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 Amerie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this out with stocks rising as investors begin shifting focus back towards megacap earnings. This week, Emily Ronand of Manual Life Writing, stock returns may not match the gains of the past three to five years, but earnings remain the fair way. Investors may need to become more comfortable taking a full swing with growth assets over the long run. Emily joins us now for more. Emily appreciate the golf analogy. It's good to see you. Let's get into the market and we'll focus on there. Earnings have been fantastic. The bar's crept higher. Why do you think the bar is not too high this earning season.

00:01:07
Speaker 3: Yeah, companies have proven that they can surpass that bar. But the problem, John now is that the earnings are amazing story is already an old story. All you have to do is turn into Bloomberg surveillance to hear it. And now it's like, don't let me down. And we have seen companies absolutely crush it down the fair way. You know, we're ten percent through earning season. Fifty one percent earnings growth like that is amazing. You look at financial so far, we're looking at thirty six percent earnings growth. The bar was five percent to start the quarter. But we are seeing some company specific challenges. They're not necessarily related to the macro environment. But if companies are disappointing, they're issuing guidance, that's not favorable. You're seeing those stock prices punished. So the bar is high, but so far, so good in terms of surpassing it.

00:01:54
Speaker 2: IBM is a good example of that, might be a rare example of that. But if you miss, you get obliterated in this stock my okay, if you want, you will get absolutely crushed. Emily, what do you think the setup is for individual parts of the tech sector?

00:02:06
Speaker 1: Then in the next week. What are the parts of the market you.

00:02:08
Speaker 2: Worried about, the parts of the sector you're pretty constructive on.

00:02:12
Speaker 3: Yeah, it's going to be absolutely critical over the next couple of weeks to see these heavy hitters.

00:02:16
Speaker 1: In the tech space.

00:02:18
Speaker 3: You know, semis have continued to just throw up these amazing earnings. We're looking at one hundred percent earnings growth quarter after a quarter. It's really just remarkable, and prices are reflecting that. So we're watching things like the COSTP index right now to see how these South Korean exports are fairing. You look at South Korean exports right now, they're up about seventy percent year over year.

00:02:40
Speaker 1: That is a record, and that.

00:02:41
Speaker 3: Is telling us that demand remains exceptionally strong. But can prices keep up with that? These some of these moves have been absolutely parabolic, So again that bar has to be met. You know, we look at the large cap growth space. You know, some of those big hyperscaler names, they haven't seen quite the same price appreciation, So in that case, bar may be a little bit more manageable here, but overall, fifty percent earnings growth in the tech space that is a really high bar. I like looking at places that have a lower bar. Industrials, for example, expected to see less than ten percent earnings growth this quarter. Again, financial is the five percent expected. We are looking to some of those sectors. Healthcare is another one where the bar is very reasonable, and those are areas we are looking at in order to diversify from some of those elevated expectations within technology.

00:03:29
Speaker 4: When you're looking at diversifying, though, and you see elevated crude prices, potentially, does that worry you?

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Speaker 3: It does in some cases, and you know, theoretically the idea is that you should see some multiple compression if oil prices keep rising and the cost of capital becomes prohibitive.

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Speaker 1: But we've looked at what.

00:03:49
Speaker 3: Happens in higher inflation regimes to stocks, and in a three to four percent inflation regime, that's actually the sweet spot companies are able to raise prices. Right now, we're seeing that in some of the earnings results and some of the guidance that's out there. In particular, mid cap stocks and value stocks tend to do particularly well during those higher inflation regimes.

00:04:11
Speaker 1: I would say, Anne Marie, it's.

00:04:13
Speaker 3: All fun in games until the FED has to pump the brakes and right now inflation is not hot enough to really see the FED doing that. You know, you look at this softer employment report, you look at the lowest CPI data that we've seen in six years. That doesn't exactly scream Fed hike. But if oil prices do remain elevated, that risk comes back into the table. And that's frankly, when the party starts, starts to look like it may be over.

00:04:38
Speaker 4: But you hear from the likes of Cleveland FED President Beth Hammick saying that businesses consumers are actually going to her and saying, you guys need to do something about inflation. Does that make you nervous that at some point in the next few months the Fed will end up having to hike interest rates.

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Speaker 3: It does, you know, It's certainly on the table. And that's the biggest concern we have because now we have these two mega forces colliding of central banks, you know, becoming a little bit more hawkish at the margin at the same time that there's this massive need for liquidity with this huge AI earnings boom. So those two things coming together are really critical here. But when we look underneath the hood of the inflation reports that we're dealing with Yes, PPI was a little bit hotter. I would say that probably isn't necessarily a bad thing because it means businesses and manufacturing is booming.

00:05:27
Speaker 1: In the United States.

00:05:29
Speaker 3: But the key to us is looking at shelter. It's all about shelter. Housing is the economic cycle. And if you looked at that last CPI report, shelter was up zero point one percent year over year.

00:05:41
Speaker 1: That is remarkably low.

00:05:42
Speaker 3: And it's finally starting to reflect some of the real time data that we're watching within the housing market. The NAHB on Housing Market Index, it slowed to its lowest level in years. The other day, home builder sentiment is slowing, et cetera. So we think that that can keep feeding into the inflation. It's thirty five percent of CPI, So we think that slowing shelter component, which you know, look, mortgage rate's still six seven percent. That is not helping the housing market recover. That can help dampen any inflation that we see coming from higher oil prices or from the good side of the economy.

00:06:15
Speaker 2: Emily, this is the challenge. This Federal Reserve has got the drivers of inflation right now on couably right and sensitive and if they hike, it's going to pick a bad phrase. I'll pick a different one, alguably just whistling in the wind. I don't think, Emily, it makes much of a difference.

00:06:29
Speaker 3: No, And I think that's why it's so notable that Warsh has said that these things are mutually exclusive, the employment side of the mandate and the inflation side of the mandate. You know, that's a very different tone than what we see in historically, and we think that they that doesn't necessarily play out because if the FED does hike, they're not really solving this supply side problem. There's not much the FED can do on that front, and they may risk the employment side of their mandate if this cost of capital becomes higher and company margins potentially get compressed.

00:07:01
Speaker 1: It's not our base case.

00:07:02
Speaker 3: Margins are great, earnings are phenomenal, like we've talked about, but if that cost of capital goes up, that is the FED that's going to really kind of be pulling the punch bowl away from the party.

00:07:13
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. As Yemen's hoothy rebels add to uncertainty across the Middle East, the group issuing a warning for vessels planning to use Saudi Arabian ports. Francisco blanch of Bank of America right in the following. If tensions do not abate for weeks, Brent could retest again above one hundred dollars a barrel. Francisco jointed snaw for more Francisco, good morning, good morning. First of all, congratulations, you're in the stadium Sunday evening. Share with us what that was like. So what's your Spain with another World Cup?

00:07:53
Speaker 5: It was an absolutely amazing feeling, you know, just it was also such a such a tough game, you know, where there's a lot of biting and kicking.

00:08:03
Speaker 2: If I may, did you fill out numbered in that stadium, because it looked like overwhelmingly there was Argentina support topping Spanish support in that room.

00:08:10
Speaker 1: Absolutely. I think it's five to one, six to one.

00:08:12
Speaker 5: Crazy, But you know, it was just one of those one of those games that it's just history in the making, right, I mean, second star for Spain.

00:08:22
Speaker 1: That doesn't get bigger than that.

00:08:24
Speaker 2: We conngrass to you and your country. Let's pretend you weren't here for that and you're here for this, all right, let's talk about crude cushions. Cushions matter. Clearly, we had a big cushion coming into the initial war that's started March the end of February. How big is that cushion now support this market?

00:08:39
Speaker 5: It's a thinning cushion, John, And I'm increasingly worried that these tensions could eventually turn what's been relatively orderly market where prices have moved in a linear fashion more or less, and we end up being pushed into a nonlinear event, meaning that rather than just steady movements, we started to see spike key behavior. And in fact, I think crude oil doesn't really tell the full story. The full story is being told by diesel, is being told by gasoline prices. I mean, you see crude oil at ninety, but look at diesels training one hundred and fifty plus oars a barrel, gasoline approaching fifty one hundred and fifty doors of barrel. We have a true petroleum product showfall here, and even natural gas not in the US, but globally starting to trend higher again with prices hitting sixty euros and mego at hour. So that's where the price pressures, with the pain points are quickly are.

00:09:33
Speaker 4: The potential risks in the future, the first one being the Red Sea. How much product could we see be taken off the market if the Hooties were to get involved and make it quite difficult for ships to go through the Bubbamndeb.

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Speaker 5: Straight well, so it will be another choke point I think for product is maybe not as big.

00:09:50
Speaker 1: I think that's a lot bigger for crude oil.

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Speaker 5: And of course through saud the Arabia, which has been moving oil from east to west, has been one of the big relief vaults for this hormones shutdown, has been re routing through the other end of the Arabian peninsula.

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Speaker 1: But I think I think the issue with products is.

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Speaker 5: That we have Ukraine hammering Russian refineries and we have to a third of Russian refining capacity being hit or being damaged by Ukrainian military activity. On top of that, we have obviously a lot of oil patroleum products that go through the straight hormones. And then just to top that up, you have a lot of countries in Asia, starting with China, the world's largest refine toolkit, with the US hoarding petroleum products that not being active in the export market in order to protect their domestic economy. So we have some of the biggest players in the world just hoarding, either hoarding back or being damaged by military action. So effectively, the US remains a place where you can come and by your diesel and gasoline if you don't have any.

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Speaker 4: So as the iron of this has in China though, sort of put a lid on all of this by softening their imports.

00:10:57
Speaker 5: They have, but they have softened their crude oil imports, not their gasoline or diesel exports. Right, that's remember that's what China does. They import crude oil and at the margin they export some petroleum products. But yes, I mean they've they've eased the pressure on the crude market, and they may have to come back depending on the duration of this conflict, because right now they're just drawing down imagery.

00:11:21
Speaker 1: That's what we're doing.

00:11:22
Speaker 5: We're drawing down imageries until you know, we get to rock about them.

00:11:27
Speaker 2: So there's a phrase that I've had a lot had it from you, crack spreads. Can you just explain to our audiences sound of your world that might not be familiar with them, what it means and how big they are right now?

00:11:37
Speaker 5: Yeah, So crackspread is sort of differential between the refined product diesel, gasoline and the actual crude input that goes into making it.

00:11:47
Speaker 1: And right now we are record.

00:11:49
Speaker 5: Seasonal levels for a lot of a lot of products, like pretty were gasoline and diesel, and refining margins are also exploding collectively because you have gasoline and diesel just just running up together again reflecting that scarcity of refining capabilities.

00:12:05
Speaker 1: So it's it's a major it's a major.

00:12:08
Speaker 5: Concern because if we have to ration demand, those products need to get to very very high levels where they actually pinch your pockets. So even if crude oil at eighty nine ars barrels manageable, it may have to be the petroleum product price that forces demand lower if we can't supply it just quickly.

00:12:26
Speaker 2: If politicians start to say that spreads and they start to suggest that something else is happening here, something opportunistic, what would you sign back to that purely from a market perspective, what is actually going on and why they're wrong?

00:12:38
Speaker 5: Well, so, I mean, I think the issue is obviously who's making the most money right right now? You see, US refiners are effectively giving a license to print money and that's that's what's.

00:12:48
Speaker 1: Happening, right.

00:12:49
Speaker 5: They're getting relatively cheap input costs, and they are pushing enormous amounts of highly value or product out into the US and into the world. So that's one part of the market that is really benefiting from this situation. I think the broader concern is that prices because consumers don't consume crude oil. The airlines fly on jeff fuel, yeah, and trucks run on diesel, right, so if you're a transportation company, you can get hurt pretty badly. I think the view maybe in the US is because America is such a large energy exporter, is day is such the US is effectively the world's biggest petro state, right is twenty percent plus of the world's production and a third of the world's gas. So I think there's the perception that the US won't be as negatively impacted by all these tensions globally, but there will be other countries that will be hit hard that won't be able to afford eventually this price.

00:13:47
Speaker 2: I remember take I used to call it Santi America ten years ago when the shamp production fifteen years ago, when the shop production being ready picked up what's the client code like at the moment, I'm intrigued by that because I can tinding you the reception we get every time we cover the story. I whemically, I'd say eighty percent of the audience right now, kind of pushing back, don't need to worry about this, don't care. You talked about this all the time back in March and April didn't matter. Then why does it matter now?

00:14:10
Speaker 5: Well, so I think back then inventories were very high. We've been drawing those inventories, and I think if you look at US gasol in inventories, US diesel inventories, US cruel elementaries are cushing these strategic termis are they're all stocking out right, So commodities move in a nonlinear fashion when you run out of stocks.

00:14:32
Speaker 1: And again we haven't run out yet.

00:14:34
Speaker 5: I mean, we probably have another two to three months on crude oil, which is why Brent is not going crazy yet. But we're really running very close to tank bottoms for the petroleum products. And you know, I think maybe China comes to save the day. You've seen more aluminum exports from China's prices picked up, but it's unclear to me that Chinese have the appetite to essentially start in their system to release a lot of petroleum products in creation.

00:15:03
Speaker 1: Region, and we do need those products to run the economy.

00:15:07
Speaker 4: What would be the impact if the United States bans exports.

00:15:12
Speaker 5: Well, so that's well, first of all, the US would have a glut, right, because they use such a large exporter. The US is the biggest export of petroleu products in the world, is around seven million ballos a day of crude on liquids, which called sorry, petroleum products and liquids.

00:15:26
Speaker 1: So I think you have a domestic glut.

00:15:30
Speaker 5: I don't really think it'd be a very practical thing to do, because you just not create a major market this location. But there's a lot of things that can be done to try to pressure down domestic prices, which frankly are starting to go up again. Right, so you talked about price pressures. I mean I get this question at the time, why why are price pressures not abating? Well, in my mind, you know, we run a very very lax physical policy, which wants to be laxer because there's more potential for a million story spending right up down the road. And then at the same time, and and Kevin Warsh has said this interest rates may just be too low for the level of inflation that we have. I mean, we do have real rates pretty much flat to negative, not just in the US, in a lot of places, right, So we may have to likes of monetary policy, We definitely have to likes of fiscal policy. So it's really hard for prices to normalize in that context, and that includes commodities. But also it's difficult to rain and demand because again, as long as money keeps on gushing, oil does too.

00:16:40
Speaker 2: Stay with us. Multil inte extravadance coming up after this, the General Mode says company exceeding estimates on the top and bottom line for the second quarter. The automaker also raising its folly profit forecast by another five hundred million dollars. The GMCFO Paul Jacobson joins us now for more. Paul, welcome to the program and congratulations on the result. It's a bet and a raise, I mean treat by the race, Paul. So let's start there. What power would that raise this morning?

00:17:17
Speaker 6: I'm sure well, good morning, Jonathan and team. Thanks so much for having us today. You know, we're here to celebrate in large part the accomplishments and achievements of the GM team across the board, and I think the theme for the day is consistency. You know, the team has really executed well over the last few years. Our go to market strategy, our inventory discipline, our incentives remain below the industry average across the board. The consumers remain resilient across the board as well, and we've seen some good tailwinds coming in the form of continued warranty improvement, our ev profitability journey, as well as a pretty significant ramp in our digital revenues across the board. So when we look at that and measure it against even some of the macro headwinds that are out there, we felt confident raising our full year guidance by another five hundred million dollars, effectively taking our out performance in the first year and banking it and really continuing to drive those results. But incredibly proud of the team and what we've been able to accomplish.

00:18:14
Speaker 2: I can see that this morning, Paul. Also, the pricing power, let's just sit on that just for a beat. The pricing paw is impressive. We see gasoline prices back to four dollars a gallon for the first time.

00:18:24
Speaker 1: It's something like a month.

00:18:25
Speaker 2: That problem has persisted through Q two into Q three. You've got great experience of dealing with energy prices in your time over at DOLTA. It's different in the same seat over at GM, But can you describe how this works when you see gasoline prices push up the way they have, what is the relationship between that and sales for general motors.

00:18:43
Speaker 6: Well, certainly the air earl industry has a lot more ups and downs than the auto industry does as it relates to oil prices. But you know, what we look at is where is the health of the consumer? Where is the demand? And you know, our full sized truck sales are up four percent year to day. We expect that to be flat for the year, mainly because of production because we're cutting over to the next generation of trucks, which we're really excited about. It'll be the most capable pickup truck we've ever produced, with a brand new Gen six V eight engine as well as diesel options across the board. So you know, the success that we've seen in the last year of a generation of trucks is really unprecedented, and we've held in on price and demand as well, and that's remained consistent. So as we look at the overall energy price environment, it hasn't really impacted us. We're still selling full sized SUVs as quickly as we can make them, but we have a much broader product portfolio.

00:19:37
Speaker 2: You know.

00:19:37
Speaker 6: We like to talk about here that you know, when you look at our crossover portfolio, the profitability is up four x from where it was just in twenty twenty, So we've gotten much more efficient at a broader portfolio to be able to meet customers wherever.

00:19:50
Speaker 2: They are pull There's a line in the stamen this morning from Mary and aretas follows just a short quote. We have multiple engines of march and expansion. Can we just sit on the margin expansion as well? I think this is really important. You know what we're like, Paul, We sit around this table every morning and we worry for three hours about a bunch of risks you have to execute. We've spoken this morning about higher prices for chips, higher prices for energy, the prospective increased tariffs. How do you make sure that you've got that cost discipline, to make sure you've got the flexibility as well to see those margins and that margin performance continue even with that price pressure come in from all directions.

00:20:27
Speaker 6: Well, if you're pros a worrying, that might set you up to be a CFO someday. So keep at it because we have to worry a lot, you know, in our desk as well. But you know, we've really also got to focus on what is that playbook that we can do, can execute to overcome And I think what the team has really done is we don't make excuses. We're out there trying to find productivity where we can enhancements across the board. So when you look at what the team is doing with quality improvement, and you know, we've increased our warranty savings year over year from a billion which we came out of the beginning of year to one to one and a half billion dollars. Our digital revenue, which we're really excited about, will be over three billion dollars this year, and we expect to add a million new subscribers to our digital channels. So the team is really executing and I think that's what's really different. When you look at ten years ago, we were producing about three to five billion dollars a year in free cash flow. Today, we're producing over ten billion dollars a year in free cash flow, and it's driving that efficiency in spite of what everybody would argue is probably more challenging macro environment than where we were a decade ago. So we're really proud of these results and we're continuing to execute and expect that the market is going to continue to see that.

00:21:43
Speaker 4: Building On Jonathan's point though, when it comes to TSMC this morning, we're looking at ten percent higher prices next year for their chips. Do you at some point have to start passing chip costs specifically to the down to the consumer.

00:21:55
Speaker 6: Well, we look at it in the entire equation. So coming into the year, we talk about a billion to a billion and a half dollars of inflationary pressures. We took that up after we saw the around conflict. Some of that is chip inflation as well. So our supply chain team is out there sourcing everything that we can. The first and most important thing is that we don't impact production, and we've been very, very consistent in that space. So while we are seeing some inflation, the opportunities and the tailwinds we have elsewhere in the business have been more than enough to overcome it, and that's why we've been able to get back into our eight to ten percent margin range in North America despite three billion dollars of tariff headwinds and other inflationary pressures as well. And you know, we think many of those opportunity sets that we have are going to carry us in with even more momentum into twenty twenty seven and beyond.

00:22:49
Speaker 4: I'm glad you mentioned tariffs. I know you've done a lot to try to reduce the tariff bill, But are you having some PTSD this morning when you wake up and you see the President is talking about Canadian tariffs once again, which is key for your supply chain.

00:23:02
Speaker 6: Well, there always seems to be something happening the day before earnings. But you know, in this circumstance, this isn't anything that is impacting us. These new tariffs that were announced don't fall under Section two thirty two, which is what covers autos. And you know, and I think you know, if we could encourage the parties, we would love to be able to get the deals done with Canada and Mexico. Mexico seems to be a little bit ahead of Canada right now, but you know, I think a good trading block that meets all of the country's needs is really important for us competitively. We've got a lot of capital that we've been putting in place, almost six billion dollars into the United States to onshore production of both vehicles full size trucks as well as the new Gen six engines that are coming in. We're increasing production across the board. We'll have over two million units produced in the United States when all this is said and done. So, you know, I think we've been able to make adjustments, but you know, consistency is helpful, especially when you have a multi year planning cycle.

00:24:03
Speaker 2: I don't want to put worse in your mouth, but it's that a frustration for you and the team, for the executive team, for the whole team at GM. You just want to know the rules and you'll get on with it.

00:24:12
Speaker 1: Well.

00:24:13
Speaker 6: I wouldn't classify it as frustration, Jonathan. I would just simply say, you know, there's a lot of volatility in the world, and if it wasn't tariffs, it might be energy prices, it might be global conflict or geopolitical issues. And that's why I say, as a team, we don't sit around and make excuses. We look and to and figure out what is that playbook that we're going to execute. Where are we going to continue to try to find the opportunities to expand margin And what the team has done is pretty remarkable, and it's now three years straight that we've delivered these types of results and feel very very optimistic about our ability to weather the storms wherever they might come from.

00:24:49
Speaker 2: This is the Bloomberg Semends podcast, bringing you the best in markets, economics, an giet politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app