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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Welcome to the Bloomberg day Break Asia podcast. I'm Doug Krisner.

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Speaker 2: On today's episode, we'll be getting a preview of earnings

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Speaker 2: from Japanese auto giants Honda and Nissan.

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Speaker 3: These reports come.

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Speaker 2: On the heels of a report in the nie Ke

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Speaker 2: that these Japanese automakers will be backtracking on their planned merger.

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Speaker 2: We'll be hearing from James Hong Is, head of Asia

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Speaker 2: Autos at Macquarie Capital.

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Speaker 3: But we begin in the States.

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Speaker 2: So markets right now are reducing their bets for FED

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Speaker 2: rate cuts. This is all in reaction to a hot

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Speaker 2: reading on US retail inflation. We had yields spiking across

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Speaker 2: the treasury curve today on news that's CPI month on

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Speaker 2: month at the core rate increased by four tenths of

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Speaker 2: one percent, and money markets are now projecting the first,

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Speaker 2: perhaps the only rate cut of the year not come

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Speaker 2: until December. Joining us now for a closer look is

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Speaker 2: Michael Green. He's portfolio manager also the chief strategist at

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Speaker 2: Simplify Asset Management. Michael, thank you for making time to

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Speaker 2: chat with us. A lot of this increase in the

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Speaker 2: core consumer prices had to do with auto insurance, airfares,

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Speaker 2: and that record monthly increase in the cost of prescription drugs.

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Speaker 2: Are you worried at all about what we're seeing here

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Speaker 2: in the tape?

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Speaker 4: So I'm really not, because I actually think a lot

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Speaker 4: of what is occurring is unfortunately a seasonal function. If

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Speaker 4: you look back to last summer, when we were experiencing

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Speaker 4: much lower than expected inflation numbers, the seasonal adjustments at

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Speaker 4: that point had pushed them down below where you would

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Speaker 4: expect them to be. We're seeing the opposite of that

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Speaker 4: in January. That's exactly unfortunately what we saw last year.

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Speaker 4: It led markets astray to expect a return of inflation.

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Speaker 4: I think a very similar phenomenon is playing out this

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Speaker 4: year unfortunately.

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Speaker 3: So do you think markets are overreacting a bit?

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Speaker 4: I do, and I think actually Powell has tried to

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Speaker 4: guys in that direction, as has Secretary Treasury Scott Vessant,

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Speaker 4: indicating that they are focused on the longer end of

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Speaker 4: the curve much more so than they are at the

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Speaker 4: short end of the curve. You know, we have basically

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Speaker 4: seen an environment in which people react to those hikes

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Speaker 4: or to those increases in inflation in expectation that the

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Speaker 4: FED is going to react to them. Howell told is

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Speaker 4: very clearly in December, reiterated it in January, echoed by

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Speaker 4: Waller in January as well and a few other speakers

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Speaker 4: that what they're really focused on are what are called

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Speaker 4: the market derived prices or the market prices as compared

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Speaker 4: to the imputed prices. And almost all the prices that

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Speaker 4: you just mentioned to me, insurance, et cetera, are imputed

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Speaker 4: prices that are not really going to play a significant

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Speaker 4: role in the Fed's consideration. The other one, of course,

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Speaker 4: that you didn't mention, was there was a huge spike

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Speaker 4: in gasoline or in energy costs for heating homes in

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Speaker 4: the United States that played through in January of twenty

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Speaker 4: twenty five that contributed zero point one points this time,

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Speaker 4: or how it contributed zero point seven so as a

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Speaker 4: significant contributor that was really driven by usage associated with

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Speaker 4: the very cold weather in January as compared to a

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Speaker 4: meaningful inflation metric.

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Speaker 2: So if we can agree that the tenure right now

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Speaker 2: is a little above four sixty, I'm wondering whether there

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Speaker 2: is risk that we have a move higher and yield

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Speaker 2: and maybe closer to something of five percent, just based

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Speaker 2: on the risk that maybe one of the big unknowns

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Speaker 2: is the inflationary implications of tariff policy.

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Speaker 4: Well that I think is actually playing a more meaningful role.

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Speaker 4: We certainly saw an element of buying forward associated with

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Speaker 4: consumer purchases in the fourth quarter of durable goods, items

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Speaker 4: that are most likely to be affected by tariffs. It's

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Speaker 4: unclear whether that was a legitimate acceleration or whether that

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Speaker 4: was pulling forward in anticipation of tariffs raising prices. I

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Speaker 4: think the Fed has been pretty clear on this that

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Speaker 4: if ultimately the issue is tariffs driving prices, those are

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Speaker 4: not really the same thing as an overheated economy driving prices.

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Speaker 4: If anything, they're reducing purchasing power. There's no reason to

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Speaker 4: double up with an interest rate response associated with it.

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Speaker 4: Could we see the ten year go to five percent,

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Speaker 4: of course we can. Would that have any meaningful impact

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Speaker 4: on the already impacted areas of our economy, like housing

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Speaker 4: or others. I'd be very surprised if it has that

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Speaker 4: meaningful of an impact. The much more important question is

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Speaker 4: going to be do we see that inflation start to

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Speaker 4: retreat again in the areas that Powell's paying attention to we.

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Speaker 2: Had to pull back an oil prices. Here in New

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Speaker 2: York today WTI was down by more than two and

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Speaker 2: a half percent. That seemed to coincide with President Trump

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Speaker 2: saying that he's spoken with Russian President Putin about talks

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Speaker 2: to end the war in Ukraine. To what extent does

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Speaker 2: energy factor into what we've been talking about with respect

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Speaker 2: to inflation.

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Speaker 4: Well, energy is obviously a critical component. It's much less

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Speaker 4: so in the the United States, where we have access

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Speaker 4: to natural gas at relatively low cost. President or Vice

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Speaker 4: President Advance gave an impassioned speech highlighting the importance of

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Speaker 4: energy and energy production, particularly as we talk about the

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Speaker 4: Ai Revolution and the need for data centers with significant

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Speaker 4: energy demands. This is going to be a really interesting

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Speaker 4: period because what President Trump is indicating is a return

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Speaker 4: to a focus on baseline power building as compared to

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Speaker 4: the variable and episodic contributions from things like wind and solar.

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Speaker 4: It clearly is an impact, But anytime you take away

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Speaker 4: a war, particularly a significant war like Ukraine, you have

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Speaker 4: to expect that the price of oil, particularly if that

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Speaker 4: Russian oil comes back onto the market in any meaningful way,

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Speaker 4: could really be negatively impacted. So that would be a

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Speaker 4: contributing factor to lower inflation if we were to experience it.

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Speaker 2: So you mentioned the demand for more energy as a

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Speaker 2: result of this transformation that we're seeing right now in

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Speaker 2: artificial intelligence. After the bell today, Cisco gave an upbeat

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Speaker 2: sales forecast for the current quarter. This seems to reflect

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Speaker 2: that companies are spending more on computing infrastructure as a

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Speaker 2: part of the AI narrative. Is this a trade that

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Speaker 2: you still must be participating in.

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Speaker 4: Well, I think it's an interesting question because is it

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Speaker 4: a trade that you're actually playing for the AI enablers

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Speaker 4: and the AI companies themselves, or are you starting to

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Speaker 4: make a play for how AI is impacting the economy.

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Speaker 4: I will tell you candidly that I've started using the

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Speaker 4: new chat GBT version one with the deep research capabilities,

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Speaker 4: and it is truly astonishing how powerful it is for

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Speaker 4: anyone whose primary role is communications, programming, research, analysis, etc.

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Speaker 4: They are really really powerful tools. But one of the

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Speaker 4: critical things to understand. Anthropic just released an economic report

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Speaker 4: on AI, and it's astonishing because less than six percent

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Speaker 4: of the workers in the workforce, or less than six

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Speaker 4: percent of the employment categories are accounting for more than

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Speaker 4: fifty percent of the AI usage. So this is going

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Speaker 4: to be a really interesting question. Does this become a

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Speaker 4: widely diffuse technology or does it become a technology that

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Speaker 4: is used by a limited subset of our population until

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Speaker 4: it's able to diffuse through educational systems, et cetera and

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Speaker 4: people become very comfortable using it. It's not clear how

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Speaker 4: quick the adoption path will be. It's clearly going to

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Speaker 4: have a huge impact on those workers like myself who

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Speaker 4: were affected by it.

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Speaker 2: I just to let you know that Open Ai is

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Speaker 2: nearing the release of a new AI model.

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Speaker 3: I guess chat GPT four.

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Speaker 2: Point five from what I understand, this is going to

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Speaker 2: be the last model that doesn't use additional computing power

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Speaker 2: to mimic human reasoning. I'm sure you've been following the

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Speaker 2: story on China's Deep Seek. To what extent do you

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Speaker 2: regard this as is transformational for the AI industry?

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Speaker 4: Well, I think the key in its transformational capability is

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Speaker 4: not that it's actually pushing the envelope in terms of

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Speaker 4: capability like a four point five or the new Deep

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Speaker 4: Research capability or chat GPT, but what it does do

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Speaker 4: is highlight the inevitability that the sort of efficiency gains

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Speaker 4: that we saw in the fiber optic revolution are coming

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Speaker 4: for the AI Revolution. I just want to remind people

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Speaker 4: if you go back and listen to the commentary from

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Speaker 4: the late nineteen nineties about the costs of rolling out

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Speaker 4: fiber optics and the switching networks, those estimates turned out

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Speaker 4: to be way too high, and as a result, we

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Speaker 4: experienced extraordinary deflation in communication technology that now allows you

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Speaker 4: and I to be talking over the Internet.

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Speaker 2: One of the things that I remember from that period

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Speaker 2: talking about the need for greater Internet bandwidth, and it

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Speaker 2: came as a bit of a surprise back then, was

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Speaker 2: DSL multiplex technology, right, and so we could use twisted

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Speaker 2: pair that kind of the traditional phone lines and get

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Speaker 2: much greater speed for connecting to the intranet. And I

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Speaker 2: think that really took the industry quite by surprise.

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Speaker 4: Well, there was that, and then the real revolution actually

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Speaker 4: occurred in the switching technology and the amplification technology. The

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Speaker 4: real cost associated with the fiber optic revolution, much like

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Speaker 4: the AI Revolution, were associated with actual physical building, digging

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Speaker 4: up streets, laying fiber optic, et cetera. Because of the

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Speaker 4: advances in related technologies, not dissimilar to the algorithmic advance

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Speaker 4: in terms of memory utilization and lower power consumption. The

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Speaker 4: deep seak has identified and placed in open code so

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Speaker 4: that it's available to everybody. Open source code so that

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Speaker 4: it's available to everybody, and everybody will now begin adopting it.

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Speaker 4: We just saw extraordinary improvements. Again, going back to that

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Speaker 4: fiber optic example, we are still today twenty five years

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Speaker 4: later using only a fraction of the laid fiber in

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Speaker 4: the United States because we became so much more efficient

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Speaker 4: at using it, and with the US so far ahead

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Speaker 4: of the rest of the world in data center construction,

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Speaker 4: you have to believe that there is a risk of

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Speaker 4: a similar bubble associated with it, which is why caveat.

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Speaker 4: Are you more interested in the actual companies producing AI

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Speaker 4: technology or are you more interested in companies that are

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Speaker 4: going to figure out how to exploit that technology to

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Speaker 4: improve their business.

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Speaker 2: So as long as we're talking about artificial intelligence, I

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Speaker 2: think we have to include the chip makers away from

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Speaker 2: in Vidia for a moment. Today the Wall Street Journal

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Speaker 2: reported a conversation about a potential factory partnership between Intel

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Speaker 2: and Taiwan's semiconductor manufacturing, obviously the world's largest contract chip maker.

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Speaker 2: How do you want to be exposed to the chip

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Speaker 2: stocks right now?

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Speaker 4: Well, I think the key component that you just hit

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Speaker 4: is the Nvidia dynamic. In Vidia has experienced extraordinary profitability

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Speaker 4: margins associated with their AI chips that seem unlikely to sustain.

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Speaker 4: They didn't sustain before, it's unlikely they sustained going forward. Ultimately,

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Speaker 4: we're finding out that the chips themselves, much like brain cells,

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Speaker 4: are somewhat commoditized in their underlying features. So and my

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Speaker 4: bias is that we are still caught in an environment.

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Speaker 4: And I shared with you some of the work that

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Speaker 4: I've done around passive investing and which as long as

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Speaker 4: money is flowing in, it's going to meaningfully impact those

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Speaker 4: largest stocks once we begin to actually evaluate them on

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Speaker 4: a discretionary basis and ask the key questions that we're

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Speaker 4: discussing right now. You couldn't see those prices correct quite

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Speaker 4: sharply in a replay of what looked like the dot

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Speaker 4: com cycle.

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Speaker 2: Michael will leave it there. Thank you so much for

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Speaker 2: being with us. Michael Green there. He is portfolio manager

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Speaker 2: also the chief strategist at Simplify Asset Management, joining from

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Speaker 2: here in New York City on the Daybreak Asia Podcast.

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Speaker 2: Welcome back to the Daybreak Asia Podcast. I'm Dog Krisner.

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Speaker 2: Later today we'll be getting earnings from Japanese auto giants

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Speaker 2: Honda and Nissan. These reports come on the heels of

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Speaker 2: a story in the Nieke indicating these two auto companies

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Speaker 2: will be backtracking on their planned merger. For more, we

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Speaker 2: heard from James Hong. He is head of Asia Autos

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Speaker 2: at Macquarie Capital. He spoke earlier with Bloomberg Sherry On

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Speaker 2: and Heidi Stroud Watts.

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Speaker 1: James, good to have you with us. We're saying, really

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Speaker 1: Nissan under pressure today, Honda stock gaining ground. How much

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Speaker 1: does this really reflect the outlook for business for these

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Speaker 1: two companies, especially if we see in fact the merger

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Speaker 1: talks collapsing.

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Speaker 4: Yeah.

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Speaker 5: Well, I don't think that today's move really has to

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Speaker 5: do with their third colorter operation results more about the

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Speaker 5: future of the company, especially when it comes to Nissan

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Speaker 5: with the recent not only poor on Honah getting interested.

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Speaker 5: But it's not about expisition, It's more about partnership, which

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Speaker 5: also means that the burning cash situation of Nissan may

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Speaker 5: not really turn around anytime soon. We are actually expecting

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Speaker 5: more of the self restruction plan to be announced updated

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Speaker 5: in the third quarter today, So I guess the total

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Speaker 5: impact on their Baalish cash podition will be.

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Speaker 6: The key focus.

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Speaker 5: But at the moment, given the heights we had around

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Speaker 5: these acquisitions from Honai or someone getting interested on Nissan,

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Speaker 5: I guess that's basically dragging down the ship pres at

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Speaker 5: the moment and hurting the sentiment.

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Speaker 1: Yeah, so how will Nissan say about water if this

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Speaker 1: talk in fact collapses and there's no merger.

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Speaker 5: Well, I guess there will be a couple of things

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Speaker 5: to do. I mean, at least the company need to

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Speaker 5: continue to deliver their self restruction plan and hoping that

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Speaker 5: they persuade creditors or their stakeholders to continue to support

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Speaker 5: the company. Do not that majority of their loan out

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Speaker 5: staying loan is already guaranteed by the Japanese government, so

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Speaker 5: we don't really expect any issue major issue financing related

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Speaker 5: issue anytime soon for Nissan.

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Speaker 6: However, in order.

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Speaker 5: To deliver more positive message to the market and basically

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Speaker 5: ease the concern around the sustainability of the business, we

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Speaker 5: surely need to hear more about their outlook and the

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Speaker 5: progress that will deliver and within the plan probably the

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Speaker 5: market wheks want to hear more about partnership, what kind

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Speaker 5: of financial investor they're looking, or how they fund their operations.

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Speaker 5: I mean, these all these are all the questions that

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Speaker 5: still has yet been answered, and the mainly a lot

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Speaker 5: of analysts who our investor will probably ask about it

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Speaker 5: today later afternoon on their earnings briefing.

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Speaker 7: We have heard that home High is open to that

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Speaker 7: partnership right through buying Renault's steak. Are there other partners

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Speaker 7: or possibility you know, roads ahead that are available to

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Speaker 7: Nissan that might make sense.

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Speaker 5: Well, I mean we've been hearing some of like like

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Speaker 5: in Japan market obviously a lot of active private equality funds,

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Speaker 5: So I do hear some of from some of the

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Speaker 5: investors that there might be a potential target for those

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Speaker 5: equity although we personally we don't don't see Nissan as

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Speaker 5: a very attractive target. But like with the company start

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Speaker 5: to carve out some of the overcapacities and the company

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Speaker 5: who want to cut their capacity, I'm sure some of

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Speaker 5: those factory are it can be sold at the to

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Speaker 5: the potential buyers, like it can be whole, it can

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Speaker 5: be anyone else who are willing to enter the evy

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Speaker 5: assembly business. But again, I mean again, all these are

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Speaker 5: still remains uncertainty to us. At the end of the day,

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Speaker 5: we still believe that Nissan would need to get support

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Speaker 5: from the other big auto maker, uh uh. And without that,

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Speaker 5: I mean, it's seems a quite difficult situation for for them.

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Speaker 7: Survive always one thing, right, but you know, being able

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Speaker 7: to actually regain competitiveness seems like a really big ask

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Speaker 7: at the moment. The scale on its own through through

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Speaker 7: these sorts of you know, a collaboration or emergent like this,

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Speaker 7: actually helped compete with the Chinese manufacturers.

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Speaker 5: Yeah, so the overall like over overcapacity titration and the

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Speaker 5: lack of scale actually started with US. They lost their

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Speaker 5: market share in China with the obviously competition from bid

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Speaker 5: or local companies. But at the same time, their respond

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Speaker 5: to the changing market dynamic such as like growing demands

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Speaker 5: for hybrid in the US was actually a bit late.

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Speaker 5: So we're basically seeing the Nissan with the weakening brand

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Speaker 5: power every day. And obviously on the other hand, we're

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Speaker 5: seeing the Koreans and other hybrid manufacturer in US and Japan,

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Speaker 5: which is a basic on Honda and Toorada continue to

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Speaker 5: do better in the US market. So for Nissan, as

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Speaker 5: you said, I mean, it's a stainable survival with one thing,

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Speaker 5: but the turnaround and becoming a better brand, were becoming

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Speaker 5: what they were, like say, like twenty years ago, we're

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Speaker 5: still I don't think there is a lot of the confidence.

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Speaker 5: We don't have much of confident on that one.

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Speaker 6: Yet.

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Speaker 1: What does this actually mean for the broader auto industry

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Speaker 1: here in Japan and perhaps what we thought would be

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Speaker 1: more accelerating moves towards consolidation, right right.

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Speaker 6: I don't We don't think that the consolidation is off

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Speaker 6: the table.

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Speaker 5: I mean the given there are many of the Japanese

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Speaker 5: automakers with the lack of scale to invest on software

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Speaker 5: defined vehicle, we've been seeing like B I D basically

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Speaker 5: guiding that all their vehicles, even cheaper ones, will have

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Speaker 5: ada's function rights as A as A as A as

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Speaker 5: a basic picture uh. And also the Eavy tradition, competition

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Speaker 5: from Chinese, especially in China and which are basically the

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Speaker 5: key market for Japanese automakers, and the changing environment in

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Speaker 5: Europe and the US. We don't think that sub scale

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Speaker 5: company can actually deal with that efficiently.

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Speaker 6: So consolidation is still there. It's just that the when you.

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Speaker 5: Look at the Japanese automotive industry, the major most of

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Speaker 5: the members are within the towy umbrella like Suzuki, Suva, U,

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Speaker 5: MAS and Master. But the question still remains on the

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Speaker 5: three more independent companies which are basically on Innissa and Missubishi.

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Speaker 6: UH and these.

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Speaker 5: Japan French Alliance or Japan US Alliance, which is a

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Speaker 5: Honda and GM has not really been successful. I'm sure

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Speaker 5: there will be a lot of cultural issue between the

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Speaker 5: two automotive groups there. So still from the japan automotive

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Speaker 5: industry as a whole, we still believe that the UH,

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Speaker 5: this consolidation and the collaboration within the remaining street company

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Speaker 5: is still still a bible option. It's just that the

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Speaker 5: discussion just went that for now. But I don't think

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Speaker 5: there's like permanently con From a more.

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Speaker 7: Global perspective, we know that both Honda and it's not

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Speaker 7: particularly vulnerable to trade tensions and towerffs, right because of

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Speaker 7: the high share of those vehicles that get imported to

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Speaker 7: the US from countries like Mexico and Canada. What's your

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Speaker 7: assessment in terms of how big that exposure is yeah.

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Speaker 5: I mean so not all the Japanese or the more

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Speaker 5: makers are not free from those impact to begin with.

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Speaker 5: But when it comes to Nissan, we're basically seeing the

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Speaker 5: larger dependency towards a Mexican operation compared to other companies.

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Speaker 5: I mean, some of the popular models they produce, such

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Speaker 5: as Central and Kicks, which is a small entry type

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Speaker 5: of vehicles, are accounting majority of their volume for their

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Speaker 5: US operation, And unlike Nissan, Honda and Tourida still has

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Speaker 5: room to adjust their production and location for those vehicles

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Speaker 5: being produced in Mexico, So that actually puts a different situation.

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Speaker 5: And also when you look at the Mexican product to

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Speaker 5: the US is either a high very expensive pickup trucks

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Speaker 5: like US companies in TWYDA building Mexico, or either low

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Speaker 5: end passenger cars.

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Speaker 6: So if there is an actual teriff against.

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Speaker 5: The Mexican product, I'm sure these highp products are more

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Speaker 5: lessons when it comes to their customer lessons tive those

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Speaker 5: price changes, whereas it can actually be a cost, cannot

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Speaker 5: be really been passed on to the consumers for the

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Speaker 5: dues cheaper who has less affordability when buying the vehicles.

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Speaker 5: So we're more negative, concerned about this exposure when it

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Speaker 5: comes to Nissan, who are basically delivering very lasor thin

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Speaker 5: margin at the moment, if not negative, or their automotive

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Speaker 5: business at the moment, especially in the US.

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Speaker 7: James Hung really great to have you with us as

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Speaker 7: a head of Asian Autos at Macquarie Capital.

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Speaker 2: Thanks for listening to today's episode of the Bloomberg Daybreak

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Speaker 2: Asia Edition podcast. Each weekday, we look at the story

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Speaker 2: shaping markets, finance, and geopolitics in the Asia Pacific. You

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Speaker 2: can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel,

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Speaker 2: or anywhere else you listen. Join us again tomorrow for

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Speaker 2: insight on the market moves from Hong Kong to Singapore

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Speaker 2: and Australia. I'm Doug Prisoner and this is Bloomberg