Episode summary
David Rosenberg and Rich Bernstein on What Ends the AI Trade — And What They Own Instead
Excess Returns
· · 1 hr 4 min · Guests: David Rosenberg, Richard Bernstein
Summary
Richard Bernstein and David Rosenberg argue that the U.S. market is sitting in a late-stage, highly speculative AI-driven bubble, even if they differ on the Federal Reserve and inflation. Bernstein says the Taylor Rule and a range of market signals imply the Fed should be hiking, while Rosenberg says the economy is slowing, underlying inflation is easing, and the Fed would make a mistake by tightening now. Rosenberg points to weak housing and auto activity, declining real disposable income, and slowing GDP growth as evidence that the economy has more fragility than headline data suggest.
Both see the AI boom as a major source of capital misallocation. Bernstein argues that the surge in data center and AI capex is crowding out housing and other productive investment, making the boom inflationary in a broader economic sense. Rosenberg agrees that AI spending is distorting business investment, but says the bigger difference from the late 1990s is that today’s economy is weak outside the AI trade. He adds that credit spreads and financing costs may warn of trouble before equities do.
They also make a case for gold and international diversification. Rosenberg says gold remains supported by central bank demand and real-rate dynamics, while Bernstein calls it a portfolio “spare tire.” On equities, both favor non-U.S. markets over the expensive, concentrated U.S. market, with Bernstein stressing that growth opportunities now exist around the world, not just in the Mag Seven.
Key takeaways
- Bernstein says the Taylor Rule points to higher rates, but Rosenberg argues the Fed should not hike because underlying inflation is decelerating and growth is weakening.
- Rosenberg says the credit market is likely to signal the end of the AI trade before the equity market does, just as credit led the 2007 housing unwind.
- Bernstein says AI capex is creating a capital misallocation by pulling money toward data centers and away from housing and other productive investment.
- Rosenberg argues gold is being driven more by real rates, the dollar, and central bank buying than by near-term inflation fears.
- Both guests think non-U.S. markets look more attractive than the expensive, highly concentrated U.S. market.
- Bernstein says investors are in a hyper-speculative period when people no longer distinguish between capital formation and betting markets.
Notable quotes
“All 30 suggest that the Fed should be hiking rates”
“I think it would be a mistake, especially when you consider that, you know, the lags between what the Fed does in time A and time Z”
“bubbles are inherently inflationary. And they're inflationary because they misallocate grossly misallocate capital within the economy”
How the episode opens
You're watching Excess Returns, a channel that makes complex investing ideas simple enough to actually use where better questions lead to better decisions. This is an extra special show, partly because these guys used to talk together all the time, and now it so rarely happens in public. I've got firsthand reasons why I know how much fun this is going to be.
Honestly, feels kind of like a Blues Brothers reunion. I'm gonna let him let him debate who's Jake and who's Lwood, but I have hunches on where that could go. So, let's get into it.
Richard Bernstein, welcome back to Access Returns. Say hello, Rich.
Thanks, Matt. Great to be here. Thank you for the invitation. — And I mean, the best Rosie since the Riveter, David Rosenberg, welcome back to Access Returns. How you doing today, David? — Thanks for inviting me on. I, you know, uh I was going to say there's no accounting for taste, but uh I appreciate it. and plus I'm with my my buddy and former colleague. We went we did go through a lot together.
Well, here's to the trauma bonding. Here's to the trauma bonding. I'm ready to unpack some of this because I feel like and this was part of the inception for this.
I was I was new in my career at Maril Lynch coming into the financial crisis period and between Dave between you talking about the economic consequences of a slowdown in housing and just how ugly that could get which few were talking about and Rich between you saying I get it you still have to be long so just get out of financials get out of the way letting me understand how sector rotation worked these were both pivotal to my education as an investor and an allocator I want to just start there for for just a second.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- taylor rule and fed rates
- ai capex and data centers
- credit spreads and cds
- gold drivers real rates and dollar
- international diversification vs us mega-caps
Companies and tickers mentioned
- Janus Henderson
- Rosenberg Research
- Richard Bernstein Advisors
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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