1 00:00:02,360 --> 00:00:06,720 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 2 00:00:11,640 --> 00:00:15,440 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 3 00:00:15,480 --> 00:00:18,680 Speaker 2: with Lisa Bromwitz and Amerie Hordernt. Join us each day 4 00:00:18,720 --> 00:00:22,280 Speaker 2: for insight from the best in markets, economics, and geopolitics 5 00:00:22,400 --> 00:00:24,840 Speaker 2: from our global headquarters in New York City. We are 6 00:00:24,920 --> 00:00:27,680 Speaker 2: live on Bloomberg Television weekday mornings from six to nine 7 00:00:27,720 --> 00:00:31,280 Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or 8 00:00:31,320 --> 00:00:33,919 Speaker 2: anywhere else you listen, and as always on the Bloomberg 9 00:00:34,000 --> 00:00:37,240 Speaker 2: Terminal and the Bloomberg Business app. Let's talk about tech. 10 00:00:37,280 --> 00:00:39,479 Speaker 2: The tech trade Steady and head of Micron earnings due 11 00:00:39,720 --> 00:00:42,280 Speaker 2: after the close today, shares that more than two hundred 12 00:00:42,320 --> 00:00:45,000 Speaker 2: and fifty percent so far this year. Danives of web 13 00:00:45,080 --> 00:00:47,920 Speaker 2: Bush writing, there is some added nervousness on the important 14 00:00:47,920 --> 00:00:51,479 Speaker 2: memoryship trade. We continue to believe that in this market 15 00:00:51,560 --> 00:00:53,760 Speaker 2: we will continue to go through a number of gut 16 00:00:53,840 --> 00:00:56,360 Speaker 2: check moments. Dan Ives of Webus joins us now from 17 00:00:56,360 --> 00:00:58,480 Speaker 2: what Dank and morning, is this one of those gut 18 00:00:58,520 --> 00:00:59,120 Speaker 2: check moments? 19 00:00:59,400 --> 00:01:01,560 Speaker 3: Is thing you saw it with the cost be down 20 00:01:01,640 --> 00:01:06,119 Speaker 3: ten percent? It look the golden childs of this tech 21 00:01:06,200 --> 00:01:09,000 Speaker 3: boom a lot. It's in Korea in terms of memory chips. 22 00:01:09,160 --> 00:01:11,480 Speaker 3: When you think about what's happening with SK and obviously 23 00:01:11,520 --> 00:01:16,360 Speaker 3: Samsung a SK overtaking Samsung Micron such an important quarter 24 00:01:16,520 --> 00:01:19,560 Speaker 3: relative to what we see in terms of demand ripple, 25 00:01:19,600 --> 00:01:22,920 Speaker 3: What does that mean for Nvidia hyperscalurs? But I continue 26 00:01:22,920 --> 00:01:27,120 Speaker 3: to look our checks in Taiwan, in Korea, no cracks 27 00:01:27,120 --> 00:01:29,200 Speaker 3: in the armor. And that's why I just continue to 28 00:01:29,240 --> 00:01:32,800 Speaker 3: believe third inning one out in terms of the AI game. 29 00:01:32,920 --> 00:01:35,880 Speaker 2: Further downstream, though you're starting to say some pushback to 30 00:01:35,959 --> 00:01:40,319 Speaker 2: price increasingly, does that uppend some of the story. 31 00:01:40,880 --> 00:01:43,600 Speaker 3: Look, I think on the edges that could look right 32 00:01:43,640 --> 00:01:47,760 Speaker 3: now demand the supply called twelve fifteen to one in 33 00:01:47,840 --> 00:01:50,840 Speaker 3: terms of where we are relative to chips. So my 34 00:01:51,040 --> 00:01:55,120 Speaker 3: view is like you still even if you had some 35 00:01:55,200 --> 00:01:57,880 Speaker 3: events to even take some demand off, you don't have 36 00:01:57,960 --> 00:02:01,320 Speaker 3: an equilibrium probably for another year and a half two years, 37 00:02:01,600 --> 00:02:03,800 Speaker 3: which in my view just continues to weave like the 38 00:02:03,880 --> 00:02:06,919 Speaker 3: chip trade is what you continue to own. Look hyper 39 00:02:06,960 --> 00:02:09,000 Speaker 3: scours obviously, right, I know that those are kind of 40 00:02:09,040 --> 00:02:12,360 Speaker 3: the penalty box to some extent, but you will see 41 00:02:12,400 --> 00:02:16,120 Speaker 3: some push against price, but it's our view like over 42 00:02:16,240 --> 00:02:18,840 Speaker 3: time price comes down it's all part what we're seeing 43 00:02:18,840 --> 00:02:19,519 Speaker 3: with tokens. 44 00:02:19,680 --> 00:02:21,880 Speaker 1: Profit margins self kind of a key point here because 45 00:02:21,919 --> 00:02:23,680 Speaker 1: profit margins have been just going to the moon. They've 46 00:02:23,720 --> 00:02:28,040 Speaker 1: been incredibly, incredibly robust at some of these semiconductors, in 47 00:02:28,040 --> 00:02:30,360 Speaker 1: part because they can charge whatever they want, and that's changing. 48 00:02:30,360 --> 00:02:32,760 Speaker 1: You are seeing some competition with Google and with Amazon 49 00:02:33,120 --> 00:02:35,320 Speaker 1: coming into the four. At what point do you start 50 00:02:35,320 --> 00:02:37,320 Speaker 1: to see those margins really compress. 51 00:02:37,680 --> 00:02:40,799 Speaker 3: Look, I think right now, if there's a pressure point, 52 00:02:40,919 --> 00:02:43,760 Speaker 3: you probably don't see that for another nine twelve months. 53 00:02:43,919 --> 00:02:46,560 Speaker 3: But just like you said, like competitions coming across the sport, 54 00:02:46,520 --> 00:02:49,280 Speaker 3: it's an arms race, you know really when you think 55 00:02:49,280 --> 00:02:52,800 Speaker 3: from what Meta is doing, to Amazon, to Microsoft, you 56 00:02:52,880 --> 00:02:55,480 Speaker 3: have software companies and now they'll start to produce chips. 57 00:02:55,480 --> 00:02:58,080 Speaker 3: Look what's happening even on the Intel side with Apple. 58 00:02:58,639 --> 00:03:02,840 Speaker 3: So that will definitely only start to pressurize the situation. 59 00:03:03,240 --> 00:03:05,400 Speaker 3: But in my view, it just continues to be like 60 00:03:05,760 --> 00:03:09,040 Speaker 3: we are still so early relative to the build out, 61 00:03:09,480 --> 00:03:12,480 Speaker 3: and that's also you're going to have these gut check moments, 62 00:03:12,520 --> 00:03:15,400 Speaker 3: you'll have these white knuckle periods, But we continue to 63 00:03:15,520 --> 00:03:19,160 Speaker 3: view these as opportunities where you own the AI winners. 64 00:03:19,200 --> 00:03:21,320 Speaker 1: Well the AI winners though, is the key point here? 65 00:03:21,360 --> 00:03:23,239 Speaker 1: How do you know who they are when they're shifting 66 00:03:23,240 --> 00:03:25,240 Speaker 1: around so quickly? And I say this, I thought one 67 00:03:25,240 --> 00:03:27,280 Speaker 1: of the most interesting stories was when Microsoft came out 68 00:03:27,320 --> 00:03:28,519 Speaker 1: and they said that they were going to be using 69 00:03:28,560 --> 00:03:32,800 Speaker 1: deep seek to lower the cost of deploying some of 70 00:03:32,840 --> 00:03:35,360 Speaker 1: their large language models. I mean, is this indicating that 71 00:03:35,480 --> 00:03:39,080 Speaker 1: cost is now a much higher factor on the list 72 00:03:39,200 --> 00:03:41,720 Speaker 1: for a lot of these big tech companies when it 73 00:03:41,720 --> 00:03:42,800 Speaker 1: comes to who they're going to go with. 74 00:03:43,000 --> 00:03:48,000 Speaker 3: Yeah, I think it's obviously technology scale, but cost clearly 75 00:03:48,000 --> 00:03:51,480 Speaker 3: puys in. There's also the models. Over time, the model 76 00:03:51,560 --> 00:03:53,120 Speaker 3: is going to be a cheaper and cheaper. I mean 77 00:03:53,160 --> 00:03:55,680 Speaker 3: the value you actually start to thinking about it's in 78 00:03:55,760 --> 00:03:58,840 Speaker 3: the data, it's in the chips, less about the models. 79 00:03:58,880 --> 00:04:02,680 Speaker 3: Which is why ultimately anthropic open AI, they're so focused 80 00:04:02,720 --> 00:04:06,960 Speaker 3: on enterprise compute, They're focused on all these partnerships because 81 00:04:07,040 --> 00:04:10,240 Speaker 3: essential what's happening. Everyone's building out their own moot for 82 00:04:10,360 --> 00:04:12,880 Speaker 3: their own forward And that's why it's a game of 83 00:04:12,960 --> 00:04:16,640 Speaker 3: musical chairs because eventually someone's left without a chair. Now, 84 00:04:16,640 --> 00:04:19,720 Speaker 3: who are those losers? Look, that's that's our job, that's 85 00:04:19,760 --> 00:04:21,919 Speaker 3: other people's in terms of trying to understand who the 86 00:04:21,920 --> 00:04:24,599 Speaker 3: winners are because you you are starting to see a 87 00:04:24,600 --> 00:04:27,679 Speaker 3: separation in terms of you can't just own the space, 88 00:04:27,839 --> 00:04:30,000 Speaker 3: you can't just own to it speaks to our view 89 00:04:30,040 --> 00:04:33,960 Speaker 3: you have to be selective relative to own the winners, 90 00:04:34,080 --> 00:04:36,960 Speaker 3: making sure that you're not sitting. 91 00:04:36,279 --> 00:04:39,000 Speaker 4: When it comes to enterprise, though, is an anthropic way 92 00:04:39,000 --> 00:04:39,800 Speaker 4: ahead of open AI. 93 00:04:40,560 --> 00:04:44,080 Speaker 3: Look, I think anthropic clearly from a model perspective. I mean, 94 00:04:44,200 --> 00:04:47,719 Speaker 3: it's their world. Everyone's paying rent relative to what they've done. 95 00:04:47,800 --> 00:04:51,120 Speaker 3: But that gap could be narrow quickly. I mean open 96 00:04:51,160 --> 00:04:53,240 Speaker 3: AI is just not going to sit there on a treadmill. 97 00:04:53,680 --> 00:04:57,640 Speaker 3: So open AI they had their bulls eye on their back. Anthropic. 98 00:04:57,720 --> 00:05:01,080 Speaker 3: But you see what's happening with anthropy, Like in terms 99 00:05:01,120 --> 00:05:04,800 Speaker 3: of going after talent from you know, from Google, it's 100 00:05:04,880 --> 00:05:06,640 Speaker 3: this arm because a lot of it is going to 101 00:05:06,680 --> 00:05:10,680 Speaker 3: be it's about the engineers. It's about compute power, and 102 00:05:10,680 --> 00:05:13,960 Speaker 3: that's going to drive more and more debt raises, equity raises, 103 00:05:14,080 --> 00:05:17,120 Speaker 3: and that will be also tests for the market in 104 00:05:17,240 --> 00:05:18,400 Speaker 3: terms of how it handles it. 105 00:05:18,560 --> 00:05:20,479 Speaker 4: I haven't seen you since the President briefed me in 106 00:05:20,480 --> 00:05:23,320 Speaker 4: a few reporters looking into you know, maybe doing something 107 00:05:23,360 --> 00:05:25,640 Speaker 4: public private partnerships in these companies. What do you what 108 00:05:25,680 --> 00:05:27,560 Speaker 4: do you make of that government taking a stake. 109 00:05:28,640 --> 00:05:33,480 Speaker 3: I think it's selectively. It's important if it's done the 110 00:05:33,560 --> 00:05:36,080 Speaker 3: right way, because you could argue if you think Intel 111 00:05:36,320 --> 00:05:39,440 Speaker 3: Intel now I mean they're you know, they're obviously in 112 00:05:39,480 --> 00:05:41,920 Speaker 3: a glorious situation. Look where they were a year and 113 00:05:41,960 --> 00:05:45,279 Speaker 3: a half go. If government doesn't take a stake there, 114 00:05:45,600 --> 00:05:48,880 Speaker 3: which ultimately led to Nvidia and more. Now you look 115 00:05:48,920 --> 00:05:51,359 Speaker 3: at Lip and Intel their core in terms of the 116 00:05:51,440 --> 00:05:54,239 Speaker 3: trade when it comes to quantum I think that's really 117 00:05:54,279 --> 00:05:56,840 Speaker 3: important in terms of some of the government initiatives. And 118 00:05:56,880 --> 00:05:59,039 Speaker 3: I think IBM and Arvin have been kind of front 119 00:05:59,040 --> 00:06:01,680 Speaker 3: and center there because what's happened in China because of 120 00:06:01,680 --> 00:06:02,240 Speaker 3: this arms or. 121 00:06:02,440 --> 00:06:05,400 Speaker 2: Can we finish on two losers? Meta? Microsoft? What do 122 00:06:05,480 --> 00:06:07,320 Speaker 2: I do with those names now? They're in bad markets. 123 00:06:07,560 --> 00:06:09,600 Speaker 2: Everyone's getting all built up on the text story. Some 124 00:06:09,720 --> 00:06:12,000 Speaker 2: of the biggest tech names on the planet. We're in 125 00:06:12,040 --> 00:06:13,760 Speaker 2: a bad market. What you do with those names now? 126 00:06:13,800 --> 00:06:16,160 Speaker 3: I think you have to separate amount of what Microsoft 127 00:06:16,279 --> 00:06:19,080 Speaker 3: I think is the most oversold large cab name. Just 128 00:06:19,120 --> 00:06:22,520 Speaker 3: to my view, have they made stumbles on Copile and 129 00:06:22,560 --> 00:06:25,440 Speaker 3: some other aresa. But in terms of enterprise, their backyard 130 00:06:26,000 --> 00:06:30,200 Speaker 3: as your growth, compute supply issues, I think that's ultimately 131 00:06:30,240 --> 00:06:32,279 Speaker 3: a stock that you know, five five hundred and fifty 132 00:06:32,279 --> 00:06:34,560 Speaker 3: hours stock. So I actually think that continues. Just like 133 00:06:34,600 --> 00:06:37,160 Speaker 3: a year ago, the narrative on Google was so negative. 134 00:06:37,200 --> 00:06:40,560 Speaker 3: Look where we are now from meta Look it's approved 135 00:06:40,560 --> 00:06:43,479 Speaker 3: me like right now, like they're going up Mount ever 136 00:06:43,680 --> 00:06:46,640 Speaker 3: Is without you know, oxygen or whatever. What they're trying 137 00:06:46,680 --> 00:06:49,640 Speaker 3: to do. That will be the prove it moment for 138 00:06:50,080 --> 00:06:53,400 Speaker 3: Zuck as he ultimately tries to go and change the model. 139 00:06:53,600 --> 00:06:55,880 Speaker 3: I think they're going to be successful doing it, but 140 00:06:55,960 --> 00:06:58,760 Speaker 3: they have You can't just spend on cappacks and not showing. 141 00:06:58,640 --> 00:07:00,279 Speaker 4: Results by this. 142 00:07:00,640 --> 00:07:13,080 Speaker 2: More Bloomberg surveillance coming up after this, let's talk about 143 00:07:13,080 --> 00:07:17,280 Speaker 2: the debt dlage facing some PUSHBACKSPACEX selling twenty five billion 144 00:07:17,320 --> 00:07:19,680 Speaker 2: dollars of investment grade bonds and paying Cup to get 145 00:07:19,720 --> 00:07:21,920 Speaker 2: it done. The company's bond mere shuring a twenty thirty 146 00:07:21,920 --> 00:07:24,440 Speaker 2: six pricing at a premium of one point four percentage 147 00:07:24,440 --> 00:07:27,920 Speaker 2: points above treasuries, roughly half a percentage point wider than 148 00:07:27,920 --> 00:07:30,600 Speaker 2: the average spread on other triple B rate of debt 149 00:07:30,800 --> 00:07:32,840 Speaker 2: to discuss A man in the no joining US now 150 00:07:32,960 --> 00:07:36,480 Speaker 2: is JP Morgan's global cohead of IG Financing, John Servedea. 151 00:07:36,840 --> 00:07:37,880 Speaker 2: Good morning, sirs, good to see you. 152 00:07:37,960 --> 00:07:38,360 Speaker 4: Good to see you. 153 00:07:38,480 --> 00:07:40,000 Speaker 2: That's a bit of a gut check, I think for 154 00:07:40,040 --> 00:07:41,920 Speaker 2: investment grade debt. How do you think things went in 155 00:07:41,920 --> 00:07:43,000 Speaker 2: the last twenty four US. 156 00:07:43,320 --> 00:07:47,280 Speaker 5: I think it was another positive signal of the availability 157 00:07:47,280 --> 00:07:49,520 Speaker 5: of capital. If you just take a step back. So 158 00:07:49,600 --> 00:07:53,280 Speaker 5: far this year we've seen six transactions of twenty five 159 00:07:53,280 --> 00:07:56,400 Speaker 5: billion dollars or greater. In all of twenty twenty five 160 00:07:56,440 --> 00:07:59,440 Speaker 5: there were two, So the scale of the capital needs 161 00:07:59,480 --> 00:08:02,960 Speaker 5: continues to grow. Everybody knows that what we're really encouraged 162 00:08:02,960 --> 00:08:06,560 Speaker 5: by is that the market is available and understands that 163 00:08:06,920 --> 00:08:09,520 Speaker 5: and is positioning themselves on the investor side to make 164 00:08:09,680 --> 00:08:13,880 Speaker 5: thoughtful investment decisions to help finance this secular trend that 165 00:08:14,240 --> 00:08:15,720 Speaker 5: is not going anywhere. 166 00:08:15,800 --> 00:08:17,800 Speaker 2: For obvious reasons, we won't spend too much time on 167 00:08:17,800 --> 00:08:19,520 Speaker 2: this one single issue, don't want to get you in 168 00:08:19,560 --> 00:08:21,760 Speaker 2: too much trouble. But further rount along the curve, the 169 00:08:21,840 --> 00:08:24,360 Speaker 2: longer dated maturity, Just how much wider that was trading 170 00:08:24,440 --> 00:08:27,600 Speaker 2: relative to other triple B rated debt, other triple B 171 00:08:27,720 --> 00:08:30,440 Speaker 2: rated pairs. What's the takeaway from that, doubts about the 172 00:08:30,440 --> 00:08:33,800 Speaker 2: credit ratesing agencies? How are you thinking about that the way. 173 00:08:33,640 --> 00:08:37,160 Speaker 5: That we're thinking about the market generally and specifically to 174 00:08:37,200 --> 00:08:39,880 Speaker 5: your question, if you take a big step back, and 175 00:08:39,920 --> 00:08:43,120 Speaker 5: this is no surprise, but credit spreads are at historic tights, 176 00:08:43,720 --> 00:08:47,640 Speaker 5: and so in our view, across the investment grade credit spectrum, 177 00:08:47,800 --> 00:08:51,800 Speaker 5: there should be differentiation based on different ratings and credit profiles. 178 00:08:52,200 --> 00:08:54,280 Speaker 5: So one of the things that I take great comfort 179 00:08:54,280 --> 00:08:57,600 Speaker 5: in is the fact that investors are not blindly buying 180 00:08:57,640 --> 00:09:00,559 Speaker 5: everything right yet. Yes, there's a tremendous amount of capital 181 00:09:00,880 --> 00:09:03,720 Speaker 5: being deployed here, but investors are taking the time to 182 00:09:03,720 --> 00:09:06,520 Speaker 5: do credit work, to understand the stories and to figure 183 00:09:06,559 --> 00:09:09,360 Speaker 5: out relative value in pricing. So to me, a healthy 184 00:09:09,400 --> 00:09:10,240 Speaker 5: sign for the market. 185 00:09:10,360 --> 00:09:13,640 Speaker 1: How nervous are investors getting about the concentration risk that's 186 00:09:13,679 --> 00:09:16,440 Speaker 1: developing given that so much of this debt is tied 187 00:09:16,480 --> 00:09:17,160 Speaker 1: to the AI store. 188 00:09:17,240 --> 00:09:21,480 Speaker 5: Yeah, it's something we're clearly watching very closely. We're still 189 00:09:21,520 --> 00:09:24,920 Speaker 5: at a point where there's a lot of capital available 190 00:09:25,040 --> 00:09:28,360 Speaker 5: and investors are figuring out how they want to play 191 00:09:28,400 --> 00:09:31,240 Speaker 5: this theme. Again, as I just said, this is arguably 192 00:09:31,600 --> 00:09:35,319 Speaker 5: the biggest secular theme in any of our professional lifetimes. 193 00:09:35,360 --> 00:09:37,360 Speaker 5: So as an investor, you have to be part of it. 194 00:09:37,840 --> 00:09:41,680 Speaker 5: The question is how, and so I don't think we're 195 00:09:41,720 --> 00:09:45,760 Speaker 5: at a point yet where concentration limits are a huge concern, 196 00:09:46,200 --> 00:09:48,480 Speaker 5: but it is part of the dialogue because you're absolutely right. 197 00:09:48,480 --> 00:09:50,840 Speaker 5: As a proportion of the overall market, it is growing 198 00:09:51,320 --> 00:09:52,360 Speaker 5: and growing very quickly. 199 00:09:52,679 --> 00:09:54,000 Speaker 1: This is the reason why you're seeing a lot of 200 00:09:54,000 --> 00:09:57,840 Speaker 1: companies look to tap every single corner, picking up quarters 201 00:09:57,840 --> 00:10:00,760 Speaker 1: in the couch questions of Canada and the couch of Japan. 202 00:10:00,840 --> 00:10:03,560 Speaker 1: And at what point is this capital coming from other 203 00:10:03,640 --> 00:10:07,000 Speaker 1: bond portfolios versus new pools of capital, whether it be cash, 204 00:10:07,040 --> 00:10:09,480 Speaker 1: whether it be equities, whether it be private equity. I mean, 205 00:10:09,520 --> 00:10:11,120 Speaker 1: how much are you seeing that really unleashed? 206 00:10:11,559 --> 00:10:11,760 Speaker 2: Well? 207 00:10:12,240 --> 00:10:14,960 Speaker 5: As a debt person, the really exciting part of this 208 00:10:15,040 --> 00:10:16,680 Speaker 5: for me has been there have been a lot more 209 00:10:16,880 --> 00:10:19,400 Speaker 5: coins in the couch cushions, right, and so if you 210 00:10:19,440 --> 00:10:22,640 Speaker 5: look across the global markets, we've led the biggest Canadian 211 00:10:22,679 --> 00:10:26,000 Speaker 5: dollar deal ever done, the biggest Euro deal Stirling deal. 212 00:10:26,080 --> 00:10:28,680 Speaker 5: So these other global markets which have always been there 213 00:10:29,440 --> 00:10:32,440 Speaker 5: have grown in relevance in a very material way such 214 00:10:32,480 --> 00:10:36,200 Speaker 5: that the available capital is much larger, which helps the 215 00:10:36,240 --> 00:10:39,840 Speaker 5: overall ecosystem in terms of how we finance these massive 216 00:10:39,880 --> 00:10:40,680 Speaker 5: CAPEX numbers. 217 00:10:40,760 --> 00:10:42,319 Speaker 4: What's most attractive if you're going to do one of 218 00:10:42,360 --> 00:10:45,120 Speaker 4: these offerings outside the United States, out of all of 219 00:10:45,120 --> 00:10:47,400 Speaker 4: these countries you're talking about. 220 00:10:47,360 --> 00:10:51,720 Speaker 5: It is a combination of diversifying funding sources and demonstrating 221 00:10:51,760 --> 00:10:55,160 Speaker 5: that as an issuer you won't be solely reliant on 222 00:10:55,360 --> 00:10:58,520 Speaker 5: the US corporate bond market, which remains the largest, deepest, 223 00:10:58,520 --> 00:11:02,240 Speaker 5: most liquid buy a lot. In certain cases, there's a 224 00:11:02,240 --> 00:11:06,640 Speaker 5: pricing benefit to it. In certain cases, it's just establishing 225 00:11:06,640 --> 00:11:08,679 Speaker 5: a new investor base so that in the future, you 226 00:11:08,720 --> 00:11:10,840 Speaker 5: know you can go back there. So it really is 227 00:11:10,920 --> 00:11:14,240 Speaker 5: again helpful in the context of we're still in the 228 00:11:14,320 --> 00:11:15,640 Speaker 5: earlier mid innings of this. 229 00:11:15,920 --> 00:11:17,800 Speaker 1: Does it worry you when a company doesn't have cash 230 00:11:17,800 --> 00:11:21,480 Speaker 1: flows that really compensate over the debt and over the 231 00:11:21,520 --> 00:11:23,920 Speaker 1: expenses that they have, And yes, I'm talking about SpaceX, 232 00:11:23,920 --> 00:11:25,200 Speaker 1: but there are a number of them that are probably 233 00:11:25,240 --> 00:11:27,360 Speaker 1: going to be coming to market. I'm thinking if this 234 00:11:27,400 --> 00:11:29,400 Speaker 1: is a model, we could see something similar from open 235 00:11:29,400 --> 00:11:31,719 Speaker 1: AI and Anthropic. Once they IPO, then there's going to 236 00:11:31,720 --> 00:11:34,280 Speaker 1: be a follow on debt offering. How important is it 237 00:11:34,320 --> 00:11:36,760 Speaker 1: for people to see the show me the money, the 238 00:11:36,800 --> 00:11:39,440 Speaker 1: sort of the cash flows that can continue in perpetuity 239 00:11:39,760 --> 00:11:42,800 Speaker 1: to overcome some of these huge debt piles. 240 00:11:43,320 --> 00:11:46,080 Speaker 5: Yeah, it's going to be interesting to see as the 241 00:11:46,120 --> 00:11:50,120 Speaker 5: story plays out. And you're absolutely right that the cash 242 00:11:50,160 --> 00:11:53,440 Speaker 5: flow profile of many of these companies is very different 243 00:11:53,440 --> 00:11:56,840 Speaker 5: from what your average investment grade investor is used to seeing. 244 00:11:57,559 --> 00:12:00,880 Speaker 5: The reality is there our investor bases getting so up 245 00:12:00,880 --> 00:12:03,600 Speaker 5: to speed on all of these stories in and around 246 00:12:03,640 --> 00:12:07,800 Speaker 5: the IPO that I think they're prepared to deploy capital 247 00:12:08,200 --> 00:12:11,800 Speaker 5: as needed pretty quickly. Again, it will play out over 248 00:12:11,880 --> 00:12:14,760 Speaker 5: time in terms of cash flow profile or what the 249 00:12:14,760 --> 00:12:18,080 Speaker 5: capex curve looks like relative to servicing the debt. 250 00:12:18,400 --> 00:12:20,200 Speaker 2: We're not there yet, John, You've been in the market 251 00:12:20,240 --> 00:12:22,959 Speaker 2: a long time. How would you frame this moment historically 252 00:12:23,040 --> 00:12:24,240 Speaker 2: if you ever seen anything like this? 253 00:12:24,400 --> 00:12:29,360 Speaker 5: No, this is again to me, this is the biggest 254 00:12:29,400 --> 00:12:32,720 Speaker 5: theme we've seen in a very long time. What's particularly 255 00:12:32,760 --> 00:12:38,200 Speaker 5: exciting for me as well is the level of creativity 256 00:12:38,240 --> 00:12:40,679 Speaker 5: that is required to finance all of this. Right, if 257 00:12:40,679 --> 00:12:45,040 Speaker 5: you go back one year, there was a very predominant 258 00:12:45,080 --> 00:12:48,520 Speaker 5: market narrative that the hyperscalers would finance a lot of 259 00:12:48,520 --> 00:12:51,920 Speaker 5: this through free cash flow from there to several hundred 260 00:12:51,960 --> 00:12:55,480 Speaker 5: billions of dollars of debt issuance around the world, a 261 00:12:55,520 --> 00:13:00,840 Speaker 5: lot of asset level project financing equity issuance in twelve months. 262 00:13:01,320 --> 00:13:05,080 Speaker 5: That's an incredible journey as a capital markets person, and 263 00:13:05,160 --> 00:13:09,319 Speaker 5: so for us, thinking about how to raise this capital 264 00:13:09,360 --> 00:13:12,960 Speaker 5: in the most efficient way requires a lot more creativity, 265 00:13:13,200 --> 00:13:16,360 Speaker 5: a lot more product agnosticism. It's not just if your 266 00:13:16,440 --> 00:13:20,160 Speaker 5: capital need looks like X, then go to this market. 267 00:13:21,000 --> 00:13:23,679 Speaker 2: They're getting creative. And I wonder there's something on your 268 00:13:23,720 --> 00:13:26,280 Speaker 2: dashboard that would trigger concern and I don't think with 269 00:13:26,360 --> 00:13:28,080 Speaker 2: that again, listen to you right now, But what would 270 00:13:28,080 --> 00:13:30,160 Speaker 2: come up on your dashboard that would say, I think 271 00:13:30,160 --> 00:13:32,959 Speaker 2: things againstuphon? When would the red lights star flash. 272 00:13:32,720 --> 00:13:36,880 Speaker 5: In the red lights would start flashing if it felt 273 00:13:36,880 --> 00:13:39,839 Speaker 5: like there was blind euphoria, And again, it does not 274 00:13:40,040 --> 00:13:44,800 Speaker 5: feel that way, whether it's underlying credit work or in 275 00:13:44,880 --> 00:13:49,000 Speaker 5: project financing, where it's looking at the actual contract terms. 276 00:13:49,120 --> 00:13:52,559 Speaker 5: Investors are doing the work and understanding what's actually happening here. 277 00:13:53,000 --> 00:13:55,920 Speaker 5: If you move it away from the AI ecosystem theme, 278 00:13:56,440 --> 00:13:58,360 Speaker 5: what we're all watching is and I said this at 279 00:13:58,400 --> 00:14:02,120 Speaker 5: the outset is credit spreads are just historically tight. If 280 00:14:02,160 --> 00:14:06,080 Speaker 5: you buy a generic investment grade bond today, eighty five 281 00:14:06,120 --> 00:14:10,320 Speaker 5: percent of your coupon is a treasury yield, and so 282 00:14:10,440 --> 00:14:13,199 Speaker 5: effectively it's an enhanced treasury, right, and so I think 283 00:14:13,240 --> 00:14:17,400 Speaker 5: about you know what that means in a rockier economic environment. 284 00:14:17,480 --> 00:14:19,440 Speaker 2: Well, the question we've been asking is why people so 285 00:14:19,520 --> 00:14:22,560 Speaker 2: much more comfortable taking the credit risk when the additional 286 00:14:22,600 --> 00:14:24,440 Speaker 2: yield is so small. And I seem to be more 287 00:14:24,440 --> 00:14:27,000 Speaker 2: concerned about the trenchery than they on the corporate credit. Yeah, 288 00:14:27,280 --> 00:14:28,479 Speaker 2: you hearing the same think. 289 00:14:28,760 --> 00:14:31,280 Speaker 5: Yeah, And it's interesting. Part of it is corporate credit 290 00:14:31,320 --> 00:14:33,880 Speaker 5: fundamentals in general remain very strong, and so there's a 291 00:14:33,920 --> 00:14:37,800 Speaker 5: comfort level with that. But there is also just a 292 00:14:37,840 --> 00:14:41,160 Speaker 5: tremendous amount of capital that has to be deployed. But 293 00:14:41,200 --> 00:14:44,280 Speaker 5: I do think again with even within the investment grade universe, 294 00:14:44,320 --> 00:14:48,040 Speaker 5: there is differentiation. But you're absolutely right it is to me, 295 00:14:48,160 --> 00:14:51,320 Speaker 5: that's what we're watching is it's a historically tight spread. 296 00:14:52,000 --> 00:14:55,280 Speaker 2: Stay with US multile imperg savans coming up off to 297 00:14:55,400 --> 00:15:07,240 Speaker 2: this the next read on inflation twenty four hours away 298 00:15:07,240 --> 00:15:11,440 Speaker 2: with PC data just around the corner, Francis Donald of RBC, writing, 299 00:15:11,520 --> 00:15:14,600 Speaker 2: the new wrinkle in our outlook is Wash positioning the 300 00:15:14,640 --> 00:15:17,160 Speaker 2: FED as keen to return inflation back to two percent. 301 00:15:17,400 --> 00:15:20,320 Speaker 2: Should the Fed begin hiking, the heat under inflation may 302 00:15:20,320 --> 00:15:23,280 Speaker 2: be more contained. Francis joins us now for more, Francis, 303 00:15:23,320 --> 00:15:25,360 Speaker 2: good morning, good to see you. Debate we've had so 304 00:15:25,440 --> 00:15:27,920 Speaker 2: far this morning and over the last week is whether 305 00:15:27,960 --> 00:15:30,880 Speaker 2: this is a change in style or substance, a change 306 00:15:30,880 --> 00:15:33,560 Speaker 2: in policy or how we communicate policy. How would you 307 00:15:33,600 --> 00:15:34,720 Speaker 2: describe it? 308 00:15:34,800 --> 00:15:37,560 Speaker 6: Certainly a change in style, and we'll wait to see 309 00:15:37,600 --> 00:15:40,640 Speaker 6: whether it's a change in substance. But John Artik has 310 00:15:40,680 --> 00:15:43,840 Speaker 6: always been follow the data. The data will tell us 311 00:15:43,840 --> 00:15:46,440 Speaker 6: where central banks are going to go, give or take 312 00:15:46,440 --> 00:15:48,440 Speaker 6: a little bias to one side or the other twenty 313 00:15:48,440 --> 00:15:51,080 Speaker 6: five to fifty basis points. And right now the problem 314 00:15:51,200 --> 00:15:54,240 Speaker 6: is inflation, which finally we have a share of the 315 00:15:54,280 --> 00:15:57,560 Speaker 6: Federal Reserve which is calling it out. You know, thirty 316 00:15:57,560 --> 00:16:01,200 Speaker 6: percent of the CPI basket is running above I'm sorry, 317 00:16:01,240 --> 00:16:04,000 Speaker 6: forty percent of the CPI of basket is running above 318 00:16:04,360 --> 00:16:08,960 Speaker 6: three percent right now, including food, daycare, healthcare, even pet 319 00:16:09,000 --> 00:16:12,320 Speaker 6: services are running above three percent, way away from that 320 00:16:12,400 --> 00:16:15,240 Speaker 6: FEDCE target. And there is more inflation in the system 321 00:16:15,320 --> 00:16:18,040 Speaker 6: outside of energy. This is a central bank that is 322 00:16:18,080 --> 00:16:20,080 Speaker 6: going to have to contend with that. But more importantly, 323 00:16:20,240 --> 00:16:22,680 Speaker 6: this is an American per people that is going to 324 00:16:22,720 --> 00:16:25,960 Speaker 6: have to contend with ongoing inflationary pressures in core services 325 00:16:26,200 --> 00:16:28,360 Speaker 6: all the way to food. And this is a central 326 00:16:28,400 --> 00:16:30,680 Speaker 6: bank that is finally acknowledging there is a problem here 327 00:16:30,680 --> 00:16:31,920 Speaker 6: and something needs to be done about it. 328 00:16:31,960 --> 00:16:33,840 Speaker 2: And can they address the problem of for inscis how 329 00:16:33,920 --> 00:16:36,960 Speaker 2: right sensitive is that demand that's leading to this price pressure? 330 00:16:37,760 --> 00:16:39,960 Speaker 6: Well, this is the challenge. There is a lot of 331 00:16:40,000 --> 00:16:43,600 Speaker 6: breadth under inflation and who's bearing the challenges of that. 332 00:16:43,680 --> 00:16:47,200 Speaker 6: While it's low and middle income Americans. And while our 333 00:16:47,240 --> 00:16:50,040 Speaker 6: take has been that the inflation issue is not really 334 00:16:50,120 --> 00:16:53,880 Speaker 6: an energy issue, that has been one compounding factor, what's 335 00:16:53,960 --> 00:16:56,400 Speaker 6: happening under the surface is there are cracks starting to 336 00:16:56,480 --> 00:17:00,280 Speaker 6: form amongst low and middle income Americans. That's saving rate 337 00:17:00,280 --> 00:17:03,680 Speaker 6: has dropped pretty precipitously since the start of the energy crash. 338 00:17:03,880 --> 00:17:06,560 Speaker 6: We've seen an uptick and credit usage, real wages have 339 00:17:06,600 --> 00:17:09,720 Speaker 6: gone more negative, and so there are signs yellow flags, 340 00:17:09,760 --> 00:17:12,800 Speaker 6: I would say, for low and middle income Americans that 341 00:17:12,840 --> 00:17:15,320 Speaker 6: are struggling. Now if we raise interest rates, it's a 342 00:17:15,400 --> 00:17:17,800 Speaker 6: catch twenty two. And this is a central bank that 343 00:17:17,880 --> 00:17:20,280 Speaker 6: hasn't really had to deal with this challenge of the 344 00:17:20,359 --> 00:17:23,600 Speaker 6: K shaped economy, which is being divided by demographics and 345 00:17:23,640 --> 00:17:26,240 Speaker 6: also by income uses. So this I think will be 346 00:17:26,280 --> 00:17:29,679 Speaker 6: Warsha's biggest challenge, not inflation. If it was straightforward inflation 347 00:17:30,040 --> 00:17:32,840 Speaker 6: and the regular pre pandemic economy, you could hike interest 348 00:17:32,880 --> 00:17:36,159 Speaker 6: rates bring down. But now with a very weak bottom 349 00:17:36,240 --> 00:17:39,639 Speaker 6: ninety percent of American consumers, you hike interest rates just 350 00:17:39,680 --> 00:17:42,560 Speaker 6: too far, you risk a much bigger slowdown in the consumer. 351 00:17:42,760 --> 00:17:45,159 Speaker 1: What's a bigger hit on the income of lower income 352 00:17:45,200 --> 00:17:49,160 Speaker 1: consumers for insis interest rates going higher or the way 353 00:17:49,200 --> 00:17:52,280 Speaker 1: that inflation has ticked up at a number of different components. 354 00:17:53,880 --> 00:17:57,040 Speaker 6: I'm continuously worried about food price inflation, and a lot 355 00:17:57,040 --> 00:17:59,560 Speaker 6: of our leading indicators tell us there is still some 356 00:17:59,720 --> 00:18:02,600 Speaker 6: impact coming from that from the conflict in the Middle 357 00:18:02,640 --> 00:18:05,520 Speaker 6: East that will be more lagged. Food inflation is one 358 00:18:05,520 --> 00:18:08,320 Speaker 6: of those pieces of inflation that Americans see every single 359 00:18:08,400 --> 00:18:11,879 Speaker 6: day and they cannot substitute away from it. Sometimes we 360 00:18:11,920 --> 00:18:14,680 Speaker 6: see some moves from beef to chicken to peanut butter. 361 00:18:14,800 --> 00:18:17,600 Speaker 6: But everybody has to eat, so keeping your eye on 362 00:18:17,640 --> 00:18:20,040 Speaker 6: food price inflation is going to be critical. And here's 363 00:18:20,080 --> 00:18:22,520 Speaker 6: the big challenge is the part of my job is 364 00:18:22,600 --> 00:18:25,120 Speaker 6: to talk to everyone from hedge funds who are looking 365 00:18:25,119 --> 00:18:27,480 Speaker 6: at headline inflation and how rates are pricing that in 366 00:18:27,760 --> 00:18:30,439 Speaker 6: but all the way over to CEOs. Now, markets are 367 00:18:30,480 --> 00:18:33,280 Speaker 6: going to be very relieved because inflation has probably peaked 368 00:18:33,280 --> 00:18:36,240 Speaker 6: in headline terms, and by Q two of twenty twenty seven. 369 00:18:36,280 --> 00:18:38,320 Speaker 6: Once we get to the summer of twenty twenty seven, 370 00:18:38,680 --> 00:18:41,479 Speaker 6: our call is at headline inflation will be sub two percent. 371 00:18:41,880 --> 00:18:44,240 Speaker 6: But if you're CEO running a business, particularly one that's 372 00:18:44,280 --> 00:18:47,520 Speaker 6: exposed to consumers, consumers are still going to be struggling 373 00:18:47,520 --> 00:18:50,199 Speaker 6: with price pain that isn't going backwards. So you're going 374 00:18:50,240 --> 00:18:53,119 Speaker 6: to get a dichotomy here between headline inflation that maybe 375 00:18:53,160 --> 00:18:57,359 Speaker 6: soothes the FED, maybe soothes markets, but doesn't impact real America, 376 00:18:57,400 --> 00:19:00,280 Speaker 6: and navigating that transition is going to be challenging through 377 00:19:00,280 --> 00:19:02,400 Speaker 6: the rest of twenty twenty six and into twenty twenty seven. 378 00:19:02,480 --> 00:19:05,040 Speaker 1: Are you seeing any, for lack of a better phrase, 379 00:19:05,080 --> 00:19:09,000 Speaker 1: trickle down from the hyperscaler investment the capex et cetera, 380 00:19:09,400 --> 00:19:13,720 Speaker 1: to middle and lower income just average consumers, given the 381 00:19:13,760 --> 00:19:16,800 Speaker 1: fact that so much of the growth has really come 382 00:19:16,840 --> 00:19:18,960 Speaker 1: from there, and if you strip that out, the US 383 00:19:19,160 --> 00:19:22,320 Speaker 1: would probably be in a shrinking type of condition. 384 00:19:23,240 --> 00:19:25,520 Speaker 6: Well we wouldn't be shrinking, but we certainly wouldn't be 385 00:19:25,520 --> 00:19:28,040 Speaker 6: close to two percent, which is about where we see 386 00:19:28,040 --> 00:19:30,680 Speaker 6: the trend economy going right now. That two percent is coming, 387 00:19:30,960 --> 00:19:34,680 Speaker 6: of course from this massive infrastructure build out, it's also 388 00:19:34,720 --> 00:19:37,479 Speaker 6: coming from big government and of course the savior of 389 00:19:37,520 --> 00:19:41,080 Speaker 6: the headline consumer, which is that top ten percent. What's 390 00:19:41,119 --> 00:19:43,359 Speaker 6: going to continue to matter for consumers and why we 391 00:19:43,600 --> 00:19:46,119 Speaker 6: think that the US economy can persist a two percent 392 00:19:46,520 --> 00:19:49,520 Speaker 6: is because the labor market is very, very tight. That 393 00:19:49,560 --> 00:19:52,159 Speaker 6: will continue to be the most important thing. And the 394 00:19:52,240 --> 00:19:54,560 Speaker 6: labor market is going to stay tight and has nothing 395 00:19:54,600 --> 00:19:56,480 Speaker 6: to do or almost little to do with what's happening 396 00:19:56,520 --> 00:19:58,960 Speaker 6: in AI. It has to do with mass retirements, a 397 00:19:59,000 --> 00:20:02,080 Speaker 6: shrinking labor force, par anticipation rate, and a consumer that 398 00:20:02,200 --> 00:20:04,200 Speaker 6: now is not going to be judged on whether they 399 00:20:04,240 --> 00:20:06,800 Speaker 6: have a job or not, but are they making enough 400 00:20:06,840 --> 00:20:10,200 Speaker 6: money and working enough hours in order to pay for life. 401 00:20:10,320 --> 00:20:12,840 Speaker 6: So you've got many structural themes that are happening under 402 00:20:12,880 --> 00:20:14,840 Speaker 6: the surface, and the core message I have for clients 403 00:20:14,960 --> 00:20:18,000 Speaker 6: is don't use the pre pandemic way of thinking about 404 00:20:18,040 --> 00:20:20,880 Speaker 6: a cycle as a good element or a good way 405 00:20:20,920 --> 00:20:22,879 Speaker 6: to think about where the economy is going to go next. 406 00:20:23,080 --> 00:20:26,640 Speaker 6: These structural trends from AI to labor first, participation rate 407 00:20:26,680 --> 00:20:28,920 Speaker 6: declining are changing the way we have to think about 408 00:20:28,960 --> 00:20:31,080 Speaker 6: the American economy and it means that markets are going 409 00:20:31,119 --> 00:20:33,600 Speaker 6: to react differently. Businesses are going to operate differently. 410 00:20:33,680 --> 00:20:33,840 Speaker 2: Well. 411 00:20:33,840 --> 00:20:35,560 Speaker 4: When it comes to the Federal Reserve, I mean, Kevin 412 00:20:35,600 --> 00:20:39,520 Speaker 4: Moore said, the monetary policy is somewhat restrictive in some sectors. 413 00:20:39,920 --> 00:20:41,760 Speaker 4: Them raising interest rates is not going to hurt the 414 00:20:41,800 --> 00:20:45,160 Speaker 4: AI build out, but might continuously restrict those certain sectors 415 00:20:45,200 --> 00:20:45,679 Speaker 4: like housing. 416 00:20:47,119 --> 00:20:51,720 Speaker 6: That's exactly right. Monetary policy is a poor tool for 417 00:20:51,760 --> 00:20:55,960 Speaker 6: an economy that is fragmented by sector, by income group. 418 00:20:56,200 --> 00:20:58,760 Speaker 6: And we've seen this. We've seen central banks across the 419 00:20:58,880 --> 00:21:01,040 Speaker 6: entire world who are struggling with what do you do 420 00:21:01,080 --> 00:21:03,000 Speaker 6: when your regions look very different? What do you do 421 00:21:03,040 --> 00:21:06,719 Speaker 6: when your incomes look very different? For now, the mandate 422 00:21:06,760 --> 00:21:09,639 Speaker 6: of the central bank is price stability, oh and labor. 423 00:21:09,720 --> 00:21:12,200 Speaker 6: But FED chair worships maybe put that to the side 424 00:21:12,200 --> 00:21:14,440 Speaker 6: for a little bit, and if your mandate is inflation, 425 00:21:14,600 --> 00:21:16,919 Speaker 6: then that's what you've got to target. So the biggest 426 00:21:17,000 --> 00:21:19,200 Speaker 6: risk moving forward to me is not a huge move 427 00:21:19,200 --> 00:21:20,879 Speaker 6: in the bond market. It's not a collapse of the 428 00:21:20,960 --> 00:21:24,760 Speaker 6: US economy. It's what happens to middle and low income 429 00:21:24,840 --> 00:21:28,359 Speaker 6: Americans in a hiking environment. In our view, it's probably 430 00:21:28,440 --> 00:21:30,639 Speaker 6: going to take a lowercase K economy and move it 431 00:21:30,640 --> 00:21:32,240 Speaker 6: to an uppercase K economy. 432 00:21:32,960 --> 00:21:36,520 Speaker 2: This is the Bloomberg Survendons podcast, bringing you the best 433 00:21:36,560 --> 00:21:39,880 Speaker 2: in markets, economics, an giopolitics. You can watch the show 434 00:21:39,920 --> 00:21:42,879 Speaker 2: live on Bloomberg TV weekday mornings from six am to 435 00:21:43,000 --> 00:21:46,800 Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify, 436 00:21:46,920 --> 00:21:49,119 Speaker 2: or anywhere else you listen, and as always on the 437 00:21:49,160 --> 00:21:51,600 Speaker 2: Bloomberg Terminal and the Bloomberg Business app.