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Speaker 2: I think there's a lot of news in the technology
Speaker 2: side of the business on open ai. Open ai has
Speaker 2: agreed to rent a massive amount of computing power from
Speaker 2: Oracle data centers as part of its Stargate initiative, totally
Speaker 2: about four point five gigawats. I don't know what a
Speaker 2: gigawatt is, but it sounds big of data center power
Speaker 2: in the US. So I have no idea what that means.
Speaker 2: And open ai is not. I mean, Bloomberg ais give
Speaker 2: me some stuff, but I need to go to the
Speaker 2: source on a Ragrana technology analysts for Bloomberg Intelligence on
Speaker 2: a rocket. It seems like we're seeing a lot of
Speaker 2: deals getting inked here in the tech space. This open
Speaker 2: this ai story is still moving along at a rate pace.
Speaker 2: Talk to us about what's going on at Oracle.
Speaker 3: Yeah, so this is something we discussed a few days
Speaker 3: ago when Oracle was up you know, sharply at that point.
Speaker 3: They didn't disclose the name of the client, but that
Speaker 3: seems like, you know, as we said, it is open Ai.
Speaker 3: This is part of the Stargate project that came out
Speaker 3: right after the president gard elected at the beginning of
Speaker 3: January or the middle of the end of jan This
Speaker 3: is a big project. It's going to take several years
Speaker 3: to build out. It's going to be very humongous data
Speaker 3: centers across the country and perhaps even globe where open
Speaker 3: ai is basically buying computing capacity from Oracle with the
Speaker 3: help of SoftBank, you know, funding part of that particular project.
Speaker 4: What is your sense of this deal, because we have
Speaker 4: credit ratings SMP saying that Oracle clouds infrastructure and buildings
Speaker 4: free was training cash flow and that the current spending
Speaker 4: pace is hired and anticipated. Is that also the view
Speaker 4: you have?
Speaker 5: Yeah, it's going to be much higher.
Speaker 3: In fact, we think the company gave guidance of about
Speaker 3: capex of twenty five billion.
Speaker 5: We think that's going to be low.
Speaker 3: It's going to be you know, north of that over
Speaker 3: the long term, I mean over the next three to
Speaker 3: five years. Remember, just a few years ago they were generated,
Speaker 3: they were only spending about five six billion dollars a year.
Speaker 3: But frankly speaking, if you really want to play in
Speaker 3: the cloud infrastructure game or AI infrastructure game, you really
Speaker 3: need to spend the money up front in order to
Speaker 3: get those workloads down the road. Microsoft is spending, Amazon
Speaker 3: is spending, and you know, frankly, for Oracles, you know,
Speaker 3: good fortune they actually have a client who's willing to
Speaker 3: pay them ahead of time, or they have an agreement
Speaker 3: so that they can go out and build this data
Speaker 3: center and they can recognize revenue.
Speaker 5: Over the next few years.
Speaker 2: Oracle will develop multiple data centers across the US with partners,
Speaker 2: with sites in several states on consideration, including Texas, Michigan,
Speaker 2: and Wisconsin. Here where does Oracle fit within kind of
Speaker 2: your broader AI theme.
Speaker 5: On a run? Yeah, just about five years ago.
Speaker 3: To be honest, they were pretty much absent in this
Speaker 3: game because their cloud infrastructure was there to take care
Speaker 3: of their clients only, and you know, nobody else was
Speaker 3: renting it from them. I mean there were certain clients,
Speaker 3: but not so big. I think the TikTok deal really made,
Speaker 3: you know, helped them out because TikTok runs on Oracle
Speaker 3: cloud infrastructure.
Speaker 5: They gave them some credibility.
Speaker 3: You know, they've been spending a lot of money to
Speaker 3: expand their data center footprint.
Speaker 5: I think they can afford to do.
Speaker 3: That because they have a very incredible profitable, you know,
Speaker 3: database business where they are the market leaders. They have
Speaker 3: a lot of cloud applications where they generate a lot
Speaker 3: of free cash flow. So they established this business and
Speaker 3: now they're getting the reaping the benefit of it. As
Speaker 3: it relates to let's say AWS, They're still very small
Speaker 3: in size and their infrastructure as a service business. Last
Speaker 3: year day ten billion dollars in revenue as compared to
Speaker 3: let's say Amazon, which is running about one hundred billion
Speaker 3: or so. But this particular customer or this customer and
Speaker 3: a few others by f FY twenty eight will add
Speaker 3: another thirty billion dollars on top of the ten that
Speaker 3: we are talking about. So their cloud business really becomes
Speaker 3: much stronger down the road because of this deal.
Speaker 4: What about Microsoft? Lots of news here too. Their gaming
Speaker 4: division laid off hundreds of employees, and specific to Xbox,
Speaker 4: this is the fourth mass layoff at least in the
Speaker 4: last eighteen months. What is their strategy here?
Speaker 5: The strategy I think is by the CEO saying, listen,
Speaker 5: you use these.
Speaker 3: AI tools, become more productive, and I'm not going to
Speaker 3: hire at the same pace as we used to hire before.
Speaker 5: And I think that is the game now.
Speaker 3: I think this is going to go on and carry
Speaker 3: on to other tech firms, whether it's on the software
Speaker 3: landscape or any of the other subsectors. But I think
Speaker 3: you're going to see this theme recurring over the next
Speaker 3: twelve months where CEO's CEOs are saying, you really need
Speaker 3: to figure out your productivity before you ask for a headcount.
Speaker 3: And I think that is frankly speaking, that's not good
Speaker 3: for the downstream players, people who are selling software packages
Speaker 3: to these companies HR software sales software. But there's not
Speaker 3: a whole lot anybody can do about it at this point.
Speaker 2: Anrag, I know you and Mandeep and your technology team
Speaker 2: have done deep, deep dives into AI, and folks, there's
Speaker 2: lots of great Bloomberg intelligence research out there on the
Speaker 2: terminal and so check it out. But there's some serious
Speaker 2: and deep dive work, some the best on Wall Street.
Speaker 2: If you want to learn about what AI is, check
Speaker 2: that out. I'll tell you what what I say, which
Speaker 2: I don't hear many people talking about this will replace people.
Speaker 2: AI is going to replace people across I think countless industries.
Speaker 2: What do you guys think?
Speaker 5: No, I think that's a very valid view.
Speaker 3: And as I was telling you on the Microsoft's case,
Speaker 3: when we go pre you know, pre chart gpt ERA,
Speaker 3: for every dollar one percentage points increase in revenue for Microsoft,
Speaker 3: that headcount used to grow somewhere around point seven zero.
Speaker 5: Point eight times.
Speaker 3: We're close to a point that it's going to be
Speaker 3: very difficult to see that ratio now because Microsoft revenue
Speaker 3: is going to grow, let's say, over the next twelve months,
Speaker 3: somewhere around thirteen to fifteen percent, but I don't think
Speaker 3: the HeadCount's going to grow anywhere more in four to
Speaker 3: five percent. And that's, frankly, is the asymmetric growth between
Speaker 3: revenue and headcount that's going to recur throughout the entire
Speaker 3: technology you know space, And that's you know, frankly speaking,
Speaker 3: it is good for the shareholders, but not so good
Speaker 3: for if you are a tech worker in this landscape.
Speaker 4: What about the tens of billions of dollars spent on
Speaker 4: data centers and application development. We have Microsoft, for instance,
Speaker 4: pledging that it will put a lid on that cost.
Speaker 4: Are you also hearing that same vibe from other companies?
Speaker 4: And by the way, to paulsepoint, that's kind of sad
Speaker 4: because I hope we still have a job, which is
Speaker 4: why I keep cooking, because I say cooking will not
Speaker 4: be replaced by AI. Back to AIS in Microsoft.
Speaker 5: Yeah, I see.
Speaker 3: For Microsoft, they have already pledged you know, let's say
Speaker 3: over the next twelve months, somewhere close to one hundred
Speaker 3: dollars billion dollars for the expansion of their data center
Speaker 3: and all the AI infrastructure build. That revenue that the
Speaker 3: piece of that growth is going to slow down over
Speaker 3: the next let's say, twenty four months.
Speaker 5: But what we don't know is beyond in.
Speaker 3: F F twenty seven or twenty eight, whether it's going
Speaker 3: to continue that level or not. Right now, it is
Speaker 3: driving some growth for them, but it's also hurting margins.
Speaker 3: All this reveting that's coming up is actually has a
Speaker 3: much lower margin structure than their core business.
Speaker 5: So we really have to see, you know, how.
Speaker 3: They're going to deal with margins, and one of the
Speaker 3: ways they can do that is by reducing headcounts.
Speaker 5: So I think they're going to give guidance.
Speaker 3: By the end of this month when they report results
Speaker 3: for the next their fiscal yer, which is have Fight
Speaker 3: twenty six, and I think that's where they're going to
Speaker 3: see some of the margin benefits of these layoffs.
Speaker 2: And Agrana thanks so much, appreciate it as always on
Speaker 2: our Agrana Senior Technology aannels for Bloomberg Intelligence.
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Speaker 2: One of the stories I really enjoyed the most on
Speaker 2: the Bloomberg terminal today is the company I to cover
Speaker 2: for years and years and years and did a lot
Speaker 2: of work with Warner Brothers Discovery. This was a company
Speaker 2: too nay famed media companies put together a few years
Speaker 2: ago to get scale to compete, but they probably don't
Speaker 2: have enough scale even there. So now they are and
Speaker 2: the stock is underperformed since putting that those two companies together.
Speaker 2: So now they're doing what I would have recommended as
Speaker 2: a banker, which is let's take them apart again. But
Speaker 2: part of it is you got to deal with the
Speaker 2: balance sheet. There's a lot of debt there for this company,
Speaker 2: so you have to figure out a way to deal
Speaker 2: with that. Rushmi Basu joins us here Bloomberg News, a
Speaker 2: credit reporter, Rushmi, I loved your story here today talks
Speaker 2: about what JP Morgan, the banker for Warner Brothers Discovery,
Speaker 2: what deal did they kind of craft to deal with
Speaker 2: the debt problem at Warner Brothers Discovery before they could
Speaker 2: even split the company apart.
Speaker 6: In order for the split to happen, JP Morgan needed
Speaker 6: to doruct a restructuring of the debt stack. So basically
Speaker 6: what they did is they provided seventeen point five billion
Speaker 6: dollar bridge, which is biggest bridge, massive, and they use
Speaker 6: those funds to take out existing debt. They cut about
Speaker 6: three point two billion of thirty two point five billion
Speaker 6: of outstanding debt. And it was just a deal that
Speaker 6: really used a lot of distressed restructuring tools and applied
Speaker 6: it to an investment grade company, something we've never seen before.
Speaker 4: Can you talk about how this has the potential to
Speaker 4: set a new president for companies, especially those in investment grade,
Speaker 4: to just renegotiate their debt moving forward.
Speaker 6: So this kind of introduces a new playbook to the
Speaker 6: investment grade community in that it was an unbelievably short consent.
Speaker 6: It was only five days, and it was even shorter
Speaker 6: for some funds because they had to turn in their
Speaker 6: consent within three days given the processing times like they
Speaker 6: were depending on software, et cetera. So really, this deal
Speaker 6: prevented lenders from being able to organize a group and
Speaker 6: fight for better terms.
Speaker 2: How did they get away with that? I mean, if
Speaker 2: I ever tried that back in the day when I
Speaker 2: was at Chase, the bondholders would just smack back at me,
Speaker 2: right back in my face. How did they get that done?
Speaker 6: They really relied on kind of a prison prisoner's dilemma
Speaker 6: in that there were winners and losers created in the
Speaker 6: structure and they kind of stapled it to consent. There's
Speaker 6: no kind of rules around how long a consent can be,
Speaker 6: so they really utilized that deadline to prevent lenders from organizing.
Speaker 6: And also they you know, to Jpmerican's Credit and to
Speaker 6: the other advisors of Acorn Kirkland, they did provide an
Speaker 6: exchange rate that was higher than where the debt was
Speaker 6: currently trading.
Speaker 2: Okay, I see, but still.
Speaker 6: There a loss on the face value, yes, but a
Speaker 6: premium to current trade lot.
Speaker 2: These are investment This isn't junk. I mean these bonds
Speaker 2: were investment grade.
Speaker 7: Weren't they?
Speaker 5: Yep?
Speaker 6: I mean it kind of took investment great bombholder.
Speaker 2: I'm not taking this deal. I just I've never seen
Speaker 2: anything like it.
Speaker 6: No, neither have we. And this is kind of the
Speaker 6: concern in the market that this is going to be
Speaker 6: the playbook that we're going to see for more and
Speaker 6: more investment grade companies. So the distressed kind of mechanisms
Speaker 6: are coming to investment grade.
Speaker 4: But they must be taking a victory lap right now.
Speaker 4: Although we do have the European Leverage Finance Association releasing
Speaker 4: a statement warning that the whole process was quote a
Speaker 4: worrying negative development, and they say that this might be
Speaker 4: coercive in nature. How are others receiving this and will
Speaker 4: it even be a president given warnings with certain language
Speaker 4: like this.
Speaker 6: So they're talking about the anti boycott language, which basically
Speaker 6: prevents lenders from kind of banding together and deciding not
Speaker 6: to take part in a new issuance. So that kind
Speaker 6: of is the first time we've seen that language. And
Speaker 6: you know, as we know in the distressed land. We
Speaker 6: see a ton of like no so called liability management exercises.
Speaker 6: We see groups kind of forming locking arms together with
Speaker 6: these cooperation packs. But this one just basically prevents life
Speaker 6: unders from again coming together and not partaking in a
Speaker 6: new issuance. And you know, eventually JP Morgan is going
Speaker 6: to have to issue new debts.
Speaker 2: So this kind of in what's system again. What was
Speaker 2: also interesting to me was this, you know, huge bridge
Speaker 2: loan that JP Morgan did. Because I know a lot
Speaker 2: of boutique investment banks they're really good at doing these
Speaker 2: debt restructurings and maybe taking some business away from the
Speaker 2: JP Morgans and the Goldman Sachs of the world. I
Speaker 2: guess this is JPMorgan coming back and saying, listen, we've
Speaker 2: got this big balance sheet. It can help you get
Speaker 2: deals done.
Speaker 6: And that's so long ago we reported on a story
Speaker 6: about how JP Morgan was trying to take a bite
Speaker 6: out of restructurings and lmes, et cetera. And one thing
Speaker 6: that we were hearing is that they have the balance
Speaker 6: sheet to do so something that boutique firms may not.
Speaker 6: So this kind of gives them more validation and.
Speaker 4: An interesting thing in your stories you said the whole
Speaker 4: thing was so important, important enough that even Jamie Diamond
Speaker 4: received updates on it. So it's not like this one
Speaker 4: little niche group risking something big. Even the CEO, Yes,
Speaker 4: Kepta breast.
Speaker 6: This front to the top. So this was a big
Speaker 6: deal for JP Morgan and it's bankers, the M and
Speaker 6: A bankers, the capital markets bankers, the restructuring desks.
Speaker 2: This was all right, JP Morgan and the company may
Speaker 2: be doing a victory lap, but at some point in
Speaker 2: the next year, two three, they're gonna have to come
Speaker 2: back to the bond market and these people are going
Speaker 2: to remember, and there could be a price to pay there.
Speaker 2: I know I would hold a grudge if I were
Speaker 2: a bond holder there. So anyway, great story. It got
Speaker 2: a green bee, folks, and that means that it's a
Speaker 2: really really good, cool story, and it's unique and into
Speaker 2: scoopish and all those kinds of things of the journalists
Speaker 2: worry about. Resh me, Bossu, thank you so much for
Speaker 2: joining us credit reporter for Bloomberger's great story right down
Speaker 2: my hallway. And what I did notice is JP Morgan
Speaker 2: actually was the M and A advisor on the deal
Speaker 2: coming together to put the company together, and now they're
Speaker 2: getting paid to take them apart.
Speaker 5: That is beautiful.
Speaker 1: You're listening to the Bloomberg Intelligence podcast live weekdays at
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Speaker 2: The bond market's certainly taking notice here. I got the
Speaker 2: fun end of the curve up nine basis points on
Speaker 2: the two year. So the bond market cares, which means
Speaker 2: Ira Jersey cares. Ira Jersey, chief US interest rate Strategies.
Speaker 2: Bloomberg Intelligence esconced in that Princeton office. I keep ting,
Speaker 2: we have a nice office here in New York, but
Speaker 2: it's not budgeting at all. My man is comfortable down there,
Speaker 2: and I respect that. Hey, Ira, what did you and
Speaker 2: what did your bond market take away from some of
Speaker 2: all this economic data we had today, including ism, which
Speaker 2: came in a little bit better and expected as well.
Speaker 7: Yeah.
Speaker 8: Well, I think in particular, people were concentrating on that
Speaker 8: unemployment rate as well as the fact that you didn't
Speaker 8: have a signific you know, you had to slow down
Speaker 8: in private payrolls, but you didn't have as significant a
Speaker 8: slowdown in aggregate payrolls, and those were.
Speaker 7: The things that people were worried about.
Speaker 8: So the reason why the two year yield is off
Speaker 8: nine basis points right now is basically we were starting
Speaker 8: to price in for the chance of a July rate cut,
Speaker 8: and that's basically off the table at this point.
Speaker 7: So September is now.
Speaker 8: Priced about three quarters of a seventy five percent chance
Speaker 8: of a September cut. I still think that's probably going
Speaker 8: to be a little bit too early, but nonetheless, you know,
Speaker 8: taking out July meant no nine basis points on twoes,
Speaker 8: and that's exactly what we've seen.
Speaker 4: We have Gregory Faranello, if a mayor of it Security,
Speaker 4: saying the Fed will take the summer off. It's really
Speaker 4: a surprising report. To your point, rate cuts for July
Speaker 4: basical punches zero September is kind of ify. How did
Speaker 4: this shape your view moving forward? Did you immediately have
Speaker 4: to write a report? Did you and your team really
Speaker 4: were surprised and had to reshape or re angle your outlook?
Speaker 7: Yeah, it was, I mean, I guess a little bit.
Speaker 8: You know, you know, the consensus for the unemployment rate
Speaker 8: was for it to go up a tenth and set
Speaker 8: it went down a tenth, and I think that that
Speaker 8: was the single biggest surprise, you know, you know, we
Speaker 8: don't our colleagues over at Bloomberg geconom they own that
Speaker 8: unemployment call, but the you know, I think it didn't
Speaker 8: really reshape our views very much at all, because we've
Speaker 8: been suggesting that we'll continue to kind of muddle along
Speaker 8: with okay, employment situation, with this overhang of tariffs, keeping
Speaker 8: the Fed on hold probably until at least the October meeting,
Speaker 8: which happens in very late October. So we're looking at
Speaker 8: the fourth quarter in our view, before the Federal Reserve
Speaker 8: makes any moves at all.
Speaker 7: Or we'll get enough data, you know.
Speaker 8: You know, I think the market is more sensitive to
Speaker 8: data now thinking that oh, they're going to change on
Speaker 8: a dime. One bad data print means that the Federal
Speaker 8: Reserve may go or not. But that's that's quite frankly
Speaker 8: not the case. And one of the you know, necessary
Speaker 8: conditions for the Fed to cut rates is a weakening
Speaker 8: employment situation. And while it's it's weakening, it's not getting weaker, right,
Speaker 8: So so it's you know, the the we're not yet
Speaker 8: at a point where the FED will feel compelled to
Speaker 8: cut because of the job situation.
Speaker 2: So sent that the market now has maybe a better
Speaker 2: feel on the labor market, and maybe the FED has
Speaker 2: a better feel on the labor market with today's data focused,
Speaker 2: can then maybe move to inflation. What are the expectations
Speaker 2: in the market here. We haven't really seen any inflation
Speaker 2: creep into this market of any note here, which some
Speaker 2: people had feared with the tariffs and so on.
Speaker 8: What's the view there, Yeah, well, there's a couple of
Speaker 8: things going on under you know, underlying some there were
Speaker 8: some when you look at the May data, there were
Speaker 8: some sectors that did see a little bit of an
Speaker 8: uptick in inflation in the good sector, but that was
Speaker 8: offset in large part and will be offset again by
Speaker 8: lower energy prices and as well as rents that are
Speaker 8: starting to flow through. Keep in mind, you know, when
Speaker 8: we talk about rents and owner's equivalent rent, which is
Speaker 8: the housing component of the consumer price index, that will
Speaker 8: continue to fall just naturally because it takes a long
Speaker 8: time for you know, twelve months basically right for rents
Speaker 8: to be adjusted to these new prices. So you're going
Speaker 8: to wind up seeing, yes, it, prices will increase but
Speaker 8: they're increasing at a slower pace. That means that inflation
Speaker 8: is falling. And I think we're in an environment where okay,
Speaker 8: goods prices go up a little, but with energy prices
Speaker 8: and housing prices starting to come down, the only variable
Speaker 8: left is what are service prices doing? And in today's
Speaker 8: report you saw that wages in the services sector were
Speaker 8: a little bit lower.
Speaker 7: Month on month in June than they were in May.
Speaker 8: So yeah, I agree with you, Paul, Like, we haven't
Speaker 8: seen inflation and probably won't.
Speaker 2: Interesting all right, folks, Ira Jersey we know him as
Speaker 2: one of the leading voices on US interest rates in
Speaker 2: Global Wall Street, but he's also our soccer correspondent as well. Ira,
Speaker 2: can you explain to me.
Speaker 7: Club World Cup?
Speaker 2: Where did that come from?
Speaker 8: It was the attempt by FIFA for money grab and
Speaker 8: quite frankly, I think it's underwhelmed. You know, there's in
Speaker 8: the summer you're kind of used to seeing Major league soccer,
Speaker 8: and then you know international tournaments like the Women's Euros.
Speaker 7: Just kicked off.
Speaker 8: That's all the national women's teams in Europe kicking off,
Speaker 8: and we have the Gold Cup here in North America
Speaker 8: where we just saw last night Guatemala lose to the
Speaker 8: United States, and you know, so now we're set up
Speaker 8: for a final in this weekend. You know, the Club
Speaker 8: World Cup is an idea that maybe some people will like,
Speaker 8: but it's really underwhelmed. The times of games have been
Speaker 8: really poor. It hasn't been good for the health of
Speaker 8: some players playing in you know, summer.
Speaker 7: Heat in the United States at noon.
Speaker 8: I'm not not a huge fan of the tournament so far,
Speaker 8: the way it's been run.
Speaker 2: Yeah kind of yeah. I kind of was there, but
Speaker 2: I didn't really know what was there, and I'm like,
Speaker 2: where did that come from? So all right, now I've
Speaker 2: a little bit more clear. Irid Jersey, he gives you
Speaker 2: what you need to know on the interest rate space.
Speaker 2: It gives you what you need to know about global soccer.
Speaker 2: He tells me what I need to pay attention to
Speaker 2: him when I don't, So we appreciate that. Irid Jersey,
Speaker 2: Chief US Interest rate Strategist at Bloomberg Intelligence, coming to
Speaker 2: us from our Princeton office.
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