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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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 six to nine am 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 out with stocks and crewed rising as Wall Street searches for stability. Pintercheer of Academy writing, many of the inflection points have demonstrated a clear direction to which way they are headed. But with everything going on, expect more downside for markets. Pete joins us now for more. Pete, good morning. What's the source of that downside risk for you this morning?

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Speaker 3: You know, I think it's rethinking of what's going on with the AI spend.

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Speaker 4: That's a big part of it.

00:00:57
Speaker 3: Right Our company is going to continue to spend where we see any slow down, and at the same time we kind of talk about these moments out of China. I'm wondering if what we're starting to see is just a flood of cheap compute, right? Is China going to flood our markets like they did with trinkets back in the early two thousands.

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Speaker 4: Have they built up enough compute?

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Speaker 3: It's not as good as ours, I don't think, and they distill it from our models probably which helps on their costs. But the reality is they have the electricity grid, they have enough chips, and they seem to be able to flood the our market. I would not be using Chinese compute, but a lot of people might, so that to me, I hadn't really thought about that until in the last couple of weeks, and it's coming more and more in conversations. That's my concern is real cheap competition from China circle what we saw back in the two thousands, where they just flood our market and it slows down our built.

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Speaker 2: There's a whole body of literature on the so called China shock from that time. If we have another China shock, what would it mean for the bank drop, for the economy, and for Marcus.

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Speaker 4: I think it would be awful.

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Speaker 3: Just my best comparison right now is probably look at byd Automobile in Europe. I was in Ewurop last week. I had to go check out one of the showrooms. They're interesting cars. They are now dominating salesman, right so they are eating away at stuff.

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Speaker 4: Does that come to us? I don't think it should.

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Speaker 3: And the other problem I didn't really mention is, you know, I think the concept of not in my backyard does not exist in China. I don't think anyone would say, oh, you can't build that here with any expectation that wouldn't happen. And you're seeing that really grow in the US. It's I thought it might be a twenty twenty eight issue. It's coming quickly.

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Speaker 1: You said that the risk is that it would slow the build of compute in the US, which is kind of exactly opposite of what some people are expecting from earnings. They're expecting the market to potentially reward companies for reducing their CAPEC spend on building out compute. Do you see it differently.

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Speaker 3: I think the companies that may reduce their spend and get rewarded, you know, the debt diet sort of companies, they might do well. But what's that going to do for the picks and shovels, right, all the companies that were flying into this, And again, I think it's very dangerous for the economy as a whole. For the last years, so we've been looking at this kind of as a two part economy, the non AA part and the AI spend part. So if you got any slowing down on that, the construction that goes with that, all the things I think would really hurt the economy.

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Speaker 1: Right now, a lot of different analysts are trying to split up the mag seven. They're saying the mag seven's dead. There isn't such a thing anymore. That tech is being segmented into different segments and you're seeing rotations through them. Is that a positive? Is that a negative? Is that a bear sign? Is that just a natural evolution where everything is AI.

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Speaker 4: I think it's a natural evolution.

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Speaker 3: And look at Apple for example, Right, Apple did not invest a ton of AI, right, they would kind of let the market develop.

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Speaker 4: Their stock's doing high. I believe they're just off all time high.

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Speaker 3: So the market's trying to figure out who's winning, who's losing, what's priced in Ken I was really excited about earnings about two weeks ago into what we've seen, and I go back to Micron awesome earnings, right, great guidance, two three years of chips sales, all those things were right. Stock went up, and it's given it all back and then some. So I think people are now thinking about not this quarter's earnings, not even like next years where we headed two three years down the road. And for the first time, I think there's some question will there be competition? Are people even in the US trying to create alternatives? And you know what we've seen in these sorts of cycles, you get these parabolic moves up, any of whose barriers kind of has to be quiet, duck their head, and all of a sudden people can feel a little bit more comfortable.

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Speaker 4: And I'm still waiting for more and more CEOs to.

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Speaker 3: Say we love AI. It's really helped our company. My sense is people are starting to feel some pressure on the token utilization. Everyone used to have these leaderboards and the more you spend on tokens, Hey you're the best person here now, people, so what exactly do we get that?

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Speaker 4: So I think we are due for.

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Speaker 3: A bit of a pullback, and some of it will come with allowing the more negative or concern narrative to play through as well.

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Speaker 5: We saw some of that concern when it comes to at least policy in the gubatorial races for New Jersey and Virginia. It was all about electricity prices this year, especially with the moratorium in New York. It's about data centers, not in my backyard. How much of a political risk is there to this trade.

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Speaker 4: I think there's a decent amount.

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Speaker 3: I think you're seeing kind of this not building in my backyards kind of step one. Again, there are lots of states that want this business.

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Speaker 4: You want it.

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Speaker 3: But my bigger concern this is probably more down the road, is you could start seeing some sort of windfall tax, some sort of tax you know people by Again I hate the concept of universal basic income. But you're seeing this play chatter about this in South Korea, and I could see some group of politicians saying, you know what, you guys make too much money.

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Speaker 4: We're going to tax you.

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Speaker 3: We're going to do something, and that would really be bad for stocks. And again, I think we need our data centers, we need this for national security.

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Speaker 4: We should be growing it.

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Speaker 3: I think the industry has to do a better job communicating the need and that they're good for us, and they have not done a good job. So I'd like to see this, but I think the risks are there and real.

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Speaker 2: I'm going to ask you a question based on the title of some research from Jonathan Krinsky of BTIG. Do you think a high correlation accident is brewing?

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Speaker 4: Care? I could see that.

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Speaker 3: So one of my concerns is we've been talking some people and if you think about various factors, right, you have momentum, you have all these factors, and you know, a lot of the really best hedge funds kind of run their positions based on these factors, and they're trying to organize it. And one of the sens I get is AI is starting to creep into a lot of these factors. So you think you don't have an AI exposure, but you do, And so all these things have become very correlated. And I would add that market structure to me is just off. I hate all these triple leverage gtfs. I think like eight or nine leverage ETFs on SpaceX alone, it's only out two weeks, Like why do we bother with single stock leverage socks? L SOXL is a twenty billion dollar triple leverage ETF. You have zero DA expiration options, weekly options. So yeah, I think when this happens, it can happen really really fast. We saw a bit of it last week. I think maybe we had a bounce. People are looking at the learnings, but the next wave I think could be fairly ugly.

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Speaker 4: So I like that phrase, the high correlation train record.

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Speaker 2: Whatever accident potentially potentially potentially a question to make train rereck Potentially we've got to ask. Yeah, that's another way of looking at it too. Look, everyone's exposed to AI, even if they don't think they are, because you're either exposed to the spending directly or the wealth channel. Elisa was half joking, but she was right last week when you were asking the airlines whether they're an AI trade as well, because of the amount of spending coming from very particular places that are built off the wealth being created by all this AI spend.

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Speaker 1: Where's the business fend coming from. It's coming from defense. A lot of it is tied to AI as well as the financial sector because everyone's flying around trying to get the business at a certain point, even if it's not necessarily directly tied to it, everyone feels a lot better be CU stocks are going up. You also start to wonder how interconnected emerging markets are, say to the United States, in ways that they just haven't before, and how much volatility can be introduced given the lack of understanding of where we're going in the.

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Speaker 2: Next So wee get earning is a thing from Eskhonis in the next week, yep, And I was looking at the calendar. I was thinking, Okay, that's a risk event for US markets, isn't it earnings from a South Korean company? Now? A few years ago that was absolutely unthink about.

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Speaker 4: But that's why we are again. I think a lot of things been tied.

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Speaker 3: And again I don't We're always going to pay some attention to South Korea, but we get a little bit more looped into this. And again, you know, we have all these leverage ETFs. The Koreans have all sorts of these leverage products, right And my one thing, I'm starting to pay a little bit attention. If you kind of watch you had, I would say the really gambling sort of crowd love crypto. They were in that sort of space, and it looks like they shifted their attention much more to the tech and AI build out quantum, and if that set of money pulls out at the margin, that's a reasonable chunk of money. And you're starting to see some inflows into crypto again, so maybe people are going to reposition where they get their most bang for the bus.

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Speaker 2: So this still sounds superbarish. So how do we find that hedge to that high correlation accident? If it materializes, where do I go?

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Speaker 3: You know, right now, I think you want to be a bit in Europe. I think you want to be in the companies that well.

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Speaker 1: I know it's kind of scary to say it's the anti AI trade, it's hysterical, okry on well actually, and it's also their design to build out their own things, right.

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Speaker 3: I think just today I was coming in Bloomberg, Grady was talking about Bezos making an investment in a European AI come So I think Europe is finally starting to get the joke again. They'll probably screw it up a couple more times, but they have to make their own things, they have to get their own electricity. It'll be really curious to see what the new Prime minister does in England. I think they should be releasing BP. They should be doing these things with the North Sea, they should be really expanding their energy base. And I think Trump came kick the hornets nests and said everyone's got to do more of their own thing and buy us. I think companies countries are starting toak, Yeah, we should do more of our own things and become vertically integrated. We're not going to buy as much US, so I think that creates opportunities, particularly in Europe. I actually think Canada is probably decent on that front. Carnei's I think been playing tough, has been rewarded for that, so I would say and even in the US, the grid needs to be built out, even if we slow down data. I think anything that's you know, we've sold off a little bit in the electricity in the grill build I think that has to be done regardless of how.

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Speaker 4: The AI spend goes. So I like that sector as well. Here stay with us.

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Speaker 2: More Bloomberg surveillance coming up after this. So here's the latest this morning, the US conducting a ninth straight dev strikes on a run following the deaths of three service members over the weekend. The run in Foreign Ministry confirming the receipt of mediator proposals earlier this morning? What does the OFFERMP look like? HENRITA trace a vader partner's writ in this IRGC control of For most, it's worth more to turn round than a warhead. It is a weapon. They can deploy, it will and then deploy again. Expect escalation rather than resolution in the days and weeks ahead. Henrietta joins a snap for more. Henrietta, good morning and good to see you here in New York.

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Speaker 6: Great to be with you.

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Speaker 2: What does a solution look like? Given the quote I've just read from.

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Speaker 6: You, I think that we are on day nine of what will be a pretty expansive protracted engagement on the military front. I am discomforted. I guess is the word to use by the frequency with which I hear administration officials and those in the tertiary military space talk about boots on the ground, carg Island escalating militarily. The reality remains that the port authority of the IRGC is just simply unacceptable to the Western banking world. Whether you're an insurer or a taker getting through or JP Morgan trying to do business with any industry that wants insurance or wants to deal in getting flow through the Strait, So it's as long as that's unsustainable and incompatible with the Western economy, we will be at war.

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Speaker 5: They're moving some more war plans to the Middle East. We also have Secretary Hegseth and Joint chiefs of Staff General Kaine speaking to the Appropriations Committee tomorrow and Congress. We're going to get more funding for this war.

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Speaker 6: Not anytime soon, and I think the timing is really important to watch, especially when you think about what the US can sumer or any consumer is going to be dealing with in gas prices. So the sequence of events is helpful to follow here. House members are going to be in session for the rest of the week. It's going to look like there's progress on getting Pentagon funding out the door, but really then they're going to leave for five weeks. The state is nowhere on the reconciliation bill. My odds of passage are thirty percent at best. The only reason I'm that optimistic, though, is because think about how much longer this war is going to escalate. To John's point, and the sort of the military component that you're talking about is we're going to be in this until the end of August jd Vance's sixty day window is what August twentieth I want to say. So we'll definitely bump up again that we'll have no stimulus from the Congress side, and then they'll come back in September, and if the war is still raging, gas will be four fifty six again, which is where we saw the President call off the war last time, and the single most effective way to get Greats down was to stop the war. So as we're way out into September and even October and heading into the election, there's going to be option now for a stimulus bill, for some funding for the Pentagon, maybe a gas tax holiday. Those are options that exist, but not for months.

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Speaker 5: With the House and the Center and session this week and they won't together be back in session, to your point, till the middle of September, Right, will they need to do something before September? If we're dealing with above four dollars a gallon gasoline.

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Speaker 6: That's a possibility. But I think you'd have to get up to four fifty like this week in order to have them move in order to cancel the August recess. They just don't do that.

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Speaker 4: You guys know that as well as I do.

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Speaker 6: They don't cancel the August resets. It's inviolable, So as long as they want to get out of town, they won't be doing anything.

00:12:33
Speaker 1: So none of the War Powers Act, or any of the potential or legislative constraints on what President Trump can do in Iran really comes into.

00:12:42
Speaker 4: Play when they're on vacation.

00:12:44
Speaker 1: Is that the issue that essentially that's not even up for debate and potentially isn't even a constraint later on.

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Speaker 6: That's definitely the case right now. I mean, there's a couple events that are happening at the end of this week, the presidents to decide what to do on tariffs, so I find that that is important to be mindful of. I know the street is exhausted of tariffs. I'm sorry, I'm not The tariff authority is going to be available to the president at the end of this week if Jameson Greer has done his job correctly, because the Section one twenty two tariffs expire. So if you're mad at Spain, if you're mad at France for not sending enough anti mind capability, so the UK or anybody, this is your opportunity to make a choice, do you want to keep penalizing everybody the way that you're doing with Iran and go to effectively a tariff war with those nations and ask him to get involved in the Strait and whether it's peacekeeping missions or military missions, this is your opportunity, and he has that chance this Friday.

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Speaker 1: Is there a sense that President Trump will go hard on some of these tariffs at a time when the Iran war is escalating and he's looking for a greater alliance cooperation to potentially fight back some of the IRGC actions in the Strait of Remos.

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Speaker 6: I think it's a glaring absence and has been since the war was announced, and the sequence of events is really fascinating to think through. The Supreme Court took away the president's tariff authority on February twentieth, and we started bombing on the twenty eighth. That is just so noticeable throughout the entire duration of this military war, the fact that the President hasn't been able to say, you will come with me to the street, you will help me in the street, unless where else I'm going to tariff you. You know, we saw that through all of twenty twenty five. I don't like your digital services tax boom, you get one hundred percent tariff. Here, we have the same kind of thing, and he just doesn't have the authority. He will have that authority come Friday.

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Speaker 2: Stay with us. More Bloomberg surveillance coming up after this alphabet kicking off those earnings later this week for the hyperscantus investors of course, looking for that justification for AI spending. Ron Jose of City expecting CAPEX projections for next year to reach over eight hundred billion US dollars, writing, we believe this is by far the top focus into two Q earnings, given continued aim around and rising component pricing run joined just now for more, Ron, let's get into those numbers. Are you seeing any market based pushback that would lead to a rethink of CAPEX intentions from some of the big players.

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Speaker 4: At this point? Not really.

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Speaker 7: I mean that's the biggest question going into earnings, as we just talked about. You would think if there was more pushback, I think the equity would actually come back a little bit more than they are. Frankly, right now, we are waiting when Google announces on Wednesday. We're waiting for them to really reassert their strategy and where they want to go, meaning that we have delays on Gemen on some of their models like Gemini three point five pro, we've seen some issues where they're sort of falling behind on other things, and so we really want to see is what are they going to do with all these all this capex is being spent, And as he said, we just raise our numbers because we think there is a strategic acid involved. If you've got the compute, if you've got the intelligence, and really the energy as well, and that Google's really racing to have. So well, if you have those three, yeah.

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Speaker 2: I'm just want to jump in because different companies are doing different things with that compute capacity, and Meta is an interesting example of that. Just on Friday into the weekend, we have the New York Times leading reporting that they're looking potentially to least computing power from its data centers to the likes of Anthropic. Do you expect to see more of that kind of opportunistic move from the likes of Meta maybe others?

00:16:22
Speaker 4: Two, Well, I.

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Speaker 7: Think if you have and I don't want to use the word excess capacity because I'm not too sure there's excess capacity out there everywhere. Everyone we talk to everyone, we sort of have conversations with talk about determined satiable demand and the demands there and it's outstripping the supply. With that said, if you're meta, we've been a little bit delayed in terms of their personal superintelligence or meta super intelligence strategy. And so if in fact they do have these eight gigawats of power, maybe going to fourteen over the next year or so, and they have extra power available, I think they're looking around and seeing, well, maybe we can actually get some dollars back or subsidize some of the costs that we're doing with our capacity and compute that we've built out. So I think we do see more of this, assuming there's capacity available, and maybe that is the best one to do that simply because we're waiting for these new products to come out, and you know, when these products come out, rarely is it a big bang where you launch and then you have demand that exceeds capacity. It probably takes a little bit of time to adopt it.

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Speaker 1: Is there any way that these hyperscolers in particular, can show return on investment that would make an increase in capex beyond expectations worthwhile for the market?

00:17:31
Speaker 7: Well, we're looking at two things. Really really, if you're talking about Google here the next week or next couple of days, I think there's like three things that we're looking for. Of course, we're looking for Google Cloud revenue growth. We're looking as part of that their backlog or commitments in terms of pretty much guaranteed spend over the next couple of years, and that's a number that's been growing incredibly strong over the past couple years. Frankly, that helped highlight what is the demand for Google Cloud and really the demand for AI. But then we have on the Google others side which is there, which is Google Search, and we think Google Search can grow seventeen percent this quarter. It's growing because of these AI investments, because of their investments in Gemini, and frankly, people are searching more. So if you're Google and even Meta for that matter, you're building on both and Amazon. You're building the consumer side, but then also have this massive opportunity on the B to B side, and that's something we're looking at as well. Right, So that's the commitments, that's the revenue for Google Cloud, and that's of course the core of Google properties business.

00:18:31
Speaker 1: Do you suspect Ron that we're going to see or that we already have seen signs the truly Chinese tech companies have started to cannibalize from US tech companies, whether it's in models, whether it's in compute, whether it's in international clients. I mean, are you getting any sense that that actually is coming to fruition?

00:18:50
Speaker 7: Well, I think one thing that's absolutely coming to fruition is the fact that these open source models are now weeks or months away from the frontier models, and we are absolutely seeing a compression of timeline of new models being launched. And these models you say to be our frontier models, are second to none. And so what we're seeing for sure is the open source movement is absolutely catching up at a faster pace, which is certainly causing us and everyone on the street to say, Okay, we're investing all these dollars and intelligence and compute and energy, yet for only to be copied down the road, or not copied, but frankly followed. And so that's going to be a key theme in topic, I think on Wednesday and also into next week with meta Amazon numbers, this is.

00:19:31
Speaker 2: The Bloomberg Survendics podcast, bringing you the best in markets, economics, an Gio Politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business opp