1 00:00:02,400 --> 00:00:06,760 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 2 00:00:11,600 --> 00:00:15,440 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,440 --> 00:00:18,400 Speaker 2: with Lisa Bromwitz and am Marie Hordern. Join us each 4 00:00:18,480 --> 00:00:21,360 Speaker 2: day for insight from the best in markets, economics, and 5 00:00:21,400 --> 00:00:24,720 Speaker 2: geopolitics from our global headquarters in New York City. We 6 00:00:24,760 --> 00:00:27,400 Speaker 2: are live on Bloomberg Television weekday mornings from six to 7 00:00:27,480 --> 00:00:31,000 Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify 8 00:00:31,200 --> 00:00:33,479 Speaker 2: or anywhere else you listen, and as always on the 9 00:00:33,479 --> 00:00:35,840 Speaker 2: Bloomberg Terminal and the Bloomberg Business App. 10 00:00:36,320 --> 00:00:40,519 Speaker 1: Jason Thomas of Carlisle writing the job displacement, productivity gains, 11 00:00:40,560 --> 00:00:43,960 Speaker 1: and agentic economy expected to up end our world have 12 00:00:44,120 --> 00:00:47,720 Speaker 1: yet to materialize. The current AI related capex already accounts 13 00:00:47,920 --> 00:00:50,800 Speaker 1: for more than one third of the second quarter twenty 14 00:00:50,840 --> 00:00:54,160 Speaker 1: twenty five US economic growth. Jason joins us Now, Jason, 15 00:00:54,240 --> 00:00:56,280 Speaker 1: always wonderful to speak with you. Thank you for being 16 00:00:56,280 --> 00:00:58,200 Speaker 1: with us, And to me, this is the big question 17 00:00:58,560 --> 00:01:02,200 Speaker 1: that so many people have estimated for twenty twenty five. 18 00:01:02,600 --> 00:01:06,559 Speaker 1: How much are we actually seeing that AI tailwind come 19 00:01:06,720 --> 00:01:09,760 Speaker 1: into practical effect versus still remain a promise? 20 00:01:11,560 --> 00:01:14,520 Speaker 3: Well, I think it's again it's It's interesting because when 21 00:01:14,520 --> 00:01:17,319 Speaker 3: you think of AI, when you discuss AI, it's almost 22 00:01:17,480 --> 00:01:21,200 Speaker 3: exclusively about the future and what it means, and then 23 00:01:21,280 --> 00:01:24,319 Speaker 3: I think distracts from the present. Just how important all 24 00:01:24,400 --> 00:01:31,080 Speaker 3: this spending is stacks, servers, GPUs, physical construction, and of 25 00:01:31,120 --> 00:01:35,840 Speaker 3: course electricity related energy needs related applications. And this year 26 00:01:35,880 --> 00:01:39,319 Speaker 3: have four companies now that are intending to spend over 27 00:01:39,360 --> 00:01:43,559 Speaker 3: three hundred billion dollars. This year about six are spending 28 00:01:43,600 --> 00:01:46,800 Speaker 3: over four hundred billion. This is went from something that 29 00:01:46,880 --> 00:01:50,720 Speaker 3: is market significant, stock market significant, to something that is 30 00:01:50,760 --> 00:01:54,800 Speaker 3: now GDP significant and also I think underappreciated. It's also 31 00:01:55,280 --> 00:01:59,040 Speaker 3: increasingly significant for bond markets because you know, if we 32 00:01:59,200 --> 00:02:02,880 Speaker 3: look at decade ago, these large companies, they were largely 33 00:02:03,000 --> 00:02:07,320 Speaker 3: virtual companies. Prior to the pandemic, this class of businesses 34 00:02:07,360 --> 00:02:10,840 Speaker 3: only about twenty percent of their book value was property, 35 00:02:10,880 --> 00:02:14,200 Speaker 3: plant and equipment. Most of it was really just cash 36 00:02:14,600 --> 00:02:18,600 Speaker 3: security holdings. Now property plant equipment ACCUNTS for over seventy 37 00:02:18,639 --> 00:02:22,760 Speaker 3: percent of their book value. There's an industrial feel to 38 00:02:22,800 --> 00:02:25,360 Speaker 3: some of these businesses as they ramp up their capital 39 00:02:25,400 --> 00:02:29,160 Speaker 3: spending and that huge surpluses that they used to generate 40 00:02:29,160 --> 00:02:31,960 Speaker 3: the providing liquidity to the rest of the economy is 41 00:02:32,040 --> 00:02:35,400 Speaker 3: now being rolled in capital spending Ai. 42 00:02:35,800 --> 00:02:38,480 Speaker 1: So Jason, just to sort of bleed through into the market. 43 00:02:38,520 --> 00:02:42,040 Speaker 1: What you're saying the industrial revolution that so many people 44 00:02:42,080 --> 00:02:44,239 Speaker 1: say is taking place, are you saying that is a 45 00:02:44,280 --> 00:02:48,040 Speaker 1: physical world sucking capital out of financial markets, in particularly 46 00:02:48,080 --> 00:02:50,280 Speaker 1: the bond market, leading to higher yields. 47 00:02:51,680 --> 00:02:52,160 Speaker 4: Exactly. 48 00:02:52,600 --> 00:02:55,800 Speaker 3: Again, what's so interesting, I think is that these companies 49 00:02:56,480 --> 00:03:00,960 Speaker 3: have really exercised an option to change strategy. In the past, 50 00:03:01,120 --> 00:03:04,480 Speaker 3: it was typical to generate one hundred billion dollars of 51 00:03:04,520 --> 00:03:09,160 Speaker 3: cash from operations, reinvest maybe twelve to fifteen billion, and 52 00:03:09,200 --> 00:03:12,360 Speaker 3: then that free cash flow would of course lead to 53 00:03:12,639 --> 00:03:15,880 Speaker 3: a massive war chest on the balance sheet, or it 54 00:03:15,919 --> 00:03:20,720 Speaker 3: would fund huge share repurchase programs or special dividends. Today 55 00:03:20,760 --> 00:03:24,320 Speaker 3: that revenue is being diverted to capex, and so this 56 00:03:24,440 --> 00:03:28,600 Speaker 3: raises really interesting questions such as the cash generation potential. 57 00:03:28,800 --> 00:03:33,359 Speaker 3: We saw in Alphabet's earnings a big divergence between net 58 00:03:33,400 --> 00:03:37,000 Speaker 3: income and free cash flow. It also raises industrial error 59 00:03:37,080 --> 00:03:41,760 Speaker 3: questions about capacityilization, and also what is the economic rate 60 00:03:41,920 --> 00:03:44,760 Speaker 3: at which this new capital depreciates? You know, is there 61 00:03:44,880 --> 00:03:49,240 Speaker 3: functional obsolescence where you're investing at the frontier of new technology, 62 00:03:49,280 --> 00:03:52,320 Speaker 3: how quickly does it arrive? So these are again very 63 00:03:52,320 --> 00:03:55,880 Speaker 3: interesting questions. But from the bond market perspective, when you 64 00:03:55,920 --> 00:03:59,520 Speaker 3: look at the cumulative cash flow surplus of the corporate 65 00:03:59,560 --> 00:04:04,200 Speaker 3: sector this cycle, it's down seventy five percent from where 66 00:04:04,200 --> 00:04:07,040 Speaker 3: it was a decade ago. So the last cycle, there's 67 00:04:07,080 --> 00:04:10,080 Speaker 3: a question, very large deficits. Why was it so easy 68 00:04:10,560 --> 00:04:13,040 Speaker 3: for the FED to fund itself? Well, of course QE 69 00:04:13,560 --> 00:04:17,400 Speaker 3: is a simple answer, but I think behind that you 70 00:04:17,480 --> 00:04:21,479 Speaker 3: also had again this enormous corporate savings glut. Some of 71 00:04:21,480 --> 00:04:24,640 Speaker 3: that was cyclical, the scars from the GFC, but a 72 00:04:24,640 --> 00:04:27,080 Speaker 3: lot of it was that most of the growth in 73 00:04:27,200 --> 00:04:31,880 Speaker 3: earnings and revenues were attributed to again these virtual businesses, 74 00:04:31,960 --> 00:04:36,680 Speaker 3: businesses that could grow revenue without incremental hiring, incremental investment, 75 00:04:37,120 --> 00:04:38,320 Speaker 3: and they've changed strategy. 76 00:04:38,760 --> 00:04:42,280 Speaker 5: So Jason, it's some serious tailwinds and changes we're talking about, 77 00:04:42,720 --> 00:04:45,839 Speaker 5: But as you underscored, it's only a handful of companies, 78 00:04:46,040 --> 00:04:49,320 Speaker 5: it's only for maybe six companies hyper scalers that are 79 00:04:49,400 --> 00:04:52,760 Speaker 5: leading this charge. Is there a concentration risk in this 80 00:04:52,880 --> 00:04:55,800 Speaker 5: that these trends are being driven by a small cohort 81 00:04:55,839 --> 00:04:58,440 Speaker 5: that for now are being rewarded by markets for spending. 82 00:04:58,480 --> 00:05:04,240 Speaker 5: What happens if that changes. Yes, of course there's concentration risks. 83 00:05:04,240 --> 00:05:08,279 Speaker 5: There's concentration risk in the stock market, there's concentration risk 84 00:05:08,320 --> 00:05:12,720 Speaker 5: in the economy again, as capital spending and GDP become 85 00:05:12,760 --> 00:05:15,080 Speaker 5: more dependent on these continued outlays. 86 00:05:15,520 --> 00:05:16,520 Speaker 4: And I think that that. 87 00:05:16,800 --> 00:05:19,599 Speaker 3: People talk about the mag seven of course, and it's 88 00:05:19,360 --> 00:05:23,039 Speaker 3: the share I think, you know, fifteen percent of global 89 00:05:23,279 --> 00:05:26,919 Speaker 3: stock market capitalization, almost a third of the S and 90 00:05:26,920 --> 00:05:30,760 Speaker 3: P five hundred market capitalization. But I think that what's 91 00:05:30,800 --> 00:05:33,600 Speaker 3: more concerning to me, at least, is that these are 92 00:05:33,640 --> 00:05:37,080 Speaker 3: not a diversified set of businesses operating in you know, 93 00:05:37,120 --> 00:05:41,320 Speaker 3: completely different sectors with completely different strategies. They're all basically 94 00:05:41,360 --> 00:05:44,880 Speaker 3: pursuing the same end goal at the moment. There's some variation, 95 00:05:45,240 --> 00:05:50,320 Speaker 3: of course, but in general, it's a concentrated bet on 96 00:05:50,400 --> 00:05:53,320 Speaker 3: the same AI future, and you know, everyone has to 97 00:05:53,360 --> 00:05:56,400 Speaker 3: hope that ultimately it pays off, because again it's not 98 00:05:56,600 --> 00:05:59,600 Speaker 3: just of significance for the stock market or investors in 99 00:05:59,640 --> 00:06:03,680 Speaker 3: these companies, but again it has very significant spillovers on 100 00:06:03,720 --> 00:06:05,320 Speaker 3: the rest of the economy today as well. 101 00:06:05,560 --> 00:06:05,720 Speaker 1: Well. 102 00:06:05,760 --> 00:06:08,520 Speaker 5: Some of those spillovers Jason, which has been widely talked about, 103 00:06:08,600 --> 00:06:10,600 Speaker 5: is what it does to this labor market, and there 104 00:06:10,600 --> 00:06:12,960 Speaker 5: it's unclear what's really showing up. You see it in 105 00:06:12,960 --> 00:06:15,640 Speaker 5: some of the Earnings Service now, the management platform tool, 106 00:06:15,880 --> 00:06:18,360 Speaker 5: the CEO they're saying yesterday, we're slowing down the hiring 107 00:06:18,400 --> 00:06:21,240 Speaker 5: and jobs that are quite frankly soul crushing, which I 108 00:06:21,279 --> 00:06:23,800 Speaker 5: think is maybe a nice way to describe replacing people's 109 00:06:23,839 --> 00:06:27,240 Speaker 5: jobs with Ai Jason. Is it showing up anywhere? 110 00:06:29,240 --> 00:06:31,960 Speaker 3: I think that most of the change in the labor 111 00:06:32,000 --> 00:06:35,280 Speaker 3: market that we observed in twenty twenty five was related 112 00:06:35,520 --> 00:06:39,320 Speaker 3: to tariffs, just just the shock, the uncertainty, and I 113 00:06:39,320 --> 00:06:42,520 Speaker 3: think what was so interesting about that was CEOs really 114 00:06:42,640 --> 00:06:46,599 Speaker 3: not panicking after April second. I think there was this 115 00:06:46,680 --> 00:06:50,279 Speaker 3: intention to project a sense of normalcy, to look at 116 00:06:50,480 --> 00:06:52,720 Speaker 3: competitors and see if there are any missteps, if they 117 00:06:52,720 --> 00:06:55,800 Speaker 3: could take market share, And part of that had been, yes, 118 00:06:55,880 --> 00:06:58,640 Speaker 3: perhaps slowing the pace of hiring. But it was just 119 00:06:58,720 --> 00:07:01,919 Speaker 3: interesting when we look through our portfolio that they're really 120 00:07:02,040 --> 00:07:05,760 Speaker 3: not much for reduction in open but unfilled positions. There 121 00:07:05,800 --> 00:07:08,880 Speaker 3: really wasn't the pullback that I think many people expected. 122 00:07:09,200 --> 00:07:11,560 Speaker 3: So so the labor market is held up reasonably well, 123 00:07:11,600 --> 00:07:13,920 Speaker 3: and of course on the other side of that, you 124 00:07:13,960 --> 00:07:17,120 Speaker 3: have inflation that continues. You know, if you look at 125 00:07:17,120 --> 00:07:21,280 Speaker 3: core PCE over the last twelve months, still probably two 126 00:07:21,360 --> 00:07:24,280 Speaker 3: and a half two point six percent, So you know, 127 00:07:24,520 --> 00:07:27,280 Speaker 3: it is this interesting moment where I think that inflation's 128 00:07:27,560 --> 00:07:29,960 Speaker 3: a bit stickier. I mean, of course, some people look 129 00:07:29,960 --> 00:07:32,280 Speaker 3: at the last eight to ten weeks and tell me 130 00:07:32,760 --> 00:07:35,800 Speaker 3: inflation is only up by one percent annualized rate. But 131 00:07:36,280 --> 00:07:38,640 Speaker 3: you know, of course there's not that many prices in 132 00:07:38,640 --> 00:07:43,080 Speaker 3: our economy that reset that regularly, you know, whether they're 133 00:07:43,080 --> 00:07:46,200 Speaker 3: fixed or contractual term or you know, just other frictions. 134 00:07:46,760 --> 00:07:52,400 Speaker 3: So you know, it's a twelve month inflation benchmark and 135 00:07:52,720 --> 00:07:55,000 Speaker 3: this it's still elevated. So you know, next week, I 136 00:07:55,000 --> 00:07:57,800 Speaker 3: think is a time when when the FED is very 137 00:07:57,880 --> 00:08:01,080 Speaker 3: reasonably going to take rate study. 138 00:08:01,440 --> 00:08:05,120 Speaker 1: Jason, you're making an argument for why stocks can outperform 139 00:08:05,200 --> 00:08:07,640 Speaker 1: and bonds cannot, the idea that the promise of the 140 00:08:07,680 --> 00:08:10,520 Speaker 1: future and all of this investment and the profitability is 141 00:08:10,640 --> 00:08:13,640 Speaker 1: much more attractive than credit markets. That people say, or 142 00:08:13,640 --> 00:08:16,160 Speaker 1: I would say, government bond markets credit markets might be 143 00:08:16,160 --> 00:08:16,840 Speaker 1: slightly different. 144 00:08:17,280 --> 00:08:17,960 Speaker 4: Is that accurate? 145 00:08:18,120 --> 00:08:19,320 Speaker 1: Is that kind of the way you think of the 146 00:08:19,320 --> 00:08:20,320 Speaker 1: world right now. 147 00:08:21,920 --> 00:08:25,120 Speaker 3: There is of course the convex upside of earnings, of 148 00:08:25,160 --> 00:08:27,640 Speaker 3: the potential of AI, and that is what equity markets 149 00:08:27,680 --> 00:08:30,720 Speaker 3: are ultimately betting on. Whether that materializes or not is 150 00:08:30,760 --> 00:08:34,200 Speaker 3: a separate question, but there is that upside there, and 151 00:08:34,280 --> 00:08:37,040 Speaker 3: I think also just the potential for inflation. When you 152 00:08:37,120 --> 00:08:41,560 Speaker 3: have businesses that can increase prices proportional to the overall 153 00:08:41,559 --> 00:08:44,400 Speaker 3: increase in the price level, that also provides an inflation 154 00:08:44,559 --> 00:08:48,800 Speaker 3: hedge when you're investing in businesses, you know, the fixed 155 00:08:48,840 --> 00:08:52,200 Speaker 3: income markets. That's a different story right now. If you 156 00:08:52,200 --> 00:08:55,560 Speaker 3: look at the size of the US fiscal deficit, it's 157 00:08:55,600 --> 00:08:59,960 Speaker 3: consuming about forty percent of the savings of the private sector, 158 00:09:00,320 --> 00:09:03,440 Speaker 3: that is, the savings of the household sector plus the 159 00:09:03,440 --> 00:09:06,000 Speaker 3: free cash flow of the corporate sector. This is up 160 00:09:06,600 --> 00:09:09,760 Speaker 3: about fifty percent from where it was in the past 161 00:09:09,760 --> 00:09:13,040 Speaker 3: cycle two thousand and nine to twenty nineteen. So this 162 00:09:13,120 --> 00:09:17,520 Speaker 3: is just enormous funding needs, and I think that people 163 00:09:17,600 --> 00:09:23,720 Speaker 3: have to be concerned about the potential to be inflated away. Eventually, 164 00:09:23,760 --> 00:09:26,880 Speaker 3: the Treasury may try to turn out more of its 165 00:09:26,880 --> 00:09:29,880 Speaker 3: dead issuance. And what is the market clearing price when 166 00:09:29,920 --> 00:09:32,840 Speaker 3: the share of federal funding actually moves in the direction 167 00:09:32,920 --> 00:09:35,920 Speaker 3: of ten year notes thirty year bonds. So I think 168 00:09:36,040 --> 00:09:38,240 Speaker 3: certainly a lot of questions there, and I think the 169 00:09:38,280 --> 00:09:44,320 Speaker 3: other big concern bonds historically have hedged equity market risk. 170 00:09:44,520 --> 00:09:47,560 Speaker 3: That was the experience really since two thousand. What we've 171 00:09:47,600 --> 00:09:50,560 Speaker 3: seen since the FED started hiking rates in two thousand 172 00:09:50,559 --> 00:09:53,880 Speaker 3: and two is that stock and bond returns have been 173 00:09:53,960 --> 00:09:59,000 Speaker 3: positively correlated. Those treasury holdings that you thought were protecting 174 00:09:59,040 --> 00:10:02,240 Speaker 3: you that would rise predictably when stocks sell off, are 175 00:10:02,280 --> 00:10:04,880 Speaker 3: actually selling off at the same time. And we saw that, 176 00:10:04,920 --> 00:10:08,320 Speaker 3: of course in April, which many people attribute to the 177 00:10:08,320 --> 00:10:12,160 Speaker 3: decision to suspend the initial Liberation Day tariff schedule. 178 00:10:12,600 --> 00:10:25,000 Speaker 1: Jason Thomas of Carlisle, thank you so much. Francisco Blanche 179 00:10:25,000 --> 00:10:28,000 Speaker 1: of Bank of America. Writing this, we project Brent and 180 00:10:28,200 --> 00:10:31,560 Speaker 1: WTI to average sixty seven and sixty four dollars a barill, 181 00:10:31,640 --> 00:10:35,600 Speaker 1: respectively in twenty twenty five. Francisco joins US now, and 182 00:10:35,679 --> 00:10:37,880 Speaker 1: I guess that you could ask why our price is 183 00:10:37,920 --> 00:10:41,200 Speaker 1: not lower considering all of the supply that we see 184 00:10:41,200 --> 00:10:43,240 Speaker 1: coming out of the Middle East and this push for 185 00:10:43,320 --> 00:10:45,320 Speaker 1: drill baby drill in the United States. 186 00:10:46,160 --> 00:10:47,680 Speaker 4: Thanks for having Melissa once again. 187 00:10:48,559 --> 00:10:51,280 Speaker 6: Yeah, you know it's funny, right, So you know, weaker 188 00:10:51,360 --> 00:10:55,560 Speaker 6: little are we're getting slightly littlewer oil, potentially lower rates 189 00:10:55,559 --> 00:10:56,000 Speaker 6: the whole point. 190 00:10:56,080 --> 00:10:56,200 Speaker 4: Right. 191 00:10:56,240 --> 00:10:59,240 Speaker 6: That's so it's all going according to pine. I do 192 00:10:59,320 --> 00:11:02,079 Speaker 6: think one of the issues that has been supporting oil 193 00:11:02,400 --> 00:11:07,200 Speaker 6: has been the seasonal strength of the summer months. But 194 00:11:07,320 --> 00:11:08,920 Speaker 6: as we go into the second half of the year, 195 00:11:09,280 --> 00:11:12,920 Speaker 6: we are going to likely see lower prices, and that's 196 00:11:12,960 --> 00:11:15,880 Speaker 6: because inventories are most likely to build outside the China. 197 00:11:15,880 --> 00:11:18,640 Speaker 6: I remember in the second quarter we had a surplus, 198 00:11:18,960 --> 00:11:21,440 Speaker 6: but ninety percent of those barrels were stored in Chinese 199 00:11:21,480 --> 00:11:25,480 Speaker 6: strategic reserves. And can you blame them after all the 200 00:11:25,520 --> 00:11:27,199 Speaker 6: volativity we've seen in the Middle. 201 00:11:26,920 --> 00:11:28,160 Speaker 4: East, Russia, Ukraine. 202 00:11:28,760 --> 00:11:31,480 Speaker 6: So the Chinese are acutely aware of the geopolitics and 203 00:11:31,880 --> 00:11:33,880 Speaker 6: the fact that they're the biggest oil important in the world, 204 00:11:33,920 --> 00:11:36,040 Speaker 6: so twelve million barrels a day, so they have a 205 00:11:36,120 --> 00:11:38,880 Speaker 6: huge exposure. Whether it's the Strait of. 206 00:11:38,880 --> 00:11:40,199 Speaker 4: Hormones or Malacca. 207 00:11:40,840 --> 00:11:42,840 Speaker 6: They're still really heavily on oil despite all the electric 208 00:11:42,920 --> 00:11:45,200 Speaker 6: vehicles that they keep pushing into their market. So I 209 00:11:45,200 --> 00:11:47,600 Speaker 6: think that's that's been part of the story. My sense, 210 00:11:47,640 --> 00:11:50,680 Speaker 6: they'll they'll keep building inventories, but they're almost they almost 211 00:11:50,679 --> 00:11:54,000 Speaker 6: have forty percent of all oil stocks globally at. 212 00:11:53,880 --> 00:11:55,520 Speaker 4: This point, crude oil stocks, that is right. 213 00:11:55,600 --> 00:11:58,880 Speaker 6: So I do think second half of the year, the 214 00:11:58,880 --> 00:12:01,360 Speaker 6: surple is going to be close to two hundred million barrels, 215 00:12:01,960 --> 00:12:05,160 Speaker 6: and eventually we're going to spill out from Chinese inventories 216 00:12:05,200 --> 00:12:07,640 Speaker 6: into the Atlantic Basin, into into the US and Europe, 217 00:12:07,760 --> 00:12:09,600 Speaker 6: and that's what's going to allow prices to come off. 218 00:12:09,960 --> 00:12:11,600 Speaker 6: How much are we going to come off will depend 219 00:12:11,640 --> 00:12:14,839 Speaker 6: on how much Open Plus keeps pushing barrels out, because 220 00:12:14,840 --> 00:12:17,319 Speaker 6: we've seen the recount in the US is already coming down. 221 00:12:17,840 --> 00:12:18,880 Speaker 4: It's down fifteen percent. 222 00:12:18,960 --> 00:12:21,800 Speaker 6: So my sensus that we'll see lower prices, but not 223 00:12:21,880 --> 00:12:24,240 Speaker 6: necessarily prices crashing given. 224 00:12:24,040 --> 00:12:26,640 Speaker 1: The geopolitics and given this supply demand dynamics that we're 225 00:12:26,679 --> 00:12:29,600 Speaker 1: just talking about. How divorced is the price of oil 226 00:12:29,640 --> 00:12:31,640 Speaker 1: from an economic cycle that seems to hinge on a 227 00:12:31,720 --> 00:12:34,880 Speaker 1: new industrial revolution that ten years ago would have included 228 00:12:34,920 --> 00:12:36,160 Speaker 1: a huge use of oil. 229 00:12:36,760 --> 00:12:39,360 Speaker 6: Yeah, this is a very very good point. And when 230 00:12:39,360 --> 00:12:43,160 Speaker 6: you think about the energy demand we're seeing today, it's 231 00:12:43,280 --> 00:12:45,800 Speaker 6: in some places in the US it's astronomical. I mean 232 00:12:45,880 --> 00:12:48,839 Speaker 6: Texan powery Man is up five point five percent year 233 00:12:48,880 --> 00:12:51,439 Speaker 6: and year. I mean, you can barely find an emerging 234 00:12:51,440 --> 00:12:53,440 Speaker 6: market that's going at that's pace, right, And it's just 235 00:12:53,720 --> 00:12:58,240 Speaker 6: this is like insane. So I think if you if 236 00:12:58,240 --> 00:13:00,360 Speaker 6: you look at the next the next few months, the 237 00:13:00,400 --> 00:13:02,719 Speaker 6: majority of the demand and probably next two three years, 238 00:13:02,720 --> 00:13:04,400 Speaker 6: the majority of nine for energy is going to be 239 00:13:04,440 --> 00:13:07,240 Speaker 6: still renewals. Also natural gas, which is what makes us 240 00:13:07,240 --> 00:13:11,400 Speaker 6: relatively constructive on Henry Hub and even into the summer 241 00:13:11,440 --> 00:13:14,440 Speaker 6: on TTF European gas. But for oil, it's not going 242 00:13:14,480 --> 00:13:16,439 Speaker 6: to touch it immediately. It's gonna take a little longer. 243 00:13:16,760 --> 00:13:18,880 Speaker 6: I'm not even sure, you know. Oil is the transportation 244 00:13:18,960 --> 00:13:22,600 Speaker 6: fuel for the most parts, so it's kind of left 245 00:13:22,600 --> 00:13:26,280 Speaker 6: by the wayside in this in this AI revolution for 246 00:13:26,360 --> 00:13:27,960 Speaker 6: more energy at this stage. 247 00:13:28,040 --> 00:13:30,160 Speaker 4: Maybe later on it may not, but for now it. 248 00:13:30,160 --> 00:13:33,440 Speaker 5: Is talk about that later on point what could it 249 00:13:33,480 --> 00:13:34,280 Speaker 5: eventually look like? 250 00:13:35,080 --> 00:13:37,000 Speaker 6: Well, I mean, I think if you look five years out, 251 00:13:37,040 --> 00:13:39,480 Speaker 6: the demand growth threies we're saying for energy, they're going 252 00:13:39,520 --> 00:13:40,440 Speaker 6: to be pretty hard to meet. 253 00:13:41,520 --> 00:13:43,960 Speaker 4: And remember how we've evolved. 254 00:13:43,960 --> 00:13:46,880 Speaker 6: Two years ago, the big tech companies were looking for 255 00:13:47,040 --> 00:13:49,160 Speaker 6: clean sources of power. They're like, oh, we just want 256 00:13:49,160 --> 00:13:53,600 Speaker 6: to use super clean power, and then you know, renewals 257 00:13:53,640 --> 00:13:56,360 Speaker 6: and this net and then they said, well maybe renewals 258 00:13:56,360 --> 00:14:00,360 Speaker 6: and nuclear and now it's like renewals nuclear gas, like, oh, 259 00:14:00,480 --> 00:14:02,280 Speaker 6: just give me any power you can find, because we 260 00:14:02,360 --> 00:14:04,760 Speaker 6: really need a lot of power we need. So there's 261 00:14:04,800 --> 00:14:09,600 Speaker 6: talks about building ten fifteen gigs of power in Pennsylvania. 262 00:14:09,640 --> 00:14:11,640 Speaker 6: There's you know, you have the easterner Boarder is going 263 00:14:11,640 --> 00:14:15,520 Speaker 6: to need a lot of power. Texas already growing beyond belief, 264 00:14:15,640 --> 00:14:17,640 Speaker 6: and even older parts of the US where you have 265 00:14:17,640 --> 00:14:20,200 Speaker 6: this data center's Pacific Northwest, you're gonna have a lot 266 00:14:20,200 --> 00:14:23,080 Speaker 6: of world So and then eventually Europe as well, and 267 00:14:23,280 --> 00:14:25,680 Speaker 6: the US has a capacity problem. The US needs to 268 00:14:25,720 --> 00:14:29,320 Speaker 6: build those power plants Europe because it's destroyed the energy 269 00:14:29,680 --> 00:14:31,400 Speaker 6: consumption in the last couple of years a result of 270 00:14:31,480 --> 00:14:34,440 Speaker 6: Russia Ukraine. Actually it does have the capacity. So there's 271 00:14:34,440 --> 00:14:36,680 Speaker 6: going to be an interesting balancing act in the next 272 00:14:36,720 --> 00:14:38,920 Speaker 6: two three years for power too, which is on. 273 00:14:38,760 --> 00:14:41,600 Speaker 5: That point we finally have a ban on Russian imports 274 00:14:41,640 --> 00:14:44,080 Speaker 5: coming into effect for Europe, and Totel Energy is one 275 00:14:44,120 --> 00:14:46,040 Speaker 5: of the biggest energy players in Europe, was saying, look, 276 00:14:46,040 --> 00:14:48,640 Speaker 5: we have a tightening diesel market because of this how 277 00:14:48,680 --> 00:14:50,280 Speaker 5: played out is this is there going to be more 278 00:14:50,320 --> 00:14:52,920 Speaker 5: stress and tension in the market and tightening of supplies 279 00:14:53,280 --> 00:14:55,880 Speaker 5: as the band really starts to come into force. 280 00:14:56,840 --> 00:14:59,600 Speaker 6: There could be, certainly, and you also have to ask yourself, Okay, 281 00:14:59,640 --> 00:15:04,880 Speaker 6: so there's this ban on that secondary resell issues. Of course, 282 00:15:05,120 --> 00:15:08,040 Speaker 6: Europe doesn't want to buy diesel that has come from 283 00:15:08,120 --> 00:15:11,360 Speaker 6: originally Russian crude oil, which as we know, is going 284 00:15:11,440 --> 00:15:15,160 Speaker 6: mostly into India but also into China. Right So Europe's 285 00:15:15,160 --> 00:15:19,440 Speaker 6: been buying oil from refiners that actually do purchase Russian 286 00:15:19,680 --> 00:15:21,440 Speaker 6: crude and that's been one of the issues. But Europe 287 00:15:21,520 --> 00:15:27,000 Speaker 6: still purchases fifteen percent of its gas directly from Russia, 288 00:15:27,080 --> 00:15:29,560 Speaker 6: right so, and that's that goes from Belgium and France 289 00:15:29,600 --> 00:15:32,480 Speaker 6: and Spain and Italy and does it make its way 290 00:15:32,480 --> 00:15:35,120 Speaker 6: into Germany too. So Europe is trying to really cut 291 00:15:35,160 --> 00:15:37,920 Speaker 6: its dependency on Russia. But it's a tough thing to 292 00:15:37,920 --> 00:15:40,920 Speaker 6: do because again, only three years ago or a half 293 00:15:40,960 --> 00:15:43,640 Speaker 6: years ago, fifty percent of European energy, oil, gas and 294 00:15:43,640 --> 00:15:45,840 Speaker 6: coal came from Russia. So they're trying to do it 295 00:15:45,880 --> 00:15:50,400 Speaker 6: progressively and in the process is not being helping European industry. 296 00:15:50,440 --> 00:15:52,280 Speaker 6: But that's kind of I guess part of the price 297 00:15:52,320 --> 00:15:53,480 Speaker 6: that Europe is ready to pay. 298 00:15:53,600 --> 00:15:54,080 Speaker 4: Francisco. 299 00:15:54,120 --> 00:15:56,000 Speaker 1: Before I let you go, I'd love a comment on 300 00:15:56,080 --> 00:15:59,440 Speaker 1: oil and gold. Excuse me, the solid gold, the solid 301 00:15:59,680 --> 00:16:02,960 Speaker 1: oil that we've seen in terms of just how people 302 00:16:03,040 --> 00:16:05,800 Speaker 1: are treating it. We've seen prices double since twenty twenty 303 00:16:05,800 --> 00:16:08,440 Speaker 1: two to more than three thousand dollars in allens, and 304 00:16:08,480 --> 00:16:10,680 Speaker 1: I just wonder how much higher you see it going 305 00:16:10,680 --> 00:16:13,000 Speaker 1: as you hear an increasing amount of people point this 306 00:16:13,520 --> 00:16:16,760 Speaker 1: out as the haven asset as the real questions around 307 00:16:16,840 --> 00:16:18,000 Speaker 1: via currency. 308 00:16:18,240 --> 00:16:20,080 Speaker 4: Right, So we have to be clear. 309 00:16:20,840 --> 00:16:23,120 Speaker 6: Just like we are bearish on oil and we're constructive 310 00:16:23,120 --> 00:16:24,800 Speaker 6: on gas because of the power story we are, we 311 00:16:24,840 --> 00:16:28,880 Speaker 6: are bullish on gold as well. We think gold is 312 00:16:28,920 --> 00:16:31,200 Speaker 6: eventually going to get around four thousand or the next 313 00:16:31,400 --> 00:16:34,720 Speaker 6: Prounce over the next twelve months. Having said that gold 314 00:16:34,800 --> 00:16:37,760 Speaker 6: needs more investor demand. The story has been mainly a 315 00:16:37,760 --> 00:16:40,520 Speaker 6: central bank story, and of course you know there was 316 00:16:40,560 --> 00:16:43,960 Speaker 6: a nice tour estera of the FED building that we 317 00:16:44,000 --> 00:16:47,040 Speaker 6: saw that, right, So the pressure is on for the 318 00:16:47,080 --> 00:16:50,840 Speaker 6: Fed to cut rates, and obviously people are going to 319 00:16:50,920 --> 00:16:55,200 Speaker 6: question independence and one of the beneficiaries of that questioning 320 00:16:55,280 --> 00:16:57,440 Speaker 6: is going to be the goal market, right, So to 321 00:16:57,480 --> 00:17:02,880 Speaker 6: what extent this you know, this pressure builds on the 322 00:17:02,880 --> 00:17:06,119 Speaker 6: FED political pressure. I think that's what will ultimately trigger 323 00:17:06,200 --> 00:17:09,359 Speaker 6: a higher price for gold. But remember jewelry demands for 324 00:17:09,359 --> 00:17:12,800 Speaker 6: gold is down twenty percent year on year. So so 325 00:17:13,119 --> 00:17:16,200 Speaker 6: the real beneficiaries a year to date of the gold 326 00:17:17,160 --> 00:17:20,800 Speaker 6: upside pressure have been the other metals, the other precious 327 00:17:20,840 --> 00:17:24,200 Speaker 6: metals like silver and platinum and palladium. So so gold 328 00:17:24,240 --> 00:17:26,720 Speaker 6: this is doing well. It's still picking up a mentune, 329 00:17:26,720 --> 00:17:29,680 Speaker 6: but it's already a twenty plus trillion dollar market. Right, 330 00:17:29,760 --> 00:17:32,720 Speaker 6: there's twenty plus trillion dollars worth of gold out there. 331 00:17:32,920 --> 00:17:37,120 Speaker 6: I remember, US treasure isn't handled public twenty trillion or so, 332 00:17:37,240 --> 00:17:39,400 Speaker 6: right in the US public. Now you have the foreigners, 333 00:17:39,400 --> 00:17:43,720 Speaker 6: which on another nine nine trillion. But Goal's gotten very big, 334 00:17:43,800 --> 00:17:46,600 Speaker 6: and to get another leg up you need lower rates 335 00:17:46,800 --> 00:17:49,520 Speaker 6: when this happens, and pretty much those lower rates come 336 00:17:49,520 --> 00:17:52,120 Speaker 6: on the back of political pressure, I think will get 337 00:17:52,119 --> 00:17:53,200 Speaker 6: another another light wind. 338 00:17:53,240 --> 00:17:55,080 Speaker 1: All I can say is we saw a tour of 339 00:17:55,119 --> 00:17:56,760 Speaker 1: the FED. I would have loved to see a tour 340 00:17:56,800 --> 00:17:57,320 Speaker 1: of Fort Knox. 341 00:17:57,320 --> 00:17:57,880 Speaker 2: That's all I can say. 342 00:17:57,880 --> 00:18:00,080 Speaker 5: That's where they should meet next time and Trump at four. 343 00:18:00,320 --> 00:18:03,399 Speaker 1: I would like to see that tour Francisco lunch. Thank you, Gregor, 344 00:18:03,480 --> 00:18:04,120 Speaker 1: thank you so much. 345 00:18:04,119 --> 00:18:05,679 Speaker 4: I'm great to see you as always. 346 00:18:15,480 --> 00:18:19,639 Speaker 1: Great dayco of Ey writing this economic activity is decelerating 347 00:18:19,720 --> 00:18:23,280 Speaker 1: even as inflationary pressures are re emerging. This tension is 348 00:18:23,440 --> 00:18:26,440 Speaker 1: likely to persist through the summer. Greg joins us now 349 00:18:26,480 --> 00:18:28,400 Speaker 1: and Greg, we just had a lineup of people all 350 00:18:28,440 --> 00:18:31,679 Speaker 1: saying that the economy is going strong. People are just 351 00:18:31,680 --> 00:18:35,320 Speaker 1: deciding which fast casual restaurant to go to, and there 352 00:18:35,400 --> 00:18:37,760 Speaker 1: definitely does not seem to be the same kind of 353 00:18:37,760 --> 00:18:40,720 Speaker 1: inflationary pressure that many people thought would be the case. 354 00:18:41,040 --> 00:18:43,879 Speaker 1: Why are you maintaining this idea of a stagflationary push 355 00:18:44,119 --> 00:18:45,880 Speaker 1: that just hasn't shown up in the data yet. 356 00:18:45,960 --> 00:18:48,560 Speaker 7: Well, I think it hasn't shown up in the superficial data. 357 00:18:48,600 --> 00:18:50,080 Speaker 4: But if you lift the hood, you're. 358 00:18:49,960 --> 00:18:53,240 Speaker 7: Going to see the signs of this diflationary move. If 359 00:18:53,240 --> 00:18:56,120 Speaker 7: you look at the recent developments in terms of inflation, 360 00:18:56,560 --> 00:18:59,560 Speaker 7: we estimate that about a third to a fourth of 361 00:18:59,600 --> 00:19:02,639 Speaker 7: the push in inflation in the month of June was 362 00:19:02,680 --> 00:19:06,480 Speaker 7: actually coming from tariff induced price pressure. So it's there 363 00:19:06,600 --> 00:19:09,119 Speaker 7: it's slowly starting to emerge. And I've written in the 364 00:19:09,119 --> 00:19:11,600 Speaker 7: past about the fact that it's not that we're not 365 00:19:11,680 --> 00:19:14,480 Speaker 7: seeing the tariff pressures, it's that they're taking some time 366 00:19:14,520 --> 00:19:18,560 Speaker 7: to filter through because businesses have been managing inventories, because 367 00:19:18,840 --> 00:19:22,280 Speaker 7: they've been using bonded warehouses and foreign trade zones, because 368 00:19:22,480 --> 00:19:24,919 Speaker 7: the effective teriff frate is not quite yet at the 369 00:19:25,000 --> 00:19:27,400 Speaker 7: average teriff frate, and there is a gap between those two. 370 00:19:27,680 --> 00:19:30,320 Speaker 7: All these measures are delaying the inflation pass through. But 371 00:19:30,480 --> 00:19:34,000 Speaker 7: make no mistake, it is materializing, and it will affect 372 00:19:34,080 --> 00:19:36,600 Speaker 7: us with more and more pressure over the course of 373 00:19:36,640 --> 00:19:39,800 Speaker 7: the summer, which will feed into how consumers spend. 374 00:19:40,080 --> 00:19:41,720 Speaker 4: And we're seeing these signs. 375 00:19:41,400 --> 00:19:44,040 Speaker 7: Of pressures on the consumer already. If you look at 376 00:19:44,040 --> 00:19:47,040 Speaker 7: retail sales, the categories that were most affected by the 377 00:19:47,080 --> 00:19:49,119 Speaker 7: tariffs are the ones that are suffering the most. 378 00:19:49,200 --> 00:19:51,840 Speaker 5: So what happens then if we feel the real effects 379 00:19:51,960 --> 00:19:55,000 Speaker 5: later this year and early next year, at the same 380 00:19:55,040 --> 00:19:57,679 Speaker 5: time we're starting to get fed cuts and you're starting 381 00:19:57,680 --> 00:20:00,280 Speaker 5: to see the one big beautiful bill some the stimulus 382 00:20:00,280 --> 00:20:01,400 Speaker 5: through from that, well, I. 383 00:20:01,320 --> 00:20:03,880 Speaker 7: Think it's important to distinguish all of the different details 384 00:20:03,920 --> 00:20:05,760 Speaker 7: that are affecting the economy. There are a lot of 385 00:20:05,760 --> 00:20:09,359 Speaker 7: cross currents which make for this very confusing economic picture, 386 00:20:09,600 --> 00:20:12,119 Speaker 7: but the reality is that the economy is decelerating. If 387 00:20:12,160 --> 00:20:15,480 Speaker 7: you look at the labor market momentum, it is actually decelerating, 388 00:20:15,800 --> 00:20:18,760 Speaker 7: Slower job growth, more concentration of job growth in a 389 00:20:18,800 --> 00:20:22,399 Speaker 7: few sectors. We are seeing continuing claims for unemployment that 390 00:20:22,440 --> 00:20:25,399 Speaker 7: are rising, even though after the hump we saw initial 391 00:20:25,480 --> 00:20:28,240 Speaker 7: claims come back down. We're seeing the hiring rate at 392 00:20:28,240 --> 00:20:31,520 Speaker 7: a ten year low. All of these factors are factors. 393 00:20:31,080 --> 00:20:32,280 Speaker 4: That drive income growth. 394 00:20:32,320 --> 00:20:35,479 Speaker 7: The key pillar to consumer spending activity, and that is 395 00:20:35,760 --> 00:20:37,720 Speaker 7: way to the downside. So that's going to be a 396 00:20:37,720 --> 00:20:41,040 Speaker 7: constraint for consumer spending as we navigate through the second 397 00:20:41,040 --> 00:20:44,200 Speaker 7: half of the year at the same time as inflation 398 00:20:44,320 --> 00:20:47,919 Speaker 7: pressures are ramping up. And about that biscal bill that 399 00:20:48,040 --> 00:20:50,439 Speaker 7: is not going to provide a lot of stimulus in 400 00:20:50,520 --> 00:20:52,920 Speaker 7: terms of the US economy. The major thing the One 401 00:20:52,920 --> 00:20:56,160 Speaker 7: Big Beautiful does is prevent the expiry of a number 402 00:20:56,200 --> 00:20:58,840 Speaker 7: of tax provisions from the Tax Cuts and Jobs Act. 403 00:20:58,840 --> 00:21:01,719 Speaker 7: That prevents a drag on the economy of one percent, 404 00:21:01,960 --> 00:21:04,640 Speaker 7: but the actual net boost to the economy we calculate 405 00:21:04,640 --> 00:21:07,120 Speaker 7: will be around zero point two zero point three percentage 406 00:21:07,119 --> 00:21:10,440 Speaker 7: points of GDP, not a big benefit for the cost 407 00:21:10,480 --> 00:21:10,960 Speaker 7: of that pill. 408 00:21:11,160 --> 00:21:14,159 Speaker 5: Well, the other factor to put into this too is 409 00:21:14,200 --> 00:21:16,119 Speaker 5: also what we might see in terms of a supply 410 00:21:16,200 --> 00:21:18,960 Speaker 5: shock to a supply shock in the labor market, going 411 00:21:19,000 --> 00:21:22,080 Speaker 5: from something like four million people coming into the USA year, 412 00:21:22,119 --> 00:21:24,520 Speaker 5: a lot of them working age men, going to something 413 00:21:24,560 --> 00:21:27,639 Speaker 5: like just a few hundred thousand per year. Have we 414 00:21:27,680 --> 00:21:29,800 Speaker 5: started to see the effects and what will the effects 415 00:21:29,800 --> 00:21:30,639 Speaker 5: be going forward. 416 00:21:30,800 --> 00:21:34,040 Speaker 7: I think that's a much underdiscussed topic, the immigration topic, 417 00:21:34,320 --> 00:21:36,960 Speaker 7: because we are in an environment where increasingly. 418 00:21:36,560 --> 00:21:39,280 Speaker 4: Economic activity is driven by supply side factors. 419 00:21:39,520 --> 00:21:42,480 Speaker 7: Whereas before COVID it was all about demand side factors, 420 00:21:42,640 --> 00:21:45,120 Speaker 7: now it's increasingly about supply side factors. 421 00:21:45,280 --> 00:21:46,800 Speaker 4: It's the supply of labor, it's the. 422 00:21:46,720 --> 00:21:49,399 Speaker 7: Supply of capital, it's a supply of energy, it's trade 423 00:21:49,400 --> 00:21:52,680 Speaker 7: in logistics. And when it comes to immigration, you're absolutely right. 424 00:21:52,680 --> 00:21:55,280 Speaker 7: It's been a key driver of economic activity. If we 425 00:21:55,400 --> 00:21:58,639 Speaker 7: start to see less immigration, that is going to do 426 00:21:58,720 --> 00:22:02,080 Speaker 7: a couple of things. One will weigh directly on spending 427 00:22:02,119 --> 00:22:05,000 Speaker 7: because people there are fewer people that are spending less 428 00:22:05,040 --> 00:22:08,920 Speaker 7: in part because they're fearful. And two, it drives lower supply, 429 00:22:09,240 --> 00:22:12,320 Speaker 7: lower labor supply, which weighs on employment growth, which weighs 430 00:22:12,359 --> 00:22:13,760 Speaker 7: on your economy's. 431 00:22:13,240 --> 00:22:14,359 Speaker 4: Potential to grow. 432 00:22:14,400 --> 00:22:17,360 Speaker 7: Combined, all of these representative drag of about zero point 433 00:22:17,400 --> 00:22:19,840 Speaker 7: three zero point four percentage points over the next year. 434 00:22:20,080 --> 00:22:22,680 Speaker 7: That's more than the one big beautiful bill that we 435 00:22:22,680 --> 00:22:23,480 Speaker 7: were just discussing. 436 00:22:23,600 --> 00:22:26,920 Speaker 1: It's one reason why people are looking at this miss 437 00:22:26,960 --> 00:22:30,720 Speaker 1: on capital goods orders that include non defense aircraft as 438 00:22:30,720 --> 00:22:33,879 Speaker 1: being particularly notable. Stay close Greg for one second, Mike McKee, 439 00:22:33,920 --> 00:22:36,000 Speaker 1: you've got some more details on what exactly was behind that. 440 00:22:36,840 --> 00:22:39,640 Speaker 8: It is sometimes fairly easy to figure out durable goods orders. 441 00:22:39,680 --> 00:22:42,040 Speaker 8: When you have these big swings, it's usually Boeing. They 442 00:22:42,200 --> 00:22:46,080 Speaker 8: reported a decline of fifty one point eight percent in 443 00:22:46,240 --> 00:22:50,679 Speaker 8: new orders for the month of June Boeing and some 444 00:22:50,760 --> 00:22:54,320 Speaker 8: of the smaller little private plane makers, and that compares 445 00:22:54,359 --> 00:22:57,679 Speaker 8: with a two hundred and thirty one percent arise in 446 00:22:57,840 --> 00:22:59,040 Speaker 8: the month before in May. 447 00:22:59,119 --> 00:23:00,879 Speaker 4: So you can see why we get these big swings. 448 00:23:00,920 --> 00:23:03,639 Speaker 8: Unless you're Danny Berger, you're not buying a new Boeing 449 00:23:03,960 --> 00:23:08,200 Speaker 8: jet every month. We also saw a decline in manufacturing 450 00:23:08,359 --> 00:23:11,120 Speaker 8: orders of twelve point eight percent. That's something that FED 451 00:23:11,119 --> 00:23:14,560 Speaker 8: will keep an eye on along with computers and communications equipment. 452 00:23:14,640 --> 00:23:17,360 Speaker 8: They both were down on the month, and this may 453 00:23:17,440 --> 00:23:21,280 Speaker 8: signal that business is sitting on its hands. One last note, 454 00:23:21,680 --> 00:23:25,000 Speaker 8: capal good shipments were up four tenths after a five 455 00:23:25,160 --> 00:23:29,160 Speaker 8: tenths rise the month before, and that was double what 456 00:23:29,359 --> 00:23:31,760 Speaker 8: was anticipated. So maybe we have a little more strength 457 00:23:31,800 --> 00:23:34,720 Speaker 8: in the second quarter the rebound from all those imports, etc. 458 00:23:35,240 --> 00:23:36,679 Speaker 4: That we saw in the first quarter. 459 00:23:37,280 --> 00:23:40,840 Speaker 8: Those numbers will feed into better than expected perhaps second 460 00:23:40,880 --> 00:23:43,920 Speaker 8: quarter GDP, which we get on Wednesday when the FED 461 00:23:44,080 --> 00:23:45,080 Speaker 8: is making its decision. 462 00:23:45,440 --> 00:23:47,480 Speaker 1: Thank you so much, Michael McKee and Danny Berger is 463 00:23:47,480 --> 00:23:50,520 Speaker 1: here to tell us all about your selection of Boeing 464 00:23:50,600 --> 00:23:53,080 Speaker 1: Jetsike you have put on yeah radar. 465 00:23:53,160 --> 00:23:55,560 Speaker 5: Apparently every month I'm buying a new Boeing jet. You 466 00:23:55,640 --> 00:23:57,480 Speaker 5: all are welcome to join. I guess I don't know 467 00:23:57,480 --> 00:23:59,200 Speaker 5: where we're going with an entire jet, but. 468 00:23:59,200 --> 00:24:01,399 Speaker 1: Yeah, but you know, what Michael was talking about is 469 00:24:01,400 --> 00:24:03,480 Speaker 1: actually really important. And this idea that we've heard about 470 00:24:03,480 --> 00:24:06,080 Speaker 1: so much this morning, which is that it used to 471 00:24:06,160 --> 00:24:10,000 Speaker 1: be just investment in assets and liquidity heavy kinds of 472 00:24:10,320 --> 00:24:13,960 Speaker 1: corporate investment. Now we're talking about real physical investment in 473 00:24:13,960 --> 00:24:16,840 Speaker 1: this whole industrial revolution. At what point do you see 474 00:24:16,840 --> 00:24:19,880 Speaker 1: that really offering a boost to both productivity as well 475 00:24:19,880 --> 00:24:22,720 Speaker 1: as growth that hasn't been accounted for in so many 476 00:24:22,760 --> 00:24:25,520 Speaker 1: of the more pessimistic outlooks for the US economy. 477 00:24:25,760 --> 00:24:28,720 Speaker 7: Well, I've been an optimistic on the productivity front, despite 478 00:24:28,720 --> 00:24:30,760 Speaker 7: the fact that I'm quite reserved in terms of the 479 00:24:30,800 --> 00:24:33,960 Speaker 7: short term cyclical outlook. I've been very optimistic about the 480 00:24:34,040 --> 00:24:37,560 Speaker 7: exceptionalism that we were seeing going into twenty twenty five 481 00:24:37,640 --> 00:24:40,800 Speaker 7: because it was driven by strong productivity growth that was 482 00:24:40,840 --> 00:24:44,080 Speaker 7: coming from the bottom up. It wasn't yet the AI 483 00:24:44,240 --> 00:24:47,480 Speaker 7: lift that we're all talking about. It was actually businesses 484 00:24:47,520 --> 00:24:49,960 Speaker 7: being more efficient with a talent on hand that costs 485 00:24:50,040 --> 00:24:53,920 Speaker 7: more in today's environment, ensuring longer tenure. Better trained employees 486 00:24:54,040 --> 00:24:57,280 Speaker 7: are better able to contribute to economic activity. And it 487 00:24:57,400 --> 00:25:00,960 Speaker 7: was this focus on investing in the infrastructure that will 488 00:25:00,960 --> 00:25:04,680 Speaker 7: support AI that is often undercounted. And then on top 489 00:25:04,760 --> 00:25:07,800 Speaker 7: of that, you have a desire to push more industrial 490 00:25:07,840 --> 00:25:11,520 Speaker 7: policy and focus on driving more manufacturing investment. 491 00:25:11,720 --> 00:25:14,240 Speaker 4: It won't bring back the jobs, but it will bring. 492 00:25:14,080 --> 00:25:17,439 Speaker 7: Back more economic activity and more potential supply that is 493 00:25:17,520 --> 00:25:19,800 Speaker 7: right now undercounted, but it is still one of the 494 00:25:19,880 --> 00:25:23,600 Speaker 7: key pillars of economic activity driving that stronger productivity momentum. 495 00:25:23,600 --> 00:25:25,560 Speaker 5: Does that mean, for all the fears of growth slowing 496 00:25:25,560 --> 00:25:28,320 Speaker 5: and inflation picking up, that it's not quite stagflation because 497 00:25:28,359 --> 00:25:30,320 Speaker 5: you have some of these forces, it would moderate the 498 00:25:30,320 --> 00:25:31,240 Speaker 5: worst case scenario. 499 00:25:31,560 --> 00:25:34,600 Speaker 7: Well, I think economic activity is a flow notion, right, 500 00:25:34,640 --> 00:25:38,359 Speaker 7: and so we are still benefiting from a very robust economy. 501 00:25:38,560 --> 00:25:41,080 Speaker 7: As I was saying, up until the start of twenty 502 00:25:41,160 --> 00:25:43,320 Speaker 7: twenty five, we had an economy that had been growing 503 00:25:43,400 --> 00:25:47,840 Speaker 7: at a three percent pace with disinflation. Inflation was moving lower, 504 00:25:47,880 --> 00:25:49,520 Speaker 7: so we had the best of both worlds. We had 505 00:25:49,600 --> 00:25:53,520 Speaker 7: essentially strong productivity growth supporting a very strong economy and 506 00:25:53,600 --> 00:25:57,000 Speaker 7: disinflationary currents. We're gradually moving to the opposite of that, 507 00:25:57,040 --> 00:26:01,000 Speaker 7: a stagflationary environment where economic activity is lowing and inflation 508 00:26:01,200 --> 00:26:05,040 Speaker 7: is accelerating, and that becomes a headache for policy makers 509 00:26:05,280 --> 00:26:08,480 Speaker 7: around the world, but including the FED, which has to 510 00:26:08,560 --> 00:26:12,919 Speaker 7: balance these divergence pressures in terms of the employment mandate 511 00:26:13,080 --> 00:26:14,119 Speaker 7: and the inflation mandate. 512 00:26:14,200 --> 00:26:17,400 Speaker 5: Considering the pressure from the White House. Inevitably, especially next 513 00:26:17,440 --> 00:26:20,200 Speaker 5: year when we have a FED chair appointed by President Trump, 514 00:26:20,280 --> 00:26:22,360 Speaker 5: does this just turn into a FED that puts more 515 00:26:22,400 --> 00:26:24,840 Speaker 5: weight on the growth side of the mandate even if 516 00:26:24,880 --> 00:26:26,160 Speaker 5: inflation is still picking up. 517 00:26:26,400 --> 00:26:28,399 Speaker 7: No, I think the Fed will have to pay attention 518 00:26:28,480 --> 00:26:29,719 Speaker 7: to both sides of the mandate. 519 00:26:29,800 --> 00:26:31,359 Speaker 4: That is what it's supposed to do. 520 00:26:32,040 --> 00:26:35,760 Speaker 7: But it has to determine whether the pressures from tariffs 521 00:26:36,000 --> 00:26:39,200 Speaker 7: are one off pressures, which is the argument that Governor 522 00:26:39,280 --> 00:26:41,440 Speaker 7: Waller has been making. It's the argument that I've been 523 00:26:41,440 --> 00:26:45,560 Speaker 7: making for a while now that essentially this tariff induced 524 00:26:45,600 --> 00:26:48,720 Speaker 7: inflation is going to be a temporary one, that we 525 00:26:48,840 --> 00:26:53,280 Speaker 7: are still seeing significant this inflationary currens, in particular from 526 00:26:53,280 --> 00:26:56,479 Speaker 7: the shelter side of the economy, that inflation expectations are 527 00:26:56,520 --> 00:26:59,679 Speaker 7: still well anchored, and that we're not necessarily going to 528 00:26:59,680 --> 00:27:02,600 Speaker 7: see and round effects because the labor market is softening 529 00:27:02,720 --> 00:27:04,439 Speaker 7: and you're not going to see the types of pressure 530 00:27:04,480 --> 00:27:07,879 Speaker 7: that we saw during COVID. With wage inflation accelerating, in 531 00:27:07,920 --> 00:27:11,119 Speaker 7: my opinion, that opens the window for the Fed to 532 00:27:11,280 --> 00:27:14,800 Speaker 7: neutralize monetary policy from a slightly restrictive stance to a 533 00:27:14,840 --> 00:27:17,639 Speaker 7: more neutral stance with some easing over the course of 534 00:27:17,680 --> 00:27:18,359 Speaker 7: the next few months. 535 00:27:18,440 --> 00:27:31,000 Speaker 1: Greg Daco of EU, I thank you so much. Vishall 536 00:27:31,080 --> 00:27:35,040 Speaker 1: Conduja of Morgan Stanley writing this, given the tariff revenue collections, 537 00:27:35,080 --> 00:27:37,720 Speaker 1: we believe that the next two inflation prints will be 538 00:27:37,800 --> 00:27:41,920 Speaker 1: reflective of the tariff contribution. We shall joins us now 539 00:27:42,200 --> 00:27:44,480 Speaker 1: and I am curious about whether this is going to 540 00:27:44,520 --> 00:27:46,639 Speaker 1: be a one time price shock or whether this is 541 00:27:46,680 --> 00:27:49,200 Speaker 1: going to have longer legs, and how much we've really 542 00:27:49,200 --> 00:27:52,639 Speaker 1: gotten clarity versus just people's expectation that this will be 543 00:27:52,720 --> 00:27:53,879 Speaker 1: just a one time adjustment. 544 00:27:55,480 --> 00:27:59,240 Speaker 9: Budding Liza, Definitely, in principle it should be a one 545 00:27:59,280 --> 00:28:02,600 Speaker 9: time adjustment. Again tariffs. There are only three spots that 546 00:28:02,640 --> 00:28:05,399 Speaker 9: we can see the effects. Either the exporters seated up, 547 00:28:05,520 --> 00:28:08,040 Speaker 9: either companies through their profit margins. We heard a couple 548 00:28:08,040 --> 00:28:10,920 Speaker 9: of those in the earnings more on the order side 549 00:28:10,920 --> 00:28:13,639 Speaker 9: and the OEM side showing up with one time charges there, 550 00:28:14,040 --> 00:28:15,960 Speaker 9: or it trickles through PPI and CPI. 551 00:28:16,000 --> 00:28:17,280 Speaker 4: Here in economic data. 552 00:28:17,080 --> 00:28:19,320 Speaker 9: We saw a little bit of all of that, less 553 00:28:19,320 --> 00:28:22,080 Speaker 9: of exporters, more of profit margins, and CPI show us 554 00:28:22,119 --> 00:28:24,760 Speaker 9: a little bit. I think as you track the revenue 555 00:28:25,440 --> 00:28:29,040 Speaker 9: from the tariffs, and as average rates start to go 556 00:28:29,119 --> 00:28:32,280 Speaker 9: through the economy, I think the next two prints are 557 00:28:32,280 --> 00:28:34,440 Speaker 9: going to get a little steamy and a little bit 558 00:28:34,440 --> 00:28:36,760 Speaker 9: more contribution from there, but we still think it's going 559 00:28:36,800 --> 00:28:39,280 Speaker 9: to be a one time bump rather than a lingering 560 00:28:39,320 --> 00:28:41,280 Speaker 9: effect that we had seen in the prior years. 561 00:28:41,960 --> 00:28:45,840 Speaker 5: On to your point, Vishal, the tariff revenue has been real. 562 00:28:45,920 --> 00:28:47,760 Speaker 5: We have seen a bump in what the US is 563 00:28:47,800 --> 00:28:50,560 Speaker 5: taking in. What does that tell you about how sticky 564 00:28:50,640 --> 00:28:53,280 Speaker 5: these tariffs are for the foreseeable future? That this isn't 565 00:28:53,280 --> 00:28:55,440 Speaker 5: a story of the next four years, but this is 566 00:28:55,480 --> 00:28:59,680 Speaker 5: a tariff story that will continue on beyond present trumps. 567 00:29:00,320 --> 00:29:03,200 Speaker 9: I think if you just remove all the politics, mid terms, 568 00:29:04,040 --> 00:29:06,240 Speaker 9: four year term etc. Out Of the pitture and just 569 00:29:06,320 --> 00:29:09,880 Speaker 9: mathematically extend the clock out. Yes, this is going to 570 00:29:09,880 --> 00:29:11,760 Speaker 9: be a consumption tax which is going to be five 571 00:29:11,840 --> 00:29:16,080 Speaker 9: times more. But then companies are resilient, resilient and adjust. 572 00:29:16,200 --> 00:29:19,240 Speaker 9: I think they will take some profit margin hits slightly 573 00:29:19,240 --> 00:29:20,160 Speaker 9: more profit margin. 574 00:29:21,440 --> 00:29:23,360 Speaker 4: Sectors with high profit. 575 00:29:23,120 --> 00:29:24,920 Speaker 9: Margins will take a little bit more less on the 576 00:29:24,920 --> 00:29:29,880 Speaker 9: consumer side, and then consumptions, consumption will adjust or consumers 577 00:29:29,880 --> 00:29:32,840 Speaker 9: will adjust as well. I know we are still squinting 578 00:29:33,000 --> 00:29:37,040 Speaker 9: to see the weakness in consumption and consumer and labor market, 579 00:29:37,360 --> 00:29:40,640 Speaker 9: but still there is that sort of underlying weakness that 580 00:29:40,720 --> 00:29:43,360 Speaker 9: is showing up, and we do think that consumption patterns 581 00:29:43,360 --> 00:29:47,480 Speaker 9: will adjust nominal GDP should adjust down for that matter 582 00:29:47,560 --> 00:29:47,920 Speaker 9: as well. 583 00:29:48,000 --> 00:29:50,280 Speaker 5: What will it take to finally see that show, Vishal, 584 00:29:50,400 --> 00:29:53,160 Speaker 5: because it has been sometimes since we've seen any of 585 00:29:53,160 --> 00:29:55,520 Speaker 5: that weakness, despite the constant calls for it. 586 00:29:56,320 --> 00:29:58,520 Speaker 9: Yeah, No, I think it will take time, and that's 587 00:29:58,560 --> 00:30:02,719 Speaker 9: where it makes the FEDS job difficult from our perspective. 588 00:30:02,800 --> 00:30:04,680 Speaker 9: I think why it is difficult to see this and 589 00:30:04,720 --> 00:30:07,960 Speaker 9: why it's taking time because balance sheets, both consumer and 590 00:30:08,040 --> 00:30:11,880 Speaker 9: corporate balance sheets coming into this twenty twenty five uncertain 591 00:30:12,000 --> 00:30:16,200 Speaker 9: environment from both physical and monetary policy, have been extremely strong. 592 00:30:16,560 --> 00:30:19,920 Speaker 9: I think you're sitting on a consumer who is a homeowner, 593 00:30:20,720 --> 00:30:23,320 Speaker 9: is sitting on three percent thirty or fixed rate. Even 594 00:30:23,360 --> 00:30:25,080 Speaker 9: the best hedge funds in the world don't get that 595 00:30:25,120 --> 00:30:28,400 Speaker 9: type of type of leverage and their equities up twenty 596 00:30:28,400 --> 00:30:32,000 Speaker 9: five percent at least on their houses, and you're running 597 00:30:32,000 --> 00:30:35,240 Speaker 9: a four decade low unemployment rate. So that balance sheet 598 00:30:35,240 --> 00:30:38,720 Speaker 9: of that consumer extremely strong to take on some of 599 00:30:38,720 --> 00:30:40,840 Speaker 9: the uncertainties that you're seeing, and that's why I think 600 00:30:40,840 --> 00:30:43,600 Speaker 9: it's taking time for it to see through the economy. 601 00:30:43,720 --> 00:30:45,560 Speaker 1: Vijuel, you said something in your notes that I thought 602 00:30:45,680 --> 00:30:47,560 Speaker 1: was fascinating when you bleed this into the market. You 603 00:30:47,560 --> 00:30:50,280 Speaker 1: said US assets and US dollar are two separate trades, 604 00:30:50,320 --> 00:30:52,840 Speaker 1: and this is something increasing numbers of investors are coming 605 00:30:52,840 --> 00:30:55,000 Speaker 1: around to. Is that something that you expect to be 606 00:30:55,040 --> 00:30:58,520 Speaker 1: persistent Bullish US assets bearish US dollar. 607 00:31:00,560 --> 00:31:03,160 Speaker 9: I think that's how our portfolios are adjusted today as well. 608 00:31:03,240 --> 00:31:05,520 Speaker 9: Over the last like seven months, we've adjusted and steered 609 00:31:05,520 --> 00:31:09,160 Speaker 9: our portfolios in that direction. We're still trying to eke 610 00:31:09,240 --> 00:31:13,240 Speaker 9: out that positive fundamentals from consumer and corporate balance sheets here. 611 00:31:13,480 --> 00:31:17,320 Speaker 9: Not saying that there are not some of the idiosynthetic, eediosyncratic, 612 00:31:17,440 --> 00:31:20,400 Speaker 9: strong fundamental balance sheets in Europe and other parts of 613 00:31:20,400 --> 00:31:23,160 Speaker 9: the emerging market world as well, but I think that 614 00:31:23,360 --> 00:31:27,920 Speaker 9: dollar weakness, I think is coming primarily from that, you know, 615 00:31:28,000 --> 00:31:31,280 Speaker 9: the urge from the administration. We've heard it time and 616 00:31:31,320 --> 00:31:34,840 Speaker 9: again from speakers and another FED speak, but more from 617 00:31:34,920 --> 00:31:38,720 Speaker 9: DC on that part. And then where the exceptionalism story 618 00:31:38,800 --> 00:31:42,440 Speaker 9: is landing us. It is much weaker dollar from here 619 00:31:42,520 --> 00:31:44,600 Speaker 9: rather than what we had seen probably the last decade. 620 00:31:44,600 --> 00:31:47,600 Speaker 9: And I have so strong fundamentals from consumer and corporate 621 00:31:47,640 --> 00:31:51,560 Speaker 9: balance sheets, weak fundamentals from the government balance sheets, and deficits, 622 00:31:51,600 --> 00:31:54,520 Speaker 9: which flows into your currency. And that's how portfolio of 623 00:31:54,560 --> 00:31:55,640 Speaker 9: position at the moment. 624 00:31:55,520 --> 00:31:57,840 Speaker 1: Just about twenty seconds fee show. You said much weaker dollar, 625 00:31:57,920 --> 00:31:59,600 Speaker 1: how much further does it have to depreciate? 626 00:32:00,560 --> 00:32:02,920 Speaker 9: I think in the next probably two years. We think 627 00:32:02,960 --> 00:32:05,920 Speaker 9: that probably around that ten to fifteen percent in a 628 00:32:05,960 --> 00:32:08,480 Speaker 9: basket of currencies. We are not picking one currency to 629 00:32:08,520 --> 00:32:11,360 Speaker 9: go against in a basket of DM and EM currencies. 630 00:32:11,400 --> 00:32:14,080 Speaker 9: That's how we've reflected in our portfolios. We do think 631 00:32:14,080 --> 00:32:17,440 Speaker 9: that there is a double digit depreciation along the way. Again, 632 00:32:17,520 --> 00:32:21,080 Speaker 9: the point being that it is not about US treasury. 633 00:32:21,200 --> 00:32:23,720 Speaker 9: Foreign buyers of US treasury as a percentage of GDP 634 00:32:23,880 --> 00:32:27,320 Speaker 9: has actually not changed. It is the foreign buyers of 635 00:32:27,440 --> 00:32:30,320 Speaker 9: US equities that are up probably ten to fifteen percent 636 00:32:30,400 --> 00:32:32,720 Speaker 9: since the financial crisis that needs to adjust. 637 00:32:32,800 --> 00:32:34,600 Speaker 4: That's where some of the hedging. 638 00:32:34,320 --> 00:32:36,520 Speaker 9: Will come through. And that's why we think that that 639 00:32:37,120 --> 00:32:39,640 Speaker 9: ten to fifteen percent is how we are thinking about it. 640 00:32:39,800 --> 00:32:41,960 Speaker 1: Visha Konduja of Morgan Stanley, thank you so much for 641 00:32:41,960 --> 00:32:44,240 Speaker 1: being with us. Have a wonderful, wonderful weekend. 642 00:32:45,160 --> 00:32:48,720 Speaker 2: This is the Bloomberg Sevenans podcast bringing you the best 643 00:32:48,720 --> 00:32:51,800 Speaker 2: in markets, economics, an gio politics. You can Watch the 644 00:32:51,800 --> 00:32:54,800 Speaker 2: show live on Bloomberg TV weekday mornings from six am 645 00:32:54,960 --> 00:32:58,120 Speaker 2: to nine am Eastern. Subscribe to the podcast on Apple, 646 00:32:58,400 --> 00:33:01,800 Speaker 2: Spotify or anywhere else, and as always on the Bloomberg 647 00:33:01,880 --> 00:33:03,720 Speaker 2: Terminal and The Bloomberg Business out 648 00:33:07,720 --> 00:33:08,160 Speaker 1: Mm hmm