Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordert. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business app. So here's the latest
Speaker 2: this morning, US manufacturing activity expanding at his fastest pace
Speaker 2: in four years. Investors are waiting more data to reinforce
Speaker 2: bets on the path for interest rates. Kit Jigs of
Speaker 2: Self Gen Writing, While President Trump's hopes for FED easing
Speaker 2: may be disappointed, hikes are off the table for now.
Speaker 2: Kit Jigs joins us some more. Kit Welcome to the program, Buddy,
Speaker 2: good to see my apologies about the result over the weekend.
Speaker 2: I've squeezed that into the end of the conversation.
Speaker 3: Kit.
Speaker 2: How high is that bar for that rate?
Speaker 4: Hik of this feder reserve?
Speaker 5: It seems very high. Now, it's not going to feel
Speaker 5: so high in six, nine, twelve, twelve months time. I
Speaker 5: think the world will eventually change. Look, the US economy is,
Speaker 5: without doubt not just out growing the rest of the world,
Speaker 5: but it's grown pretty strongly.
Speaker 3: If that's the case, kit, what is the barrier potentially
Speaker 3: raising rates and not just once but several times. And
Speaker 3: we were just talking to somebody talking about how is
Speaker 3: the ten year yield getting onmoored? With all of the
Speaker 3: capital spending from big tech giants. We're seeing inflationary pressures
Speaker 3: coming from Myria at different places. I mean, would it
Speaker 3: be a problem if they hight rates?
Speaker 5: Well, if you leave it too long, and you height
Speaker 5: rates too much, too fast, too late, then you you know,
Speaker 5: that is a recept recipe for a recession. Equally, I
Speaker 5: almost want to flip it sideways over here where the
Speaker 5: danger is with the slowing economies. We're going to raise
Speaker 5: rates the market things. We're going to raise rates at
Speaker 5: the ECB several times, which seems to me a sort
Speaker 5: of a quicker way to a problem. But yeah, I
Speaker 5: think that. You know, I've always assumed the Fed's fast,
Speaker 5: smart enough that they don't get too far behind the curve,
Speaker 5: and that what we'll find is that the story just
Speaker 5: changes through time, and that one of the things about
Speaker 5: Kevin Walsh now turning up and being there will be
Speaker 5: that it'll be possible to turn that story around, make
Speaker 5: it clear that this economy is doing better than others.
Speaker 5: The terms of trade shocks in its favor. Obviously, the
Speaker 5: technology boom is still happening, and gradually, gradually.
Speaker 4: There'll be a rethink if that's the case.
Speaker 3: I'm wondering if you push that through the currency channel
Speaker 3: what that means. If you have rate hikes that are
Speaker 3: a mistake in your view from the ECB, they could
Speaker 3: potentially create an economic problem, and you have a US
Speaker 3: economy going strong in a federal reserve that sits on
Speaker 3: its hands.
Speaker 4: Do you want to own the dollar or do you
Speaker 4: want to sell it?
Speaker 6: I want to own it.
Speaker 5: I mean, I know I'm not relaxed about it, but
Speaker 5: I get asked, you know why if you think, if
Speaker 5: we think that the rates are going to go up
Speaker 5: in Europe, why don't I want to own the Europe
Speaker 5: Because they're going up despite their not being enough growth. Fundamentally,
Speaker 5: that's the issue that tightening into wheat growth environment's just
Speaker 5: going to make things worse, Whereas in the United States,
Speaker 5: what's holding me back is a central bank that doesn't
Speaker 5: recognize the problem at hand. But they'll get there because
Speaker 5: you know, that's the kind of organization it is. There's
Speaker 5: a lot of people on the FMC, a lot of
Speaker 5: regional governors will who will react to what they see
Speaker 5: in front of them with the economy, and I think
Speaker 5: in due course that's going to argue that, yeah, we're neutral,
Speaker 5: not at super easy policy, but we need to be
Speaker 5: better than that. Numbers like this morning's they just push
Speaker 5: in that direction.
Speaker 7: Kit though there was an ECB report that says gold
Speaker 7: replaces US treasuries as the world's top reserve acid.
Speaker 4: Are you worried about d dollarization.
Speaker 5: Yet the margin, I mean that the dollars being the
Speaker 5: world's reserve currency to a much greater degree and for
Speaker 5: longer than, for example, the pound was so that the
Speaker 5: global economy is so dependent on it that we get
Speaker 5: de dollarization at the margin in the same way as
Speaker 5: that there's not enough gold in the world to replace
Speaker 5: a fraction of the US treasuries that people might want
Speaker 5: to own instead. So yeah, at the margin that there'll
Speaker 5: be some of that and the dollar will be less dominant,
Speaker 5: but it will probably still be more dominant than Sterling
Speaker 5: was one hundred and fifty years ago.
Speaker 2: What does the ECP have in common with Arsenal Football
Speaker 2: Club kit.
Speaker 5: That they are too defensive. That's the fundamental issue in
Speaker 5: my heart, that their game plan isn't going to win
Speaker 5: them the Champions League. That's probably the quick way of
Speaker 5: putting it. The US is the FED is much more
Speaker 5: like much more like Bar Saint Ramin. And in the end,
Speaker 5: you know, this could be long drawn out, it could
Speaker 5: be painful, it could go to extra time and to penalties.
Speaker 5: But I don't think the ECB can win this with
Speaker 5: premature tightening and such a defensive strategy.
Speaker 2: Stay with us more Blindberg surveillance coming up after this.
Speaker 2: I'm a QE of PSP growth. Right in the following,
Speaker 2: Berkshire is effectively putting its stamp of approval on the
Speaker 2: idea that AI is not just market hyphe but a
Speaker 2: durable infrastructure shift worth funding at scale. Mama's in the studio,
Speaker 2: MA make a morning and to see you morning. It's
Speaker 2: great to see you in person. Let's talk about the
Speaker 2: supply tons of it? Is it going to be met
Speaker 2: with a lot of demand.
Speaker 8: I think demand is showing no signs of slowing down.
Speaker 8: And we're talking about building out essentially the real roads
Speaker 8: and the electricity grids of AI, right, so everyone's piling on.
Speaker 8: Everyone wants to grab as much as they can. This
Speaker 8: is almost like a war on oil. That's like the
Speaker 8: new compute. So I don't see demands slowing down at all.
Speaker 2: I asked this question earlier on this morning, how much
Speaker 2: runway do you think there is here? People are wondering
Speaker 2: what innings we're in. You know that cliche kind of
Speaker 2: question on Wall Street? How much runway do you think
Speaker 2: there is here?
Speaker 6: I think it's the early innings.
Speaker 8: I do think the questions will start to be asked
Speaker 8: in terms of when is the payback on this capex
Speaker 8: because these numbers are staggering. I think Alphabet or the
Speaker 8: reason they're raising this much equity is their CAPEC spend
Speaker 8: this years it's going to be two hundred billion dollars,
Speaker 8: and of the Max seven together, I think we're talking
Speaker 8: six hundred and seven hundred billion, maybe even more depending
Speaker 8: on what we q acid is. And so far, no
Speaker 8: one seems to be asking where's that return going to
Speaker 8: come from who is going to fund it?
Speaker 6: But I think we will soon.
Speaker 8: But the fact that people are not asking that question
Speaker 8: yet shows me that we're still in the early innings
Speaker 8: of AI and this is just the land grab.
Speaker 3: Demand is outstripping supply again and again and again. With HPE,
Speaker 3: we saw that as well, that really this is an
Speaker 3: issue of just supply not being able to keep up.
Speaker 4: How much pricing power is there?
Speaker 3: I mean, can they just keep raising prices to the
Speaker 3: moon for some of these parts that are in the
Speaker 3: choke points that essentially are necessary for the build out?
Speaker 6: It sort of seems that way, doesn't it.
Speaker 8: I think you touch on an interesting point, which is
Speaker 8: where is the choke point? And I do think if
Speaker 8: you look at sort of the core suppliers GPUs memory, yes,
Speaker 8: like you're strictly where the bock is and that makes sense,
Speaker 8: and I think they probably will commit pricing power for
Speaker 8: quite a bit. But where I start maybe start to
Speaker 8: worry in the market is if the rally becomes broader.
Speaker 8: I could see a world where there's so much frenzy
Speaker 8: around AI that anything that even touches the supply chain
Speaker 8: gets seen as a AI beneficiary.
Speaker 6: And I think that's when you get into trouble.
Speaker 8: Is I don't know if this is a good example,
Speaker 8: but data center cooling right, this is marginally touching the space,
Speaker 8: but also obviously very different than memory.
Speaker 6: I do think for the core.
Speaker 8: Spaces of memory and GPU, you probably see that rally
Speaker 8: go for quite a bit longer.
Speaker 3: Yeah, like when a shoe company becomes an AI company,
Speaker 3: then potentially that.
Speaker 4: Raises some concerns.
Speaker 3: I just wonder, you know how much companies have to
Speaker 3: show return on investment going forward to keep investing at
Speaker 3: the pace that they are to rebuild their entire infrastructure
Speaker 3: or is that not necessary yet?
Speaker 6: Yeah?
Speaker 8: And I think in some ways, right, we can talk
Speaker 8: about the anthropic IPO in a little bit see anthropics
Speaker 8: numbers could be interesting on this front.
Speaker 6: Well, first of all, we at PSP we think about
Speaker 6: this a lot.
Speaker 8: We actually hosted an event a month ago where we
Speaker 8: gathered fortune five hundred CEOs and AI entrepreneurs together in
Speaker 8: one room and be like, what is actually valuable to
Speaker 8: being built? Like when do you see ROI or does
Speaker 8: it just build build build and was pa some some
Speaker 8: interesting insights there. But back to anthropic the interesting thing
Speaker 8: we could see from them is From the very beginning,
Speaker 8: the narrative has been about enterprise adoption. It's not just
Speaker 8: about having the best model, it's about having how do
Speaker 8: we drive actual productivity in customers. And they've done well
Speaker 8: as a result, but seeing their numbers, hopefully we will
Speaker 8: soon will show that if retension is good, if we're
Speaker 8: continuing to see spend increase among the largest corporate spenders,
Speaker 8: then maybe AI skeptics could be a little wrong in
Speaker 8: terms of how far we are in the AI ad
Speaker 8: option curve.
Speaker 4: After all, let's talk about the Anthropic IPO.
Speaker 7: You say it's going to be not just a massive
Speaker 7: deal in terms of being first for open AI, but
Speaker 7: also along the entire AI stack.
Speaker 4: What are these smaller A companies going to be looking for?
Speaker 6: Yeah, I think everyone will be watching them. It's going
Speaker 6: to affect the whole AI stack because.
Speaker 8: Essentially, Anthropic is the first AI in need of company
Speaker 8: to go public, and they're going in public at a
Speaker 8: trillion dollar valuation, And there's this belief in the market
Speaker 8: that AI is going to be so much bigger than
Speaker 8: traditional software. So if traditional software is a trillion market globally,
Speaker 8: AI could be ten times that, twenty times that I've
Speaker 8: heard fifty times, like fifty times as the highest I've
Speaker 8: heard in terms of how much bigger AI will be
Speaker 8: than traditional software. So if you're thinking there's a market
Speaker 8: that creates fifty trillion dollars of new market cap, obviously
Speaker 8: that has implications.
Speaker 6: Up and cross the sack.
Speaker 8: And if you look at any of the listings around
Speaker 8: top AI companies, I think Bloomberg has one that's top
Speaker 8: twenty four AI companies to watch. You can look at
Speaker 8: the Forbes AI fifty as a rough proxy for what
Speaker 8: the market thinks is like the top tier AI companies,
Speaker 8: all of them are valued at at least one billion
Speaker 8: or more, which means investors think they're going to be
Speaker 8: ten civilians, they're going to be a trillion dollars. And
Speaker 8: it's every part of the sack. It's not just the
Speaker 8: models like open to AI or anthropic. You have infrastructure
Speaker 8: infrastructure companies so this is like Base ten foul together.
Speaker 8: You have application layer companies so this is like Synthesia,
Speaker 8: This is like Decagone, a Bridge Harvey. All these companies
Speaker 8: sitting at billions of dollars of value. Issues is going
Speaker 8: to be looking an anthropic to see if the public
Speaker 8: markets will truly view EI as a different crop of companies.
Speaker 2: Stay with us more Bloomberg Surveillance coming up after this.
Speaker 2: We begin this out, we'll stop holding on to record
Speaker 2: highs as Alphabet is planning to raise eighty billion dollars
Speaker 2: in equity capital. Monica dissent serve JP Morgan Private Bank,
Speaker 2: saying the following, stay invested in the AI supercycle, but
Speaker 2: b selective. Monica joins US now for more Monica, good morning,
Speaker 2: could see you, Thank you. I'm just thinking about the
Speaker 2: clients that you speak to, investors, individuals, families, family offices.
Speaker 2: How much exposure do they have to these names already
Speaker 2: through private markets.
Speaker 1: It's funny on private markets with everything that's happening lines overnight.
Speaker 1: I think so many people assumed that's where you had
Speaker 1: to be to get the value today to play AI,
Speaker 1: and then you see this news over night and you
Speaker 1: realize maybe there are more opportunities in public markets.
Speaker 4: Now.
Speaker 1: You look at a name like Alphabet, which has run
Speaker 1: over one hundred percent in the last year, and to
Speaker 1: see it holding in this well this morning, it is
Speaker 1: pretty interesting. And so I think the bottom line is
Speaker 1: there are absolutely opportunities in private markets, but there's still
Speaker 1: at to do in the public side as companies make investments,
Speaker 1: and you look at these companies like alphabet with a
Speaker 1: significant free cash flow generation, it still feels like there's
Speaker 1: value on both sides.
Speaker 2: Why do you think the value is then in the
Speaker 2: equity market, let's explore that a bit a bit more
Speaker 2: on the public side, where do you stay at the moment?
Speaker 1: You know, at the beginning of the year, we were
Speaker 1: a little worried, right because you looked at valuations over
Speaker 1: twenty times, you know, earning's growth pising of digits, and
Speaker 1: you said, okay, maybe that's about where it should be,
Speaker 1: maybe a little stretched, and then you know all the
Speaker 1: geopolitical fears, and you said, okay, can we actually hold
Speaker 1: on to twenty plus times? And now here we are
Speaker 1: and what's happened. Obviously, your earnings have significantly outpaced what
Speaker 1: we thought. But it's not just earnings growth, it's revenues
Speaker 1: are accelerating, margins are expanding, and again it's not just tech.
Speaker 6: You're actually seeing breadth.
Speaker 1: Because a year ago, with the big concern was it's
Speaker 1: just the mag seven, it's just tech. We're seeing that
Speaker 1: margin expansion in most sectors actually, and So that's what's
Speaker 1: really interesting that you're finally seeing some of this follow
Speaker 1: through in the market. To me, that tells me fundamentals
Speaker 1: actually might be better than people fought and maybe twenty
Speaker 1: times isn't outlandish for equity markets.
Speaker 3: What's driving the broadening ad It's certainly not coming from
Speaker 3: a cheaper commodity prices, it's not coming from disinflation, So
Speaker 3: where is it coming from.
Speaker 1: It's funny because a year ago, year plus ago, everyone
Speaker 1: would push back and say, how can margins expand? And
Speaker 1: that's where you get this AI story and you haven't
Speaker 1: seen it, I think as significant as it will be,
Speaker 1: but I do wonder, are you're starting to see some
Speaker 1: benefit from these investments. Again, it's really hard to put
Speaker 1: numbers around it, and I think that's where the market struggles.
Speaker 1: That's where investors struggle because if I can't put an
Speaker 1: estimate on it, how can I look at evaluation and
Speaker 1: say this stock is worth X in two years? But
Speaker 1: it seems like it has to be there. And then
Speaker 1: you wonder, Okay, if companies raise prices never actually took
Speaker 1: them back down, if there's been some moderation in the
Speaker 1: rate of inflation in that up if it helps on
Speaker 1: the margin side as well.
Speaker 3: There's always someone know when you're investing in technological technological cycle.
Speaker 3: But if I think about, say the Industrial Revolution with
Speaker 3: the train, you're investing a train to get from here
Speaker 3: to there.
Speaker 6: With this, it's different.
Speaker 3: People don't totally understand exactly what iteration is going to
Speaker 3: be one at the end of.
Speaker 4: Whatever this is.
Speaker 6: How difficult is it.
Speaker 3: To remain nimble and to remain live at a time
Speaker 3: of such incredible uncertainty around the thesis that's raising trillions
Speaker 3: of dollars.
Speaker 1: I think it's really difficult, and it's why you've seen
Speaker 1: this concentration. I think in these tech names right, those
Speaker 1: are the deep pockets, clear beneficiars at the beginning when
Speaker 1: we talk about being nimble, being selective. Now most of
Speaker 1: my clients are saying, where else can I invest? Where
Speaker 1: are the sectors that haven't worked who could be a
Speaker 1: bit efficiar of AI? And I look at something like
Speaker 1: financials sector that's been down while the SMP is up
Speaker 1: over the last few months and yet probably stands to
Speaker 1: benefit from rates hanging in here, And certainly if you're
Speaker 1: a financial institution, you will benefit from AI makes it
Speaker 1: easier to underwrite credit. Maybe you get a little smarter,
Speaker 1: a little more nimble than some of your businesses, and
Speaker 1: suddenly you can make an argument.
Speaker 4: For another sector to benefit.
Speaker 1: And so I think that's where we're trying to look
Speaker 1: is who hasn't participated in this rally?
Speaker 4: Another sector that I love?
Speaker 1: Looking at healthcare? If you believe in AI, how can
Speaker 1: there not be significantly more innovation on the biotech side globally?
Speaker 1: And you have seen a dislocation between healthcare and tech
Speaker 1: over the last couple of years.
Speaker 4: And so is it on the margins?
Speaker 7: Is why you say the upside is underappreciated when it
Speaker 7: comes to AI. Is it on the margins of these
Speaker 7: other sectors that could benefit?
Speaker 1: I think it's I used to be a selfide analyst,
Speaker 1: We'd estimate numbers going be at one or two quarters.
Speaker 4: That's kind of what you did.
Speaker 1: How do you predict three four years out and actually
Speaker 1: do a DCF and figure out what these stocks are
Speaker 1: worth when you have really no idea how to put
Speaker 1: pen to paper on this. And I think that's what
Speaker 1: the market struggles with, It's what an investors struggle with.
Speaker 1: And so when you have these like game shifting things
Speaker 1: that happened in the dot com bubble as well. People
Speaker 1: struggle because it's really hard to see five years out,
Speaker 1: and so that makes equity investing a bit challenging. And
Speaker 1: I think again it's why people go to the obvious places.
Speaker 1: But now we're starting to see money want to shift
Speaker 1: to other areas, and this is going to be the
Speaker 1: challenge over the next year. Who are the next year
Speaker 1: two to three sectors that will benefit when you.
Speaker 7: Start the critical question for every clients your portfolio built
Speaker 7: for a waald of high and more volatile inflation. Are
Speaker 7: your clients right now more concerned about AI and the
Speaker 7: future and how to predict this four or five years
Speaker 7: or actually the conflict in the Middle East, or people
Speaker 7: have just completely moved on.
Speaker 1: It's so funny the questions around the conflict in the
Speaker 1: Middle East. The beginning of the year, it was all
Speaker 1: about AI and is it a bubble that has dissipated?
Speaker 1: I think because this earning story has started to calm
Speaker 1: those fears, then it's about the Middle East. Yet to
Speaker 1: your point, I don't see portfolios that reflect this fear
Speaker 1: about higher rates, higher inflation, and so that's normal. People
Speaker 1: tend to kind of lag a little bit with these shifts.
Speaker 1: But after this secuity rally, I think you have to
Speaker 1: look even at some of these techniums and say, Okay,
Speaker 1: should I take a little bit off the table and
Speaker 1: think about rebalancing. Do I have enough in the sectors
Speaker 1: that will benefit if inflation remains sticky slash higher? So
Speaker 1: I think again, core real estate infrastructure, things like that.
Speaker 1: We look at large family offices we work with still
Speaker 1: significantly under allocated to where they say they want to be,
Speaker 1: and I think no one wants to chase, but like
Speaker 1: it does feel like you probably have a little more
Speaker 1: balance there. These things didn't matter in your portfoliofivey, ten
Speaker 1: year go and roads for lower Now they're rely much
Speaker 1: more important.
Speaker 2: I think this is the Bloomberg Surveillance Podcast, bringing you
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