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