Remy Blaire: Massive AI buildout and infrastructure spending are driving capital spending to record levels, but it is also creating prolonged demand for capital that could keep rates elevated.
Now, in New York afternoon trade, we are looking at the 10-year currently at the 5.09% level.
And while yields above 5% on the 10-year Treasury are attracting buyers in the short term, refinancing pressure is also mounting on real estate as well as small businesses, creating sector-specific downturns even as the broader economy avoids a recession.
And Fed Chair Kevin Warsh specifically calling artificial intelligence, quote, "the most productivity-enhancing wave of our lifetimes, past, present and future, and perhaps the most significant change in our economy in my adult lifetime."
Well, joining us this afternoon to weigh in is Tom Bruce, Macro Investment Strategist for Tanglewood Total Wealth Management.
Good afternoon, Tom. Thank you so much for joining us.
So we are keeping a close eye on Treasury yields this afternoon, but companies out there may be finding ways to implement AI and encountering challenges, while heavy spending as well as large federal deficits keep capital in high demand.
So why won't AI productivity gains bring rates down anytime soon?
Tom Bruce: Well, there's a number of reasons for this, and I've been negative on fixed income and expecting rates to rise all year.
You know, we finally hit a point around 5%. We're starting to see more buyers. I wouldn't be too surprised to see, over the short run, potential for the rates to decline a little bit.
But over the long run, we have this bigger issue with, you know, potentially great productivity. And while that's going to be good, it also raises the cost of capital for everyone.
So, you know, indirectly, we're all kind of paying for this AI buildout because it's raising interest rates across the board.
And as we have more and more productivity, there's more and more good uses for capital, which has it become even in higher demand and raises rates further.
So we kind of get into this good-bad cycle where, yeah, we're making a big investment in the future and have great things to come, but at the same time, it's really bad for certain areas of the economy right now.
And we're going to see bigger strains in areas like real estate and other interest-rate-sensitive parts of the economy because of this.
Remy Blaire: Yeah. And I do want to get your take on capital demand beyond 2030.
The AI infrastructure boom may be expected to run through 2030 at least, but power grids as well as robotics may require funding for longer.
So how prolonged will this capital demand be? And give us your take on expectations in terms of impact on long-term borrowing costs.
Tom Bruce: Well, there's no easy answer for this. I don't know what's going to come down the road five years, 10 years down the road.
But it does appear to me that we're looking currently at the AI buildout, all the infrastructure that goes behind it and the capital intensity that's required.
But after that, we're seeing robotics probably three or four years behind AI. And then there's going to be, I would expect, a large demand for capital behind robotics.
And then you have AI that's more or less fully built out at that point. You have something very smart that can operate and express itself physically in the world.
And where we go from there is a big question mark.
But the way I'm looking at this, I think over the next 10 years, more or less, we have some very high demand for capital.
And after that, I think it gets very questionable because the economic model starts to break down overall.
If you have this, you know, artificial general intelligence that we're already kind of seeing now combined with physical AI, it gets much harder to forecast after that point.
So I think a lot of market participants are expecting things to cool off at 2030. I'm expecting it to continue for quite a while longer than that.
Remy Blaire: And we have about 60 seconds here, Tom.
So in an environment of higher yields, which we are seeing right now, as well as selective economic weakness, portfolio positioning is critical.
So what does it mean in terms of finding opportunities?
Tom Bruce: All right. Well, briefly, you know, I still like AI.
I think there's a lot of question marks about what area exactly you want to invest in. But the area I actually like the most is AI-adjacent in cybersecurity because I feel like, with all this increased intelligence, it's not all going to be used for good.
You know, there's going to be some bad actors out there who are trying to hack. We've seen the models themselves hacking. And I think we're just getting a preview of what's to come.
So I really like cybersecurity for that reason.
Also commodities. I think there's a lot of potential there, but it's something you need to be careful about because historically, commodities have not been one of these buy-and-hold assets you want, except for gold.
Beyond that, it's been very selective about times when they've done well.
Remy Blaire: Well, Tom, I appreciate your time. Thank you so much for joining us this afternoon, and thank you so much for all of your insights.
Tom Bruce: Thank you for having me.
Remy Blaire: Thank you.
