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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 3: Turning two deals TikTok, saying it reached binding agreements for
Speaker 3: a new US joint venture majority owned by American investors,
Speaker 3: the company's CEO telling employees agreements with Oracle, Silver Lake
Speaker 3: Management and MGX have been signed. Joining us now as
Speaker 3: we purse through everything that has happened in twenty twenty
Speaker 3: five around the trade story is the twentieth US Trade
Speaker 3: Representative missing Greer.
Speaker 1: Representative Greer.
Speaker 3: I want to start on how busy twenty twenty five
Speaker 3: really was Looking ahead to twenty twenty six, do you
Speaker 3: expect the same kind of pace with respect to trade deals?
Speaker 3: With respect to trade announcements.
Speaker 4: Well, during twenty twenty five, President Trump the administration has
Speaker 4: essentially reset the global trading order to move from you know,
Speaker 4: total liberal trade in the United States without any cost,
Speaker 4: to a new fair and balanced approach we had. We've
Speaker 4: announced lots of trade deals, We've annowned lots of tariffs,
Speaker 4: as you know, in the coming year, we expect to
Speaker 4: finalize a bunch of those trade deals as well. You know,
Speaker 4: I think that the tariff plan is in good shape.
Speaker 4: I think we have a lot of the tariffs we
Speaker 4: want in place. You know, if there are countries here
Speaker 4: and there that don't comply with their deals or don't
Speaker 4: want to finish a deal, then maybe we have to
Speaker 4: have another conversation. But I think the economy's booming, inflations down,
Speaker 4: wages are up, weren't a really great track.
Speaker 3: How much are you potentially at risk should the Supreme
Speaker 3: Court overturn some of the tariffs that have been enacted
Speaker 3: under the AEPA provision. Do you have something in place
Speaker 3: to get those tariffs through other measures or will there
Speaker 3: be a rethink about what will be put.
Speaker 1: On and what won't.
Speaker 4: Well, it would be terrible if the Supreme Court overturned
Speaker 4: the case, because we have built a new global trading
Speaker 4: order on the back of these tariffs and the tariff system,
Speaker 4: and our trading partners have accepted it, and they've made deals,
Speaker 4: and they've accepted there's going to be some tariff level
Speaker 4: to help protect US industry.
Speaker 5: So it would be disaster if this was pulled out.
Speaker 4: All that being said, we will do whatever we need
Speaker 4: to do to make sure that we can maintain the
Speaker 4: tariffs we need and keep the deals in place.
Speaker 5: Obviously, we want the flexibility.
Speaker 4: Of the emergency powers that Congress has given to the President.
Speaker 4: It's the most effective way to deal with it. So
Speaker 4: what's made them so effective this year in negotiating. But
Speaker 4: absent that, we'll work and we'll find a way to
Speaker 4: make sure we can keep all these games we've made
Speaker 4: over the past.
Speaker 1: Year representative career.
Speaker 3: There's also a feeling right now that cost of living
Speaker 3: concerns are coming to foreign President Trump has talked about
Speaker 3: removing some of tariffs on specific goods, particularly having to
Speaker 3: do with food, as a way of alleviating some of
Speaker 3: the price concerns. How does that factor into discussions going forward?
Speaker 3: Do you think that that will be an increasing part
Speaker 3: of your thought process as you go through some of
Speaker 3: these trade negotiations.
Speaker 4: Well, any good president wants to address affordability, and our
Speaker 4: president is and over the past month we saw you know, dairy,
Speaker 4: you know, fruit and vegetables, all kinds of prices go
Speaker 4: down for basic stables, staples. So that's a great development
Speaker 4: going forward. The President removed some tariffs in connection with
Speaker 4: some deals related to food coming from a broad bananas, coffee, coco,
Speaker 4: the kinds of things we just don't make in the
Speaker 4: United States. United States is a food powerhouse. When we
Speaker 4: saw inflation earlier, it's really about housing, healthcare.
Speaker 5: Driven by Obamacare disaster.
Speaker 4: So I don't think that, you know, food imports are
Speaker 4: really going to be an issue for us. You know,
Speaker 4: the tariff program is really about creating jobs, and the
Speaker 4: President's regulatory approach is really about bringing prices down and
Speaker 4: bringing affordability.
Speaker 6: Ambassador, have you had any specific directives from the President
Speaker 6: though as you carry out your negotiations to make sure
Speaker 6: any tariffs you put on from here are anyones that
Speaker 6: you negotiate specifically are not having an impact on affordability.
Speaker 4: So I know, the kind of the way you put it,
Speaker 4: there are a specific direction I would say no, whenever
Speaker 4: we're imposing tariffs are doing deals. The purpose of the
Speaker 4: trade program is to reshore American manufacturing and protect American
Speaker 4: food security. It's really about jobs and increasing wages, which
Speaker 4: we've seen over the past few months. When it comes
Speaker 4: to prices, the President is undertaking a lot of other actions,
Speaker 4: you know, energy policy, tax policy, regulatory gas prices are down,
Speaker 4: et cetera. So we don't see the trade policy really
Speaker 4: as driving prices. We see it as driving jobs.
Speaker 6: Ambassador, I'd love to go back where Lisa started, and
Speaker 6: that is it looks more likely that we indeed have
Speaker 6: something of a TikTok deal where US buyers will take
Speaker 6: the American portion. You after some of the negotiations in Madrid,
Speaker 6: we're talking about how this deal, how this company was
Speaker 6: part and parcel of a variety of matters when it
Speaker 6: comes to negotiation, negotiating with your Chinese counterparts. So have
Speaker 6: you had more discussions about this deal with TikTok? Does
Speaker 6: it seem likely that China will let it happen?
Speaker 5: So there are two layers to the TikTok deal.
Speaker 4: One is the private sector layer, where the private parties
Speaker 4: are concluding a deal and then there's a layer of
Speaker 4: government approvals between the United States and China, and so
Speaker 4: my conversations with the Chinese government over the past few months,
Speaker 4: as you mentioned, have covered a variety of issues.
Speaker 5: One of them has been TikTok.
Speaker 4: Back at our discussions in Madrid, we came to an
Speaker 4: essential agreement that if the private parties came to agreement,
Speaker 4: that the Chinese would approve it.
Speaker 5: So we expect approval by.
Speaker 4: The government of China in alignment with that agreement we
Speaker 4: reached earlier this year.
Speaker 3: We're hearing about not only this deal with respect to
Speaker 3: TikTok and some investors in the US, but also a
Speaker 3: review product is to sell two hundred.
Speaker 1: Chips into China.
Speaker 3: And I'm just wondering, stepping back, if all of these
Speaker 3: are pieces of a bigger deal that will come to
Speaker 3: fruition in twenty twenty six between the US and China.
Speaker 4: I would say with the h two hundred export control issues,
Speaker 4: those really are standalone. That was not a negotiated outcome
Speaker 4: in the United States. With respect to export controls, those
Speaker 4: are not something that are really subject to negotiation. Those
Speaker 4: are national security and commercial decisions made by the federal government.
Speaker 4: So that's kind of standing on its own with respect
Speaker 4: to the rest of the China deal. Right now, we're
Speaker 4: trying to make sure that rare earths continue flowing from China.
Speaker 4: You know, they've bought over five million metric tons of
Speaker 4: soybeans at this point, and we're trying to keep trade
Speaker 4: flowing between the two countries in way that makes sense.
Speaker 3: Do you expect a bigger deal other than just sort
Speaker 3: of steady reset kind of idea that you've talked about
Speaker 3: with respect to the US and China. Do you expect
Speaker 3: something more comprehensive to be outlined next year.
Speaker 5: It's a little hard to say at this point. Goal
Speaker 5: one is stability.
Speaker 4: For me, and everyone's heard me say this before, we
Speaker 4: need trade with China to be much more balanced. Our
Speaker 4: trade deficit with China has decreased by twenty five percent
Speaker 4: this year alone under President Trump's policy, so that's going
Speaker 4: the right direction. I can first see a situation in
Speaker 4: the first half of next year where we come to
Speaker 4: some kind of agreement with China on exactly what we
Speaker 4: should be trading with each other and even in what volumes.
Speaker 4: It's a little bit of managed trade, but it's the
Speaker 4: kind of thing that can be healthy and stable. Given
Speaker 4: the way that Chinese government runs its economy, it just
Speaker 4: doesn't mesh very well with the way we want to
Speaker 4: run our economy. That just means we have to manage
Speaker 4: it a little bit more. And I think there's a
Speaker 4: possibility of that. I'm not sure i'd call it comprehensive,
Speaker 4: but i'd call it confidence building.
Speaker 1: I'm masser.
Speaker 6: I think a lot of the confusion from many people
Speaker 6: comes around national security. One of the points that you
Speaker 6: mentioned just a moment ago, especially things with H two
Speaker 6: hundred chips.
Speaker 1: Giving chips to.
Speaker 6: China has seen an issue of national security. Even giving
Speaker 6: S thirty fives to Saudi Your what does that mean
Speaker 6: for national security? Because critics would say that it means
Speaker 6: that national security is up for sale. What would you
Speaker 6: say to those critics?
Speaker 4: So, with respect to the F thirty five, that's not
Speaker 4: my I used to be in the Air Force, but
Speaker 4: it's not it's not my wheelhouse. I'm H two hundreds
Speaker 4: and export controls generally, export controls have always been fluid,
Speaker 4: They've never been static. The very nature of export controls
Speaker 4: is that the US government is constantly reviewing the state
Speaker 4: of technology and assessing what technologies can be sold and
Speaker 4: which ones can and balancing national security and assessing whether
Speaker 4: or not there's foreign availability. Everyone knows that the Chinese
Speaker 4: are quickly also trying to develop their own AI chips,
Speaker 4: semiconductor tools to make those chips, et cetera.
Speaker 5: It's a race. All of those h two hundred.
Speaker 4: Approvals still have to go through the Commerce Department to
Speaker 4: make sure that any licenses that are granted really respect
Speaker 4: US national security and make sure that it's not violated,
Speaker 4: and there can be conditions on licenses, etc. To they
Speaker 4: go to end users and end uses that don't jeopardize
Speaker 4: US national security?
Speaker 6: Is it fair to say, that, Ambassador that even if
Speaker 6: this does go through the kind of cases where this
Speaker 6: is allowed, where it's approved, will still be quite limited
Speaker 6: in scope.
Speaker 4: So it's hard to say at this point that these
Speaker 4: types of license applications are typically a case by case
Speaker 4: and reviewed. So we'll see the way it's set up
Speaker 4: right now is if the chips are going to go
Speaker 4: to China, they come back to the US for a
Speaker 4: security inspection to make sure that they are indeed the
Speaker 4: types of chips that are being allowed to be sent
Speaker 4: to the Chinese. We know there are a lot of
Speaker 4: Chinese companies that want them. We know the Chinese government's
Speaker 4: pretty interested in having their own domestic champions build them.
Speaker 4: So the Chinese themselves right now are having a conversation
Speaker 4: about the types of chips that they want from the
Speaker 4: United States. We think that they want the Age two Hunters.
Speaker 4: They've shown an interest in that. So we'll see between
Speaker 4: their process and ours, we'll see where it goes.
Speaker 3: It seems like the tech wars have been behind a
Speaker 3: lot of the negotiations over the past twelve months, in
Speaker 3: particular not only with China, but of the European Union.
Speaker 3: I'm just wondering where some of those discussions are with
Speaker 3: respect to some of the restrictions and regulatory investigations Europe
Speaker 3: has been making toward US tech companies.
Speaker 1: Where are some of those discussions.
Speaker 4: So I just had a conversation yesterday with my counterpart
Speaker 4: in the European Trade in the European Commission yesterday to
Speaker 4: reinforce some of the strong concerns we're hearing from US stakeholders.
Speaker 4: US tech companies are the most competitive in the world,
Speaker 4: and Europe frankly doesn't have those types of competitors.
Speaker 5: If you talk to the Europeans.
Speaker 4: They'll say, that's why we have to regulate and have
Speaker 4: these protectionist measures against US tech companies. Unfortunately, we see
Speaker 4: in the way that they've developed those measures they're discriminatory.
Speaker 4: They only capture companies above a certain threshold of revenue
Speaker 4: globally or certain business models, and magically it only happens
Speaker 4: to capture US companies. They'll say that they're Chinese companies too,
Speaker 4: but we only see actions against American companies. So it's
Speaker 4: a problem. It's discriminatory in fact. You'll hear the European say, well,
Speaker 4: it's fair, but it's discriminatory in fact and an intent.
Speaker 4: So I want to talk to these folks. I want
Speaker 4: to negotiate over it. They've been somewhat resistant to that,
Speaker 4: but again I had a great conversation yesterday with the
Speaker 4: European Trade Commissioner, and I think we just have to
Speaker 4: be able to talk about why they're doing this, so
Speaker 4: why they're purporting to regulate American companies and their global
Speaker 4: business models.
Speaker 3: Ambassador, coming into twenty twenty five, a lot of people
Speaker 3: were wondering who are allies and who our adversaries would
Speaker 3: be on trade, and we were talking about who traditionally
Speaker 3: have been US allies and who haven't. Have you been
Speaker 3: surprised and who has been most difficult to deal with
Speaker 3: in twenty twenty five, it has surprised a lot of
Speaker 3: people in the markets to see the likes of Europe
Speaker 3: be a more contentious discussion than other regions, even sometimes China.
Speaker 4: That's because they haven't been trade negotiators. I have not
Speaker 4: been surprised at where it's been more challenging. Take India,
Speaker 4: for example, who's an important partner and a strategic partner
Speaker 4: in a lot of ways. We started negotiating with them
Speaker 4: early in the year and we're still negotiating with them
Speaker 4: to trying to find a good landing zone. During that time,
Speaker 4: we have other trade partners who have come in, started,
Speaker 4: proceeded with and concluded trade negotiations with US, etc. The
Speaker 4: reality is somebody like Europe and frankly you know some
Speaker 4: jurisdictions that want to emulate them. They know they might
Speaker 4: have relatively low tariffs compared to the rest of the world,
Speaker 4: but they have non tariff barriers regulations that exclude American agriculture.
Speaker 4: There's a major exports and regulations that exclude are industrial
Speaker 4: exports and so you get into US, and this is
Speaker 4: why we have giant imbalances. It's not because Europe is
Speaker 4: really competitive, we know they're not. It's because they have
Speaker 4: a lot of these rules that prevent US goods and
Speaker 4: services from going into the continent.
Speaker 3: Ambassador career just to finish up on Mexico, which.
Speaker 1: Has been negotiating.
Speaker 3: From what we understand, they just recently gave final approval
Speaker 3: to put tariffs on certain Chinese imports and a lot
Speaker 3: of people are affecting there to be some sort of
Speaker 3: reprieve with respect to aluminum and steel tariffs on Mexico.
Speaker 3: Is there any discussion about that going on right now?
Speaker 4: So, first of all, any country in the world who
Speaker 4: exports steel and aluminum to the United States wants to
Speaker 4: have a modification to that regime because the United States
Speaker 4: for many years has been the consumer of last resort,
Speaker 4: and this is why the President puts steel loomed tariff's
Speaker 4: on in the first administration, the Biden administration kept them,
Speaker 4: and the President has tightened them further in his second administration.
Speaker 4: Of course, the Mexicans are asking for this. We have
Speaker 4: found the Mexicans to be quite constructive in some of
Speaker 4: our recent discussions and looking to change some of their
Speaker 4: laws and regulations related to long standing US concerns. So
Speaker 4: have the Mexicans asked about this, Yes, I won't give
Speaker 4: any further detail beyond that, but it's certainly something that
Speaker 4: they would like to see.
Speaker 2: Stay with US. Multbleenberg Savannah's coming up off.
Speaker 3: To this, Osang Quan of Wells Fargo joins US.
Speaker 1: Now. Osan has a.
Speaker 3: Bullish forecast for next year in the equity space, and
Speaker 3: it comes to this question of how much does the
Speaker 3: data even matter if you have a federal reserve that
Speaker 3: is biased to cut rates at a federal government that
Speaker 3: is biased to run this economy.
Speaker 7: Hut, Yeah, I mean I think the set of four
Speaker 7: equities into twenty twenty six is pretty favorable. I mean,
Speaker 7: the prophecycle is still in a lop cycle. We're forecasting
Speaker 7: fourteen percent growth EPs growth forty SMP next year, followed
Speaker 7: by another thirteen percent in twenty twenty seven. I think liquidity,
Speaker 7: which we talk quite a lot about, that's going to
Speaker 7: improve quite a lot in Q one with the fact
Speaker 7: starting to expand this balance sheet. It was a lot
Speaker 7: sooner and a lot bigger than what we had previously forecasted,
Speaker 7: and with that, we're going to see a huge uptake
Speaker 7: in the liquid environment overall, and I think that's really
Speaker 7: going to be the bullcase for equities as you move
Speaker 7: into twenty twenty six.
Speaker 3: But I hear people at the television screen, this isn't
Speaker 3: actually quantitative easing. This is just trying to ease the
Speaker 3: technical backdrop for banks that are using the FED as
Speaker 3: some sort of backstop. So how does this really increase liquidity?
Speaker 3: Is this more of a boost to liquidity than some
Speaker 3: people are accounting for.
Speaker 7: I mean, it depends on how you define Q. If
Speaker 7: Q is really about shortening duration, then it's not a Q.
Speaker 7: But if QE is about boosting liquidity into the system,
Speaker 7: Because the funding market was really seeing a lot of stress.
Speaker 7: If you look at the SOFA spread between the sulfur
Speaker 7: rate versus the fat funds rate, it blew up back
Speaker 7: in October to as much as thirty five basis points.
Speaker 7: So there was a real stress that we saw back
Speaker 7: in October and November in the funding market. I think
Speaker 7: I think that was really the main crporate for the
Speaker 7: selloff that we saw over the past, you know, or
Speaker 7: the volatility that we saw over the past six weeks
Speaker 7: or so and looking at things like bitcoin quantum stocks
Speaker 7: nonprofitable tag those guys sold off the most. And that's
Speaker 7: essentially what happens when liquidity dries up. Everyone's risk curves
Speaker 7: just to the left, and the assets that are farthest
Speaker 7: out the riskurves, the most speculative assets, they gets all
Speaker 7: the most.
Speaker 1: I think we liquid are coming back.
Speaker 7: And potentially condition liquid conditions overall being actually good in
Speaker 7: Q one, I think speculation is going to pick back up.
Speaker 1: I think I.
Speaker 7: Think AI is going to AI trade is going to
Speaker 7: work more in the second half the year that we're thinking, well,
Speaker 7: I think the overall equity market it's going to be
Speaker 7: pretty bolish.
Speaker 6: Is that why you have the assumption that into next
Speaker 6: year you write your research that inflation reacceleration is going
Speaker 6: to be worse for equities than a recession would be,
Speaker 6: because a lot of people would look at the dichotomy
Speaker 6: between the two and say, inflation coming off the back
Speaker 6: of COVID, equity still did well. But it's growth that's
Speaker 6: really an earnings that's underpretning this equity market, and if
Speaker 6: we get a recession then that would be worse.
Speaker 7: Yeah, I mean, if I have to, you know, think
Speaker 7: about the probability of recession and inflation. I would assign
Speaker 7: a higher probably of inflation. I'm not too concerned about
Speaker 7: inflation either, because I think there's that AI productivity, this
Speaker 7: inflationary pressure that's going to keep inflation pretty low. But
Speaker 7: there's the physical as well as monetary policy that's coming
Speaker 7: back in to potentially drive inflation higher. So if I
Speaker 7: have to choose, I'll say inflation has a higher potential
Speaker 7: than recession. Well, I'm not overall, I'm not too concerned
Speaker 7: about it either.
Speaker 6: But inflation would be worse for equities than a recession
Speaker 6: would be at this point.
Speaker 7: I mean, both would be bad, but I think the
Speaker 7: probability of inflation is probably higher than probability over session
Speaker 7: at this point because of physical we estimate about eighty
Speaker 7: basis points of GDP contribution for the full year twenty
Speaker 7: twenty six. Most of that is happening in the first
Speaker 7: half of the year, really through the tax return, so
Speaker 7: I think consumption is going to pick back off. Consumption
Speaker 7: is seventy percent of the economy, so I'm not too
Speaker 7: concerned about the economic downturn.
Speaker 3: What's the sort of break the glass moment in the
Speaker 3: yield space for equities, And I asked this, as you
Speaker 3: do see longer yields globally creep up on the backs
Speaker 3: of a hawkish move from the Bank of Japan, albeit
Speaker 3: whatever people are thinking in the currency space, but also
Speaker 3: this idea that the ECB is getting to the end
Speaker 3: of their using cycle. How much do you see this
Speaker 3: sort of line in the sand, let's say, at four
Speaker 3: and a half percent for the tenure at five percent,
Speaker 3: where suddenly the book case just isn't there.
Speaker 7: Yeah, I think I think it's going to matter more
Speaker 7: for what works within the equity market. So we're more
Speaker 7: bullished on the reflation cycle into the first half of
Speaker 7: the year because of the physical stimulus that we're going
Speaker 7: to get. But if rates climbable four and a half
Speaker 7: percent or so, I think that's potentially what kills the
Speaker 7: reflation cycle and potentially back into AI. I think closer
Speaker 7: to five percent is going to be actually pretty bearish
Speaker 7: for equities.
Speaker 6: So in this pollish environment for twenty twenty six, the
Speaker 6: speculative stuff starts doing well again.
Speaker 1: Is that a healthy bull market?
Speaker 6: Is that a healthy turn in the continuation of the
Speaker 6: games we've seen in equities?
Speaker 7: I mean, I think, you know, the bullmarket food boollmarkets
Speaker 7: typically have a little bit of speculation at least especially
Speaker 7: in this AI cycle. There's there is going to be speculation.
Speaker 7: It's new technology, and I don't think it's a bubble yet,
Speaker 7: but I think there's a potential it becomes a bubble
Speaker 7: in the second half of the year, especially you know,
Speaker 7: with the FED continuing with this easing cycle, liquidly being
Speaker 7: more ample. And I don't think the AI trade is over.
Speaker 7: I mean, there's quite a lot of concerns around AI
Speaker 7: cap backs and because Hyperscalers, the market started pushing back
Speaker 7: band on hyperscalars capbecs. There's CONSISTUS view is that Hyperscalers
Speaker 7: are going to moderate its capbecs and that's been basically
Speaker 7: what what drove the SEMI and the AI infrastru infrastructure
Speaker 7: sell off over the past week or so. And if
Speaker 7: you look at Semis over Hyperscalar Semis versus Hyperscalers, over
Speaker 7: the past week, we have seen a three and a
Speaker 7: half standard deviation move, meaning hyperscalars are perform semis by
Speaker 7: three and a half center deviation, and that trade has
Speaker 7: been diverging. If if we start to see hyperscalers sort
Speaker 7: of reiterating their capex outlook, the funding issues that Oracle
Speaker 7: and open AI are having, those concerns, Get those concerns
Speaker 7: ease going forward and liquidity comes bay. I think the
Speaker 7: A rate is going to.
Speaker 3: Be back on.
Speaker 2: Stay with us, multiple impact Survanance coming up after this.
Speaker 3: Joining us now is Heidi Krebo Retica of the Council
Speaker 3: on Foreign Relations. Heidi, thank you so much for being
Speaker 3: with us. You recently wrote a piece about how the
Speaker 3: structure of financing the European Union agrees on for Ukraine matters.
Speaker 3: So what have we learned overnight when it comes to
Speaker 3: the structure they have laid out.
Speaker 8: So, I mean there was first of all, there was
Speaker 8: not a question in my mind as to whether or
Speaker 8: not Ukraine was going to get the financial support from
Speaker 8: the EU. Is just basically how they did it through
Speaker 8: collective borrowing, which I think, you know, it's it's a
Speaker 8: it's a step towards mutualized debt, but it's not.
Speaker 5: But it is absent.
Speaker 8: You know, three of three of the EU countries, namely Hungary,
Speaker 8: Slovakia and Czech and so I think, on the one hand,
Speaker 8: that's that's good. They came through with the ninety billion.
Speaker 8: This is just from a timing perspective. I think it
Speaker 8: had to happen because the IMF is finalizing an eight
Speaker 8: point one billion dollar loan to support Ukraine and there's
Speaker 8: a huge gap in their financing and so the EU
Speaker 8: really needed to step up to provide support. And the
Speaker 8: ninety billion is going to go a long way there.
Speaker 8: It's not all the way there, because I think the
Speaker 8: gap that is projected over the next three years is
Speaker 8: one hundred and thirty six point five billion, which is huge,
Speaker 8: and but this is a big step in the right direction.
Speaker 8: It's it also I think all over pointed. I mean,
Speaker 8: it's an elegant solution in a way because it takes
Speaker 8: it takes the burden off of individual countries to actually
Speaker 8: provide the budget finance from their own individual budgets, So
Speaker 8: there is a bit of a collective shift. But at
Speaker 8: the same time, it would have been a lot more
Speaker 8: powerful to use the Russian sovereign assets. The This was
Speaker 8: something they've been negotiating it for a very very long
Speaker 8: time and it was I believe politically a big failure
Speaker 8: for Chancellor Mergen. So this didn't get done.
Speaker 6: And that's something that Ukraine and Zelensky had been arguing
Speaker 6: that it becomes a powerful negotiating force if they were
Speaker 6: to use the frozen Russian assets. Hiding on the other
Speaker 6: side of things, the Belgians had been arguing that it
Speaker 6: would face legal retribution and just retribution in general if
Speaker 6: they had used these Russian funds. Straight up, is there
Speaker 6: any merit to the arguments coming from the European capital.
Speaker 8: So, you know, Belgium I think at the end of
Speaker 8: the day, I just really didn't want to do this.
Speaker 8: They had a lot of popular support in not moving
Speaker 8: forward to use these immobilized Russian assets. And you're clear obviously,
Speaker 8: you know, has the Russians just just sued for you know,
Speaker 8: in case Euroclear was planning to use any of these assets,
Speaker 8: even though the structures that were being discussed would have
Speaker 8: taken the legal I think the legal burden away from
Speaker 8: both Euroclaire and Belgium. But you know, at the end
Speaker 8: of the day, this is something where Mertz was standing
Speaker 8: by himself, France and Italy went Lukewarman did not support him,
Speaker 8: and Belgium just you know, pushed through and decided that
Speaker 8: this was something that they that they cared a lot
Speaker 8: about I'm of two minds. I think that the EU
Speaker 8: needs to move towards collective borrowing for its own national
Speaker 8: security in order to be able to fund, for example,
Speaker 8: its own defense. But the but for this, it just
Speaker 8: needed to get done, and it got done by Hooker.
Speaker 6: What does it change, if anything? Heidi though to the
Speaker 6: political situation of the very highly indebted nations of France,
Speaker 6: of Italy of others.
Speaker 8: Well, I mean, this is going to be a burden,
Speaker 8: a burden on them, and it's uh, this is ideally
Speaker 8: this would have been, uh, you know, an exercise where
Speaker 8: you didn't have to have any additional any additional funding
Speaker 8: coming from in particular, you know, countries like France and
Speaker 8: Italy and others that are you know, that are struggling
Speaker 8: for you know, from a you know that don't have
Speaker 8: the headroom to really borrow or put too much up
Speaker 8: for to support this loan. It's it just it's it's
Speaker 8: unfortunate because they had an opportunity to actually use a
Speaker 8: sizable amount of Russian of Russian funds and they weren't
Speaker 8: able to get there.
Speaker 2: Stay with us multiple impax Savannah's coming.
Speaker 1: Up after this.
Speaker 3: Socks slightly higher as Wall Street looks to end the
Speaker 3: week with a win, and Nastasia and Moroso of Partners
Speaker 3: Group writing, we don't believe investors should give up on
Speaker 3: AI into twenty twenty six. The current pullback may present opportunity,
Speaker 3: and Astasia joins us more and a Stasia, great to
Speaker 3: see you to say, very much to the holiday spirit.
Speaker 1: I see, yes, run the holiday spirit. I think it's great.
Speaker 1: So coming up.
Speaker 3: It does feel like people over the past couple of
Speaker 3: days at least have come back to this idea.
Speaker 1: Maybe the sell off's a good thing.
Speaker 3: It highlights skepticism, it highlights a better entry value.
Speaker 1: How where are you on that?
Speaker 3: What have we seen over the past couple of weeks
Speaker 3: that gives you more confidence?
Speaker 1: Right?
Speaker 9: Well, first of all, as you were saying, maybe the
Speaker 9: volatility is normal as we get higher and higher at
Speaker 9: market altitudes, so to speak. So maybe that is what
Speaker 9: we should be accustomed to seeing in twenty twenty six,
Speaker 9: and investors scrutinize things more and investors question things more,
Speaker 9: so maybe that is to your point in healthy development.
Speaker 9: I do think it's nice to see the AI trade
Speaker 9: pullback by five or seven percentage points over the last
Speaker 9: couple of weeks. Having said that, as I look at
Speaker 9: you know, what's really driving the AI trade, it is demand,
Speaker 9: the adoption, It is productivity, and it is monetization. And
Speaker 9: when I look at all three of those categories, I
Speaker 9: see positive developments there.
Speaker 1: First of all, let's talk about adoption.
Speaker 9: You know, around the table, I'm sure are you using
Speaker 9: more AI now versus what you did at the beginning
Speaker 9: of the year. And if you look at kind of
Speaker 9: the adult population in the United States, fifty five percent
Speaker 9: is the percentage that use artificial intelligence today. That was
Speaker 9: about forty five percent to start the year. We went
Speaker 9: from a ten percent adoption rate economy wide to about
Speaker 9: seventeen percent, So we are moving up that.
Speaker 1: Adoption curve, which is great.
Speaker 9: The second thing, Lisa, that I looked at the other
Speaker 9: day was the productivity increases. Coming into the year, we
Speaker 9: were sort of hoping expecting to see the productivity gains
Speaker 9: due to artificial intelligence. And when I look back at
Speaker 9: the last call it three years, you have actually seen
Speaker 9: measurable productivity gains. Productivity has been average about two percent
Speaker 9: over year growth versus ten versus one percent we saw
Speaker 9: in kind of the decade. You know, after the financial crisis.
Speaker 9: So these are not just wishes, These are tangible productivity gains.
Speaker 9: We hear that from companies. We see that in our
Speaker 9: portfolio companies as well. And then the last point, it's
Speaker 9: all about the modernization and there too, whether you look
Speaker 9: at cloud revenues, whether you look at some of the
Speaker 9: AI lms, the likes of open Ai, their revenues are
Speaker 9: surging and I think that trend can continue into twenty
Speaker 9: twenty six. So with all of that, the AI trade
Speaker 9: is priced better today. So I would step in here
Speaker 9: for twenty twenty six.
Speaker 3: The HAI trade in pockets, right, I mean, are there
Speaker 3: areas that are the winners and areas that are big
Speaker 3: losers as you do see a consolidation of profitability and
Speaker 3: a select number of cohorts. Right, I mean, at what
Speaker 3: point is the gain of some players the pain of
Speaker 3: everybody else? That I point to Micron yesterday doing really
Speaker 3: well because guess what, they can charge a whole lot
Speaker 3: more for their chips.
Speaker 9: Right now, that is a really good point. It's not
Speaker 9: going to be just everybody is a winner, you know.
Speaker 9: It's now the tie that lifts all the boats. And
Speaker 9: that's what we think about in our investmentmties. We think
Speaker 9: about whether a company is going to be disrupted by
Speaker 9: artificial intelligence or is actually going to be helped by
Speaker 9: artificial intelligence because they're quick enough to embed it.
Speaker 1: So that's one way to think about it.
Speaker 9: The other way, I would say, Lisa, we should actually
Speaker 9: draw the distinction between No, I don't think AI is
Speaker 9: a bubble, but are there signs of bubble like valuations
Speaker 9: in certain parts of the ecosystem.
Speaker 1: Absolutely.
Speaker 9: I mean, if you look at, for example, the lay
Speaker 9: stage venture valuations for AI companies versus not AI companies,
Speaker 9: there are trading at a premium something.
Speaker 1: Like two hundred and fifty percent.
Speaker 9: You know, it's not the case for earlier stage, but
Speaker 9: it is the case for lata stage. So I think
Speaker 9: you have to have a question mark around those valuations.
Speaker 9: But you know, we are finding I think winners in
Speaker 9: artificial intelligence.
Speaker 1: I would say in several different categories.
Speaker 9: The first one is infrastructure, and the shift is now
Speaker 9: really sort of yes, we've done data centers for the
Speaker 9: last five years, but it's really more of a focus
Speaker 9: on energy because you know that's the bottleneck. You know,
Speaker 9: we also think about investing in AI companies that have
Speaker 9: proprietary data, they have vertical expertise and they can leverage that.
Speaker 1: That's where we.
Speaker 9: Think gives them the competitive mode and the best chance
Speaker 9: to embed artificial intelligence and kind of you know, invent
Speaker 9: AI power services. And then the last thing is across
Speaker 9: our portfolio companies, we also have a concerted effort to
Speaker 9: boost productivity, drive revenue growth and also enterprise value creation
Speaker 9: by infusing AI.
Speaker 1: So that's where we identify the winners. But you're right,
Speaker 1: you know there's.
Speaker 9: Going to be lots of disruption and lots of companies
Speaker 9: to avoid as well.
Speaker 6: How much of the avoidance doesn't just have to do
Speaker 6: with are you producing revenue? Are you being disrupted by it?
Speaker 6: And maybe there is promise there, but debt loads are
Speaker 6: getting unmanageable. I mean, Oracle has been the poster choud
Speaker 6: for this, for their spending increases elevenfold and their cash
Speaker 6: growth has turned into an outright cash burn. Even you
Speaker 6: can pick into any company, but even if the promise
Speaker 6: is big to you do, debt piles like that in
Speaker 6: cash burn make it enough to make that kind of
Speaker 6: company no longer attractive.
Speaker 9: I mean, look, once again, I think investors should look
Speaker 9: at Oracle and the Lakes and scrutinize anybody who is
Speaker 9: quickly taken on debt and maybe not scaling revenues.
Speaker 1: Clear enough. So I do think that's a healthy development.
Speaker 9: But when I think about, let's say, the rest of
Speaker 9: the hyperscalers, they don't have the issue that the market
Speaker 9: is sort of punishing Oracle for.
Speaker 1: They have plenty of free cash flow. They have plenty
Speaker 1: of cash.
Speaker 9: On the sidelines to finance the data center spend. So
Speaker 9: and the other thing I would point out on Danny,
Speaker 9: you know, going into twenty twenty six, I certainly would
Speaker 9: not give up on all the hyperscalers because what you
Speaker 9: actually see is their earning stra dijectory keeps on accelerating
Speaker 9: towards the tail end of twenty twenty six. And we
Speaker 9: talk about this gap narrowing between the MAC seven versus
Speaker 9: the four ninety three, but that gap is actually going
Speaker 9: to wind out once again for most of the MAC seven,
Speaker 9: perhaps not the specific.
Speaker 6: But even for the hyperscalers, and specifically the lms the
Speaker 6: Google's Open AI. Why isn't just a Google being the
Speaker 6: ultimate winner because they have the ability with their balance
Speaker 6: sheet to not charge for their AI models.
Speaker 1: Why not just run open AI?
Speaker 6: Into the grounds with the inability of them being able
Speaker 6: to produce revenue of Google just offering it for free,
Speaker 6: and then once they're gone, then maybe they can turn
Speaker 6: around becoming monopoly. Why why isn't that the future road
Speaker 6: that this might go down?
Speaker 1: Well, you bring up a couple of good points.
Speaker 9: You know, Google, first of all, has been investing in
Speaker 9: artificial intelligence and working on development and developing artificial intelligence
Speaker 9: for years, you know, prior to open AI. So Google,
Speaker 9: by all means should be one of the winners of
Speaker 9: this AI trend. But the other point I would say is,
Speaker 9: you know, whether it's Google, whether it's open AI, whether
Speaker 9: it's another platform, it is about that.
Speaker 1: It is about the platforms. You know.
Speaker 9: I remember, you know, talking about artificial intelligence back in
Speaker 9: twenty nineteen, and the biggest winners were always going to
Speaker 9: be the providers of the picks and shovels.
Speaker 1: Of AI and a lot of these LM models. And
Speaker 1: who's that going to be?
Speaker 9: Those who have the massive treasure troves of data, and
Speaker 9: so it's the likes of Google and Meta and others.
Speaker 9: So I'm not surprised to see, you know, perhaps Google
Speaker 9: kind of be in the lead once again.
Speaker 1: As I think they kind of wore back in twenty
Speaker 1: nineteen Andastasia.
Speaker 3: There is a big discussion around if there is risk building,
Speaker 3: and yes, sure is risk building, but the question is
Speaker 3: where most people have pointed to private markets as a
Speaker 3: place of potential risk. I know you're focused on financing
Speaker 3: companies and financing infrastructure projects through the private markets. How
Speaker 3: much risk do you really see building heading into twenty
Speaker 3: twenty six.
Speaker 9: Right, Well, if you take a step back, as to
Speaker 9: back Lisa, if you think about the sheer growth of
Speaker 9: private credit, for example, it went from being a six
Speaker 9: hundred billion dollar asset class to a one point seven
Speaker 9: trillion dollar asset class. So by the sheer kind of
Speaker 9: virtue of growth that we've seen, there's going to be
Speaker 9: more and more risks. And I think that's what we've
Speaker 9: seen is some of these idiosyncratic headlines are representative of
Speaker 9: the growth of the asset class. But when I think
Speaker 9: about it from interest coverage ratio perspective, for example.
Speaker 1: Yes it is you know, dipped from.
Speaker 9: Where it was pre twenty twenty two, but it's actually
Speaker 9: trought and is starting to improve. So the FED, the
Speaker 9: fact that the FED is cut interest rates actually alleviates
Speaker 9: I would say some of the pressure on private credit.
Speaker 9: You know, I think what you have to look out
Speaker 9: for is, you know, there's been lots of money raised
Speaker 9: in credit. That money had to be deployed quickly, and
Speaker 9: you know, in some cases it was deployed in large
Speaker 9: chunks of capital. So was it always appropriately deployed? Was
Speaker 9: it always properly covenant covenanted? For everybody?
Speaker 1: I don't know, But for us, if we look.
Speaker 9: Across our prior credit platform and the US side and
Speaker 9: the European side, on average, I would say ninety percent
Speaker 9: of the loans that we've done have a covenant attached
Speaker 9: to them.
Speaker 1: So I can't speak for.
Speaker 9: The industry as a whole, but I think, you know,
Speaker 9: if you had the prudent underwriting standards, despite the growth
Speaker 9: in the industry, we're in a good place today.
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