October surprises: Inflation, AI and energy risks loom over midterms

[00:00:00] Speaker 1: I've been finding myself, guys, having these conversations off camera about the possibility of an October surprise. I realize that tends to be a dynamic that happens more in presidential election years. But given how uncertain and geopolitically fraught the world is right now, I do think it's worth asking a question about what should be on investors' so-called bingo cards with us three weeks out. So, Henrietta, I'm going to kick this conversation off with you. What is your October surprise? What are you watching for that maybe others have not been tracking closely enough? [00:00:28] Henrietta: I've been kicking this idea around all week since we last spoke, Morgan. And obviously, we have the existential risk of maybe an AI event that could happen really at any time, a Federal Reserve interest rate hike just a couple of days before the midterms. Those are all, you know, anticipated October surprises. But I think what we really got from the president was a very real contender for a shock to the election, if not necessarily the markets directly. And that is with the decision that is, of course, illegal to suspend sanctions on Russian imports of diesel. This is causing a fracture within the Republican conference in a couple of really important states. The entire delegation of Alaska. John Curtis in Utah, who's been an interesting figure to watch since his election just a couple of years ago. And then also Mike Rogers in Michigan. Those are critical, specifically Michigan and Alaska, critical races to the decision about who wins the United States Senate. So purely from a political bent, I think this tension between Trump supporting Russia and the Republican conference strongly supporting Ukraine, rejecting Putin's incursion into the EU territories, NATO threatened. Those are all pieces that I think could upend this election going into the final stretch. [00:01:44] Speaker 1: Just to follow up on that quickly here, Henrietta, is this really a scenario where you could see diesel or other types of energies imported from Russia? Or is this really just jawboning to bring prices down ahead of elections? [00:01:57] Henrietta: It's an attempt to jawbone. As you walk through, it hasn't had an impact on WTI yet. I don't expect that it will. I think the decision to try to get the EU to release some of its SPR was much more impactful to prices. I mean, we all know that Russia has put an export ban on its own diesel because they don't have enough. And the question really remains, even if they were trying to get something over the United States, could Customs and Border Patrol even offload that product into the United States? Because, again, it is illegal to accept Russian diesel by our own laws. So I think there's a lot of problems with actually getting prices down here. [00:02:31] Speaker 1: Okay. Jimmy, what's your October surprise? [00:02:35] Jimmy: Yeah, well, clearly the president is trying to create an October surprise, which is a little unusual. We have the diesel fuel. We have the $5,000 checks. But, you know, something Henrietta said about AI. Listen, there are at least a couple of Senate races, particularly Ohio, where data centers is a big issue. And I don't think we need some sort of, like, major existential problem. But I think if we get another high-profile hacking incident, which is entirely possible, and the media, you know, media loves to talk about it. People seem particularly susceptible to worrying about this issue. You see that, especially on social media. Now, if we're going to get another, I think, big headline-grabbing sort of AI hack, I think that could have an impact on some individual Senate races where data centers are a big issue. And this could be a very close election in the Senate, so that matters. [00:03:30] Speaker 1: And we do, Jimmy, like to talk about this. Yes. You've seen a rebranding. I mean, you've seen a rebranding. I mean, AI is now superintelligence, right? I mean, so there does seem to be a shift in terms of, that's, you know, according to the administration and this executive order. I mean, there does seem to be a shift in terms of that narrative. And what's emerging now is the safety and innovation can track together. Do you think there's dollars and there's meaningful investment and meaningful policy that's actually going towards that? Or no, not yet. [00:04:05] Jimmy: Listen, I've generally, even though I've been super enthusiastic about artificial intelligence, superintelligence, sort of my baseline has been that in this election and in 2028, that still affordability issues would be the key issue. You know, but clearly there are particular places, you know, in this election of the Senate race where it's going to be about AI and data centers. And to me, it's just also not just an existential issue or a hacking issue. But if we should get some, like, bad tech earnings reports and all of a sudden these stocks aren't doing well, then I think more people will say, well, okay, there seems to be a lot of downside risks to AI. But, like, on the upside, we haven't seen, like, the big cures yet or the big scientific breakthroughs, maybe a few math problems. But at least the market's going up because of this. And there's a lot of great stocks. But, like, if that's not happening either, then not only does I think that hurt some Republicans' individual races, but, of course, the administration, which has been very pro-AI, very skeptical of regulation, I think that's another sort of, you know, headwind against Trump administration going in both into this election and for Republicans two years from now. [00:05:12] Speaker 1: If we just stick with affordability, because it is driving so much of the action here. Henrietta, what can be done? What else can be done near term versus long term to actually, you know, help consumers' pocketbooks? [00:05:26] Henrietta: Nothing is the honest answer. We have a situation where Congress is not in D.C. So any kind of comprehensive legislation or real solution is not forthcoming. When you get stuck with executive orders, you, by definition, get more extreme events, such as the president siding with Vladimir Putin in Russia, such as, you know, trying to outright rebrand AI as SI. I think James brings up a really interesting point. The American public doesn't much care about AI as a top tier issue. It's the number one concern of just 1% of the population in the latest Gallup polling. So they're really more concerned with everyday prices, the grocery store, every time they go to the gas station. If you're a farmer and you're dealing with diesel, 47% of Americans say that the economy and inflation are their number one issues. So the president and the Republican conference would love to keep attention on that. But like I said, when you're splitting the conference on the very thing that's trying to bring gas prices down, you've got yourself a sort of negative narrative arc. And that's what the president is working with right now. And costs are not coming down. They continue to rise. [00:06:33] Speaker 1: Okay. Quickly, Jimmy, just on affordability here. How much onus is now on these inflation reports this week? [00:06:41] Jimmy: Listen, generally, you know, at least with elections, you know, economists and political scientists, economists will say it's all baked in in the summer. But listen, people are focused on inflation. Another like another worrisome inflation report. Interest rates are always going up. I think it just further cement in that narrative in people's minds. But if you're looking for an October surprise about affordability, the president could do one and the tariff war.