00:00:02 Speaker 1: Bloomberg Audio Studios. Podcasts Radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. So here's the latest this morning. Markets bracing for remarks from Fed Chair Kevin Walsh at Jackson Hole later this morning. Wall Street looking for clarity on plans to bring inflation back to target. Claudia Salm of New Century Advisors writing, we have a clear sense of what Walsh doesn't like at the Fed, but very little sense of what he's proposing as a replacement. His Jackson Hole speech is an opportunity to bring depth to his vision. Claudia joins us now for more. Claudia, welcome to the program. How hopeful are you heading into this speech later this morning? 00:01:05 Speaker 3: So I am confident that I am going to learn more today about Kevin Warsh as a leader, as a Fed chair. I may not like what I learn, but this is an opportunity for us to really understand his vision for the Fed. We don't know leaders until they have been tested. What came out of the July press conference was a test. I wouldn't call it a really tough one, right? But this is his opportunity to reassess. 00:01:28 Speaker 1: Respond. And it will be very. 00:01:29 Speaker 3: Meaningful to see how he approaches today and what he shares with us about his vision and how he's going to get us from A to B in terms of better Fed, lower inflation, better policy. 00:01:39 Speaker 2: Claudia, it's a big job. You know that. And even the most experienced make mistakes along the way. And we've seen that in various Fed officials and central bank leaders all around the world. What kind of mistakes do you think he made specifically in that news conference that you think maybe this man would look to repair? 00:01:54 Speaker 1: Well, I wouldn't want to judge. He is a new Fed chair. He's out of the gate. 00:01:58 Speaker 3: I think at this point, it's really more about how does he move on from this moment? I don't expect him to backtrack on his kind of big ideas. I don't expect us to get forward guidance. We're not going to get a big lead on September 11th. But I do expect him to show that he's building a consensus. I think responding to some of the feedback, particularly from the committee, I'm sure they had feedback on the July press conference too, and just showing that he's leading a team and he is responding to that as opposed to going it alone. It's a big transition to go from the outside critic to the leader of the institution. I would expect it to be Bob Lee, but I also expect him to bring it today. 00:02:34 Speaker 4: Do you think that he also, Claudia, then needs to address the dissenters, the most dissents since September 2016, the hawkish speech we've had from those and others post-July conference? Is that something that this chair also needs to be addressing? 00:02:49 Speaker 3: The chair needs to understand all of the arguments that are on the table. The hawks have been very articulate in what they are seeing in the data, what they are concerned about, why they have dissented. 00:02:59 Speaker 1: I think that is great. 00:03:00 Speaker 3: It's really giving voice to the hold, like the majority at the Fed who have so up to this point been on hold. 00:03:08 Speaker 1: It is clear they are looking for more improvement. 00:03:10 Speaker 3: It's him giving voice to the consensus and and also giving us a piece of that debate. I'm not so sure we're gonna get that message from Kevin Walsh today. I'm not sure that's where he's gonna go with it, but it is going to be in the air. 00:03:23 Speaker 1: At Jackson Hole. They are going to be talking about inflation and the inflation outlook. 00:03:27 Speaker 4: Claudia, how much, though, do you expect any sort of framework, maybe not forward guidance, but a laying out of the data he finds important, the things he watches for and would concern him as he's judging what inflation looks like? Do you expect to get more meat on those specific bones? 00:03:44 Speaker 3: I would hope we get meat on some bone, right? I mean, he has put out a really big regime change. I mean, if you look at the five task forces, they touch almost everything the Fed does. 00:03:55 Speaker 1: That is massive to go through that. If he pulls off a piece of it. 00:03:59 Speaker 3: Goes into a little more depth, gives us some more details, I think that would be great. But consistently, Kevin Warsh has stayed at 30,000 feet. He's kind of given the big picture. I think that's where he's comfortable. That's probably the best likelihood of what we get today. 00:04:13 Speaker 1: We'll just have to see. Like, this is a learning process. We're getting to know him. This is the first, not the last Jackson Hole speech. So, you know, let's let's just see how it goes today. 00:04:21 Speaker 2: Claudia, I'd love your opinion as well on what you think we are. We've heard from so many Fed officials in the last several weeks or so. They appear to be debating again once more whether we are sufficiently restrictive or not. This economy is very, very different to the one we saw a number of years ago. Claudia, do you believe we are sufficiently restrictive and how can you tell? 00:04:41 Speaker 3: I think we're shifting to a place where it would be most appropriate for them to start raising rates. I have been in the hold camp up until about this week, and it's not just on the data. 00:04:50 Speaker 2: I think the. 00:04:50 Speaker 3: Inflation data are mildly encouraging. 00:04:52 Speaker 1: We're seeing some improvement. The headlines are not good, right? 00:04:56 Speaker 3: Trade war with Canada, Middle East progress completely stalled out, and a lot of demand for the AI build-out that's pushing up chip prices. If I look at the outlook a year out, I am not confident we are moving to 2% on a steady clip, I think it's probably time for the Fed to do more. And I think that's where that conversation is at. There's a lot of data still to come before September and more headlines, but there is something shifting in the inflation picture in the U.S. 00:05:22 Speaker 2: Right now. Claudia, you alluded to it. What shifted more recently? What got your attention? You listed a few things, but what got your attention and made you think, this has changed, it's moved? 00:05:32 Speaker 3: But I think it also was that we had multiple headlines, right? Part of the Fed's staying on hold is saying, well, inflation is elevated. I mean, they can read the numbers just like we can, but the forces will abate. 00:05:44 Speaker 1: The tariff effect is waning. The gas price effect is waning. The AI, this is narrow. 00:05:51 Speaker 3: And we're just getting really hit with a lot of information that's forward-looking that makes you think, am I really confident that those inflationary effects are waning? They might not get a lot worse, but if we get stuck, we're a lot closer to 4% on PC inflation than we are 2%. So you need some good news in the headlines in terms of inflation. And at least in the last week. 00:06:12 Speaker 1: Or two, we have not been getting the good news headlines. 00:06:15 Speaker 4: If parts of the issue are coming from concerns about geopolitics, high prices of memory, Claudia, what would a Fed rate hike do to fix those? 00:06:25 Speaker 3: So a Fed rate hike pulls some demand out of the economy. It's true that that wouldn't necessarily go at the root causes of the supply shock in the Middle East or the tariffs. Now, I think with AI demand, you can debate it, right? We have some of the AI build-out that is going through capital markets with bond issuance. So interest rates are relevant, and AI is a demand story. That is not purely a supply-side shock. But the reality is, to your point, those higher interest rates... They're going to hit people on the margins, small businesses on the margins. That's where the demand comes out. But like that is the tool the Fed has. They can't stop those tariffs. They can't get the peace in the Middle East. But their job is to get inflation down. So they got to do what they can do. I'm not talking about anything aggressive. I think just moving in that direction of getting a little more restrictive seems to me like it's likely not a done deal. But I think we're maybe moving in that direction. 00:07:20 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Let's turn back to our top story. Fed Chair Kevin Walsh gearing up to speak from Jackson Hole at 10 a.m. Eastern Time. The former Philadelphia Fed President Patrick Harker writing, Walsh has three elephants in that room, inflation, the treasury market, and the fiscal situation underneath both. Watch what he addresses rather than what he promises. Patrick joins us now for more. Patrick, welcome to the program, sir. Always good to hear from you. Out of those elephants, what does he have the most influence over? 00:08:01 Speaker 5: Yeah, good question. So he clearly doesn't have influence over the long end of the yield curve. That's never been the case, right? He does have influence over inflation and the credibility of the Fed in terms of inflation fighting. It's not enough just to say we're going to be tough on inflation. You actually have to do something. Now, I think I was listening to your comments earlier on raising the short end by 25, 50 basis points. Is it going to make a huge difference? 00:08:31 Speaker 1: No. 00:08:32 Speaker 5: But it's signaling what the Fed means when it says it's tough on inflation. 00:08:38 Speaker 2: Patrick, do you think there are questions being asked of this Fed chair that weren't being asked of the former Fed chair? Is there something about the switch here that has raised questions about credibility that little bit more because of the pressure this institution's come under over the past 18 months? 00:08:52 Speaker 5: No, I don't think so. I don't think that's the issue. I think the issue is the circumstances we have. Right now, we have inflation. We're going on to six years here soon of inflation above target. The Fed has to show that it's serious about getting that under control, getting to 2%. And the idea that we change the target, change the goalposts right now in the middle of this fight, that's just, you have to take that off the table. It makes no sense. 00:09:22 Speaker 4: Patrick, there is this argument, though, that when Chair Walsh speaks, that he doesn't really need to do any cleaning up, that the long end yields on 30-year yields, they haven't moved that much, as John pointed out, only 10 basis points, that his whole aim is not to hold the markets hand. Do you think that there is an element of cleanup that he needs to do from his July press conference? Yes. 00:09:42 Speaker 5: Yeah, I think he actually has to take action. You know, as people say, words are cheap. He actually has to show, and this is what you're seeing with the other committee members right now, those who dissented and all the others who are out talking right now. I mean, Susan Collins, my old colleague, she's pretty much a center. And the fact that she is now saying we're probably not restrictive is a real tell. 00:10:06 Speaker 4: What does taking action look like? 00:10:08 Speaker 5: Well, I think they just have to raise the Fed funds rate. Again, it's not going to affect the long end. I get that. But I think it's an important signal to the market. 00:10:18 Speaker 2: Pantry, what has changed? You mentioned that things have changed. Certainly, the bond market is way more unforgiving now than it was in years gone by. What's changed about the economy that's led to less confidence about ultimately achieving this target anytime soon? 00:10:32 Speaker 5: Well, some of it is the build-out of AI, right? It's sucking. It's a great sucking sound. It's sucking all kinds of capital in, all kinds of goods, transformers, you name it. So that is different in that you're just seeing this incredible build-out in a very rapid time period. So that's one. The second is the war. I mean, let's face it. I mean, We talk about supply shocks, and if you read the textbook, you're supposed to look through supply shocks if you're a monetary policymaker. But these supply shocks keep coming at us. They're off, on, off, on, tariffs on, tariffs off. It's hard to keep looking through those. They're not so much... random acts of God. These are deliberate actions by nation states or within our own administration. So those are not shocks in the traditional sense. And they are very different than what we've experienced in the past. 00:11:28 Speaker 2: Just on the first point, the AI build out, one debate we've had on this program, we'd love your input on how race sensitive that build out might be, how race sensitive that build out might not be. Where would you come down on that? 00:11:40 Speaker 5: Well, it hasn't to date, right? I think what we're seeing right now is it really doesn't matter. I mean, they're rushing to build out this infrastructure. But what we know through history is, you know, that it's going to take time to actually see the productivity on the other side. You know, we're going back to the 1980s, baby, bell bottoms, disco, and the word reengineering. Remember this word? That we have to redesign our production processes, our service delivery processes. to take advantage of new technologies. That doesn't happen overnight. So, I mean, that's what we're seeing right now, this rush to build this out. But we're not going to see the payoff for quite a while. It's going to take time to move into the economy. 00:12:23 Speaker 4: Well, and that's part of the difficulty, especially if they haven't been rate sensitive to date, Patrick, of what raising rates would actually do to these hyperscalers, especially when the new central bank for them in town seems to be NVIDIA that's happy to finance everything from the entire ecosystem. So if you raise rates, what would eventually then be the transmission mechanism to the AI hyperscalers, if that is part of what's changed and part of the issue for this economy? 00:12:48 Speaker 5: I don't think that the hyperscalers will be affected by a rate increase. What they're going to be affected by is people who start to question, where's the beef? Where's another phrase from the 1980s? Where's the money? And so investors may get a little skittish at some point. 00:13:05 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. NVIDIA adding $ 442 billion in market value just yesterday, marking the second largest one day gain by any stock in history. Gene Munster of Deepwater Asset Management joins us now for more. Gene, welcome to the program. For years, we used to talk about Apple and Apple getting bigger and bigger and people used to talk about deceleration. And it just felt like in the last few months we were doing the same thing with NVIDIA. What was your reaction to that outlook from that company? 00:13:48 Speaker 6: Well, I appreciate the Apple analogy, John. Actually, it's something that I've been thinking about more recently, that growth that Apple had. And just to put into perspective what's happened with NVIDIA over the past few years and looking towards next year, calendar 22, NVIDIA did $ 27 billion in revenue. Calendar 27, so five years later, they'll likely do more than $ 700 billion. It's probably going to be $ 750 in revenue. So $ 27 to $ 750. The reason why I say that in the comp relative to Apple is that what's happened with NVIDIA has been breathtaking, even relative to the iconic tech moves that we've seen. And so the key takeaway here is less about what we've seen from 22 to 26, It's more about what we're going to see from 27 to 30, to get to your point here. It's been well documented here about the numbers, the guidance, the plus 70% revenue growth rate versus the street at plus 45%. That's for calendar 27. That was kind of the eye-opener from a couple nights ago. I expect that next year calendar 27 will probably grow at 90%. That means that the growth rate in calendar 27 will be about the same as it is in calendar 26, 90%. And I think at the core of what's going on here, if we just look at the business, forget about the big picture with AI, but just if we look at NVIDIA's business, at the core of what's going on is that the customers... simply just can't get enough capacity to do inference and that is what is driving these numbers up and ultimately i still believe we're probably in the third inning of this build-out sounds hard to kind of wrap my head around that almost impossible we're very early. 00:15:28 Speaker 2: Gene i really struggle with that but that's the way things are heading gene when you look at this company one unique part of the way they operate is they look to foster and create their own demand by helping to build out the ai ecosystem elsewhere what would you point to as a unique feature of that. 00:15:44 Speaker 6: Well, I think from the demand side, it's just the speed of their chips that ultimately is what is driving all this. And that's what's allowing them to have this incredible pricing leverage, kind of next year, probably 20, 30% potential pricing increase on some of their products. And I think that's the piece, John, that gets missed in this conversation, is that ultimately consumers or their customers really need these chips more than any other custom silicon. And so I think that's a big key takeaway here is that they basically have the best stuff in town. 00:16:16 Speaker 4: What then do you make of some of the other moves they've been making recently, Gene? Maybe lost in the news flow of that huge gain in earnings they had yesterday was the fact that they bought Hugging Face, a big platform for open source modeling and discussion. They have their own open source that they're working on too. Gene, what exactly is NVIDIA doing there? 00:16:35 Speaker 6: So this is an important dynamic in terms of how NVIDIA sees the progression of models. And so what Hugging Face is, is for those who are more technical, it's effectively the GitHub of AI development. 00:16:48 Speaker 2: For those less. 00:16:49 Speaker 6: Technical, it's a library of open source AI models that people who are developing AI can basically pull thousands, hundreds of thousands of models together. and plug and play them into the development. And so that's what this is, the big picture here, Danny, is this is the theme around open source, and this is something that Jensen's been very supportive of. But there's a story underneath the surface that I think is more important to what the headlines are, which is, Hugging faces, progressing NVIDIA into the open source world. What's most important here is that NVIDIA is basically building out, is doing the inverse of what their customers are doing to them. So just stick with me for a second here. If you look at customers like Meta and Google, they are building their own custom silicon. Effectively, they want to compete or they want to have alternatives to NVIDIA. What NVIDIA is doing here with Hugging Face, what they did last week with Poolside, a small acquisition, is essentially they're building their own models. 00:17:54 Speaker 4: In the event that. 00:17:55 Speaker 6: Their customers, their current key customers, start to do more of their custom silicon products, they have an advantage to focus more on the models themselves and make money from the models themselves. It's just a fascinating dynamic. As tightly as these companies, the mega caps and NVIDIA hold their hands, NVIDIA is also getting some diversification in case those customers start to do their own custom silicon. 00:18:17 Speaker 4: Well, there was also in the earnings outlaid some other hedging, just looking to other customers besides the hyperscalers, looking to sovereign AI as well as to enterprise. Jean, does that seem like a growing, at least the pace of growth fast enough versus their historical customers to kind of alleviate some of the concerns over concentration risk? 00:18:39 Speaker 6: So the customer concentration, actually the top two declined in terms of total percentage of revenue. It went from 38% in the April quarter to around 30%. And the reason is SpaceX basically came out of nowhere. It was a couple percentage of total revenue in the April quarter. It was probably about 5% in the July quarter. So they are getting some diversification within that. But to your point is the script is flipping in terms of where they're getting their growth from. If we're looking at for next year, those hyperscalers are expected to grow revenue just over 50%. If you look at the non-hyperscalers, the sovereign, like you mentioned, they're expected to grow around 85%. So why that's important is that what investors struggle with here, when we started and talked about this breathtaking increase in numbers, It's less about the law of large numbers. Google is a similar-sized business. The issue is the slope of the deceleration of revenue. And as the non-hyperscalers grow, that gets investors more comfortable that that decline from 90% next year to maybe 50% in calendar 28 won't be as sharp. And so I think that this customer diversification, this script flipping in terms of focus more on non-hyperscale, is an important piece that allows investors to sleep just a little bit better at night knowing that that growth curve isn't going to be as sharply declining as maybe something today. 00:20:00 Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. 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