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Speaker 2: I want to bring in now Kay Her, she is
Speaker 2: US CIO of Global Fixed Income, Currency and Commodities at
Speaker 2: JP Morgan Asset Management. And Kate, do you think that
Speaker 2: we got anything new from this latest FED minutes? I mean,
Speaker 2: we knew that Steven Myron was an outlier, and these
Speaker 2: minutes certainly showed that. But what do we learn in
Speaker 2: terms of the debate going on inside the Federal Reserve?
Speaker 3: So Scarlett, first off, I'm glad to be here. Thank
Speaker 3: you for having me, Nora too. Second off, I think
Speaker 3: the short answer to your question is we didn't learn
Speaker 3: anything new. And I think one of the best ways
Speaker 3: to think about whether we've learned anything new is what
Speaker 3: the market's reaction is. And the market's really not giving
Speaker 3: us much of a reaction. Maybe at the margin the
Speaker 3: minutes are showing us that there was some discussion about
Speaker 3: maybe we didn't need to do anything, but it was
Speaker 3: pretty clear that we only had one dissent when that
Speaker 3: was released September seventeenth, and not a lot of new
Speaker 3: information in the minutes today.
Speaker 4: Okay, not a lot of new information. And of course,
Speaker 4: as we're looking at the trade still green across the
Speaker 4: screen right now, all across the board here when we're
Speaker 4: looking at equities in particular. But what do you think
Speaker 4: the FED should be focused on right now?
Speaker 3: It's such a great question in Aura. As everybody knows,
Speaker 3: we've got a government shut down and we are in
Speaker 3: an absence of data. So the FED or the the
Speaker 3: Bureau of Labor Services did not release the employment data
Speaker 3: on Friday. It's unlikely unless the government reopens, it's unlikely
Speaker 3: that we're going to get CPI next week. So what
Speaker 3: are we looking at? What's the FED looking at? The
Speaker 3: next major piece of data that we think is two things.
Speaker 3: I would say The first is corporate earnings start on
Speaker 3: October fourteenth, and I think that can be a great
Speaker 3: indication of what we're seeing from a bottom up perspective
Speaker 3: on the economy. The second one on a macro perspective
Speaker 3: that I'm sure the fedal look at is the Beige Book.
Speaker 3: So we've got the Beige Book coming out on October fifteenth.
Speaker 2: Yeah, and I feel like the Beige Book has taken
Speaker 2: on greater importance in this period of uncertainty where we're
Speaker 2: not sure if companies are passing along higher costs to
Speaker 2: their customers or how they're dealing with it. We're kind
Speaker 2: of in an uncharted territory and every company is doing
Speaker 2: things differently based on the experience of their executives when
Speaker 2: it comes to corporate earnings. K as someone who is
Speaker 2: in the fixed income market, what do you watch for?
Speaker 5: What do you look for?
Speaker 2: Is it the banks that will really tell you the
Speaker 2: most about what kind of credit quality we have in
Speaker 2: this economy.
Speaker 3: Sure, that's a great thing to think about. I think,
Speaker 3: first off, you know, we're not entirely in unprecedented territory.
Speaker 3: We have had government shutdowns before, and when we take
Speaker 3: a step back and think about the overall impact to
Speaker 3: gross domestic product, it tends not to be that material
Speaker 3: in the grand scheme of life. So from an earnings perspective,
Speaker 3: I think we're going to be looking for a couple
Speaker 3: of things. Number One, from the banks, what's the credit quality?
Speaker 3: Look at what's the indication of the consumer. As we've
Speaker 3: seen in the macro data, we've seen some softening in employment,
Speaker 3: so is that going to flow through into reserves, into
Speaker 3: credit quality and banks? And then from the broader companies
Speaker 3: and the industrials, what are we seeing in revenue growth
Speaker 3: versus EBITDAH obviously or earnings before interest, taxes, depreciation cash
Speaker 3: flow as it were. So what are we seeing in
Speaker 3: cash flow? I think for the most part, companies have
Speaker 3: very high margins and are they going to protect those
Speaker 3: margins or are they going to pass through costs onto consumers?
Speaker 3: And then what's that going to do to demand? I
Speaker 3: think that's what we'll be look looking at.
Speaker 4: So as we head into earnings, using just around the
Speaker 4: corner here, what sectors in particular are giving you the
Speaker 4: most concern? Just based off of what you were saying.
Speaker 3: I'm a bond portfolio manager, I'm paid to worry and
Speaker 3: loose sleeve, so very thing gives me concern. You never
Speaker 3: know where you might see a pocket of distress, and
Speaker 3: it's the unexpected that are the real concerns.
Speaker 2: Well, we've seen pockets of stress in the auto sector.
Speaker 2: When you look at first brands, when you look at tricolor,
Speaker 2: what does that tell you about the state of the consumer,
Speaker 2: especially at the lower end. You know, these were two
Speaker 2: credit blow ups that took people by surprise, and a
Speaker 2: lot of people will say, Okay, there's it syncratic. There's
Speaker 2: some maybe fraud issues that are particular to those companies,
Speaker 2: and that may be the case, but these are also
Speaker 2: sectors that are very much affected by tariffs, and they
Speaker 2: are not the only ones affected by tariffs either.
Speaker 3: So I think there's a couple of things going on here.
Speaker 3: Scarlett and yes, on a certain level, tree color and
Speaker 3: apparently that's how it's pronounced.
Speaker 5: Oh, thank you.
Speaker 4: I know that's your pro tip.
Speaker 5: I've been saying try credit.
Speaker 4: Thanks there.
Speaker 3: Well, I think there's a couple of things going on
Speaker 3: treac a Lore in particular, and I'm not going to
Speaker 3: talk about specific credits, but I think we should take
Speaker 3: a step back and think about what's going on in
Speaker 3: the broader economy and broader financial markets. And the reality
Speaker 3: is there's a lot of cash slashing around. And when
Speaker 3: there's so much money slashing around, that tends to be
Speaker 3: the point late cycle where excesses happen. So that tends
Speaker 3: to be the point if you went back to the
Speaker 3: two thousands you send to see it's not uncommon to
Speaker 3: see corporate malfeasance, and it may be in these types
Speaker 3: of instances where are seeing corporate malfeasance. To answer your
Speaker 3: question with regard to the consumer, you know, we had
Speaker 3: been talking for a while about what we referred to
Speaker 3: as a CA shaped economy, and that was high income
Speaker 3: consumers with a lot of exposure to stock markets, and
Speaker 3: we're doing very well. Lower income consumers had been hit
Speaker 3: with inflation. It actually that that seems lower income consumers
Speaker 3: he seem to have stabilized some. We're more focused and
Speaker 3: concerned about maybe more prime consumers that are going to
Speaker 3: start repaying student loans or interesting defaults and type of
Speaker 3: behaviors that we're going to see there.
Speaker 4: So let's dig a bit deeper into the lack of
Speaker 4: data that you pointed out, just the bit to go here.
Speaker 4: So we have traders that are really bracing for a
Speaker 4: range of fed outcomes here, some of them even hedging flows,
Speaker 4: plate flavoring outlier dubbish scenarios, and others focusing more on
Speaker 4: the possibility that the Fed four goes a move at
Speaker 4: one meeting. How are you thinking about all this right
Speaker 4: now as it relates to the bond market.
Speaker 3: Yeah, a couple of things. I think if you look
Speaker 3: at what the market is pricing in now, a twenty
Speaker 3: five basis rate to twenty five basis point rate cut
Speaker 3: is almost fully priced into the market for the October meeting,
Speaker 3: I think is it October twenty fifth, So that's almost
Speaker 3: fully priced in October twenty ninth, twenty ninth.
Speaker 4: Sorry, I mean, how can you not know? Easy? How
Speaker 4: could anyone not? That's kidding.
Speaker 3: So the market's pricing almost an entire rate hike in October,
Speaker 3: and then on the December tenth meeting, the market's pricing
Speaker 3: another let's call it twenty basis points something like that.
Speaker 3: But I think the other interesting aspect is that volatility
Speaker 3: in the rates market has been very low, So you
Speaker 3: get this base case that the Fed continues to ease.
Speaker 3: And if we go back to the Fed minutes and
Speaker 3: what the Fed said on the last meeting on September seventeenth,
Speaker 3: is that they are saying that they intend to do
Speaker 3: two more cuts this year, And that's the base case.
Speaker 3: I think in periods of economic uncertainty, and the government
Speaker 3: shut down is perpetuating that uncertainty because we're not getting
Speaker 3: regular economic data updates. Then I think that logically follows
Speaker 3: that people worry about tail risk outcomes and they look
Speaker 3: at unusual patterns in behaviors or in particular markets and
Speaker 3: worry about what they could glean from those.
Speaker 5: So we don't have any data right now.
Speaker 2: What we do have are the government auctions of US
Speaker 2: treasuries because we need to raise money. So that continues.
Speaker 2: Is the risk of a tail event tapering off a
Speaker 2: little bit here. For a while, people were monitoring every
Speaker 2: single auction with baited breath, and it feels like we're
Speaker 2: excelling a little bit here.
Speaker 3: We still monitor them with baited breath, and I think,
Speaker 3: off the top of my head, today's auction at one
Speaker 3: o'clock was something like ninety one percent end users and
Speaker 3: something like a tale of zero point four or five
Speaker 3: basis points. So you're right, that's a strong auction, and
Speaker 3: I think that has settled down. I think concerns about
Speaker 3: the US government US treasury as a safe haven have
Speaker 3: abated as people have gotten more comfortable with the macro
Speaker 3: environment and the geopolitical environment.
Speaker 4: So safe haven here, maybe abating, But what do you
Speaker 4: think is the next story here?
Speaker 3: Next story? Gosh, I don't know. I'm not the reporter
Speaker 3: on this. We're just we're just I want to leave
Speaker 3: that to you in the market. In the market, I
Speaker 3: think it's probably earnings. I think it's going to be
Speaker 3: you've got earnings kicking off on. Look, as you all said,
Speaker 3: in the absence of any macroeconomic data being released by
Speaker 3: the federal government, I think people are going to obsess
Speaker 3: about every single earnings release and anything that they can
Speaker 3: glean from that. Specifically in as you all know, there's
Speaker 3: been an extraordinary amount of investment in AI and looking
Speaker 3: maybe starting to look for returns on that, look at
Speaker 3: that investment cycle. So I think that's going to be important.
Speaker 3: I think to Scarlett's earlier question, always credit quality, return
Speaker 3: of capital to shareholders, increases, and dividends, looking at flows.
Speaker 3: I think that's that's that's the next story.
Speaker 4: But yeah, where do you want to be on the
Speaker 4: yield curve?
Speaker 3: Yeah, we still like the belly of the curve.
Speaker 2: Everyone loves the belly of the curve.
Speaker 4: Everyone loves the belly.
Speaker 3: Is just fun to say that the belly of the curve,
Speaker 3: right income Geese. But yeah, I think we think that
Speaker 3: the we think that the rates are going to continue
Speaker 3: to be pretty range bound here between three seventy five
Speaker 3: and four and a quarter, and we continue to like
Speaker 3: high quality intermediate duration credit. You know, as my dear
Speaker 3: colleague Ian Steely says, spreads are tight, but yields are right.
Speaker 3: And that's that's really what the what the driver is
Speaker 3: for investors. You know, they're not investors who are thinking
Speaker 3: about investing for pension funds, endownment funds, individual investors. They
Speaker 3: care more about what the yield is, not what the
Speaker 3: spreads are.
Speaker 4: So, of course, as we mentioned, the belly is what
Speaker 4: everyone's talking about. But is there any sort of opportunity
Speaker 4: on the other end.
Speaker 3: I mean, there are always opportunities, but where we would
Speaker 3: are most comfortable in the yield curve is really in
Speaker 3: the belly.
Speaker 2: What about gold, I'm curious what you think about the
Speaker 2: relationship of gold to fixed income These days, gold continues
Speaker 2: to zoom higher, now sixty one dollars an ounce and
Speaker 2: just pierce four thousand.
Speaker 5: Dollars this morning.
Speaker 4: Insane.
Speaker 2: Yeah, so, and there seems to be very little that
Speaker 2: people can identify that's going to stop this momentum. It's
Speaker 2: driven by inflows into gold ets and also central bank buying.
Speaker 5: How does that playoff.
Speaker 2: Of what's happening in treasuries or doesn't.
Speaker 3: So you've just hit on a key aspect of it, Scarlett.
Speaker 3: So there are obviously two components of any market, supply
Speaker 3: and demand, and you just hit the two main components
Speaker 3: of demand and that central bank buying, and that's the
Speaker 3: ETF buying. I think the ETF wrapper is providing people
Speaker 3: with an easily accessible way to buy gold instead of
Speaker 3: buying bullion and storing at someplace. So you've got an
Speaker 3: increase in demand for gold. On the other side, if
Speaker 3: you look at the supply of gold, it's really been
Speaker 3: pretty constant, So you've got this mismatch between supply and demand.
Speaker 3: I think in terms of the relationship that we've seen historically,
Speaker 3: gold has been correlated with real yields. So when you
Speaker 3: see real yields come down, gold prices go back up.
Speaker 3: So why is that the opportunity cost is lower? If
Speaker 3: you can't get a high rate in treasuries or in
Speaker 3: risk free assets, then maybe gold becomes more attractive. Well,
Speaker 3: what we've seen really post pandemic. That relationship has broken
Speaker 3: has broken down, and I think it's really a function
Speaker 3: of the supply and demand. But I think the point
Speaker 3: would be that that's broken down really over the last
Speaker 3: five years. So I don't read anything different in gold
Speaker 3: pricing about you know, US exceptionalism or the dollar flight
Speaker 3: to currency or anything like that. I think it's old
Speaker 3: fashioned supply and demand fundamentals.
Speaker 2: You don't see it as part of the debasement trade
Speaker 2: that everyone keeps talking about.
Speaker 4: Not really now, you don't buy into that.
Speaker 2: I guess someone who's the global head of fixed income,
Speaker 2: you know, probably doesn't see.
Speaker 5: Much value in that, but had to ask it.
Speaker 4: I mean, do you think we have more room to
Speaker 4: run here on gold?
Speaker 3: You know? My only strong view on that is I
Speaker 3: like it as jewelry, as you can see from my necklace.
Speaker 5: I don't.
Speaker 3: I'm not enough in the leeds on supply and demand
Speaker 3: to gold to have a strong view on that. I
Speaker 3: think I've got a good handle on what's going on
Speaker 3: the fundamentals and why we've seen prices going, but I'm
Speaker 3: not a technical analyst on gold and whether we've got
Speaker 3: more room to run?
Speaker 2: All right, Kay, Always appreciate your joining us.
Speaker 5: Thank you so much for coming into studio.
Speaker 2: Okay, her is us CIO Global Fixed Income, Currencies and
Speaker 2: Commodities at JP Morgan Asset Management.
Speaker 5: Stay with us.
Speaker 6: More from Bloomberg Business Week Daily coming up after this.
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Speaker 2: All right, let's head over back to Europe because we
Speaker 2: now have some more details coming out of France, and
Speaker 2: I want to bring in Stephen Carroll. He is, of
Speaker 2: course the host of Bloomberg Daybreak Europe, and Stephen is
Speaker 2: an expert on authings France. He's certainly my expert on
Speaker 2: all things Frans. We go to him constantly for the
Speaker 2: latest and there's been a lot to stay on top
Speaker 2: of here. Stephen Sebastian Lancorneu, who is the outgoing Prime
Speaker 2: Minister of France, says that Emmanuel Macron, the President of France,
Speaker 2: can name a new prime minister in the next forty
Speaker 2: eight hours. He can do that, he may not do that.
Speaker 2: Where does leave us what does this mean for his government, Scott.
Speaker 7: Things are a little bit clearer now than they were
Speaker 7: earlier today, but not much. What we know is that
Speaker 7: the theory that fresh elections could be called for the
Speaker 7: National Assembly looks less likely than it did this morning.
Speaker 7: For example, what Sebaston mccorney was just said on French
Speaker 7: television is that he believes there is now a political
Speaker 7: situation that allows Emmanuel Macron to name a new prime
Speaker 7: minister and take the next spin on this wheel that
Speaker 7: we've been on since June of last year of trying
Speaker 7: to build a minority coalition in Parliament that's able to
Speaker 7: pass a French budget. Now, he did this after the
Speaker 7: forty eight hours of intense consultations with political leaders from
Speaker 7: across the political spectrum, not all parties, but most, and
Speaker 7: what he was trying to do was see if among
Speaker 7: those groups he could find enough support for central ideas
Speaker 7: that he believes that could lead to a budget. Essentially,
Speaker 7: he wants somebody else to take the reins from here,
Speaker 7: That's what he's told to the President Emmanuel Macron. He
Speaker 7: came to this interview this evening on French television straight
Speaker 7: from the Elise Palace where he spent an hour and
Speaker 7: forty minutes with the President briefing him on what he'd
Speaker 7: learned over the past two days. He now expects the
Speaker 7: President to name somebody else to take on the job
Speaker 7: to lead those discussions. He was asked repeatedly, should it
Speaker 7: be a candidate from the Left Party, He said, it's
Speaker 7: up to the President to decide. Should it be a
Speaker 7: technocratic prime minister, It's up to the President to decide.
Speaker 7: He has made it clear, though, is that nobody's going
Speaker 7: to be in this government should have presidential ambitions for
Speaker 7: the twenty twenty seven presidential election.
Speaker 5: It looks like.
Speaker 7: He's pointing towards a sort of technocratic arrangement, but very
Speaker 7: much involving the politicians who are in the National Assembly now,
Speaker 7: who are on the political scene to be able to
Speaker 7: put that compromise together, because they have some pretty big
Speaker 7: issues they have to decide, and the calendar on this
Speaker 7: budget is already running very very tight. So the rush
Speaker 7: is to try and get something done in time that
Speaker 7: can be passed through Parliament and actually keep the public
Speaker 7: finances running over into next year, avoiding the sort of
Speaker 7: emergency measures that we saw at the end of last year,
Speaker 7: which as we know, didn't go down very well on
Speaker 7: the bond markets.
Speaker 4: Can investors force the hand of the centrist parties who
Speaker 4: must decide whether to play ball with Lacornell or for
Speaker 4: that matter, Macrum.
Speaker 7: Look, that's a really good question, because what we've seen
Speaker 7: so far is a little bit of tension in markets,
Speaker 7: but not something that our own economists or any of
Speaker 7: the market analysts that we've been speaking to would describe
Speaker 7: as a fiscal or financial crisis in France. This is
Speaker 7: still a political crisis. We have seen the spread of
Speaker 7: bond deals between France and Germany widen, although it did
Speaker 7: actually tighten a little bit today when the corn New
Speaker 7: signaled this morning that he had been making some progress
Speaker 7: in these talks. Realistically, looking at it for markets right now,
Speaker 7: nothing's really changed in the past week, or really since
Speaker 7: the middle of the summer when the last prime minister
Speaker 7: from Sobereru proposed his budget. They're still in this phase
Speaker 7: of negotiation. There are still signals that a compromise could
Speaker 7: be found. When markets will run out of patience with
Speaker 7: France is very much an open question. You don't have
Speaker 7: the cliff edge of a government shut down in France
Speaker 7: in the way that you do in the United States,
Speaker 7: because the way it works as the system runs into
Speaker 7: sort of keeping the lights on measures where taxes are
Speaker 7: collected and public services operated. That's not a situation any
Speaker 7: politicians want to be happening. It's not a situation the
Speaker 7: public wants to happen either. But the cliff edge moment
Speaker 7: looks that little bit further away, at least for now.
Speaker 7: The situation that markets were most worried about is what
Speaker 7: fresh elections could could produce national assembly elections or in
Speaker 7: an extreme case, a fresh presidential election. Both of those
Speaker 7: look off the cards this evening, but things are moving
Speaker 7: very quickly, and who am Manual Macron could pick in
Speaker 7: forty eight hours time is going to be a very
Speaker 7: interesting question.
Speaker 5: So very quickly.
Speaker 2: If you know, legislative elections would be unsettling to investors.
Speaker 2: I'm guessing that presidential elections, Macron actually resigning, as some
Speaker 2: in the opposition parties want him to do, is not
Speaker 2: something investors would welcome.
Speaker 7: No indeed, I mean that would be a much more
Speaker 7: dramatic shift in France's both fiscal approach and some of
Speaker 7: those big heavy issues like the pension reforms, which is
Speaker 7: the central thing politicians here are fighting over at the moment.
Speaker 7: If that were to be disrupted, that would change the
Speaker 7: fiscal perceptions of France. We've also got some ratings agency
Speaker 7: decisions to look out for, too. A presidential election would
Speaker 7: be very dramatic. A National Assembly election would be less dramatic,
Speaker 7: and getting a new prime minister, while that could produce
Speaker 7: another shrug from markets.
Speaker 2: All right, thank you so much, Stephen Carroll. Fantastic context here.
Speaker 2: Stephen Carroll is host of Bloomberg Daybreak Europe, but he
Speaker 2: is at least my go to authority on all things
Speaker 2: in France, certainly the political crisis that has been brewing
Speaker 2: for over a year now.
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Speaker 8: Now, so many aideals and so many questions. So to
Speaker 8: answer those questions, let's bring in Mandy Saying, who is
Speaker 8: the global head of technology research for Bloomberg Intelligence. Who
Speaker 8: can tell us all about whether we are in fact
Speaker 8: in an AI bubble. So Mendy, thank you so much
Speaker 8: for joining us today.
Speaker 5: Okay, let's talk about.
Speaker 8: This concept of circular funding to start with why has
Speaker 8: it created such a fus amongst market observers.
Speaker 4: And what is it?
Speaker 9: Well, I guess the easiest way to frame it is
Speaker 9: a company like OpenAI doesn't have the balance sheet of
Speaker 9: Meta or Microsoft or Google in terms of the huge
Speaker 9: AI infrastructure build out that they want to go ahead with.
Speaker 9: And so far they relied on Microsoft to consume all
Speaker 9: the data center capacity they needed for chat, GPT and
Speaker 9: the enterprise business they have. And now they feel that
Speaker 9: numbers and the demand is getting so big that they
Speaker 9: are planning ahead. They are looking two three years ahead
Speaker 9: where they would need probably two or three times more
Speaker 9: capacity than they are consuming right now. And for that,
Speaker 9: first they did a deal with Oracle three hundred billion
Speaker 9: dollar deal that spends almost five years. Then they did
Speaker 9: this deal with Nvidia actually to build ten gigawatt of
Speaker 9: data center capacity. Now, the interesting part to answer your
Speaker 9: question on circular funding is Nvidia is spending you know,
Speaker 9: ten billion dollars and giving it to open Ai for
Speaker 9: them to add up to ten gigawatts of capacity, and
Speaker 9: that investment could go up two hundred billions, So every
Speaker 9: gigawat involves almost forty billion dollars of spend. That's a
Speaker 9: rough calculation, so you can imagine for ten giga whats
Speaker 9: we're talking four hundred billion dollars in spend. Out of that,
Speaker 9: Nvidia is going to put one hundred billion dollars, So
Speaker 9: one fourth of that is coming from Nvidia. The rest
Speaker 9: open EI still has to raise it through a private
Speaker 9: vehicle or some other type of instrument. But that's the
Speaker 9: challenge open ai has to grapple with and figure out
Speaker 9: the rest of the funding, and they feel they can
Speaker 9: do that in conjunction with I mean, I'm not even
Speaker 9: talking about the AMD partnership, but that's essentially what they're
Speaker 9: trying to do is to build out data centers on
Speaker 9: their own as opposed to relying on hyperscale.
Speaker 4: And so we're going to get to the whole idea
Speaker 4: of an AI bubble here shortly. But do these companies
Speaker 4: have all the money to back it up? Do they
Speaker 4: have the financing to support these efforts. We're throwing around
Speaker 4: a lot of big numbers here, and it feels like
Speaker 4: with the tech space. It doesn't matter what number you
Speaker 4: throw out. You could find some company that's saying that
Speaker 4: that's what they're going to spend. When we think about CAPEX.
Speaker 9: So you're right, the traditional business used to be asset light.
Speaker 9: You needed kapex spend of maybe thirty to thirty five
Speaker 9: billion dollars if you're Google or a meta and that
Speaker 9: would suffice for the whole year and it would stay
Speaker 9: you know, around five to ten percent, give or take.
Speaker 9: But now it's already you know, two times larger than
Speaker 9: that thirty five billion dollar and next year it's going
Speaker 9: to cost one hundred billion dollars. It's going to be
Speaker 9: three times larger for existing companies that run data center assets.
Speaker 9: And the reason for that is the compute has gotten
Speaker 9: so expensive. Plus you need more compute for generative AI.
Speaker 9: So think of traditional search. It needed compute that equated
Speaker 9: to maybe point zero two cents per query. Now with
Speaker 9: generative AI, that chat pot query is almost ten times
Speaker 9: more expensive then your traditional search query. So that's where
Speaker 9: the compute demand is coming from. And these companies have
Speaker 9: no choice but to invest in infrastructure because users are
Speaker 9: spending more time. I mean, Google's token usage has grown
Speaker 9: fifty x, so people are consuming a lot of these products,
Speaker 9: and if the pace continues at this level, then you
Speaker 9: have no choice but to add more capacity. And that's
Speaker 9: why the numbers are so big here.
Speaker 8: Well, you know you're talking about it seems like it
Speaker 8: really is just an insatiable appetite for investment into the space,
Speaker 8: right and now we're talking about not just kind of
Speaker 8: the chips and the service, but also the physical space.
Speaker 8: But when you compare that with the flow of money
Speaker 8: and investment into the stock, whether it's from investors on
Speaker 8: the street or companies looking to get in on it,
Speaker 8: it seems like there are a lot of willing players
Speaker 8: still in the market. Do you think there really is
Speaker 8: such a mismatch between the flow of money coming out
Speaker 8: and also the demand for funding to create and further
Speaker 8: fuel this AI infrastructure situation.
Speaker 9: Yeah, everyone, I think now realizes that this is a
Speaker 9: very long runway in terms of both the bill out
Speaker 9: of the infrastructure and how it will eventually monetize. I mean, look,
Speaker 9: there's a lot of upfront investment, and that's where you know,
Speaker 9: the Hyperscaler Capex guys, they were willing to invest money
Speaker 9: with their operating cash flow. They have the balance sheet,
Speaker 9: the Google Meta Microsoft, they have the balance sheet to
Speaker 9: put their operating cash flow in the form of capex.
Speaker 9: But now the numbers are getting even bigger. And so
Speaker 9: if Google generates one hundred billion dollars in operating cash flow,
Speaker 9: now they're talking about spending more than that hundred billion.
Speaker 9: And that's where the private guys come in. Everyone feels
Speaker 9: it's an attractive asset because you can rent it, you
Speaker 9: can generate a return over three or four years, and
Speaker 9: that's where I do think there will be a lot
Speaker 9: more of these deals. I mean, the whole neo cloud
Speaker 9: space has come about literally because of this demand and
Speaker 9: you know, willingness to rent compute from someone else.
Speaker 4: Right lots of activity happening in the AIS can't stop,
Speaker 4: won't stop. A lot of bubble allegations too, anything that
Speaker 4: you can point to that would dispute that.
Speaker 9: Well, right now, we are still in that phase where
Speaker 9: the demand far outstriped supply. And to me, the biggest
Speaker 9: indicator of that is what Nvidia tells us on their
Speaker 9: earnings call in terms of their margins they're pricing. I mean,
Speaker 9: right now they're in Blackpool architecture, their Harper chip prices
Speaker 9: have started to go up because the demand is far
Speaker 9: outstripping supply. So when you see a trend like that,
Speaker 9: just there will be probably some misallocation of capital that
Speaker 9: will find out in retrospect that this capital was misallocated
Speaker 9: in some way. But right now, it's very hard to
Speaker 9: question the pace of this build out because there's still
Speaker 9: that big gap between demand and supply, and until that narrows,
Speaker 9: it's hard to question why capital is going in this
Speaker 9: domain because I mean it should.
Speaker 8: Well, thank you for mentioning the earning season, because that's
Speaker 8: exactly what we want to be asking you about.
Speaker 4: Obviously.
Speaker 8: Yeah, Kapex was such a big theme last season, especially
Speaker 8: for Nvideo, but really just in general, right the magnificence
Speaker 8: having companies and anyone involved in the space. I think
Speaker 8: that's still the big question for investors is is what
Speaker 8: companies are spending on AI Does that justify the returns
Speaker 8: that they're getting now and in the future. What would
Speaker 8: you say to those investors kind of weighing that balance
Speaker 8: as we head into the next season's earnings.
Speaker 9: I mean, look at the ear to date performance of
Speaker 9: mag seven. The stocks that have outperformed are the ones
Speaker 9: that have spent their capex that have increased their spending
Speaker 9: on AI, not the ones that have been conservative. Your
Speaker 9: Apple and Amazon haven't.
Speaker 4: Outperformed, right, and Vidya the best performer.
Speaker 9: I mean, Nvidia is not the one who is putting
Speaker 9: capex dollars. But look at you know, Google, they I think,
Speaker 9: so that's where I do think the market is still
Speaker 9: rewarding companies that are spending on AI. And if you
Speaker 9: have been conservative and just focused on margins, you're multiple
Speaker 9: has shrunk. And that's the sort of mood we are in.
Speaker 9: So my feeling is you will see this earning season
Speaker 9: also reward companies that show higher AI revenue growth, even
Speaker 9: if they have large businesses. If that AI component is accelerating,
Speaker 9: you will see multiples expanding, and that's where there is
Speaker 9: scope to be positively surprised.
Speaker 4: Our valuation is too high though.
Speaker 9: I mean you could argue that, you know, in certain
Speaker 9: pockets for maybe the index as a whole, but when
Speaker 9: you look at individual companies, I go back to mag seven.
Speaker 9: These are wonderful businesses that are investing in AI, which
Speaker 9: everyone deems, you know, will have high usage. The question
Speaker 9: is how will they monetize and if they can answer
Speaker 9: that question in terms of, you know, how it monetizes
Speaker 9: over time, not in the next twelve to twenty four months,
Speaker 9: but over time, I think investors will be happy.
Speaker 8: Now, of course, part of the jitters around this weather
Speaker 8: AI is in a bubble and all that is really
Speaker 8: this idea of concentration risk, right, And the fact that
Speaker 8: more and more gains and the S Top five hundred
Speaker 8: and the US equity market in general are being driven
Speaker 8: by such a small number of companies. Is that something
Speaker 8: that investors really need to be worrying so much about when,
Speaker 8: as you say, at the moment, demand for these companies
Speaker 8: products and services is still far outstripping the supply.
Speaker 6: Yeah.
Speaker 9: So I mean again the pigs and shovels trade has
Speaker 9: carried on. Now we are in that phase where the
Speaker 9: LLM frontier models are you know, clear which ones are
Speaker 9: those and which ones have the lead. And now it's about,
Speaker 9: you know, how the other software companies adapt in terms
Speaker 9: of using these models as a distribution and making sure
Speaker 9: they can thrive in the world where llms are also
Speaker 9: part of the tech stack. So we'll start to see
Speaker 9: that pan out over time. Not every company will be
Speaker 9: as dominant as they used to be But then the
Speaker 9: businesses that end up using LLM as an intelligence layer
Speaker 9: and continue to show positive surprises, I think you will
Speaker 9: see a rerating in their multiple Well.
Speaker 8: Thank you so much, Mandeep, as always for providing us
Speaker 8: with your excellent insights into this space. Now, for more
Speaker 8: insights from Mandeep and the Bloomberg Intelligence team, make sure
Speaker 8: to check out their Tech Disruptors podcast that features conversations
Speaker 8: with thought leaders and management teams on disruptive trends in
Speaker 8: the tech world, covering everything from AI, to EVS, to
Speaker 8: VR and beyond. Find it at Apple, Spotify, or wherever
Speaker 8: you get your podcasts.
Speaker 6: Stay with us more from Bloomberg Business Week Daily coming
Speaker 6: up after.
Speaker 1: This listening to the Bloomberg Business Week Daily podcast. Catch
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Speaker 4: We need to move over into the land of banks.
Speaker 4: I mean, earning season is just around the corner. You blink,
Speaker 4: and here we are again. Let's talk about banks, Christine,
Speaker 4: I think that would be such an interesting discussion here
Speaker 4: for our viewers. We're joined, of course, by Herman Chan.
Speaker 4: He's a senior analyst for US regional banks at Bloomberg Intelligence,
Speaker 4: and he is here with us happily in the Interactive
Speaker 4: Brokers studio.
Speaker 5: Bridge down.
Speaker 4: This deal that's going on right We've got Third, This
Speaker 4: is an eleven eleven billion dollar deal, sparking hopes for
Speaker 4: a bank merger wave. Is there a wave?
Speaker 5: There's a bit of a crust right now.
Speaker 10: I would say that this deal with Fifth Third and
Speaker 10: Commergan comes on the heels of a few other large
Speaker 10: regional bank deals. P and C's buying First Bank, which
Speaker 10: is mostly in Colorado and Arizona, and then Huntington's also
Speaker 10: buying a smaller competitor to Camericas in Texas as well
Speaker 10: in Veritech. So you're seeing some percolating activity. A lot
Speaker 10: of that is really driven by deregulation efforts under the
Speaker 10: Trump administration. That's encouraging more banking M and A. And
Speaker 10: also the secondary factor is bank stock prices have improved,
Speaker 10: so they've got the currency to do deals.
Speaker 6: I talk to us.
Speaker 8: About this wave right of just mergers in particularly in
Speaker 8: the regional banking sector. It wasn't too long ago that
Speaker 8: you know, we were having issues in this particular space
Speaker 8: talking about a couple of years ago. Now fast forward
Speaker 8: to this sort of environment where there are a lot
Speaker 8: of active deals. Do you think that this kind of
Speaker 8: helps mitigate some of the concerns that we got from
Speaker 8: that regional banking crisis from a few years right.
Speaker 10: So, one of the key lessons from the SBB failures
Speaker 10: that also toppled First Republic and Signature was that deposits
Speaker 10: are the lifeblood of banks and you really need to
Speaker 10: protect those deposits during events of uncertainty because the positive
Speaker 10: flight is real. That's really what took down SBB, and
Speaker 10: this deal with Comerica and Fifth Third is a direct
Speaker 10: reflection of that. Well, come America really didn't have the
Speaker 10: same deposit flight as SVB, they did have some, and
Speaker 10: it really showed the need to have a more diversified
Speaker 10: deposit base, i e. More retail deposits that fall under
Speaker 10: the FDIC insurance so there's no reason to take your
Speaker 10: money out of the bank.
Speaker 5: And that's really one.
Speaker 10: Of Fifth Third's key expertises is their consumer banking in
Speaker 10: branch banking expertise, and that's that's driving some of that
Speaker 10: merger activity that we're seeing today.
Speaker 4: So taking a look at your report that you recently wrote,
Speaker 4: you see that Camerica's management missteps and structural weaknesses in
Speaker 4: its funding profile have hindered the top line trajectory and profitability.
Speaker 4: Here are these risks that Fifth Third can afford to
Speaker 4: be a exposed to.
Speaker 5: Yeah, that's that's a good question.
Speaker 10: What's what's great is that, through the magic of bank
Speaker 10: merger accounting, when when these deals happen, you get to
Speaker 10: reset on day one. So so the issues that affected
Speaker 10: co America are are effectively less of an issue for
Speaker 10: for Fifth Third, And so they start off with the
Speaker 10: clean slates and they can manage their rate sensitivity and
Speaker 10: asset management liability without some of the legacy issues that
Speaker 10: that co America had, both on the funding side as
Speaker 10: I mentioned earlier, but also on the swap side, where
Speaker 10: where they added some ill time swaps that really hindered
Speaker 10: them when rates were staying high.
Speaker 8: Yeah, and what do you make of the equity reaction
Speaker 8: or I guess like the investor reaction to this. Is
Speaker 8: this a deal that you know, as you mentioned, you
Speaker 8: know there's some synergies here or some benefits, particularly for
Speaker 8: coo America, But what are we kind of gleaning from
Speaker 8: the immediate reaction industry to this.
Speaker 10: Yeah, I think that the immediate reaction is is there
Speaker 10: going to be more ahead? I think the analyst community
Speaker 10: and the investor community understood the reason why COO America
Speaker 10: was sold, and particularly why they chose fifty third as
Speaker 10: a partner, so it makes sense that that would happen. Really,
Speaker 10: is there going to be more consolidation ahead? There are
Speaker 10: a number of regional banks around the same size as
Speaker 10: the Third and PNC and Huntington banks, like Regions and
Speaker 10: M and T and Citizens, and that's going to be
Speaker 10: a big topic on the three Q earning skalls over
Speaker 10: the next couple of weeks.
Speaker 4: Is there more room for consolidation? I mean personally when
Speaker 4: I think, I feel like we have so many regional
Speaker 4: banks here in the US, and you can inlighten me
Speaker 4: as to how that compares globally, But we have so
Speaker 4: many regional banks here. Is there more room for mergers
Speaker 4: some consolidation trinking here?
Speaker 10: There is? There's about forty five hundred banks in the
Speaker 10: United States, and so is.
Speaker 5: There really a need for that many?
Speaker 10: I would say no, And so there's going to inevitably.
Speaker 5: Be con consolidation. These smaller banks.
Speaker 10: They not only have to compete with these regionals that
Speaker 10: I'm talking about, but also the largest banks in the
Speaker 10: United States like Chase and b of A that are
Speaker 10: expanding organically and opening up branches in areas like Alabama
Speaker 10: and Mississippi and Pittsburgh and Washington.
Speaker 2: D C.
Speaker 10: And And the fintech challenge is real. You've seen FinTechs
Speaker 10: come in and really take share banks. FinTechs like Chime
Speaker 10: and so far are really gaining a lot of new
Speaker 10: customers and to the to the detriment of banks big
Speaker 10: and small, So it's harder to compete. And then you
Speaker 10: have the technology and compliance issues that all banks have
Speaker 10: to deal with because of the regulations that they have
Speaker 10: to adhere to. So it makes for a really tough
Speaker 10: operating environment. And so that's something that that is pushing
Speaker 10: a lot of banks.
Speaker 8: To Yeah, well, we're of course kicking off earnings season
Speaker 8: and next week with the biggest Wall Street banks reporting.
Speaker 8: What are you in particular looking out for when that starts.
Speaker 10: Yes, so the largest Wall Street banks kickoff next week.
Speaker 10: I think a lot of it will be what's happening
Speaker 10: in capital markets driving trading activity, fixed con ecruity trading
Speaker 10: activity IPOs have been really picking up over the past
Speaker 10: several months, so that's something that bodes well for the
Speaker 10: capital markets activity. And also on the lending side, commercial
Speaker 10: lending has been pretty strong, particularly lending to non bank
Speaker 10: financial institutions, and so it seems like there's some positives.
Speaker 10: And also the interest rate high cut that happened in
Speaker 10: September should help on the deposit funding side as well.
Speaker 4: And I mean, you mentioned the rate cut that we
Speaker 4: just had. What about this October? I mean, are you
Speaker 4: if there is one right leading this October? Does that
Speaker 4: change your thinking at all?
Speaker 10: Yeah, So it's interesting banks typically will be able to
Speaker 10: reduce their funding costs that they cut their deposit rates
Speaker 10: for their depositors, so that's an immediate benefits. On the
Speaker 10: other hand, there there's still some uh some juice left
Speaker 10: with a lot of the fixed rate assets that the
Speaker 10: banks added onto their balance sheet when rates for zero,
Speaker 10: So those are actually repricing still higher today and so
Speaker 10: there there's some really positive sort of dynamics going on
Speaker 10: for for banks netter just income, so that'll continue to flow.
Speaker 5: Through over the next several quarters.
Speaker 8: Yeah. Well, I mean, yeah, given that what we've seen
Speaker 8: from the Federal Reserve though in their potential for the
Speaker 8: rate US this year. I mean, just generally, is the
Speaker 8: rate conversation still relevant for banks or has that been
Speaker 8: overtaken by just the deal BLENANDSA that we've seen over
Speaker 8: the last quarter.
Speaker 5: Yeah, that's that's a good question.
Speaker 10: Rain banks are are naturally reflecting the rate environment and
Speaker 10: how their positioned for rate changes. A lot of the
Speaker 10: banks have really hedged their exposure, so there's less of
Speaker 10: variability going forward for a lot of the banks that
Speaker 10: I cover, so that that's helpful. They've already taken some
Speaker 10: of the hits on their negatives incombine by adding these
Speaker 10: swaps and insurance on their on their balance sheets.
Speaker 5: And then I think the real, the real.
Speaker 10: Positive aspect of my coverage right now is just there's
Speaker 10: more M and A activity that really gets the juices
Speaker 10: flowing from analyst investors. And it's really good to see
Speaker 10: after the Biden administration, because it seemed like the prior
Speaker 10: administration really did not have a positive view on bank
Speaker 10: m and A and it's been a real one eighty
Speaker 10: from from the current administration and that's why you're seeing
Speaker 10: more activity today.
Speaker 4: I'm looking at the BKX index. Actually quickly KBW regional
Speaker 4: Banks down one point two at the closing bell, Christine, Wow.
Speaker 8: Yeah, Well, I mean a lot to look out for
Speaker 8: them when it comes to M and A deals. But
Speaker 8: thank you so much once again to Herman Chand, who
Speaker 8: is our senior analyst for e US regional Banks from
Speaker 8: Bloomberg Intelligence.
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