Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordernt. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. We begin this out
Speaker 2: with Stock's extending gains on another chip field search, Mark
Speaker 2: Hayfley of UBS raising his year end price target to
Speaker 2: seventy nine hundred, writing, continued economic growth and AI adoption
Speaker 2: should drive further US earnings increases, supporting additional market gains
Speaker 2: over the medium term. Mark joins us now for more.
Speaker 2: Welcome to the program. Maybe this is a gut check
Speaker 2: on sentiment with the following question are you bullish enough?
Speaker 3: That's a good one, Thank you. You know, I think
Speaker 3: that we're bullish on the SMP, but we're probably even
Speaker 3: more bullish on this rally. Broadening out from kind of
Speaker 3: the top names and extending.
Speaker 4: Globally from here. So you know, for.
Speaker 3: Those people who haven't been in on the rally and
Speaker 3: are afraid to get in, we think there is a
Speaker 3: lot of opportunity globally.
Speaker 4: Now, how much is.
Speaker 1: This coming from the AI sectors that have already gotten
Speaker 1: bid up, and how much is this coming from the
Speaker 1: broadening out that is sensibly will come with some sort
Speaker 1: of resolution in the Middle East.
Speaker 3: Well, I don't think you can discount the AI impact
Speaker 3: in a broader sense, which is that you know, the
Speaker 3: capex spend from AI is probably having two times the
Speaker 3: impact of the negative effects of the rise in oil
Speaker 3: prices on global GDP, so that's factoring into this as well. Now,
Speaker 3: of course, our economist Paul Donovan talks about the wily
Speaker 3: coyote effect, where you know, behavioral economics. At some point,
Speaker 3: if oil prices continue to be elevated, or they continue
Speaker 3: to surge over one hundred, behavioral economics can take over
Speaker 3: and things can start to break and we can see
Speaker 3: this unravel. But I like that AI to oil statistic
Speaker 3: a little bit because it gives people a sense of
Speaker 3: you know, there are.
Speaker 4: Other factors besides what's going on.
Speaker 1: In the oil story, Mark, we were just talking about
Speaker 1: how difficult it is to really price some of the
Speaker 1: moonshots that we've seen in the tech universe, how far
Speaker 1: some of the prices have come of the shares as
Speaker 1: well as price targets that can't keep up with how
Speaker 1: fast it's moving. How do you price a moonshot? How
Speaker 1: do you price a technology where we don't have a
Speaker 1: sense of what the ultimate goal is or frankly even
Speaker 1: how quickly it's moving.
Speaker 3: Well, the good news is I don't have to do
Speaker 3: that because we've had AI power and resources and healthcare
Speaker 3: as long term themes for a considerable period of time.
Speaker 4: And you know, playing.
Speaker 3: It that way, you uh, you can you can benefit
Speaker 3: from this without trying to pick one or the other names.
Speaker 3: And I think that's even more important now as we've
Speaker 3: had some very large moves.
Speaker 4: Uh.
Speaker 3: You know, I think if you're gonna, if you're gonna
Speaker 3: start picking names, you really have to dig in, be
Speaker 3: very selective, or you can just play the larger themes
Speaker 3: that we think are going to be durable.
Speaker 2: Mark, the big person right now is just to highlight
Speaker 2: where the constraints are, the so called bottlenecks. Do you
Speaker 2: see that shifting in the years ahead. Do you see
Speaker 2: a visible runway to so called over capacity, which is
Speaker 2: the ultimate worry, that's the bus further down the road
Speaker 2: that people worry about. Do you see any runways towards
Speaker 2: that in the medium term.
Speaker 3: I think it's very hard right now to get to
Speaker 3: over capacity.
Speaker 4: And as as you point out, it's.
Speaker 3: More like there's more and more bottlenecks in the chain
Speaker 3: as just the the cap X projections keep growing and
Speaker 3: so uh, you know that that's I think a little
Speaker 3: bit more more The worry at this end is where's
Speaker 3: the you know, where's the power going to come from?
Speaker 3: Where are the transformers that are going to the ground,
Speaker 3: you know what, where's all these parts of the value chain?
Speaker 3: How are they going to add up? And who's going
Speaker 3: to benefit from that and who may not benefit from it.
Speaker 3: Now that now that the realization that there is this
Speaker 3: scarcity uh is out there, the risk reward on kind
Speaker 3: of just the pure play, say chip names is a
Speaker 3: little harder to make mark.
Speaker 2: How a clin's stating with this, How are they avoiding
Speaker 2: so called company specific risks? How do you mitigate them?
Speaker 2: What kind of advice are you offering?
Speaker 4: Well?
Speaker 3: I will say that our clients have been very sanguine
Speaker 3: through this. I think many of them, uh, you know,
Speaker 3: as we get together and talk and talk about the
Speaker 3: impact of AI on people's businesses, it's generally been positive.
Speaker 3: I do think a lot of clients have stayed invested
Speaker 3: and they have not really been phased by this situation.
Speaker 3: And you know, we've kind of said, don't don't get
Speaker 3: too caught up in the headlines, stay focused on the data.
Speaker 3: You know, oil prices being one on the negative side,
Speaker 3: but also, as you pointed out, this tremendous earnings growth,
Speaker 3: this tremendous cap X build. And then something that we
Speaker 3: have to keep in mind is what usually kills these
Speaker 3: bull markets is FED hikes. And given what's going on
Speaker 3: with with wages and the fact that a lot of
Speaker 3: the inflation is probably driven by energy, we still don't
Speaker 3: see the FED hiking anytime soon.
Speaker 5: Is that one of the bigger concerns so that investors
Speaker 5: are bringing up with you. They're concerned that the Federal
Speaker 5: Reserve is going to potentially hike interest rates this year.
Speaker 3: Well, I think that you know, for our international investors,
Speaker 3: there are two of big concerns out there that are
Speaker 3: related of course, one is inflation and then what does
Speaker 3: that mean, probably in particular for the dollar, because last
Speaker 3: year a lot of international investors saw their US gains
Speaker 3: eaten up by dollar weakness compared to other currencies, and
Speaker 3: so I think d dollarization is a topic that comes
Speaker 3: up a lot.
Speaker 4: Now.
Speaker 3: We think that getting the global diversification and for many
Speaker 3: of our international investors looking at China and China tech
Speaker 3: as a way to be invested in an almost completely
Speaker 3: different system. At this point, it remains an important theme.
Speaker 3: But given what's going on, we like the US market.
Speaker 3: Given what's going on in the US market, investors haven't
Speaker 3: given up on the US yet.
Speaker 4: Mark.
Speaker 1: For about twenty years, a lot of people talked about
Speaker 1: the financialization of money and how people would invest and
Speaker 1: they'd make money and then they put it back in investments,
Speaker 1: and it wasn't making its way in to the real world.
Speaker 1: And suddenly it's making its way to the real world
Speaker 1: in a big way. I just wonder if you can
Speaker 1: see these incredible valuation rises, these incredible capex budgets without
Speaker 1: some of it producing inflationary results. We're talking about how
Speaker 1: you aren't going to see some sort of persistent inflation.
Speaker 1: Doesn't some of this lead to a persistently higher inflation
Speaker 1: moment at a time of deglobalization and reindustrialization.
Speaker 3: Well, it's it's look, it's a great point, But there again,
Speaker 3: I think it's one of these races.
Speaker 4: Uh. You know, I think we can all point.
Speaker 3: To the potential for deflationary forces from ai.
Speaker 4: Uh.
Speaker 3: You know that that could be out there, I think,
Speaker 3: But to your point right now, given given just this uh,
Speaker 3: this scarcity of tokens, we're all we're all focused on scarcity.
Speaker 3: We're all focused on, you know, the need to settle
Speaker 3: prices higher, uh, perhaps to even create some demand destruction.
Speaker 3: But I think one of the points you made at
Speaker 3: the beginning of this is that there is there is
Speaker 3: so much uncertainty around it.
Speaker 4: So the way that we.
Speaker 3: Think about it is that you know, a little bit
Speaker 3: of inflation and even a little bit of higher rates,
Speaker 3: as long as that's driven by growth. And we you know,
Speaker 3: we're expecting twenty percent earnings growth for the S and
Speaker 3: P five hundred. The equity markets are likely to tolerate that.
Speaker 3: And I think, you know, one of the things that
Speaker 3: we've talked about in the past is how we have
Speaker 3: been more focused on equities now that we've come out
Speaker 3: of the zero interest rate policies, as as a place
Speaker 3: for asset allocations, because they are more likely to weather
Speaker 3: bouts of inflation, say, of course than bonds can do.
Speaker 2: What'd you think gold fits into that?
Speaker 4: Well, we still like the gold.
Speaker 3: I think it's it's you know, I think gold Actually
Speaker 3: when there was talk around the FED and things like that,
Speaker 3: you know that that was driving money into gold. And
Speaker 3: now as people think that interest rates are going to
Speaker 3: go higher, that's taken money out of the gold trade.
Speaker 3: But when we look at the fundamental drivers that got
Speaker 3: us into the gold trade, which is concerns about the
Speaker 3: weaponization of the US dollar with sanctions, what our clients
Speaker 3: tell us about their interest in d dollarization, we think
Speaker 3: that the gold trade is still going to have legs
Speaker 3: in the future and it does provide something of a
Speaker 3: hedge in portfolios.
Speaker 2: Stay with US mult Bloomberg Surveillance coming up after this.
Speaker 2: The President gathering his cabinet today as the administration continues
Speaker 2: high stakes negotiations with Iran, the former US Sentcom Commander
Speaker 2: General Joseph Fotel saying Giran is using the straight of
Speaker 2: foremost a strategic leverage in a wider confrontation. The likely
Speaker 2: trajectory for future US military operations is a prolonged mission.
Speaker 2: General Votel joined US now for more, General, welcome to
Speaker 2: the programs. We're all well familiar with the situation in
Speaker 2: the Middle East. We understand the importance to energy. We
Speaker 2: can just about identify the stratiformers on a map. General
Speaker 2: for people haven't been there, who don't understand what it
Speaker 2: actually looks like to go through that waterway. Why is
Speaker 2: it so difficult to get energy flowing even now?
Speaker 6: Oh? Thanks, good morning, John, it's good to be with you.
Speaker 4: Well.
Speaker 6: First of the reason geographically, it's a very narrow passage
Speaker 6: where the main transit routes are only about two miles long.
Speaker 4: The water in the.
Speaker 6: Got in the strait is generally pretty shallow, it's very rocky,
Speaker 6: particularly on the Omani Ammaradi side, UH, and it's really
Speaker 6: subject to weather.
Speaker 4: It's it's when you go.
Speaker 6: Through the straits of Homos, it's very difficult to see,
Speaker 6: it's very difficult to you know, kind of be oriented
Speaker 6: to where you are. So it's just a very very
Speaker 6: difficult UH portion of water to get through. And of
Speaker 6: course it's dominated geographically by Iran. You can't dispute the
Speaker 6: fact that on at least you know, three sides of
Speaker 6: it as you go through, the Iranians have the geographical
Speaker 6: advantage there general.
Speaker 5: Yesterday the Wall Street Journal said the Navy started assisting
Speaker 5: in terms of escorts of vessels to the Straight and
Speaker 5: then Syncome came out and said, they're not currently.
Speaker 4: Escorting commercial vessels.
Speaker 5: If we were to see mass escorts, what would that
Speaker 5: look like?
Speaker 6: Yeah, and real with that, what generally look like as
Speaker 6: the commitment of a number of our destroyers, probably someone
Speaker 6: in the order of fifteen to twenty that would be
Speaker 6: dedicated to the mission. And what they would basically do
Speaker 6: is not only ticket and what maritime assets and key
Speaker 6: positions where they could provide protection over the top of
Speaker 6: these of these convoys, but they'd also be in a
Speaker 6: position where they would be escorting them. Sometimes we would
Speaker 6: try we might try to, uh, you know, bring together
Speaker 6: a number of tankers and then move them as a
Speaker 6: package through the through the golf with with close escort
Speaker 6: by US Navy destroyers, or we may move in smaller packets,
Speaker 6: or we may try to do what, you know, what
Speaker 6: I would describe kind of as his zone defense create
Speaker 6: up bubble under which these uh, these ships can move.
Speaker 6: But important to do that is we have to be
Speaker 6: certain that they can move through safely, so they aren't
Speaker 6: going to bump into minds, they're not gonna have they're
Speaker 6: not going to be subject to attacks from the Iranians.
Speaker 6: And that's what takes up a lot of the resources.
Speaker 6: It's the mind clearing, it's uh, the defensive resources we
Speaker 6: have to put in place. There's a number of ships
Speaker 6: that we have to have there, uh in order to
Speaker 6: do that to relieve the pressure in the in the
Speaker 6: golf right now.
Speaker 5: Well, based off the US presence right now, would the
Speaker 5: United States be able to undertake this.
Speaker 6: Well, I think there's certainly a considerable amount of a
Speaker 6: maritime resources in the region, and I think probably I'm
Speaker 6: an army guy talking here, but I think probably with
Speaker 6: the resources that are in place, we probably could certainly
Speaker 6: begin to do some type of escort emissions, but that
Speaker 6: would likely come to the cost of other things are doing,
Speaker 6: so it would be difficult for US to maintain a
Speaker 6: blockade and to escort And of course, you know it
Speaker 6: isn't just maritime assets, it's US Air Force assets, in
Speaker 6: some cases ground resources without marines or military army organizations
Speaker 6: that have to man air defense sites and have to
Speaker 6: be paired to board ships and have to be prepared
Speaker 6: to go ashore if we need to to remove threats.
Speaker 6: So it's a more comprehensive effort. So there's enough force
Speaker 6: to probably do some of that right now, but it
Speaker 6: would really limit our ability to do anything else.
Speaker 1: General. This doesn't seem to be what a lot of
Speaker 1: people are talking about with respect to striking a deal.
Speaker 1: They expect a resolution to the conflict. How do you
Speaker 1: understand some of the discussions around the negotiations between the
Speaker 1: US and Iran and assertions that we are close to
Speaker 1: reaching some sort of deal.
Speaker 6: Well, we're working through interlocutors right now, and for the
Speaker 6: last several weeks has been the Pakistanis and now most
Speaker 6: recently the Kataris are joined. Of course, they're recognized and
Speaker 6: very capable negotiators where we have a lot of trust
Speaker 6: in and so I'm sure there are discussions going back
Speaker 6: and forth and some communications that would give people the
Speaker 6: impression that we are making some problemies on this, and
Speaker 6: I hope that we are. I mean, I think it's
Speaker 6: in our interest to resolve this, but you know, fundamentally,
Speaker 6: negotiations and are about trust. It's about trust between both sides,
Speaker 6: and of course that's lacking between the United States and
Speaker 6: Iran right now. And then there are fundamental differences on
Speaker 6: the major issues, whether it's non proliferation, whether it's the
Speaker 6: highly enriched uranium and what happens with that, whether it's
Speaker 6: what happens with sanctions and and frozen assets, or the
Speaker 6: status of the straits of hormones. How do we get
Speaker 6: back to kind of the open passage way that it was,
Speaker 6: or the situation in Lebanon. And I think it's important
Speaker 6: most Americans are not necessarily paying intention to what's happening
Speaker 6: in Lebanon, but it is directly linked, certainly in the
Speaker 6: eyes of the Iranians, to what is happening in the goal.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this.
Speaker 2: Minneapolis FED president Nil Kashgawi and the Dallas FED president
Speaker 2: Lori Logan both warning of increasing price pressure and pressure
Speaker 2: on the broader economy. Blarina, you're Richie a t rou
Speaker 2: price writing. The FED outlook is now a fork in
Speaker 2: the road. The most likely outcome is the fed stays
Speaker 2: on hold for the next twelve months. Blarina joins us
Speaker 2: now for more Now, Blarina, if that's the most likely
Speaker 2: outlook twelve months on hold, where's inflation and how easy
Speaker 2: is the Federal Reserve getting in the meantime, it's a
Speaker 2: very good question.
Speaker 7: The art look for inflation has become much more uncertain
Speaker 7: that it was, let's say, three or six months ago,
Speaker 7: and I think that's what is driving that fork on
Speaker 7: the road language for me, in the sense that we
Speaker 7: have some structural things building up in the inflation pipeline,
Speaker 7: including the AI story, which you discussed with your guests
Speaker 7: earlier in the show. We don't know how much of
Speaker 7: that AI price boost is actually going to feed to
Speaker 7: consumer prices, but the risks are to the upside clearly,
Speaker 7: at least in the near term, and that's the narrative
Speaker 7: that the market is prepared for. We also have a
Speaker 7: story from China where for the last two years, China
Speaker 7: PPI has been trending lower. It's been helping with this
Speaker 7: inflation in the goods sector globally, not just the US.
Speaker 7: But now we're hearing anecdotal evidence from companies in China
Speaker 7: for raising prices. Again, it's a question how much of
Speaker 7: that does get feed through to consumer prices, but it
Speaker 7: does present upside risks. And then you have the energy
Speaker 7: price shock where we're seeing first round effects into energy
Speaker 7: services and at the pump we might see airfares increasing again.
Speaker 7: But in this environment where companies are used to passing
Speaker 7: through prices to consumers, are we going to get second
Speaker 7: round effects spillovers into core goods and services inflation this year?
Speaker 7: And a lot of that has to do with how
Speaker 7: much higher is the oil curve going to be from here?
Speaker 7: And this headline news on the conflict with Iran? Are
Speaker 7: they going to lead to a resolution of the conflict
Speaker 7: and the oil traveling freely through the strait of Hormus?
Speaker 7: So where is inflation going to be over the next
Speaker 7: twelve months? I'm afraid it's very uncertain and it does
Speaker 7: feel like a binary outcome whether we move towards two
Speaker 7: percent or we stay at three percent or both higher.
Speaker 7: And in those scenarios, I could see a path for
Speaker 7: the FAT cutting interest rates. They could start in December
Speaker 7: or January of next year, or I could see path
Speaker 7: where the Fed could actually have to hike interest rates
Speaker 7: even sooner than the market has currently priced.
Speaker 1: There's a lot to unpack there blorin now. I'm just
Speaker 1: curious how much of the inflationary story truly is oil.
Speaker 1: Oil prices today WTI down some six percent and just
Speaker 1: fluctuating on that level. After some headlines came out. People
Speaker 1: are looking for this conflict to end. How much does
Speaker 1: that relieve the bulk of the inflationary pressures that have
Speaker 1: led to a lot of the upside surprises.
Speaker 7: So I would separate the oil story with a core
Speaker 7: inflation pressure story. Here we have seen a big build
Speaker 7: up in energy prices because of the oil shock. I
Speaker 7: don't think we have seen that spilling over to core
Speaker 7: services besides airfares yet, or to core goods prices. So
Speaker 7: a resolution of the conflict, an oil price is coming down,
Speaker 7: I think it's going to be great news for headline inflation,
Speaker 7: and then it leaves a little bit intact the progress
Speaker 7: on core inflation that I had expected before the war
Speaker 7: in the second half of the year. So I think
Speaker 7: that oil story is really key for the path for
Speaker 7: core inflation in the second half, but also for core
Speaker 7: inflation expectations.
Speaker 4: The good news.
Speaker 7: So far is that when you look at diffusion indices,
Speaker 7: the ISMS and pmis and the regional PMIS. We have
Speaker 7: seen a spike in input costs, especially from energy and
Speaker 7: other raw materials. What companies are reporting is that they
Speaker 7: don't plan to pass through much of that yet, maybe
Speaker 7: twenty to thirty percent of those cost increases. And that's
Speaker 7: good news, I think for core inflation. But if that
Speaker 7: dynamic were to change because the war is lasting longer
Speaker 7: and oil prices increase from here, I think we could
Speaker 7: be looking at a different story.
Speaker 2: This is the Bloomberg Seventans podcast, bringing you the best
Speaker 2: in markets, economics, angiopolitics. You can watch the show live
Speaker 2: on Bloomberg TV weekday mornings from six am to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloeberg
Speaker 2: Terminal and the Bloomberg Business Amp.