00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordert. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. Jeremy Stretchers CIBC writing. Compared to the April May interventions, the latest round arguably carries more weight because of the coordinated moves by the US Treasury. Jeremy joins us now for more, Jeremy, there are some underlying problems in Japan. There is a term of trade shark. And welcome to the program, buddy. It's always good to see you. 00:00:52 Speaker 3: Good morning. 00:00:53 Speaker 2: You're facing a term to trade shark that oil is attributed to. You've got deficit issues as well, a massive rate different and saws with the US. Why does this intervention help them fight those three? 00:01:06 Speaker 4: Well, indeed, you are talking about, in effect a containment policy, because unless the oil price is going to come down materially, or unless the interest rates spread between the US and Japan closes exponentially, and that would imply that the boj would have to bring forward, not only bring forward that policy, tiling would be more aggressive, and perhaps the market reprice the FED expectations. It is seemingly more of a containment issue. But I've just been listening with great interest to your discussion with Lisa regarding the holdings of treasuries by Japanese investors, and I think that is particularly notable. I think that twist steepening that we did see in terms of the US curve after last Wednesday's FED decision, I think was also notable. And I think if we go back to Liberation Day and the post Liberation Day period, it was the discipline of the bond market that really exercised control on the politician. So I think it is that sort of bond market dynamic that I think is proven to be contingent here in terms of this broad and narrow regarding the Dollian exchange. 00:02:02 Speaker 1: Right, Jeremy, just to take that a step further, how much is the timing kind of predicated on the move that we saw following the Wednesday FED press conference. 00:02:10 Speaker 4: Well, certainly, I think the two are not inconsistent in terms of the timing dynamics. So we have seen obviously a consistent grind higher or had seen a consistent grind higher and dolly en through the month of July. 00:02:22 Speaker 3: But clearly that's risks. 00:02:25 Speaker 4: You know, there was an increasing degree of concern or destabilization perhaps in the bond space after that FED decision, So I think that did amplify concerns, and in a sense it is an opportunity, you know, to try and hit a market which is very extreme in terms of its positioning. I think it was very notable that if you look at yen short positions, they were at the most extreme in two years. And indeed we're pretty close to the levels that we hadn't seen since thirteen thousand and seven. So the market was pretty stretched. There was a degree of volatility or a degree of uncertainty which had been unleased in terms of the treasure curve, in particular after the FED guidance narrative. So I think those two things certainly coincided to provide perhaps a fertile ground into the month end for the authority to try and come in and hind a market which you've been heavily skewed in one direction. 00:03:13 Speaker 1: This is incredibly rare, Jerreman. We were talking about how the last time there was some sort of bilateral coordinator currency intervention was twenty eleven one, at the time a number of nations coordinated with Japan to help depreciate their currency. Then before that was two thousand, when the US and a group of other nations helped support the newly formed Euro when it was depreciating. Do you think that interventions like this are going to become more frequent, given what we're seeing now with Japan, given what happened with the credit line to Argentina, given some of the rhetoric that we're hearing out of the Trump administration. 00:03:44 Speaker 4: Well, again, I was listening to your discussion earlier when you were talking about free and fair markets, and in a sense that does beg the question that intervention or the prospect of interventions certainly creates uncertainty regards the free floating nature of both currencies, also the free flow of information and the market reactions accordingly from that, so I think there are degrees of concern in relation to the current environment, and I think there is going to be increasing skepticism as to whether there will be some degree of increase in official action going forward, and that could create additional pockets of volatility and or uncertainty. And I think that's the subtext here. And I think it's quite interesting to to tie this with the forward guideance debate and discussion that you've been having for some time, and in relation to mister Warshing, etc. I think we have to remember that we are in a new world, or at least for many market partisimants, we're in a new world because I've unfortunately been around more than long enough to remember free free forward guidance, and perhaps many in the market have yet to understand and ramifications and the uncertaintys that could come with us. 00:04:50 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Let's talk about SpaceX facing its next big test with this first public earnings report you want tomorrow. The stock is down over thirty percent since it's IPO. Sarah Conce of Cleo Capital writing, we know the headline story we'll hear at earnings. What we don't know is how much the fire sale we'll see and how much Elon and other large shareholders are willing to buy to stop the bleed. Sarah joined us. Now for more, Sarah, are you suggesting the beginning of the end of the lock up, the staggered lockup that we're about to see, is more important than the earnings report this week? 00:05:33 Speaker 5: I think it absolutely is. 00:05:34 Speaker 6: You know, we for the most part, don't know who owns those shares. We don't know who's able to participate in this initial lock up tranch. We do know that that's sort of one seventy five I think barrier they had to hit to unlock even more. 00:05:49 Speaker 5: I'm pretty sure that that is not going to happen. 00:05:51 Speaker 6: But you know, this is going to be a really fascinating test of who actually wants to hold this and what do they think about the law long term sort of promise of the company. 00:06:03 Speaker 2: So how much the move that we've seen since the IPO do you think is about front running some of those headwinds. 00:06:09 Speaker 6: I think a lot of the move post IPO is because people are getting nervous about one the AI trade, the macro in general, and two they're realizing that this might be kind of the end of the line for Elon's ability to sort of construct reality. 00:06:25 Speaker 5: We know that we're not on Mars. 00:06:27 Speaker 6: And I think that when you look at the fundamentals of the company, you kind of scratch your head and say, wait, what am I paying a trillion plus for? 00:06:35 Speaker 3: Well, this goes to the heart of the issue. 00:06:37 Speaker 1: How much is Elon Musk losing some of his capital and markets in a big way? You point out, we know the headline story, we'll hear at earnings, the rockets are having trouble, the stock is thinking Starlink works pretty well, AI needs improvement. I mean, at a certain point, are you seeing people look at the balance sheet more than they are listening to the words, the hopes, the dreams of CEOs in an era where people are saying, show me the money. 00:06:58 Speaker 5: Certainly, in general that is how happening. 00:07:00 Speaker 6: But with Elon, you know, we've been two years away from self driving cars with him, and. 00:07:04 Speaker 5: We always will be right. 00:07:06 Speaker 6: So there's a problem when you keep telling people things and they don't come true. And so I think he has a bit of a chicken little problem at this point where people just are starting to not believe no matter how much they like him, that he will deliver what he says when he says it. And then on top of that, a lot of people don't like the guy. They've heard enough, they've seen enough, and they're kind of sick of it. And so I think that sort of mania that took over Tesla for years of believing that he could do, you know, the impossible, has really really cooled. 00:07:38 Speaker 1: So how much does this set a precedent for the likes of open AI and Anthropic or color the potential IPOs that could be coming out later this year. 00:07:47 Speaker 6: I think that we've already seen with open Ai it's having a huge impact. You know, Sam talks a lot about how he doesn't want to be a public market CEO. You know, there's a lot of hesitation around that IPO. But at the same time we know they are absolutely bleeding cash and that private markets are getting a lot less excited about putting more money in. And I think with Anthropic there's a question mark there too. They seem like they have better margins, like they will go public. But I think everybody's going to slowly be dropping that tea that trillion and going back to hey, it's perfectly respectable that IPO is one hundreds of billions valuation. 00:08:24 Speaker 1: A situational awareness a convenient excuse. 00:08:28 Speaker 6: I mean, situational awareness is a very interesting peak. I think into sort of the tech mindset, which is tech is really bad at sort of managing downside risk. 00:08:39 Speaker 5: We are really good at sort of diamond hands. 00:08:42 Speaker 6: You put the money in money, printer go burn number goes up. 00:08:45 Speaker 5: We are simple, simple investors. And so I think what you're seeing with situational. 00:08:49 Speaker 6: Awareness is that there's a lack of it in Silicon Valley, and that is likely to be really tough with things like the SpaceX deal, where the question is where do you see when do you stop backing the founder? 00:09:02 Speaker 2: So that's also the case sometimes on Wall Street as well, and you can see the anticipation building just to buy semis and hardware all over again after the decline of last month, and to Lisa's point, they collapsed to that fund then blow up of it has basically told some people that that's a clearing of the decks, that's a clearing event and you can buy again. What would you tell investors this morning, can we're looking to buy into that dep particularly going into earning season this week with numbers from sand Disk. 00:09:33 Speaker 6: You have to look at the individual underlying company and see isn't a dip for that company? 00:09:38 Speaker 3: Right? 00:09:38 Speaker 5: If something was ten. 00:09:40 Speaker 6: X overvalued and now it's five x overvalued, that's still five x overvalued. And so with a lot of these names, they are so different until you get under the hood. You look at the pe ratio, you look at the profit margins, if they're profitable at all, and where the growth is going to come from, because for a lot of these companies, growth is coming from this idea that everyone will need more and more expensive memory. 00:10:02 Speaker 5: Forever, and I just don't know if that's true. 00:10:06 Speaker 2: Stay with us. More Bloomberg Surveillance coming up after this. We begin this now with stocks rising a crude falling ahead of a busy first week of August trading. Joining us now the former NEC director and IBM Vice chair Gary good Morning, get. 00:10:28 Speaker 3: To see it, Good to see you. Thanks for having You've. 00:10:30 Speaker 2: Been following the debate. I wonder your reaction, you know, Kevin wash Well, what is everyone getting wrong? And I say everyone, I mean the consensus for you on their reaction to that news conference last Wednesday. 00:10:40 Speaker 7: I'm not going to characterize as anyone's getting anything wrong or anything anyone's getting it right. What I'm going to characterize this as Kevin is a masterful student of the market. Kevin has been at the FED before. He understands the limited toolbox, but the effective toolbox that the FED has. 00:10:56 Speaker 3: What Kevin is. 00:10:57 Speaker 7: Doing right now, and I think people don't like this is Kevin is reverting the FED to the historic norms of what the FED did. We unfortunately, as newscasters or as market makers or as traders, we got spoiled from the eight period on. From eight period on, the FED has been an open box. They've been completely transparent. They have not done anything that you wouldn't know they would do hours or weeks or months before they did it, and the market became addicted to knowing what the FED was going to do. 00:11:30 Speaker 3: What Kevin is doing right now, he's trying to. 00:11:32 Speaker 7: Get the market off the addiction of me, the FED chairman of the FED Board having to tell you what we're going to do, and you the market and you participants. You should go and participate however you think it makes sense for you and wherever you think the opportunities are. This is a tough transition. People liked having the answers to the quiz before they took. 00:11:51 Speaker 2: The test, So there's a market's question. I also think there's an economics question that needs to be addressed. The issue for us, I think is less about the lack of guidance, less about having the answers before the test, more about you've got an inflation problem, why you're not doing anything about it, which essentially was the Mike mckein question in the news conference. Why are you waiting? What are you waiting for? Without giving us any real clarity on the preferred tool, why they're waiting, whether they carry on waiting, and at the same time telling us to believe them that I do something about inflation. I think the economic question is the difficult one to answer. 00:12:25 Speaker 3: Chairman Worrish is going out of his way. 00:12:26 Speaker 7: I mean he's literally going out of his way to tell you he is an inflation fighter, that the stable price mandate and the two percent inflation guide is his bell weather, and he's going there. He has limited tools to get there, as we know. In fact, he has said in the speech, I have two tools to help us get there. I can raise rates or I can sell down the balance sheet. 00:12:47 Speaker 3: Those are his two tools. 00:12:49 Speaker 7: Raising rates, as we know, will affect the overnight rate. The Fed Fund has very little effect on the economy as a whole. The real effect on the economy is, let's say, let's call it a five to ten year bucket. That's where most people borrow. That's where consumers borrow. That's where credit cards are, and that's where student loans are. That's where automobile loans are, that's where mortgages are. Kevin knows that what he's also telling you is right now, the market is doing its own work in steepening the yield curve. So in less than a year, we have gone from a twos tens interest rate curve inverted about twenty basis points to positive forty basis points. We've moved sixty basis points in two tens rates. So Kevin is saying, look, the market is doing my job. They're making the ability to borrow money out on the curve more and more expensive, and it's going to continue to get more expensive. If I raise Fed funds, yes, I can raise Fed funds, I'm not sure that has the effect. I think what he would probably prefer to do is he preferred to. 00:13:48 Speaker 3: Sell down the balance sheet, which again. 00:13:50 Speaker 7: Would put more supply into the market, which would steep in the yield curve. 00:13:54 Speaker 3: But the market's doing that for him right now. 00:13:56 Speaker 7: So being in that chair for less than two months, or about two months, But he happened to come in a funny time where a week and a half after he came in he had his first meeting, Then thirty days later he had a second meeting. He then tells you nothing happened in those thirty days. He's sitting here and I think he's evaluating where he wants to be. He's lucky on the schedule. He doesn't have an August meeting. He does have Jackson Hole. He could tell us what's going on in Jackson Hole. So I think Kevin wanted to probably get through those first two meetings, make it clear to the market that he is an inflation fighter, make it clear to everyone who's watching that the market is doing much of what He would have tried to get accomplished early and have the month of August before the September meeting to come out and deliver a relatively baked plan. In his mind, he's not going to give you the baked plan, but he himself will have a highly baked plan. 00:14:51 Speaker 1: Do you think that the selloff in the long end of the yield curve is by design that what he saw after the FED meeting with thirty eight rates going to the highest level since two thousand and seven was. 00:15:01 Speaker 3: A good thing. It's doing Kevin's jobs for him. 00:15:05 Speaker 7: At the end of the day, if you want to slow down the economy and you want to tamp inflation, you have to make the cost. 00:15:11 Speaker 3: Of money more expensive. 00:15:13 Speaker 7: So if the thirty year rates went up, which they did, and the tenure rates went up, in the front end of the curve basically stayed the same, which means we had. 00:15:19 Speaker 3: A curve sleeepener. 00:15:21 Speaker 7: You are accomplishing what a FED chair would want to accomplish if you're trying to tamp down inflation and moderate I don't think it's just Kevin that's doing that. I thank Kevin's being very realistic to what the environment is today. He knows the Treasury barrings are going up every year. He also knows there's this enormous amount of need for debt in the AI compute data center world, where we're talking about potentially on the trillion dollars of issuance going on in the market day. The market is finding a home to clear these bonds. It's also raising longer term rates. It's putting more risk premium into the curve. All things that Kevin is probably happy are happening without him having to do anything. 00:16:03 Speaker 1: Scott bustn't did something over the weekend, and I wonder how related you see this as the idea that there was a coordinated intervention. 00:16:11 Speaker 3: In the end, some. 00:16:12 Speaker 1: People are speculating it's because the Japanese Finance Ministry was selling treasuries to finance their unilateral intervention and their currency and this could potentially help support US yields from going much higher. Do you believe there is any coordination between the. 00:16:27 Speaker 3: Two, Well, we know that the US and Japan coordinat I mean, no one's nine. 00:16:32 Speaker 1: The thirty year yields in the US and potentially what happened. 00:16:35 Speaker 7: I think there are multiple factors and why the US would have got involved in an intervention. Obviously the rate, the trades that would force people into transactions where they may be selling US securities to buy at home. 00:16:51 Speaker 3: It also has to do trade balances. 00:16:53 Speaker 7: Remember we've got administration that is fixated on trade deficits. So to the extent that you know, WIGN products come into the United States below what we think is a market clearing price, or our products are extraordinally expensive to someone that would we would like to sell to. There's a way to try and equal out the trade deficit or trade balance with the country as well. So I don't think it's a single factor model. I think when Scott Besson gets the phone call from the bank in Japan, he's evaluating all of these factories. He's evaluating what's going on in supply demand of treasuries from foreigners, what's going on in the trade market, what's going on with the trade deficits, specifically with Japan, And each one of those has a different input into the equation to go ahead and move forward. 00:17:37 Speaker 2: No, Inpestant, it might have been the one that made the call, you know, sort of laser focused on these issues. 00:17:42 Speaker 1: Well, he has had an experience with that with a Bank of England, so why not bring it over to Japan. 00:17:45 Speaker 2: How Fronchile is the bankdrop for markets right now? All these little things going on, tension in Japan, situational awareness that fund getting into a bit of trouble in the last week too. How fragile do you think the bank drop is. 00:17:56 Speaker 3: I don't know if the mark. 00:17:57 Speaker 7: If i'd call it fragile, I would say we have as much instability or balls up. 00:18:03 Speaker 3: In the air as we've had. 00:18:04 Speaker 7: I mean, usually there's one or two driving factors in the market. Today, we've got a myriad of factors. You know, we've got the war going on, We've got the price of oil going on, we've got the major capex AI investment going on. And the question is, you've taken some of the largest companies in America that historically have owned intellectual property and we're massive free cash flow generators, and then they recirculated that cash into the market, either by buying assets, buying other things, returning dividends, buying back shares. You've taken those companies and you've now made them huge, huge asset gathers, huge asset builders, and they're no longer creating free cash flow. In fact, it's the first time I can remember in the history of an earning's call of some of these largest companies when they're talking about we will stay positive on free cash flow. It's hard to understand that these are companies that we're producing tens of billions of dollars a quarter in free cash flow. So the market's digesting that we went through the software scare versus the AI scare, markets digesting that we're trying to figure out where all these pieces come together. So there's an enormous amount of instability in the market at the same time rates are going up. But the consumer, we know, the consumer continues to spend, spend, and spend. So even when you look at the GDP numbers, the strongest pieces in there are the consumer spending. 00:19:29 Speaker 3: Now we could even go further. 00:19:31 Speaker 7: We know the consumer is spending, but we also know that's a bit of a bifurcated event. We know that the wealthier consumers in this country are consuming at extraordinary high levels, and we know the low end consumer is barely getting by. And this is one of the dilemmas that everyone's trying to deal with. And how does this filter through markets? I think all of these pieces of instability are out there, and look, markets can handle one or two pieces of instability. They start to they start to fail when it's three four and five, and they really fail when it's three four and five and they're totally out of their control or the answer is six to twelve to eighteen months off. 00:20:08 Speaker 2: And that's what I'm trying to work out. How close sw we So you've got a massive competition for capital, you want circulate that really well. You've had a huge terms of trade shock at the energy market that's hitting Japan when they've already got a frenchile backdrop. On top of that, there's evidence of leverage building up in places like South Korea and hedge funds blowing up. And I wanted to go back to the very beginning of this conversation whether now is a good time to go back to the old world of reducing forward guidance in the handholding post GFC at central banks. How difficult will that mission be? 00:20:37 Speaker 7: I don't think it's difficult. Like I said, we've been trained since two thousand and eight to today to expect the FED to telegraph, and for a guy prior to two thousand and eight, when I was trading for a living and running bigging trading desks, we did not know when the FED was going to move. There were surprise meetings after surprise meetings, after surprise meetings. You know, the FED doesn't have to wait for a scheduled meeting to cut or raise interest rates. 00:21:03 Speaker 3: Now they have not. 00:21:04 Speaker 7: Done it really since the I guess they did in COVID. The last time they did it was twenty twenty. We had one hundred basis point cut on a Sunday evening in COVID, if you remember. But we've now gotten in this point where the market insists not only there be a meeting, there'll be a meeting with a press conference. You can't have actions list there's a meeting with a press conference. I think the chair is trying to say, no, I have a job to do. We will meet whenever necessary to raise or lower raise. We will meet whenever necessary to do any action we need to do based on what's going on in the environment, not based on the schedule that I put out eighteen months in advance. 00:21:40 Speaker 2: That's bringing the discipline back to capitalism and financial markets. I'm not averse to that at all. Just trying to work out the consequences of making the switch when you've been feasting gone easy money and forward guidance for fifteen sixteen years and knowing they're always going to be there to have your back and step in whenever there's a problem, and they'll loll fee the guidance. Since you're the why you put it, they'll give you the answers to the quiz before you sit the test. Wall Streets feasted on that for years. 00:22:05 Speaker 3: They have. 00:22:05 Speaker 2: That's why I use the word French out how much fragility is in the system that needs to be unwound as we make that transition back to the old world. 00:22:13 Speaker 7: I don't think there's as much fragility as you think. Like I said, most of my career trading, I had the opposite world I had. 00:22:22 Speaker 2: Because you had the two way discipline you had. 00:22:25 Speaker 3: I had to be disciplined. 00:22:26 Speaker 7: I had to assume when I went home with the position or I made a price for something. And I ran a big mortgage business for a while, man ran a big treasury business for a while, ran a big at Christ business. I had to assume that the FED could meet any moment and change policy and were we trading appropriately? Were we managing risk appropriately? Instead of saying, oh, I don't have to worry about because that there's a FED put or rates can't change until September something. Now because there's no FED meeting, maybe they'll say something in Jackson Hall. So I'll manage my risk up till the Jackson meeting. I'll wait for that. Then I'll manage my risk differently after that. That's not the way markets should work. The markets should manage themselves in a way that anything is possible in any given day. 00:23:11 Speaker 2: I hope we got back to that world. I just know that when the guard tried that we're not here to close spreads, the guard quickly closed spreads straight afterwards. Right, It's difficult to make the transition. 00:23:22 Speaker 1: The question, and I think you're alluding to it, John, how much has the financial market changed and debt build up under the old regime that has to be unwound in a period of a new regime that potentially is much less transparent but allows markets to do their things. 00:23:36 Speaker 8: Did you write a piece, Gary, I did not write the piece that said, you know, there are an enormous amount of hedging tools today, so as you see debt move up and you see the private credit markets explosed, which has been very helpful. 00:23:49 Speaker 3: You know, you can head your interest rate exposure. 00:23:52 Speaker 7: You can't head your credit exposure as much, but heading underlying interest rate exposure happens to be one of the most development markets in the world. You can interest rate exposure in almost virtually every currency that we issue bonds in today, So managing interest rate exposure. 00:24:06 Speaker 3: Is not hard. 00:24:07 Speaker 7: Now people have historically said, well, I know exactly what the Fed's. 00:24:09 Speaker 3: Going to do. I don't need to manage this. 00:24:11 Speaker 7: That's probably not a good outcome. It's probably a better outcome when people look at their risk and say, my interest rate risk is x AM I happy with that or not not. Oh, I don't really care because the Fed's got my back. 00:24:24 Speaker 2: This is the Bloomberg Survendons podcast, bringing you the best in markets, economics, an giopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.