00:00:02 Speaker 1: Bloomberg Audio Studios. 00:00:04 Speaker 2: Podcasts Radio News. 00:00:11 Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. We begin this hour with stocks little changed as markets digest Fed chair Kevin Walsh's Jackson Hole message. Bob Elliott of Unlimited Funds writing, while the Walsh speech was taken as a tad hawkish, it looked more like continued policy ineptitude, relying on rhetoric rather than clear action. Bob joins us now for more. 00:00:53 Speaker 2: Bob, good morning. Good morning. 00:00:54 Speaker 1: Are you looking for a hold in September? 00:00:56 Speaker 3: Well, I think the real question is, is he actually going to follow through on the rhetoric that at least he outlined? And I agree with this basic idea that maybe he's boxed himself in, in terms of if you've missed your target for 60-plus months— and inflation is above what your mandate is by a lot, and the employment conditions are not so bad, it seems like they should hike. 00:01:21 Speaker 2: And yet, there's all of this ambiguity. 00:01:23 Speaker 3: The market is looking at this and saying, is this a Fed that's actually credible in delivering the tightening? Or is this, as they say out West, all hat and no cattle from the new Fed chairman? 00:01:34 Speaker 1: Where do you see the credibility gap in the market right now? 00:01:37 Speaker 3: Well, I mean, I think the basic idea is if you look at any sort of simple Taylor rule here, you'd expect interest rates on the short end to be up 100 or 200 basis points. I love the fact the Atlanta Fed puts out a whole range of different Taylor rule estimates. It's almost like they're trolling those folks in the Eccles building saying, hey, look, if you're going to actually deliver monetary policy consistent with what we've talked about that's credible, you've got to be raising rates. 00:02:02 Speaker 2: You've got to be raising rates quickly. 00:02:03 Speaker 3: And yet we're in this argument of, you know, is it 40-60 that they're going to tighten in September or 60-40? The data is unambiguous. It's meaningful hikes relatively quickly. And the odds that we get that are de minimis at this point. And so the real question is, when the market is looking at that, they're basically pushing the long end to basically penalize the Fed not doing their job on the short end. 00:02:26 Speaker 4: Couldn't this be a great way to kill forward guidance, though, to say, hey, market, stop parsing through every single line of my speech to try to get signal for what we are doing? Isn't that a great way to stop that from happening by not hiking in September? 00:02:38 Speaker 5: Sure. 00:02:38 Speaker 3: I mean, incompetence can be a way to kill forward guidance, right? That's certainly a way in which they could do it. But the reality is what the Fed needs is to be credible. And when you stand up there and you say, we failed at our mandate for 60-plus months— and you don't deliver based upon the data, that's the thing that's actually, the credibility is what matters a lot more than the forward guidance. 00:03:01 Speaker 4: And the irony, perhaps, is the 10-year yields were initially moved lower on the speech from this chair and ended the day higher. 00:03:08 Speaker 2: Peter Scheer points. 00:03:09 Speaker 4: To the large amount of IG supply that we're going to be getting from this market. Is the 30-year yield really a read on Fed credibility at this moment? 00:03:17 Speaker 3: Well, I think I wouldn't necessarily just look at the 30-year yield in terms of Fed credibility. 00:03:22 Speaker 2: I'd be looking at gold. 00:03:24 Speaker 3: And I think gold, in general, is giving us an indication. It's reacceleration over the course of the last couple of weeks. It's giving some indication that people are really questioning not just the Fed, but the policymaking institutions across the administration, whether it be at the Treasury or at the Fed or in the administration. And it's saying, you know, despite all these efforts to try and keep rates low, gold is pushing higher. Of course, Friday it sold off a little bit. But the general trend here is for all the effort that the administration is doing to try and keep rates low, they're basically just flowing money into crypto and gold these days. 00:03:58 Speaker 1: Gold up 10% so far this month. At one point, up 16. We were on course for a monster month. Is the gold trade back on for you? 00:04:04 Speaker 2: Oh, for sure. 00:04:05 Speaker 3: I mean, I think if you look at this whole scope of different pressures, whether it be the continued conflict in the Middle East or the administration's lack of credibility in policymaking across a number of different areas, this is setting up an environment where hard assets. 00:04:20 Speaker 2: are outperforming soft assets, right. 00:04:22 Speaker 3: Where you see gold and oil continuing to be strong, where you see bonds and stocks soft in this sort of environment. And I think that's the complexion that we're starting to see here. You get that ball rolling a little bit, and that could really define what we're seeing in the second quarter. 00:04:38 Speaker 1: Is that another way of expressing a dollar short or is it something different? 00:04:42 Speaker 2: For sure. 00:04:42 Speaker 3: Because I think the challenge when you think about the dollar is a dollar against what? I mean, the dollar against the yen just keeps falling every day. Dollar against the euro. You know, that's a pretty soft economy in and of itself. And so I think investors are starting to move away from trying to express the U.S. dollar and the fiat currency trade across crosses. And they're moving more to hard assets. And that's exactly what we're seeing. 00:05:05 Speaker 2: What reverses that? 00:05:06 Speaker 4: Is there anything you see that could stop that trend from the path that we're witnessing now? 00:05:10 Speaker 5: Yeah, sure. 00:05:11 Speaker 2: A credible 200 basis points of tightening. But it ain't going to happen. 00:05:14 Speaker 4: But that doesn't alleviate the geopolitical risk you're talking about, about the U.S. weaponizing the U.S. 00:05:20 Speaker 1: Financial system? 00:05:21 Speaker 3: Yeah, and I think what it would do is it would basically say we're willing to take the pain necessary, we meaning the U.S. economy, and developed economies across the world are willing to take the pain and tighten the belt in response to the geopolitical pressures, the rising inflation pressures that we're seeing in oil, but we're also seeing it in other commodity areas like. 00:05:42 Speaker 2: Copper reaching new highs, etc. 00:05:44 Speaker 3: The question is, are we going to fulfill the mandate of these central banks in the U.S. 00:05:50 Speaker 2: And Europe and Japan? 00:05:52 Speaker 3: Or are we going to keep things easy and not take the pain and allow these inflationary pressures to build globally? 00:05:59 Speaker 2: And that's basically what we're seeing. 00:06:01 Speaker 4: One of the interesting things in that speech from Friday was his read on inflation and how he's using it. He brought in two new indicators for us, speed and breadth. And I wonder if you, with that in hand, would look at the inflation data differently and derive something different for this market too. If it's not just what is the headline number, it's what do the components look like and how quickly is it getting back to 2%. 00:06:20 Speaker 3: Yeah, I think it's a good example of how the equivocation in the speech. I think many people sort of looked at it at face value and said, looks hawkish, right? And we saw a bit of that in terms of the market pricing. But the reason why I didn't go further is because Warsh was opening the door to torturing the data to find the path that was necessary. 00:06:40 Speaker 2: So that he didn't necessarily have to hike. 00:06:42 Speaker 3: If you take a certain number of the components and the derivative of how those share of components are moving relative to the target, maybe you could figure out a way to try and make a case that we shouldn't have 100 to 200 basis points of tightening. But everyone in the market knows the reality, which is nominal growth is too high, inflation is too high for the Fed's mandate. And if he won't deliver the goods, then the market is going to figure out. 00:07:07 Speaker 2: Other ways to express that circumstance. 00:07:09 Speaker 1: So, let's talk about expressing that through equities. High nominal GDP, 5% to 6%, above target inflation, and a Fed that you believe is incredible right now. Isn't that a green light to buy stocks? 00:07:19 Speaker 3: Well, except for the extraordinary expectations that are already built in. I mean, we've priced in 25% earnings growth for the next two quarters, which … if we get, is an extraordinary run over the course of the last couple of quarters into the second half of the year. 00:07:37 Speaker 2: And so you've set a very, very high bar. 00:07:40 Speaker 3: And part of what we're seeing there, I think the market action is interesting, particularly in the high-flying names, where you see in this last earnings period a lot of beat and falls. And that gives you sort of an indication, even NVIDIA, that which ostensibly gave the best guidance they could plausibly get, got a pop and then a fall on the backside of it. And I think that highlights just how overextended this market is. They're basically using all sorts of tools in one way or another in terms of leverage in order to get higher and higher exposure to these assets and to stocks, the high-flying stocks. And at some point, you reach some exhaustion. And that's basically where we're at. And I think the thing that, from a stocks perspective, that few people are talking about, everyone's talking about the AI trade. Very few people are talking about what's going on with the consumer. Because the consumer, whether you like it or not, the US economy is a consumer economy, and that's what's driving it. And there, actually, you see a lot of interesting softness under the surface. I mean, the PCE numbers were pretty weak. The retail sales numbers were pretty weak. Suggests some exhaustion. And more timely numbers, whether it be TSA or Bloomberg second measure measures, suggest actually the consumer is starting to fade pretty quickly. That would be a big surprise for the equity market in the second half. 00:08:52 Speaker 1: It would be a major surprise going into year end. Bob, it's good to see you. Stay with us. More Bloomberg surveillance coming up after this. CJ Moose of Cannabis Gerald covers the chip sector. CJ joins us now for more. CJ, welcome to the program. Just take it from the top. How long can this cycle really keep on going? How durable is this cycle? A lot of people have their doubts. You're pushing back. 00:09:22 Speaker 5: Yeah, good morning. Thanks for having me. 00:09:24 Speaker 6: I think you're hitting on the key debate for all of semiconductors, the durability of AI infrastructure spending. If you look at the supply side, TSMC is effectively sold out until 2029. 00:09:39 Speaker 5: Memory, similar. And then there's the demand side, right? 00:09:42 Speaker 6: And I think there's some fears around open source modeling and the effectiveness and efficiency of models in China. And is that going to reduce the overall amount of spend? but I think internally at the largest frontier models, they see what their next gen models look like. and they are trying to get as much compute as fast as they can. 00:10:04 Speaker 5: Compute is sold out, right? 00:10:06 Speaker 6: We heard from NVIDIA last week that they can only meet 70% of the demand that they have for calendar 27. They obviously have visibility into 28 and 29. 00:10:16 Speaker 5: And so our view. 00:10:18 Speaker 6: Is that, you know, this spending will continue until 2030 minimum. But that is the core debate. You know, if you're thinking that 28 is call at the peak, then you're probably going to put a lower multiple on the entire group. 00:10:31 Speaker 5: Right. 00:10:32 Speaker 6: But if you think this can extend into 2030 and beyond, then, you know, these stocks are incredibly cheap. 00:10:38 Speaker 4: How important are NVIDIA's moves in funding various efforts in this ecosystem, CJ, to helping that supply issue? It's something they talked about on the call that the CFO did. Is this the lens at which we should view their investments of trying to ease some of the shortages and bottlenecks that are rife within the industry? 00:10:56 Speaker 5: Yeah, it's a great question. 00:10:57 Speaker 6: I think there's, you know, a couple of points, you know, specific to MediaTek. You know, Rick Tsai used to be the CEO of TSMC. He's great friends with Jensen. MediaTek is essentially NVIDIA's physical AI partner. And so this combination or this investment, you know, makes perfect sense to me. You know, I think the earlier comments around getting customers to buy into NVIDIA's full system rack is, even if they have to give up some of the custom silicon business, you know, is a strategy for Jensen. So I think, you know, when you look at these investments in isolation, this one makes perfect sense to me. They are their physical partner. More broadly speaking, you know, I think that Jensen is doing two things with the investments. Number one, he's securing his supply chain. You know, and I think it is multi-year contracts plus, you know, endeavoring to bring financial institutions to support the investment so that that becomes another competitive advantage for them. And then the other is just the simple notion that, you know, Anthropic and OpenAI have limited balance sheets. You know, they're competing against the largest hyperscalers on Earth. 00:12:12 Speaker 5: They have run out of compute. They have. 00:12:15 Speaker 6: visibility to demand for more compute to support their models. And so in that backdrop, they need to find funding elsewhere. And that's where NVIDIA has been willing to do it. So I agree more with Colette from NVIDIA that this is not your typical circular financing. This is more of a demand problem in terms of just not enough supply. And they're helping to make that match up better. 00:12:43 Speaker 4: CJ, the other part of this ecosystem that NVIDIA has been very supportive, be it vocally or with dollars, is open source modeling. They bought Hugging Face shortly after their earnings announcement. Jensen Huang himself has been out writing letters advocating for the ability of American companies to be able to use open sourcing. How important is it for NVIDIA and their continued growth that that access remains turned on, that there are options of cheaper models for corporate global corporations to use? 00:13:14 Speaker 6: Yeah, no, I think, you know, the worst case scenario for an NVIDIA would be the world or at least the United States and non-China, you know, gravitates to a open AI anthropic only frontier model world. 00:13:27 Speaker 5: Right. 00:13:28 Speaker 6: And that's where they get such great scale benefit that they will, you know, look to produce their own silicon and try to use less and less of NVIDIA. 00:13:37 Speaker 5: So if you're NVIDIA, what do you do? 00:13:39 Speaker 6: You go full stack, which means you're going to compete at every level of the AI cake that they've described. And as part of it, it is providing the models. If you look at their investments... with the Neo clouds, you could argue that, you know, NVIDIA is a virtual hyperscaler. They are absolutely competing with the likes of, you know, Amazon, you know, Google, et cetera. And so here again, on the model side, you know, they're going to actively work there and, you know, if they can kind of push their CUDA software and then these kind of smaller enterprise industry focused models, you you know, that's a real win for them in terms of, you know, driving, you know, adoption of their platform. And really, you know, going to first principles, that's what Jensen wants. He wants the world on NVIDIA's platform. 00:14:33 Speaker 1: CJ, before you go, Danny asked a version of this question just last week. I'd love your reaction to it. Is there a bit of a disconnect between the cost of building out the ecosystem right now and the loss of pricing power for the frontier models? 00:14:46 Speaker 5: It's a great question. Um, You know, I think. 00:14:52 Speaker 6: I think the truth today is that the frontier models probably do about 30 percent of token generation, yet earn about 90 percent of the economic profits. You know, I think true real intelligence will garner the lion's share of the economic profits. And so as They continue to push forward great models. You know, I think they'll continue to continue to do extraordinarily well. But there is absolutely a need for other models. 00:15:20 Speaker 5: Right. 00:15:21 Speaker 6: You know, if you're if you're just going to ask, you know, this year, where does Thanksgiving fall? 00:15:26 Speaker 5: You don't need a great model for that. 00:15:28 Speaker 6: And so in the future, you know, we're going to optimize that. to the question to each, you know, specific model that is best for that and offers the lowest cost per token. And so I absolutely think we're in a world of, you know, closed frontier plus open, you know, will be our future. 00:15:45 Speaker 1: CJ, final question, I promise. There's a near unhealthy obsession. Some people might say there is an unhealthy obsession on this program over monetary policy. And the prospect of higher interest rates, even on the radar of some of these companies investing in this build out and borrowing money in capital markets the way they are, You know, not I guess. 00:16:03 Speaker 6: Not typically with equity investors, but the companies, I would think 100 percent. I mean, in the last few weeks, we've seen CDS spreads push out for NVIDIA, Broadcom, others. Cost of financing is absolutely critical for, you know, investing in these data centers. That's part of the reason why NVIDIA created that $ 500 million platform with BlackRock, Blackstone, etc. Absolutely, cost of financing is incredibly important to the NPVs of these investments. If interest rates do continue to push higher, that will limit the magnitude of investments. 00:16:43 Speaker 5: I certainly hope they don't. 00:16:44 Speaker 1: Stay with us. More Bloomberg surveillance coming up after this. At Santa Cruz, President Donald Trump announcing a historic deal with Venezuela, giving the U.S. majority control of more than 65 billion barrels of proven supplies in the country. Officials saying the agreement would create the world's second largest private oil company by reserves. Paul Sankey of Sankey Research calling the deal, quote, Easier said than done. Paul joins us now for more. Paul, good morning. Good to see you, buddy. I've got to say, I found it difficult to internalize this message coming from the White House. What is going on here? What do we know about it? 00:17:24 Speaker 7: Well, I think a lot of this is just fiddling while Rome burns. You know, what we've got here is a $ 4 gallon gasoline price and a $ 5. 00:17:30 Speaker 2: 50 diesel. 00:17:32 Speaker 7: So you're up at $ 250 a barrel diesel, similarly, nearly 200 gasoline a barrel. And we're talking about Venezuelan oil reserves when we really don't need Venezuelan oil reserves. And starting at the top, this is, for example, contrary to the Venezuelan constitution. These are really, really big issues to address. And an announcement between Delce Rodriguez and President Trump, which don't match, by the way, they're saying different things. You're just like, yeah, whatever. We don't need more crude at this point. That's not the issue. We don't really, in my view, need an SPR because we're in such a good position from the point of view of our own oil and gas industry. So, I just think it's, you know, a bit of a sideshow, quite frankly. 00:18:11 Speaker 1: You think we need refiners? 00:18:13 Speaker 7: Yeah, we're short refining and that's the big issue. And, you know, there's really almost nothing you can do about that. The headlines around Hormuz are similar. You know, what you're talking about here is 8 million, 10 million, 5 million barrels a day of crude. And the issue is whether or not we can get products out. And if you look at how much product is coming out of the Hormuz, it's actually not what increases when deliveries of oil increase through the Hormuz. So that doesn't address the issue either. And from the point of view of the stuff you guys just talking about, the wash, the interest rates, everything else, this diesel price is a colossal problem. 00:18:46 Speaker 2: You know, it really is. 00:18:46 Speaker 7: And I just don't hear anyone really talking about it in terms of making announcements about Venezuela. 00:18:51 Speaker 6: Yeah. 00:18:52 Speaker 4: What is industry? What role do they have to play? If you're an investor, if you're Chevron right now looking at the actions in Venezuela, how do you act? 00:18:59 Speaker 7: Well, I mean, this is good for Chevron, right? They never left Venezuela. They are the dominant U.S. 00:19:05 Speaker 5: Player. 00:19:05 Speaker 7: They don't have the legal dispute that you have with Exxon and Conoco against the Venezuelans. And so Chevron's in very good shape here. And you've seen their volumes from Venezuela grow rapidly. The other issue here, which makes it somewhat moot in terms of the impact on global oil markets, is basically every barrel of Venezuelan growth, which is growing quite rapidly in terms of incremental supply from where they were at the lows. 00:19:28 Speaker 2: So, you're probably at. 00:19:28 Speaker 7: About 1.2, 1.3 million barrels a day coming out of Venezuela right now. You can probably get to 2 million barrels a day. That essentially just competes with Canadian crude. So, what you're doing is actually more pressuring Canada. then you are really having any major impact on the diesel price that I'm focusing on. 00:19:47 Speaker 4: So if there's little that can be done around diesel price, how does that translate into China? A China which stockpiled ahead of the conflict in Iran and largely found themselves insulated because of that. At what point does that sort of relief start to wear off and it really impacts the nation? 00:20:02 Speaker 7: You know, it's very significant that as soon as Hormuz blew up, the first major announcement from a government was China saying they were going to ban product exports. And what we've been watching very closely, because it's hugely important at the margin of the Asian market, is when China's going to start ramping back up its refining and exporting more into Asia, which will then have that knock-on effect throughout the whole of the complex. So my argument very, very early, before even the IEA emergency announcements, was that President Trump should get straight on a plane and go and see Xi, because the only way you can sort this out is a U.S.-China agreement to do something about Iran, because obviously China has a call on Iran. And at the moment, the first thing actually that happened was that President Trump delayed the trip to China, then went to China and really didn't do anything about Hormuz, quite frankly, and now we're waiting for another meeting. But I think they should frankly make, if they really want to sort this Hormuz problem out, And it's debatable whether it's really that much of a problem for the U.S., quite frankly, because of our very strong oil and gas supply here. Some sort of an agreement between China, which would then bring in Russia and Iran, in theory, that to me is the only really long-term solution you can get here, unless the U.S. does just a full exit and says, good luck, we're out. 00:21:16 Speaker 4: Just on that, the Russian portion of it, how significant is it for this market to also not get products exported from. 00:21:21 Speaker 1: Russia, too? 00:21:22 Speaker 5: Very significant. 00:21:22 Speaker 7: So, that's another massive issue, which is, again, a little bit surprising because it seems that the administration, the Trump administration, asked Ukraine to stop bombing the Kazakh operations and exports, which, of course, are a Chevron, mainly a Chevron project. They seem to have done that, but they haven't backed off the incredible kinetic attacks that they're doing against Russian refining. And that, basically, Russia was the second biggest diesel exporter in the world, and it's really, really struggling right now. So, There's two things really. For example, Kuwait was the biggest supplier of jet fuel to Heathrow. That hasn't been addressed. That whole product complex that was coming out of the Hormuz simply hasn't been addressed. And then the second one was exactly as you say, such a massive supplier. Russia is just being wrecked by Ukraine systematically. And that's hugely important for oil markets. It absolutely is. 00:22:11 Speaker 1: You're in a really interesting seat because you cover the primary commodity. You cover the product. You also cover the companies. Do a little bit of AI as well. Do a bit of everything. So let's talk about the companies, if we can. What's your call now for some of the majors in this country? 00:22:25 Speaker 7: You know, they've never been in better shape in terms of the management and the strategy. So that's been the sort of overriding long-term view is that the companies have finally got it together. They're doing exactly almost the opposite of what the Mag7 are doing. You know, that used to be the oils blowing their brains out on CapEx. One of the big differences on the AI versus the oil CapEx blowout 10, 15 years ago was Back then, the big rush for CapEx from the oil companies was actually to supply China. In the AI case, you're blowing your brains out with CapEx in order actually to get into a fight with the government. As Elon Musk has said, you can compete with companies, you can't compete with the government. I really think that you're headed in the wrong direction there in terms of what kind of returns you're going to make. That's not new news, so to speak. The companies in general are making a vast amount of money in refining. Chemicals remains a problem and more of a problem than I thought given that the issues I think we found out from Hormuz that there's significant chemical overcapacity in Asia. So, actually, we haven't tightened the market as much as I might have thought. And then on the upstream side, you know, 90 is a very good price for these guys. And so, they're doing very, very well. And actually, for some of them, you know, particularly the refiners, it's a problem of too much cash at this point because obviously... They're reluctant to buy back stock at very, very elevated oil prices. The most bullish thing that's happened this summer in many ways is the oil demand hasn't cratered. You know, you would have thought a 550 diesel, $ 4 a gallon at the pump. It really tells you, again, that they're not necessarily fighting the right battle here because it's clear that the gasoline price is not that much of an issue for U.S. 00:23:54 Speaker 5: Consumers. 00:23:55 Speaker 7: And to really help people think, one of the issues here is they keep talking about lower and lower oil prices. And what they miss is there's an inverse correlation between oil prices and natural gas prices. So the long-term issue here is electricity for AI. And one of the huge advantages the U.S. has is the cheapest natural gas. 00:24:12 Speaker 6: In the world. 00:24:13 Speaker 7: One of the reasons for that is because the elevated oil price keeps drilling high. And you have enormous amounts of free natural gas, associated natural gas prices. that comes out from that relationship. So at a high level, it's not complicated, but they just don't seem to get it, that it's not good to bring down the oil price for the U.S., for the industry, nor for the U.S. 00:24:32 Speaker 2: Gas supply. 00:24:33 Speaker 7: And it's just basic points like that that have you kind of tearing your hair out when you observe stuff. Generally speaking, I think, as you know, the oils have been the best performing sector in the market this year, which is great to say. It doesn't happen every year. We can safely say that. And the companies are just in excellent shape and doing very well. 00:24:48 Speaker 1: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business Hour.