Speaker 1: This is the Bloomberg Surveillance Podcast.
Speaker 2: I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz.
Speaker 2: Join us each day for insight from the best an economics, geopolitics,
Speaker 2: finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple,
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Speaker 3: With us around the table and please to say Jack Caffrey,
Speaker 3: Equity portfolio manager at JP Morgan Asset Management, Mornajack.
Speaker 1: Good morning.
Speaker 3: What do we need to see to get this rally
Speaker 3: to broaden out it's next year?
Speaker 4: Well, I think let's break this down into three steps,
Speaker 4: if you will. The holiday rally is certainly very much
Speaker 4: in force. As Tom just mentioned, It's November has been
Speaker 4: a really good year. I think against the context of
Speaker 4: what most people would have been putting forth as an
Speaker 4: idea of what to expect with the end of say
Speaker 4: tex selling, with the return of the corporate bid, with
Speaker 4: earnings actually now being positive year on ear you have
Speaker 4: the ingredients of the next month two three of things
Speaker 4: being able to I think move a bit higher, you know,
Speaker 4: turning to what gets you a broader market rather than
Speaker 4: an extraordinarily narrow market, I think is a I hate
Speaker 4: to say, we stop kicking the can down the road
Speaker 4: in terms of what a continuing resolution turns into. How
Speaker 4: do we actually get some clarity on what federal spending
Speaker 4: might look like for a long enough time that we
Speaker 4: can then just worry about the election rather than how
Speaker 4: we're going to finance.
Speaker 1: The election and our government.
Speaker 4: And then I do think you're going to have a
Speaker 4: continued tug of war between the earnings outlook and the
Speaker 4: multiple where what happens in bond markets becomes really important.
Speaker 3: It's interesting that the first thing that you pointed to
Speaker 3: was the political calendar in twenty twenty four. Is it
Speaker 3: that important for you?
Speaker 4: Equity markets want to find something to worry about. And
Speaker 4: to the extent that most economics students chose to away
Speaker 4: from political science for a reason. We wanted to pretend
Speaker 4: we understood the math rather than understanding the psychology. And
Speaker 4: what we come back to and and and where you know,
Speaker 4: I actually have a degree, quote a formerly in political economy,
Speaker 4: and at that point in time, like why, I'm like, well,
Speaker 4: I kind of think government writes the rules under which
Speaker 4: the economy operates. So it would help me to understand
Speaker 4: who's writing those rules and what they're going to set
Speaker 4: them up to be. So, you know, paying for all
Speaker 4: of it kind of matters.
Speaker 2: Jack, What do people do with that have single digit
Speaker 2: returns this year? You've been doing this for ages, and
Speaker 2: there's those certain years where we're all behind.
Speaker 1: How do you catch up?
Speaker 4: I'm trying to figure that out because I'm behind this year.
Speaker 1: Answer. We want an answer now?
Speaker 4: Oh okay, well I should have bought a lot more
Speaker 4: in Nvidia would have been an important thing, but it
Speaker 4: doesn't really fit in a divid and growth mandate. I
Speaker 4: think ultimately it comes back to that question of broadening
Speaker 4: A and B. I think, you know, if you look
Speaker 4: at a strategy, earnings are supposed to be down this year,
Speaker 4: they want that being up. Dividends are up mid single digits.
Speaker 4: You know, you can find portfolios of stock set of
Speaker 4: dividends that are up low double digit.
Speaker 2: Do you fault big tech because they don't pay big
Speaker 2: dividends or establish double digit dividend growth?
Speaker 4: I don't think you can fault big tech for behaving
Speaker 4: in a way that they're rewarded. So to the extent
Speaker 4: that you can have companies that are valued on a
Speaker 4: price to sales basis. What everyone is telling you is,
Speaker 4: we're not actually asking you to have earnings, so to
Speaker 4: the extent that you can have an entire you know,
Speaker 4: almost thirty percent of a market which doesn't have to
Speaker 4: manage itself from an earnings perspective to a consistent cash
Speaker 4: return to its investors. You know, those management teams are
Speaker 4: going to do what they've done and continue to do that.
Speaker 4: I think, you know, dividends offer a real check on
Speaker 4: earnings and a real return of investors and let them
Speaker 4: decide where to reinvest.
Speaker 2: Lisa, Nvidia drowning in debt one point one percent.
Speaker 5: Well, this is a cash flow just bonanza, right, And
Speaker 5: at what point are we pricing in a potential continuation
Speaker 5: of the pace of acceleration of that cash bonanza into
Speaker 5: the future. How do you even game out what we're
Speaker 5: pricing in given some of the moonshots we've seen.
Speaker 4: In Nvidia today reminds me a lot of Cisco in
Speaker 4: the late nineties as having been that defining stock that
Speaker 4: somehow sat in the middle. So what Cisco was to
Speaker 4: the Internet and the completely network world, everyone hung on
Speaker 4: what John Chambers would say at four oh one, where
Speaker 4: he would shockingly manage to beat earnings time after time
Speaker 4: after time, and ultimately it came down to when his
Speaker 4: customers ran out of money to keep buying his servers.
Speaker 4: Nvidia now sits in that particular position where they can
Speaker 4: sit there and look at the capital spending of Microsoft,
Speaker 4: of Amazon, of Alphabet with some reworkschips, of what China
Speaker 4: intends to do in AI, what certain countries in the
Speaker 4: Middle East seem to be doing in order to actually
Speaker 4: build up their own AI equivalent. And you'll come back
Speaker 4: to you at what point does the investments as other
Speaker 4: people are making start actually becoming more challenged? What's different
Speaker 4: now versus the nineties example, where I have to admit
Speaker 4: there's a difference. Cisco's customers were all detfinanced, and so
Speaker 4: what the FED wound up doing draining liquidity, taking down
Speaker 4: the concerns and the flood of liquidity for Y two
Speaker 4: K for people who remember ancient history, is very different
Speaker 4: than an extraordinarily powerful base of very profitable cash flow
Speaker 4: generating companies, which for the most part aren't being asked
Speaker 4: or pressed to return cash to their investors. Some cases
Speaker 4: thanks to dual voting stock that they're not ever going
Speaker 4: to be pressed.
Speaker 5: This is a fascinating point. In other words, it's how
Speaker 5: long do the customers have open pocketbooks and plenty of
Speaker 5: cash and their customers have big open pocketbooks and massive
Speaker 5: quantities of cash. So how much can you see the
Speaker 5: moonshot continuing in some of these names that we didn't
Speaker 5: appreciate perhaps at the beginning of the year.
Speaker 1: Well, I think.
Speaker 4: Wall Street loves an easy store to understand. AI is
Speaker 4: conceptually really hard to understand. But if everyone wants to
Speaker 4: do it, everyone is going to keep spending. And certainly
Speaker 4: right now, you know, the cost of capital is higher,
Speaker 4: but it's still not all that burdensome against a longer
Speaker 4: term history of what money should cost, to the extent
Speaker 4: that the companies which are really driving that spending either
Speaker 4: have access to a blank check if you're in China
Speaker 4: effectively from state financing or personal financing and ultimately coming through.
Speaker 4: But you know, when you look through Whire, people somewhat
Speaker 4: disappointed in Nvidia. I think this morning it's oh, okay,
Speaker 4: that's all you've done for me, Like, yeah, what's double digit?
Speaker 4: What's a you know, effectively a two hundred percent gain
Speaker 4: year on year.
Speaker 3: Shipped in revenue in a year or something. It's it's
Speaker 3: kind of nuts.
Speaker 4: It kind of speaks to being a unique company and
Speaker 4: unique place in time. But that comes back to at
Speaker 4: some point, what have you done for really lately?
Speaker 3: And that's where we are this morning, Lisa. I think
Speaker 3: investors also they sort of gravitate towards stories they believe
Speaker 3: a divorce from the cycle because they don't want to
Speaker 3: talk about the cycle anymore. And this is one of
Speaker 3: those trends that you can just see out beyond a
Speaker 3: recession a year, two, three, four, five years down a road.
Speaker 5: Well said, it also doesn't necessarily have a cyclical feel,
Speaker 5: since we're looking right now at something that is a
Speaker 5: moonshot in a very specific slice of history and has
Speaker 5: the dominant, dominant footprint.
Speaker 2: Quickly, Jack, I'm calling the bullmarket the income poor Yourdenni
Speaker 2: bullmarket two fossils from the past like you. And the
Speaker 2: answer here is is this a legit bull market? And
Speaker 2: are we a seventy seven analog where this is the
Speaker 2: second leg of a bull market? You got a lot
Speaker 2: of scared people over at JP Morgan, don't you.
Speaker 4: You've got some really enthusiastic people. You've got some really
Speaker 4: scared people. That's the beauty of having.
Speaker 2: Is it the second leg of a bull market?
Speaker 4: Yea, we've had a great year this month, and if
Speaker 4: we go back and look back two years, we're still
Speaker 4: down two percent. So you know, we haven't really re
Speaker 4: entered that bull market because we're still not back too highs.
Speaker 4: To really make the sustainable highs, you actually need more
Speaker 4: people playing along than what I call the sacred seven,
Speaker 4: not the magnificent seven, because I'm trying to avoid theological
Speaker 4: belief in terms of growth rate. But I do come
Speaker 4: back to you. You know, what we had was a
Speaker 4: good growth quarter. It seems like we got that because
Speaker 4: the inventory supply chain finally got fixed. Companies could actually
Speaker 4: fill the orders right and right now the concern is, well,
Speaker 4: orders are seemingly drying up a little bit because you
Speaker 4: don't have to double order anymore because you actually get
Speaker 4: your stuff.
Speaker 2: John, did you see this percent change on the standard
Speaker 2: of four or five hundred.
Speaker 1: The canon it now?
Speaker 3: Yeah, today we're at big time month to day, up
Speaker 3: something like eight percent. Amazing on a session at the moment,
Speaker 3: we're positive by zero zero point two percent Jack, you
Speaker 3: and I have had the privilege of talking together for
Speaker 3: a long long time. I just wanted to squeeze in
Speaker 3: your call on housing because you've had some interesting calls
Speaker 3: associated with that part of the economy. What's the call now?
Speaker 4: You know it's certainly last several months. My bias has
Speaker 4: been we're living in the renovation nation, the idea that
Speaker 4: you know, with an eight percent mortgage rate, people are
Speaker 4: almost trapped concept trapped in your thirty year mortgage at
Speaker 4: two and three quarters percent. The shame, the shame. But
Speaker 4: you're certainly going to see I think some freeing up
Speaker 4: of housing activity. I do think that comes back to,
Speaker 4: you know, will the bond traders finally be right and
Speaker 4: we start getting some ray cuts next year rather than
Speaker 4: this permanently high plateau that the Fed is talking about,
Speaker 4: which kind of reminds me of Irving Fisher about nineteen
Speaker 4: twenty nine, except now it's bonds not stocks.
Speaker 3: This was a clinic Jack, Thank you, Jack Cash so
Speaker 3: much of JP morgan esimage.
Speaker 1: This is a.
Speaker 2: Joy and away from the horror of the Eastern Mediterranean.
Speaker 2: To have Aaron David Miller with us is wonderful. He
Speaker 2: wrote a book in twenty fourteen, which ought to be
Speaker 2: reissued this morning. He's senior fellow Carnegie Endowment for a
Speaker 2: National Peace and aaron with respect to our president, and
Speaker 2: to take your wonderful book here on the end of Greatness,
Speaker 2: I want you to describe how you perceive any given president,
Speaker 2: but in this case President Biden with mister net Yahoo,
Speaker 2: how should we interact? How should our president lead? Dare
Speaker 2: I say, Israel to a better future?
Speaker 6: That's a very good question. And the president has been
Speaker 6: roundly criticized by just about everybody who with the exception
Speaker 6: of the Republican Party that has sort of emerged as
Speaker 6: the Israel Can Do No Wrong party for restraining Israel
Speaker 6: from not cracking down on the exponential rise in Palestinian
Speaker 6: deaths and the humanitarian catstroe in Gaza. You know, I mean,
Speaker 6: I'm you know, a pithy of the Oracle at Delphi
Speaker 6: reading the best of Golden Trails. Can't tell you how
Speaker 6: this content is going to end. But I will say
Speaker 6: one thing is predictable, and that is Joe Biden's response
Speaker 6: to this crisis. For three reasons, his persona, the fact
Speaker 6: that the presidential model here is Bill Clinton, though a
Speaker 6: generation of part. Both of these men have this peter
Speaker 6: natural love. I would say, I use the word intentionally
Speaker 6: for Israel in a high regard for its security. President
Speaker 6: reacted to October seven in a powerful speech on October tenth,
Speaker 6: was set to frame for his reaction. Second is politics.
Speaker 6: You have a deeply divided Democratic Party, progressives and even
Speaker 6: mainstream Democrats, some of whom are calling for more restraint.
Speaker 6: But again in twenty twenty four, I don't think the
Speaker 6: president wants to leave himself vulnerable to Republican charges that
Speaker 6: he's weak on his role. And the third p persona
Speaker 6: politics is policy constraints. The fact is Biden doesn't have
Speaker 6: any better answers to the three cruel dilemmas that the
Speaker 6: Israelis face. Number One, prosecute a war against Tamas and
Speaker 6: eradicate it in a densely populated urban area without endangering
Speaker 6: and killing large numbers of Palestinians. And then what do
Speaker 6: you do about the day after. I don't think the
Speaker 6: nutrition that are sensing the is rallies eron.
Speaker 2: You know, I look at the collective memory loss, and
Speaker 2: it may be as far back beyond nineteen forty eight,
Speaker 2: or certainly nineteen sixty seven. We have a youth of
Speaker 2: America that seems removed from our collective memories of the
Speaker 2: Eastern Mediterranean.
Speaker 1: How do either political party.
Speaker 2: Corral the youth of America towards an understanding of America's
Speaker 2: effort in diplomacy in the Eastern Mediterranean.
Speaker 6: I think it's virtually given the generational divides identity politics
Speaker 6: the sort of a symmetry of power where the stronger party,
Speaker 6: regardless of its motivations or context, is perceived to be
Speaker 6: the goliath and the smaller party perceived to be the David.
Speaker 6: I'm not sure that's possible. I mean, I would argue
Speaker 6: public service, but then again, I'm old and probably out
Speaker 6: of touch with this generation. You know, when it comes
Speaker 6: to foreign policy, I think George Will was right for
Speaker 6: most Americans, and I think even for young Americans they
Speaker 6: want as little of it as possible. So the fight,
Speaker 6: the struggle, the focus is here at home. I worry
Speaker 6: about that young generation. I have two forty year old
Speaker 6: kids who I think are committed trying to leave the
Speaker 6: world a better place. They are interested in foreign policy.
Speaker 6: My bias has become theirs to a degree. I think
Speaker 6: it's hard, it's really hard.
Speaker 2: I'm depressed when somebody young is forty, Okay, I just
Speaker 2: want to let you know that.
Speaker 5: But Erin, I am curious how you see this evolving
Speaker 5: in terms of if we've been all talking about what
Speaker 5: some sort of humanitarian pause or cease fire or whatever
Speaker 5: you want to call it, a cessation in fighting for
Speaker 5: four or five days to allow the hostages to go
Speaker 5: home to their families, to allow for humanitarian aid to
Speaker 5: enter Gaza, what does that lead to? Do we have
Speaker 5: a sense of what different camps want after that?
Speaker 1: I think that's the broke the code.
Speaker 6: I think that's the key question is what we're win
Speaker 6: the scene within the next twenty four hours, when fifty
Speaker 6: Israeli women and children will be released, hopefully three Americans,
Speaker 6: including a three year old that Bob to celebrate birthday.
Speaker 6: Is this a headline or is this a trend line.
Speaker 6: Hamas took prisoners for two reasons. Number one, to trade
Speaker 6: them for asymmetrical number of Palestinians released from Israeli jays
Speaker 6: one hundred and fifty in this trade, because this resonates
Speaker 6: deeply into Palestinian street. Hamas also took hostages in order
Speaker 6: to constrain and delay an Israeli ground campaign. The hope
Speaker 6: is that pressurable amount. A four day pause will turn
Speaker 6: into a six, seven, eight, ten day pause, pressurable amount
Speaker 6: for what Hamas really wants, which is extended in prolonged
Speaker 6: cease fire. That is going to be extremely problematic an
Speaker 6: Israeli government that seems to have no intention of stopping
Speaker 6: its military campaign. But pressure is going to rise. And
Speaker 6: we have two clocks sticking. The Israeli operational clock which
Speaker 6: is ticking much slower weeks, perhaps months biden than the
Speaker 6: international community's political clock. She's taking much faster under the
Speaker 6: humanity pressure of the humanitarian catastrophe in Carza and the
Speaker 6: exponential rise in Palestinian deaths.
Speaker 7: Seems to me this situation.
Speaker 6: Is going to get worse before it gets much worse.
Speaker 6: I'm afraid.
Speaker 3: Back to back clinics on this program in the last
Speaker 3: thirty minutes, Aaron David Mela that of the canagiantownment for
Speaker 3: international pace just phenomenal.
Speaker 2: It is a wonderful tradition for us to write size
Speaker 2: the airline industry all that we hated joining us now.
Speaker 2: Helene Becker, senior research analyst at tid Cohen Halene, let
Speaker 2: me just start with the basic idea, when does it
Speaker 2: get better? When does American aviation not so much nostalgically
Speaker 2: harken back to what we remember, but gets to a new,
Speaker 2: more constructive model.
Speaker 8: Thanks Tom So. I think we're in this period of
Speaker 8: time now for a few years where we don't have
Speaker 8: enough air traffic controllers, So anytime there's a rain cloud
Speaker 8: in the area, and a lot of the controllers we
Speaker 8: have are less experienced than the ones who are retiring.
Speaker 8: They slow things down, and they do it for safety purposes,
Speaker 8: but it's frustrating for passengers. You've seen in the New
Speaker 8: York area especially, but it will occur in other markets.
Speaker 8: The FAA asking the airlines that serve the market to
Speaker 8: cut capacity, so we've seen this trend to more seats
Speaker 8: per departure and fewer departures per day in an effort
Speaker 8: to smooth things out. And then just in terms of
Speaker 8: people traveling, I think people are tired of not being
Speaker 8: able to go away. And you've seen that, right, You
Speaker 8: saw it in twenty twenty two. You're seeing it really
Speaker 8: aggressively as people travel in twenty three, and we definitely
Speaker 8: expect it to continue.
Speaker 1: On this weekend with this weather. What do you focused
Speaker 1: on in the team.
Speaker 8: Cohen, We're looking at the traffic numbers, and we're looking
Speaker 8: at where people are going, and what we're seeing is
Speaker 8: an increasing increasingly number, increasing number of people going outside
Speaker 8: the country actually for the holidays with their family. I
Speaker 8: don't think people may be tired of cooking at home,
Speaker 8: they don't want to go to a restaurant for their
Speaker 8: Thanksgiving dinner, so they change their mind and they go traveling.
Speaker 8: And we're seeing an awful lot of that, and again,
Speaker 8: I think that's a good thing.
Speaker 5: I'm looking right now in some prices to a couple
Speaker 5: of places, and they've come down really markedly. I mean,
Speaker 5: I'm actually surprised by how much lower they are this
Speaker 5: time of the year than last time of the year.
Speaker 5: There was a story on the Bloomberg talking about how
Speaker 5: airplanes have been actually increasing capacity in response to what
Speaker 5: you're talking about the demand from the consumers, but they're
Speaker 5: having trouble now filling the seats. Are we seeing the
Speaker 5: shift that could really change the picture in a more
Speaker 5: material way for next year?
Speaker 8: I think we are. Actually what we're saying for next
Speaker 8: year is that domestic is going to be normal, whatever
Speaker 8: that is. But it will be normal seasonal travel patterns,
Speaker 8: more so than we've seen in the last few years.
Speaker 8: I call it for as the new three. Lisa, your
Speaker 8: boss wants you back in the office three or four
Speaker 8: days a week instead of two or three days a week,
Speaker 8: so makes it harder to take that long weekend. Kids
Speaker 8: are back in school five days a week, so again
Speaker 8: it makes it hard to just pull them out and
Speaker 8: go somewhere. So we're seeing that more normalized travel pattern
Speaker 8: in the domestic market. I think what you're going to
Speaker 8: see internationally is increased capacity because that's where the demand was.
Speaker 8: So you'll see fears coming down, especially in the North
Speaker 8: Atlantic and the Caribbean, Mexico as well. Those are three
Speaker 8: of the biggest markets where we see declines and then
Speaker 8: we think there will be a ship to Asia Pacific.
Speaker 8: Oh sorry, Tom No.
Speaker 1: I think this is important, Lisa.
Speaker 2: You and I have been following selected flights and I
Speaker 2: just look at one Newark to Paris.
Speaker 1: It's what everybody takes and the answers is one third,
Speaker 1: it's one.
Speaker 2: It's you can fly three people now business class for
Speaker 2: what one business class ticket costs eighteen months ago.
Speaker 1: It's stunning.
Speaker 5: I love at lines Denver theoretically because some of the
Speaker 5: snow has started and it's really nice. Well, okay, Helene,
Speaker 5: I am curious as you talk about the potential for
Speaker 5: prices to go lower where the breaking point is for
Speaker 5: some of these airlines. We talked about some of the
Speaker 5: contracts with pilots, with other staff, all the prices are
Speaker 5: going up dramatically of the work staff. The base costs
Speaker 5: are going up as well. Put oil aside for one second,
Speaker 5: how difficult is it to make that break point for
Speaker 5: some of these airlines as prices start to come in.
Speaker 8: Yeah, we're going to see margins get squeezed. No choice
Speaker 8: but to raise your revenue. And it's hard to raise
Speaker 8: revenue because, especially in the domestic market, people will opt
Speaker 8: out and you can't. I've done this for a long
Speaker 8: time as you're not and you can never lower fares
Speaker 8: to offset volume declients. It just doesn't work that way.
Speaker 8: And so we'll see margin pressure and we don't think
Speaker 8: airlines will make as much money on twenty twenty fours
Speaker 8: they earned in twenty twenty three as we revert to
Speaker 8: a more seasonal and normal pattern. I liken it to
Speaker 8: the cargo industry. Look at what happened with FedEx and
Speaker 8: ups over the last year and a half or two years.
Speaker 8: Volumes are down and revenues are not up as much.
Speaker 8: Revenues are down, costs of rep and margins are under pressure.
Speaker 1: Well, that's sad happen.
Speaker 2: Do you run away from the industry? I mean, I'm
Speaker 2: trying to get my airline stocks back to where they
Speaker 2: were pre COVID. Good luck with that dream. Is there
Speaker 2: a single best buyer? Do you just walk away from
Speaker 2: the sector.
Speaker 8: It's really hard, Tom, because the stocks are at twenty
Speaker 8: twenty lows or below. Our best idea for twenty twenty
Speaker 8: three was United. We had some good success with that
Speaker 8: most of the year until we didn't and then we
Speaker 8: really like Copa CPA, which is kind of not based.
Speaker 8: Everybody thinks own Panama, but there's actually a lot of
Speaker 8: really good things. It's a three billion dollar market cap company.
Speaker 8: Panama is a sea level airport, so you don't have
Speaker 8: the weather related delays. There are a lot of usx
Speaker 8: Pats who live there. They rely on the US dollar.
Speaker 8: They don't have their own currency, so they can only
Speaker 8: spend what they earn. The Canal would be the largest employer,
Speaker 8: as you would imagine, and then COPA would be the
Speaker 8: second largest private employer, followed by the airport. So it's
Speaker 8: a really well run, well positioned airline with a dividend
Speaker 8: around a three or four percent dividend yield, and that
Speaker 8: dividend goes up almost every years. The family the shareholders
Speaker 8: get pay or the company rather pays out fifty percent
Speaker 8: of ads net income. So that's a that's a good
Speaker 8: that's a good one to look at a couple of others.
Speaker 5: Yeah, Helene, thank you. We are so grateful that you're
Speaker 5: here on Thanksgiving, and I am wondering, are you traveling
Speaker 5: on Thanksgiving? Do you ever travel on Thanksgiving?
Speaker 8: That's so funny, Lisa. Normally we do, but I couldn't
Speaker 8: take it this year. I've been on the road every
Speaker 8: single week since August first. And when I looked at
Speaker 8: my all our kids are traveling, they're all gotten. My
Speaker 8: son and daughter are together with my son's baby and
Speaker 8: his wife, and my step kids are visiting their in laws.
Speaker 8: So it's like I looked at my husband. I said, no,
Speaker 8: we're staying home and I'm not eating turkey.
Speaker 9: Elaine Becker of td COWED, thank you so much for
Speaker 9: being with us.
Speaker 2: This is a really important conversation right now. It was
Speaker 2: important thirty days ago, but it is important into two
Speaker 2: thy and twenty five. Earl Davis has had a fixed
Speaker 2: income BEMA Global Asset Management, and I can't say enough
Speaker 2: about the controversy of his call that your own Powell
Speaker 2: will stay the moment and keep rates higher for longer.
Speaker 1: Earl, do you stick with that call?
Speaker 7: And that's one of the things we're looking at in
Speaker 7: the market now in regards to how many eases are
Speaker 7: being discounted for next year. We see, you know, we're
Speaker 7: on our way to one hundred basic points of eases
Speaker 7: by the end of next year, which we think that
Speaker 7: you know what, you know, I always believe the market,
Speaker 7: but in regards to the pricing and the moment, but
Speaker 7: it's our belief that they'll be firmly on hold next year.
Speaker 2: You're out of Western Ontario, the land of perfect statistics.
Speaker 2: What's the correlation of your FED call you're higher for
Speaker 2: longer call to the equity markets.
Speaker 7: Oh, that's that's a great, great question. You know that
Speaker 7: the higher for longer doesn't matter to the equity markets.
Speaker 7: You know their discount rates the long term rate right
Speaker 7: the ten to thirty year real rate. So what happens
Speaker 7: on overnight won't impact, won't impack equities unless they do ease,
Speaker 7: then it's just a euphoric buying of equities. But from
Speaker 7: a quantitative perspective, it's the ten to thirty year real
Speaker 7: rate that matters for equities.
Speaker 5: We talk about the ten to thirty year rate. We
Speaker 5: were talking yes day with Michael Collins of PEGM fixed income.
Speaker 5: He said he could see a material further decline in
Speaker 5: real yields just based on the fact that people are
Speaker 5: expecting this growth to continue, and that he thinks we're
Speaker 5: seeing the signs of a more material slow down.
Speaker 10: Do you agree?
Speaker 7: I agree eventually. I think the real rate is sayles now.
Speaker 7: The economy remains resilient. I know we're getting mixed numbers,
Speaker 7: but the economy o we're all still doing well. You know,
Speaker 7: less and less calls for a recesion during twenty twenty four.
Speaker 7: As long as we have that real rates will stay
Speaker 7: five because that's the counterbalance to the economy doing well.
Speaker 7: You need to drive take money out of the growth
Speaker 7: economy into the savings economy, which is real rates, and
Speaker 7: to fight inflation, which you know it seems like people
Speaker 7: are forgotten. You get part of the fighting that's keeping
Speaker 7: the real rate high.
Speaker 5: So in otherwids, you're saying you don't think that the
Speaker 5: slowdown that we're seeing on the margins enough to bring
Speaker 5: inflation lower, and that currently the nine tenths of a
Speaker 5: percentage point decline in benchmark rates, the cuts that people
Speaker 5: are pricing into the market next year are overstated.
Speaker 7: So I'll say two things. It's not necessarily the slowdown
Speaker 7: that we're seeing, it's the pace of the slowdown. Is
Speaker 7: growth declining fast enough? You know, there's still a lot
Speaker 7: of excess demand in the economy. I see it when
Speaker 7: I still go to the stores and restaurants. Yes, it
Speaker 7: may be savings and maybe credit.
Speaker 1: That we're seeing that retail sales people are still buying.
Speaker 7: That is excess demand. That's a big driver of the
Speaker 7: growth in our economy, and that's what leads to inflation.
Speaker 7: So I don't see it on that part. On inflation front,
Speaker 7: you know, we're getting constructive numbers, but we are still
Speaker 7: very warned about wage inflation that passes into in pricing.
Speaker 2: It's right where we wanted to go. You really center
Speaker 2: out wage inflation. How sixties are we I mean the
Speaker 2: idea of you know, you know, forget about cost push,
Speaker 2: demand pulling the rest of it.
Speaker 1: Is it just plain and.
Speaker 2: Simple wage inflation that we remember forty fifty years ago.
Speaker 7: I think we're getting there. The difference between now and
Speaker 7: the sixties or forties and fifties years ago is the
Speaker 7: amount of unionized employees. You know, it's significantly lower now
Speaker 7: than it was before, but that trend is increasing. And
Speaker 7: what happens when that trend increases and we're seeing the
Speaker 7: wage increases UAW ups, you know, you look abroad in
Speaker 7: Canada as well, what happens is the people who are
Speaker 7: non unionized have to get wage increases. And we saw
Speaker 7: that with Honda and Toyota. So we're not quite sixty
Speaker 7: seventies because we're not as unionized, but that trend is
Speaker 7: increasing and the wages will remain a pressure on inflation.
Speaker 7: I think it leads to secular higher inflation, you know,
Speaker 7: three four percent instead of two to three percent.
Speaker 5: So what's your highest conviction? Earl's heading into next year
Speaker 5: at a time where people seem to be moving in
Speaker 5: the opposite direction, celebrating soft landing, celebrating maybe the return
Speaker 5: to the old normal where's your conviction line.
Speaker 7: The highest conviction is that there's no eases until at
Speaker 7: least Q four. So that means just by shortening two
Speaker 7: year bonds or any part of the curve, you make
Speaker 7: money if nothing happens, because the overnight rates still five
Speaker 7: in a quarter. And you know, we saw where ten
Speaker 7: year bonds are right now, right, so that's negative carry
Speaker 7: trades owned those versus overnight. So highest conviction trade is
Speaker 7: no eases, fed on hold till at least after the election.
Speaker 3: Wow, fed on hold until after the election. Oh, that
Speaker 3: runs counter to a lot of people. What do clients
Speaker 3: say when you tell them that?
Speaker 7: Well, first I tell them, following of winners is a
Speaker 7: loser's game, you know, so when if we try to
Speaker 7: follow what the crowd's is doing, we're always coming in second.
Speaker 7: So we've based our views on tailwinds, on fundamentals, on
Speaker 7: quantitative numbers, and that's what gives us, that's what has
Speaker 7: proven to be successful in the past. We just show
Speaker 7: our results and we say, what's our markers? So for example,
Speaker 7: where would we advance our eases? Where would do we
Speaker 7: start believing what the market's saying?
Speaker 8: For us?
Speaker 7: The key number to look at is unemployment rate above
Speaker 7: four percent? As soon as it gets above, then you know,
Speaker 7: I think the safety's off, so to speak, in regards
Speaker 7: to eases. We're not even closer. We're three seven still,
Speaker 7: so we still have a waste to go, and I
Speaker 7: think the FED would like to see it closer to
Speaker 7: four to five before they start using. So that's our trigger,
Speaker 7: and that's what we tell clients what we're looking at
Speaker 7: and what will help us change. And they know our
Speaker 7: results and they know this is the most volatile year
Speaker 7: and fixed income and we're aut performing in it.
Speaker 3: It's nice to get an original thought. Oh, we appreciate it. Oh, Davis,
Speaker 3: there a female global asset management.
Speaker 1: What are we going to talk to Man Deep sing
Speaker 1: about that stuffing? It's like video AI or in video?
Speaker 1: Which would you like to go?
Speaker 3: To be honest with you would prefer to talk about
Speaker 3: in video because I think it's more material to do there.
Speaker 2: Right now, Mandy's enjoys a Cera and in Vidia and
Speaker 2: what we saw yesterday, what is the legs on this,
Speaker 2: Man Deep? I mean, you know, we all get the
Speaker 2: moonshot and units and the fervor, and I saw the
Speaker 2: two hundred and forty percent.
Speaker 1: Blah blah blah. Do you look at it as a
Speaker 1: three quarter thing or can it be a thirty year thing?
Speaker 10: I mean, look, we are witnessing the biggest data center
Speaker 10: expansion right now, and data center it market was about
Speaker 10: you know, eight to ten percent rower historically, and when
Speaker 10: you look at the numbers that Invidia is printing, clearly
Speaker 10: there's insatiable demand. Yes, they will be affected by China restrictions,
Speaker 10: but they're still undershipping demand. And that was the message.
Speaker 10: And this is a near monopoly at this point of time.
Speaker 10: The question that you have to ask yourself is will
Speaker 10: it remain a monopoly like Intel was over the last
Speaker 10: twenty five years in the CPU market or will there
Speaker 10: be more players that can develop chips? And right now,
Speaker 10: you know, the customers that are buying these chips are
Speaker 10: very concentrated. It's the hyperscalers that are buying you know,
Speaker 10: fifty percent of in Vidia's capacity. Will they continue to
Speaker 10: do that, you know, for the foreseable future?
Speaker 2: Okay, well, you know you're an expert on this, and
Speaker 2: I guess Allman's back at open AI.
Speaker 1: How long does it take to make a competitive chip?
Speaker 10: Well, so that's what in Vidia has showed that they
Speaker 10: can pivot much quicker, they can ship products much quicker
Speaker 10: than anyone else. Look, AMD and Intel have the capability
Speaker 10: to make a GPU, but it's not as productive and
Speaker 10: efficient as an Nvidia GPU is, and that's what we
Speaker 10: are seeing. That's why I say it's still a monopoly.
Speaker 10: And until you see proof that companies can train as
Speaker 10: effectively their models on alternative chips, I think Nvidia will
Speaker 10: continue to have this kind of esp growth which we saw.
Speaker 5: Last night, Mandy. One aspect of the earning support that
Speaker 5: I thought was probably most interesting was the drop off
Speaker 5: they signaled in Chinese demand for their GPUs for some
Speaker 5: of their products. And this comes at a time where
Speaker 5: they're still able to beat expectations on revenue. They can
Speaker 5: still ship those chips elsewhere. What does that tell us
Speaker 5: about both what's going on in China but also more
Speaker 5: broadly what's going on with just the glood of demand.
Speaker 10: Yeah, Look, there was certainly some pull forward in China
Speaker 10: because they anticipated these restrictions, and you could argue and
Speaker 10: VideA was probably over earning in that region, but there
Speaker 10: is that demand. You know that they can ship their
Speaker 10: chips elsewhere, and that is what gives I think the
Speaker 10: confidence that this company is way ahead in terms of
Speaker 10: not only just developing a GPU, but bundling it. They
Speaker 10: highlighted networking is a ten billion dollar run RAG business.
Speaker 10: Software is a billion dollar run RAG business. They have
Speaker 10: the perfect mousetrap right now in terms of bundling these
Speaker 10: chips to train large annguage models and that's huge.
Speaker 6: All right.
Speaker 5: So, Mandy, if we were talking about open ai and
Speaker 5: not trying not to talk about open ai and the
Speaker 5: relevance of that to this story, how much is there
Speaker 5: a relationship in terms of Microsoft's desire to create some
Speaker 5: sort of rival chip with respect to the AI development
Speaker 5: more broadly and what the future is for open ai
Speaker 5: as an independent agency.
Speaker 1: Yeah.
Speaker 10: Look, open ai and in video are the face of
Speaker 10: generative AI, you know, if you think about the and
Speaker 10: that has played out this year, and I think with
Speaker 10: open ai going through this turmoil, Microsoft driving those changes
Speaker 10: has steadied the ship. But I would be surprised if
Speaker 10: they can, you know, ship out the next version of
Speaker 10: GPT as quickly as they intended to be, because there
Speaker 10: will be some talent loss as a result of this.
Speaker 10: And I think Sam coming back to open ai may
Speaker 10: drive some people out, and I can't imagine things will
Speaker 10: go back the way they were last week.
Speaker 2: What do those people actually do, man, Deep, I'm serious.
Speaker 2: Do they sit at a desk with what a sun
Speaker 2: Spark station, a Mac what computers in front of them?
Speaker 2: And are they doing the coding like the coders do
Speaker 2: at Bloomberg?
Speaker 1: Is it just as romantic as that?
Speaker 10: I mean, Look, this generative AI wave is built on
Speaker 10: a transformer model, and that is built on you know,
Speaker 10: ingesting large amounts of data. There is a human feedback
Speaker 10: element to train these algorithms and put those guardrails, and
Speaker 10: training is a constant process. That's what we learned from
Speaker 10: Nvidia last night that you're not one and done with training.
Speaker 10: You're constantly training your model. That's why you need the
Speaker 10: GPUs and the data center build out. So there's a
Speaker 10: lot that's going on in terms of understanding the algorithms
Speaker 10: and then obviously putting the guardrails to make sure you
Speaker 10: know the results are correct.
Speaker 3: A mande just to find a question from me, And
Speaker 3: certainly I would never criticize sat In Adella. I think
Speaker 3: have said on this programmed in the last twenty four
Speaker 3: as one of if not the best COO in corporate America,
Speaker 3: but clearly some missteps along the white Here, Mandy, what
Speaker 3: do you think the lesson to the last week will
Speaker 3: be for him and for Microsoft.
Speaker 10: Away, When you make a thirteen billion dollar investment and
Speaker 10: you know, take a forty nine percent take in a company,
Speaker 10: you take a board seat as well so that you
Speaker 10: know what's going on. I think in this case they
Speaker 10: were blindsided by the developments, and he mentioned that, and
Speaker 10: clearly I think that was the lesson for Microsoft.
Speaker 3: Mandave. Thank you, sir, Mandy Sink a Bloombeg Intelligence.
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