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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amerie Hordern. Join us each day
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Speaker 3: Stoxslawer Is Investors wait a crucial week of data, Alistair
Speaker 3: Pinder and the team at HSBC setting their twenty twenty
Speaker 3: six S and P five hundred target at seventy five hundred.
Speaker 4: Writing.
Speaker 3: AI has carried equity markets throughout twenty twenty five. We
Speaker 3: believe it will drive both equities and credit in twenty
Speaker 3: twenty six, though in different ways. Alistair joins us now
Speaker 3: after a refreshing Thanksgiving brae that all of us cannot
Speaker 3: relate to. But I am curious from your perspective going forward,
Speaker 3: how come you think the AI is going to resurrect
Speaker 3: that kind of lead higher given some of the concerns
Speaker 3: that we've seen recently.
Speaker 1: Well, I think if you look at the performance of
Speaker 1: the market this year, it's been driven by the AI
Speaker 1: infrastructure and you know the AI enablers story, you know,
Speaker 1: going into next year, I think the big narrative for
Speaker 1: markets is how companies are going to adopt AI and
Speaker 1: that's going to drive earnings, and so there's loads of
Speaker 1: data showing this. You know. Some of the ones that
Speaker 1: we like to look is the ramp AI index shows
Speaker 1: forty five percent of companies are adopting AI. One of
Speaker 1: the things that we've been doing a lot on is well,
Speaker 1: what is the actual tangible cost savings from this, and
Speaker 1: so far we think that there can be basically one
Speaker 1: percent of cost cuts going into next year.
Speaker 5: That's one hundred and thirty million dollars.
Speaker 1: We think that can basically be saved going into twenty
Speaker 1: twenty six. And there's this amazing narrative going on right
Speaker 1: now in the market where revenue is increasing, you've got
Speaker 1: nine percent growth. Actually at the same time, companies are
Speaker 1: cutting back on labor and so if you look at
Speaker 1: the warm data from the S and P five hundred companies,
Speaker 1: it's been shooting higher. But this is nothing, absolutely nothing
Speaker 1: to do with them warning about the economy. Actually, their
Speaker 1: guidance earning divisions are you know, close to all time highs.
Speaker 1: So this almost for me feels like a Goldielock scenario
Speaker 1: going with the you know, the AI narrative going into
Speaker 1: next year. And my final thing, if you have a
Speaker 1: little bit of labor weakness as a result of AI,
Speaker 1: then going back to your conversation about the FED, might
Speaker 1: I not keep the FED a little bit more dubvish?
Speaker 1: And now I think again can help support the equity
Speaker 1: market value going into next year.
Speaker 3: Goldilocks for the equity market maybe changing economy.
Speaker 4: Which is a sort of key distinction here.
Speaker 3: I do wonder so this is an argument for AI
Speaker 3: being dominant, But that means the rest of the four
Speaker 3: hundred and ninety three outperforming playing catch up with the
Speaker 3: Magnificent seven.
Speaker 2: Is that correct?
Speaker 5: Right?
Speaker 1: And again, one of the biggest things that we've seen
Speaker 1: over the last couple of years is that actually the
Speaker 1: performance of the mag seven has not been driven by valuations.
Speaker 1: It's all been by earnings growth. And now what we're
Speaker 1: seeing is earnings growth going from roughly thirty to forty
Speaker 1: percent on year into next year probably being in high
Speaker 1: teens and the rest of the market actually catching up
Speaker 1: with that, and so this will be one of the
Speaker 1: first years really since twenty twenty one where earnings growth
Speaker 1: between the mag seven and the four nine three are
Speaker 1: going to be somewhat equal, and so I do see
Speaker 1: much more scope for you know, outperformance for the rest
Speaker 1: of the market.
Speaker 6: What for you will be the telltale sign that actually
Speaker 6: adoption is underway significantly in some of these industries.
Speaker 1: Well, I mean, to be honest, I already think that
Speaker 1: we see that. I mean, if you look at the
Speaker 1: data from some of the consumer stocks that are basically
Speaker 1: saying that we're using AI and becoming much more productive
Speaker 1: in terms of you know, targeted ad sales and whatever else.
Speaker 1: A huge number of companies on their earning schools are
Speaker 1: discussing about how they're adopting AI and actually again replacing
Speaker 1: that you know, labor or freezing labor as a result
Speaker 1: of the higher productivity. To me, you know, we're already
Speaker 1: seeing it from companies and the earning scores. Now us
Speaker 1: to talk about the exit market and the economy. What's
Speaker 1: very interesting is that for the broad economy, I don't
Speaker 1: think we are seeing much productive increase.
Speaker 5: It's really the large cap stocks.
Speaker 1: And so again like where does this AI productivity come from?
Speaker 1: It comes from companies with huge amount of employees that
Speaker 1: need to reduce it. If you're a small company and
Speaker 1: you have ten employees, you're not going to really replace
Speaker 1: that with AI. But if you've got hundreds of thousand employees,
Speaker 1: actually that's where the cost benefit comes from.
Speaker 6: You mentioned that this means maybe the FED then has
Speaker 6: to be dubvish. But how could a FED interest rate
Speaker 6: cut cycle solve the problem of AI.
Speaker 1: In terms of I mean, I mean, it doesn't really
Speaker 1: solve the problem of AI at allah labor layer, Yeah exactly,
Speaker 1: I mean, it doesn't solve this really, but it does
Speaker 1: reduce some of the pressure on the labor market in
Speaker 1: the near term, right in terms of reducing uh, you know,
Speaker 1: credit costs, reducing interest rates, reducing some of that burden
Speaker 1: on the low income consumer. And of course it is
Speaker 1: the low income consumer particular which has been hardest hit
Speaker 1: by higher interest rates, given that they have more of
Speaker 1: their debt in sort of floating rate debt products like
Speaker 1: you know, auto loans, credit card loans rather.
Speaker 3: Than mortgages at this point, it sounds like everyone's banking
Speaker 3: on stimulus coming from the fiscal side, with potentially two
Speaker 3: thousand dollars checks or whatever else comes from the tax
Speaker 3: refunds that we get in January. We're expecting monetary stimulus
Speaker 3: when it comes to FED rate cuts, possible use of.
Speaker 4: The balance sheet.
Speaker 3: I just wonder if this makes the US a less
Speaker 3: attractive place and a sort of currency adjust did basis
Speaker 3: for equities based on some of what we're expecting to see.
Speaker 1: Totally on the physical side, totally, I totally agree with that.
Speaker 1: And actually, you know one thing that I think the
Speaker 1: market is missing a little bit is it's not just
Speaker 1: stimulus that's coming out from the US. Actually, you know,
Speaker 1: China has just done a one point for trillion dollar
Speaker 1: debt swap. Germany is coming in with one hundred and
Speaker 1: fifty billion dollar stimulus next year. Japan is seeing up
Speaker 1: one hundred and ten billion dollar stimulus next year. So actually,
Speaker 1: what you could see is that you get a huge
Speaker 1: global wave of stimulus. As you mentioned, Actually the dollar
Speaker 1: starts to weaken and the rest of the world starts
Speaker 1: to looking very attractive, particularly because valuations are at a
Speaker 1: thirty forty percent discount even on the AI place you
Speaker 1: go to Asia, you get on an AI discount there
Speaker 1: in Europe less so, but you still got places like
Speaker 1: Germany which are seeing fourteen fifteen percent earnings growth and
Speaker 1: evaluation of fourteen to fifteen times earnings. To me, that
Speaker 1: seems quite attractive at this point.
Speaker 6: So what equity markets do you like? Germany and Asia
Speaker 6: plus the United States?
Speaker 1: So we are overweight emerging markets that includes Asia Latin.
Speaker 1: I mean, that's all due to you know, huge decreases
Speaker 1: in cost effect in interestraightcuts. But yeah, Europe Germany also
Speaker 1: stand out as our key overweights, and the US were
Speaker 1: neutral one. And a part of that really is because
Speaker 1: if I was going to get my AI kind of
Speaker 1: tech play, I'd actually rather do it with emerging markets
Speaker 1: rather than the US at this point, again, just from
Speaker 1: that valuation perspective.
Speaker 6: Lisa mentioned was coming out of Washing in terms of
Speaker 6: the fiscal stimulus, how are you thinking about the potential
Speaker 6: tariff impact, whether it's the United States or globally because
Speaker 6: we're still waiting on the Supreme Court decision on the
Speaker 6: President's signature tariff.
Speaker 1: Yeah, I mean, I think that is one of the
Speaker 1: aspects that worries me the most going into next year.
Speaker 1: So I mean, you know the three risks obviously AI bubble,
Speaker 1: and you know, the thaid being more hawkish, and we
Speaker 1: kind of discussed that the tariff on and I just
Speaker 1: don't think we've discussed it enough. I think everyone thinks
Speaker 1: that we've moved past tariffs and that's never going to
Speaker 1: come to buy. I do think there's been a lot
Speaker 1: of stocking up on inventory, and I do think we're
Speaker 1: starting to see incremental signs of inflation actually come through.
Speaker 1: We haven't had a lot of inflation data, and I
Speaker 1: suspect actually, when we get it, what we're going to
Speaker 1: find is that actually, particularly in the good side, there's
Speaker 1: been a lot ofishing up there, and so I do
Speaker 1: wonder whether that starts to eat a little bit into margins.
Speaker 1: But this is where I could say AI comes to
Speaker 1: save the day, because on the one hand, if you're
Speaker 1: a company and you're facing higher costs, actually, I think
Speaker 1: the big incentive as a company right now is Okay,
Speaker 1: why don't we adopt AI and try and reduce cost
Speaker 1: savings that way, And so much like COVID was right,
Speaker 1: one of the biggest forces of innovation adoption for companies.
Speaker 1: I actually wonder weather taris is one of the biggest
Speaker 1: forces of adoption of AI this year and next year
Speaker 1: because it forces people to become more productive.
Speaker 3: Does it make you nervous if nobody else is parish?
Speaker 1: I mean I talk to people that are bearsh I
Speaker 1: think you know, I think you know, I think you
Speaker 1: can speak.
Speaker 3: Are they enacting their bearish beliefs or they just sort
Speaker 3: of feel negative?
Speaker 1: I think theo's are two things. I think the cell side,
Speaker 1: you know, including myself, is quite bullish. I think when
Speaker 1: I speak to investors, they're clearly a little bit worried
Speaker 1: about this. I think there's there's definitely you know, every
Speaker 1: room that I walk into it is are in an
Speaker 1: AI bubble? You know, that is the number one concern.
Speaker 1: And then again, actually this conversation about the impact on
Speaker 1: lead the consumer role over more aggresively next year is
Speaker 1: probably the second biggest concern for people's investors at this point. So,
Speaker 1: you know, do I think everyone's bullish? No. I think
Speaker 1: there's actually a huge amount of money on the sidelines.
Speaker 1: And one of the things that I think is again
Speaker 1: really important here is that this three and a half
Speaker 1: trillion dollars of cash sitting in time deposits, just retail
Speaker 1: investors cash three and a half trillion dollars. And as
Speaker 1: the FED cuts interest rates, that's going to unlock a
Speaker 1: lot of that cash which can go into the equity market. Still, so,
Speaker 1: I still think there's a lot more buying opportunities and
Speaker 1: money to go into the equity markets here.
Speaker 2: Stay with US mult Blomberg Surveillance coming.
Speaker 3: Up after this, Ian hearted of Absolute Strategy Research, writing,
Speaker 3: America is in a race to dominate AI. We see
Speaker 3: this as part of a broader objective to bruce productivity keeping.
Speaker 2: The US is one of.
Speaker 4: The world's richest economies.
Speaker 3: Ian joins US now and I think that the most
Speaker 3: controversial question to you is will at work? Is the
Speaker 3: US stilobastion of returns and safety?
Speaker 7: Well, I think you know what we're looking at is
Speaker 7: an environment where President Trump is determined to win the midterms.
Speaker 7: You know they're going to work whatever they can do
Speaker 7: to avoid recession. I think you know, our chief rates
Speaker 7: economist Ebra Harby wrote a great piece about Kevin Hasset,
Speaker 7: you know, looking at his voting profile that potentially would
Speaker 7: lead to FED rates being seventy five basis points lower
Speaker 7: than they might have been otherwise.
Speaker 4: This is a really yeah, and so.
Speaker 7: You know that's one of the things that we're starting
Speaker 7: from definitely recovery rather than recession.
Speaker 5: I think, Lisa, this is.
Speaker 3: The reason why a lot of people are expecting an
Speaker 3: easier monetary policy, the reason why you're seeing that baked
Speaker 3: into FED fund's futures, as well as the sort of
Speaker 3: optimistic tone for the forgotten four hundred and ninety three.
Speaker 3: Do you think that that is the right way of
Speaker 3: looking at this, that either one way or another, the
Speaker 3: rest of the universe, the equal weighted universe, is going
Speaker 3: to outperform.
Speaker 7: Yeah, that we're certainly expecting that broadening out with seeing
Speaker 7: that in some of the data. But the real question
Speaker 7: that investors have to answer for twenty twenty six is
Speaker 7: this is a really unusual balance, really strong earnings growth
Speaker 7: and expectations of rate cuts that isn't going to survive
Speaker 7: probably the whole of the year. So is it going
Speaker 7: to be the growth in the earnings coming down or
Speaker 7: is it going to be those raid expectations starting to
Speaker 7: get raised Even with a more dubbish FED chair.
Speaker 6: Should we say, well, you think that Ai Capex and
Speaker 6: game is coming and you think there are signs of
Speaker 6: a bubble.
Speaker 7: B Absolutely, the AI is a bubble, you know, and
Speaker 7: so let's in terms of AI stocks and that is
Speaker 7: going to be the problem.
Speaker 5: You know that, But why does it stop?
Speaker 7: And I think the thing that we see is that
Speaker 7: the end of bubbles typically comes because cash flows start
Speaker 7: to get strained, and that can be the cash flows
Speaker 7: of the producers themselves. And we're starting to see that
Speaker 7: cash flow headroom coming down. Our Quarantinum have done some
Speaker 7: great work. But where we're going to see that is
Speaker 7: that it won't be capex that gets cut first. It'll
Speaker 7: actually be buybacks, so watch out for those. But historically
Speaker 7: when bubbles burst, it tends to be that the people
Speaker 7: buying goods the services they run out of cash, and
Speaker 7: that's going to be the thing. So, yeah, AI can
Speaker 7: be a structural story, but are those banks really sicklical
Speaker 7: rather than structural?
Speaker 6: Has it all been exacerbated by the fact that we
Speaker 6: see a lot of circular financing in this space.
Speaker 7: This is a very classic bubble experience. So we're seeing
Speaker 7: all the classic signs. We're getting exponential share prices, the
Speaker 7: companies are using those share prices to buy each other.
Speaker 7: They're buying each other's goods, they're doing it on vendor
Speaker 7: financing that circularity that you're talking about, and then this
Speaker 7: capex blowout as the cost of capital comes down for
Speaker 7: these AI companies, everybody tries to crowd into that space.
Speaker 5: That accelerates the build out. But the trouble is.
Speaker 7: The capex goes on like that and if your sales
Speaker 7: just start to tail off, then the margins get hit.
Speaker 7: That's when the challenge is going to come for this market,
Speaker 7: and that's when we get more of a shop.
Speaker 3: And this is coming up a moment where chat ChiPT
Speaker 3: is turning three. This is the reason why a lot
Speaker 3: of people are wondering is on its birthday, Happy birthday,
Speaker 3: good luck trying to survive for the right next time.
Speaker 3: Three years, there's this question of how much death's been
Speaker 3: built out with data centers tied to chat GPT to
Speaker 3: open AI incurring one hundred billion dollars of debt in
Speaker 3: that period. At what point can you see the overall
Speaker 3: market in US economy continue to grind higher If you
Speaker 3: do have a busting of the AI bubble in a significant.
Speaker 7: Way, I think at that point you'll be looking for
Speaker 7: those interest rates to coming down. But historically, when interest
Speaker 7: rates come down because things go wrong, that's bad news
Speaker 7: for equities. And that's the point where you could start
Speaker 7: to see the change, and that's probably going to be
Speaker 7: later in the year rather than earlier in the year. Actually,
Speaker 7: the biggest risk that we see for AI is that
Speaker 7: energy component that you know if you America has decided
Speaker 7: to use fossil fuel hydrocarbon energy, and that's going to
Speaker 7: be expensive, much more expensive than renewables that China is using.
Speaker 7: And it's also there's something called the food water energy nexus.
Speaker 7: If you want to have more energy for AI, that's
Speaker 7: going to cost you something in terms of water, which
Speaker 7: are going to cost you something in food. Do you
Speaker 7: want to faster search engine or do you want to
Speaker 7: still get you the food on you play? Those are
Speaker 7: the kind of decisions that we're going to see study
Speaker 7: to come to the fore as we see more of
Speaker 7: these issues raised.
Speaker 3: I think, Lisa think it's a great question at this point.
Speaker 3: I think some people, after spending all the time on
Speaker 3: the phone might choose their phones. I am curious from
Speaker 3: your perspective going forward, if this is the little landscape,
Speaker 3: do you think that the chance of a negative return
Speaker 3: on the S and P five hundred than Nasdaq next
Speaker 3: year and a more negative economic outlook in the United
Speaker 3: States looks.
Speaker 4: More likely because that.
Speaker 5: Seems to be what you're describing.
Speaker 7: I think when we go into twenty twenty seven, then
Speaker 7: it gets much more cloudy. You know, you have to
Speaker 7: take that decision about lower rates, a sorry, higher rates,
Speaker 7: or lower earnings. The big thing that we can see
Speaker 7: is that short term, these markets are being driven by momentum,
Speaker 7: they're being driven by liquidity, they're being driven by algorithmic trading.
Speaker 7: Longer term, what we know is that valuations matter, and
Speaker 7: so we just published report recently about the Lost decade
Speaker 7: for investors. If you are really investing for the long run,
Speaker 7: your long run earning equity returns probably about three percent
Speaker 7: over the next decade. That means you're going to get
Speaker 7: most of your returns from income, not from growth here
Speaker 7: and that is going to be the biggest challenge for investors.
Speaker 7: So recognize this as a trading market, a momentum market,
Speaker 7: and AI is a big part of that. Investing for
Speaker 7: the long run, that's a difficult game. Let's go back
Speaker 7: to two thousand. It was the digital age. We're living
Speaker 7: that digital age today. The big players today are the
Speaker 7: big players that they were there, Microsoft, Oracle, Apple, all
Speaker 7: of those companies lost between sixty five and ninety seven
Speaker 7: percent of their value their peak value and took between
Speaker 7: five and thirteen years to regain that value.
Speaker 5: Digital it was the structural story. AI is a structural story.
Speaker 7: But there's the right price to pay for everything in
Speaker 7: the equity market.
Speaker 6: Could put two of your thoughts together, that the Trump
Speaker 6: administration stock and want to see your recession before the
Speaker 6: midterm elections, and this idea that you think the AI
Speaker 6: story is start to fade. How does the Trump administration
Speaker 6: make sure that the AI story does not fade before
Speaker 6: the midterm elections given how much of the equity market
Speaker 6: is propped up by it.
Speaker 7: So I think you've got two leavers that you can
Speaker 7: or a couple of levers that they can operate through.
Speaker 7: First of all, Secretary vest And made it very clear
Speaker 7: that he's very, very keen to keep rates as well
Speaker 7: as they possibly can. You know, so, whether that's the
Speaker 7: new FED chair, whether it's using stable coin to try
Speaker 7: and inflate demand for bills or redistribute the demand for bills,
Speaker 7: then that will be one mechanism. What they have to
Speaker 7: do is to reinflate assets across the economy. The household
Speaker 7: sector needs to take on leverage, the corporate sector needs
Speaker 7: to be encouraged to take on leverage. That's the way
Speaker 7: you get the debt back under control. So what does
Speaker 7: that mean. They're going to be pumping the housing market.
Speaker 7: They're going to be trying to unlock There's thirty six
Speaker 7: trillion dollars of positive equity in houses that can't be
Speaker 7: accessed at the current time. Assumable mortgage is something like that.
Speaker 7: So some kind of innovation, privatization of Fanny and Freddie.
Speaker 7: Those are the kind of things I think we'll see
Speaker 7: up open up. The other thing is crypto. You know,
Speaker 7: they will continue this willingness to lend against crypto to
Speaker 7: keep the economy going. And you know, however they manage that,
Speaker 7: then we will see stay.
Speaker 2: With us mult Bloomberg surveillance coming up after this.
Speaker 3: Private credit concerns continuing to weigh on investors, even as
Speaker 3: losses from defaults are staying low. Amanda Linum of Blackrock
Speaker 3: writing this, we believe the peak and defaults in the
Speaker 3: public credit market is behind us. Amanda joins us. Now, Amanda,
Speaker 3: thank you so much for being with us. Thank you
Speaker 3: for having me. This is the big question, right, how
Speaker 3: much are people pricing to perfection credit at a time
Speaker 3: when potentially defaults are going to inflect upward. There's been
Speaker 3: a lot of issuance in the tech space, and there's
Speaker 3: a feeling that private credit has gotten a little bit heady.
Speaker 8: Okay, So I think there are a couple things to note.
Speaker 8: One is we often get asked in the corporate default
Speaker 8: market or corporate credit market when the peak in defaults
Speaker 8: is actually going to arrive. And what we point investors
Speaker 8: too is the data that actually shows.
Speaker 4: In the leverage loan market.
Speaker 8: For example, defaults peaked in November of twenty twenty four
Speaker 8: at seven point seven percent, which is actually a fairly
Speaker 8: high number. That's using Moody's data issuer weighted trailing twelve months.
Speaker 8: But the point is is that we think the peak
Speaker 8: in trade policy uncertainty is likely behind us.
Speaker 4: We think the peak in growth concerns.
Speaker 8: Is behind us, and we think the peak in debt
Speaker 8: service costs headwinds from higher interest rates is behind us.
Speaker 8: So when you put those three things together, coupled with
Speaker 8: a good enough growth BACKDRUP in twenty twenty six, it's
Speaker 8: hard for us to envision a new peak in corporate
Speaker 8: credit defaults, and again keeping in mind that we've already
Speaker 8: had kind of this flush in twenty twenty four because
Speaker 8: of the high borrowing cost. I think, coupled with that,
Speaker 8: our review for corporate credit, both liquid and private, is
Speaker 8: one of dispersion, but not widespread market disruption, and I
Speaker 8: think that's really the key point to keep in mind.
Speaker 3: So a positive outlook, a constructive outlook, as long as
Speaker 3: you're careful and you don't get some of the bad stuff.
Speaker 3: A real question though about just the spreads are pretty tight,
Speaker 3: but you have had a pretty loose market, and there
Speaker 3: is a feeling that maybe the appetite is waning for
Speaker 3: some of the tech related debt in a sense that
Speaker 3: maybe things have gotten gone a little bit too far
Speaker 3: too fast.
Speaker 4: It's a great point.
Speaker 8: Our view on credit is that if you're owning credit,
Speaker 8: you should be owning credit for income and yield, not
Speaker 8: necessarily because there's room for spreads to move materially tighter,
Speaker 8: and actually not because we think intermediate or long end
Speaker 8: rates are going lower.
Speaker 4: So that's really the view that's.
Speaker 8: A different way of thinking about credit versus past regimes
Speaker 8: when you had kind of a total return boost from
Speaker 8: tighter spreads and lower rates. It's really that income component.
Speaker 8: I would say to your second point part of your question,
Speaker 8: we're not really seeing on the ground that appetite is
Speaker 8: waning to a large degree in credit. In fact, a
Speaker 8: lot of these episodes of widening, and by the way,
Speaker 8: we think episodic volatility is a feature, not a bug
Speaker 8: of this market, but those periods of episotic widening, they're
Speaker 8: getting bought and so we're high. Old spreads are actually
Speaker 8: back below two seventy five using your Bloomberg index. So
Speaker 8: it's really to us, I think pretty evident that there
Speaker 8: is a fair amount of capital on the sidelines. It's
Speaker 8: income and yield based. There is demand, and I think
Speaker 8: wild spreads are tight. Our view is that the bar
Speaker 8: for a sustained sell off in credit spreads is.
Speaker 4: Also quite high.
Speaker 8: To get that, you would really need a severe deterioration
Speaker 8: in the growth backdrop, and we're really not seeing that,
Speaker 8: which goes back to this point of there's a lot
Speaker 8: of dispersion. There will be winners and losers, not every
Speaker 8: part of the credit market is keeping paced with this tightening,
Speaker 8: but we don't see an environment of widespread market disruption
Speaker 8: when you look.
Speaker 6: At the uncertainty though you named policy like tariffs and
Speaker 6: certainty being one of them that you feel like you
Speaker 6: are past. Does it bother you that we still don't
Speaker 6: have a decision from the Supreme Court on AEPA.
Speaker 8: I think our view is that if the Supreme Court
Speaker 8: does strike down the IEPA tariffs, that the administration has
Speaker 8: been pretty clear that they have other tools in their toolkits,
Speaker 8: such as sector specific tariffs. So our view is basically
Speaker 8: that tariffs and in this regime are likely to remain
Speaker 8: in place in some form.
Speaker 4: The key question is are corporates adapting to that?
Speaker 8: And actually what we see in the margin perspective is
Speaker 8: that actually margins are holding in relatively well and corporates
Speaker 8: have been forced to find other ways to protect their
Speaker 8: bottom line, whether that's through operational efficiencies that were originally
Speaker 8: supposed to take place over a couple of years, maybe
Speaker 8: they're front loaded, changing product mix, eliminating some skws. So
Speaker 8: it's really a bed on the management teams to figure
Speaker 8: this out. Just like during the pandemic, the trend of
Speaker 8: corporate resilience was actually much more pronounced than I think
Speaker 8: many market participants feared.
Speaker 3: There's a physical side of this, and the administration side
Speaker 3: of this, and then there's the monetary side of this.
Speaker 3: And we've been talking about the expected rates coming this
Speaker 3: month as well as potentially next year, and you said
Speaker 3: that you do think that some of the peak rates
Speaker 3: and peak uncertainty around that has faded. At what point
Speaker 3: is that sort of a necessary ingredient for your constructive
Speaker 3: outlook on credit next year?
Speaker 4: Sure?
Speaker 8: So, I think our view on the monetary policy path
Speaker 8: from here is that there's probably one or two more
Speaker 8: rate cuts in the pipeline, but as we get closer
Speaker 8: to neutral, and Shapal has said we're probably already at
Speaker 8: the high end of some estimates of neutral, that will
Speaker 8: become a more delicate balance between their dual mandate. And so,
Speaker 8: really what we've been emphasizing is the depth and the
Speaker 8: drivers of this rate cutting cycle.
Speaker 4: Are far more important than the timing of this.
Speaker 8: And if the drivers of the rate cutting cycle are
Speaker 8: driven by a significant deterioration in the labor market, that's
Speaker 8: not a great outcome for credit. By contrast, if the
Speaker 8: drivers of the rate cutting cycle are ongoing improvement and inflation,
Speaker 8: then that's a more benign outcome for credit. That said,
Speaker 8: it's hard for us to see rates going below neutral.
Speaker 8: We're expecting a normalization of monetary policy, not a sharp easing.
Speaker 8: So I think that income play on credit remains intact
Speaker 8: to a certain degree. It's moderated, of course, from the
Speaker 8: peak as rates have come down, but again that's a
Speaker 8: double edged sword. The yield backdrop for investors has moderated,
Speaker 8: but so too there's been some relief and debt servicing
Speaker 8: costs for corporate borrowers.
Speaker 4: Which is important.
Speaker 3: You're talking about being selective, and I do wonder, happy birthday,
Speaker 3: chatchybt third birthday. We should just touch on how much
Speaker 3: debt has been issued from the tech giants. We have
Speaker 3: seen one hundred billion dollars of debt tied to open
Speaker 3: AI and data centers that do provide services to them
Speaker 3: over the past number of months.
Speaker 4: I just wonder, does that make you nervous?
Speaker 3: Does that make you want to stay away from that
Speaker 3: debt as a potential pothole in otherwise pretty bright backdrop.
Speaker 8: So I think we view this as a bit of
Speaker 8: a regime shift in terms of the leadership of issuance
Speaker 8: at the sector level. As you noted, technology issuance actually
Speaker 8: months ago outpaced all other full years on record in
Speaker 8: the USIG market. So it's been kind of a real
Speaker 8: paradigm shift in the way that the market is absorbing
Speaker 8: tech issuance. We think there's a lot more room for
Speaker 8: this to play out. Actually, if you just look at
Speaker 8: a very modest estimate of increasing gross leverage by half
Speaker 8: a turn for the mag seven X Tesla, so excluding autos,
Speaker 8: there's hundreds of billions of debt capacity that could be added.
Speaker 8: So that's a large amount of debt actually upwards a
Speaker 8: four hundred billion, and again a modest tweak and leverage.
Speaker 8: We don't expect all of that to be used immediately.
Speaker 8: We think more likely it will be gradual over time.
Speaker 8: But I think the market is adapting to a realization
Speaker 8: that tech will be a larger contributor to issuance. But again,
Speaker 8: the demand for this has been very robust, and I
Speaker 8: think just like in sectors like biotech, where there are
Speaker 8: drug discoveries that happen years after bonds mature, it's almost
Speaker 8: a similar butt on the management teams.
Speaker 4: So you'd be patient, you'd be buying.
Speaker 8: I think from our perspective, we think that this is
Speaker 8: actually a regime shift that has been met with a
Speaker 8: significant amount of investor demand.
Speaker 2: Stay with US multile IMPEG surveillance coming up.
Speaker 3: Off to this, Shoppers spent billions on Black Friday and
Speaker 3: could break Cyber Monday records today, Luisy and a Senator
Speaker 3: Bill Cassidy joins us now for more. Senator Cassidy, thank
Speaker 3: you so much for being here. Could you square this
Speaker 3: idea of incredible spending and the ongoing American consumer continuing
Speaker 3: to uphold the underlying economy and this real feeling the
Speaker 3: cost of living is becoming unsustainable.
Speaker 9: Well, there's obviously segments within our society, and there's a
Speaker 9: group of people who are still managing to do well.
Speaker 5: There's another group of people who are really hurting.
Speaker 9: Now they may have the money to go out and
Speaker 9: buy their children the gift for Christmas. On the other hand,
Speaker 9: there is an increasing cost of insurance, whether it's health,
Speaker 9: property and casualty or flood insurance, as well as increasing
Speaker 9: costs and groceries. They have extra money but up here,
Speaker 9: but there's a lot of folks down here.
Speaker 5: Who are hurting.
Speaker 3: This is the reason why a lot of people are expecting,
Speaker 3: even though we are seeing profits at companies continue to increase,
Speaker 3: they're expecting the FED to cut rates to respond to
Speaker 3: that case shaped economy or the massive people who really
Speaker 3: aren't feeling the gains. And I'm just wondering how much
Speaker 3: you're prepared to step in that you think that it's
Speaker 3: a government's job on the fiscal side to really support
Speaker 3: that lower tier of consumers that are really feeling the pain.
Speaker 9: I would argue that in the tax cut for workings,
Speaker 9: families are the one big beautiful bill we attempted to
Speaker 9: do that. We did it both by no tax on overtime,
Speaker 9: no tax on tips for seniors, eliminating the tax that
Speaker 9: most would pay on their Social Security, but also putting
Speaker 9: in some some pro business efforts that would encourage business
Speaker 9: to reshore to build out their manufacturing. Lastly, I will
Speaker 9: say there's a lot of money taking place on infrastructure
Speaker 9: right now, and that infrastructure creates jobs. AI cannot swing
Speaker 9: a hammer, and so AI is not swinging in a hammer.
Speaker 5: Those folks will being employed.
Speaker 9: I would say that there is a business strategy to
Speaker 9: help those folks who are in the kind of struggling
Speaker 9: area of the economy centator.
Speaker 6: There's one area when it comes to affordability that actually
Speaker 6: might become a lot more expensive next year if Congress
Speaker 6: does not act, and that's the enhanced premiums when it
Speaker 6: comes to Affordable Care Act. You have a hearing this
Speaker 6: week regarding this. Do you think we can get to
Speaker 6: a decision before the deadline?
Speaker 5: Yeah? I think we can.
Speaker 9: I have a plan, but it's one that other Republicans
Speaker 9: have reposed some form of, and we take that enhanced
Speaker 9: premium tax credit and instead of giving it to insurance
Speaker 9: companies where they take twenty percent for a profit and overhead,
Speaker 9: we give one hundred percent to the patient in the
Speaker 9: form of a deposit within a health savings account. This
Speaker 9: allows her not to buy the more expensive silver plan,
Speaker 9: but also get a cheaper plan called the Bronze Plan.
Speaker 9: Now did I say it's cheaper. It's cheaper, and so
Speaker 9: we're helping her own our affordability. By the way, the
Speaker 9: money in our health savings account also gives her first
Speaker 9: dollar coverage for a child's trip to the er. You know,
Speaker 9: I practiced for twenty years as a doctor, caring for
Speaker 9: the uninsured and the poorly insured. I learned that if
Speaker 9: you give power to the patient, you can lower health
Speaker 9: care cost. So we're giving power to the patient, not
Speaker 9: profit to the insurance company.
Speaker 6: Well, democrats come on board with this plan, it doesn't
Speaker 6: seem like they're interested in this. They want at minimum
Speaker 6: and extension for a year or two of the extended premiums.
Speaker 5: So think about it.
Speaker 9: We are we would actually be if you will, in
Speaker 9: one sense extending the.
Speaker 5: Enhanced premium tax credit.
Speaker 9: But instead of giving one hundred percent to insurance companies,
Speaker 9: they take twenty percent for profit and overhead.
Speaker 5: We're given one hundred percent to the patient.
Speaker 6: So you're getting the extension, but the pool shrinks that money.
Speaker 4: So to shrink it does not shrink well for the insurance.
Speaker 4: Are they going to have to pay more?
Speaker 6: Are you going to have to say you're on say
Speaker 6: the premium plan or is your plan going to be
Speaker 6: even more expensive. It's not being subsidized by those in
Speaker 6: the lower end.
Speaker 9: No, again, going back to this, if you got this
Speaker 9: amount of money and currently under the current plan, you
Speaker 9: give one hundred percent to insurance companies and they take
Speaker 9: twenty percent for overhead and profit. Instead you give one
Speaker 9: hundred percent to patients. In terms of deposits within a
Speaker 9: health savings account. First, you're lowering their deductible. And because
Speaker 9: you have lowered their deductible, they can take a cheaper
Speaker 9: bronze plan. No, normally you don't because your deductible is higher.
Speaker 9: We just lowered their deductible. They're getting a cheaper bronze plan.
Speaker 9: By the way, when you get power to the patient,
Speaker 9: she gets the health care she chooses to have that
Speaker 9: she knows she needs, as opposed to the healthcare the
Speaker 9: insurance company permits her to have a lot of wins
Speaker 9: in here for the patient who would.
Speaker 5: Not be for that. Whether you're a Republican or a Democrat.
Speaker 3: Do you think that this is enough to prevent the
Speaker 3: government from shutting a shutting down again in January when
Speaker 3: this comes back up.
Speaker 9: Absolutely, Why, Because we've actually addressed affordability in the exchanges,
Speaker 9: I would argue, we also begin to address the overall
Speaker 9: increase in healthcare cost. When you give that woman, and
Speaker 9: women make all the decisions in healthcare, When you give
Speaker 9: her the power of the purse and you say listen,
Speaker 9: if you go here, you save money. If you go there,
Speaker 9: you don't, everybody begins to lower their cost to where
Speaker 9: they can attract her business.
Speaker 3: You know, you said something earlier that I think is
Speaker 3: really important. You said that businesses have a role in
Speaker 3: creating jobs and creating a better landscape for the lower
Speaker 3: core tiles and de siles of the US economy and
Speaker 3: the US earners. I just wonder what policies you think
Speaker 3: need to be implemented to do that, because right now
Speaker 3: it doesn't seem to be working.
Speaker 5: Are you talking about in terms of overall business through business?
Speaker 9: Yeah? Yeah, So I think that the tax policy that
Speaker 9: we've put in, and frankly with President Trump's tariffs, there's
Speaker 9: an incentive for people to begin to reshore that's certainly nearshore,
Speaker 9: and so when you reshore, you're going to create jobs. Now,
Speaker 9: that doesn't happen like that, think how long you need
Speaker 9: to put together your financing stack. But that's going to happen,
Speaker 9: and so as it happens, we'll see that kind of
Speaker 9: upswing in jobs for construction, for service, all those jobs
Speaker 9: that are related to that reshoring of manufacturing activity, and
Speaker 9: that'll cause a general boom. So that is long that
Speaker 9: is a sustainable strategy to create prosperity for folks.
Speaker 3: A lot of people are saying that the reason why
Speaker 3: companies haven't created more jobs is because they're using artificial
Speaker 3: intelligence for efficiencies, and you're seeing that in terms of
Speaker 3: Amazon coming out and saying they're laying people off because
Speaker 3: of some of the efficiencies they're getting from algorithmic learning.
Speaker 3: I'm just wondering, from a legislation standpoint, what you think
Speaker 3: that the government's role is and trying to make sure
Speaker 3: that people aren't left behind in this transition, given that
Speaker 3: a lot of these new programs can take on roles
Speaker 3: previously done by humans and.
Speaker 9: Techno optimist, if you've got something that's going to increase
Speaker 9: the productivity of our nation, will increase tax revenue, not
Speaker 9: by increasing rates, but by increasing the overall growth of
Speaker 9: the economy. When you increase that overall growth of the
Speaker 9: economy and you have more money, We've got like trillions
Speaker 9: of dollars of backlog in infrastructure.
Speaker 5: Let's just focus once we're there.
Speaker 9: If you begin to invest that money in infrastructure, AI
Speaker 9: does not swing a hammer, You're going to create a
Speaker 9: lot of jobs for folks who right now are struggling
Speaker 9: to get better jobs. By the way, we're also building
Speaker 9: out our oil and gas industry, our energy industry, that
Speaker 9: creates a heck of a lot of jobs. And so
Speaker 9: everybody looks at the negative, Oh, we're going to downside.
Speaker 9: We need to look at the positive. That would just
Speaker 9: shift investment to a more productive area of the economy.
Speaker 9: As we grow at the expense of other nations, or
Speaker 9: maybe we all grow together, we'll create that employment.
Speaker 6: Lisa started out this conversation talking about affordability. Americans are
Speaker 6: still struggling. You're also looking at trying to address healthcare
Speaker 6: affordability by actually having this health savings account proposal. The
Speaker 6: President talked about two thousand dollars tariff checks. You're on
Speaker 6: the Finance Committee, you're on the help you lead the
Speaker 6: Health committee. Do you think that that is a good
Speaker 6: way to address affordability right now? Putting money directly into
Speaker 6: consumer's pockets.
Speaker 9: So I'd like to see what the President's going to propose.
Speaker 9: We do know that the debt and deficit eventually takes
Speaker 9: money out of our pockets, and so we absolutely know that.
Speaker 9: So the question is better to pay down our nation's debt.
Speaker 9: And as you pay down our nation's debt, then it
Speaker 9: makes it easier to lower interest rates for the Fed
Speaker 9: to lower interest rates, which then lowers a mortgage payment,
Speaker 9: which then maybe lower other credit forms of credit. As
Speaker 9: you do that, you make life more affordable that way.
Speaker 5: The other thing you.
Speaker 9: Have to worry about is if you give everybody a
Speaker 9: two thousand dollars check, does that bump up inflation? And
Speaker 9: therefore the FED is inhibited on lowering their rates. So
Speaker 9: it can't be taken in kind of isolation. It has
Speaker 9: to be taken in context of everything we can do
Speaker 9: to benefit that person sitting at home struggling a little bit.
Speaker 6: It sounds like you would be a no then on
Speaker 6: the two thousand llinos.
Speaker 5: Sounds like I'm going to investigate so that I know, okay.
Speaker 6: While you investigate, there's also potentially going to be another
Speaker 6: big Senate first to hearing and then a vote when
Speaker 6: it comes to the president's FED pick. Right now, the
Speaker 6: front runner is his counsel and Economic Advisor's chair, Kevin Hassett.
Speaker 6: Do you think you would say yes to him being
Speaker 6: the FED chair.
Speaker 9: I've been impressed with Kevin. This is the second time
Speaker 9: around serving and Trump's administration. I think he's done a
Speaker 9: good job. Of course, our reserve judgment until we actually
Speaker 9: begin to look at him as FED chair we are
Speaker 9: having this problem of inflation which just is a little
Speaker 9: bit sticky, and yet we want to decrease rates. How
Speaker 9: you're going to navigate that, But I'm certainly predisposed to
Speaker 9: support him.
Speaker 4: Are you worried about FED independence?
Speaker 9: Fed independence is critical, you just have to have it.
Speaker 9: But I also think that Kevin would step up and
Speaker 9: be as aware of the importance of FED independence as anybody.
Speaker 2: This is the Bloomberg Survendans podcast, bringing you the best
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Speaker 2: Bloomberg Terminal. And Buck based this out
Speaker 8: Mm hmm.