00:00:02 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 Hordern. 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. Don't please to say that, Jenny, have you any research? Joins us now for more ed Welcome back to the program, my friends. So I've been conditioned to ignore this situation. I wake up this morning. I want to ignore the situation. Can I ignore the latest situation in the Middle East? 00:00:50 Speaker 3: And no, absolutely? 00:00:51 Speaker 4: Neat. 00:00:51 Speaker 5: I mean, this is a geopolitical crisis that just won't go away, won't end. 00:00:58 Speaker 3: The ceasefire, according to the. 00:00:59 Speaker 5: President, is over and he's clearly in a position to know and in a position to end it. So we're back to square one in some ways, back to where we were in March. I think though, I think both sides are testing one another. I think the President is demonstrating to the Iranians that while they may have obviously a significant impact and flows through the Strait, he can shut off the oil to the rest of the world. The unsettling development here, I think is may very well be that Iran is basically out of control, that the Revolutionary Guard is not going along with whoever is a quote unquote on the moderate side, moderate being that they'd like to cease fire to continue, and they'd like to come out with some sort of agreement. But the President made it pretty clear that it's very frustrating, not impossible to negotiate with the other side, and so clearly we can't ignore this. 00:02:02 Speaker 4: At this point. 00:02:03 Speaker 1: It is sort of surprising, as John was mentioning that oil prices aren't even higher if. 00:02:07 Speaker 4: The truth really is over. 00:02:09 Speaker 1: The pace of increase is pretty notable. The two day increase for both Brent and WTI is the most since at least April, and you see just sort of this surge upward. Is there a trigger point, either in the pace of increase or the level that could make you rethink even the broadening out trade in US equities? 00:02:27 Speaker 5: Lisa the honest answer is, I don't know. Nobody knows for sure. So we are all watching the price action in the marketplace, particularly in the oil market, and I think what we're saying is that we're being reminded constantly here that there was a bear market in oil before the war started. At the end of February. The bear market actually started when Russia invaded Ukraine. We had a big spike there and ever since then we've been on a significant downtrend until this war started. So that kind of and it's certainly everybody was surprised by how quickly the price of oil came down, and I think that just reflects that over in China they really adopted electric vehicles, and on top of that, their economy is really very weak. And on top of all that, the United States has looked the other way as the Russians have been selling more oil to China and India and other countries. I meanwhile, we've been exporting a lot of oil to Japan and South Korea. So put it all together, and the underlying fundamentals for oil are actually bearish, but to certainly not bearish in the short term here with the end of the ceasefire. 00:03:40 Speaker 1: The volatility that we're seeing though, just highlights how much inflationary pressures are coming from myriad places. And it seemed to be persistent even when you want to say, look, there's potentially a glut because of all of these off the release valves that you talked about. At what point do you think that this market is underpricing the risk of inflation running a bit hotter, putting pressure, yes on the FED, but potentially pressuring certain profit margins for companies that are facing a pretty wearied consumer. 00:04:09 Speaker 5: Well before the June meeting of the f o MC, we thought that the FED was going to pivot fairly significantly from an easing stance back in April to a tightening stance in June, and that's exactly what happened. The big surprise to me was that Kevin Warsh turned out to be among the hawks, because he had when he interviewed for the job, he certainly signed a dubbish. Now, the FED seems to be pretty much all aligned with the idea that price stability is much more important than the labor market. Labor market seems to be stable, but you know, all bets could be off here depending on what happens with the Middle East. 00:04:51 Speaker 3: You know, the consumer has been doing just. 00:04:54 Speaker 5: Great, but if we get another spike and gasoline prices, there may be some kind of jew political fatigue. And meanwhile the market is run into AI fatigue. And just you know, as I saw in your brief cuts, for all the strategists that you had interviewed recently, everybody was talking about rotation. 00:05:14 Speaker 3: I was talking about rotation. 00:05:16 Speaker 5: Out of the AI trade into companies that we know something about and we know their future more than we do the AI companies. And that was the Dow Jones, that was the Russell two thousand. But now we're all back to, as I said, square one in some ways with regards to the Middle East, and that's become the main focus. And you're right, the inflation concerns are back in play, and as a result of that, the FED is back in play. Not only is the FED pivoted to tightening, but they may actually have the titan. 00:05:50 Speaker 2: This is the three punch combination right now to sentiment ad it's not just a situation and energy to your point, it's how you felt that into the outlook for interest rates. Point is this rotation quite vicious rotation away from the high fliers in this anquity market right now. Lisa Shallat of Morgan Stanley was pretty scan thing in the last twenty four hours. She said, while many investors are waiting for ai capex to actually slow before reducing semiconductor exposure, given what is implied about the sustainability of future growth, we're taking profits now. And you were there too, and I just want an updated thought from you about where that Chip States trade stands now given the sixteen percent move we've had just in a few weeks. 00:06:29 Speaker 3: Yeah. 00:06:29 Speaker 5: Well, clearly we did have a tremendous rally in the semiconductors and that of course led the way up for the stock market. But the fact of the matter is it's not a fomal melt up. It's been a female melt up. Foma means fear of missing out, which typically leads to very elevated evaluation multiples, which basically as a valuation lead melt up. This has been a and earnings let melt up, and I'd rather have an earnings let melt up. I think there's less downside than there's in a fomo melt up, and I think it presents more of an opportunity in the market because the fact of the matter is earnings have really justified the rally and semiconductors, and it's not just expectations, but it's expectations based on actual reality. So I would view this a lot more as an opportunity than there isn't to panic. But right now we're saying not so much panic, just massive profit taking because there have been massive profits. 00:07:38 Speaker 2: So AGI went, then why don't you stop buying these chips, these chip names that have been beaten up in just a few weeks. 00:07:44 Speaker 3: Well, I think we're getting pretty close. 00:07:46 Speaker 5: Because these things move, they don't kind of leisure to things in the leisure of fashion. They go up very quickly, they go down very quickly, and so I think there's an opportunity starting right now. I say that with some hesitation, given that I don't really know. Nobody really knows how this latest end of the seafire plays plays out. And so the war is not over, is the bottom line here, and the stock market is working on discounting that idea. 00:08:18 Speaker 2: Stay with us more Blindberg surveillance coming up after this, presurging them with the President saying the seas far with the round is over. This after the US launch quote powerful strikes and refolked a wafer, allowing the sell of Iranian crew Samantha down to Comet. Sachs is busy again, sam You had a rest for a couple of weeks. Welcome back. It's going to see here. What is the supply back drop like right now? Let's start there. That's important because that's been a major factor in the past few months. 00:08:51 Speaker 6: What's it looked like now. 00:08:52 Speaker 7: Yeah, so the last time we had a flare up, we had a decline in the crossings through the Strait. We're very likely to see that again. But we have to also remember when we saw the MoU being announced, we couldn't expect going from zero to one hundred directly. I think right now we shouldn't also extrapolate that this is going to go to zero and stop altogether. So let's give it a couple of days. The President also said that negotiations continue that he thinks is a waste of time, but they continue, so to me, that signals that this is not necessarily over. Let's see what happens with the flows, and in terms of how high the flows were. Just before this latest flare up, we saw total Persian Gulf exports reach seventy percent of normal, So by this does include, to be fair, the reroutes the pipeline reroutes from the region, But it was a pretty good rate of flow considering how soon it was the MoU. 00:09:53 Speaker 2: Where was that flow coming from sam and how material was that waiver for a rounding crew which has now been revoked. 00:09:59 Speaker 7: Yeah, so if you look where the ships are coming from, it's from everywhere in the Gulf. It's not just the run, it's not just out, it's from everybody in the region. And if we consider the Iranian sanctions, even before this whole war started, Iran was selling crude, it just wasn't selling to everybody, wasn't selling in an unsanctioned way. 00:10:22 Speaker 4: So it's not obvious to me. 00:10:24 Speaker 7: That the revocation of the license alone is going to change this dramatically. We have to see where those flows go. I think the blocking of the strait that was in place before this is what we need to watch for. So, going back to your first question, we need to watch the crossings. We need to watch how much that seventy percent of normal is going to fall. 00:10:46 Speaker 1: To Do you have a break even point of say the traffic goes up to thirty percent or forty or fifty percent, that it would kind of even out and it would be okay. Especially given your forecast Golvin Saccess forecast earlier this month, Potentially there could be a supply glut. Should there be more normalization for the strait of for Moose, Yeah. 00:11:05 Speaker 4: That's a very good point. 00:11:06 Speaker 7: We're talking about flows having been around seventy percent of normal, and when we look at visible global oil inventories, they were starting to build. They were starting to build even though flows had not been fully normalized. And this goes back to something you guys mentioned just a minute ago what China had been doing. And this, I think to me was one of the most surprising things since the deal announcement is the fact that China oil imports in June they kept dropping versus May, so they didn't rebound after the announcement of the MLU. And this gives the system a lot of flexibility. It makes it softer, it makes it easier to accommodate the flare ups like what we're. 00:11:48 Speaker 4: Seeing right now. 00:11:49 Speaker 1: If someone were in the markets and listening to you, you could forgive them for thinking. 00:11:53 Speaker 4: So you're saying I can ignore this. 00:11:55 Speaker 1: Are you saying that this potentially is not as disruptive of development as it would have been treated, say, three months ago. 00:12:02 Speaker 7: I think just like the blockade, duration matters, but I would be more concerned with refined products than I would be with screwed first because we see this difference in terms of what China is doing. But second because when we think of production capacity crude production capacity, what we're hearing from the services companies is that this has not been damaged in the Gulf, So that's good news. That means that once this is resolved, production can likely go back to what it was, But refining capacity has been damaged. So the ability of refined product output to normalize. 00:12:42 Speaker 4: I think it's going to take a lot longer. 00:12:45 Speaker 7: And already even though so I mentioned that China oil imports are continuing to move lower, but flights were starting to go up, so mobility was starting to go up. So your consumption of refined products is going up before your production and your export of refined prices. So I would worry a little bit more about gasoline and diesel and jet fuel than I would about crude right now. 00:13:06 Speaker 2: So you can have a reset in crude, but you can still have elevated refined product prices. 00:13:11 Speaker 7: Well, let's just think about how prices changed since the MoU announcement. So before this flare up, we had seen crude down just about eighteen percent. We had seen European ature guests down about, you know, depending on the day, five to nine percent. But crew oil products they were down four percent, five percent, they were down the least. And I think this illustrates how tight that balance still is. 00:13:37 Speaker 2: They're the things that consumers buy, and that's going to be a political problem at certain places. 00:13:42 Speaker 7: I think that's exactly right when we think about inflation. 00:13:45 Speaker 4: We don't buy crude oil. 00:13:46 Speaker 7: We buy gasoline at the pump, and the trucks buy diesel, and we fly on jet fuel. 00:13:52 Speaker 2: Just to find a question sam imagery levels. Clearly they're very different now compared to where they were in like February GUGA into the first mess. What did they look like now? 00:14:00 Speaker 7: Yeah, So this is also a good point, and it goes back to the point on flexibility. On the crude side, they are not as low as what we would have expected at the beginning of the crisis. 00:14:13 Speaker 4: If we assume, oh, if. 00:14:14 Speaker 7: The crisis lasts this long, it's going to go to record low levels. 00:14:17 Speaker 4: They didn't go to record low levels. But again on the product. 00:14:22 Speaker 7: Side, the color we are receiving from market participants is that retailers indeed have very low inventory of that. 00:14:29 Speaker 2: Stay with us. 00:14:30 Speaker 8: More Bloomberg surveillance coming up after this, So. 00:14:42 Speaker 2: Chronat of city writing until we get some fundamental clarity, especially around the AI build out, we suspect rotation and chompiness will linger. However, we believe this creates an opportunity for less crowded trades. Scott changes now for more Scott. Welcome sir. It's always good to hear from you. Recently down grading tech, So I think that's why we should why the move away from tech, Well, I think. 00:15:03 Speaker 6: It's pretty clear. 00:15:04 Speaker 9: The way we were looking at it is that the setup with the strength that we saw in Q two on the memory storage component of the semiconductor space really began to set up for a face off where's it's going to lead us as as the hyperscalers have to contend with the influence of rising input costs into their capex calculations. What this did, in our view is set up a situation where the strength we saw in Q two for that semi hardware component we felt with somewhat unsustainable relative to where the hyperscaler's capex considerations are right now. 00:15:40 Speaker 2: Scott, with that in mind, is that a market where the Hyperscalis can start to pick up. We've heard lots about a rotation away from chips, from hardware back to the big spend. Does do you say it the same way? Well, I think it's going to be tricky. 00:15:52 Speaker 9: I think the way we're looking at it is that the qture reporting period is going to tell us a lot on this. I don't know that the hyperscalers can back off just in terms of their capex plans, nor do I think they should necessarily. But what you have is this ongoing friction where the market's going to be looking for evidence on the ROI discussion for the Hyperscalers, and the burden of proof on that I think is going to be the mission critical component on the way this plays out. So we've remained underweight the media component of communications services downgraded as I mentioned semis and hardware, but we did lift software from underweight up to a marketway. 00:16:29 Speaker 6: So there we. 00:16:30 Speaker 9: Think that there's an opportunity for the software component of this to be a sort of a tertiary beneficiary of some of the pressure we're seeing now on semis and hyperscalers. 00:16:40 Speaker 4: Scott, how do we get it? 00:16:42 Speaker 1: How do we get to eighty one hundred without the participation of the tech behemoths. 00:16:47 Speaker 6: Yeah, you know, it's a really good question, Lisa. 00:16:49 Speaker 9: So when you look at this, the MAG seven and I would say first up front that we think the MAG seven construct is dead. We think it's gone. We've gone to MAG eight, and we could probably go to nine or ten if we wanted to in terms of the way some of these memory semiconductor related companies have appreciated of late. 00:17:06 Speaker 6: But the path here really requires two things. 00:17:10 Speaker 9: Number One, you need the broadening effect to kick in that other half of the market that's not attached to AI, that's more traditionally macro and economically sensitive driven. We think that is where there's opportunity right now. But number two, to your point, the MAG seven, coming back to the construct I think is dead, is essentially traded roughly flat here today, and that's forty percent of the index. 00:17:33 Speaker 6: So we do have a setup here. 00:17:35 Speaker 9: We're going into the second half and we've got, you know, roughly six months to go. Is this broadening effect to take hold. On one hand, as we wind down Aroan, which I know is back in the news flow this morning. 00:17:46 Speaker 6: But as oil price is. 00:17:47 Speaker 9: Fade, we think that takes pressure off of inflation. But then as you go further into the year, we do think there's opportunity for the AI trade once it digests a lot of these issues that were tending with currently to kick back in and the combination of the two is how we get that sort of mid upper single digit move into the end of the year. 00:18:07 Speaker 1: Scott, you mentioned the Iran situation and we are seeing a flare up this morning. At what point would oil prices rise to a point where you would think that the broadening out trade was threatened, that the thesis of disinflation into the end of the year truly gets undermined. 00:18:24 Speaker 6: Yeah, I'm not sure there's a magical level here at. 00:18:26 Speaker 9: List about what I would say is that, you know, obviously, with oil sub seventy, we were feeling pretty good about our broadening play, right, and I still think that's our base case. We're a day or two into this, the conflict sort of reasserting itself, so we'll need to let this play out. But I'd say if there's a line in the sand on oil prices that we've been drawing, it's probably around eight eighty dollars level that really begins to kind of clip the thesis for us. 00:18:51 Speaker 2: This is the Bloomberg Surmandments podcast, bringing you the best in markets, economics, anngiopolitics. You can watch the show live on Bloomberg TV weekday morning's six am to nine am Eastern. 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