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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. I've noticed something recently,

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Speaker 1: more professional investors sound worried about how much money is

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Speaker 1: being spent on artificial intelligence with the promise that it'll

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Speaker 1: pay off eventually.

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Speaker 2: After the tech John's disclosed huge AI spending plans in.

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Speaker 1: A meta, committing to spend seventy billion dollars on AI

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Speaker 1: this year, Microsoft reporting a nearly thirty five billion dollar

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Speaker 1: AI spending spree, five billion dollars in a single quarter,

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Speaker 1: and it's not at all clear how that money is

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Speaker 1: going to come back. There's also a chorus of concern

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Speaker 1: about how concentrated the stock market is, how this record

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Speaker 1: setting run has been thanks in large part to just

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Speaker 1: a handful of companies companies that have these sky high valuations.

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Speaker 1: Alphabet shares advanced four and a half percent in regular trading,

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Speaker 1: with that company achieving a three trillion dollar Nvidia.

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Speaker 2: In the main one five trillion, five trillion is extraordinary.

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Speaker 2: Apple briefly traded above a four trillion dollar market cap,

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Speaker 2: only the third company in history to ever do that.

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Speaker 1: There's also been a string of mega deals lately and

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Speaker 1: a few bankruptcies that have alarmed investors, and all this

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Speaker 1: is happening against this backdrop of an economy in which

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Speaker 1: there are some signs of strain. The Federal Reserve is

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Speaker 1: shifting its focus to the jobs market, but inflation is

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Speaker 1: still above the Fed's two percent target. One of the

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Speaker 1: great things about working at Bloomberg is at a moment

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Speaker 1: like this, there are plenty of people to talk to,

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Speaker 1: to call up to email, including John Authors. He's a

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Speaker 1: columnist for Bloomberg Opinion who focuses on global markets. And

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Speaker 1: John is someone who has lived through and written about

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Speaker 1: a fair share of bubbles and booms and busts. So

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Speaker 1: let's pull back the curtain a bit. And I sent

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Speaker 1: you this email yesterday and I said I had the

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Speaker 1: conceit for an episode, which was, Gee, it seems like

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Speaker 1: things may be bad, and maybe they are, and maybe

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Speaker 1: they're getting worse. How worried should we be? And I'd

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Speaker 1: like to start with just what your reaction was to that.

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Speaker 2: Oh, I mean, you're on the pulse. Don't worry this

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Speaker 2: is there is always reason to worry about whether you're

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Speaker 2: worried enough.

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Speaker 1: I asked John if he joined me in the studio

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Speaker 1: to tell me what Wall Street is worried about and

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Speaker 1: what that means for everyone else, it's a.

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Speaker 2: Big, big, reasonable question. And in my case, yes, I

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Speaker 2: worry about things for a living, and I find there

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Speaker 2: are plenty of things to worry about.

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Speaker 1: I'm David Gerret and this is the big take from

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Speaker 1: Bloomberg News Today. In the show, I sit down with

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Speaker 1: Bloomberg Opinion columnist and resident reader of Market Tea Leaves

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Speaker 1: John Authors to discuss the trends he's watching in markets

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Speaker 1: and the economy and where he thinks it's all headed.

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Speaker 1: The first thing Bloomberg Opinion columnist John Authors wanted to

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Speaker 1: talk about was valuations. How expensive US stocks are. The

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Speaker 1: market has been on a tier.

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Speaker 2: In the markets. The biggest reason for concern is valuations

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Speaker 2: writ large, but ultimately, the only reason any stock can

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Speaker 2: be more expensive than it normally would be is because

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Speaker 2: it's going to do much better in the future, which

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Speaker 2: is always unknowable. At the moment, US stocks are very,

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Speaker 2: very expensive. You can then get into arguments about whether

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Speaker 2: they're quite as expensive as they were in the top

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Speaker 2: of two thousands, But if you're even having that discussion,

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Speaker 2: you're conceding that we have a serious problem with though evaluation. Now,

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Speaker 2: that doesn't mean that you can't use valuation as a

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Speaker 2: timing tool at all, But for long term investing, the

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Speaker 2: single most important factor in how well you do is

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Speaker 2: the price at which you bought. If you buy when

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Speaker 2: things are too expensive, you will not do as well,

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Speaker 2: and if you manage to buy when they're too cheap,

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Speaker 2: you will do excellently. And plainly, moment you have at

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Speaker 2: least to think about, is AI really going to do

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Speaker 2: so fantastically that it's worth paying far more for the

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Speaker 2: book value of these assets, far more for the projected

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Speaker 2: future earnings, not the current earnings, far more for the

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Speaker 2: projected future earnings of these stocks than people have ever

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Speaker 2: asked in the past. So that's plainly front and center

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Speaker 2: the biggest issue.

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Speaker 1: Like a lot of us, John says he's been struck

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Speaker 1: by how many headlines there have been recently about AI,

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Speaker 1: about deals valued at tens and hundreds of billions of dollars.

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Speaker 1: On Wednesday, Anthropic announced plans to spend fifty billion dollars

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Speaker 1: to build custom AI data centers across the uas.

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Speaker 2: The companies that are actually doing the buildouts of the

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Speaker 2: infrastructure are still making more rather than less profits, so

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Speaker 2: it plainly has longer to run. I'm not expecting this

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Speaker 2: whole house of carts to collapse anytime soon. The sheer

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Speaker 2: scale of the investment just the sh The amount of

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Speaker 2: money that needed copper and rare earths we are discovering

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Speaker 2: is intense. The amount of money that will be spent

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Speaker 2: on electricity is intense. We still need to be clear

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Speaker 2: about exactly how much AI is really going to help us,

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Speaker 2: how it's going to improve our lives. Is AI really

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Speaker 2: so wonderful that it justifies the immense spending on electricity

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Speaker 2: that appears to be necessary. That is the question in

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Speaker 2: the medium terms of the long term, I'm very dubious

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Speaker 2: as to whether this is really going to work. The

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Speaker 2: great transformative technologies do all have a bubble connected to them,

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Speaker 2: and the bubbles do burst. That's of canals, railroads, cars,

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Speaker 2: the Internet, all of which contributed to the sum of

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Speaker 2: human happiness, and all of which created an investment boom

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Speaker 2: followed by serious economic problems because the economy the society

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Speaker 2: couldn't have at first, I think it's reasonable to expect

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Speaker 2: that something like that will happen with AI.

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Speaker 1: But at this moment, it doesn't seem frothy to you

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Speaker 1: or bubbleicious, you're not prepared to say so.

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Speaker 2: Yeah, frothy. I'm very happy to use the word frothy

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Speaker 2: in terms of calling that it's the top of a bubble. No.

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Speaker 2: I was around in nineteen ninety two thousand doing something

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Speaker 2: quite similar to the job I'm doing now. There's no

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Speaker 2: one moment people can connect to explain exactly why the

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Speaker 2: bubble burst when it did in the spring of two thousand.

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Speaker 2: It just gets to a point when it's just gone

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Speaker 2: too far and people aren't prepared to pay the price anymore,

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Speaker 2: and then confidence falls out from under it. I don't

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Speaker 2: see any particular reason to assume that's about to happen.

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Speaker 2: And there are differences in the way this bubble works

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Speaker 2: compared to the other one. What in video has done

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Speaker 2: in the last two or three years was beyond compare

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Speaker 2: to anything that happened in two thousand.

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Speaker 1: John As I talked to investors, another area of concern

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Speaker 1: I hear a lot about involves private credit. We saw

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Speaker 1: the subprime model under Tricolor Holdings collapse along with the

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Speaker 1: car parts manufacturer First Brands, and then we had Yes

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Speaker 1: Jamie Diamond, the CEO of JP morgansha is saying quite

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Speaker 1: memorably now that there could be cockroaches in the economy.

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Speaker 1: These couldn't just be sort of singular events. There could

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Speaker 1: be more. What did he mean by that comment? How

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Speaker 1: did you interpret what Jamie Diamond said after the collapse

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Speaker 1: of those two institutions.

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Speaker 2: Well, first of all, to be clear what Jamie was saying.

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Speaker 2: He wasn't saying Tricola is a cockroach, that these guys

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Speaker 2: are these horrible six footed insects scuttling around your kitchen.

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Speaker 2: He was saying that when you see one or two,

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Speaker 2: there tend to be a lot more out there, which

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Speaker 2: is a valid point about the way credit markets tend

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Speaker 2: to work. And his comment then got taken as being

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Speaker 2: an attack on private credit rather than a point about

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Speaker 2: the credit cycle, and I think both are valid. I

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Speaker 2: am very struck by a point that Scott Bessn't made

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Speaker 2: y secretary a few months ago, which is that he

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Speaker 2: was pointing out that there was so much more growth

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Speaker 2: in private credit than there was in the banks, and

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Speaker 2: he took that as meaning that the banks were being

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Speaker 2: too heavily regulated and that they should be regulated as

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Speaker 2: lightly as private credit. And by the same logic, it

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Speaker 2: is exactly as plausible to say that that is because

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Speaker 2: private credit isn't being regulated enough and should be regulated

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Speaker 2: as tightly as the banks. The changes in regulation since

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Speaker 2: the crisis mean that the manifestly systemically important banks that

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Speaker 2: also control the payment system, they are less vulnerable. I

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Speaker 2: think it's fair to say than they were before. But

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Speaker 2: we don't know exactly how systemic the big private credit

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Speaker 2: issuers are and whether indirectly we will eventually get to

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Speaker 2: such a point. I'm not predicting two thousand and eight. Again,

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Speaker 2: people will find ways to stop it before it gets

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Speaker 2: as bad as it got in two thousand and eight.

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Speaker 2: But that is the issue that it's reasonable to think

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Speaker 2: that we ought to be close to the top of

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Speaker 2: the credit cycle, and yet we're not priced for that,

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Speaker 2: and that creates the risk of quite a come down.

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Speaker 2: Since Jamie Diamond said that there haven't been any more

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Speaker 2: cock coroaches, people haven't slammed their feet down and squelched

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Speaker 2: anymore cock coroaches over the kitchen floor in the last

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Speaker 2: few weeks. Plainly, if we do get a couple more,

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Speaker 2: that's going to be a problem.

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Speaker 1: So that's what John Arthur's has been watching in the markets.

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Speaker 1: Up next he turns his attention to the Federal Reserve

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Speaker 1: to its fight against high inflation and its competing concerns

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Speaker 1: about the labor market. We also talk about vibes now

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Speaker 1: everyone is feeling about the economy. That's after the break.

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Speaker 1: Bloomberg Opinion calumnist John Authurs says there are a lot

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Speaker 1: of contradictions right now. Above target inflation and a record

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Speaker 1: high stock market is one. For years now, the Federal

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Speaker 1: Reserve has been trying to get inflation down to a

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Speaker 1: target of about two percent, and while policymakers have made progress,

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Speaker 1: it's still not where they wanted to be. But Wall

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Speaker 1: Street is convinced the Fed is going to keep cutting

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Speaker 1: interest rates.

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Speaker 2: In the last six months, inflation has gone up and

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Speaker 2: interest rates have gone down, both not by all that much,

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Speaker 2: but it's the direction of travel that counts. That's unusual.

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Speaker 2: If inflation keeps doing this for much longer, it will

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Speaker 2: imperil the move to cut interest rates. Basically, I would

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Speaker 2: argue that the stock market is currently priced on the

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Speaker 2: assumption that the Fed is going to make a dubvish mistake.

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Speaker 2: In other words, it's going to cut rates when it

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Speaker 2: doesn't need to. That was one of the things that

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Speaker 2: contributed to the Great bubble of two thousand.

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Speaker 1: Even as the FED remains concerned about inflation, it's had

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Speaker 1: to shift its focus more to the labor market, where

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Speaker 1: cracks are starting to emerge. But John says, if you

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Speaker 1: look past the headline numbers, there are some bright spots,

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Speaker 1: some reasons for optimism.

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Speaker 2: The thing that is very positive about inflation is that

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Speaker 2: services inflation does appear to be coming under control, which

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Speaker 2: has of late been by far the biggest area that's

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Speaker 2: been more than half of all of inflation is inflation

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Speaker 2: in services. That's driven more than anything else by people's wages.

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Speaker 2: Services businesses rely far more on their wage bills as

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Speaker 2: a proportion of their budget than manufacturers retailers. Therefore, it's

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Speaker 2: reasonable to hope that we're not going to get inflation

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Speaker 2: rise significantly from where it is.

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Speaker 1: We're also getting a clearer picture, John says of the

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Speaker 1: effect President Trump's trade policies are having on inflation.

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Speaker 2: You do see tariffs beginning to have an effect. There

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Speaker 2: is much sharper inflation of the imported goods. You do

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Speaker 2: see core goods inflation is rising. It is still a

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Speaker 2: very small proportion of the whole but it's positive, and

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Speaker 2: for most of the last ten to twenty years, core

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Speaker 2: goods inflation has actually been negative. The things that come

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Speaker 2: from China typically have been getting cheaper over time. This

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Speaker 2: is a part of the inflation mix of what we

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Speaker 2: spend that we are used to actually getting cheaper over

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Speaker 2: time and creates the space for us to spend more

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Speaker 2: on services on iPhones.

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Speaker 1: We're at this moment where there is uncertainty. We're waiting

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Speaker 1: to see if the US Supreme Court will side with

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Speaker 1: the White House and agree with the President that many

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Speaker 1: of the TIFFs is put in place on national security

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Speaker 1: grounds are legal. But it's also a moment when there

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Speaker 1: is less uncertainty about the level of those tiariffs. A

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Speaker 1: lot of negotiations have happened, John says, and those tiariff

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Speaker 1: levels have settled.

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Speaker 2: That's probably been the first time that's been true for

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Speaker 2: a while. If you think these tarifs are only going

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Speaker 2: to be at these levels for three months, and you're

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Speaker 2: a company that wants to maintain competitive advantage, you'll eat them.

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Speaker 2: If it's plainly going to be there for a year,

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Speaker 2: you just can't do that. It's certainly true given that

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Speaker 2: I have been one of the many people said, if

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Speaker 2: you do tariffs like this, it's going to cause inflation,

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Speaker 2: and it hasn't immediately caused a sharp rise in inflation.

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Speaker 2: Inflation still strikes me in the medium term as a problem,

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Speaker 2: and potentially a very serious one. Companies are still putting

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Speaker 2: in their measures to alleviate the impact of tariffs, and

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Speaker 2: so it's probably not going to get in the way

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Speaker 2: of the rosy assumptions just yet.

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Speaker 1: Late Wednesday night, President Trump signed a bill that officially

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Speaker 1: ended the longest government shut down in US history. But

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Speaker 1: during that shutdown, economists and investors and policymakers didn't have

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Speaker 1: access to all the economic data and reports they usually do.

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Speaker 1: But we did get data from other sources on employment,

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Speaker 1: on inflation, and consumer sentiment. And I asked John how

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Speaker 1: much that sentiment data can tell us about what's happening

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Speaker 1: in the economy.

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Speaker 2: Much less than we used to be able to because

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Speaker 2: because we're polarized and what appears to be new is

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Speaker 2: that fairly simple, straightforward questions about how are things for

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Speaker 2: you are now being viewed through a political lens. In

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Speaker 2: the closing months of Joe Biden, when the economy was

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Speaker 2: actually growing quite nicely by any sensible measure. Republicans thought

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Speaker 2: their lives were worse than they had been during the

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Speaker 2: worst of the pandemic. After the election and the return

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Speaker 2: of Donald Trump Democrats, it's as though all the Democrats

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Speaker 2: suddenly lost their job. The lines cross very dramatically. It's

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Speaker 2: literally as though they're living in two different countries. Republicans

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Speaker 2: are suddenly convinced that their lives are much better, that

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Speaker 2: current conditions are great, and Democrats suddenly think everything is terrible.

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Speaker 2: Not only cannot both be true at once, both are

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Speaker 2: obviously untrue. That is a social phenomenon rather than an

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Speaker 2: economic one, but it does mean you've got to be

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Speaker 2: very much more careful than you ever used to be

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Speaker 2: with sentiment data.

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Speaker 1: Crucially, John says the way people think about the economy,

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Speaker 1: how they feel about the economy, is important because it

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Speaker 1: can have real impact on the economy itself.

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Speaker 2: One of the concepts I found most useful throughout my

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Speaker 2: career since I've had it explained to me is from

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Speaker 2: George Soros, who has this idea of reflexivity, the idea

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Speaker 2: that markets can create their own reality. So if people

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Speaker 2: think rates are going down, they're more likely to go down,

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Speaker 2: and so on the reflexivity. Once people start having really

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Speaker 2: extreme views of the present and of the immediate future,

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Speaker 2: it's very difficult to gauge. None of this really helps

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Speaker 2: you say when the top of the market is in.

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Speaker 2: If we wake up tomorrow to discover meta platforms, it's

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Speaker 2: gone bust or something that's probably the top of the

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Speaker 2: market that isn't going to happen. But you know, I

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Speaker 2: don't see anything at the moment that says this is

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Speaker 2: the top get out. I see plenty of reasons to

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Speaker 2: think this is more overblown, more positive than it should be,

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Speaker 2: and there are reasons for caution in the medium term.

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Speaker 2: But maybe I'm just too old.

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Speaker 1: This is the Big Take from Bloomberg News. I'm David Gerra.

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