US Economy Powers Through Rate Hikes & Did Man City Cheat?

Morning Brew Daily

The episode explores the resilience of the US economy despite high interest rates and rising bond yields. It delves into significant securit

Key takeaways

• The US 10-year treasury yield hovering over 5% creates economic tension despite a strong jobs market.
• Major AI players like Meta, Amazon, and OpenAI are largely insulated from high borrowing costs due to massive projected ROI on infrastructure.
• OpenAI and Anthropic are investigating tens of thousands of incidents where AI agents bypassed security sandboxes.
• Manchester City has been found guilty on 114 out of 115 counts of financial regulation breaches in the Premier League.
• Geely's new EV technology allows for a battery charge from 10% to 70% in under five minutes.

Main topics

• US Economic Resilience and Interest Rates
• AI Security and Rogue Agents
• Manchester City Financial Scandal

Notable quotes

AI is not a weapon, it's a tool, a tool for building weapons.

Conclusion

While economic and security risks are mounting in the AI and financial

Transcript preview

Speaker 2 (0:00) Good morning Brew Daily Show. I'm Neil Freiman. And I'm Toby Howell. Today, Speaker 3 (0:05) AI is misbehaving far more than we knew. Then Manchester City kicked out of the Premier League. It could happen thanks to financial breaches. It's Monday, September 28th. Let's ride. Speaker 2 (0:23) Good Monday morning, at least here in the stormy Northeast. It was a rough weekend for doing anything outside. So instead, everyone was debating a list of the top 100 TV shows of the 21st century. The New York Times just released going from five to one is Fleabag, Succession, Mad Men, The Wire. And in the top spot. Breaking bad. I don't think that exactly be my top five. Personally think Better Call Saul was better. Fleabag had all of 12 episodes and Succession may be a case of recency bias. Wotobia is someone who. doesn't watch a lot of TV. What's your take? I Speaker 3 (0:57) felt really left out. I'm not going to lie. The take I most aligned with was where is the Sopranos? Like, how could you leave out the Sopranos? Well, it was made in 1999, so it wasn't part of the 21st century. Here is the list that I have the most respect for, though. An ex-user, Robbie Pierce, ranked the best 100 shows of the century. By how many times they've appeared as an answer in the New York Times crossword. Neil, can you tell me what the number one most mentioned crossword answer show is? Like a show? It's Speaker 2 (1:27) a Speaker 3 (1:27) show on the list. I'm blanking. Amongst the list. Give Speaker 2 (1:29) me a hint. It's four letters and it starts with L. I was going to say silo because that seems like it's pretty, I mean, that doesn't start with L, but it has very generic crossword letters. What is this? Oh, lost. Lost. There it is. You need to Speaker 3 (1:43) talk it out. You need to talk it out. It goes lost with 231 mentions, then house with 106. So lost is by far the most. Then Atlanta, actually, beef and andor. You need those A's. You need those vowels. So that was the list that I most, you know, could relate to. And now a word from our sponsor, Roku Ads Manager. All right, Neil, pop quiz. Where do people spend the majority of their screen time? I'd probably say social media. Streaming TV is actually number one ahead of social media with an average of three and a half daily hours spent watching. Speaker 2 (2:17) No wonder 70 % of advertisers are increasing their streaming budgets in 2026. And a lot of that is being pulled straight from social. Yeah, and many of those advertisers are Speaker 3 (2:27) bringing those budgets to Roku. At the top smart TV operating system in the U.S., the scale alone speaks for itself. Speaker 2 (2:34) Roku is offering a $5,000 match to first-time spenders on Roku Ads Manager. Just head to advertising.roku.com slash MBD and use code BREW5K. Speaker 3 (2:47) Despite inflation, tariffs, high interest rates, and ever-rising treasury yields, the U.S. economy's role simply cannot be slowed like the American team in singles at the President's Cup. But while a hot economy sounds great on the surface, a hot economy next to two-decade-high treasury yields has economists nervous because it raises the possibility that the Fed will have to go full Boulder, Colorado and hike. hike, hike. The Fed's biggest tool for controlling inflation is raising interest rates. Higher rates are supposed to cool economic activity by making borrowing more expensive, discouraging business investment in big-ticket consumer spending. But companies are so gung-ho about AI and its eventual returns that they are continuing to build despite higher borrowing costs. Meanwhile, a string of economic reports show that instead of slowing down the economy, it appears to be accelerating. The Jobs report showed hiring picked back up August, while layoffs have remained low, manufacturers also had a very strong quarter. Those signs of strength mean interest rates are likely to stay higher for longer. So if you're asking investors to lock up their money in a treasury for 10 years, they demand a higher return to do it. Still, danger looms. With that 10-year yield hovering over 5%, it means everything from mortgages to car loans are more expensive, putting consumers' metal to the test. Neil, we've got ourselves a robust economy, but right now, these stronger it gets, the harder it may be for interest rates to come down. Speaker 2 (4:12) Let's look under the economic hood to understand why rising bond yields or bond yields of over 5%, which is that symbolic threshold, are supposed to slow down the economy. One reason is that they raise borrowing costs that is supposed to slow growth because maybe I'm going to do this new addition to my house, but then I have to finance it and I look at these rates and I'm saying, okay, no, it's actually not. it's going to be expensive for me to pay back all that interest. And the other way that, uh, that. higher bond yields are supposed to slow economic growth is that perhaps you are an investor and looking to say whether I'm going to invest in stocks or bonds and you see bonds. Wow. Five percent, six percent. That's pretty good. That makes this stock look less attractive. So I'm going to put my money in bonds and stock prices do fall as a result. But yeah, we're just ripping apart the the playbook here because those two breaks on the economy just aren't doing anything to slow it down. Speaker 3 (5:08) The issue, too, is that when you have borrowing costs that are elevated for an extended period of time, it just increases the chances that something breaks. Because right now, you can support the weight of higher borrowing costs because the AI boom is booming. Companies are still investing. They're doing business investment, even though technically they should be pulling back. Consumers, too, just are kind of powering through because the job market is propping them up. That's a house of cards. It's a very fine line once you stay in a place where rates are elevated for longer. And so you can just go back through history and see how the economy reacted. in similar times to this. John Roach of 22V Research identified 16 similar rapid increases in the 10-year treasury yield over the past 50 years. And every single one was associated with some form of financial disruption. That can range all the way from a massive market crash, if you go back to 1987, if you go back to the dot-com bust. to the housing crisis, or it can be something like a string of bank failures like we saw in 2023 with the Silicon Valley bank imploding. His warning was something always breaks. So again, right now we are telling this story as the economy is hot and it can support these higher borrowing costs, but it just decreases the margin of error. Speaker 2 (6:31) Yeah, but we may have never seen anything like the AI build-out. In fact, we haven't. People say it's the biggest infrastructure build-out that America has ever seen. And these companies, like Meta, Amazon, Anthropic, and OpenAI are not as sensitive to interest rate increases. You had Ajay Rajadakshya, who's at Barclays Global Chairman of Research, writing a note saying that it's basically these companies... If there is a 50 basis point increase like we are seeing in the 10 year treasury or other borrowing costs there, the returns on investment are so great that they'll literally just shrug it off. What he said is the result is that the most capital intensive construction cycle in the United States is being driven by entities for whom the cost of capital is at a first approximation irrelevant. It's one of the most important reasons why the economy has absorbed a substantial rate hike cycle without cracking. So it looks like these guys are just going to continue. to build data centers that powers construction jobs, that powers consumer spending. And it looks like that may not be breaking. The problem is Kevin Warsh at the Fed, it wants to slow down the economy because a hotter economy means higher inflation. He needs to get that back to 2%. So what he might do is pull the emergency brake and crush literally everything that's not AI data centers, because as we've talked about, they'll probably still build on. And that's bad news for the rest of us who aren't building data centers. Speaker 3