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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amerie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app.

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Speaker 1: Sanal Desiah, Franklin Templeton writing another FED rate cut next

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Speaker 1: week seems to have been fully discounted. This FED has

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Speaker 1: proven to be very reluctant to disappoint markets, Sanal joins us. Now, Sanal,

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Speaker 1: you've been saying, and thank you so much for being

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Speaker 1: here this morning.

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Speaker 3: Great to be here.

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Speaker 1: You've been saying that you think it's a mistake that

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Speaker 1: you don't think this is an economy that requires another

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Speaker 1: rate cut. Why do you think the market hasn't responded

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Speaker 1: more negatively to the likelihood that isn't just what they're

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Speaker 1: going to get.

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Speaker 4: I don't think you're going to get a look, we're

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Speaker 4: on the borderline of what isn't isn't acceptable. I think

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Speaker 4: as far as the market's concerned in particular, remember we're

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Speaker 4: still dealing and we're just coming out of a data vacuum,

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Speaker 4: right we're just emerging from that. I think we get

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Speaker 4: into the first half of next year and the Fed

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Speaker 4: would have cut fifty basis points this year. I think

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Speaker 4: the market's assumption that we're going to get three four

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Speaker 4: more rate cuts next year, that's I think completely unclear

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Speaker 4: to me.

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Speaker 3: Right now.

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Speaker 4: The first half of next year I think is going

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Speaker 4: to be really strong from a growth perspective, and potentially

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Speaker 4: if we actually get those two thousand dollars fifteen hundred

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Speaker 4: dollars tariff rebait checks going around, that means you're you're

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Speaker 4: going to have tailwinds not just a growth but also

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Speaker 4: to inflation.

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Speaker 1: So where is the inflationary pressure going to come from?

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Speaker 1: Because right now it's not coming as much from the

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Speaker 1: housing sector. We've seen rents actually decline in number of places,

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Speaker 1: huge push to bring down energy costs, maybe not on

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Speaker 1: the electricity side. What's the biggest inflationary impulse here?

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Speaker 4: Can I Can I turn that on its head? Wait, Lisa,

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Speaker 4: where has the disinflation been? Do you know since the

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Speaker 4: middle of twenty twenty three, we've been bouncing along at

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Speaker 4: basically three percent, We've dropped by a few tenths, we've

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Speaker 4: gone up by a few tenths. We're running at a

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Speaker 4: headline of basically three percent. Disinflation stopped two and a

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Speaker 4: half years ago. Now it's against that background that I'm

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Speaker 4: looking at expansionary physical policy, potentially a boom coming from

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Speaker 4: CAPEX and AI, and we're going to get I firmly

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Speaker 4: believe that one of the main drivers of that regional

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Speaker 4: spike that we saw a few years ago in inflation

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Speaker 4: was those fourteen hundred dollars checks which got sent out.

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Speaker 4: And now we're talking about checks again, and where is

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Speaker 4: the inflation going to come from? I think it's demand

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Speaker 4: side pressures.

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Speaker 5: Do you agree with what Lisa Shalatte told us last hour,

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Speaker 5: which is basically, if we get a new FED chair,

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Speaker 5: actually earlier this hour, if we get a new FED chair,

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Speaker 5: potentially one of the first things we're going to do

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Speaker 5: is in the policy towards three percent inflation target instead

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Speaker 5: of two, basically accepting three as the new two.

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Speaker 4: Haven't we already. I'm just asking you seriously. It's two

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Speaker 4: and a half years and the FED. The FED has

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Speaker 4: cut by next week it will be one hundred and

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Speaker 4: fifty basis points while being fifty percent above it above

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Speaker 4: its target. So if I think about one hundred basis

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Speaker 4: points we got last year, it was against the background

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Speaker 4: of higher inflation than we are at today. So I

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Speaker 4: guess where I'm coming from. Is all this focus on

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Speaker 4: whether the new FED chair is going to drive this

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Speaker 4: Fed dubvish.

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Speaker 3: It's moot we have.

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Speaker 4: A Dubvish FED.

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Speaker 3: I've said it before.

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Speaker 4: Last Talkish FED governor we had was Paul Vulco, and

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Speaker 4: that's maybe okay. But I'm just saying that if we

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Speaker 4: are running around, you know, bouncing along three and then

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Speaker 4: you get some drive, you could get a pickup not

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Speaker 4: to six seven, but maybe to three and a half four.

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Speaker 4: I don't know, and I just don't know that it

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Speaker 4: will be the type of backdrop against which we can

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Speaker 4: get the aggressive kind of rate cuts that there's a.

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Speaker 5: Bar next year. As long as they cut next week,

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Speaker 5: the bar next year is going to be much higher.

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Speaker 4: I think it is higher if we are correct in

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Speaker 4: terms of those tailwinds to growth. Now, you know, many

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Speaker 4: things can go completely wrong. Nobody anticipated COVID, for example.

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Speaker 4: There are many things which can go wrong. But if

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Speaker 4: I look at what we have right now, if I

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Speaker 4: look at the kapex plans, which four hundred and fifteen

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Speaker 4: billion this year, five hundred odds next year. I mean,

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Speaker 4: just to put this into perspective, Germany is going to

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Speaker 4: do one trillion euros over ten years. The private sector

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Speaker 4: in the US is doing a delta of about a

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Speaker 4: trillion in two. Of course it's going to have a

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Speaker 4: growth impact.

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Speaker 1: So why not just go wholeheartedly into risk assets and

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Speaker 1: to go into speculative grade bonds because ultimately it's either

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Speaker 1: fed put if things deteriorate, or it's an acceleration of growth,

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Speaker 1: or make these companies more able to repay their debts.

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Speaker 4: I think valuations valuations, there is a certain question of

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Speaker 4: absolute risk. I don't think you buy the entire market.

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Speaker 4: I still believe in being aggressively neutral. I think the

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Speaker 4: curve is going to sleep without a doubt. In terms

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Speaker 4: of the risks to the scenario, I don't think the

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Speaker 4: risks are going to be coming mass from a massive

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Speaker 4: uptake in defaults until the bottom drops out of the economy.

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Speaker 4: That's what I'd be looking for, maybe not even the

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Speaker 4: bottom dropping out, but significant weakness, which we are not

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Speaker 4: currently anticipating. But do you go whole hog in, No,

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Speaker 4: because spreads are tight, right, so the valuations for fixed

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Speaker 4: income as a whole. As I'm looking into next year,

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Speaker 4: I'm going to get clipping coupon, taking income cliping coupon,

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Speaker 4: But you know, not anticipating a massive rally from where

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Speaker 4: we are right now.

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Speaker 3: Stay with us.

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Speaker 2: More Bloomberg surveillance coming up after this.

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Speaker 1: Rolling in Binkie Chada of Deutsche Bank with the most

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Speaker 1: bullish take out there, calling for the S and P

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Speaker 1: five hundred to reach eight thousand by the end of

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Speaker 1: next year. Writing this in twenty twenty six, we see

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Speaker 1: robust earnings growth and equity valuations remaining elevated. Banky joins us. Now, Banky,

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Speaker 1: good morning, thank you for being with us. Good morning,

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Speaker 1: so having me what makes you so incredibly bullish given

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Speaker 1: what we're seeing right now, which is that winners don't

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Speaker 1: take all, or they might take all, but there still

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Speaker 1: are a lot of losers in the AI space that

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Speaker 1: has been driving a lot of the games.

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Speaker 6: So far sure, So you know, I'm not sure that

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Speaker 6: I would characterize my outlook as being so bullish. We

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Speaker 6: have fourteen percent earnings growth for next year. We had

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Speaker 6: fourteen percent earnings growth in the third quarter. We're looking

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Speaker 6: for about fourteen percent.

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Speaker 3: In the fourth quarter.

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Speaker 6: So from an earnings point of view, you know, it's

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Speaker 6: not unreasonable. I would say if you think about what

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Speaker 6: average earnings growth for the S and P five hundred

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Speaker 6: is outside of recessions, it's eleven percent. So we've been

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Speaker 6: bobbing up and down basically around that level for the

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Speaker 6: last two two and a half years. So moving up

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Speaker 6: just a little bit, we were just a little bit lower,

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Speaker 6: So I would argue it's just a little bit higher.

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Speaker 6: We you know, in terms of the price outlook or

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Speaker 6: the S and P five hundred target, we don't do

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Speaker 6: earnings and valuation. We think valuation is more a result.

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Speaker 6: We do our price target on the basis of our

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Speaker 6: demand supply framework has three elements. Basically, what is existing

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Speaker 6: equity money doing, is there new money coming in, and

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Speaker 6: what's happening on the supply side, which is the buy back.

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Speaker 6: So the buybacks are tied to earnings, so you're can

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Speaker 6: have forty percent earnings growth. We're talking about gross buybacks

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Speaker 6: of about one point four trillion dollars next year, and

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Speaker 6: that's with holding the buy back payout ratio flat. If

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Speaker 6: we go to where I began, which is what is

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Speaker 6: existing equity money doing, a discretionary or fundamentals based investors

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Speaker 6: positioning is neutral to slightly underweight.

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Speaker 3: So in terms of the risks that everybody.

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Speaker 6: Is talking about, I would say the fundamentals based equity

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Speaker 6: investors are actually focused and positioned for those risks. So

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Speaker 6: I would say that the wall of worry is really high.

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Speaker 1: Yeah, you haven't mentioned the US economy or the growth

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Speaker 1: backdrop once.

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Speaker 6: Our outlook is for growth actually to pick up a

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Speaker 6: little bit, and that has to do with some of

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Speaker 6: the modalities basically of the OBBA and if you believe that,

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Speaker 6: you know, people don't respond to the tax rate and

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Speaker 6: until it's refund time.

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Speaker 3: And they see their checks. But that's sort of just

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Speaker 3: sort of the distribution.

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Speaker 6: I would say, you know, if I look at the

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Speaker 6: last two and a half years, we're talking about median

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Speaker 6: GDP growth of two point nine percent, so let's call

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Speaker 6: it three percent, So that's pretty robust.

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Speaker 3: But I would say even bigger picture.

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Speaker 6: You know, keep in mind that for the last two years,

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Speaker 6: the macro consensus has very systematically underestimated macro growth, and

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Speaker 6: it's you know, we're talking about trend growth of two

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Speaker 6: two and a half percent. If you underestimate by one

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Speaker 6: percent for two and a half years, that's kind of

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Speaker 6: a big number, is the way I would put it.

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Speaker 6: So I would say the market, the macro consensus, our

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Speaker 6: economists a little bit less, so you know, are still

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Speaker 6: very much focused on the risks.

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Speaker 3: So the equity market has to climb basically.

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Speaker 6: You know, the traditional wall of worry, and I think

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Speaker 6: it's actually positioned for that. And so I mean, you know,

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Speaker 6: if you look at our positioning measures, we are sort

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Speaker 6: of in the middle just going to the top, and

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Speaker 6: the market actually getting bullish from and positioning in a

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Speaker 6: bullish way. I mean, it's nine percent just from here

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Speaker 6: to the top. I mean, if I look at basically

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Speaker 6: the buybacks, you know they're going to give you around

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Speaker 6: ten or eleven percent by themselves.

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Speaker 3: So you put those two things together.

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Speaker 6: At the world where the new money, basically all asset

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Speaker 6: classes are benefiting from this big boom that has its

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Speaker 6: basically roots back in the pandemic when households ended up

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Speaker 6: with basically way too much cash, about two and a

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Speaker 6: half trillion dollars in excess of trend holdings. And so

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Speaker 6: the new you know, from new income and new savings,

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Speaker 6: if you're already to overweight cash, it is going to

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Speaker 6: go into financial assets as long as the economy is okay.

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Speaker 6: And that's exactly what's been happening. But it's been happening

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Speaker 6: for two years. And so the question is, you know,

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Speaker 6: you can look at a chart of household cash holdings

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Speaker 6: relative to the trend line and it's sort of at

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Speaker 6: twenty twenty eight levels already, So it's got some room.

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Speaker 5: To really feel like you're trying to convince us, even

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Speaker 5: though you're a very high price target compared to your peers,

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Speaker 5: that you're actually not that bullish. You keep talking about

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Speaker 5: this wall of worries. What's top of mind for risks

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Speaker 5: of twenty twenty six.

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Speaker 6: So you know, like I said, eleven percent earnings growth

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Speaker 6: is typical, I would say S and P five hundred.

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Speaker 6: You know, price returns on average historically or eleven percent,

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Speaker 6: So forty percent is more much higher than eleven percent.

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Speaker 3: Is the first point that.

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Speaker 6: I would make and I think that you know, one

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Speaker 6: of the things about that average sort of eleven percent return, This.

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Speaker 3: Is not where you do it.

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Speaker 6: I'm just talking about, you know, a few aspects of

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Speaker 6: historical returns. I think the thing to note is that basically,

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Speaker 6: if you take the years of positive returns, and you say,

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Speaker 6: you know, I'm going to take the years where the

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Speaker 6: market was really positive, not sort of point one or

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Speaker 6: one percent, so we have a cutoff of two percent.

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Speaker 3: If you break the two percent.

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Speaker 6: Threshold, the average price in return is actually twenty percent.

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Speaker 3: So you could argue, you know that, I'm rather very okay.

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Speaker 3: And what I would say is.

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Speaker 6: In terms of thinking about next year, the first known

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Speaker 6: catalyst is Q four earnings.

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Speaker 3: They start in the middle of January.

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Speaker 6: So I think Q four earnings are extremely important and

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Speaker 6: we should focus on it for a second. Because Q

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Speaker 6: three earnings came in well better than expected, and it's

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Speaker 6: left actual Q three earnings above what the consensus is

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Speaker 6: for Q four. I think the consensus is simply stale

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Speaker 6: because it implies we're going to have a severe sequential

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Speaker 6: contraction in earnings, so we're going to get either buybacks

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Speaker 6: or big seeds.

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Speaker 1: Here's the issue that I'm having right now. The argument

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Speaker 1: that you're making is liquidity one, and it's that this

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Speaker 1: is a market with a lot of liquidity still in

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Speaker 1: it and looking to go to work, and that ultimately

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Speaker 1: companies have a lot of liquidity, the investor has a

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Speaker 1: lot of liquidity, and money market funds just hit eight

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Speaker 1: trillion dollars for the first time ever. Is this essentially

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Speaker 1: a central bank that has held policy relatively loose to

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Speaker 1: the growth and isn't going to take the punch bowl away,

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Speaker 1: so keep on playing.

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Speaker 6: I don't attribute much of it basically to the FED

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Speaker 6: or central bank policies.

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Speaker 3: I would say it's really.

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Speaker 6: Been about, you know, the resilience of the US economy,

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Speaker 6: which owes its roots back basically to the global financial

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Speaker 6: crisis and the great de leveraging that happen then, and

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Speaker 6: then of course the pandemic. So you know, we're dealing

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Speaker 6: with the world where balance sheets are just much much stronger,

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Speaker 6: so the capacity is much stronger, so the ability to

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Speaker 6: you know, absorb and withstand shocks is just much better.

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Speaker 6: I think we overemphasize interest rates. I mean, you know,

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Speaker 6: after the global financial crime, since we had interest rates

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Speaker 6: at zero.

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Speaker 3: For a very prolonged period, and.

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Speaker 6: You know, the textbook logic or the narrative would be therefore,

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Speaker 6: you know, everybody was spending or things sort have been

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Speaker 6: much worse. But the fact of the matter is that

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Speaker 6: you know, for the entire duration of that period of

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Speaker 6: low interest rates, the household sector was de leveraging and

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Speaker 6: continue to do so.

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Speaker 3: And in fact, it didn't stop on the story raising rates.

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Speaker 6: Okay, so the sign is exactly wrong here at the

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Speaker 6: simple point I'm making is other things matter besides interest rates.

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Speaker 6: We listened to you know, a number of banks in

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Speaker 6: the last quarter that you know, is the housing market

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Speaker 6: going to come back? And and and and you know,

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Speaker 6: as some banks say, you don't think it's really about

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Speaker 6: interest rates because the twenty five basis points here or there,

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Speaker 6: and of course it's the ten year and not the

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Speaker 6: short rate that matters. But it's it's really been about

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Speaker 6: the uncertainty. The uncertainty not just about you know, macro policies,

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Speaker 6: but also about the labor market and sort of where

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Speaker 6: we are in the cycle and all of the risks

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Speaker 6: that be all focused on.

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Speaker 2: Stay with us, multiple INPEX dividance coming.

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Speaker 3: Up off to this.

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Speaker 1: Joining us now Angela Zino of c f R A.

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Speaker 1: Angelo just sort of building the discussion of the new

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Speaker 1: phase of the AI build out. Do you think that

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Speaker 1: we're going to start to see a period if not

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Speaker 1: only winners, but also true losers, both when it comes

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Speaker 1: to prospects as well as stop valuation.

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Speaker 7: I think when you when you look at how this

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Speaker 7: market is reacting right now, and it's one where you know,

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Speaker 7: it's really it's really interesting because you've got these narratives

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Speaker 7: that continue to change where everyone's looking to see who

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Speaker 7: that winner is. And I do think ultimately you're going

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Speaker 7: to see, you know, a list of winners and a

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Speaker 7: list of non winners potentially losers within the overall tech

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Speaker 7: space and AI ecosystem, and I think we're still trying

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Speaker 7: to sort of who that, you know, who those winners

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Speaker 7: and losers are. We've got a really good understanding of

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Speaker 7: what that looks like on the infrastructure side, and I

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Speaker 7: think we've got less of an understanding of what that

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Speaker 7: looks like still on the software side of things. But

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Speaker 7: as far as kind of this next phase that we're

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Speaker 7: building out, I mean, we do think we're kind of

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Speaker 7: moving from a phase over the last three years where

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Speaker 7: it was one where listen, all you had to do

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Speaker 7: was announce maybe some some large you know partnership or

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Speaker 7: deal with an open AI or in a video or

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Speaker 7: what have you, and your stock kind of you know,

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Speaker 7: really just popped. Whereas we're moving to this new phase

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Speaker 7: where it is more based on execution. On the infrastructure side,

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Speaker 7: it is you know, who can build you know, those

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Speaker 7: data centers out and actually execute. On the devices side,

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Speaker 7: it's who's going to come out with the best devices

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Speaker 7: and on the software side of things, and who's going

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Speaker 7: to come out with those best capabilities that the enterprise

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Speaker 7: space is actually going to want and it can actually

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Speaker 7: be monetized.

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Speaker 8: Angel though, was the appetite there? I'm thinking about the

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Speaker 8: Information report yesterday on Microsoft talking out now there's lower

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Speaker 8: expectation for getting businesses to sign up for some of

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Speaker 8: these AI tools and things like agents.

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Speaker 7: I think there's an appetite. I think the way we're

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Speaker 7: looking at things right now is, listen, the consumer has

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Speaker 7: really adopted AI at this point in time. You look

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Speaker 7: at numbers from the alphabets of the world, and then

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Speaker 7: probably the best indication of how much the consumer has

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Speaker 7: really adopted AI, and you're talking about you know, toting

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Speaker 7: generated at one point three quirtrillion, you know, the most

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Speaker 7: recent numbers out there in October, and it's really been

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Speaker 7: kind of this hockey stick parabolic movement in terms of

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Speaker 7: tokens generated. On the consumer side, it's been really a

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Speaker 7: slog on the enterprise side of things, and not necessarily

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Speaker 7: a surprise because when we see these new technology inflections,

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Speaker 7: the consumer overs adopts first, and on the enterprise side

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Speaker 7: of things, it really takes a while. When you look at,

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Speaker 7: for instance, Salesforce's results last night, I thought they were

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Speaker 7: actually really good, and I think the momentum we saw

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Speaker 7: on Agent Force just on a sequential basis was phenomenal.

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Speaker 7: But you know, the issue is that you can win

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Speaker 7: these bookings, but by the time you know, these actual

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Speaker 7: enterprises go into pilot production and then actually start ramping

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Speaker 7: and adoption adopting these AI agents, it can take several

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Speaker 7: more quarters that we may not see that till you know,

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Speaker 7: later in twenty twenty six into twenty seven.

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Speaker 9: And Delan, I'd like to go back to the consumer

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Speaker 9: because I'm always struck with the adoption rate with the consumer.

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Speaker 9: But there is a difference between what the consumer will

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Speaker 9: use and what the consumer will pay for. Do you

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Speaker 9: see that difference showing up in terms of what the

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Speaker 9: next steps are in terms of the digital adoption versus

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Speaker 9: the hardware.

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Speaker 7: Yeah, I mean, listen, I think that's a great point.

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Speaker 7: And again, when we start thinking about the whole monetization

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Speaker 7: debate and what have you, I mean, the reason consumers

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Speaker 7: adopt this stuff, you know, early on is because it's free, right,

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Speaker 7: I mean, they're willing to kind of go out there,

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Speaker 7: try these new offerings, these AI tools because it is

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Speaker 7: free to them. As far as paid services is concerned,

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Speaker 7: you know, again, we're not seeing a type of monetization

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Speaker 7: level that maybe I think some on the street would

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Speaker 7: hope to have seen. There are definitely power users on

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Speaker 7: the you know, on the consumer front, but you know,

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Speaker 7: in terms of scaling and actually monetizing the AI services

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Speaker 7: on the consumer front, we're still not quite there at.

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Speaker 2: This point, right.

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Speaker 9: So, so what would be the pricing model that gets

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Speaker 9: the consumer engage with their pocketbooks, especially a consumer that's

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Speaker 9: used to getting digital goods for free. How do you

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Speaker 9: change that monetize that.

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Speaker 7: You know, I think that's a great question, and you know,

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Speaker 7: I think it depends on the actual platform we're talking

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Speaker 7: about and and you know, and how this all adopts.

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Speaker 7: I think right now, when you look at the monetization

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Speaker 7: at least on the consumer side of things, and maybe

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Speaker 7: how you know, maybe not the consumer itself, but how

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Speaker 7: the consumer we're actually monetizing. The consumer is still in

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Speaker 7: terms of digital advertising, right and that's how you know,

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Speaker 7: the alphabets and meatas of the world are really benefiting

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Speaker 7: from all of this. But as far the consumer themselves

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Speaker 7: and shelling out the dollars, at this point in time,

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Speaker 7: I think it's all about continuing to find new use

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Speaker 7: cases for AI and finding something that really is game

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Speaker 7: changing for them where they're willing to pay for it.

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Speaker 7: But at this point in time, again it becomes difficult,

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Speaker 7: especially in a more challenging macro outlook, to really get

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Speaker 7: the consumer to really pay up for these services. I

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Speaker 7: think it gets interesting as we start thinking about new devices,

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Speaker 7: especially as Apple starts rolling out on their you know,

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Speaker 7: in terms of their AI mbitions, what some of these

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Speaker 7: developers are going to be able to do with kind

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Speaker 7: of AI capabilities in their hands in some of those

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Speaker 7: powered apps that we're going to be able to see

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Speaker 7: go out to the consumer, potentially late next year into

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Speaker 7: twenty twenty seven.

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Speaker 2: This is the Bloomberg Survendments podcast, bringing you the best

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Speaker 2: in markets, economics, angier politics. You can watch the show

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Speaker 2: live on Bloomberg TV weekday mornings from six am to

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Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify,

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Speaker 2: or anywhere else you listen, and, as always on the

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Speaker 2: Bloomberg's nominal and look at him. Dug based this out

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Speaker 1: Mm hmm