00:00:00 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at seven am Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube. 00:00:27 Speaker 2: How do you start the week with your interview of the week, including the fed here on what mister Worsh is going to do? Aditica Bave has a wonderful pedigree, including out of Amherst, which I expect Chairman Worsh is going to quote Robert Frost here at the press conference somewhere ages and ages and hands. I Chairman Walsh will find two roads diverged in a wood or diverged in a wood, and I took the one less traveled. You say, the one less traveled is three rate hikes? 00:00:56 Speaker 3: Yeah? 00:00:57 Speaker 2: Really, you are an outlier. How do you get this rate ikes? 00:01:01 Speaker 3: Okay? 00:01:01 Speaker 4: So the way we get there is pretty simple. Let's talk about the data. For us, it's the data and the reaction function data. The unemployment rate is unchanged from a year ago. Core PC inflation is about sixty basis points above where it was a year ago, and only some of that is one off. So despite all this policies, seventy five basis points easier than last year. 00:01:26 Speaker 3: To us, they're clearly offside. 00:01:28 Speaker 4: So our forecast is just that they'll take back the cuts that they did last year. They were risk management cuts. Those risks around labor have dissipated at this point. And then in terms of the reaction function, we thought going into June that this was fundamentally a dubbish FOMC that would find reasons to not high rates. But the SEP it's not just about the dot plot. It's the fact that nine people expect to hike even though no one has the unemployment rate falling this year, So that for US is a hockey shift in the action fly. 00:01:56 Speaker 2: The guy from South Africa was offside by a totally saw that that was just absolutely, very ridiculous. 00:02:03 Speaker 3: That you don't need replay for this on. You don't need a. 00:02:06 Speaker 2: Far Kivinwurst doesn't get a far. 00:02:08 Speaker 3: What he does get is a. 00:02:09 Speaker 2: Nonlinear function one rate rise, a second, a third wildly nonlinear correct. 00:02:16 Speaker 3: I don't think it's wildly nonlinear. 00:02:18 Speaker 4: Seventy five basis points is very normal for a mini cycle for the FED So to be clear, we don't think they have as much of an inflation problem as they did back in twenty twenty two. Underlying inflation isn't three and a half percent. It's probably closer to two eight or something like that, which is why they don't need to go back to five percent. Right a three and a half percent core PC the tailor rule would tell you need to be at five percent. 00:02:41 Speaker 3: That's not what we're calling for. 00:02:43 Speaker 5: So how's the consumer doing out there? I mean better than we think. How's the consumer doing? 00:02:48 Speaker 4: The consumer is doing great, and we actually have data to back this up. So the Bank of America data credit and debit cod spending. We report this almost in real time. We've already published reports through the twentieth of June. And what we're seeing is an acceleration in spending X of gas as gas prices come down, even though you didn't really see a deceleration X of gas as gas prices went up. So the consumers in good shape. Now, some of this could be a boost from the World Cup that rolls off, but there's no clear sign again that the risks to activity are to the downside. And just going back to Robert Frost for a second. Tom he has promises to keep wors, promises to keep somebody. 00:03:34 Speaker 2: That was a Colby Smith article today Amherst. 00:03:38 Speaker 5: There's still the lord jefs to me, I'm not going to the hole mammothing no. 00:03:42 Speaker 3: Com talk to us about. 00:03:43 Speaker 5: So presumably the Fed and this chairman has some political pressure to lower rate. 00:03:51 Speaker 3: Boy, if he trusted two. 00:03:52 Speaker 5: Three rate hikes this year, the social media poster can be. 00:03:55 Speaker 3: Fast and furious. 00:03:55 Speaker 5: Does that figure into your calculus at all? 00:03:58 Speaker 3: That's a bit outside my wheel. 00:04:00 Speaker 4: But what I would say, just as a statement of fact, is that the President noted during the press conference that he would be okay with the FED hiking rates. And honestly, if you think about Chair Warsh's incentives right now, he has a brief window where he can hike rates and not necessarily take the blame in the sense that the inflation happened under the previous regime. If he doesn't hike now and inflation doesn't get better over the next year, and there's a lot of pressure from the Committee to hike next year, he'll have to own that longer. 00:04:34 Speaker 5: Term in terms of inflation, to the extent that this decline of globalization. I'm not sure if you guys subscribe to that, but its decline of globalization this America first, the near shuring friendshiing doesn't that structurally lift inflation. 00:04:48 Speaker 3: It does, it. 00:04:49 Speaker 4: Does, and we're seeing some of that in the inflation data as well. If you look at the underlying drivers of inflation, for sure, we don't have a disastrous problem around him again, which is why policy doesn't need to go to five six percent. But supply drivers are really really sticky, and that's not going away, right. It's just wave after wave of supply shock, and that's something the FED will have to contend with. If you're looking at five ten years of supply driven inflation just being elevated, then you have to put more downward pressure on demand or you have to accept that you're always going to miss your target by fifty seventy basis points. 00:05:25 Speaker 2: When you talk to your equity people, which are who are really competent, like a huge Excel spreadsheet, quantitative strength, if you get above a three rate increases, what does the stock market do? 00:05:36 Speaker 4: My senses, it'll be fine. I mean, look at the fact that we've gone from two cuts price for this year to a high and a half and equities have navigated that just fine. So another high and a half. Could that be the straw that breaks the camels back? Maybe, but I don't think that's a slam dunk either. 00:05:56 Speaker 5: So for labor, what do is the be of a kind of AI as it relates to the labor market? Kind of intermediate the longest term, I guess, right. 00:06:05 Speaker 4: So the longer term view is that AI will replace tasks more than it will replace jobs. So ultimately there's going to be creation of a whole bunch of new jobs that we just can't conceive off right now. 00:06:20 Speaker 3: So I like this. 00:06:21 Speaker 4: Statistic something like sixty percent of jobs that exist today did not exist back in nineteen forty, So I think there's going to be something like that happening down the line. Now that said, there is a transition period. There are going to be winners and losers, and the speed of that transition is going to matter a lot in the near term for FED policy. 00:06:40 Speaker 2: Aliz above, thank you so much. With the Bank of America here, really quite a call, folks. We'll have a mix of calls here as we go to the FED meeting and beyond the jobs report of this last week of the second quarter. Doctor boviy is with Bank of America. Stay with us. More from Bloomberg Surveillance coming up after this. 00:07:08 Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube. 00:07:20 Speaker 2: What a joy in studio Alicia Levine being why I'm just going to cut to the choice and you could see it in Baron's This Weekend, this cacophony of OMG. We've got a fabulous Microsoft World's Coming to an End article out today and in your research note, you've got some optimism on tech. What's your visibility here? When you say buy meg seven, own mag seven? Are you out six days, six weeks, or six years? 00:07:47 Speaker 6: So I think it's hard to be six years, But I think that the collapse in multiple here on the Mag seven gives you an entry point here because essentially what's happened over the last few weeks, And don't forget this really started in November first of last year. The funding and the spending on AI is coming from these hyperscalers, you know, hundreds of billions of dollars estimates eight hundred billion dollars this year. And it's going to fund other companies, right, the products of other companies. It's hardware, right, it's built out, it's industrial, it's energy, and it's hardware tech companies. And essentially the market said, we follow the money. I don't want to buy the spenders. I want to buy the AI beneficiaries. And so that's what we've seen. And so this year, you know, twenty twenty six AI beneficiaries, and we did a study on this, about twenty percent of market cap of the S and P they're going to grow earnings. It's seventy percent year over year. The rest of the market's growing fifteen percent. That's actually quite good. But you get to a world where like, why am I going to invest in the companies that are spending Maybe I should be you know, buying where the money is going and the cash is going. That leaves the situation where they're on loved, they're sitting on support, and it's hard for me to believe that these managements are just going to take it lying down and go, you know, quietly into that dark night. So I think there's an opportunity here from some sort of reversion trade. There are parabolas all over the place on the the tech hardware space, and I think you get a summer of reversion and I think it's better on the index level, but complicated, it's complicated. 00:09:26 Speaker 5: So buying the index today, I mean we're talking about our kids and investing. They're probably buying SMP ETFs all that kind of what they're buying is tech and AI. It's become such a concentrated market. 00:09:37 Speaker 3: Is that a concern to you? 00:09:38 Speaker 6: So it's a concern in that that the correlations across asset classes have become very high. You know, I come to Bloomberg's Awesome and we're talking about sk Heinex and Samsung and we've got the price of Skhnex and Samsong on the on the board here, Like when did we ever do that? 00:09:57 Speaker 7: Right? 00:09:58 Speaker 6: So now you have you think about Taiwan, Taiwan Semi, and you think about Korea. What percent of the EMX China index is that? Wow, it's about fifty two percent. If you think about the em index, it's also about fifty percent. So you've got AI dominating the Emerging Markets index. You've got AI dominating the US index, not in developed international because Korea is an EM for some strange reason. But you know, as a result, when you build out diversify portfolios, you're in a place where actually what you think is, you know, you're you're hedging some risk in different ways. Typically EM has been about energy and materials and financials. Now it's AI. So you're not actually buying different factors, you're buying the same factor, and so that becomes complicated in the short term and maybe even the long term of how you build out a portfolio. 00:10:48 Speaker 2: I would suggest most people don't know that the Nasdaq on a weekly chart has a drawdown of eightish percent or so. It feels a lot worse. 00:10:57 Speaker 3: It feels worse. 00:10:58 Speaker 6: Everybody owns the names, right, I mean, if you think about, you know, the seven percent of the S and P, eight percent of the S and P we flashed the names up there, those are the names that have either been flat or have gone negative for the year. And so the on the index level, it's actually quite painful. You look at the Rustle one thousand growth index, I think it's down for thee or maybe flat. Meanwhile, you've got you know, stocks up one hundred percent this year, and so you're asking yourself, way, that's hardware stock is up one hundred percent, but you know the Rustle growth index is flat for the year, and what's happening in the four one k So you're having these weird conversations. Really, the market is terrible. Actually it's pretty good. Spending is going and it's concentrated, and that's where investors have gone. So nimble investors have just followed where the cash flow is going. 00:11:41 Speaker 5: As the CIO BN y wealth what's the fixed income call these days? 00:11:45 Speaker 6: So the fixed income call is that we see we see at least one hike for this year. We've been in the belly of the curve for a long time because we think there's risk on the longer duration side simply because of the massive amounts of debt. And then to be honest as our clients, our clients went income without duration, Right, You've got to be a magician here. So I think the repricing actually because of the FED and the war wash FED. I actually think it is a great opportunity to do this. And the other thing is, you know, the market has been pricing in about two hikes for this year in the sense that previous FEDS have never gone just once. It's always like a cycle, right, either cut once, you don't cut, once you cut twice, at least you don't hike once you hike twice at least, right, that's sort of the mental map. I think the war shped could be different. I think that you know, the you know we will bring price stability is really clear. What that is very clear that oil dropping like a stone twenty percent since the MoU is not changing the court inflation outlook because the war went on too long. The price hikes went on too long. And separately from that, hardware is now expensive, so it's going into consumer goods. So now you've got higher inflation expectations in the core, in the core, And that's the FEDS problem. It's not the top line, it's the core problem. 00:13:09 Speaker 2: Alicia Levine, thank you so much with being one. 00:13:11 Speaker 6: Great to see you this morning. 00:13:12 Speaker 2: I got eight more questions for but time. Stay with us. More from Bloomberg Surveillance coming up after this. 00:13:27 Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android auto with the Bloomberg Business app or watch us live on YouTube. 00:13:40 Speaker 2: Jim Karen with us right now and when you read through is Morgan Stanley Research note a CIO cross st Paul Up's on a two hour interview. Let's see what we can do here the single sentence, Jim, I see there. You know I'm in the camp with you on this. It's a new nominal GDP regime. You say equities will win. What will bills, notes and bonds do? Public or private? If we get a more sustained lift in nominal GDP. 00:14:06 Speaker 8: Yeah, well, thanks and good morning, and thanks for having me on your show. So in a higher nominal GDP world, So let's let's put a number on this. So we just had some upward revisions on GDP growth. You know last week for the first quarter, GDP year of the year is growing at about six point one percent. That's a pretty healthy high number. What that does is it puts upward pressure on interest rates because remember nominal GDP is a combination of real plus inflation. In order to get nominal GDP so high, it just means that inflation is likely going to stay above target for an extended period of time. That puts a lot of pressure on the FED to potentially high grades, and this is the debate that we're having today. Whenever you have that debate, that's going to put upward pressure on bond yields. It doesn't mean that yields are going to just trend higher immediately. What it means, though, is that they probably don't go down materially and stay down material really unless you have a deeper correction in the market, like a recession or something like that. So it does put pressure on the duration component, the interest rate sensitivity of bonds, but on the credit component of bonds, it's actually kind of positive, right because the same thing that's powering equities higher in nominal growth, which is higher earnings, is higher cash flows. It means that companies are earning more cash flow to pay back their debt, so the risk of default is actually a bit lower, which default rates going down means that credit spreads should stay relatively tight and narrow. It's actually more of a positive for credit. So what we're saying in bonds is that you want to be a little bit underweight duration, and you want to have some overweight towards higher quality credit, and even some you know, good quality double B bonds in the high yield sector to get some extra yield and even a little bit of emerging markets. So that way you get the yield, you get the income, but you don't have as much of the interest rate sensitivity in your bond portfolio. And if you balance that with equity as well, you can generate a lot of alpha. 00:16:07 Speaker 3: Jim. 00:16:08 Speaker 5: We've had a number of equity strategists in here this morning and they say, you know, the number one question they get from their clients is AI and is it a boom or is this revolutionary? And with all the investment grade bond issuance by these AI related names, that's a story for you guys as well, how are you thinking about it? 00:16:25 Speaker 3: So it's a really good question. 00:16:27 Speaker 8: What we have to recognize is that many of these technology companies have only recently started to tap the markets, right. This is something that's happened over the last year or two. The balance sheets, if you look at the balance sheets, if you look at the debt equity mix and the cash flow in the strength of their balance sheets, and you see the amount of debt that they're offering or issuing out into the markets. And yes, these are big companies, and the numbers can be high, but as a percentage relative to their balance sheet and the strength of their balance sheet, it's actually it's actually very reasonable. In fact, I would argue that many of these technology companies are under leveraged at at this point. And that's something that we just have to understand because what we're seeing in the credit indices like investment grade in high yield is at the index level just still relatively tight. 00:17:16 Speaker 2: Okay, I agree with all that, But nevertheless, in this historical moment, if they continue to issue ten billionaire twenty billionaire a Jim caron thirty billion there, Jim, if they do that, how does that change the calculation of a traditional equity analysis like the terminal value or the dividend discount basic Stuffy, It's it's the magnitude of the debt that gives our listeners pause. 00:17:46 Speaker 3: Yeah, so that's a great question, tom. 00:17:48 Speaker 8: So what's happening is that we're putting a lot of bond supply into the markets that's going to inevitably push interest rates higher. And now when you think about your debt equity mix and your divenend discount model, and you know in your terminal values. That's going to start to impact the equity valuation of many of these companies. So I'm not saying that a lot of debts Okay, I'm not saying that at all. That's not the case, but there's a right sized amount. I don't think we've crossed the threshold where it's mattering at this moment, but of course if it continues then yeah, or of course it will. 00:18:25 Speaker 2: Microsoft Paul four point four percent debt Oracle twenty point four percent yep. 00:18:31 Speaker 5: I like in your notes here, Jim, in the bear case, AI is a bubble and will follow the path of railroads, i e. Capex will be a boom for the economy, but the directly exposed companies will go bust out. How do you think about that as a risk potentially? 00:18:47 Speaker 8: Yeah, So, so there are bull and bare cases to AI. We fall in the bull camp. So ultimately, yes, there is a lot of capex spending out. 00:18:56 Speaker 3: There, and there are going to be winners and losers. For sure. 00:19:00 Speaker 8: We think that there is going to be more net winners in this scenario. And the reason is is that the capex spend that's taking place for some of the companies that are creating operating leverage, meaning that they're using technology to generate earnings not just cut costs, is actually going to really. 00:19:18 Speaker 3: Favor that segment. 00:19:19 Speaker 8: So I would argue things like healthcare, one of the most inefficient segments of the economy, could benefit quite a bit, and there's a lot of cost efficiencies and there's a lot of earnings efficiencies that can come out of that sector. The consumer I think can win in this as well, because you get higher productivity, you get lower unemployment rate, and you get higher wages, but you don't necessarily get the inflationary impulse. So there are certain segments of the markets that are really well valued, meaning that they have a low valuation that stand to benefit quite a bit. 00:19:51 Speaker 3: So when we mix us all. 00:19:52 Speaker 8: Together, we're in the camp that the early adopters who are smartly applying technology to generate earnings, not just cut costs, but generate earnings using AI, that's the key. Then I think those companies are the winners. It's going to be very uneven, but it's great. It's a great environment to diversify portfolio and invest in. 00:20:12 Speaker 2: Jim Karen on ETFs. How are bond ETFs doing? Are they? Are they tracking all the core indices you look at. 00:20:22 Speaker 3: Yeah, I mean so. 00:20:23 Speaker 8: So the thing with ETFs in bonds, right, it depends on which ETF. If you're talking about just a passive ETF that's matching an index or something like that, I kind of find that somewhat uninteresting. And the reason is is that if you just want pure bond exposure and say, yeah, okay, that's fine, it's completely it's completely fine. I tend to like the more actively managed ETFs, where the managers are actually trying to manage some duration in credit risk and and things like that to me makes more sense. But the standard index following ETFs, it's something that I'm underweight in my portfolios. 00:20:59 Speaker 2: Jim Careen, thank you so much. Just wonderful note, particularly his ideas on nominal GDP have found interesting. Mister Karen is with Morgan Stanley Investment that management stay with us. More from Bloomberg Surveillance coming up after this. 00:21:21 Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube. 00:21:33 Speaker 2: People do research and as you know, I say we protect the copyright of all of our guests. You need to go to mcquarie of Australia, of New York, Mcquarie Chad Binen b e Y on the definitive report on World Cup betting. It is jaw dropping the excellence of this report. Chad, Thank you so much. Now today is a magical day. Even someone like me who doesn't care cares Brazil, Japan, Germany, Paraguay, Netherlands, Morocco. And you say five hundred million dollars will be bet on each of those games. 00:22:14 Speaker 3: Absolutely, thanks for that introduction. 00:22:15 Speaker 2: Tom. 00:22:16 Speaker 7: Look what we've seen so far in the knockout round has been very positive in terms of viewership, in terms of engagement, and in terms of storytelling. So we think it's a very good setup for the knockout round. Here. Three big games today and that continues for several weeks here, and we do think we will see recent record engagement and betting for the game today. 00:22:40 Speaker 2: Paul, FIFA World Cup four years ago thirty five billion. We don't know what it's going to be now. Super Bowl twenty six estimate one point eight billion. Yep. I mean it's ginormous crazy. 00:22:54 Speaker 3: Hey, Chad, just give us a censure. 00:22:56 Speaker 5: I mean, this World Cup is a totally global final Domini here and I guess we're have a better understanding what betting is like here in the US. Everybody's got it on their phone and DraftKings and all that kind of stuff. Talk just about the how betting is kind of developed in Europe, broadly defined, in Asia, broadly defined. 00:23:16 Speaker 7: Sure, globally it's a country by country business, and here in the United States it's actually a state by state business, which is why you can bet in some states and can't bet in others. But you look at mature markets in Europe, England is the United Kingdom is the largest market, Italy, Spain, France, these are other large markets. And then on the other side of the world Australia. England has been around for decades and we think the engagement in their games. Actually, the England Ghana draw would have been pretty negative for the books if England would have pulled that out, But that's why it's exciting. But yeah, there's definitely some mature markets on the other side of the pond. 00:23:58 Speaker 2: Does anybody make money? Does anybody better man? If a Lexus Christopher's. You should see what she made on the knicks. I mean, it was just unbelievable. Is anybody making money at this? 00:24:11 Speaker 7: The operators certainly make money in terms of customers. What we've seen is, you know, customers usually side with the favorites, so there was a nice string of favorites winning, and then you would see a draw or an upset. 00:24:26 Speaker 3: And that's kind of what the books need here. 00:24:29 Speaker 7: They don't want the favorites to win every game, particularly a game daylight today, where there's three matches, you would like to see a draw or an upset for the operators to take back some of those winnings. 00:24:42 Speaker 5: I'm looking at the stocks of like a DraftKings Flutter. I mean, DraftKings is down twenty five percent year today, Flutter down fifty percent. What's the market call on these stocks? 00:24:51 Speaker 3: Why are they inter performing? 00:24:54 Speaker 7: Prediction markets has been the buzzword since I'd say August or September of last year. It was your standard J curve, positive J curve in terms of inflecting the business. Two years ago, companies were generating free cash flow in twenty five. Things looked great for twenty six and beyond, and then the prediction markets entered, so that permits customers to engage in an event contract on sites like Calshi, Polymarket and others. And now Flutter and DraftKings have actually gotten into that business where sports betting is illegal in the US. 00:25:30 Speaker 2: Do you have a single best buy. 00:25:33 Speaker 3: At these levels? 00:25:34 Speaker 7: We are big fans of Flutter Ticker Flut. The company is worth less than what FanDuel was acquired for. I mean, this company has really dropped off precipitously and they hold podium positions around the world in sports betting and eye gaming. 00:25:52 Speaker 1: So talk to. 00:25:53 Speaker 5: Strets as prediction markets. How does that shake out visa VI sports betting? 00:25:57 Speaker 7: Where are we today the current administration, Since it's governed by the CFTC and not sports betting boards, it is permitted and permissible and event contracts need to be approved by the CFTC. So right now you could wager on the number of FED cuts, the number or what the CPI report is going to be, or you could also engage in sports betting. So we don't think the product in the engagement is as strong as what you're seeing on sports betting, But where the valuations have been on the private rounds with Calshi and Polymarket are pretty impressive here. 00:26:34 Speaker 2: Let's help you out, I mean, mcquarre's got to rewrite here. Coming off the new rule of the thirty two, let's go to where I step in and bet. 00:26:42 Speaker 9: Half back passes to the center, back to the wing, back to the center, center, hold it, hold it, holds it huff bucking chip. 00:26:56 Speaker 2: That defines the first half of every game. Am I allowed to step in and bet? Like when they go to ninety minutes and there's five more minutes of time, can you put a bet in at that time? 00:27:08 Speaker 7: Absolutely, that's the big improvement in wagering here. In play betting is about seventy percent wagering outside of the US, and now we're at about forty percent. So these water breaks are helping obviously stoppage time in the NFL, and it gives people time to go to the refrigerator and also re engage in their wagers. 00:27:27 Speaker 2: Don't be a stranger, Chad Byn, and thank you so much on McQuary. Can't say enough about his report votes hugely informative. Look to mcquarie for that wonderful research work. 00:27:39 Speaker 1: This is the Bloomberg Surveillance podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, seven to ten am Eastern on Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal 00:28:08 Speaker 7: HM