00:00:00 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this hour stocks extending tech led declines are in Canada of clear harbor, asset management. Writing leadership is steadily expanding beyond semiconductor manufacturers towards the broader AI ecosystem. 00:00:47 Speaker 3: Aaron joins us. 00:00:48 Speaker 2: Now for more, Aaron, We've got to talk about the latest out of China, Moonshot's new Kimmy K three model. Maybe a lot of people aren't familiar with what's coming down to China. They're taling gusts as they might that this can rifle the models coming down of anthropic and open AI. Do you see this as another deep sig type moment? 00:01:04 Speaker 3: Or is this different. 00:01:06 Speaker 4: Source feels that way, Jonathan, You know, clearly it's a question around, you know, how competitive is this KIMMI three model relative to the closed source models that we have here in the United States made by anthropic open AI, Grock and others. It also questions, you know, how much cap x have we spent this year across the hyperscalers, what will be spent next year? Could we see the slope change as perhaps the return on investing capital question comes into the four I mean, the other question that I think is worth pondering too. 00:01:42 Speaker 5: Is Kimmy's made in model. 00:01:44 Speaker 4: That's competitive with US models, and they do not have the leading chips that are designed here in the United States by the likes of Nvidia, like the Blackwell chip or the Reuben chip, And so that would suggest that perhaps they're creating more put more intelligence per unit of compute power with perhaps an inferior chip, and that could be very disruptive to the semiconductor ecosystem. 00:02:09 Speaker 5: I'm just postulating here that there's a risk to that. 00:02:13 Speaker 2: I would just say, and in response, We've got no idea. I've personally got no idea how compliant they have been with export controls, but certainly raises questions about the kind of access they do have, the kind of developments they're making right now with the chips they have locally domestically. 00:02:27 Speaker 3: That raises a lot of concerns. 00:02:28 Speaker 2: And here's one you mentioned it are we getting to a position where it's harder and harder to justify the amount of money that the hyperscapas here in America have been spending and starts to question the wealth transfer we've seen from them to the chip players over the last twelve months. 00:02:43 Speaker 3: Is that trade becoming more and more vulnerable? 00:02:47 Speaker 4: Yeah, I think it feeds into a broader question around are we going to see some sort of level of regulation within the AI ecosystem, both in the United States and perhaps globally, And there's been a discussion about that this week in the marketplace as well. And how does open source versus closed sort of. 00:03:08 Speaker 5: Function under that regime? 00:03:11 Speaker 4: I would just say, as a return as it relates to the return on investing capital question that you just posed, it's a real question. 00:03:18 Speaker 5: But you know, the likes of Alphabet open. 00:03:21 Speaker 4: AI, GROC and others, they are playing the long game, and so I suspect that they're not huddling up this morning altering their CAPEX estimates for the coming months. 00:03:35 Speaker 1: When it comes to technology space, we also have Google potentially behind on their Gemini model. You have SpaceX overnight. What do you think the next catalyst is going to be? 00:03:44 Speaker 4: Well, and Marie, it's been a stunning week for mid JULYI we have geopolitics, the strait of our moves, the escalation that you just reported on. We have earnings which have been coming out fast and furious. Bank earnings have been very strong, a little mixed on the others, but twenty plus percent annualized growth rate in the second quarter. These are the types of growth rates we tend to see coming out of a deeper session. So it all it's not all glass half empty for sure. And of course we have Fed warsh in play with a fed and it's been quite a quite a week. 00:04:19 Speaker 1: So do you think that this isn't even so much chip specific and when it comes to the selloff, but other factors like what's going on in a conflict in the Middle East. 00:04:28 Speaker 5: Yeah, I think it's a healthy breather. 00:04:31 Speaker 4: The semiconductor trade has been of all to one the equity trade through just a week or so ago is heavily momentum driven. 00:04:40 Speaker 5: The momentum factors come off. 00:04:42 Speaker 4: Kimmy just was released yesterday and so we were seeing increased volatility again this morning. I want to be a little careful that the narrative of the last twelve hours around Kimmy it is akin to sort of the deep deep seek moment. But I think it raise some very important questions about how the AI build out, how that ecosystem evolves, What are the efficiencies that are going to be brought perhaps by the open source models from China, and how does that impact the demand for things like memory, which is all of the rage right now, with the likes of s k Heiiniz just having come with their ADR, and of course Micron and sand Disk and others in that space. And so it'll be interesting to see how this all evolves. 00:05:31 Speaker 2: If you strip down the muscle of big tech, just looking at the index, go to the equal weight and we close it at all time high. Just yesterday, the banks, not just the big ones, some of the regional plans as well. Citizens, Fifth Third pn C take your pay close to records just yesterday, and we saw the big plans on Wall Street deliver record highs as well. I just wanted from your perspective, if we do have this Frenchile moment in tech, how isolated it will be and whether it will really start to unravel the other part of the market as well, that's doing quite well and holding up in the meantime. 00:06:01 Speaker 5: That's right. 00:06:01 Speaker 4: I mean yesterday the equal weight I believe was as actually positive and market cap weight was negative. We have now the equal weight up about two hundred and fifty basis points a year to date in excess of the SMP market cap weighted index. 00:06:16 Speaker 5: And so you know, you look at all the sectors, all the twelve sectors, I think. 00:06:20 Speaker 4: Only one is down year to date, and so it suggests that there is a broadening. But we have to be a little careful too to deduce too much the relationship of the sectors within the AI ecosystem, across industrials, technology, within technology, semiconductors. As semis go up, it seems like software goes down. That's been an inverse trade year to date. And then of course banks they're seeing increased activity on trading, but they're also seeing increased activity as it pertains to the AI build out in M and A and so we have to keep a close watch on the correlation across sectors. But you know, growth looks strong. I think five percent nominal as possible this year. Inflation is decelerating out on the core side of things, and that'll be a focus for the next several months. 00:07:10 Speaker 2: To your point on it all feels like one trade and that's the problem. Can you help us navigate that. This note just dropped from Jonathan Krinsky of BTIG. He says in a different seat, he focuses on the technicals. He said there's a risk of a high correlation accident and that the risk continue to grow. 00:07:24 Speaker 3: Do you think it's avoidable? 00:07:26 Speaker 4: I think it's avoidable if you don't just own the market, right. If you own the market, then then you have twenty percent in the semiconductors in the United States, you have twenty five percent in em and so if you own semis, you also are related to correlated to all the other aspects that we just discussed. So as as an asset allocator, even within equities, I think there are other places to move. 00:07:51 Speaker 5: The banking sector looks strong. It's not just the semi trade. 00:07:54 Speaker 4: Obviously, there's a lot of m and a regulatory environments positive for the banking sector. Training activities up, wealth activities up. We know that's related to AUM, and so you know, we think that there are opportunities across the landscape, but there's a lot of correlation going on even down to utilities, as we know. As it pertains this AI trade, it's half out like one trade. 00:08:17 Speaker 2: Stay with US Mulploomberg surveillance coming up after this. The US enforcing it is renewed naval blockade against Iranian shipping. According to Central Command, forces have redirected three merchant ships, boarded a vessel for verification purposes, and disabled a tanker that failed to comply with instructions. 00:08:44 Speaker 3: Let's build on that. Stick with the wall. 00:08:46 Speaker 2: The US and Iran exchanging strikes phrase six consecutive day. 00:08:50 Speaker 4: We're making a record investment in our armed forces. 00:08:53 Speaker 6: We are likewise winning big in. 00:08:55 Speaker 2: Iran, and you will see the fruits of that labor very very shortly. Crude prices remain eglevated, heading for its biggest weekly gain since April. Jeff Curry of Ultist Partners writing, Bottlenecks in the energy system are growing and widening. The entire energy complex remains underinvested, making the system extremely vulnerable to shocks like these. Jeff joins us. Now for more, Jeff got to see, buddy, let's get into it. There's two words that stuck out for me in your recent work, and that's abundance illusion. Can you just sort of flesh that out for us and why that's so important, perhaps more so at this specific moment. 00:09:32 Speaker 7: Well, I think when we look at Round one of what occurred in the Middle East, the immediate response was the you US to use strategic reserves, and we saw it in Japan, Europe and elsewhere around the world, and they use it aggressively. 00:09:46 Speaker 8: China was flexing a system. 00:09:48 Speaker 9: Between the two of these, It created the illusion of abundance. But products are telling you we don't have. 00:09:54 Speaker 8: An abundance out there. 00:09:56 Speaker 9: You know, I could point out, you know, crude oil prices are the nose. Product prices are the signal. The crack spreads this morning are seventy dollars a barrel. That means the spread between oil and products is nearly the same price of koodle. I've never seen it that high in my entire career of over three decades. That's telling you this is no longer a question of deficit. This is now a question of shortage, and people are asking where do you hide with what's going on in tech? 00:10:25 Speaker 8: Where you hide as commodities. They are the best. 00:10:28 Speaker 9: Beforming asset class year today, up thirty four percent. Petroleum index alone is up eighty one percent, and the upside is just that much greater between now and the end of the year, given the shortages that we're seeing across the energy complex, and if you put what would occur, you know, round one we got rid of the insurance policies, the cushions. This time around, we're starting from record low inventories. We have the Red Sea in play. We have the Straits of hormones and play. We have the Black c in play. We have refineries in rush all out. The list goes on. In fact, I'd argue in my entire career, I have never seen an energy environment this type. Yet the world still focuses on tech that I think is poised for a big correction, and you have the best performing asset class out there being ignored, Jeff. 00:11:16 Speaker 1: What we don't have in play, though, is China buying as normal. They're down some forty percent in terms of their imports from the start of the war. When do you think China is going to step in again? And what does that mean for the price? 00:11:28 Speaker 9: Well, we already see that the teapots are likely coming back because the margins, the margins seventy dollars of barrel. And what do those teapots do. They export to the global market. The profits are too big to ignore. And when we think about the refinery outages in Russia, you just put it in perspective, it's. 00:11:49 Speaker 8: Really nearly three million barrels per day. 00:11:51 Speaker 9: That's almost half of the refining capacity taking out You lost refining capacity in Venezuela because of the earthquakes, lost another three million barrels per day. That sits behind the Straits of Horror moves. The profit incentive to refine oil into products right now has never been higher. And when we look at a lot of that oil, that was I like to call reason why oil went down. When the Straits of Horror Moves open with the memoranda of understanding, it was like a pimple popping. It burst out into the system, put downward pressure on oil. A lot of that oil sitting off the coast of China right now and likely going to Yes the big state owned enterprises are slow to respond, but the other ones are a function of the underlying profits. 00:12:35 Speaker 1: Jeff, why didn't we see the nightmare scenario? Given everything you're talking about, Why haven't we seen one hundred and fifty dollars oil? Why is it still elevated? But it's comfortably at an if I. 00:12:45 Speaker 8: Go, this is oil. Oil is a transfer price. It's noise, it's meaningless. 00:12:51 Speaker 9: We talk about it because usually the spread between the products and oil stays relatively constant. We're dealing with this is unlike anything we've seen before. We've lost the oil, we've lost the refineries. The energy system is severely supply constrained. Product prices are telling you an entirely different story, whether it's prices in New York Harbor, you know, diesel prices one hundred and forty, one hundred and fifty dollars in effect right now, the product spread, that's all the products together versus the oil. This morning it was seventy dollars of barrow versus were eighty five. So eighty five plus seventy what that gets you to one fifty five? So you're already there. We have a very serious problem, and the consumer doesn't care about the price of oil. I don't know any consumer out there who consumes oil. They consume diesel, they consume gasoline. 00:13:46 Speaker 8: We have very serious issues. 00:13:47 Speaker 9: I'm going to go back to the point the investment returns of owning the energy of petroleum complex. 00:13:53 Speaker 8: This year, forget oil is up. 00:13:56 Speaker 9: Eighty one percent right now, already here today, because we have a problem. Everybody's focused on crude oil. But I like to point out nobody that's focused on crude oil consumes crude oil. Only a refinery consumes crude oil. So when you think about products, it's a much more dire situation. 00:14:13 Speaker 2: So Jeff, let's talk about what's in our future. Gasoline prices right now stayside around four dollars. It's not great, but it's not crisis. What do you think that's going to look like deeper into summer. 00:14:23 Speaker 8: It's going to go up. Where are you going to get the supply? 00:14:27 Speaker 9: And it's going to go up on a global basis, because again we're thinking about take Russia, just for those who don't know what happened, Ukraine in the last several months, is doing drone strikes, precision drone sykes going thirteen hundred kilometers into Russia, taking out central you know, the CDU crude distillation you to taking out with precision strikes. Some of this stuff is going to take you years to rebuild. And when you think about what Russia is doing right now, there's supposed to be long energy. They're importing gas in diesel from India, jet fuel from Japan, which underscores the severity of their situation. They used to export ten percent of the world's diesel market, and then to make sure they can't get the crude out, the Ukrainians are bombing the ships that we come out of the export terminals, and so we're all sitting there focused on, you know, what's going on in the straits of Horror moves whether or not these ships there's no products coming out, there's only you know, crude oil coming out. 00:15:30 Speaker 8: At this point, that's very demnimous. 00:15:33 Speaker 9: We also have the Red Sea at risk, and we have serious disruptions that are occurring in Russia. So again my point being here, I think is you started to hear the bottlenecks are shifting, but the trend is the same, and so you asked me what the risks are. They probably have rarely ever been this high right. 00:15:51 Speaker 2: Now, There's one variable we haven't discussed, chef, and it's an important one. I'm Marie and I were talking about this earlier on this morning, that the price accrued and we'll start with crude and we can get to product. 00:16:00 Speaker 3: In a moment. 00:16:00 Speaker 2: Wouldn't be thaty five without China, it would be closer to one hundred. The change in China's important head Chef. They're not importing like they were. They stopped piled a lot over the last twelve months. They're not processing and refining crude like they were either. What kind of assumptions are you making on what Chinese strategies around crude and crude product is going to look like in the next twelve months. 00:16:24 Speaker 8: They can't continue on like this forever. 00:16:26 Speaker 9: And by the way, everybody wants to blame this on China, China was part of it, but again let's remember they also exported the product, so they reduce. 00:16:36 Speaker 8: So let's say they taken somewhere. 00:16:37 Speaker 9: If you do it against what would be a normalized level. And by the way, the rebound, if you look at the shipping data in the last three to four weeks, suggest there was a substantial rebound there with particularly with the tea kittles. Now, the issue there is China was exporting a lot of transportation fuels, so they have tightened that global transportation fuel at the market same time that we've seen the rush and everything. So they're part of the problem. They're not the solution. So they've helped out. 00:17:07 Speaker 8: And crude again, I may go, crude oil is the noise. 00:17:10 Speaker 9: Products are the signal, and so when we think about, you know, their incentive to come back. The profit margins are just simply too large for any entity out there that has fair refining capacity. 00:17:23 Speaker 8: It's nearly the price accruise. So again, yeah, the crew. 00:17:26 Speaker 9: Price is off, but the distill in the gasoline and those product prices are not off. Hence why when you look at the pump prices they really haven't come down that much. In fact, when you look at the pump prices, the marketing margin, the refinery margins have never been this high. So the question is we'll China respond to the economic incentive of re record margins. The tea kettles are the ones that have that incentive. 00:17:50 Speaker 2: Stay with us. Mulplindug Savana's coming up off to this the global sell off and chip makers accelerating with a new AI model in China, smarking fares of another deep seek moment. Dan ives in a brand new role as Palmer and Senia managing zone rates at Yorkville IVES, writes tech stocks a laser focused on seeing the monetization trend for AI in the second quarter of hyperscalis or with the standouts and remain foundational to the broader tech spending trends. Dan Joints is now for more dankan monic. Great to be new firm. Let's start there for the benefit of our audience. New position. What kind of space see are you speaking from? 00:18:31 Speaker 6: Yeah, so in partner and really be you know, a research perspective. That's going to be my main role at Yorkville IVES. But it's a modern merchant bank. I mean this is something for me twenty five plush Yers on Wall Street. It's the evolutions, the next step. It's something to really build something that I think is going to be special in this market, but really focused in terms of sectors AI, tech, infrastructure, energy because where I view the fourth and dust evolution, so excited to do this and found just the best partners to. 00:19:03 Speaker 2: Do and these companies are borrowing a lot of money, They're spending a lot of money. The questions we're asking this morning, based on development sound of China is whether they're borrowing so much and spending so much. 00:19:12 Speaker 3: Watch the reaction to what we've heard from China. 00:19:15 Speaker 6: I think this is just called a white local moment, no different than a mini deep seek moment. To some extent. The reality is like, look, models, You're going to have ten x more models over the next five seven years vertical geographic. The reality is that it's anthropic and open AIS world and everyone else paying rent relative to the models. Gemini clearly narrowing the gap China. You're going to continue to see you very good models come out of there. But it's my view, when you talk about broader spending, the trillions dollars spending you're in CNAI, it's less about the models, it's about the data. It's about ultimately the build out, and I think that is something that we get validated to Q. 00:20:00 Speaker 1: But doesn't this show that China is not that behind the United States their neck and neck when it comes to AI development. 00:20:07 Speaker 6: I think for the first time in thirty years, it's not even a question that US is ahead of China when it comes to tech. Now when it comes to models in terms of the more of a commodization, open source and the way that they're going after. Are they ahead when it comes to robotics, when it comes to energy, Yeah, but there's one chip in the world. Few in the AI revolution, god father of AI, Jensen Nvidia, and I think what you see from hyper scours, what you see from open AI and anthropic, this is going to be an arms race. But I don't even think there's a question where the US is relative to China. When these moments happen, you'll see Jitters, white knuckles, stocks will sell up. 00:20:44 Speaker 3: Why is China able to do it cheaper? 00:20:47 Speaker 6: Because at the end of the day, the open source model, if you look whether it's deep sea or any others, when you compare it to what anthropics do into what open ai is doing, that's tip of the sphere. In other words, open AI and Anthropic they're going after the enterprise market. The models are just really the start of what the broader sort of end to end framework is going to be. When you think about where the vast majority of spending is going to be in AI, it's not un necessarily in the models. 00:21:16 Speaker 3: It's in the data, the data. 00:21:17 Speaker 6: Center buildouts, the cap backs, the ultimately is going to be physical AI. I just continue to view commoditization will continue to happen on the models. I don't get as sort of nervous when movements like. 00:21:30 Speaker 2: This the spending face. Can we talk about the end phase? And I know this is really difficult to do. Why do you think the money is ultimately going to be made the application lad the infrastructure layer. What do you think the money will be made? 00:21:41 Speaker 6: I think it's it's the application infrastructure layer that's going to really be the hearts and lungs. Because if you think about today, all the data center is getting built, those data centers are going to be it'll be like a factory for cars. You build out the factory, but now you actually need the lines. What's the operation When you look at as more and more companies on the use cases that's enterprise, that's software, that's. 00:22:06 Speaker 2: Use cases, confidently applayer won't become commoditized. 00:22:09 Speaker 6: I would tell you the more and more companies that I talk to that are depulling AI and going down the AI path, I feel that that's become less and less of a risk. They'll be winners and losers. There'll be ones where ultimately they're on the wrong side of it, and maybe some of those stocks are afflecting some of the nervousness. But the view today is that, look, we're still in the third inning of the AI revolution. Now we start off, we're in the second inning. This is not seventh eighth inning because of where this is all going in terms of physical AI. Look what Apple's doing, that's just starting the consumer AI revolution. But they're essentially a told booth in the AI highway. 00:22:45 Speaker 3: What's going on with Alphabet and Gemini? 00:22:48 Speaker 1: Why are they behind? 00:22:50 Speaker 6: I viewed that in terms of everything that they're doing, they'll be behind the point. But the reality is that their end to end framework, from Cloud to Gemini to what's happening on the search, they could catch up pretty quickly. And I just think they've narrowed the gap much more than anyone would have thought. And it goes back to a year ago New York City cab drivers barish. Now about look where they are today, and maybe today I see New York City cab drivers still bearish. Maybe they're barish on Microsoft versus where you know, I. 00:23:23 Speaker 2: Think you've got to come with a new phrase, because in my experience with my New York City camp drivers, they they're better on this market than most people I speak to on a daddy basis, and. 00:23:29 Speaker 6: That's very healthy because of ultimately more and more recent, longer and strong. 00:23:34 Speaker 3: They have a big sea at the table. 00:23:36 Speaker 6: And I know New York City cab drivers now they're driving Bentley's because of this market, right, they'll be sent. 00:23:41 Speaker 2: I remember years ago to be like, I really like Tesla and it'd be like, what this multiple that's crazy? 00:23:45 Speaker 3: And then Tesla just like to the moon up and to the right. 00:23:47 Speaker 6: And that's why a lot of them and driving Bentleys to yeah. 00:23:50 Speaker 3: Or cyber trucks or cyber trunks. 00:23:52 Speaker 2: Many of them don't know where they gunk anymore, which is it's unproblement, you know, it's not they count you the phone. 00:23:57 Speaker 1: Now, it's like I had given more. A taxi driver took my phone and said, do you mind if I keep it up here? And I just don't needed it for five minutes. I was like, I need a back, I have calls coming in. 00:24:08 Speaker 3: He's like, I need it for the whole ride. And then then drag, why are you taking the hole in town. You should be taking a walk, and then you have to ask. I don't know where they CAP's look. It's it's an issue. 00:24:17 Speaker 2: I know Dani's going to see you great, Thank you, sir. No dress code at York Film. 00:24:21 Speaker 6: We're gonna we're going to be dressing more and more color at your boass. 00:24:24 Speaker 3: Do they know that? They do you know that? And I think this is a. 00:24:27 Speaker 6: Process for some of them. 00:24:29 Speaker 2: This is the Bloomberg Survendics podcast, bringing you the best in markets, economics, angier politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.