What's Behind Fed Skepticism & NVDA Increasing AI Accessibility

**SPEAKER_1** (0:00)
Joining me now at the desk here of the New York Stock Exchange to break down that July CPI is Ali Meli, who's the founder of Monochill Capital Partners. Ali, thank you so much for your time. No surprises, bang in line. What did you make of it?

**Ali Meli** (0:13)
No surprises. It came, it came there. Market was expecting, and I believe the market is back to what it is supposed to be doing, which is highly skeptical of the Fed's conviction commitment to fight inflation.

**SPEAKER_1** (0:30)
What do you mean by that? Just unpack that a little bit. Are you saying that we're seeing that playing out in the bond market?

**Ali Meli** (0:35)
We are seeing play that even in the equities market. The most speculative part of the market is rallying hard. We are also seeing that in the rate market. I mean, if you look at it, the year-over-year inflation is at 3.4 percent. Short-term rates are very close to that, so there is no real yield in the short end of the curve.
Then if you look at the credit markets in particular, IG spreads are at historical tides, back to where they were in 1998

**SPEAKER_1** (1:05)
Yeah. I want to ask you about that actually. What about AI and all this capex do you think is impacting the bond market right now when you have obviously investment-grade corporate bonds now basically competing with treasuries? Is that what's pushing yields higher, do you think?

**Ali Meli** (1:24)
There is some element of that, and maybe I'll break it to two parts. What's pushing the yields higher? To me, it's much simpler. The market is looking for the Fed to take action and not speech. And the Fed has been a lot of speech about how they want to fight inflation, but no action in fighting inflation. Their balance sheet is still at more than $6 trillion, and their balance sheet shrinking has stalled for the past couple of years. The new regime in the Fed has been talking about it, but has not taken action. So much of the fact that yields have been going up, in my mind, has been driven by the fact that the market is not taking the Fed seriously, and they want to see action from the Fed before they start pricing lower inflation.

**SPEAKER_1** (2:09)
Do you think the market's right? Do you think the Fed should hike in the September meeting?

**Ali Meli** (2:13)
Well, it is not just about hike, per se. It's also about the size of the balance sheet. And the balance sheet increase has been the Fed's favorite weapon for the past 20 years to, in their mind, control the market or support the market. And if we go back to 2022, the signal that the Fed has sent then was that we don't really care about inflation.
If something goes wrong in the market, we will just come and step in and we will bail people out. And I think that is still with the market and it's up to the Fed to convince the market. It's not really my place to tell the Fed what to do. It's just that as long as they continue their current path of talking and not really taking action, the market will continue to discount their rewards and look at their actions.

**SPEAKER_1** (2:59)
But there is a view that many people credit Kevin Warsh with now focusing very explicitly on price stability. And he said that. But there obviously is a view out there that it's very difficult to make a bold call on inflation just yet, particularly with any sort of move on rates, because you just don't know what's going on with the Iran war. So what do you anticipate the Fed should do next? I mean, what would you like to hear from Jackson Hole, for instance?

**Ali Meli** (3:27)
That there is a real commitment to reduce the balance sheet, that the price stability is the key.
Because again, if you look at the market, the market is rewarding their speculative parts, and they are not really taking Fed hike risk seriously. To me, it just becomes about Kevin Warsh, I credit him with talking about balance sheet reduction. It's not time for action on balance sheet reduction.

**SPEAKER_1** (3:49)
Okay. What would that mean then for the tech companies? I mean, particularly those that are now negative free cash flow, we're seeing a lot of them tapping the debt market now to fuel the AI infrastructure build out.

**Ali Meli** (4:02)
Sure.
That's another interesting story that is going on. If you look at essentially the issuance in the investment grade side of the market, there is more than a trillion dollar of expected capex over the next year, and it's not just like GPUs, it's energy, it is connectivity, it is cooling systems, it's power. There is a whole ecosystem that supports AI and the amount of capex that is required there even by the hyperscalers, which is the most credit, essentially friendly part of the market. There is not a trillion dollar of space in the investment grade corporate bond market for the four or five hyperscalers to come and issue bonds. So we are seeing that even for high quality companies like Amazon, the spreads have been gradually moving wider. Even though the rates have stayed stable, the spreads are like the new issue concession, every time they come and announce that they are issuing 20 billion dollars, 30 billion dollars, there is more and more spread widening. And at this point, it is more supply and demand as opposed to concern about credit quality. It is just that there is limited shelf space in the investment grade world for all of the capex to come and hit the investment grade bond market.