00:00:02 Speaker 1: Bloomberg Audio Studios. Podcasts Radio News. This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. 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 6 to 9 a.m. 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. We begin this hour with stocks higher and bond yields lower as criticism builds against Treasury Secretary Scott Besson's buyback plans. Billionaire investor Stanley Druckenmiller writing in the journal this morning that governments defending prices against fundamentals always lose. Let the bond market speak. George Concarvis of MBFG joins us now for more. George, good morning. 00:00:54 Speaker 2: Good to be on. 00:00:54 Speaker 1: Do you agree with Stanley Druckenmiller this morning? 00:00:57 Speaker 2: I look at the bond market and market forces should always kind of dictate where things head. And I think that is the right sort of course of action. But this is complicated. This is going to be a story that we're going to have. And we've had for years. We're going to have this into this election, into the 2028 election, into 2030. Like our deficits are not getting any better. And yeah, this is a time to kind of reflect on it. It's not just the Treasury, right? This is a This is a government-wide issue. We're spending too much. 00:01:21 Speaker 1: You can't find fundamentals, seems to be the takeaway. And that's the argument so many people have made. 520 on 30s, is that the right clearing price? Do you just need to go higher than that? 00:01:29 Speaker 2: Look, I mean, there's a lot of different arguments about what do rates reflect ultimately. And you could say there's a fiscal term premium. There's a lot going on within the composition of real rates are very high. But if you think about it, inflation expectations are actually relatively contained. And that's the part that's really interesting to me. We're commanding a higher real cost of capital, which is, you know, that's the clearing price. It's the real rate that matters more. It's a function of the AI spending. So that's almost like quasi-government infrastructure spending that's competing now. We have competition for capital, which we have not had for 20, 30 years. Sovereigns have not had to deal with a private sector that's competing for just as much capital as they are. And you combine all the things, and you're like, what do rates really reflect? And they reflect that we do have a nominal issue. Our nominal growth is high because of the fiscal connection. It's not about fiscal term premium. What's going to be interesting is, will the Fed ever come out and call that out? Will Kevin Warsh say that we have a fiscal issue that's driving the inflation side? It's not the private sector, really. A little bit from the private sector, but this is largely government spending. 00:02:36 Speaker 3: My guess is he won't say that, particularly on Friday. I'm just going to throw out there and go out on a limb. I do think it's notable, though, how much Neil Kashkari and others have said the 30-year yield is fine. Where it is right now is totally normal with respect to where growth rates are and where other benchmark yields are. And ultimately, it isn't constraining the economy in an undue way. 00:02:54 Speaker 1: So why should the Fed care at all? What do you make of those arguments? 00:02:57 Speaker 2: Yeah, so we're trying to think about what can happen on Friday. And ultimately, you know, and like the Fed in the 1978 sort of version of its mandate does have this like third mandate, which is stable long-term rates, right? If you really look at it closely, it's price stability, full employment, and stable long-term rates. Do you argue these are stable long-term rates? 00:03:19 Speaker 4: Are they volatile? Are they too high? 00:03:21 Speaker 2: Like, I think any conversation around that on Friday could be market moving. So if Kevin Walsh comes out and says, like, look, we're watching the back end of the curve, I think that's interesting. 00:03:29 Speaker 3: The fact that people are even speculating about this is the reason why the dollar has fallen out of bed in the past couple of weeks. The reason why Bitcoin seems to be flying and the reason why people are all buying gold once more. 00:03:38 Speaker 1: I just wonder. 00:03:39 Speaker 3: To what degree do you pile into that? And to what degree do you think that the debasement fear is overblown at this point? Because we haven't heard from Kevin Warsh. And frankly, the Stan Druckenmillers are kind of his whisperers out there saying, maybe. 00:03:50 Speaker 1: Not so fast, guys. 00:03:52 Speaker 4: In general, this is not QE, right? 00:03:54 Speaker 2: We have to really draw the distinction of what is happening from the Treasury perspective is not QE. And we like to conflate that because we've had this narrative for 15, 20 years that whenever there's a government intervention, therefore it's printing money. And that's wrong in our view. 00:04:07 Speaker 1: This is the words of Drucker Miller that jump off the page to me too, Brammo. The 10-year yield, even after the summer sell-off, sits at or below the economy's nominal growth rate. We're running 6% budget deficits right now in this country. We're above target inflation and still funding ourself at roughly the rate the economy grows. I'm paraphrasing Drucker Miller again this morning. The bond market wasn't being a vigilante. I think we can agree with that. This was a major pushback in fixed income. Arguably, as he wrote, the bond market finally started to clear its throat. And even that was enough to get this Treasury to act. That's slightly disconcerting, isn't it? 00:04:38 Speaker 4: Right. 00:04:39 Speaker 3: Because what happens when they actually get a cold? Right. What happens when the bond market or bond vigilantes actually do wake up? Frankly, what we have seen is almost accommodative, not exactly restrictive. And that's the other point that he was making if you take a look at the issuance. So at what point can things get restrictive before you have policymakers truly get nervous? 00:04:57 Speaker 1: George, we'll have a list of things we'd like Kevin Walsh to say on Friday. What do you expect him to say on Friday into the weekend? 00:05:04 Speaker 2: I do think this is an opportunity to, as I've been saying, flipping the script. I mean, Kevin's overall sort of approach has been keeping everything close to the vest and not really disclosing as much, not wanting to offer forward guidance. But there's task forces that are in place. They're collecting information. There's metrics. What is the progress on that? Give the market some meat, and I think you can kind of stabilize things. If you just kind of hide behind, you know, we have nothing to say here. We're not really ready to have a view on things. That's not going to cut it. 00:05:32 Speaker 1: Stay with us. More Bloomberg surveillance coming up after this. Let's talk about the president then vowing to double the automobile tariff on Canadian vehicles and parts starting next year, escalating the spiraling trade war between the two economies. 00:05:56 Speaker 5: If President Trump escalates, Canada needs to be ready to do the same. Everything needs to be on the table. We need to use Canada's many points of leverage to create maximum impact, targeting deep red states and making sure that America's economy feels the pain. 00:06:17 Speaker 1: To build on this, the former Trump White House trade official, Kate Kaloukwitz, writes the following. This marks a considerable setback for the U.S.-Canada relationship and creates further uncertainty for the USMCA review. Katie joins us now for more. Katie, welcome to the program. It's good to see you. Haven't seen you in a while. Do you think this is noise or do you think this is genuinely news? 00:06:37 Speaker 6: Well, I do think it's news. I think, you know, unlike other tariff actions, we have a president who calls himself the tariff man. I think actually in this instance, he didn't want more tariffs with Canada. We saw a lot of developments last week that signaled that we could perhaps have seen a real outcome in these negotiations. 00:06:55 Speaker 1: And, you know.. 00:06:57 Speaker 6: This is a surprise, I think, to the U.S. side, which was prepared to offer Canada real concessions. The Canadians, I think, have decided from a domestic political stance that it's more important to show some backbone to the United States. But I think in reality, the White House was prepared to make a deal with Canada. So now we really do risk this spiral of which could be a very big setback for the relationship, at least. 00:07:22 Speaker 4: In the short term. 00:07:22 Speaker 1: Well, let's deal with the starting point. So 50% sounds like a really large number on some goods. How much of the trade are we talking about that actually falls outside of USMCA is going to see a 50% tariff? 00:07:35 Speaker 6: Well, it's a really good question. And it is, I think, the question about the impact of these tariffs. The tariffs that the United States has imposed cover roughly 5% of bilateral trade. So, we're talking about a relatively small amount of trade. The Canadian Prime Minister, of course, has said he will hit back dollar for dollar. So, we can expect Canadian tariffs to hit $ 20 billion of U.S. 00:07:58 Speaker 4: Trade. 00:07:58 Speaker 6: So, you know, we are tiptoeing toward a trade war. This is not a full-blown trade war. And I think that's important to remember as we think. 00:08:06 Speaker 1: About the impacts. 00:08:07 Speaker 4: Okay. 00:08:08 Speaker 1: The Treasury Secretary was asked about why it didn't go as far as it could go. with sanctions on Iran. And his response was, I don't want to blow up the financial system. And I wonder if the same applies to USMCA. Are they really willing to blow up USMCA and blow up some of these industries at the same time? 00:08:25 Speaker 6: I think the answer is no. And I think that both sides recognize, despite these very, very strong political tensions, how important and integral the US-Canadian economic relationship is to both sides. So I think we will continue to tiptoe toward a bit more tension between the two sides. But I feel relatively strong that USMCA as an entity, as a system of rules that really helps the bilateral and trilateral relationship with Mexico continue, will remain relatively solid while we try to work this out directly with Canada. 00:08:59 Speaker 1: Kate, out of interest, what do you think it will come down to? What is Trump Volume 2 unhappy with what Trump Volume 1 originally negotiated? 00:09:07 Speaker 6: Well, I think these sectors that you saw the president identify in his Truth Social post yesterday are the sector of interest, which namely is automobiles. but of course the importance as well as some of the medals. The president has been very concerned and has articulated a few over time that USMCA is fine so long as we don't see third parties accessing the United States. So he will very much want to tighten what are called content requirements so that if a car enters the United States without a tariff, it really should be made from parts from the North American trading partners, not China. So as we move forward, a USMCA agreement really does need to include these content requirements to ensure that Canada and Mexico are the primary beneficiaries, not third parties. 00:09:57 Speaker 1: Stay with us. More Bloomberg surveillance coming up. after this. The next stop for this tech trade, Nvidia. They're looking to snap the stock's longest losing streak since 22 before reporting earnings tomorrow. Ted Morrison of Baird writing, component growth and pricing for AI infrastructure. is inflecting with lead times. The street is worried about shortages starting in the fourth quarter of this year. Ted joins us now for more. Ted, good morning. 00:10:28 Speaker 4: Good morning. 00:10:28 Speaker 1: It's good to see you. So much to talk about. Is that a good problem to have? 00:10:31 Speaker 7: It's a great problem to have. I mean, they've got pricing leverage and they've got more demand than they can fulfill. And I think you're going to see that in the NVIDIA report. I mean, Most of the street is above 92 billion and 209 for EPS. And I think they're going to surprise the street on some very robust earnings and commentary. 00:10:50 Speaker 1: So should we just reload and get a lot of long hardware? 00:10:53 Speaker 4: Well, I think so. 00:10:54 Speaker 7: I mean, what I've seen, and I talk to PMs all day, is you've seen sector rotation. If you look at energy up 43 percent, health care up That's where people are going. And the mutual funds have actually instituted a play of sector rotation that's based on inflation. And that comes at the expense, unfortunately, of semiconductors and in the whole scheme of things with the SOX blowing through the 100-day moving average. 00:11:21 Speaker 8: Ted, just how out of the ordinary is that, to have mutual funds perhaps this level of activity that you've seen in that type of rotation that they've undergone? 00:11:29 Speaker 7: I've been doing this for a couple decades. The turnover on the mutual fund side on the trading aspect has been very much elevated because they're chasing attribution. Whether, I don't care if it's technology or healthcare or whatever, they've got to be very aggressive in moving in and out of certain sectors. 00:11:49 Speaker 8: What does that mean in terms of what's mispriced in this market? If some of it looks more structural, of them trying to chase gains and fend off losses, are there parts of this market then that look fundamentally mispriced because of the behavior of the funds we've seen so far in the past few months? 00:12:05 Speaker 7: I think the macro that Navidia is going to talk about, you're looking at $ 1. 1 trillion of spend next year. 00:12:14 Speaker 4: That's up 40%. We haven't seen that. That's historic. Well, look at this here. That's historic. 00:12:19 Speaker 7: So I think if you look at the AI trade, we're going to need a hell of a lot of components. 00:12:24 Speaker 1: I asked you about tech, and quite often you quote the bond yield back to me. And it's interesting to hear that from a guy who covers tech, to be looking at what's happening with fixed income. How important are those developments in the Treasury market? 00:12:36 Speaker 7: I think it's very important because when you have to fund, look what Broadcom just did, $ 100 billion. 00:12:42 Speaker 4: Look what Alibaba's doing. 00:12:44 Speaker 7: Everybody in the food chain has got to raise hundreds of billions of dollars to equate to a $ 1. 1 billion spend next year. There's going to have to be funding. So with that, I think the cost of capital from a return on invested capital is an issue. That's why I said I would not be surprised if the 10-year goes through 5% because what I see is inflation on every single call. Look what NVIDIA just raised prices on, Vera Rubin, by 15% to 17%. 00:13:20 Speaker 4: It's everywhere. 00:13:21 Speaker 1: Treasuries have repriced. Spreads are still tight. On a single-name basis within credit, you have started to see some pushback. Let's call it that. Do you expect to see more pushback? 00:13:31 Speaker 7: Listen, I'm a tech guy, so I'll watch the Treasury moves and the 30 and 10-year. I try to just focus on the fundamentals in tech, and they are robust. And quite frankly, I would not be surprised if you see a snapback in the stocks. 00:13:48 Speaker 1: We're just trying to work out whether the CapEx cycle, which is increasingly funded by the debt market, is going to be compromised or undermined by what's happening in the treasury market. And that has powered the profit cycle to some extent through this year too. 00:14:01 Speaker 7: There's a new dynamic. And the new dynamic is political. And that's the midterms. And that's what people are really worried about on data center, not in my backyard. So if the Trump administration loses control of both Congress and the Senate. 00:14:17 Speaker 1: So just to jump in, the constraint won't be the cost of capital. The constraint might be the politics. 00:14:21 Speaker 8: Yeah. 00:14:22 Speaker 7: And they, quite frankly, I think they're living on a different planet on reality. 00:14:27 Speaker 8: Well, I had a conversation, I remember, with Brookfield about this big energy project they did. And they specifically did it on federal land. And I asked them, is that a coincidence? And basically the answer was no. Is there enough support they can get from the federal government to get around this? Or are localities pushing back enough to derail this project of capital expenditures and data center construction that they're undergoing? 00:14:47 Speaker 2: Yeah. 00:14:47 Speaker 7: I think the whole political stuff is pretty much noise. I think we're very myopically focused on the U.S. 00:14:55 Speaker 4: Only. 00:14:56 Speaker 7: This is a global build. I mean, we haven't even started with sovereign builds yet. Look what's happened in the Middle East. I mean, they've got more free cash flow from oil than if this conflict would ever be rectified. They're going to build, and they're going to build hard in AI. 00:15:13 Speaker 1: Ted, I'm going to be honest when you say that. 00:15:15 Speaker 8: What comes to mind is China, a government that can have data centers built and not care about what the local politics of it might be. Does that also exacerbate the arms race going on right now between the U.S. and China if China has the advantage of being able to build these data centers? 00:15:29 Speaker 7: The biggest thing is access to power, and China's way ahead of the U.S., and that's our Achilles heel, is regulatory. 00:15:38 Speaker 4: And political shenanigans. 00:15:40 Speaker 1: Have your PMs had a summer? Are they rested? 00:15:43 Speaker 4: No, I haven't taken any time off. 00:15:44 Speaker 1: It's been brutal, hasn't it? 00:15:45 Speaker 4: It has been absolutely brutal. 00:15:47 Speaker 1: What's changed? What makes this so different? 00:15:50 Speaker 7: I think that if you look at a portfolio manager, both from the hedge fund and the mutual fund, they have different models, right? And the mutual funds look over the long term and the hedge funds are more near term. And I think the volatility in certain segments in tech has been so dramatic that they cannot take a time off. They have to be at their desk and looking at their core positions. I mean, look what happened to Optical yesterday. I mean, we're going through one of the most defined secular moves from copper to optical, and optical just got absolutely obliterated yesterday. And nobody can figure it out. So that's what they're up against. It's a bad Ouija board at this point. 00:16:34 Speaker 1: No rest. No rest at all. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6 a.m. to 9 a.m. 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.