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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

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Speaker 2: with Lisa Bromwitz and Amrie Hordernt. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app. We begin this out

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Speaker 2: we're stock sliding as AI spending concerns rattle investors. Cam

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Speaker 2: Dawson of New Edged wealthh writing, truly everything hinges on

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Speaker 2: one thing. How long will hyper scalers be willing to

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Speaker 2: throw all their capital into AI infrastructure, mostly as the

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Speaker 2: market punishes their stock prices. Cameron joins us now for

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Speaker 2: more camera. Good morning to see it?

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Speaker 3: Good morning, Cam?

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Speaker 2: Is this sustainable? What's your few want things?

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Speaker 1: I think the only reason why Mikes able to post

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Speaker 1: eight hundred and thirty percent earnings growth in the year

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Speaker 1: of twenty twenty six is because the hyperscalers are willing

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Speaker 1: to reach very deep into their pockets, burning all of

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Speaker 1: their free cash flow in order to build out capex.

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Speaker 1: Tapping the debt markets, now tapping the equity markets, and

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Speaker 1: I think the big question is how much more upside

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Speaker 1: is their too hyperscaler capex spending. The reason why we've

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Speaker 1: seen so much upside to the AI infrastructure earnings this

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Speaker 1: year is because people have revised higher their hyperscaler capex

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Speaker 1: numbers from thirty percent to start the year to now

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Speaker 1: ninety percent. So when you look into twenty twenty seven,

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Speaker 1: people are expecting twenty to thirty percent growth on top

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Speaker 1: of this year's ninety percent. The question is where does

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Speaker 1: that money come from. We're talking about hundreds of billions

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Speaker 1: of dollars, and there's a really big question as to

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Speaker 1: whether or not this equity market will have the patients

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Speaker 1: with these hyperscalers to wait for the returns to come.

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Speaker 2: At the moment that patients is wearing thin. I've mentioned

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Speaker 2: that quote from the Alphabet executive a number of summers

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Speaker 2: ago when they came out and said the biggest risk

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Speaker 2: care is underinvesting and not overinvesting. That really set the

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Speaker 2: time for the amount of capecks we've seen. How sensitive

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Speaker 2: do you think that argument will be to the pushback

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Speaker 2: this developing at a single name level.

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Speaker 1: Yeah, when you tell everybody that you're in an arms

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Speaker 1: race and it's an existential crisis, this is not necessarily

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Speaker 1: something that you would correlate with higher margins.

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Speaker 3: And I think the challenge that we have is that.

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Speaker 1: You know, these companies used to be such capital light businesses,

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Speaker 1: and that was who they were at their core. Now

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Speaker 1: they're morphing into these highly capital intensive businesses, and the

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Speaker 1: really big question is whether or not this is a

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Speaker 1: good way, a good place to allocate capital, will get

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Speaker 1: the kind of returns that we got in their legacy businesses,

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Speaker 1: which were monopolies and capital light. Now we're capital intensive

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Speaker 1: and competitive, which says to us, these are lower return

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Speaker 1: on invested capital businesses, and we think that's why the

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Speaker 1: market has been punishing them. If you look at their returns,

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Speaker 1: the reason why they're down is not because of earnings.

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Speaker 1: Earnings are still being revisedire for all these companies is

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Speaker 1: because you've taken ten multiple turns out of their names.

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Speaker 1: Mag seven used to trade at thirty five times at

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Speaker 1: the peak last year. It's now at twenty five times.

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Speaker 1: So this is the market saying we don't like the

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Speaker 1: deterioration and free cash flow generation. And I think that's

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Speaker 1: why you're seeing this multiple compression.

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Speaker 4: Karen.

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Speaker 5: I just think about what are the consequences for so

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Speaker 5: many funds that have decided that they just want to

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Speaker 5: be an AI infrastructure be co to the Hedge fund

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Speaker 5: opened up an AI infrastructure strategy. John Gray from Blackstone

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Speaker 5: was at a conference saying Blackstone is now an AI

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Speaker 5: company because AI infrastructure is the future. If those hyperscalers

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Speaker 5: stop spending, what happens to that entirety of the ecosystem.

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Speaker 1: It's one of the things that we've been wrestling not

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Speaker 1: just within public markets, but within private markets as well,

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Speaker 1: where you're signing up for seven to ten year fund lives.

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Speaker 3: And yes, we can acknowledge that today.

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Speaker 1: At this very moment, there are very distinct supply shortages.

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Speaker 1: There is so much more demand for compute than there

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Speaker 1: appears to be available capacity. But as we know, whenever

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Speaker 1: you have souper or normal profits, it tends to draw

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Speaker 1: in capital, drawing competition. And so if we're looking for

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Speaker 1: seven to ten year kinds of investments, as you would

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Speaker 1: say with the Blackstone, who.

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Speaker 3: Is a private market player.

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Speaker 1: That the question is does this supply demand and balance

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Speaker 1: remain during that entire fun life. So I think it's

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Speaker 1: a really really open question how long this supply demand

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Speaker 1: and balance actually persists.

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Speaker 5: These are some big unknowns. So what takes the mantle

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Speaker 5: in the big time? Is it the semis that these

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Speaker 5: hyperscalers are spending on, is it banks? Is it something

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Speaker 5: cyclical totally separate from the AI trade.

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Speaker 1: I mean, I think the story of the last month

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Speaker 1: has been the rotational market.

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Speaker 3: You have the dynamic where you.

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Speaker 1: Have the S and P five hundred flat on the surface,

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Speaker 1: but you have ten percent more names above their fifty

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Speaker 1: day moving average today than you had at the start

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Speaker 1: of June. So this is all this big rotation underneath

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Speaker 1: the surface. It's not necessarily people running for the hills

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Speaker 1: from equities overall. Out On top of that, something like

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Speaker 1: the Russell two thousand outperforming mag seven by twenty seven

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Speaker 1: percent this year, there's a really big caveat with Russell

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Speaker 1: two thousand. We get the rebalance at the end of

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Speaker 1: this month, and all of the big names that have

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Speaker 1: driven Russell two thousand outperformance are actually graduating up into

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Speaker 1: the Russell one thousand. So the challenge you have is

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Speaker 1: that your biggest.

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Speaker 3: Winners are moving out of the index.

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Speaker 1: So it's effectively like saying that the Knicks, if you

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Speaker 1: traded all the players away, are they still the Knicks?

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Speaker 1: That's effectively what's happening to the Russell too.

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Speaker 2: And we've got a right high debate on the horizon

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Speaker 2: as well, somewhat linked to the text story. We're seeing

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Speaker 2: these companies Microsoft, Apple pass on these higher costs. Consumer

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Speaker 2: electronics are going to go up in price. And even

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Speaker 2: though we've had a reset and crude prices, we've had

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Speaker 2: affirming and rate hike bets over the last month. What'd

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Speaker 2: you make of that disconnect?

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Speaker 1: What a brave new world that we're talking about goods

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Speaker 1: inflation being persistent.

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Speaker 3: For the last twenty years, goods has been a.

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Speaker 1: Source of disinflation or actually outright deflation because of globalization,

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Speaker 1: because of productivity. But ever since the pandemic and then

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Speaker 1: you had tariffs and now you have AI, you're in

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Speaker 1: a world where goods inflation has been far more persistent.

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Speaker 3: Now.

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Speaker 1: The good news on the other side of the inflation

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Speaker 1: story is that wage pressures are not there, so you're

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Speaker 1: not seeing the same dynamic of wage price spiral, and

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Speaker 1: you don't have pressure from housing as housing continues to

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Speaker 1: be in the doldrums due to the high rates at

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Speaker 1: the long end of the curve. So the combination of

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Speaker 1: everything means that high goods inflation services maybe not as bad.

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Speaker 3: But then you also.

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Speaker 1: Have to contend with the potential that we could see

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Speaker 1: negative headline prints on CPI just because of falling oil prices.

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Speaker 1: So we think maybe peak inflation feares might be behind us,

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Speaker 1: at least in the very near term.

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Speaker 2: So I'm not expecting a twenty two repeat effect that's

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Speaker 2: got to scramble. We can't buy definition go from zero

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Speaker 2: to five again. But could we see three hikes in

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Speaker 2: the next six months.

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Speaker 1: I think that it really depends on whether or not

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Speaker 1: we see more pressure on this inflation spreading to other areas.

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Speaker 1: And I think the fact that core pcees still at

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Speaker 1: three point four percent would be the one reason that

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Speaker 1: you would argue four rate hikes. And I feel as

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Speaker 1: if and this is really very similar to what DOTA

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Speaker 1: was arguing, which is that because warsh abstained from providing

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Speaker 1: a dot, he effectively was opening up the door for

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Speaker 1: those rate hikes by saying, look, it wasn't me. I

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Speaker 1: didn't do this, and so that effectively is giving room

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Speaker 1: to potentially height rates. But if you're an environment where

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Speaker 1: CPI and a year or on a month of a

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Speaker 1: month basis is negative on a headline basis, it's hard

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Speaker 1: to see the FED hiking in that environment.

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Speaker 5: Still, it's a market that maybe has less reality checks

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Speaker 5: on exactly where we're going. If you don't have a

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Speaker 5: war who's as present and as transparent as FED chairs

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Speaker 5: in the past, does that just lead to more volatility

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Speaker 5: then yeah.

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Speaker 1: We've been thinking about the lyric from the Rush song

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Speaker 1: a lot, which is if you choose not to decide,

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Speaker 1: you still have made a choice. And I think that

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Speaker 1: that choosing not to decide in the near term was

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Speaker 1: effectively opening the door for the hawks, as I mentioned,

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Speaker 1: And I think the big question will be as we

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Speaker 1: get later into the years, we see the market still

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Speaker 1: pricing in a twenty percent chance of a hike more

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Speaker 1: than when more than one hike through the end of

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Speaker 1: the year, do you actually see him push back against

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Speaker 1: that in any way at this meeting it certainly wasn't

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Speaker 1: the case. He talked about fighting inflation, but It's really

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Speaker 1: important to remember you have ten trillion dollars of Treasury

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Speaker 1: debt outstanding that has to be refinanced this year. Eighty

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Speaker 1: five percent of that refinancing is coming at the short

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Speaker 1: end of the curve. So if there's one person who really,

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Speaker 1: really really wants short term rates lower, it is Secretary

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Speaker 1: Bessn't because of the Treasury financing pressure.

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Speaker 2: You in the room with bess In this week at

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Speaker 2: the event at the Economic Club at New York, was

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Speaker 2: that a green light hike?

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Speaker 4: Rights?

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Speaker 1: I think it wasn't a red light, So I think

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Speaker 1: it was it was support of this hold and wait

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Speaker 1: and see. It wasn't in all out we have to

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Speaker 1: cut rates. You didn't see this argument coming from Bessn't

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Speaker 1: talking about because of AI, because of efficiency, that you

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Speaker 1: have this huge runway in order to be able to

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Speaker 1: cut rates, that the neutral rate is lower. It was

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Speaker 1: effectively whatever the data supports, I think. I think the

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Speaker 1: most interesting thing from Bessett at the presentation was the

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Speaker 1: talk about globalization and margins and the fact that effectively

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Speaker 1: you used to optimize supply chains for margin for efficiency,

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Speaker 1: and now you have to optimize supply chains for resiliency

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Speaker 1: and redundancy, and that says to us, in the last

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Speaker 1: twenty years of massive margin expansion on the back of globalization,

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Speaker 1: does that come into question?

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Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.

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Speaker 2: The VEC area of Bank for America staying bullish on

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Speaker 2: SEMIS raising his forecast for the chip sector, expecting the

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Speaker 2: market to reach two point seven trillion by twenty thirty.

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Speaker 2: He writes the AI industry moving to addressing structural and

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Speaker 2: physical constraints from having to defend return on investment before

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Speaker 2: memory chip shortages and price inflation remain the critical moving pieces.

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Speaker 2: Pavec joins us now for more. Vivek, welcome. We've been

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Speaker 2: asking how much long was the run wide response we're

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Speaker 2: getting from a lot of papers longer than you think.

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Speaker 2: What's your response?

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Speaker 4: Good morning.

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Speaker 6: We think that the AI infrastructure cycle could last at

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Speaker 6: least through the end of this decade. I think we

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Speaker 6: are only about a third of the way through, and

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Speaker 6: you know, there is still a lot of adoption ahead

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Speaker 6: when it comes to enterprises, when it comes to consumers.

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Speaker 6: You know, yes, there has been a lot of deployment

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Speaker 6: of this infrastructure, initially by the hyperscalers, but I think

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Speaker 6: we are very early in the adoption of these services

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Speaker 6: and applications by enterprises and consumers on premise. There's a

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Speaker 6: lot of deployment that different countries and states and regions

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Speaker 6: need to do to be self sufficient. So no, we

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Speaker 6: are extremely bullish, and I think that means very good

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Speaker 6: things across the semic active supply chain, whether one looks

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Speaker 6: at computing companies, whether one looks at networking, optics, memory,

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Speaker 6: and you know, these kind of deployments are never a

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Speaker 6: straight line that are there are going to be periods

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Speaker 6: of digestion in between. But I think that despite that volatility,

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Speaker 6: I do think the cycle can last at the end

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Speaker 6: of the decade.

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Speaker 5: Viig on that cycle, I have the same question for

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Speaker 5: you that John was just discussing with Ed that these stocks,

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Speaker 5: these semiconductors go through boom and bust historically. Is this

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Speaker 5: time different.

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Speaker 6: Yeah, they do go through boom and bust cycles, and

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Speaker 6: you know there is you know, there is a scenario

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Speaker 6: where between now and until the end of the decade,

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Speaker 6: there is a year where there is a period of absorption.

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Speaker 6: But I would say that that is part of you know,

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Speaker 6: any cyclical industry. What we have to question though, is

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Speaker 6: that do we believe that the deployment of this AI

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Speaker 6: infrastructure is important and that is there enough of monetization

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Speaker 6: and funding and the returns that these hyperscalers are getting.

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Speaker 6: And our assumption is absolutely yes. Look at the growth

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Speaker 6: rates that the top search company, the top you know,

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Speaker 6: web services.

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Speaker 4: Company, they are getting.

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Speaker 6: Their growth rates have accelerated to their fastest level in

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Speaker 6: the last three or four years. If you look at

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Speaker 6: the largest social company out there with three billion plus subscribers,

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Speaker 6: it is growing twenty to thirty percent a year. How

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Speaker 6: does a company with three billion subscribers grow twenty or

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Speaker 6: thirty percent a year. The only way for it to

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Speaker 6: do that is to extract more value from every user,

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Speaker 6: and AI is a critical tool to do that. That

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Speaker 6: is why we are so bullished because I think there

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Speaker 6: is a secular theme, but of course, within any secular theme,

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Speaker 6: there could be periods of digestion in between. And if

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Speaker 6: you look at the growth rates for the end customers

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Speaker 6: that are anywhere between twenty to thirty percent on an average.

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Speaker 6: The semiconductor industry is not able to create capacity that quickly.

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Speaker 6: You know, it takes years billions of dollars to add

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Speaker 6: new manufacturing fabs. There's a lot of specialization required, and

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Speaker 6: so I think the supply demand imbalance can last for

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Speaker 6: a while. And then the final point I would make

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Speaker 6: there is, you know, the top three semi conductor companies

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Speaker 6: that I cover, and Video, Broadcom and Micron, they're all

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Speaker 6: trading at below market multiples. So it is different this

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Speaker 6: time because I do think the cycle can last longer,

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Speaker 6: and because I do think the valuations make a lot

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Speaker 6: more senseless time around.

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Speaker 2: Stay with us more Pleinberg Savannan's coming up after this,

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Speaker 2: and the Savannahs this morning, a presidential the three lamp.

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Speaker 2: They want to make a deal with us very badly,

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Speaker 2: and we probably will.

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Speaker 4: I think we will.

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Speaker 3: But the Strait is open.

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Speaker 4: Yesterday they took.

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Speaker 3: Out nineteen million barrels of oil.

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Speaker 2: That's the most in the history of the Strait, and

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Speaker 2: the oil prices are dropping like a rock.

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Speaker 3: And you know, as goes oilso goes everything else.

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Speaker 2: So here's the laces. This morning, the President's ounting the

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Speaker 2: flow of crew through the strata for immers. This as

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Speaker 2: a container vessel was attacked, undermining efforts to restore traffic.

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Speaker 2: Ultiple networks reporting around launched the strike. Eddie Fishmer of

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Speaker 2: the Council on Foreign Relations writing, Iran still has the

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Speaker 2: ability to disrupt traffic if ships violate its wishes. Iran

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Speaker 2: has shown that a US adversary can weaponize a choke

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Speaker 2: point and then get paid to stand down. Others will

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Speaker 2: take note. Die joins us now for more. Eddie can

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Speaker 2: morn to get to see you? No, nice to see

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Speaker 2: as you John. It's advertised in the following fashion. No

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Speaker 2: one's changing its hull. But ultimately aren't they being paid

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Speaker 2: to reopen the stratiformos?

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Speaker 4: Oh?

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Speaker 7: Definitely, I mean that is what fundamentally the MoU is right.

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Speaker 7: If you go back to twenty fifteen, the Iran nuclear Deal,

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Speaker 7: the JCPOA, which a lot of people compare this to.

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Speaker 7: In that circumstance, the United States imposed significant economic pressure

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Speaker 7: on Iran and pressured Iran to give up concessions on

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Speaker 7: this nuclear program. What has happened in twenty twenty six

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Speaker 7: this year is actually the reverse. It's Iran, by using

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Speaker 7: its key choke point, the straight inform moves, has imposed

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Speaker 7: significant economic pressure on US and has coerced US to

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Speaker 7: give up economic concessions. The way you know that is

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Speaker 7: that all the economic relief of this deal is front

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Speaker 7: loaded before anything on the nuclear side.

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Speaker 2: Your words, your language, others, or take note. Who are

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Speaker 2: we thinking about?

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Speaker 4: Pretty much everyone?

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Speaker 7: I mean, because again this is the second time that

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Speaker 7: this has happened in as many years. China did the

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Speaker 7: same thing last year with rare earth elements. They got

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Speaker 7: us to backpedal our policy on China by virtue of

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Speaker 7: cutting us off from that key choke point. If you're

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Speaker 7: thinking about other countries that could do similar things, I mean,

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Speaker 7: Indonesia is right at the top of the list with

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Speaker 7: the Strait of Malacca. Their government has already brought up

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Speaker 7: the possibility of imposing additional fees at the strait. It's

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Speaker 7: caused a lot of adjuta in places like Singapore and Malaysia.

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Speaker 7: But that doesn't mean that over time they won't reimpose

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Speaker 7: this type of thing. I think the Iranians came out

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Speaker 7: yesterday and said that a toll at the Strait of

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Speaker 7: Hormuz could be worth forty billion dollars a year for

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Speaker 7: the Iranian government. Any other government sitting across one of

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Speaker 7: these straits will see that kind of a revenue and

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Speaker 7: imagine what they could provide for themselves too.

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Speaker 5: Do you think it will continue to work for these

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Speaker 5: other players who take note in your words, if it

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Speaker 5: is something that looks like Indonesia, are other governments going

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Speaker 5: to be okay with this? Or does there reach a

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Speaker 5: point that there is enough of a pushback that the

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Speaker 5: system becomes not viable.

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Speaker 4: That's the key question, Danny.

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Speaker 7: I mean, look what Secretary of State Rubio said yesterday,

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Speaker 7: and I totally support his position, is that if Iran

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Speaker 7: is allowed to charge a fee here, there's going to

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Speaker 7: be chaos. Right, You're undermining a core tenet of the

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Speaker 7: international system, which is that waterways like the Strait of

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Speaker 7: Horn Moves are free and open to international commerce. So

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Speaker 7: I do think it will require an international effort to

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Speaker 7: stop this from happening. I think the challenge is since

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Speaker 7: World War Two, that norm of free and open commerce

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Speaker 7: has been underwritten by US military power, and the US

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Speaker 7: military has just proven over the last four months that

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Speaker 7: we cannot physically force the Strait.

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Speaker 4: To be open.

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Speaker 7: And so I guess the question becomes, now, what are

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Speaker 7: the Iranians going to do? Are they going to target

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Speaker 7: neutral ships like that Singaporean flag vessel yesterday that defy

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Speaker 7: it and take a channel around them on maybe don't

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Speaker 7: pay a toll.

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Speaker 4: But if they do, I'm not really sure what we're

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Speaker 4: going to do about it.

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Speaker 5: Beyond the revenue from the toll, there's this question of

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Speaker 5: one hundred billions of dollars that Iran is likely getting

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Speaker 5: with this MoU and where that money goes to. The

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Speaker 5: White House is said it's going to go to things

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Speaker 5: like US agriculture. What do you make of this pot

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Speaker 5: of money and how it's likely to be spent?

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Speaker 7: Yeah, So, look, I think the most plausible way that

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Speaker 7: this deal could be funneled to buy agricultural commodities is

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Speaker 7: through the frozen assets that Iran has. They've got tens

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Speaker 7: of billions of dollars of these frozen assets, and ostensibly

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Speaker 7: through this deal, though the White House has not fully

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Speaker 7: provided the details. In this sixty day period, we're going

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Speaker 7: to provide at least twelve billion or so.

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Speaker 4: To the Iranians. The question is how does that actually get.

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Speaker 7: Channeled to buy US agricultural commodities.

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Speaker 4: So far, we've see no evidence that it will.

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Speaker 7: And the thing that makes me a little nervous frankly

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Speaker 7: that this is more rhetoric than reality is if you

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Speaker 7: look at the one regulation that has come out which

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Speaker 7: is the sanctions relief on Iranian oil sales. In this

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Speaker 7: general license that came out on Monday, there are no

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Speaker 7: restrictions whatsoever in terms of how Iran can use that money.

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Speaker 7: It actually allows Iran even to collect the funds in

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Speaker 7: US dollars, which is something that the United States has

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Speaker 7: not provided on for decades.

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Speaker 2: The Republicans used to criticize Democrats for taking those frozen

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Speaker 2: funds and allowing them to do the same thing, to

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Speaker 2: use it for humanitarian needs, but ultimately the same criticism

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Speaker 2: was leveled at them that we should level at Republicans too.

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Speaker 2: If they're not using that money for that, what are

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Speaker 2: they using the money for. If I've got excess capital

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Speaker 2: now to spend on humanitarian needs, it means I've got

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Speaker 2: additional capital to spend on the other things like sponsoring proxies.

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Speaker 2: How do we address that?

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Speaker 4: That's exactly right.

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Speaker 7: Money's fulgetable, right. So, and Iran does depend on agricultural imports, right.

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Speaker 7: They import grain, they import wheat, they import corn, a lot,

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Speaker 7: actually soybeans from Brazil, you know, a lot of the

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Speaker 7: same countries that we compete with. So they're going to

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Speaker 7: buy agricultural commodities potentially from the United States, and again

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Speaker 7: I haven't seen any proof that that's going to happen.

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Speaker 7: But to your point, John, even if some of that

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Speaker 7: money is used for that, that frees up additional resources

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Speaker 7: to rebuild their nuclear program, to supercharge their missile program,

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Speaker 7: which ostensibly now the US is okay with, you know,

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Speaker 7: per comments by President Trump. So I completely agree with

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Speaker 7: you on.

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Speaker 2: That sanctions fan operation economic theory. If you look at

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Speaker 2: this and how it's played out failed, what are the

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Speaker 2: lessons from that?

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Speaker 4: Look?

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Speaker 7: I think the key lesson from this entire episode, right,

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Speaker 7: you go back to the sanctions under George W. Bush,

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Speaker 7: Barack Obama and then and then now under trumpin Operation

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Speaker 7: Economic Fury and Operation Epic theory is that economic pressure

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Speaker 7: is a powerful tool, but it's a limited one. And

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Speaker 7: if you're trying to use economic pressure, for instance, just

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Speaker 7: a curtail arounds nuclear program, I actually think that was

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Speaker 7: a viable goal.

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Speaker 5: Right.

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Speaker 7: We had a deal on that in twenty fifteen. It's

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Speaker 7: probable Trump could have even had a deal, you know,

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Speaker 7: earlier this year. If you're going for something more maximalist

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Speaker 7: like regime change, I think it's pretty unlikely and you're

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Speaker 7: going to wind up, probably on a slippery slope to

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Speaker 7: the use of military force.

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Speaker 2: This is the Bloomberg Survendments podcast, bringing you the best

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Speaker 2: in markets, economics, ancient politics. You can watch the show

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Speaker 2: Bloomberg Terminal and the blom Bug Bits this out mhmm.