There’s no chance for Congress to resolve the shutdown and reopen the government before crossing the historic threshold Tuesday.

Congress is on track this week to break an unflattering record: presiding over the longest government shutdown in U.S. history.

The ongoing funding lapse will hit the 35-day mark Tuesday night, eclipsing the partial shutdown that ended in early 2019 and also occurred under President Donald Trump.

Bipartisan talks among rank-and-file senators are underway, which could thaw the weekslong freeze between the two parties. Lawmakers over the weekend were confronted with the grim reality that millions of Americans could lose SNAP food aid — as well as more closures of early education centers, shortages of air traffic controllers and first glimpses of higher health care premiums as Obamacare subsidies are set to expire.

But there’s little chance members of Congress will be able to cobble together a deal to reopen the government before their partisan stalemate clears a new milestone. Even if an agreement quickly materializes in the Senate, lawmakers aren’t scheduled to return to the Capitol until Monday night, and Speaker Mike Johnson has told House members they will get 48 hours notice before they need to be back in Washington to vote on any bill.

“Shameful, utterly shameful, that the Democrats are making history in this way,” Johnson said in an interview Friday. “I honestly did not believe they would have the audacity to inflict this much pain on the people and show no regard for it whatsoever.”

Tuesday is also Election Day in several states, with both parties closely watching the outcomes in the gubernatorial races in Virginia and New Jersey, as well as the mayoral contest in New York City and a congressional redistricting referendum in California. Some Republicans are betting their Democratic colleagues will be more willing to vote for a funding patch once those major political events are behind them.

“They’re going to wait till after the election on Tuesday and get their guy in New York elected — they’re going to get New Jersey. And then they’re looking for an exit ramp,” Sen. Markwayne Mullin (R-Okla.) told reporters last week. He was referring to Zohran Mamdani, the democratic socialist vying to run New York City, and Rep. Mikie Sherrill (D-N.J.), on the ballot to be New Jersey’s governor.

“They’re going to show they put up a good fight. They don’t want to do it before Tuesday. Because if they do it before Tuesday, then their base may not show up because it looks like they caved,” Mullin added.

Senate Majority Leader John Thune agreed: “Tuesday, that seems to be another inflection point and hopefully that frees some people up to be able to vote ‘yes.’”

Democrats reject the premise that they are holding out on a deal based on a political calculation.

“Over the last 30 days, we’ve said the same thing over and over and over again: We’ll sit down with Republicans anytime, anyplace, anywhere in order to reopen the government and act on a spending agreement that actually meets the needs of the American people,” House Minority Leader Hakeem Jeffries said at a news conference last week.

But Democrats have been increasingly in the hot seat during this standoff, forced to reckon with the blowback they got from their base back in March when Senate Minority Leader Chuck Schumer led a handful of his members in advancing GOP-backed legislation to avoid a shutdown. Schumer and others are now seeking a deal on health care and a path to a bipartisan funding framework before lending their votes to reopen the government.

Many Republican lawmakers are not convinced the shutdown will end so quickly.

“What I see is no off-ramp,” Sen. John Kennedy (R-La.) said late last week. “And I’ve heard all the rhetoric and the Democrats are getting restless and they’re going to crack any minute. … Chuck’s not going to let them agree on jack shit.”

Rep. Mark Takano (D-Calif.) said in an interview that Trump will play a pivotal role in what comes next in shutdown talks.

“The Republicans all take their cue from [Trump]. And ultimately, he’s got to say, ‘I want a deal.’ So a lot’s on him to bring people together,” Takano said. “He’s got to be part of the off-ramp.”

But Trump was overseas last week, only to return to the U.S. and immediately throw a wrench into fragile member-level discussions by posting a message on Truth Social demanding Senate Republicans eliminate the legislative filibuster to bypass Democratic opposition to the House-passed funding patch.

Trump’s recommendation for ending the shutdown wasn’t the type of involvement lawmakers of either party had in mind for the president. The Senate GOP likely doesn’t currently have the votes to change the chamber’s rules.

Setting the shutdown record is likely to become another talking point for each party to scorn the other with, but it’s a superlative that neither party wants to own, which could motivate lawmakers to hasten their pursuit of a deal.

Rep. Josh Gottheimer (D-N.J.) raised some eyebrows in his caucus last week by suggesting in a television interview that Thune offered Democrats a “fair deal” in saying he would allow a vote to extend expiring Affordable Care Act subsidies if the minority party voted to end the shutdown. And Rep. Adam Smith (D-Wash.) said Friday his party might need to “recalibrate” its position if Republicans remained unmoved.

“The point of this was not to blackmail the Republicans or to score political points on one issue or another. The point of this was to get to better policy. And if what we are doing with the shutdown isn’t getting us to better policy, then yeah, we recalibrate and we have a conversation,” Smith, the top Democrat on the House Armed Services Committee, said at a Council on Foreign Relations event.

This shutdown is also proving to be more painful than past ones — not only because of its length but because Congress didn’t get any full-year spending bills signed into law before thrusting the federal government into crisis.

In late 2018, when the last record-breaking shutdown began over whether to fund Trump’s border wall, lawmakers had already locked in funding for a number of agencies, including the Pentagon. That allowed some parts of the government to operate normally and limited the full impact of a lapse in appropriations.

In the coming days, lawmakers will have to weigh the full implications of allowing the shutdown to continue. While last week was filled with warnings of pain points ahead, some members of Congress believe this is the week where reality could set in.

Rep. Glenn Ivey (D-Md.) predicted a potential lapse in SNAP benefits could be a turning point.

“I think our expectation is that things are going to blow up one way or the other,” Ivey said. “When people get up and check their EBT card, it’s got zeros on it. I don’t know, it’s unbelievable.”

Read the full story HERE.

Summary

Analysts have sharply raised their price forecasts for platinum and palladium in 2026, citing tight mine supply, tariff uncertainty and rotation from investment demand for gold, as platinum nears its best yearly performance and palladium marks its best year since 2017.

Spot prices for platinum and its sister metal palladium are up about 76% and 56%, respectively, so far this year, as broader support from gold’s record-breaking rally coincided with outflows to U.S. stocks.

“We continue to expect platinum prices to test higher highs and remain deeply undersupplied in 2026,” said Standard Chartered analyst Suki Cooper.

The main factors for platinum were the potential launch of a futures contract in China, still-muted jewellery demand after Chinese fabricators increased their platinum stock, and outflows from platinum-backed exchange-traded funds helping to ease tight spot supply during periods of profit-taking, she added.

The median forecast from a survey of 30 analysts and traders was for platinum to average $1,550 a troy ounce in 2026, up from $1,272 predicted in a poll three months ago and an expected 2025 average price of $1,249.50.

Uncertainty about U.S. import tariffs have been a driver for platinum group metals this year, although more clarity is expected from a U.S. probe into potential new tariffs on imports of critical minerals, which the market is awaiting this month.

Palladium has another layer of worries, which are likely to extend to 2026, due to calls in the U.S. to consider a tariff on imports from major producer Russia.

For palladium, the median 2026 forecast in the Reuters’ poll was $1,262.50 an ounce, up from $1,100 in the previous poll and the 2025 expected average of $1,106.

Palladium prices had fallen for the previous four years on expectations that electric-vehicle takeup would reduce demand for the metal which is mainly used to clean exhausts in gasoline vehicles.

“Although there is some pushback in the uptake of electric vehicles, there is still a Damoclean sword hanging over this market,” StoneX analyst Rhona O’Connell said, referring to the possibility of the opposite still happening.

Read the full article HERE.

Key Points

The Federal Reserve on Wednesday approved its second straight interest rate cut, though Chair Jerome Powell rattled markets when he threw doubt on whether another reduction is coming in December.

By a 10-2 vote, the central bank’s Federal Open Market Committee lowered its benchmark overnight borrowing rate to a range of 3.75%-4%. In addition to the rate move, the Fed announced that it would be ending the reduction of its asset purchases – a process known as quantitative tightening – on Dec 1.

Governor Stephen Miran again cast a dissenting vote, preferring the Fed move more quickly with a half-point cut. Kansas City Fed President Jeffrey Schmid joined Miran in dissenting but for the opposite reason – he preferred the Fed not cut at all. Miran is an appointee of President Donald Trump, who has pushed hard on the committee to lower rates quickly.

The rate also sets a benchmark for a variety of consumer products such as auto loans, mortgages and credit cards.

The post-meeting statement did not provide any direction on what the committee’s plans are for December. At the September meeting, officials indicated the likelihood of three total cuts this year. The Fed meets once more in December.

Powell, however, cautioned against assuming that a rate cut is a sure thing at the next meeting.

“In the committee’s discussions at this meeting, there were strongly differing views about how to proceed in December,” Powell said during his post-meeting news conference. “A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it.”

He later added that there is “a growing chorus” among the 19 Fed officials to “at least wait a cycle” before cutting again. Traders lowered odds for a December cut to 67% from 90% a day ago, according to the CME Group’s FedWatch.

Stocks, which had been higher after the initial decision was released, turned lower on the chair’s comments. Major averages slowly came back during the session with reporters.

The reduction came even though the Fed essentially has been flying blind lately on economic data.

Other than the consumer price index release last week, the government has suspended all data collection and reports, meaning such key measures as nonfarm payrolls, retail sales and a plethora of other macro data is unavailable.

In the post-meeting statement, the committee acknowledged the uncertainty accompanying the lack of data, qualifying the way it categorized broad economic conditions.

“Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments,” the statement said. “Inflation has moved up since earlier in the year and remains somewhat elevated.”

Each of those characterizations represented tweaks from the September statement. The most significant change was the view on broad economic activity. In September, the FOMC said activity had moderated.

The statement reiterated concerns that policymakers have over the labor market, saying that “downside risks to employment rose in recent months.”

Even before the shutdown, evidence had begun to build that while layoffs have been contained, the pace of hiring had flattened. At the same time, inflation has held considerably above the Fed’s 2% annual goal. The CPI report last week, released because of its importance to Social Security cost-of-living adjustments, showed the annual rate at 3%, pushed by higher energy costs as well as several items with direct or indirect links to Trump’s tariffs.

The Fed tries to strike a balance between full employment and stable prices. Officials lately, though, have said they see a slightly higher risk posed by the jobs picture. Along with the interest rate decision, the Fed said its process of reducing the amount of bonds it holds on the central bank’s $6.6 trillion balance sheet will end.

The program, also known as QT, had shaved some $2.3 trillion off the Fed’s portfolio of Treasurys and mortgage-backed securities. Instead of reinvesting maturing proceeds from the securities, the Fed has been allowing them to roll off the balance sheet at a limited level each month. However, recent signs of some tightening in short-term lending markets have raised concern that the roll-off has gone far enough.

An implementation note accompanying the decision indicated the Fed will be rolling proceeds from maturing mortgage securities into shorter-term bills.

Markets recently had begun anticipating that the Fed would end QT either in October or by the end of the year. The Fed expanded its holdings during the Covid crisis, pushing the balance sheet from just over $4 trillion to close to $9 trillion. Powell has said that while the Fed found it necessary to shrink its holdings, he did not foresee a return to pre-pandemic levels.

In fact, Evercore ISI analyst Krishna Guha said he could foresee a scenario where the Fed actually restarts the purchases early in 2026 for “organic growth purposes” as market conditions shift. The Fed rarely eases monetary policy during economic expansions and bull markets in stocks. Major averages, though volatile, have been posting a series of record highs, boosted by further gains in Big Tech stocks and a robust earnings season.

History has shown that the market continues to rise when the Fed does cut under such circumstances. However, easier policy also poses the risk of higher inflation, a condition that forced the Fed into a series of aggressive rate hikes.

Read the full article HERE.

Gold staged a partial recovery after a three-day selloff, with dip-buyers returning ahead of an expected interest-rate cut by the Federal Reserve.

Bullion advanced toward $4,000 an ounce, having lost more than 4% over the previous three sessions. Investors are penciling in a 25-basis-point reduction, although Fed Chair Jerome Powell is unlikely to offer much forward guidance. Lower borrowing costs tend to benefit non-interest bearing precious metals.

Gold has retreated sharply following a torrid rally that drove prices to a record above $4,380 an ounce last week. Technical indicators had shown the ascent had run too far, too fast — a move that coincided with reduced demand for havens amid signs of progress in US-China trade relations.

With Donald Trump and Chinese counterpart Xi Jinping due to meet on Thursday, the US president talked up the prospects for their summit, telling reporters he expects that there will be “a very good outcome for our country and for the world.”

Even after gold’s recent pullback, the metal is still up about 50% this year, supported by central-bank buying and the so-called debasement trade, in which investors avoid sovereign debt and currencies to protect themselves from runaway budget deficits.

The surge had drawn institutional and retail buyers to gold-backed exchange-traded funds — although outflows this week have dented some of that support. Investors withdrew a net $1 billion from State Street’s SPDR Gold Shares on Monday, the most since April, according to data compiled by Bloomberg. The outflow came as total investor holdings of gold ETFs fell the most in six months.

“Gold’s role as a portfolio hedge against fiscal and policy uncertainty remains undiminished, though short-term exuberance has clearly given way to consolidation,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. “If we manage to consolidate in this range of $3,920-$4,020 an ounce, then it may set the stage for base-building before the next leg higher.”

Gold’s rapid rise — and recent retreat — was a hot topic at the London Bullion Market Association’s precious metals conference in Kyoto, Japan, this week. The overall mood remained buoyant, with a survey of 106 attendees projecting that gold would trade at nearly $5,000 an ounce in a year’s time.

Spot gold rose 1.1% to $3,996.90 an ounce as of 7:22 a.m. in London. The Bloomberg Dollar Spot Index was up 0.1%. Silver increased almost 2%, while platinum and palladium advanced.

Read the full article HERE.

The Federal Reserve faces a pivotal moment. With a divided committee and an economic landscape transformed by postpandemic shifts, artificial intelligence, and political forces, its traditional guideposts to the economy have become unreliable.

The neutral rate—the interest rate at which monetary policy neither stimulates nor restrains economic growth—is one such indicator that is becoming more and more elusive and irrelevant. Rather than remain fixated on it, the Fed should prioritize “doing no harm”: setting policy that avoids stalling growth or reigniting inflation.

The neutral rate, or r*, is the real (inflation-adjusted) interest rate where inflation is at target and monetary policy is neither expansionary nor contractionary. Swedish economist Knut Wicksell introduced the concept in the early 20th century to explain the business cycle. He argued that market rates below the neutral rate would expand credit and asset prices, eventually reversing as returns fell below capital costs.

In 1993, John B. Taylor formalized that concept with the “Taylor rule,” which posited that policy rates below the neutral rate would spur inflation, signaling the Fed to hike rates.

Before the global financial crisis, the Fed believed that inflation would clearly signal that the policy rate was below neutral. This is one reason for the Fed’s nonchalance toward housing market risks in the early 2000s. Price levels were muted heading into the crisis.

The Fed’s views evolved postcrisis. They returned to Wicksell’s original interpretation that the financial markets would do a better job than inflation in assessing whether policy was restrictive. This explains the central bank’s abrupt 75 basis-point cut in 2019, following a steep stock market selloff in the late 2018, as well as its aggressive actions during Covid-19.

Financial conditions historically helped gauge policy restrictiveness. But today, these correlations have broken down. Large tech stocks and AI enthusiasm drive U.S. market performance more than interest rates. Hyperscalers’ AI investment will continue—regardless of whether rates are 2% or 5%—making the S&P 500 less indicative of the economic cycle.

Inflation is also no longer a clear signal. The outlook for prices depends on a complex mix of monetary policy, money supply, tariffs, currency movements, immigration, housing supply, deregulation, government spending, and productivity. The combined effect is nearly impossible to predict. High policy rates have affected unemployment by slowing labor demand. Going forward, however, AI-driven job losses may have a greater impact than rates, and near-term employment prospects hinge on immigration policy, which is beyond the Fed’s control.

Given these uncertainties, Fed Chair Jerome Powell advocates for a data-dependent approach. He also wants more focus on inflation, which remains further from the Fed’s target than employment does. Yet, a “wait and see” approach risks a late response to slowing growth or increasing inflation.

The newest Fed governor, Stephen Miran, on the other hand, argues the administration’s policies will lower the neutral rate, justifying a more aggressive cutting cycle.

At its September meeting, Powell, Miran, and the rest of the Federal Open Market Committee members disagreed on the path for interest rates. The divergence stemmed from differing views on how restrictive current policy is. Powell described rates as “modestly restrictive,” while Miran called them “very restrictive.” In the end, Miran strayed from the group and voted for a larger cut of 50 basis points.

Underlying their disagreement is the debate over the neutral rate. But with the neutral rate so difficult to estimate these days, basing policy on it is too risky.

A third path is needed: The Fed should keep interest rates at the lowest real level that supports both stable inflation and maximum employment. This means reducing policy rates, which are dampening hiring from small businesses reliant on funding tied to short-term rates.

Cuts should be measured, however. Aggressive reductions could further ignite asset prices and stall the Fed’s already slow progress on bringing down inflation. The wealth effect from high asset prices has contributed to sticky services inflation, with nearly half of consumption driven by the top 10% income bracket. Continued upward pressure on prices could further profligacy from wealthy consumers.

Ironically, the inflation spike from 2021 to early 2023 may explain why the Fed’s median policy rate and inflation forecasts already align with a “do no harm” approach. The rate is forecast to be 3.4% at the end of 2026, with core inflation at 2.6%. That implies just 75 basis points of cuts over the next 15 months. Investors have crowded into short-dated credit securities, betting on more aggressive easing and strong equity momentum. If the Fed cuts more gradually than markets expect, these investors may be disappointed.

Monetary policy is always uncertain. But AI and government policies are further complicating the signals the Fed uses to judge restrictiveness. Rather than trying to pinpoint the “right” neutral rate, the Fed should set its policy rate to minimize harm—supporting growth and employment, without reigniting inflation.

Read the full article HERE.

The question of the moment in markets is whether we are in an AI bubble, as stocks seem awfully expensive amid hopes that artificial intelligence will transform the economy. But there is another curiosity that is far more concerning: low credit spreads. That suggests a low-risk environment — which describes precisely nothing about this market.

The credit spread is a measure of the difference in yield between high- and low-risk bonds. Risky debt is normally low-rated corporate or emerging-market bonds. Both tend to trade at a much higher rate because there is a higher risk of default or future volatility. And yet spreads on risky corporate debt are low by historic standards.

That means one of two things: Either these bonds aren’t so risky — or markets are underpricing risk. That second scenario never ends well.

To be sure, there are reasons not to worry, or to worry for a different reason. The yields on these bonds are higher than they were several years ago; it’s the difference between them and the low-risk bonds that is smaller. And that’s because risk-free bond yields, such as a 10-year Treasury, are much higher.

This could be because risk-free bonds aren’t looking so safe anymore. Not only is the US government taking on a lot of debt, but the future of trade, inflation and the dollar looks uncertain. All of that increases bond yields. It’s also possible that the difference between risky and risk-free just isn’t as meaningful as it used to be, so the credit spread isn’t the measure of risk that it once was.

Another potential explanation for the low credit spread is the rise of private credit. As credit-cycle finance guru Edward Altman has noted, the growing size of the private credit market means that much more capital is chasing risky bonds, which is a factor in decreasing spreads. It could also be that firms that are less well suited for public markets may be seeking credit from private lenders, leaving relatively stronger borrowers. A big influx of foreign buyers of debt, seeking higher yields, has also added to demand.

Yet none of this is entirely reassuring. First, while spreads may be low, firms face a higher cost of borrowing, and many borrowers have not yet had to refinance. When their debt reaches maturity in the next two to three years, they will face higher debt payments. Weaker firms will have a harder time servicing their debt and risk bankruptcy.

In fact, bankruptcy rates and leverage are already rising. Some companies with private loans can’t make their debt payments and are rolling them into their principal. The market will eventually have to come to terms with the fact that the rates of the 2010s aren’t coming back, possibly triggering more bankruptcies.

Another indicator is that credit spreads and the VIX, a measure of stock risk, have slightly diverged recently. The VIX is now increasing more than spreads.

All this suggests that risk may be underpriced — and all things considered, underpriced risk in debt markets is more dangerous than a stock-market bubble. When equities crash, people lose money. In a debt crisis, payments aren’t made, collateral becomes worthless, and firms go bankrupt.

A big reason that spreads are so low is the same reason that the price of gold went up: There is a lot of demand and a limited supply. As long as that is true, the price of risk will continue not to make sense, encouraging even more leverage.

This can go on for a while — but not forever. One day the demand for risky bonds will fall, perhaps because dollar-denominated assets become less attractive, or a wave of bankruptcies scares investors. And then things will get pretty gnarly pretty fast.

Read the full article HERE.

JP Morgan analysts on Thursday maintained a bullish outlook on gold, forecasting prices could reach an average of $5,055 per ounce by the fourth quarter of 2026.

The forecast is based on “demand assumptions that see investor demand and central bank buying averaging around 566 tons a quarter in 2026,” the bank said in a note.

“Gold remains our highest conviction long for the year, and we see further upside as the market enters a Fed rate-cutting cycle,” Natasha Kaneva, Head of Global Commodities Strategy at JP Morgan, said.

The combination of a “Fed cutting cycle with overlays of stagflation anxiety, concerns around Fed independence, and broader debasement hedging” supports gold’s upside, Gregory Shearer, Head of Base & Precious Metals Strategy said.

On the dollar, the bank noted that the rally is “not a de-dollarization or not a debasement story, but it is most likely a dollar diversification story,” highlighting that foreign holders of U.S. assets are gradually redirecting small allocations into gold.

JP Morgan analysts also highlighted that recent market consolidation is healthy.

The pullback reflects the market digesting the rapid price gains since August, said Kaneva.

“It’s normal if you’re paralyzed with fear, because the price moved so fast … It’s just a very clean story – you have a lot of buyers, and you have no sellers,” she said.

She reiterated a long-term target of $6,000/oz by 2028, stressing that gold should be viewed on a multi-year horizon.

Spot gold has achieved several record highs this year, with the latest peak of $4,381.21 hit on Monday, marking a significant year-to-date gain of nearly 57% and setting the stage for its strongest annual performance since 1979.

Read the full article HERE.

Wall Street strategists often warn investors that the “stock market is not the economy.” But in 2025, the two feel increasingly intertwined as the surge in artificial intelligence demand has helped buoy both economic growth and stock market gains.

“We believe that AI has kept the economy out of recession,” says BNP Paribas chief U.S. economist James Egelhof.

Research from Egelhof’s economics team shows that AI related investments contributed roughly a quarter of the total gross domestic product (GDP) growth through the first two quarters of 2025.

BNP Paribas’ economists note it’s normal for investment in any potential game-changing technology to contribute substantially to GDP. But the concentration risk feels more significant when considering how reliant the stock market rally has become on the AI boom. This year alone a combination of AI stocks—comprised of Apple, Amazon, Alphabet, Broadcom

Palantir, Tesla —have contributed about 58% of the S&P 500’s $7.58 trillion market cap gain.

The market’s most recent leg higher has featured large rallies in stocks driven by the announcements of future AI investments. Large language model leader OpenAI has penciled itself in for $300 billion of cloud computing services from Oracle and taken a stake in AI chip maker AMD. Meanwhile leading AI chip provider Nvidia has invested $100 billion into OpenAI.

“The economy’s fate is inexplicably intertwined with that of AI, so when the investments start looking circular, it’s a concerning sign,” Fundstrat economic strategist Hardika Singh writes in an Oct. 11 note to clients.

Wall Street strategists have largely pegged the path to future gains for the major stock indexes to continued growth in the AI story. In a note to clients that projected the S&P 500 to hit 7,200 by the end of 2026 on Sept. 9, Wells Fargo’s chief equity strategist wrote “[the] music stops when the AI capex stops.”

Investors aren’t the only ones wondering when the AI hype train will suddenly stop. Economists like Egelhof at BNP Paribas are pondering the same question when considering what can go wrong. Egelhof notes the economy is “levered” to AI not just because it’s significantly contributing to GDP. It’s also the reason surging stock markets are filling high-income wallets and boosting consumer spending.

“We tend to think that the economy is more responsive to market valuations than it has been in the past, because of the greater reliance of consumer spending on the higher end consumer than we’ve seen historically, and because that consumer is likely spending in contemplation of their equity market gains,” Egelhof says.

By this logic, a swift unwinding of the AI trade could impact consumer spending and weigh on economic growth. Add in the negative impacts of slowing capital spending from large tech firms, and there’s a clear case GDP could take a hit when the AI bubble bursts.

“If AI does not fulfill on the promises that it has made, then there is economic downside risk,” Egelhof says.

To be sure, Egelhof and others don’t think an AI downturn would clearly mean the legs would fully fall out of the U.S. economic growth story.

“If [AI] rolls out smoothly it shouldn’t cause a recession,” J.P. Morgan Asset Management chief global strategist David Kelly says.

Keep in mind that not all recessions are created equal either. When the dot-com bubble burst in 2000, the subsequent recession “wasn’t huge by historical standards at all,” says Kelly. The unemployment rate moved from 4.3% to 5.5% during that recession. It would rise from 5% to 9.5% during the recession prompted by the Great Financial Crisis.

“The economic impact of that pullback in capital spending on its own may not be that great,” Kelly said. “The real issue is, what does it do for portfolios.”

Read the full article HERE

“Circularity” has become a buzzword in artificial-intelligence deals. Some investors have drawn comparisons between the megadeals of today and some excesses of the original dot-com bubble.

Today the dollars at stake are exponentially bigger, the deals are more complex, and the money trail is often harder to follow. But some similarities are real. One risk: If enthusiasm for spending money on data centers wanes, companies such as Nvidia NVDA -0.55%decrease; red down pointing triangle and Microsoft MSFT 1.11%increase; green up pointing triangle could be hit twice—with less revenue coming in and declining values for their equity investments in customers.

Broadly speaking, circular financing often goes something like this: One company pays money to another as part of a transaction, and then the other company turns around and buys the first company’s products or services. Without the initial transaction, the other company might not be able to make the purchase. The funding mechanism could take the form of an investment, a loan, a lease or something else.

During the late 1990s and early 2000s, such dependency loops mainly consisted of telecom-equipment makers lending money or extending credit to customers so the customers could afford to buy their gear. In those days, this was widely referred to as vendor financing.

The poster child for vendor financing run amok was Lucent Technologies. It lent billions of dollars to upstart telecom providers building out their infrastructure and networks. In the boom years, their purchases helped fuel Lucent’s rapid sales growth. When those customers went bust—because they ran out of cash and couldn’t raise fresh capital—Lucent had to write off their bad debts and book huge losses.

Some of Lucent’s biggest troubled customers, including telecom startup Winstar Communications, were publicly traded. As it turned out, investors sometimes could learn more about Lucent’s doomed vendor-financing deals from reading Winstar’s disclosures than they could from Lucent’s.

Vendor financing still exists. But it isn’t how the bulk of the latest attention-grabbing, circular deals are structured.

Take, for example, the strategic partnership announced in September by Nvidia and OpenAI, the company behind ChatGPT. The companies said Nvidia would invest as much as $100 billion in OpenAI, and that OpenAI is looking to buy millions of Nvidia’s specialized chips. That isn’t vendor financing, because it doesn’t involve a loan to finance a specific purchase. But it does look circular.

OpenAI isn’t publicly traded, so it doesn’t disclose financial reports. But it is known to be losing money, notwithstanding a recent secondary share sale that implied a $500 billion valuation. Nvidia’s investment will help OpenAI pay for its infrastructure build-out. Nvidia also stands to get money back from OpenAI through chip sales, boosting its revenue.

To bullish investors that might look like a win-win. It also provides fodder for skeptics who suspect the AI ecosystem is in a bubble and can’t expand without the companies subsidizing and leaning on each other. The actual deal terms weren’t disclosed, either, because Nvidia and OpenAI said they weren’t finalized. In a vendor-finance deal, the risk for the seller is it won’t get paid. For Nvidia, its OpenAI investment could fall in value, but it also has the chance for upside.

That is a relatively simple example. When Morgan Stanley analysts in an Oct. 8 report mapped out the AI ecosystem to show the capital flows between six companies—OpenAI, Nvidia, Microsoft, Oracle ORCL -0.95%decrease; red down pointing triangle, Advanced Micro Devices AMD -2.93%decrease; red down pointing triangle and CoreWeave CRWV -6.36%decrease; red down pointing triangle—the arrows connecting them resembled a plate of spaghetti. 

OpenAI recently agreed to buy $300 billion of computing power from Oracle over about five years. It is far from clear how OpenAI will get all the money, or whether it would still be possible should Nvidia’s $100 billion investment fail to materialize. That in turn could mean Oracle has less money for Nvidia chips. 

AMD, a rival to Nvidia, was so eager to land OpenAI as a customer that it issued warrants for OpenAI to buy as much as 10% of AMD at a penny a share. AMD said it expects tens of billions of dollars of revenue, but it’s basically paying OpenAI to become a customer.

CoreWeave, an AI-cloud infrastructure company that rents out data-center capacity, illustrates the industry’s complex ties. Nvidia owns about 5% of CoreWeave and sells chips to CoreWeave. Nvidia also committed to purchase any unsold cloud-computing capacity from CoreWeave through 2032, effectively backstopping its customer.

Meanwhile, CoreWeave’s biggest customer is Microsoft, which is an investor in OpenAI, shares revenue with OpenAI, buys chips from Nvidia and has partnerships with AMD. OpenAI also is a CoreWeave customer and shareholder, having made a $350 million equity investment in the company before its initial public offering.

Anyone trying to keep track of all the relationships would have a hard time. CoreWeave also has disclosed having some vendor-financing debt, but not the identity of the counterparty.

There isn’t necessarily anything untoward about these arrangements. AI is a transformational technology, and OpenAI is a juggernaut. The industry’s participants are in a race to build the infrastructure they need quickly.

Their efforts may pay off enormously if OpenAI and its competitors can ultimately generate strong cash flows to justify all the capital spending. But there also could come a point when investors grow tired of companies pouring so much capital into developing AI models and products, with little visibility into future returns.

That is when the AI ecosystem conceivably could hit a wall, and where the parallels may lie with the original internet bubble and the circular deals of that era. Circularity can be virtuous on the upside, and vicious on the downside. The deals can work fine, until they don’t.

Read the full article HERE.

The idea of a “neutral” or “natural” rate of interest looms over discussions of US monetary policy. Whether it’s any help in setting the course of monetary policy is questionable. Yet there’s no doubt it belongs at the center of a different, equally important discussion — on the sustainability of public debt. In that context, it gets far too little attention.

Briefly, using the neutral rate as a starting point for setting the Federal Reserve’s policy rate is unhelpful. You can define that idea in many different ways; however you define it, it’s hard to measure. Put simply, it’s the interest rate that balances saving and investment with stable inflation and no transitory shocks. Observers infer the Fed’s estimate of this number from the periodic “dot plot.” Beyond 2028, the central bank expects inflation to be back on target at 2% with the federal funds rate at 3%. So, the Fed thinks the neutral policy rate, in due course, will be 3% in nominal terms, or 1% after adjusting for inflation.

This doesn’t tell you what the neutral rate is right now — with inflation running well above the 2% target and all manner of shocks pushing this way and that. Even if you could filter out the shocks, the here-and-now neutral rate would be unclear in principle. The term could mean “not pressing up or down on inflation,” as many investors probably suppose. But many academic researchers take it to mean something else: the rate that would bring inflation back to target, either quickly, or slowly, or eventually.

If you ask central bankers where the policy rate stands right now in relation to the neutral rate, they will usually tell you, “It depends on what you mean by neutral.” Fed Chair Jerome Powell says that the current rate is “modestly restrictive.” He’ll keep saying the same if the Fed (as expected) cuts again later this month and then again in December, as long as inflation is still above target. Given all the complications and uncertainties, he’s unlikely ever to tell investors what they would love to know: how many basis points above the here-and-now neutral rate he believes the policy rate to be.

In short, the neutral rate is no help in fine-tuning monetary policy, and it’s probably a downright nuisance in explaining where the Fed stands. But the idea works much better for looking farther ahead. In fact, it’s indispensable to thinking intelligently about fiscal policy.

The US has settled into a posture of unprecedented fiscal lassitude. With the economy at full employment, the budget deficit stands at around 6% of GDP. Current policy projections show the ratio of public debt to GDP, already as high as the peak immediately after 1945, rising further and indefinitely — and nobody in Congress or the administration seems to mind. Earlier this year, the Congressional Budget Office projected an increase from 100% in 2025 to 156% by 2054. According to the Yale Budget Lab, the One Big Beautiful Bill Act will push that number to more than 194%. (Neither estimate takes account of tariff revenues, which remain anybody’s guess — but they won’t come close to stabilizing the debt ratio, let alone reducing it.)

The long-term neutral rate — for this purpose, let’s say “natural” rate — determines whether any given fiscal path is manageable or calamitous. Economists agree that the natural rate has declined over recent decades, perhaps by as much as three percentage points in real terms. This fall seemed to justify a more relaxed approach to fiscal discipline. If the natural rate is less than the rate of growth in GDP, budget deficits in moderation are sustainable — meaning consistent with a stable or falling ratio of debt to output.

Those days are over. The US budget deficit is now extraordinarily immoderate, the expected rate of economic growth is lower than before and the natural rate of interest is going up.

Just how much the natural rate might rise is of surpassing importance. It’s another complicated question. An excellent new book by my colleagues at Bloomberg Economics, The Price of Money, surveys the research and concludes that the real natural rate for US 10-year government debt fell from nearly 5% in 1970 to 1.7% in 2012, and is now on course to climb back to 2.8% by 2030. Combined with slower growth, this seemingly small change would make taming the debt trajectory much harder.

What’s driving the natural rate? Recall that it’s the interest rate that balances savings and investment. Fiscal excess is therefore a big factor. Budget deficits reduce national saving, which pushes up the natural rate, which in turn makes the debt more expensive to service, adding further to budget deficits. Note that the Bloomberg researchers predicate their estimated natural rate of 2.8% on the assumption that “governments get their finances under control and debt ratios stabilize.” If they don’t, the rate will rise faster.

Many other factors are in play, Slow growth pushes down the natural rate, because it makes investment less attractive. Pushing the other way is the need for greater investment in defense and clean energy. Demographic change raises the natural rate because a higher ratio of dependents to workers means less private saving and, most likely, higher budget deficits. Weaponization of the dollar through sanctions against Russia, China’s efforts to lessen its dollar dependence, and global economic fragmentation will cut demand for safe US assets — lowering their price and raising the natural rate. For decades, the prices of investment goods trended lower relative to consumer goods, pushing the natural rate down; that force is likely to be weaker from now on.

On balance, a continuing upward trend in the natural rate looks likely. To my mind, 2.8% in real terms by 2030 looks optimistic. And this trajectory is on a collision course with an ever more deeply entrenched complacency about budget deficits. So yes, let’s focus on the natural rate — not to get monetary policy right, but to peer into the fiscal pit we’re digging.

Read the full article HERE.