Shortage of Capital
Summary: Global capital markets are becoming a tug of war between AI spending and higher interest rates. Equity markets suggested that they're feeling a bit spooked last week by the implications of higher rates. How will the Fed react? Editor’s Note: We have made this week’s newsletter available to all subscribers. If you’re not already a premium subscriber, please consider subscribing. Share The Transcript Macro AI CapEx is powering the global economy “...the quantums are so big, and the growth of the U.S. economy is at some level and even the global economy being powered by this AI CapEx cycle. I don’t know that it necessarily accelerates from the $1 trillion that we’re at. It could be $1 trillion, it could be $1.2 trillion, but we are at a level where it is meaningful, 50, 70 basis points of real GDP in the U.S. That is no small matter.” - Morgan Stanley ( ) CEO Ted Pick “...it is obviously hitting the demand side of the economy before it is going to hit the supply side of the economy. If you are a central banker and you are in the business of trying to ensure stable prices and full employment, you have got to recognize this as a shock, but it is a positive supply shock in the medium term. I do fundamentally believe that. On the path to that positive supply shock, we are seeing increases in aggregate demand.” - Federal Reserve Chair Kevin Warsh A lot of capital is required “We’ve got a good U.S. economy supported by the consumer and by the AI CapEx. And there’s underneath that, a lot of capital requirement from these AI companies and the whole environment that surrounds them.” - Bank of America ( ) CFO Alastair Borthwick AI capital demand is competing with government demand, pressuring rates “I think one of the things that’s going on is there’s a lot of demand for capital for this AI cycle, and that’s also competing with the fact that governments have borrowed very aggressively, and there’s a lot of demand for capital for government. So there is, there is some pressure around that that affects rates, but I’m not, I’m not scared you know, about all this.” - Goldman Sachs ( ) CEO David Solomon There’s a genuine shortage of capital “For the first time in my career, and that’s 50 years of a career, I’m seeing genuine shortages of capital. Governments are running historically large deficits, while at the same time, demand for private capital is rising across the economy. Governments need financing for infrastructure. Companies need to fund a generational AI build-out. Individuals need better ways to invest and retire.” - BlackRock ( ) CEO Larry Fink The rest of the economy is very, very strong “We have a very, very strong underlying economy. The economy continues to be very, very resilient despite some of the headwinds.” - Goldman Sachs ( ) CEO David Solomon Consumers are spending “...we’re not seeing anything on the consumer side. Spend levels are high. Employment is strong.” - U.S. Bancorp ( ) CFO John Stern “...our data shows that our consumer and business customers are doing well. Consumers are spending more, loan delinquencies are low, and deposit and investment balances have grown.” - Wells Fargo ( ) CEO Charles Scharf “Consumers continue to spend, with year-to-date money movement up 5% from 2025” - Bank of America ( ) CEO Brian Moynihan Inflation is sticky “However, large fiscal deficits, sticky inflation, elevated asset prices, rising interest rates, and geopolitical conditions continue to shift under the surface. These forces may be manageable, but we remain prepared for a wide range of outcomes” - JPMorgan Chase ( ) CEO Jamie Dimon Markets want to know how the Fed will react “I think that what markets are looking for is they’re looking for any guidance as to where the Fed is going to go...I think they respond more based on what they think the Fed will do rather than what they think we should do. And so I think that it’s important to take signal back from the markets about how the economy is progressing, but I take more signal about how the economy is progressing from the data, from the stories I hear in the district.” - Cleveland Fed President Beth Hammack Warsh is looking out the window “What I have tried to do, which might be a little bit of a change for policymakers, is what I try to do is look outside the window...we can focus on the past, on the history...but it is really lagged data...We can also focus a lot of our time and attention on the future...but none of us are perfect forecasters...I try to look out that window as clearly as I can.” - Federal Reserve Chair Kevin Warsh He still carries scars from 2008 “I will say I have still a little bit of scar tissue from the deepest, darkest days of the global financial crisis. I might be over-scarred from that period, but better over-scarred than under-scarred, I presume.” - Federal Reserve Chair Kevin Warsh International LVMH saw a rapid decline in Chinese consumer demand “...the macro news flow that led to a rapid shift in the Chinese backdrop translated in Chinese demand down mid-teens. American clientele, by contrast, held up well, up mid-single digits. Europeans were up modestly. Japanese and Middle Eastern were down mid-single digits” - LVMH (LV:CA) CFO Cécile Cabanis Financials Is this the peak for capital markets? “I know everybody wants to call the peak. It’s hard to call the peak, but let’s just step back. And I want to go back to something I said just a little bit earlier, I still think for capital markets activity, it’s a top quartile environment. For strategic M&A, there’s an enormous amount of dialogue that continues. Our backlog is incredibly robust.” - Goldman Sachs ( ) CEO David Solomon Higher rates tend to slow activity “Does a move in interest rates of the magnitude that we saw impact transactional activity from our clients? Yes, that does happen...when rates go up 85 basis points in a quarter, that tends not to be good for those businesses. Clients tend to slow their activity. It’s not good for asset prices.” - Bank of America ( ) CFO Alastair Borthwick 5% 10-year Treasury yields are normal “I mean, I’ve been around for 64 years. The anomaly is zero interest rates, not 5% 10-year Treasury. And so, obviously, significant moves when they happen quickly upset markets and can have an impact. But you’re seeing the world’s absorbed, you know, this move in the 10-year Treasury reasonably well.” - Goldman Sachs ( ) CEO David Solomon Volatility is the issue “What creates headwind for markets is when you have very, very abrupt moves. Yes, we had a meaningful move in the quarter. There were probably some days when it was abrupt, but you’ve got a lot of other things going on that are very, very important” - Goldman Sachs ( ) CEO David Solomon But pipelines are solid “Intuitively, higher rates, as this goes forward, is going to crimp CapEx and otherwise slow borrowing, but we’re not seeing any instance of that yet, and our pipelines remain strong.” - PNC Financial Services Group ( ) CEO William Demchak “I think you should feel pretty good about the pipeline. It’s a solid pipeline to say the least...The IPO market continues to be a bit more selective. So certainly an option for issuers of durable earnings.” - Citigroup ( ) CEO Jane Fraser “I actually look out. I see some very big equity deals coming. I see some potentially very big IPOs coming. I look at our M&A backlog. We said on the call yesterday, our backlog is still at very, very robust levels, and so I feel very good about revenue accruals we have coming in M&A, and I also see the strategic activity and dialogues that are going on, and I feel pretty good about it.” - Goldman Sachs ( ) CEO David Solomon “The DCM pipeline is strong, but it’s supported by clients acting before rates move higher and stay there for longer.” - Citigroup ( ) CEO Jane Fraser Corporate balance sheets remain strong “Businesses continue to have strong balance sheets and losses remain low” - Wells Fargo ( ) CEO Charles Scharf Credit quality is stable “...the stats are very strong...So in terms of seeing any stress on the consumer, absolutely not in terms of credit quality.” - Bank of America ( ) CEO Brian Moynihan “Net charge-offs and the nonperforming asset ratios also remained stable, supporting our view that the broader portfolio credit trends remain sound.” - FB Financial ( ) CFO Michael Mettee Loan demand is robust “C&I loan demand is quite robust and broad-based.” - U.S. Bancorp ( ) CEO Gunjan Kedia “Given the robust pace of lending this year, loan growth has outpaced deposit growth, which has resulted in greater utilization of our diversified funding sources.” - The Charles Schwab ( ) CFO Mike Verdeschi “We grew loans at an annualized rate of 9.7%, which is at the very high end of our forecasted range of mid- to high-single digits.” - FB Financial ( ) CEO Chris Holmes There’s plenty of capital in the world “But, you know, is there a crowding out effect that at the margin affects the cost to capital a little bit? Absolutely. But that doesn’t mean the capital’s not available and for good projects and good returns and good opportunity, there’s plenty of capital in the world.” - Goldman Sachs ( ) CEO David Solomon Higher rates are pressuring housing markets “Like others across the industry, we expect higher rates to weigh on near-term origination volumes and profitability.” - FB Financial ( ) CFO Michael Mettee Private Equity is also struggling to adapt “My less positive, less salutary response would be it is a little frustrating. There are some sponsors in the universe that are stuck on marks and MOICs that are just not going to come to pass, given the market is very sharp to what is in folks’ portfolio and very sharp to the reality of what the new weighted average cost of capital regime is around the world and what incremental country risk or supply risk or AI risk means for that asset.” - Morgan Stanley ( ) CEO Ted Pick We’re going to learn a lot from Anthropic and OAI IPOs “I guess we’re gonna learn a bunch over some period of time in the future. Assuming that Anthropic and OpenAI go public, we’ll learn a bunch about exactly how public market investors will look at that and value that.” - Goldman Sachs ( ) CEO David Solomon Consumer Consumers are under pressure “...we are seeing the customer remain under pressure, particularly our lower-income customers, they’re still trading down, looking for value, buying more private label, and we expect to see that to continue for the short term.” - Albertsons Companies ( ) CEO Susan Morris But bank account balances are growing “...if you go to the balance in our accounts, they’re growing. And when you look at the paychecks, the direct deposits coming from employers to our consumers, we see those growing across the 3 segments of income we have low, medium and high, and we see the low having picked up. So that all bodes well.” - Bank of America ( ) CEO Brian Moynihan Consumers are accepting price increases “...customers are acknowledging the reality of inflation. I mean everyone is feeling it. And when you look at our spring ‘26 pricing action, we’re seeing good realization.” - Lamb Weston ( ) CEO Mike Smith “...the fact that our product continues to be seen in a consumer basket as reasonably affordable even at a 20% price increase, which largely we have taken this year. I think that’s a very good sign for the future.” - Delta Air Lines ( ) CEO Ed Bastian Travel demand remains strong “Our demand in premium products continues to be high teens, and that’s leading us also to our corporate -- pulling our corporate travelers. We see no cracks in that demand for the fourth quarter. And the economy is really strong. So we’re set up for a really strong fourth quarter.” - Delta Air Lines ( ) CCO Joe Esposito Restaurant traffic is soft “U.S. restaurant traffic was essentially flat, while QSR traffic declined by 1%..Internationally, QSR traffic declined 1% in the U.K., France, Italy and Germany, while Spain was essentially flat.” - Lamb Weston ( ) CFO Jim Gray AI consumer agents are a growing topic of conversation “In the long arc, you’d clearly expect that demand will shift from current avenues more and more towards agentic demand. There always will be demand that lives elsewhere, just in the same way that there’s still brick-and-mortar demand in commerce and there’s a lot of e-commerce demand. In the same way, I think agentic commerce demand will grow as a portion of the pie.” - Meta ) Chief AI Officer “...when you think about the world of AI, about the Agentic economy where to me, at some level, it sounds like the OTA is returning to the scene here, trying to commoditize your product and your premiums. I think it’s even more important that we hold tight and continue to ensure that we’re focused on premium, we’re focused on service and not getting distracted by trying to cash out along the journey.” - Delta Air Lines ( ) CEO Ed Bastian Technology Belief in ASI is reaching a religious fervor among some believers “I think there’s a profound truth to that Pascal saying that every human has a God-shaped hole in their heart. And it’s important to understand that many of these folks in Silicon Valley who are building this technology have filled that hole with the machine god of AGI. And I mean, there’s so many interesting stories around this. Like, for example, so many AI researchers have started smoking as a way of signaling to other researchers how much they believe in AI. I believe so much... That makes no sense. What do you think? I believe so much in AI that it’s going to cure cancer, so I will... I’m showing you my chips are all in. So there is kind of this mass psychosis, social delusion around it. And I think it’s getting in the way of actually what is happening with AI. Where is it meeting the American worker in industry? What are the results of doing that?” - Palantir ( ) CTO Shyam Sankar We need 1 billion x more compute “It’s very fairly logical why the amount of compute that we’re going to need is a billion times more than where we were just recently, so call it last year. And the reason for that is because thinking and problem-solving takes a lot more inferences than repeating something, regurgitating something that you memorized, right?” - Nvidia ( ) CEO Jensen Huang Agents are driving even more demand “Agentic AI consumes about 2x to 4x more wafers than a generative AI pod.” - Applied Materials ( ) CEO Gary Dickerson More compute is going to get built “But one thing’s for clear, there’s a lot of demand for compute at the moment. The supply has not come into balance. More is going to get built. More financing is going to be necessary” - Goldman Sachs ( ) CEO David Solomon The numbers sound crazy, but they keep growing “Last year at our custom AI event, I showed that analysts were forecasting about $1 trillion in total data center CapEx by calendar 2028...I remember when we put the $1 trillion up there, it kind of stuck in my mouth a little bit, $1 trillion, like that’s a lot of money. Is this a little bit crazy? And then you fast-forward 1.5 years, and it wasn’t crazy at all, actually. We ended 2025 over $700 billion. And now we’re hitting over $1 trillion this year already. Clearly, this is a fast-moving market and one that’s hard to forecast, and it’s growing faster than anybody expected.” - Marvell ( ) President Chris Koopmans Capex is expected to reach $3 trillion by 2030 “By 2030, we expect total data center CapEx to reach roughly $3 trillion, growing at about a 35% compound annual rate starting from calendar ‘25 to calendar ‘30. And importantly, that assumes that the current rate of CapEx growth moderates over that period, moving closer to historical levels in the outer years.” - Marvell ( ) CEO Matt Murphy Maybe spend could get as high as $10 trillion “...we’re still relatively early in the CapEx cycle. Whether it ends up being $10 trillion or more or less, we will see as it plays out. But the hyperscaler CapEx is running as we speak at around $1 trillion a year.” - Morgan Stanley ( ) CEO Ted Pick 70% of the spend is coming from 10 companies, 50% from 4 “So if you look inside that data center CapEx, the top 10 or so hyperscale customers are actually driving over 60% of that last year. And as large as they are, they’re actually expected to grow their spend even faster than the overall TAM, reaching more than 70% out in calendar ‘30. That’s astounding. If you do the math, that means that these top 10 companies are $200-plus billion TAMs each. And if you look within that, the top 4 U.S. hyperscalers alone were more than half of total data center CapEx last year.” - Marvell ( ) President Chris Koopmans Demand is outstripping supply “If we take a step back to look at the market environment, we see that the pace of the AI build-out continues to be very robust. Supply shortages across advanced Logic and Memory nodes continue to increase in size and in time horizon.” - ASML Holding ( ) CEO Christophe Fouquet “The gap between demand and supply are still quite big, and that is why we put all our strengths to increase the capacity, as I just mentioned. Whether it is bigger or if the gap become bigger or the gap become narrow, we are working very hard. I cannot answer this question right now because my customer continue to increase their demand.” - TSMC ( ) CEO C.C. Wei Suppliers are trying to increase capacity “...we have very strong conviction in the AI megatrend. Therefore, our CapEx from 2026 to 2028 is expected to be significantly higher than the past three years. And this is a step up of our investment to support the customers’ growth. We have no intention to leave any food on the table for others.” - TSMC ( ) CEO C.C. Wei Semiconductor suppliers are experiencing shortages of their own “I think the primary constraint, Mark, that we called out is clean room...I think that’s the major -- we talked about how that will meter the growth rate. That is the primary variable that we see.” - Applied Materials ( ) CFO Brice Hill But capacity is growing slower than demand “...we shared our intent last quarter to increase our capacity in 2027 by 30% for both Low NA EUV and deep UV immersion systems as well as to investigate adding a further 30% in 2028. However, given the dynamics of this quarter, we now anticipate that our current planned levels of output in ‘27 and ‘28 will not fully meet the demand of our customers.” - ASML Holding ( ) CFO Roger Dassen The entire industry is facing inflation “The tool price inflation is real. The tool price, material, labor cost, et cetera.” - TSMC ( ) CFO Wendell Huang Hyperscalers are willing to pay any price “We’re in an environment where demand is much bigger than supply. The chips have never been more valuable.” - Applied Materials ( ) CEO Gary Dickerson Will capital markets continue to finance it? “...we are extremely conscious of the fact that the expectations for the quantum of financing that’s necessary to build out the data center infrastructure in the United States, based on what people are predicting, is quite significant. And over time, there is risk. There is risk to pressure on crowding out the size of scale. Not every project’s going to be received as well.” - Goldman Sachs ( ) CEO David Solomon Enterprises are spending tokens like kids in an arcade “When you are a kid you go to a video arcade, you play. Your parents give you $10 of tokens, you finish it in 10 minutes, and you haven’t learned anything,” he said. “That’s what's happening in enterprises today.” - Broadcom ( ) CEO Hock Tan They are trying to rein in costs “Just before this meeting, I met with 4 different customers, and what they’re frankly worried about is the token cost tied to those agents who tells me they want to use the agents, and we have to get smart in how we work with them to make sure that the costs don’t run away from them.” - Workday ( ) CEO Aneel Bhusri Most enterprises are seeing clear benefits “AI is accelerating our product development life cycle. So we are launching new products at lower cost and at faster speed...We’ve reduced our tech vendor spend by 30% year-over-year as a consequence, and that’s still got a long way to run.” - Citigroup ( ) CEO Jane Fraser The cost of intelligence will fall quickly “My expectation is that the cost of intelligence would fall fairly quickly... obviously we’re bringing more compute online. These models are getting smarter. When you’re smarter, you could be more efficient.” - Nvidia ( ) CEO Jensen Huang Are we at the threshold of where further deployment is no longer safe? “We have frontier models now that have not been released because people have realized maybe we’re not ready to release them. That would have been an unimaginable thought a year ago.” - Palantir ( ) CTO Shyam Sankar Meta doesn’t seem to be slowing down “Quite famously, we were not happy with the trajectory that we were on with Llama 4. We kind of rebuilt the whole team. I mean, that’s been this kinda crazy thing over the last year and a half that we should probably spend a bunch of time on. Because we’ve had some war stories. But the team basically had to go build up different tiers of models to kinda get to this one. And now that we are kind of at the frontier, everything that we do going forward will just kind of be pushing the frontier, as opposed to there’s a lot of background work that we needed to do before that.” - Meta ( ) CEO Mark Zuckerberg So far the doomsayers have been wrong “The doomsdayers have basically been wrong. Everything they predicted. They told us that ChatGPT-2 was too dangerous to release. They told us at this point in the timeline we’d already have mass unemployment and job displacement, and the economists see that actually we’re having job growth in areas that we wouldn’t have predicted doing exactly that. So the technology industry has two burdens. One is to show very clearly to the American people that AI is going to result in economic prosperity and security for the nation. And two, to actually do and absorb the burden of engineering. You cannot abdicate this idea that designing safe products is your job. You can’t handwave around it.” - Palantir ( ) CTO Shyam Sankar Healthcare Healthcare costs are rising along with everything else “Costs remain stubbornly high across the entire healthcare landscape and particularly in areas such as specialty pharmacy and acute healthcare service intensity...Care intensity remains elevated relative to historical norms, even as we continue to see signs that trends are bending in a more stable direction than what we have recently experienced.” - UnitedHealth Group ( ) CEO Tim Noel Industrials and Transport Industrial activity improved further in Q3 “Industrial conditions improved further in the third quarter. U.S. manufacturing PMI averaged nearly 55, and industrial production for our key end markets remained positive. This is consistent with the gradual improvement we’ve seen since late last year. Although momentum remains stronger in select industrial markets than in the traditional manufacturing and automotive area.” - Fastenal ( ) CFO Max Tunnicliff Global aluminum inventories are historically low “Aluminum prices moderated from recent highs but remains supported by constructive market fundamentals. On the supply side, production is gradually recovering as Middle East smelters restart and Indonesian capacity ramps up. The timing of a full recovery to pre-conflict production levels in the Middle East remains uncertain. Global aluminum inventories remain historically low at approximately 42 days of consumption, leaving the market with limited capacity to absorb further supply disruptions or stronger-than-expected demand.” - Alcoa ( ) CEO William Oplinger The Strait of Hormuz has had a major impact on aluminum supply “I think the world has changed when it comes to aluminum within the Strait of Hormuz. And I think it’s going to be a while before that completely gets normalized of flows in and out. And so I think it is a big impact. You see it in pricing today, even though prices are off from where they were, we’re still sitting at close to $3,000 a ton. And so it has had a big impact, and I think it will still have a big impact going forward.” - Alcoa ( ) CEO William Oplinger China has plenty of aluminum supply “China remains well supplied from within the region as new refinery capacity has increased production and inventories. This continues to create a clear divergence between softer market conditions in China and tightening fundamentals outside China.” - Alcoa ( ) CEO William Oplinger The new Tesla roadster isn’t necessarily safe or legal, but it is fun “So the car has attitude control thrusters and main thrusters in the rear, so it can basically fly like a rocket. It could do rolls, crazy gymnastics, whatever you want, really. Now, I should say that this is not necessarily a safety-optimized car, but it takes the fun meter to 11 out of 10....This will be an actual car that’s on the roads. I’m not sure it’s necessarily legal in all jurisdictions, but there will be such a car that someone can own. So it’s going to be pretty wild that you can have a rocket car....It’s using an advanced, ultra-high-pressure air tank. So the car can recharge its air tank. It’s not like you need special propellant or anything like that. It literally is just going to puff itself up and be able to do these maneuvers.” - Tesla ( ) CEO Elon Musk Materials & Energy Energy remains a primary bottleneck for AI “We’re not seeing a slowdown in investment in the broader AI ecosystem behavior there. There’s simply not enough compute. Energy remains a bottleneck, requiring more investment. That’s globally, not just in the U.S.” - Citigroup ( ) CEO Jane Fraser Meta is planning for 5GW datacenters “We built this Prometheus cluster in Ohio that’s scaling to larger than a gigawatt, and now we’re building this Hyperion cluster in Louisiana that’s gonna scale to five gigawatts. Those actually pre-date MSL, because building a whole data-center site from scratch takes years.” - Meta ( ) CEO Mark Zuckerberg TSMC is wondering whether customers have the power to receive the chips that are being produced “Definitely, the power supply situation is one of the consideration factors that we are looking into. That is why we also do one more step to double-check whether the power supply situation in the US, and we have done all the study, and so far so good, let me say that.” - TSMC ( ) CEO C.C. Wei Nuggets of Wisdom Act decisively “I think one thing that is quite special about Mark is the degree to which, once he concludes that something is the right thing or something makes sense, he just fully shifts everything to be consistent with that belief set...He’s very willing to pivot entire things to be consistent with it.” - Meta ( ) Chief AI Officer Meta Chief AI Officer Think big “As an investor, well, I say, forget about short-term, small money. Think big. The result is proportionate to your dream. If your dream is so small, if your wish is so small, you still get 70% achievement. If the wish is so big, the dream is so big, you still get 70% achievement. So, no matter how big your wish or dream is, you’re not gonna get 100% that easily. On average, you’ll get 70%. So why not think big?” - SoftBank (SFTBY) CEO Masayoshi Son A good captain is willing to go down with the ship “I took half of my money, half of it, that day when I was made the CEO, and put it in that stock. And not because I thought the stock was a bargain, but because I wanted everyone to know that’s what I’m going to do. I’m going to go down with the freaking ship, and anyone who joins knows that I’m going to do the best I can, as hard as I can, for as long as I can, to make it the best possible bank I can.” - JPMorgan Chase ( ) CEO Jamie Dimon