00:00:02 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at seven am Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube. 00:00:27 Speaker 2: Steven chivone with us right now. Federator mas A thrilled that he could join us this morning. He is exquisite at accent allocation. I'm going to be exquisite. I got a five eleven thirty year bond. Most people don't look at the thirty year bond because they have no gray hair. You have no gray hair. The thirty year bond. Managers, what does a five eleven thirty year bond signal to you? 00:00:50 Speaker 3: I don't think it's high enough. I know that sounds kind of crazy. I mean, I think what you're seeing. You know, it's interesting that conventional wisdom is that, you know, stocks might end up having a bond yield problem. I think bonds have a stock problem. I think in order to compete for capital with earnings growing, you know, what could be twenty two to twenty five percent this quarter, with margins expanding at probably the fastest rate in any of our careers. Gray hair, black hair, brown hair, whatever color hair you want. I think bonds ultimately have to offer a higher yield to compete for capital, and so I don't think we're in on the verge of a kind of fed hike cycle here, But I do think the yeld curve needs to steepen. I think longer yields probably need to drift higher. And I think it's okay. I think it's a reflection of higher growth. 00:01:40 Speaker 4: So what have you seen. We're going to get some Morgan Stanley numbers today. We've got a ton of bank earnings. Yesterday they seemed pretty solid across the board. What did you take away from yesterday's numbers? 00:01:50 Speaker 3: Yeah, Wall Street's doing well, right, I mean trading, investment, banking. You know, obviously you see some of the deal making that's coming through. You know, the SpaceX deal was a kind of huge boon for Goldman. But look, I think it's indicative of what you're going to see this earning season. To put this into perspective, we came into this year expecting margins to grow at a kind of five percent clip that's been the average since COVID. That was too low. Then we said, well, maybe it's the six percent that we've seen that we saw during the entirety of the dot com boom that's proven to be too low. We're growing at something like nine percent on a year or a year basis. That is the fastest in our lifetime. And I think this earning season is going to be a kind of poster child for that. This is a big growth corner. 00:02:33 Speaker 2: How the responsible adults intelligently stay in stocks? What's the best asset allocation? Do you buy more funds? Are you're more diversified? Are you more focused? What's the chival own way to say? Okay, I want to participate, but I know it's a bull market and it's getting frothy. 00:02:52 Speaker 3: So I don't know that it's frothy yet, Tom, I really don't. I think what you've seen is that while the multiple has moved up, right, we're trading at twenty two twenty one times multiples on a long term average six long the earnings have supported it, and so I you know, from our perspective, you start with are you in a secular bull market? We just wrote a piece about this. Are you in a scenario where you're in a structural up trend and earnings and multiples. We think the answer to that is yes, and that means you're going to want to buy dips. So what does that mean? I think growth and value are less of a meaningful distinction than they used to be, particularly after some of this reconstitution, you know, business from from the likes of the index providers, I think you want to be diversified, but overweight the US. You want to have large growth, you want to have large value. You should not shy away from small caps. And I think em also represents some opportunities. We'd be underweight Europe. They are just struggling on everything. 00:03:46 Speaker 2: Anybody overweight Europe. 00:03:47 Speaker 4: Now, I mean we had it for like a cup of coffeeback last year on a tariffs kick. Then we're people were saying let's buy some years. 00:03:53 Speaker 3: But it's interesting even though no one's overweight. I would say for eight of the last ten years, you've had a lot of the Wall Street type saying this is the year for Europe, this is the year for Europe. I think they've thrown in the towel on and I think the reason why, and I think what's what's really crystallizing here? Is they missed mag seven in Europe and they're going to miss Ai. Sure, and you can't. You can't miss these mega trendgity you can't regulate your way out of them. And I think that's what they're doing. 00:04:17 Speaker 4: Yeah, I just think it's such a shame for you thinking about Europe just missed technology over the last fifty years. There is no technology buy and large in Europe. And now I fear I think they're going to miss Ai as well. 00:04:28 Speaker 3: They're just they're regulating something that they're not building. 00:04:31 Speaker 2: Yep. 00:04:31 Speaker 3: You have to build it and then regulate it. You can't regulate it out of existence. 00:04:34 Speaker 4: A shock that they would allow it to happen a second time. 00:04:37 Speaker 2: What is it like if the blue light Detroit Lions blue light? What is it like it federated to have to work where Steve oth is taking he's like you know, like the like he's like Verlander, right, he's on a retirement sure, yeah, across talk tell us about the service of what did you learn from Steve Oth as he retires here into the year. 00:05:00 Speaker 3: So the greatest opportunity of my career was to learn at the side of Steve Author the last twenty years he's so much more than a boss. Over the last year, as we're transitioning and he's moving towards retirement, and it's it's probably the greatest honor of my career to succeed him. We often refer to the garden scene of The Godfather, you know, where we're playing through scenarios of the future and how they may play out. We're reviewing the lessons that we've learned together. You know, I started on the day of the market peak in two thousand and seven with him, so our first experience was trying to navigate the Great Financial Crisis. Yeah, well I got ten years of education in about a year and a half and so, and then on a personal level, you know what I would just say Tom is I've worked with him every day for twenty years, and so professionally, I think, you know, we think alike at this point. I think people come to expect a lot of the similar things from us. I'm just gonna miss the man on a personal level, because he's been you know, he's been. We jokingly sometimes we'll call him Dad, you know, around the office, but I don't think that's an overstatement. 00:06:16 Speaker 2: He's been. 00:06:17 Speaker 3: He's been like a father. 00:06:19 Speaker 2: I don't think he's gonna be out LinkedIn right, and. 00:06:22 Speaker 3: I know I will find him, and I know, you know, I'll be on the media and I'll get a text, you know, with a little bit of exact comment. 00:06:29 Speaker 2: Steve schuvon, thank you so much, great comments, sir mister. He's with Federated. Can't say enough about their ability to have courage to be in the markets. Stay with us. More from Bloomberg Surveillance coming up after this. 00:06:49 Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live weekday afternoons from seven to ten am. He'stern listen on Apple, Karplay and Android Otto with the Bloomberg Business app. Watch us Live on YouTube. 00:07:01 Speaker 2: William Power holds on the Court on Microsoft at Baird. What a joy he has to work with. Ted Mortenson is just absolutely encyclopedic. We get a huge response when Ted Morris is on. Yes, we'll talk about the Navy here and a bit link your work like on ASML into what Bill Power is doing on Microsoft. 00:07:20 Speaker 5: So I see all of tech. Some of our animals unfortunately have to stay in there silo. I see all of tech, So I've got a little bit of an advantage of seeing where capex and where prices are going. 00:07:31 Speaker 2: So if you were sitting with Mandela right now, what would you tell them? 00:07:35 Speaker 5: The enterprise capex is only up four percent year every year, and component costs are up twenty five so you have a mismatch on dollars being spent. I mean a lot of these IT managers are getting creamed on what they're spending on. And this is one of the problems with IBM. They didn't see it coming yesterday and that's why the stock was off twenty five percent. So I as you look into the end of the year, the big debate is how much do the global two thousand have to spend and this headwind of twenty five percent component price increases, something has to give and the feeling is at the tail end of the year we have to really watch software renewals. 00:08:19 Speaker 2: You see counts. 00:08:21 Speaker 5: I think everybody's looking at their expenses very very closely, because if you look at any semiconductor, whether it be memory or advance logic, prices are through the roof. 00:08:32 Speaker 4: How did we get to this point? Was it simply this surge and demand for AI that the asmls, the whatever the other chip fab guys around out there didn't see coming. 00:08:42 Speaker 5: Is a breakthrough essentially from Anthropic essentially on next generation quad and the adoption of inference. So when you have inference, you have to have a ton of memory. And I think it caught everybody off size. 00:09:00 Speaker 4: Just take IBM. I mean, you're an old man, You've been in this business a long time. Unfortunately you've never seen it. I've never seen it exactly. I mean we've never seen what happened to IBM yesterday. Put that into context for us. 00:09:13 Speaker 5: I think IBM is a kind of a steady addy both on consulting on the software side, on red Hat and if they're seeing it, I guarantee you everybody else is seeing it. 00:09:22 Speaker 2: And you're right. 00:09:25 Speaker 5: I've been doing this for thirty plus years. That was a big surprise for a lot of people. 00:09:30 Speaker 4: Is the fix here to wait two or three years? So there's more fabs out there? 00:09:34 Speaker 2: Is that it? Yeah. 00:09:36 Speaker 5: We had a call yesterday with our head of semiconductors at Tristan Gara and Samsung on memory and I thought it was one of the best webcasts that we've done in a long time. And the gist of the common is memory's not going to be in balance until twenty nine or thirty wo and the amount that s k Heinex and Micron and Samsung has to spend is an I underline the adjective historic. So you look at ASML's report this morning and aim At and Clack and Lamb they have three years of thirty percent visibility. I mean that is we have never seen that. Are they going to build fabs? 00:10:17 Speaker 2: Yes? 00:10:18 Speaker 4: Where do they build them? 00:10:20 Speaker 5: Well, the memory there's June twenty ninth, the South Korean government came out and basically signaled that they're going to along with Samsung and s khink, spend five hundred and ninety billion dollars. 00:10:33 Speaker 2: So do you have a single best buy then, don't tell me it's IBM. 00:10:38 Speaker 3: No. 00:10:38 Speaker 2: Templeton would say, shares are on sale today, right, do you have a single best buy? 00:10:43 Speaker 5: I'm looking at two areas, one and it's under one of the One of the areas is under everybody's nose. Is the whole semiconductor defense spend names like TSM, ADI, MTSI, Monolithic Power. We're if you look at what the Trump administration is doing in the Gulf, We're going to have weapons essentially builds for multiple years. And what I'm looking at is all those names on the semiconductors that play into the defense area. We're you know, we're expending a fair amount of munitions. So names like Ava v Krados and that whole semi food chain I think is interesting. And then as you look at these changes from a secular standpoint in the data center, one of the big ones is eight hundred volts. The voltage and all these data centers is going straight up, and you need power management the physical voltage, the physical voltage, and that's being fueled by Navidia's architecture of Rubin and Blackwell. 00:11:45 Speaker 2: And when you put that. 00:11:47 Speaker 5: Amount of voltage, you need new power management. And one of one of the best companies I think there is that is positioned in that secular change is Monolithic Power MPWR. 00:11:58 Speaker 2: Interesting. 00:11:59 Speaker 5: And then the last one would be Optical. We're going through the whole optical the five names of Lamentum, Coherent, those two leaders, we're going through secular change. 00:12:11 Speaker 2: When you're on we get a huge response to your tangible experience serving the nation in the Navy. So we're at war for the last two days, I guess, and I think it's incredibly unfortunate where we show pictures and the President tweets in that that we don't talk about super hornets or growlers or advanced hawk eyes, like actual stuff going up in the air. How at risk are men and women in these attacks? If we have twenty thirty forty jets in the air at any given moment, it's not a free technolog technological lunch, is it. There's real risk. 00:12:51 Speaker 5: There is immense amounts of risk for and I'd say a prayer for all of our Air Force and Navy aviators every single night because they are pushing. 00:13:00 Speaker 2: If you are on an aircraft very deck, I mean still to you as a kid, that plane going off the deck as a miracle. 00:13:08 Speaker 5: It's a miracle. And there is mortality. Okay, this is very, very high risk operations. And if you don't think the naval aviator's heart rates are at the max, they are and there's huge sacrifices that the American public does not understand it. 00:13:26 Speaker 2: I'm sitting on the couch at four am reading the headlines. Social media sanitize photos. What's the reality of forty or fifty jets up in the air in real time? 00:13:37 Speaker 5: It's chaos? So and you're directed to a target almost instantaneous. Now with the weapons systems we have, so it's not like you have a direct thought process of how your mission is going to go that day. It changes by the second and minute. 00:13:54 Speaker 2: This is not Gregory peckha know in Britain in twelve o'clock. 00:13:57 Speaker 5: It puts a lot of pressure on your brain. And when you're deployed, you know, for six months, it takes a real big toll. Your brain can only do this every day and you've got to You really got to psyche yourself up on every single sorty that you're doing that you don't make a mistake. 00:14:15 Speaker 2: Thank you for your discussion on technology, hugely valuable and of course this with our men and women truly in harms way. You just can't say enough. But we do this with Becca Wasser, with Ted Mortenson and others about maybe what's really going on beneath the headline data on the military. Stay with us. More from Bloomberg Surveillance coming up after this. 00:14:42 Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Auto with the Bloomberg Business app or watch us live on YouTube twins in with this. 00:14:55 Speaker 2: Chief Economist Bank of NASA right now. You got one single sentence in here that's like, hell, hello, Atlanta FED GDP now Q two one point three percent? Really do you believe that number? 00:15:09 Speaker 6: Well, you know there's several FED models. New York FED also has a now cast. The Atlanta Fed GDP now model happens to be a lot more volatile like they as each INFU comes and they kind of ky reccolate. But it's something too. It's something to keep an eye on Tom. And you know, I think there's there's some signs that's that the commoms may be losing MO momentumly like the ADP weekly numbers nfp IS has slowed three months in a row. So there's some signs that the commomy may be slowing in Q two, but nothing to worrisome. But I think enough to prevent the UH. I believe enough to prevent the FRED from hiking anytime soon. 00:15:41 Speaker 4: We're gonna get some PPI numbers here today at a thirty. We got CPI yesterday, a little softer than expected, but impacted presumably by the swings and energy prices. What's your view of underlying inflation out there? 00:15:52 Speaker 6: Yeah, if you look at all the core underlying messages, they all accelerate also, so I think that the FED is breathing a sigh of relief. But yeah, you all, I'm sure heard Chairwash's testimony said. Look, I'm not I'm not saying mission accomplished. I'm still concerned. So he's he's talking very hawkish. I expect more of that today. 00:16:10 Speaker 4: So, I mean, as we think about the underlying inflation here, is this something that is I mean, it's been characterized as just sticky, and maybe it's permanently sticky. If we're going to have you know, reduced supply of labor out there, if we're going to have on shuring and reshuring, maybe that two percent number is it really shouldn't be the target. Maybe it's something higher. 00:16:30 Speaker 2: Yeah, positively A good point. 00:16:31 Speaker 6: There's so many moving parts, right, so many possibly structural changes in the economy. I would say it doesn't help that we have another wave of energy price shock, you know, sort of coming at us. You know, the FED was hoping to look through that that first spike up to you know, in oil up in one twenty. Now now we're heading up to ninety plus. It just complicates things again. I think it supports the Fed's reason to say, let's stay on hold to see how this works out. 00:16:55 Speaker 2: You did this for years. Linking in strong dollar into the yield space in an injury can start your thin I'm looking at the low and the ten year real yield end of February early March, and it has been an elegant climb higher to two point three four percent. This morning. We're one standard deviation above trend log trend. I should say, do you have a concern about the trend and the peakedness that we're seeing in real yields climbing? 00:17:23 Speaker 7: Yeah? 00:17:23 Speaker 6: Absolutely, And I'm surprised that the equing marks are not paying more attention to both nominal and real yields. So you know, the ten and thirty year nominal yields approaching those highs from from May, and that's what's really what's pushing the really yields higher. 00:17:35 Speaker 5: We don't know. 00:17:36 Speaker 6: We've got the inflation coming down a little bit, but again it's in higher rates. That's another reason I think we're concerned about the US economy. These higher rates, they're obviously killing the already sort of dead housing market. They're killing it further. You know, consumingcratits can get more expensive, et cetera. 00:17:51 Speaker 2: So just again, just. 00:17:52 Speaker 6: Some yellow flags that you know, I think the us COM's still doing okay, but just some things to keep an eye on. 00:17:56 Speaker 4: And the marks pressing in about one rate hike this shar year. Does that seem reasonable? 00:18:02 Speaker 6: Yeah, so I think if your wonderful w I RP page, I think has it an October hike almost almost priced in fully, which I'm going to push back again. 00:18:11 Speaker 4: I think you look, we look what happened over ACB in June. 00:18:14 Speaker 6: They hiked right as the sort of the oil prices turned, you know, the Fed's whale where they're just trying to look through the oil price the core core readings, and for now the core readings are in June or well behaved. But just again, some of the things to watch out for. 00:18:27 Speaker 2: In the summer. If you're with the Bank of NASA, do you get to wear Berbatia's shorts? 00:18:34 Speaker 6: Well, be honest, I think, I mean, we're not to go down down there too long during the heart of the summer. 00:18:41 Speaker 2: It's just it's really hot and I can see you with the shorts and then thank you so much, greatly appreciated with Bank of NASA really sharp note. Stay with us more from Bloomberg Surveillance coming up after this. 00:19:01 Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Otto with the Bloomberg Business app, or watch us Live on YouTube. 00:19:14 Speaker 2: John Sliggy is with Reflexivity, and what you need to know is he's a wonder child of economics who's gone off into the world of AI. You were at Harvard with Rogueoff, who's been a supporter of the show. John Campbell's been on, Andrey Schliefer's been on a couple of times. What was it like in your dissertation, your oral dissertation, sitting there with Roguoff, Campbell Recipher. Were you shaking? It's a good question. 00:19:42 Speaker 7: I hadn't thought about that in a while, but yes, at the time, I definitely felt a little bit of anxiety, although again I worked very closely with all three of them in the lead up to that, so by the time you're sitting in a room, it was easier than you would think. 00:19:56 Speaker 2: All different, But the number one thing I see there is academic human What's the humility you have right now? About all the certitude of AI. 00:20:05 Speaker 7: Oh, tremendous. In fact, you know, often there's a discussion about what do you think is going to happen over the next three years, five years? And I'm thinking even six months out exactly. 00:20:15 Speaker 2: That's quit I predict from the adults, Paul, that's when I hear they can't get out six months all right. 00:20:20 Speaker 4: So AI in the investment industry talk to us about analytical reasoning? What is that? 00:20:28 Speaker 7: So what I think we're now seeing the capability of these large language model has reached a level where you really can't treat them and use them as you might let's say a junior quant an end list somebody who is very good at calculating things. This is how we see reflexivity, but can also benefit from a degree of guidance and experience, because ultimately the output you get is very much dependent on the quality of questions you're asking. 00:20:55 Speaker 4: That's what I've heard from the young kids, that they're trying to explain AI to me. So how do you how does that work? In I think about my first two or three years as an investment banker junior investment banker. I think it all can be done by AI when I think back upon it. But how do you guys think about it? 00:21:10 Speaker 7: We're really seeing currently as taking off your hands thinks that you probably never enjoy doing, which is looking for and downloading data from a variety of different data sources, putting macros into an Excel spread cheet andess on. I don't think anybody genuinely enjoy doing that part. What I think is interesting when you're doing investing is the investigation part. Right, you have a hypothesis, you have an idea, you want to see if you're right or wrong. If you're able to act more as a lead investigator and have somebody else calculate and do all of the sensitivity analysis, I actually think the process becomes a lot more fun. And that's what we see people with reflexivity experiencing. 00:21:51 Speaker 4: So where is AI in the investment industry these days? How is it being used? I could see the young I'm thinking about being a young analyst myself coming out of college or business school. I'm all over this stuff like cutting into for me back then, was the macros in Excel that's how I added value to my managing director who didn't know what a spreadsheet was. Now, I would think a similar type iteration is these young kids are probably coming in with tons of ideas. 00:22:20 Speaker 7: I would think, so here's what has been really interesting. I think one, and you won't be surprised by this. There's a wide range of advance SAT state. I'd say that we see a cross funds. There are some that obviously have made this an integral part of the process, have sometimes outsourced everything to AI. But there are others, and I'd say that's the majority who are still in what I would say experimental phase or kind of weight and C mode, and are using a lot of AI for only very low stakes processes because they worry about accuracy, worry about hallucination and so on. 00:22:56 Speaker 2: It's a constraint. Like I think of it fidelity. Will Danoff's retiring and you've got Jason Winder and Asher and I'm like, okay, fine, those guys are senior, they've got experience, but under them are four or five acolytes from fancy schools with fancy maths, real bright They're using it to bring in data. But that's it, right. 00:23:16 Speaker 7: And so I think the key thing that we are changing and make one of the pillars of reflexivity is that you have complete transparency, auditibility, and accuracy, right because I don't think that you will start using this for higher stakes investment decisions unless you can rely on it and also have the ability to check all of the results really easily. 00:23:39 Speaker 2: What's your time date on it? 00:23:41 Speaker 7: I mean this is currently happening now. This isn't sort of like a future thing. That's the core feature off reflexivity. 00:23:48 Speaker 2: Do you think that long only by side in arbitrage, hedge funds, along short whatever they're using AI right now up the food chain of making key decisions? 00:24:00 Speaker 7: Well, I think at the moment for a lot of them, they're using it what I would say or describe as like amplified Google search, right, you will use in order to kind of say like, hey, summer, is this market for me? Tell me what I should pay attention to and so on. Okay, the next level, and this is what reflexive it was specifically designed to do, is much more to say, Okay, I actually have a scenario in mind. I think that the fat isn't going to high rate by twenty six. I'm just getting a hypothetical. Give me a quick calculation as to in my portfolio, what is vulnerable, what will do well? What are things in the vast act universe that I should be making at for that? 00:24:37 Speaker 2: SKay didn't Peter Lynch do that a few years ago at Magellan. He just didn't need an LLM. 00:24:43 Speaker 7: Yes, and so I think this is what I think llms should be able to do, is that they can close the gap and experience right for somebody like him. You are relying on this vast reservoir of previous market experiences and you're able to do a lot of it. Intuitively, Not everybody can do this, and so what you really want a system and AI to help you with is to ultimately close the gap by performing the calculation and say, I understand how these assets relate to each other. I understand how macro environment changing will impact them. Here are most likely implications of that scenario. 00:25:20 Speaker 4: So, how good is reflexivity in your and whatever product you're giving you're selling to your clients? How good is it today? 00:25:28 Speaker 7: Let me put it this way, It's very very good, and it's the worst will ever be because it only gets better right each time when we get more iterations of claude and chat GPTs on the reasoning layer gets better, and that makes the knowledge graft that we had built shine brighter, and it also makes the speed with which you get the answers faster. 00:25:48 Speaker 4: Who do you compete against? 00:25:51 Speaker 7: Really at the moment, there isn't as much focus on some of the time serious data that we particularly specialize in because we had all come from the hedgephone world, so to us that's bread and butter. So I don't think that there's a clear competitor. But I think it's also exciting because I think we act as we can compliment very well what people get from Bloomberg Terminal and so on. So you have the data, we have the analytics. 00:26:14 Speaker 2: Yeah, and thank you so much, John Salya with an update there, co founder Reflexivity. 00:26:19 Speaker 1: This is the Bloomberg Surveillance podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, seven to ten am Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal