WEBVTT - Bloomberg Surveillance: Microsoft, OpenAI and Sam Altman 0:00:05.120 --> 0:00:07.119 This is the Bloomberg Surveillance Podcast. 0:00:07.160 --> 0:00:11.080 I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. 0:00:11.280 --> 0:00:15.760 Join us each day for insight from the best and economics, geopolitics, 0:00:15.760 --> 0:00:20.720 finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:20.960 --> 0:00:25.439 Spotify and anywhere you get your podcasts, and always on 0:00:25.520 --> 0:00:29.800 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. 0:00:29.840 --> 0:00:32.320 With Richey Jealia, this is the interview of the day 0:00:32.320 --> 0:00:34.120 on this folks. We're going to talk to an adult 0:00:34.200 --> 0:00:36.640 right now of the melding of all this, How do 0:00:36.680 --> 0:00:39.560 you get to Nvidia, which mister Jelia does not cover, 0:00:40.320 --> 0:00:43.800 over to the software world of Microsoft that we think 0:00:43.880 --> 0:00:47.479 we know. Ruchy Jelia out of Berkeley and Rawschool, Michigan 0:00:47.840 --> 0:00:51.560 at RBC Capital Markets ex JAMP, which is a boutique 0:00:51.600 --> 0:00:53.639 firm of incredible ability. 0:00:53.720 --> 0:00:56.240 Richie, honored, you're with us this morning. 0:00:56.640 --> 0:00:59.760 Okay, they're going to walk in two guys, five guys, 0:01:00.160 --> 0:01:03.760 five hundred engineers and they're going to make two chips 0:01:03.880 --> 0:01:07.960 or whatever to compete with Nvidia. Let's start with the 0:01:08.080 --> 0:01:15.600 why why does Microsoft, enormous Microsoft have to compete with Nvidia, Yeah, and. 0:01:15.680 --> 0:01:18.240 Thank you so much for having me in the warm introduction. 0:01:18.880 --> 0:01:22.200 I think there's two reasons. Number one is the unit economics. 0:01:22.360 --> 0:01:24.720 You know, we can all look at Nvidia's gross margins 0:01:24.720 --> 0:01:27.640 and obviously the amazing rally the stock has had and 0:01:27.720 --> 0:01:30.959 the revenue growth, and Microsoft knows that there's a lot 0:01:30.959 --> 0:01:34.120 of ability to save money and bring down costs. But 0:01:34.160 --> 0:01:36.759 I think the more important factor of why they want 0:01:36.800 --> 0:01:39.319 to bring in their own tips is because there is 0:01:39.400 --> 0:01:42.280 eight major GPU shortage out there, and you are in 0:01:42.319 --> 0:01:45.959 a situation where it is hard to meet demand. And 0:01:46.400 --> 0:01:49.760 because of all of this, costs are prohibitively expensive for 0:01:49.880 --> 0:01:52.559 generative AI, and that can actually be a limiting factor. 0:01:52.640 --> 0:01:54.640 That's a piece I've talked to when I've had my 0:01:54.720 --> 0:01:58.040 conversations with companies is a lot of companies want to 0:01:58.080 --> 0:02:00.160 go down the route of adopting gender of AI a 0:02:00.160 --> 0:02:03.320 big way, but the costs are what stopped them. By 0:02:03.320 --> 0:02:07.680 my estimates, a generative AI workload cost about five times 0:02:07.680 --> 0:02:09.880 more than a traditional cloud workload. 0:02:10.160 --> 0:02:11.600 How do you bring those costs down? 0:02:11.760 --> 0:02:14.079 It starts with the hardware, and you want to bring 0:02:14.120 --> 0:02:16.160 that cost curve down to make it more useful and 0:02:16.240 --> 0:02:19.280 ultimately you get generative AI to become a much more 0:02:19.320 --> 0:02:20.280 prevalent technology. 0:02:20.440 --> 0:02:25.600 On a percentage basis, how Nvidia ish is Microsoft? Is 0:02:25.639 --> 0:02:29.679 it a two three percent bolt on to Nadella's ginormous 0:02:29.760 --> 0:02:32.960 company or can it be out three five years a 0:02:33.080 --> 0:02:38.120 germane part of Microsoft. Compare the potential size of what 0:02:38.160 --> 0:02:40.920 Allman can do to the total of Microsoft. 0:02:42.280 --> 0:02:42.520 Yeah. 0:02:42.520 --> 0:02:44.800 From a broader AI perspective, this is going to be 0:02:44.800 --> 0:02:47.440 more like the cloud. And then, you know, that's the 0:02:47.480 --> 0:02:50.279 big thing about AI is it is that seismic technological 0:02:50.360 --> 0:02:51.079 change similar. 0:02:50.880 --> 0:02:52.320 To what we saw with the cloud. 0:02:52.880 --> 0:02:55.040 Look at what happened to Microsoft when they were an 0:02:55.120 --> 0:02:57.440 on premise company. Look at where they are as a 0:02:57.480 --> 0:03:01.000 cloud company, not just their stock price, get their revenue growth, 0:03:01.000 --> 0:03:04.200 look get their profitability, and look at their relevance in 0:03:04.200 --> 0:03:07.080 the technology world. And I think AI can be a 0:03:07.120 --> 0:03:08.480 similar accelerator. 0:03:09.280 --> 0:03:09.440 You know. 0:03:09.680 --> 0:03:12.480 And the great thing about having Sam and Greg and 0:03:12.520 --> 0:03:15.640 whoever else joins if this is how it proceeds, and 0:03:15.639 --> 0:03:21.040 obviously this is changing by the hour that Microsoft not 0:03:21.240 --> 0:03:24.480 only is continue to be a leader in AI, they're 0:03:24.520 --> 0:03:27.200 actually in control of their own destiny. That was I 0:03:27.200 --> 0:03:29.440 think one of the few knocks that people had against 0:03:29.440 --> 0:03:32.080 Microsoft is they didn't control their destiny. 0:03:32.080 --> 0:03:34.600 They were up to open AI. Now this happens kind 0:03:34.600 --> 0:03:35.320 of all internally. 0:03:35.360 --> 0:03:38.640 So this can be a major accelerator for Microsoft, and 0:03:38.680 --> 0:03:40.680 I think this can be a much bigger company as 0:03:40.720 --> 0:03:41.360 a result. 0:03:41.560 --> 0:03:43.480 Risia, I'm still stuck on this idea that it costs 0:03:43.480 --> 0:03:45.760 about five times based on how expensive some of the 0:03:45.840 --> 0:03:49.600 hardware is for generative AI to get certain workloads done 0:03:49.680 --> 0:03:52.280 as it does the traditional means of just hiring people. 0:03:52.640 --> 0:03:53.920 Does it basically mean. 0:03:54.000 --> 0:03:56.680 That in Vidia's access is success so far? Is the 0:03:56.720 --> 0:03:59.920 reason why the Microsoft's of the world, the software focused area, 0:04:00.520 --> 0:04:03.720 have not been able to monetize AI in as material 0:04:03.760 --> 0:04:04.040 a way. 0:04:05.600 --> 0:04:07.880 I don't think it's because of the GPU shortage. I 0:04:07.880 --> 0:04:09.280 think that is one factor. 0:04:09.520 --> 0:04:11.240 And then by the way I would maybe push back, 0:04:11.280 --> 0:04:14.120 I think Microsoft is monetizing AI in a big way. 0:04:14.440 --> 0:04:18.920 By my estimates, AI is already a half billion dollar 0:04:19.240 --> 0:04:22.919 arr business for Microsoft after what two or three quarters, 0:04:22.960 --> 0:04:25.800 which is kind of an amazing, unheard of trajectory for 0:04:25.839 --> 0:04:26.960 the rest of software. 0:04:27.000 --> 0:04:29.039 However, I think there are a couple of reasons. 0:04:29.320 --> 0:04:32.240 You know, Microsoft, remember has a huge head start when 0:04:32.279 --> 0:04:34.640 it comes to generative AI. They invest in open AI 0:04:34.760 --> 0:04:37.480 back in twenty nineteen. A lot of other companies are 0:04:37.480 --> 0:04:40.240 playing catch up. I think a lot of enterprises are 0:04:40.279 --> 0:04:46.120 also maybe have concerns around data privacy, residency, and they 0:04:46.200 --> 0:04:49.400 just you know, security, and that's also a limiting factor. 0:04:49.640 --> 0:04:52.160 Another think, maybe lastly, is a lot of companies are 0:04:52.160 --> 0:04:53.040 figuring this out. 0:04:53.279 --> 0:04:56.080 Remember generally I is a little bit of. 0:04:56.040 --> 0:04:59.120 A blank canvas and you have to figure out the 0:04:59.200 --> 0:05:01.200 right way to use it. Think about the way you 0:05:01.279 --> 0:05:04.800 and I use chat GPT today versus what you know 0:05:04.800 --> 0:05:07.320 a year ago when it first got launched. Part of 0:05:07.360 --> 0:05:09.680 it is obviously it's gotten more powerful, but part of 0:05:09.720 --> 0:05:12.320 it is we had to figure out what's the right 0:05:12.400 --> 0:05:15.400 prompt to ask it, what's the right way to tweak it? 0:05:15.680 --> 0:05:18.120 And you know, with APIs it's maybe ten times more 0:05:18.760 --> 0:05:19.800 complex and difficult. 0:05:20.080 --> 0:05:21.760 I think the monetization is going to come. 0:05:22.000 --> 0:05:24.440 I just think for software it's probably a twenty twenty 0:05:24.520 --> 0:05:27.240 five event when it starts to be material for you know, 0:05:27.320 --> 0:05:30.920 the hubspots and the Mango DB's of the world. But 0:05:30.920 --> 0:05:33.320 for Microsoft, I would say it is already material and 0:05:33.480 --> 0:05:34.200 rapidly going. 0:05:34.240 --> 0:05:37.159 So when you keep talking about GPU, it's graphics processing. 0:05:37.200 --> 0:05:39.000 You and one of the key components for some of 0:05:39.040 --> 0:05:43.599 these chips that are required for generative AI. Do you 0:05:43.640 --> 0:05:48.920 think that Microsoft canterially get into the chip creation, the 0:05:48.960 --> 0:05:53.280 physical word world, the hardware game as it ramps up 0:05:53.400 --> 0:05:56.760 to the software monetary prowess. 0:05:57.600 --> 0:05:58.560 I think they can't. Now. 0:05:58.600 --> 0:06:00.760 I would say they're not going to be directly selling 0:06:00.880 --> 0:06:04.360 GPUs to customers in a big way. I think it's 0:06:04.400 --> 0:06:08.159 more of a you can rent out GPU capacity via Azure, 0:06:08.200 --> 0:06:11.480 and this becomes a boost for the Azure business that 0:06:11.600 --> 0:06:14.520 I you know, this becomes the preferred cloud vendor to 0:06:14.640 --> 0:06:17.080 run dinner to AI workloads, not only because they have, 0:06:17.480 --> 0:06:20.680 you know, the best AI technology out there, including all 0:06:20.680 --> 0:06:24.240 these Azure opening eye services that they're already monetizing, but 0:06:24.279 --> 0:06:26.960 now they're going to have more and more capacity, and 0:06:27.240 --> 0:06:29.400 again at a competitive rate. 0:06:29.560 --> 0:06:30.800 Versus how things have been. 0:06:31.080 --> 0:06:32.960 So I think this is more of a unit economics 0:06:32.960 --> 0:06:34.960 for Microsoft and a boost Azure. 0:06:34.720 --> 0:06:36.479 For she gets a slow day here, we got to 0:06:36.520 --> 0:06:39.800 make some news. Everybody's piled on Microsoft. Now it's one 0:06:39.839 --> 0:06:42.120 big love fest. You know, we're on our way to 0:06:42.160 --> 0:06:45.120 three trillion dollars. I think it's four to four. You're 0:06:45.160 --> 0:06:48.080 at a three ninety. The well dressed, dan Ives and 0:06:48.080 --> 0:06:49.600 the rest of them are up there. Are you going 0:06:49.680 --> 0:06:52.600 to be a justin a higher year? When you see 0:06:52.600 --> 0:06:55.040 this unfold? Can we get you out over four to 0:06:55.120 --> 0:06:56.720 twenty on Microsoft right now? 0:06:58.200 --> 0:06:58.360 Yeah? 0:06:58.400 --> 0:07:02.040 Obviously I can't comment on the price target changes that 0:07:02.400 --> 0:07:04.440 I may or may not bring. I would point you 0:07:04.520 --> 0:07:06.800 in our note we do talk about, you know, a 0:07:06.880 --> 0:07:09.960 bowl case, which would be beyond that, and you know 0:07:09.960 --> 0:07:11.440 you can kind of draw your own conclusion. 0:07:11.520 --> 0:07:13.960 Come on, come on, no listen where among friends? What's 0:07:14.000 --> 0:07:16.680 your bookcase? Give me a number or can you out ives? 0:07:16.760 --> 0:07:17.440 Dan Ives? 0:07:18.600 --> 0:07:20.960 Uh, look by by bookcase, you know, and the note 0:07:21.000 --> 0:07:23.920 would be above about four hundred dollars this year. I 0:07:23.920 --> 0:07:25.800 think the thing we have to say is, right now, 0:07:25.880 --> 0:07:30.200 I'm not modeling huge generative AI revenues in my model. 0:07:30.760 --> 0:07:33.720 If we start to think about Officer sixty five copilot, 0:07:33.840 --> 0:07:36.920 for example, that's all kind of gravy on top of this. 0:07:37.240 --> 0:07:38.800 And I haven't even really brought in you know. 0:07:38.760 --> 0:07:41.200 A calendar, your twenty five calendar, your twenty six numbers. 0:07:41.720 --> 0:07:43.520 So again I would say you can draw a lot 0:07:43.560 --> 0:07:46.000 of conclusions based on those sort of things to get 0:07:46.040 --> 0:07:48.480 you significantly above where this dock is today, but published 0:07:48.480 --> 0:07:49.880 price target during our ninety. 0:07:49.640 --> 0:07:52.920 Bucks Rischie, thank you, camplonsistent in bet, don't worry about it, Rischie, 0:07:52.960 --> 0:07:56.200 Jeliria about me, sick capital, Marcus, they wake up about 0:07:56.200 --> 0:07:57.080 a thirty c k. 0:08:07.080 --> 0:08:10.680 Victoria Fernandez with his chief market strategist at cross Mark 0:08:10.720 --> 0:08:14.920 Global Investment. I have no idea how you reallocate rebellance, 0:08:15.040 --> 0:08:16.280 Victoria for next year. 0:08:16.520 --> 0:08:19.200 What's the cross Mark strategy? 0:08:19.720 --> 0:08:22.360 Yeah, well, Tom, as you know, throughout the last year, 0:08:22.360 --> 0:08:23.880 when a lot of people were trying to make the 0:08:23.920 --> 0:08:25.640 decisions of what it would be in or out of 0:08:25.680 --> 0:08:29.280 the market for our clients, we were completely in the market, 0:08:29.280 --> 0:08:31.520 but we were being very cautious as to where we 0:08:31.520 --> 0:08:33.760 were putting our money to work. We had a lot 0:08:33.760 --> 0:08:36.400 of defensive names in our portfolio while still having a 0:08:36.440 --> 0:08:39.199 little bit of cyclical names in there. And our strategy 0:08:39.280 --> 0:08:42.959 hasn't changed tremendously on days when the equity market is 0:08:43.040 --> 0:08:45.600 up right now, because we don't think that we're in 0:08:46.160 --> 0:08:49.440 this solid bull market right now, we're trimming some names 0:08:49.480 --> 0:08:51.400 and we're going in to some of the names that 0:08:51.400 --> 0:08:52.120 have pulled back. 0:08:52.160 --> 0:08:55.160 You mentioned energy. That's one area where we've been. 0:08:55.040 --> 0:08:59.320 Adding some exposure to names like Conico Phillips. We actually 0:08:59.320 --> 0:09:02.880 are adding in healthcare too. Healthcare has been decimated, but 0:09:02.960 --> 0:09:04.720 you look at the balance sheets of some of these 0:09:04.720 --> 0:09:08.600 companies and you have a lot of opportunity there adding 0:09:08.600 --> 0:09:10.800 a little bit of fixed income, having a little bit 0:09:10.840 --> 0:09:14.680 of cash, using some alternatives in your portfolio like covered calls. 0:09:14.840 --> 0:09:17.520 We think this is the time when you really need 0:09:17.559 --> 0:09:20.520 to have that diversification and be ready because we think 0:09:20.559 --> 0:09:22.520 there's still quite a bit of volatility to go. 0:09:22.720 --> 0:09:26.360 Do you get uncorrelated diversification and fixed income right now 0:09:26.440 --> 0:09:27.320 versus equities? 0:09:28.360 --> 0:09:30.520 You know, not as much as you probably used to. 0:09:30.760 --> 0:09:32.840 But what you're going to be using your fixed income 0:09:32.920 --> 0:09:36.400 for right now is for the cash flow for our client. 0:09:36.559 --> 0:09:38.880 So you can get a five percent yield on the 0:09:38.920 --> 0:09:42.480 short term part of the yield curve. It's an opportunity 0:09:42.520 --> 0:09:44.600 to have something a little bit better than cash, a 0:09:44.600 --> 0:09:47.560 little bit better than government agencies. You can lock that 0:09:47.640 --> 0:09:49.920 in for a short period of time and then add 0:09:49.960 --> 0:09:52.960 a little bit Jonathan on the longer end of the curve, 0:09:53.280 --> 0:09:55.840 or you can have that longer steady cash flow over 0:09:55.880 --> 0:09:59.120 a longer period of time to help buffer any equity volatility. 0:09:59.240 --> 0:10:01.760 When you look forward, there's a real question about whether 0:10:01.840 --> 0:10:04.080 rate cuts next year are good or bad for risk. 0:10:04.440 --> 0:10:06.880 How do you think about that at a time when 0:10:06.920 --> 0:10:09.360 people are expecting the soft landing as the base case. 0:10:10.679 --> 0:10:13.120 So I think there is a misconception here that the 0:10:13.160 --> 0:10:16.040 FED is going to cut in the first half of 0:10:16.080 --> 0:10:16.600 next year. 0:10:16.960 --> 0:10:18.720 If you look Lisa, over. 0:10:18.640 --> 0:10:22.680 This hiking cycle, we've already had six dubvish headfakes where 0:10:22.679 --> 0:10:24.800 the market has gotten ahead of itself. 0:10:24.640 --> 0:10:26.800 Assumed the FED was going to be more dubvish than. 0:10:26.720 --> 0:10:29.040 It was, and they've had to price that back out 0:10:29.040 --> 0:10:31.199 of the market. I think we're seeing a little bit 0:10:31.240 --> 0:10:33.679 of that now. I don't expect the FED to cut 0:10:33.800 --> 0:10:36.160 rates until the second half of next year, and I 0:10:36.200 --> 0:10:39.240 think it will be more because we're seeing a deterioration 0:10:39.440 --> 0:10:43.079 in the economy than it is because of inflation expectations. 0:10:43.120 --> 0:10:45.160 I mean, look at delinquencies right now. 0:10:45.200 --> 0:10:48.440 We're back up at pre COVID levels in regards to autos, 0:10:48.480 --> 0:10:51.800 in regards to credit cards, especially in that eighteen to 0:10:51.840 --> 0:10:54.480 twenty nine year old age group, where they've got student 0:10:54.520 --> 0:10:57.600 loan debts coming as well. And as delinquencies go up 0:10:57.679 --> 0:11:00.679 at a time with very low unemployment, what does that 0:11:00.760 --> 0:11:02.720 mean for banks, it means they're going to increase their 0:11:02.760 --> 0:11:06.680 low loss reserves. It means low growth goes down. These 0:11:06.720 --> 0:11:08.720 are things that are going to stimmy the economy. It's 0:11:08.760 --> 0:11:11.440 going to stimmy the consumer, and I think that's where 0:11:11.440 --> 0:11:12.880 we're going to see rate cuts come in. 0:11:13.280 --> 0:11:15.600 So when you take a look at risk appetite heading 0:11:15.640 --> 0:11:18.600 into next year, do you think that people are overly 0:11:18.679 --> 0:11:23.559 optimistic about both rates coming lower and equity is continuing 0:11:23.600 --> 0:11:25.800 to do well led by the names that have done 0:11:25.840 --> 0:11:26.520 best this year. 0:11:27.679 --> 0:11:29.880 I do think there's a little bit too much optimism 0:11:29.960 --> 0:11:30.280 right now. 0:11:30.320 --> 0:11:31.840 And I'd like to be optimistic. 0:11:31.920 --> 0:11:33.640 I like to say good things are going to happen, 0:11:33.960 --> 0:11:36.040 but look we've said for the last year, you've got 0:11:36.040 --> 0:11:39.800 to be cautious. You look at leading economic indicators down again. 0:11:40.040 --> 0:11:43.720 Even coincident economic indicators are flat right now. 0:11:43.920 --> 0:11:45.040 Consumer is weakening. 0:11:45.080 --> 0:11:49.360 You've been talking about mister McMillan's statement about deflation going 0:11:49.400 --> 0:11:51.480 on and worries about the consumer. We've heard it in 0:11:51.520 --> 0:11:54.360 the retail earnings that have come out. And I think 0:11:54.400 --> 0:11:56.600 you're going to see some of the things that have 0:11:56.640 --> 0:11:59.880 been propping up the equity markets, like buybacks, start to 0:12:00.040 --> 0:12:00.520 come back. 0:12:00.720 --> 0:12:05.480 But Victoria you're living in Texas. The Austin boom and 0:12:05.520 --> 0:12:09.160 the Austin boom is a broad sense is service sector 0:12:09.280 --> 0:12:13.920 in technology. How do you underweight the Magnificent seven. 0:12:16.000 --> 0:12:18.520 It's a tough decision to make on what you do 0:12:18.600 --> 0:12:22.560 with this Magnificent seven. Obviously, the AI tailwind to those 0:12:22.640 --> 0:12:25.960 names has been tremendous, and we assume Nvidia is going 0:12:26.000 --> 0:12:26.720 to report. 0:12:26.400 --> 0:12:28.000 Good earnings and that's going to continue. 0:12:28.040 --> 0:12:31.240 Then to lead that narrative and help that Magnificent seven, 0:12:31.360 --> 0:12:33.520 you have to have exposure to these names. You do, 0:12:33.880 --> 0:12:35.680 but I just think you have to be a little 0:12:35.720 --> 0:12:38.720 bit cautious and putting all your eggs in that basket. 0:12:38.920 --> 0:12:40.840 If you have, you've done well this year, so I 0:12:40.880 --> 0:12:41.720 can't deny that. 0:12:42.000 --> 0:12:44.040 But as we assume that we're going to have a 0:12:44.040 --> 0:12:46.760 pullback in this economy and the consumer is going to 0:12:46.800 --> 0:12:51.240 come back, and capital expenditures and spending by corporations is 0:12:51.280 --> 0:12:53.120 going to slow down, I think you have to be 0:12:53.200 --> 0:12:55.440 a little bit concerned about what those earnings look like 0:12:55.520 --> 0:12:56.120 going forward. 0:12:56.160 --> 0:12:56.920 So have your. 0:12:56.840 --> 0:13:00.360 Exposure, but like we said, add that diversification and other 0:13:00.400 --> 0:13:01.240 areas as well. 0:13:01.440 --> 0:13:03.319 Victoria, thank you. We've got to leave it there. Happy 0:13:03.320 --> 0:13:06.120 Thanksgiving enjoy the next coup of night guys. Thank you, 0:13:06.200 --> 0:13:09.880 Victoria Fernandez. There a Crossmark Global Investments. 0:13:13.600 --> 0:13:16.520 Right now and fixed Income Michael Collins joined Senior portfolio 0:13:16.559 --> 0:13:19.359 manager Page and fixed Income. Michael, what is the symbolism 0:13:19.720 --> 0:13:22.800 of the inflation adjusted ten year yield coming in and in? 0:13:22.840 --> 0:13:26.360 I got a two point zero nine percent print this morning. 0:13:26.440 --> 0:13:30.319 That's extraordinary. What does that mean for our viewers, our listeners. 0:13:31.240 --> 0:13:34.080 Well, as you know, you know the world's discount rate, 0:13:34.160 --> 0:13:38.480 you know, the US real yield is what's driving valuations 0:13:38.520 --> 0:13:41.640 on everything in the world, and that real yield TOM 0:13:41.679 --> 0:13:46.000 at two point one or so is probably still one 0:13:46.080 --> 0:13:47.800 hundred basis points too high, right. 0:13:47.840 --> 0:13:48.800 I think it's supposed to. 0:13:48.800 --> 0:13:50.960 Be somewhere between zero and. 0:13:50.880 --> 0:13:53.440 Two, So I think there's still room to go there. 0:13:53.440 --> 0:13:55.960 I think if you believe the real yield should be 0:13:56.080 --> 0:13:58.240 above two permanently, remember it was at two and a 0:13:58.280 --> 0:14:01.480 half just a few weeks ago. You're buying into the 0:14:01.520 --> 0:14:04.600 notion that we're going to have this continuation of really 0:14:04.679 --> 0:14:08.400 strong real growth in the US and around the world, 0:14:08.480 --> 0:14:10.200 and it feels like that that's not in the cards. 0:14:10.440 --> 0:14:13.360 What is your xxis to get even halfway there? That's 0:14:13.360 --> 0:14:16.400 a bold statement by you that the inflation is just 0:14:16.440 --> 0:14:19.120 a yield two point five to zero down to two 0:14:19.160 --> 0:14:21.600 point one zero and it will I'm going to use 0:14:21.640 --> 0:14:25.320 this word carefully, Michael plunge Lower. What's your timeline to 0:14:25.360 --> 0:14:26.120 make that happen? 0:14:27.080 --> 0:14:29.680 You know these things tend to happen more quickly than 0:14:29.720 --> 0:14:32.600 the market's price in right. I mean, just a few 0:14:32.640 --> 0:14:34.760 weeks ago, the markets were pricing in a funds rate 0:14:34.800 --> 0:14:36.840 that ended at four and a half percent and never 0:14:37.280 --> 0:14:39.560 got lower than that over the next ten years. And 0:14:39.600 --> 0:14:41.720 now that number is four, right, So the markets are 0:14:41.760 --> 0:14:44.360 pricing in kind of a permanent funds rate at four 0:14:44.840 --> 0:14:48.920 and again that probably is one hundred or maybe two 0:14:48.960 --> 0:14:52.120 hundred basis points too high as well. And we do 0:14:52.280 --> 0:14:55.040 know when the feed is done. And the feed is done, 0:14:55.880 --> 0:14:58.240 that's why the minutes today today don't matter. When they're done. 0:14:58.720 --> 0:15:00.880 Rates rally, right, that's the begin of the rally in 0:15:00.920 --> 0:15:03.240 the bond market, as soon as the message is clear 0:15:03.560 --> 0:15:05.480 that the hiking cycle is over. Because the market is 0:15:05.520 --> 0:15:08.120 always overshoot on the upside and then they overshoot on 0:15:08.160 --> 0:15:10.320 the downside. So I think we just hit the overshoot 0:15:10.560 --> 0:15:12.200 at a five percent tenure at a two and a 0:15:12.240 --> 0:15:16.480 half percent real yield, and now we're probably on the 0:15:16.520 --> 0:15:19.320 way down. I mean, rates today maybe you look fair 0:15:19.440 --> 0:15:23.160 value in a good world, but you know, we've had disinflation, 0:15:23.400 --> 0:15:25.200 as you've all talked about this morning, and it's been 0:15:25.280 --> 0:15:29.320 driven almost solely by the supply side, the huge rebound 0:15:29.760 --> 0:15:32.280 in the supply side, both from the labor market and 0:15:32.320 --> 0:15:35.200 the productivity boost. And I worry that twenty twenty four 0:15:35.320 --> 0:15:37.880 is going to be a demand side story. And that's 0:15:37.880 --> 0:15:40.760 the bad disinflation right that we're worried about. And if 0:15:40.760 --> 0:15:44.359 that plays out, if inflation ends up having one handles 0:15:44.760 --> 0:15:47.400 instead of three handles, which is which is very possible, 0:15:47.440 --> 0:15:50.440 and we're kind of moving in that direction pretty quickly now. 0:15:50.920 --> 0:15:53.000 You know who knows rates could be be off sized 0:15:53.000 --> 0:15:53.600 by quite a bit. 0:15:54.000 --> 0:15:56.360 That's the worry of equity investors as well. 0:15:56.440 --> 0:15:56.640 Mike. 0:15:56.840 --> 0:15:59.120 Let's talk about bigger picture, and I'll do this for 0:15:59.160 --> 0:16:01.960 you because you're fun too modest. About ten years ago, 0:16:02.600 --> 0:16:05.600 you and a team I'm thinking Robert Breck Peters were 0:16:05.640 --> 0:16:09.000 really known for this call of low interest rates, low inflation, 0:16:09.240 --> 0:16:11.840 range band yields, low and range band. I remember the phrase. 0:16:11.880 --> 0:16:15.160 It was the low ranger. Now Mike, that was ten 0:16:15.240 --> 0:16:17.080 years ago. You guys won awards for all of that. 0:16:17.120 --> 0:16:21.800 We celebrated them on this program a decade later. Post pandemic, 0:16:21.880 --> 0:16:24.520 Can you talk to us about this regime and how 0:16:24.560 --> 0:16:26.160 different you think it will be. 0:16:27.440 --> 0:16:29.880 I mean, certainly, you're in a world right now, Jonathan, 0:16:29.920 --> 0:16:35.080 where you're seeing a kind of generational high in capital 0:16:35.120 --> 0:16:39.160 investment in this country in technology related things that you've 0:16:39.200 --> 0:16:42.440 been talking about AI all morning, right, and it's happening, 0:16:42.440 --> 0:16:45.600 and it's real, and it's increased our productivity in this 0:16:45.680 --> 0:16:49.760 country significantly over the last year. And there's a chance 0:16:50.600 --> 0:16:54.000 that that is sustainable, that this AI and the robotics 0:16:54.040 --> 0:16:58.120 and all of the technology investment does lead to more 0:16:58.160 --> 0:17:01.920 sustainably and higher real GDP in this country, let's say 0:17:02.160 --> 0:17:05.040 in the twos as opposed to in the ones. And 0:17:05.080 --> 0:17:08.200 that's a big difference. And there's also a chance that inflation, 0:17:08.920 --> 0:17:10.680 you know, doesn't fall back to one and a half, 0:17:10.720 --> 0:17:13.000 that it gets stuck at two and a half or three. 0:17:13.040 --> 0:17:17.240 And I think geopolitics and climate related risks and energy 0:17:17.320 --> 0:17:21.360 transition and shortages of labor around the world are all 0:17:21.480 --> 0:17:25.120 factors that could lead to stickier inflation. So yeah, there's 0:17:25.160 --> 0:17:28.760 this big high probability scenario out there that you know 0:17:28.840 --> 0:17:31.800 that heck, maybe, like I said, rates are fair value here, 0:17:31.800 --> 0:17:34.800 that the funds rate bounces between three and five for 0:17:34.840 --> 0:17:37.200 the next ten years, and the ten year bounces between 0:17:37.920 --> 0:17:39.439 three and a half and five and a half, and 0:17:39.440 --> 0:17:41.480 maybe you're in the middle of that range now. So 0:17:41.560 --> 0:17:45.600 that's a scenario that we're really contemplating very seriously as 0:17:45.640 --> 0:17:48.879 a pretty high probability. But of course you do have 0:17:48.920 --> 0:17:51.640 to be humble in this business, and that downside risk 0:17:51.720 --> 0:17:54.720 is always out there, lurking and looming. So it's something 0:17:54.760 --> 0:17:56.199 we're certainly looking at. 0:17:56.359 --> 0:17:58.480 Have you gotten more conviction over the past four weeks, 0:17:58.480 --> 0:18:01.600 Michael Is? The market seems to be accepting the idea 0:18:01.760 --> 0:18:03.800 of possibly more aggressive rate cuts. 0:18:03.520 --> 0:18:09.399 Next year, you know, more conviction on rates, maybe a 0:18:09.560 --> 0:18:12.399 little bit more, you know, I think the inflation side 0:18:12.440 --> 0:18:16.280 is really what's given us more encouragement. The disinflation story 0:18:16.359 --> 0:18:20.119 seems to be kind of embedded now and we're not 0:18:20.160 --> 0:18:24.840 as worried about a permanently higher you know, inflationary environment. Right, 0:18:24.880 --> 0:18:28.720 So that's really a big delta that we're seeing recently 0:18:28.760 --> 0:18:32.600 with goods prices in deflation right now, right, and services. 0:18:32.640 --> 0:18:36.000 Inflation is finally coming down, so and the labor market 0:18:36.040 --> 0:18:38.240 is seeing some cracks, right, which leads to lower wages. 0:18:38.280 --> 0:18:40.920 So all those things give us encouragement. Inflation which given 0:18:41.040 --> 0:18:43.639 us encouragement. Hey, maybe we've seen the high end rates, 0:18:44.240 --> 0:18:46.800 and who knows, maybe the next move is fifty basis 0:18:46.800 --> 0:18:49.240 points lower instead of fifty basis points higher. On the 0:18:49.280 --> 0:18:52.160 credit side, though, you know, the markets have run with 0:18:52.200 --> 0:18:56.560 this low inflation, soft landing world and have in the 0:18:56.560 --> 0:18:59.440 equity market too, right, So risk assets of rallied hard 0:19:00.119 --> 0:19:02.240 us in the last few weeks, and I think you're 0:19:02.240 --> 0:19:05.320 supposed to be really careful there and fade those rallies. 0:19:05.320 --> 0:19:06.879 It feels like a much tough of co on the 0:19:06.880 --> 0:19:09.119 credit side. My thank you, sir. It's gonna catch up 0:19:09.119 --> 0:19:10.960 with you. Mike Cullins. They have PGIM fixed income. 0:19:21.359 --> 0:19:24.000 Sometimes you get lucky, and we do that always with 0:19:24.160 --> 0:19:29.080