Rate Cuts, AI Bubbles & Credit Cockroaches

10.11.2025

In this episode of SB Talks, CEO Vincent O’Neill and CIO Nick Ryder, discuss the Reserve Bank’s Cup Day decision and what it signals for future rate moves. They explore the latest inflation data and the RBA’s updated forecasts, highlighting the delicate balance between a softening labour market and above-target inflation. Across the Pacific, the US Federal Reserve’s stance is equally nuanced, with rate cuts, shutdowns, and inflation uncertainty clouding the outlook.

Nick shares insights on US earnings season, the AI investment surge, and whether we are edging toward bubble territory. The conversation turns to private credit markets, where recent fraud cases raise red flags and prompt a closer look at lending standards.

Read Transcript

If you’d like to receive our publications direct to your inbox, click here to subscribe.

Listen on Apple Podcasts

Watch on Youtube:

Transcript

Vincent: Welcome to SB Talks. Today is Wednesday, November 5th, and I am joined as ever by our Chief Investment Officer, Nick Ryder. Welcome, Nick.

Nick: Thank you, Vinny.

Vincent: Now today Nick and I will be discussing the Reserve Bank. We had no cup day rate cut, but where to from here, we’ll chat about us earning season and fears over potential market bubble, as well as talk of cockroaches in the credit markets. Hopefully that doesn’t put you off. Welcome to all our listen.

So, we had no cup day rate cut yesterday. Not any great surprise given the September quarter inflation data that we saw last week. But unpack, your thoughts around just that broader data and where it leaves the reserve bank going forward.

Nick: It was no great surprise given the strong trim mean imprint for the September quarter, which came in at 1%, and that compared to 0.6 that the RBA had in their forecast in August. So, we got a new set of forecasts from the RBA that shows that they expect inflation trim, mean inflation, which is the measure of underlying inflation to track at about 3.2% through till June of next year. So, that’s not heading in the right direction. That’s not two and a half based on their longer run forecast, they’re only seeing it get down to 2.6% by the end of 2027. We got a new set of forecasts, Michelle Bullock at the press conference, which I watched, said that there was some noise that she thought in that September number. Some, maybe some temporary factors that are distorting the quarterly numbers a lot. I think she wants to buy a little bit more time to see whether some of those things unwind next quarter.

Vincent: But she’d previously been on the record to say they were hoping for 0.6. She said 0.9 would be a material miss or words to that effect, and they got a worse result than that.

Nick: They did. There was a couple of things in there that she kind of called out. One is what they call market services inflation, which is the stickier part of the sort of inflation basket, which is not really moving too much. And she called out dwelling construction costs, which have sort of gone back up again. She also discussed that the sort of lag effect of the prior rate cuts earlier this year, the three rate cuts, are still kind of coming through.

Vincent: As the rate cuts come through, people get a bit of a boost, as you’ve talked about on the podcast before to their disposable income, which hit impacts your discretionary spending.

Nick: That’s right. Even though we got that spike in unemployment rate from 4.2, 4.3 up to 4.5, she didn’t seem particularly concerned about that. She still characterised labour market as on the tighter side. They do seem more worried about inflation, and want to, I guess just buy more time really, just to see whether some of those temporary factors unwind.

Vincent: So markets had been previously pricing in, you know, a fairly significant probability of a cut, but once that inflation data came out last week, that was really off the cards.

Nick: Yeah, that’s definitely been off the cards since then. We now have just four basis points priced for December. So, no probability of any action, pretty low probability. There’s not a lot of data between now and then anyway, and really the first full cut is not until August of next year.

Vincent: If at all. So, we’re heading into pretty significant data dependent territory.

Nick: Yeah. And she just discussed this at the press conference saying she didn’t think policy was that restrictive, indicating that the neutral rate could be. Roughly where we are today or maybe a little bit lower. So didn’t really feel like there was a great need. She kept saying that we didn’t raise rates as high as other countries, therefore we don’t need to cut them as much either.

Vincent: That’s true. And that is true. We’ve talked about in the immigration and the other factors affecting our economy, so we’re probably heading into a period now where they’re going to assess where that neutral rate is based on how the economy’s tracking.

Across the ocean, The Federal Reserve policy makers voted for a 25-basis point cut last week, but tempered expectations potentially in terms of where their trajectory would be going from here.

Nick: Yeah, I think there’s still a degree of uncertainty there as well. Very similar to Australia in many respects. Inflation is, too high. It’s tracking around 3%, 3.1 in the US so above their target. There’s still some, Fed speakers. We had Lisa Cook last night saying. She thinks that the tariffs have still yet to pass fully, sort of pass through into prices.

Vincent: There’s still more to be seen there. There’s probably plenty of evidence of that still question marks of where companies are absorbing it and the consumer’s not really seeing it yet.

Nick: Yeah, and Chair Powell said that December at the press conference, December is definitely not a foregone conclusion. They’re obviously still in that government shut down. There’s no data around inflation or the labour market that’s coming through. He used the expression when you’re driving through the fog you need to slow down suggesting that there’s a good chance that they might do nothing in December. We’ve seen some repricing in the bond market. Bond yields have risen on the back of that. So that makes, I guess makes sense. And we’ve had a few other Fed speakers also saying, they really don’t think that there’s a need at the moment for follow-up rate cut in December.

Vincent: And it might take a bit of a, well, I guess a cautious path forward, probably appropriate. Then we’ll see what the makeup of that board is as we enter the new year. And some terms potentially come to an end and new individuals are added.

Nick: Well, that’s right. I mean, Lisa Cook, who I mentioned there’s still Supreme Court, case about whether she can be removed by Trump for, cause or lack of cause, so that’s still to play out. And then, we know he’s still considering, I think, five candidates to replace Chair Powell in May. So, there’s all of that to play out as well.

Vincent: But the US have risen further. They started cutting sooner, but I’ve taken a meaningful bit down from where they previously were. It is getting to this period now where they probably should be slowing down, and particularly with all the factors at play in their economy, as you’ve articulated before. It’s probably sensible that we see sort of a cautious approach from here, even if that’s not what the administration might ideally seek.

They’ve had had 150 basis points of cut so far. The cycle now, earnings season, broadly a positive picture. We’ve got a market that’s beginning to have more question marks over the AI rally, and is this a bubble? It’s increasingly getting headlines and comments. How’s the earning season shaping up before we maybe step across that broader topic?

Nick: Yeah, so US third quarter earnings season, we are 71% of the way through that. It’s. been good, 84% companies beaten. That’s above the long-term average. We’ve seen growth in revenue tracking around 8.2%, year on year, excluding the energy sector, which is quite volatile. Earnings are tracking around 14.7% higher than last year, excluding energy. Strong results, and so, when we do talk about the AI bubble and all that sort of stuff. When you look at those numbers, you can see why the market’s been as strong as it has and particularly, with the rate cuts we just discussed with sort of reduced trade tensions with economic resilience markets have really liked that and that’s sort of been one of the reasons why the market has continued.

Vincent: To drive high this year has remained as resilient as it is, albeit it’s fair to say the market has baked in fairly lofty expectations, particularly for some of the companies in the technology sphere.

Nick: Yeah, so we saw a few of those companies, those Mag Seven companies report in the last couple of weeks. And the results generally were pretty good. There was a few sort of divergences. So, Amazon had a really good result and its shares kind of rose, 10% meta had a equally good result. It shares went down 10% and you know, there are increasing concerns about the amount of capital these companies are spending to kind of drive forward in AI.

Vincent: So, building data centres and buying Nvidia chips.

Nick: Well, that’s right. Just to put this in context, the four big hyper-scalers, Amazon Meta, Microsoft and Google are on track to spend 350 billion in capital expenditure this year. That compares with, they spent about 70 billion in 2020, so a context, significant context increase, and a lot of them guided in their most recent results for even more spending in the year ahead.

Vincent: Your spending trajectories that they’re guiding to are, eye popping, obviously question marks over whether that all plays out, but very capital intensive.

Nick: Yeah, and I think with Amazon, Google and Microsoft, you can say, well, at least they have cloud businesses, AWS Azure, Google Cloud, and so, they have a service to sell. In the case of Meta, they don’t, they produce advertising and content and so it’s not clear why they need to spend so much on AI. Is it really needed to generate, more advertising content?

Vincent: That’s an interesting question. Do they just see it as an existential threat? Therefore, they feel like they just need to be here spending this money doing it for the sake of their own survival, but question marks over what’s the road to monetizing this?

Nick: Well, that’s right, and that is what Mark Zuckerberg’s talked about almost existentially. He is happy to keep spending for the time being and when questioned from analysts as to what the payback is, can’t really articulate that and that’s why meta shares were down last week.

Vincent: And when you have I guess, an organisation that’s running such huge EBIT margins and you’ve got this cash flow, it’s a lot easier to make those decisions than if you’re running a historically, traditional business of lower margins and lower cash flow, and you’re having to go to the market to finance some of this spending.

Nick: Well, that’s right, and Meta did go to the bond market last week to raise $30 billion for a bond issue. They’re also doing some of these sort of off-balance sheet deals with groups like PIMCO and BlackRock to finance data centres that don’t sit on their balance sheet. There is some concerns that there are parallels to the.com bubble when you see some of these sorts of things creeping in the infrastructure build.

Vincent: Infrastructure build out that went on at that time of playing the cable and other things, which eventually all got used, but for a period of time there was probably an overbuild.

Nick: Well, that’s right. The payback was quite long. It’s like when the personal computer came in. Great. But it took, 15, 20 years before it really started to boost productivity and to get monetized, so there’s some parallels.

Vincent: Can I take a step back from that, if I may, and then ask you to put your chief investment officer hat on if I can. How do you think about this? When you look at the market and the strength there’s been in the market, your comfort on, I guess, remaining invested. And a caveat over the top of that is, of course, you have to invest somewhere. So, if you’re not invested there, where do you go?

Nick: Yeah. For the time being, we’re comfortable. I’m comfortable remaining fully invested in equities. I do see that this AI runway has further to run. It’s not something they’re just going to switch off tomorrow. Based on the demand that’s coming through for some of these companies, it does seem like there are returns potentially from some of these investments. So, I think, for the time being, we’re happy to remain invested. I do go back and look at the .com bubble, Alan Greenspan, who was the Fed, Chair back in the 1990s, talked about irrational exuberance in December 1996, and the .com bubble didn’t pop until March 2000, three and a bit years later.

These things are very hard to time. And if you, get out too early. That’s the same as being wrong. You might eventually be right, but you might miss a lot of the returns that come subsequently. So, we’re alert to the risks. I do look at some of these things like for example, meme stocks are up 71% this year. Unprofitable tech companies up about 60%. The Mag Seven, which does have real earnings up about 25. Before last night’s pullback, the S&P up about 16, the equal weighted s and p, which is sort of the average stock only up eight and a half.

Vincent: Yeah, that’s worth clarifying that one. So obviously the more heavily weighted end of the market is the big tech. And the rest of the market hasn’t risen nearly as much. But you do paint a picture there that there’s a bit of a junk rally with meme stocks and other non-profitable companies have been risen quite strongly. So, it probably paints a picture where at some point there’s a rationalisation point here and that. It means that potentially everything gets sold off somewhat in that process, but it doesn’t all stay sold off in that process too, and you’re never going to time that perfectly. So, you’re trying to be selective about how you’re invested into it.

Nick: Yeah, that’s right. So, we’re, keeping an eye on it, but we’re not overly concerned at the moment, even though, last night we had two CEOs from banks, Goldmans and Morgan Stanley warning of bubbles. There are more and more people in the press warning of bubbles. Which is probably a healthy thing in some ways, if you think about it.

Vincent: Here’s an example of how it plays straight through from some of the mega scalers. If everyone becomes a bit more cautious, maybe their capital rollout. Slows down, and that will slow down, obviously, the evolution and the rollout of AI, but it’ll help bring things a bit more into equilibrium. So, the market has the potential to do those sorts of things. It can self-correct. If you’re a non-profit making tech company, it’s not going to do anything for you. You’re just gone. And perhaps some of those need to be cleared out as well. And that’s probably what they’re calling for.

Now, we’ve spoken on the podcast previously when looking at valuations and talking of bubbles. Your preference for mid risk assets, in particularly areas like private credit and it’s been in the news in recent weeks. The credit markets more broadly, and you wrote about it in our SB News last Friday, and particularly, Jamie Diamond, JP Morgan’s, CEO, talking about the cockroaches in the credit market. Can you expand on that?

Nick: Well, he used the expression, when you see one cockroach, there’s usually more, referring to some of these problems that we’ve seen, in the press around various companies that have gone bust recently. Notably First brands, which is selling car parts, and Tricolor, which is a business that JP Morgan actually lost money on, 170 million. In each of these cases, First Brands, Tricolor, another company called Triple Seven, which I discussed in the article. A couple of, real estate funds in California and since then, two more have popped up, with BlackRock and BNP Paraba also exposed. So, this isn’t just private credit, these are banks, actually getting caught up in the credit market more broadly. In almost all these cases, there was fraud involved where assets were double pledged.

Vincent: Explain that for us.

Nick: It’s like you have a car and you go and get a loan against that car from one provider, and then you go get a loan against the same car from another provider. And the two don’t know.

Vincent: So structural security over the same structural weaknesses in the system that have failed to pick this up.

Nick: Yes, that’s the problem. Faud has allowed this to happen with falsifying of records about cars and invoices which have been sold or borrowed against. So, there has been fraud and I think that is a wakeup up call when there’s too much capital chasing too few, sort of lending opportunities, maybe standards get relaxed a bit too much, and then you get these sorts of scenarios popping up. I think it is a wakeup call, not just for banks, but also for the broader private credit industry that is providing this finance to, really make sure that they’re trying to avoid fraud, although it can be very difficult to avoid.

Vincent: Well, I think you’re talking, and you made a couple of very important points there is I think when you get over exuberance and too much capital flooding into a space and then standards can fall. And potentially your returns obviously are impacted by that. Maybe, it is worth setting up when we invest in private credit. What we look for in managers, particularly around, I guess, their experience, their history through different cycles under diversification.

Nick: Yeah, so definitely we look for institutional grade managers that have robust practices and systems that have been doing this for a long time that have been through cycles that have people dedicated to dealing with problems.

Vincent: Talk about those sort of problems.

Nick: Well, generally, when you’re lending money and you are earning, the cash rate plus another 5, 6%, these are borrowers that cannot get traditional financing from the bond market or from banks at lower costs. You’re dealing with a riskier borrow, it’s going to higher risk, you’re dealing with higher risks. So, you need people that know how to work with those borrowers if they run into troubles and try and recover their money and have strong lending covenants, legal documentation, monitoring of the borrowers.

They’re getting the monthly reports on how they’re tracking. They can get in early if they see signs of weakness. There’s a lot of levers that these firms have and a lot of experience, and that’s what we look for. And we also look for, companies that are highly diversified. In one case, we have one firm that has 700 underlying exposures. We know some of them might have problems, but it will be, some of them inevitably. But it will be not impact the whole portfolio.

Vincent: And they’ll still expect to hit the return objectives because they anticipate that there’s some of those borrowers given the rates that they’re paying, are going to have challenges.

Nick: In one case one of our fund managers has said they had looked at First Bands and there had been a lot of red flags that had popped up and had deliberately avoided that. And one of the things that they look for, for example, is a private equity owner of that business and First Brands didn’t have that. Where you have a private equity owner, they’re obviously highly incentivised to make sure that their equity is protected and fraud and things like that are minimised.

Vincent: That fraud will wipe out their equity very quickly, and potentially the debt as well. So fair to say, you remain enthusiastic on the sector, but appropriately cautious.

Nick: Yeah, I’m not going in with eyes closed. I know exactly what I’m getting into and looking for managers that can navigate through what will eventually be a more challenging economic environment.

Vincent: But if you have a credit manager out there that’s offering you double digit returns for cash, like risk, there’s clearly red flags all over that one.  Excellent summary as always, Nick. Thank you very much, and thank you to all our listeners.

Any advice contained in this publication is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Stanford Brown is a Corporate Authorised Representative of The Lunar Group Pty Limited. The Lunar Group and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products. The Lunar Group Pty Limited ABN 27 159 030 869 AFSL No. 470948