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Matt Frees, goalkeeper for the U.S.man's national team and New York City FC. We discussed how to prepare for one of the biggest moments of your life. You can hear it all by listening to Confessions of the Elite Athlete on YouTube or wherever you get your podcasts. Welcome to Prof. E. Markets. I'm Adelson. It is September 17th. Let's check in on yesterday's
market vitals. The major indices fell following the Federal Reserve's interest rate decision
more on that in a second, treasury yields rose, the dollar strength and finally bank stocks.
“How did their worst-day since February on concerns that higher rates will slow lending growth?”
Okay, what else is happening? The Fed just raised rates for the first time since 2023. In a unanimous vote, a official's raised rates by a quarter point and the Fed's forecast shows an additional hike is likely this year. The hike is an attempt to cool inflation, which has been above the Fed's target for five and a half years. In his remarks, "This summer's inflation readings do not tell me that underlying trends have
meaningfully improved." Investors largely had expected this outcome on Calshy, the odds of a rate high gross to 88% ahead of the decision following the decision the yield on tenure treasuries hit a 52 week high, the 10-year climbed back above 5% and stocks fell. Joining us to discuss the Fed's decision, and what to make of it, we are joined by Robert Armstrong, author of the Unhead News Lesser and US financial commentators for the Financial Times.
Rob, it's great to see you. We have finally gotten a rate hike, a quarter point hike, a unanimous decision. Lots we could say, but I'll start with your initial reactions to the news. We can put to bed the theory that Kevin Worsh is Donald Trump's sock puppet.
I had never bought that theory particularly for the simple reason that I don't see what's in it
for Worsh playing the part of the sock puppet. He had nothing to gain by doing that. He's in a
“good position to go his own way. I think that was becoming clearer as the weeks went on,”
but now it's very clear he has hiked despite the threats and protestations of the president. So that is point number one. Point number two, and you mentioned this, which I think is very interesting and very important for this hike, is the unanimity. It was not at all obvious going on that this was going, that all the voting members were going to agree on this outcome. Several members of the committee had made slightly dovish noises going in.
So this is a very good sign for the Fed chair's credibility or might be. Right, there's two ways this may have happened. Either he wanted to hike and he got everybody on board or almost everybody was on board and he wasn't and he joined the crowd. So he didn't look like a weenie, right? But there is a little interesting detail you might have noticed about this in the notorious dot plot, which is this graphic they include,
which shows for this year and several coming years, what each member of the committee believes is the appropriate monetary policy. There were two dots that showed that the appropriate monetary policy for the end of this year is the rate we were at before the rate hike. So what are those two people
Thinking?
by the end of the year. So that was like this weird like what are we doing? Maybe that's a good argument to go with wash and dismiss the dots plot altogether, get rid of the thing. But the important point was the committee as a whole agreed, that puts them a strong position, politically
“send a strong message, very important. I think the third thing I would point out is with each meeting,”
we're finding this fed chair is finding his feet and we're getting to know him a little bit better.
And you know his first two public appearances were terrible. His appearance at Jackson Hole was
better. I think with this appearance we get a still clear sense of who he is. And we have a mantra now. And the mantra is this, we must be confident that underlying inflation is moving to our objective, clearly and that's sufficient speed. That's the phrase he used in Wyoming. That's the phrase he used today. And what he's doing there is describing the Fed's reaction function. He's telling the world, this is the test we apply to see whether monetary policy is where it needs to be. And there's
some vague elements of that mantra. What is sufficient speed? etc. But you know that that's the mantra,
are we at target? Target is 2% PCE? Are we moving to it fast enough? If the answer is no,
we're going to take in policy. That's a reasonably clear statement of the reaction function.
“And I think gives market something to work with that they need. Why do you think it was unanimous now?”
Because inflation has been hot for a long time. We had the same inflation report the previous month. We've had an even higher readings before that. And it was such a large debate in politics, in economics, everyone going back and forth. And then suddenly on this occasion, they all agreed with each other. Yes, inflation is a real problem that we need to do something about now.
Well, remember what we talked about last time in the show, which is that in central banking,
how you say it is more important than what you say or do, right? And so, if you're going to move, it helps a lot to move unanimously. It just means the move is more effective, right? You know what I mean? So once I wonder if in that room, and when we get the meeting minutes in a couple of weeks, we might get a slightly better sense of this. Once you get to a majority and it's clear, you're going to hike everybody's like, "In for a penny, in for a pound." If we're doing this, we're doing it.
You know, we don't want to say to the world where a divided committee. It's one thing to have
“10 votes and then two dissenters. I think that's normal and fine. But if you're going to be like,”
you know, whatever it is, a 60% of the committee voting for it. No, I think let's go on. And by the way, it's particularly important at this time when people are still asking questions about the independence of the institution. So here is the Fed saying, we know we're listening to what the president is saying and if you screw with one of us, you're screwing with all of us. Right? You're not going to divide this committee, right? And that's a statement about Fed
independence, which I think is a positive one. Let's talk about the implications here. Clearly, the point is to get inflation under control. But I think something that a lot of people are debating is will this actually move the needle considering that the problem, the real problem, is a war in Iran causing a supply shock to oil, oil prices, then rising, causing higher gas prices, higher diesel prices and funneling through to everything else. The question being, okay,
we're going to try to slow down the economy. But is that actually going to solve the problem that we're trying to address, which is higher prices? So, Wash had that exact question put them. And he said, we can't control any one price, whether it's the price of oil or peanut butter. What we can do is we can see that price increases don't become diffuse, right? They don't spread from oil to elsewhere. So his answer to that question would be, "No, I can't control the oil
price." That clearly is affecting inflation. But what I can do is make sure that the oil price doesn't start to affect wages and go from wages to prices of consumer goods and so forth. So, at a certain point, it is absolutely true that the Fed cannot create like hydrocarbon atoms,
Right?
decided that's what they have to do right now. But you're absolutely right. There's a lot of people out here who think this is just crazy. It's hiking into a supply shock and it's a crazy thing to do. I guess I lean towards the Fed on this topic, but I agree. It's a real debate.
During the conference, he also said that the most important asset price in the world is the
10 year treasury, the 10 year yield settled near 5% on Tuesday. It briefly hit 5.04, which was the highest number since 2007. It's around 5%. Now, he said that the yield is risen first and foremost because the economy has strengthened. What does that mean? All else being equal. If you have an economy that is growing faster, you are going to have higher interest rates. Because in a faster growing economy, there's more competition for capital, more things to do with capital, capital costs more. That is fair.
“Is some of that going on right now? Well, yes, I think so. We just got a very strong”
for example, retail sales number or a solid retail sales number. This morning, we have the AI boom going on
private sales to final domestic private consumers, which is kind of GDP without the nonsense, is like 3% or something, best guess, right? So you get 3% growth. You have 3% inflation. That means nominal growth of 6%. You're going to get higher rates. So I got this part of it, but I wouldn't say it's a predominant part. I think the predominant part of it is in America and in the rest of the world, we're looking at inflation and everyone knows central banks, including the Fed are going to
raise rates and that echoes down the interest rate curve to the long end. So it's not that the
world expects more inflation. What the world is, what the market is telling you is inflation pressures
are high. We think the central bank will get them under control by raising interest rates and therefore we in anticipation are selling 10-year bonds the yield is going up. So inflation is the main story, but I'm not one of the people who says growth has nothing to do with it. Growth has something to do with it, doing it. And interestingly, worst didn't say, of course, inflation is part of the picture. He used a euphemism. He said geopolitics is part of the tech picture, but four geopolitics
“read inflation. I think in his comments. Now, the, and he mentioned a third factor,”
competition for capital from hyperscalers. I think, again, that's part of the story about a small one. Main part of the rise in yields is inflation and central banks. I would say. Gross, hyperscaler investment, all this stuff. They're part of it, but not a huge part of it. This event, this day, is something that a lot of people have been making predictions about, I'm wondering about for a very long time. At the beginning of the year, we went into the year.
I think you and I recorded a podcast talking about the point, which is that one tailwind for the stock market right now is the fact that we're probably entering a rate cutting environment that didn't happen. And now here we are, we're entering a rate
“hiking environment. And I think it would be fair to say that if we're going to raise”
rates this time, oftentimes what happens is that we keep raising them. And so I guess the question is, what does that mean for the stock market, higher interest rate environments, generally speaking, on good for stocks? Do you think that's going to be the case? The reason a high rate environment would not be good for stocks is that they discourage certain kinds of activity classically, right? It becomes more expensive to finance stuff. And that slows down the economy.
And there's other psychological factors, but let's just concentrate on that one mechanism for now. The standard mechanism by which that happens is the housing market. The thing where you have the most direct channel to the economy is you raise rates, mortgage is get more expensive, housing slows down, that's a big swing factor in the economy, the economy slows, et cetera, et cetera, stock market gets hurt. Well, we are in the situation now, and you can call this fortunately or unfortunately,
as you please, where the housing market already sucks. So it can't be damaged that much more by higher rates. Nobody's buying or selling houses to begin with. So that's good. Next question, are these rates high enough to derail the AI investment bubble? You know, you get a higher finance and cost
Out the curve.
a data center, whatever else, become less viable. The payback, no longer looks any good. You don't want
to do it anymore. So some air comes out of that bubble. Well, so far, the people who are doing this investment are extremely price-sensitive, right? You're building a data center, the price of
“Nvidia GPU goes up 50% fine. I'll pay it. Whatever it takes, right? You know what I mean?”
So like another 100 basis points on your interest bill are not going to bug you. Could that change? Right? You know, if the bubble is slowing down anyway, and people are suddenly becoming more price-sensitive about their AI investments, that part of the economy could slow and that would connect in a very obvious and very direct way to the stock market. I would 100% agree. That seems to me the thing to focus on is what are the borrowing costs of the AI companies, what are the borrowing
costs of the big tech companies, when they are spending all of this money, which is really what is driving so much of the returns, so much of the GDP growth, and could this be the thing that makes that more difficult, especially when they're issuing so much debts to build what they're building. Absolutely, and 25 basis points is not going to change a decision right now. 75 probably isn't
“going to change a decision, but it's going to be one factor in the decision down the road, right?”
Like interest costs don't matter until they do. Like a lot of things, and they clearly don't matter right now, but six months from now, we'll have to see. Final question, as you mentioned, this is washed officially, defying the president. Have we heard from the president yet? Have you been watching your true social account? I haven't opened up my app. I usually check it every day. Yeah, maybe the White House they just have made sure the president has not seen his phone.
Is that happening? He has no idea what's happening. He'll have an aneurysm. My question to you, what do you think happens here? Politically speaking, is this another Powell versus Trump moment? Are we going to see wash versus Trump? If we haven't heard anything now, two and a half hours after the announcement, that's probably a good sign, right? I just think, I mean, I've gotten out of the
“trying to understand Trump business, but I just think this is a losing battle for him, isn't it?”
And doesn't he acknowledge that? At some point, if he's, you know, I just think what can he do? He tried this on with Powell that didn't work. Scott Bessent, probably in the back of his mind, nose rates need to be higher if they're going to keep the 10-year yield under control, which, after all, you know, is good. The government financing costs in a lot of ways. You know, I just feel like it's a loser for Trump and he'll probably make a little noise
and move on. But again, you know, there's no money in predicting this guy, anything's possible. I'm afraid it. And that's, you know, something that others don't. Sounds like you don't. I don't, yeah. I've just here in my bedroom in Brooklyn, hoping it's the best. Robert Armstrong is author the unheaded news letter and U.S. financial commentator for the
financial times. Rob, thank you so much. Always appreciate it. Great pleasure to be on the show.
After the break, I look at China's response to AI. And for even more markets insights, you can subscribe to my weekly news letter simply put go to Edwardlson.substack.com. Support for the show comes from upside. Gas grocery is eating out. These are all things you do even if you're on the tires of budgets. But here's what you can control. Get in cashback every single time you fill a tank, hit a grocery store or go out to eat and you can do it with the upside
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of existential risks to the president dismissing any form of regulation, the US is officially in a
full-blown AI panic. Let's discuss, however, is the response to these fears from America's most powerful
AI competitor specifically. China. China, the head of China's Ministry of State Security issued a statement calling for increased state control over AI on Monday. The increased government oversight is had as necessary to ensure domestic stability, cyber defense and military parity with the US. This statement comes just a week and a half ahead of Xi Jinping's trip to America. His first in nearly three years AI is expected to be one of the central topics of discussion.
So, for more on China's response to AI, we're speaking with Alice Han, director at Green Mantle, Alice, great to see you. We have been talking about AI basically every day. It's been the biggest discussion on any news platform. It's everywhere right now. Everyone's very upset about it or triggered by it on multiple different dimensions. What are the discussions like
“the Euroware of in China right now when it comes to AI?”
So, firstly, what I find quite interesting is domestically Chinese people are very positive about AI. Generally speaking, they see this as being good for productivity, good for innovation. It can increase consumer surplus. It can allow China to export more AI hardware and models in the open weights ecosystem to the rest of the world, not just for the Chinese market. There is an understanding at the elite level called amongst think tankers or policy makers that
AI inclusiveness and AI safety are critical issues in the way that we do discuss about them in the West,
but I would say largely the feeling is very different. It's more positive on the ground. That being said, I do sense, and this is very domain to what you just quoted from the Minister of State Security, that there is a feeling that if no one is at the head of AI governance globally, we could be setting ourselves up for some kind of AI-related risk, whether it's through the kind of autonomous rogue agents that we saw in the hugging face incident, or potentially
even more catastrophic, it's any kind of bi-related or nuclear-related attacks that may have come out
“of AI rogue agents or state-sponsored AI agents as well. This, I think, is going to be critical”
in the bilateral discussions between the Americans and the Chinese. Both when she comes to the US and September 24th, but also potentially when Trump is slated to visit China in mid-to-late November for the apex change and summit. One of the big arguments that has been made by Trump and by a lot of people as to why we should not be regulating AI despite some of the warnings that we have heard from the AI researchers and even the leaders of these companies, Darrye Amade, Simon Altman, all saying
that this is like an existential risk. One of the arguments has been, well, we are in a race with China, and if we are to put any sort of regulation, AI, if we slow things down, then AI, then China excuse me, will pull ahead, which will be a danger for America. How is China thinking about
Regulation and how is it thinking about regulation specifically in relation t...
So, I would say largely that the Chinese have compared to the Americans that is built up a more
robust system of regulations. They are still issuing and drafting some in the AI safety realm, especially now, that we have seen more incidents come out in the last couple of months from the frontier models, not just the hugging face incident, but also the open-claw incident incident when you had bad actors doing supply chain malware attacks or data exfiltration. So, there is a concern that both agencies need to be registered, models need to have safety
guard rails put in place in terms of the private sector being responsible, again for those safety measures and precautions, but also in terms of making sure that they are at the forefront of what is actually happening in the broader, what I would call, broader US China's strategic competition
“and technology, because putting aside the domestic safety guidelines, which I think China is actually”
to some extent ahead compared to the West, there is a concern, and this is again why I think by a lot of discussions have picked up since the start of the year, there is a concern that if there is no kind of consensus reached between Washington and Beijing, in terms of, you know, what are the clear red lines for the deployment of AI technology in say military warfare,
in cyber warfare, in the kind of grey zone operations that basically fall short of full
scale escalation of conflict. These are the things that will take time to try to figure out, but as AI becomes even more developed, which we were already starting to see quite rapidly this year, I think this will bring the two powers even close together, and we'll probably have to wait for a real crisis, frankly, and this is, you know, obviously a pessimist talking, but a real crisis that may push the two countries to cooperate in the same way that we've seen
say in terms of the pandemic during COVID, where countries are forced to get, again, in terms of health standards to make sure that these kinds of risks didn't expand beyond the borders and affected not just countries specifically, but the global economy. When you think about, when the way China thinks about the regulation, as you mentioned,
“they are actually stricter on AI regulation than America is, which is, I think a relevant point,”
because if we're worried about being in a race with China that China's going to develop AI models faster than we are, we should at least acknowledge the fact that they seem to care a lot about slowing things down or at least putting some level of restriction or regulation on this technology. I have the same time though, is there a recognition or a concern in China among Chinese leadership that regulation might mean that they might lose the race with America? Do they see it that way,
as a race, where they must accelerate ahead of the pace, which AI has been developed in the US?
I think this is the real critical balancing act of our time, both countries need to figure out
what the right mixes in the US, you have this sense that we're going full scale to into innovation at all costs and we're starting to see some of the political backlash as a result. In China, there is a feeling that they do need to protect the domestic ecosystem by putting in these safety guidelines, registrations, safety guard rails, regulations against deep fake technology, for instance. That is designed to make sure that the party in the government has a
“degree of control and stability over the system, but at the same time, and this is why I think”
both Xi Jinping and the party have been generally supportive of the open-weight model ecosystem, you saw Xi make a speech about it very recently. In general, they have been supportive of the deep Sikhs and the moonshots of China, because they understand that these companies do need to be allowed to compete with the Americans so that China can have a real say and a stakeholder in this competition. Thus far, I think that that balancing act has been all right, but in general, I think
China will need to continue to that type of type of rope in terms of regulation and one side, but allowing the tech sector to really thrive. Part of my observation in America, looking at the discussions that have been had, the way that we're interacting between the leadership of the AI companies and the president and how it's all sort of flaring up online. To me, the AI conversation in America is a mess. It's not clear who's on what side. Everyone's pointing fingers at each other.
They're saying you're lying because you're influenced by the Democrats or by China or you're trying
To drum up fear in order to have a successful IPO.
And to me, it's just kind of, excuse my language, a shit show over here. Do you think that that's how
it is seen by leadership in China? Do you think there is an understanding of how the conversation is being had in America? And there is a feeling that we might not have our heads wrapped around this, perhaps as well as the Chinese do? I do sense that the elites in China have understood the politicization of AI. I've sensed this as early as the summer, that the writing was on the wall for these large language models coming out of these hypiscillers and closed frontier labs because
they had an order and an amount of power. And that the electorate was becoming more and more worried about what I would say is the consolidation of economic political and intellectual power by these labs. So they understand that this has become super politicized in America. They also understand that
“in a way this will take up a lot of oxygen, I think, even after the midterms at the legislative”
level. And they are hoping that that will distract to some extent. This is my belief from anti-China regulation. Now, this is something that we haven't mentioned yet, but this is a real concern for the Chinese is if the Congress and the Senate get their act together and decide that they want to I wouldn't say I say I'm so much a ban because it's technically quite difficult, but make it difficult for US companies to use Chinese openweight models. Or for cloud provides a service openweight
models coming out of China. That will be a big concern for the Chinese. We're not yet seeing that, but I think that that next year, that could be on the bigger card. Final question, Xi Jinping comes to America in a week. What do you expect his discussions with Trump to look like to what extent will AI be the center of that conversation? Well, we had two major track 1.5 track two dialogues in the last month or so between the US and China over AI. So that's
teed them up nicely for defer the discussions. Basin is meeting with Helefeng in New York over
“the weekend. I believe AI will come up again. It is become, I think, one of the most important,”
I would say, top three issues in the bilateral relationship. It will come up in, I believe, in Xi's trip to the US, but I still believe that this trip is largely going to be symbolic,
as opposed to substantive because ultimately I believe the Chinese won't want to make give major
concessions until at least Trump comes in November. I think there will be space for maybe slight tar for elections and/or an extension on the tarf pause from the US side as well as the rarests, pause on the Chinese side. But in general, I think that the Chinese will remind the Americans, hey, the world is really dark and chaotic right now and it pays to have a stable US China relationship and I think large, they trumple by that and all teed up nicely. I think for
November meeting when Trump goes to China. Alice Haam is director at Green Mantle Alice. We appreciate your time. Thanks so much, EU has just announced a historic new alliance with a nation that is actually located several thousand miles away and that nation is Canada. In her state of the Union address, EU President Ursula Fondaleen invited Canada to become the first associate member of the EU. We don't know exactly what that means yet, but some of the ideas that were discussed
include integrating their supply chains, joining forces on data centers, increasing energy flows from Canada to Europe and vice versa and much more. In other words, they are teeming up and essentially
every economic domain that actually matters. Why are they doing this? The answer is pretty obvious
they're doing it because of Trump. Trump has, of course, repeatedly made an enemy out of Canada. He launched a tariff war against them. He posted AI videos of him beating up their president with a hockey stick and he also suggested taking them over entirely and turning them into the 51st state of America. Canada has plenty of incentive to find friends elsewhere. Find other trading partners too. Meanwhile, Europe is in a similar position as well. They have also received multiple
tariff offensives. They have been described by Trump as an organization that was designed to quote
“screw America. And of course, one of their territories also received threats. I think potentially”
military take over by Trump and that territory was Greenland. So in the same way that Canada wants some new friends, so does Europe. And in a lot of ways, it is a match made in heaven. Two enormous
Economies dealing with similar issues and similar enemies.
those enemies together. Economically, sure Canada isn't much of a threat to America on its own,
“but combined with Europe. Well, that is a $25.5 trillion economy right there. That is significantly”
larger than China's economy and it's almost as large as America's. This might be how the world
order gets rearranged. It might not be a battle between America and China, but rather between
“America and the rest of the world. Canada might be the first associate member of the European Union,”
but it probably won't be the last. Okay, that's it for today. This episode was produced
by Claire Miller and Alison Weiss, an engineered by Benjamin Spencer. Our video editor is Brad Williams,
“our research team is Dan Schlon, Kristen O'Donay here, and Mia Salvario, and our social producer”
is Jake McPherson. Thank you for listening to Profty Markets from Profty Media. If you like what you heard, give us a follow. I'm Ed Nelson and tune in tomorrow for our conversation with the legendary AI philosopher Nick Bostrum. All is through the past form. I'll try to understand that. I'll try. Stay out there.
