00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordert. 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 hour with stocks hovering near all time highs. Bob Elliott of Unlimited Funds right in the rotation isn't a sign of resilience but misplaced optimism. As talks ramp up, folks ramp up, the FOMO caution is warranted. Bob joins us now from More Bob, good morning, going to see you. What are your thoughts on this rotation so far? And do you think we've had that so called clearing event that's going to allow us to rally on a sustainable basis. 00:01:00 Speaker 3: Like even a week ago, that we might be moving towards to the point where we got a clearing of the mania that existed in the AI and seventy sector, and all of a sudden we're back to fomo and catch up here. And that's really been the driver of what's been going on in this market, is everyone is so concerned about being behind the curve as prices go higher and higher. It's classic bubble type activity. I'm calling the top in a bubble a little challenging. Anyone who's been in this business for long enough knows, but when you see something like that, you've got to recognize that levering in and going full bore on the bubble is often an imprudent move. 00:01:37 Speaker 2: You're colding get a bubble. Just to find why you're colding at a bubble right now? 00:01:40 Speaker 3: Well, I think a classic bubble is extremely high expectations, which, to be clear, on earnings, we have the highest expectations for earnings growth over the course of the next five years that we've had in the post World War two era. Extraordinary outcome is priced into these markets, combined with the fact that people are using significant leverage to buy assets because they're already full up on getting exposure to these names, they have to go and add leverage, and that leverage is everywhere. I wrote a recent piece of my subsett called leverage leverage everywhere, right, And it's interesting. This isn't the leverage of the GFC concentrated in highly levered banks. This is like Wells Fargo giving significant amount of securities leverage to their wealth clients. This is leverty TFS, this is options trading. It's kind of everywhere and diffuse, so it's hard to point to the exact place where all the leverage is piling up, but it's kind of everywhere. And that's a good sign that this market is overbought on borrowed money. 00:02:37 Speaker 1: So what'll make you think that actually is starting to get cleared out? Because some people were saying that after the declines that we had seen in some of the chip names as well as the hyperscalers, and then of course with situational awareness, that gave them the confidence to go back. 00:02:50 Speaker 4: In what are you watching? 00:02:52 Speaker 1: That says, hold on a second, not so fast. 00:02:54 Speaker 3: Well, I think one of the challenges is the rotation means that the overall S and P five hundred earnings expectations actually haven't changed that much. Right overall at the economy wide level hasn't changed that much. We're just sort of shuffling between whether the money goes to the AI names or the hyperscalers, or. 00:03:12 Speaker 4: To the real economy, let's say. And the challenge is when the. 00:03:15 Speaker 3: Overall expectations are so high at the economy wide level, this shuffling can get confused and you might think, oh, things have repriced, but in aggregate, we're still expecting over twenty percent earnings growth for five consecutive years. 00:03:29 Speaker 4: That an extraordinary outcome that's priced in. 00:03:31 Speaker 1: But the earnings have actually been extraordinary, and it's actually been some of the best earnings we've ever had outside of a recovery period post crisis. Why do you think that that is unsustainable, especially given where rates are here. 00:03:43 Speaker 3: Well, you could have earnings for a quarter, you can have earnings for two quarters. A lot of that stuff is asset oriented earnings, right. A big chunk of the earnings grow that we're seeing is, you know, basically holding equity in other positions and booking that as earnings. And so the question is not can you get earnings good earnings one or two quarters. The question is can you get it persistently? And if you think about twenty five percent earnings growth, which is roughly what's priced in the five year expectation. In order to get twenty five percent earnings growth in an economy that's growing at six seven percent nominal, you guys, either have to have one of the most extraordinary expansions and margins ever seen in recorded history, which will crush workers, or you have to have some sort of productivity boom that has never been seen in the history of humanity. 00:04:28 Speaker 4: So, look, could that happen? 00:04:30 Speaker 3: Sure, anything could happen, right, But the idea that extraordinary is prices consensus. 00:04:35 Speaker 4: That's the problem right now when. 00:04:37 Speaker 5: You look at though, what's going on the memory makers. The memory supply shortage is going to last and persist into twenty twenty seven. Digit Times just had a whole article about this. Doesn't that set up at least at minimum next year to be an expansion of the AI trade. 00:04:51 Speaker 3: Certainly you're getting good nominal growth out of that out of that sector because there's supply constraints. 00:04:57 Speaker 4: But the question is who's paying for it? Mean, see as an. 00:05:00 Speaker 3: Example, the relationship between all the AI related names, so you have you know, open AI is basically financing. 00:05:08 Speaker 4: Microsoft's entire. 00:05:12 Speaker 3: Operate cloud operations, right, and so the question is Okay, so if that's what's happening, everyone looks at Microsoft and says, oh, things are going great. But then you're like, oh, it's actually open Ai. That's buy and large financing that. And then the question is who's paying open ai the type of the type of cash that is being priced into the expectations there that eventually make themselves to Microsoft. And the question is will the real economy pay for the type of expectations that are being built into the cap expectations in the various sort of core providers. And that's the real question, particularly in an environment when we're starting to see challenger models that are just a hair off, you know, the frontier models that are what one one hundredth one, one thousandth one ten thousandth the price to accomplish the same outcome. Like, why if you're in corporate America, would you ever pay for a frontier model when you get something slightly less efficient for one thousandth of cost. 00:06:06 Speaker 2: Well, let's finish on the bond market, which told lots about the Federal Reserve at the stand of the program, are we on the brink of this bond market becoming a problem. 00:06:13 Speaker 3: Well, I think that's one of the questions is how does this leverage bubble pop? And typically when you look through time, it's all about the bond market. And so I think one of the things when we see Secretary Bestnt come out and try and sort of distract from the core issue here. The core issue is there's too much bond supply, yields are rising. And while he's often sort of moves around in terms of what he focuses on in terms of the market, you know you should be focused on the gold market, because if there's one thing the gold market is saying, it's saying, cut out the nonsense, deliver the issuance that's necessary reprice the bond market. And instead he seems very cautious along with his friend in the Eccles building, who to actually deliver the type of policy that's necessary to make the adjustments of this economy. 00:07:00 Speaker 2: I thought he was an inspired choice to run Treasury at the time. I still think that in many ways he understands the situation where it's tilking about this morning in places like Japan in the treasury market. Do you sense he seems rattled in the last week in a way that he hasn't been previously. 00:07:16 Speaker 3: Well, I think he's a man of markets, right, and he can see what's going on across the market. So when he sees that simply from a FED hold, you see the long end move a point or two and then keep going, that's a real concern. He understands that, I mean his work. It's odd that he's getting worked up about using the FED to finance the Japanese intervention because obviously he's going to do whatever it takes in order to not have pressure on the long end of the bond market as the Japanese intervene. And so I think what's rattling him is the markets, and the markets are sending a signal. If the FED doesn't deliver the tightening that's necessary, if the Treasury doesn't deliver the duration that's required, then what's going to happen is the bond market is going to correct this market environment, and that would be quite an unfortunate event for him if that comes right into the midterms. 00:08:08 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Brian hamlet'son the chair of the enterprise software firm Life Switch, warning the share unlock reinforces some of the same concerns. Rays that the IPO writing retail investors are being asked to take significantly more valuation risk than employees and early investors who received shares at much lower prices. Brian joined us now for more. Brian, it's good to see you again. When we spoke on the day of the IPO, I remember you called it an extraordinary company that's extraordinarily overvalued. 00:08:47 Speaker 4: Brian. 00:08:47 Speaker 2: Do you still believe that's the case? 00:08:49 Speaker 4: I think so. You know what a world we live in. Look at the company. 00:08:52 Speaker 6: They cut their losses in half, they doubled their revenue, doubled their customers, and their stock price went down, as you guys know, by about ten percent yesterday only on Wall Street. You know what I mean. But look, here's the big picture. These guys are still priced at fifty times trailing sales of last year. So they're doing well on an operating level, Jonathan, but they're still overpriced. 00:09:14 Speaker 2: Let's talk about what they are doing, Brian. At an operating level. There are several businesses in there, and Lisa was talking about this earlier this week. How do you value this company? I'm sure we had that conversation at the time it went public. Yeah, is it a telecommunication company? Is it going to be a growing neo cloud firm? 00:09:30 Speaker 6: How do you look at it? Yes, it's all of that. It's Elon Musky's joy ride. You know what I mean. 00:09:36 Speaker 4: I love the guy. 00:09:37 Speaker 6: What a great entrepreneur, but still overvalued and unpacking what the company does. Good luck with that, you know what I mean. But here's the thing, guys, look at this. I will say I have to back off my thing from a couple of months ago. As you guys know, the price has been battered. I'm not surprised by that. But at an operating level, they're doing great. It's you know, here's the thing. It's a good company that's overvalued. It's not complicated. It's a mishmash, as you mentioned, of a bunch of things that Elon wants to do. Great entrepreneur, but still super risky. Now, one last thing, I listened to your last segment. It is true that about I thought it was about seven percent by the way, by my calculation. But there's a bunch of people who've been in the company, they're employees and they're unlocking. But it's I don't think that's going to be a material thing. 00:10:25 Speaker 4: I could be wrong. 00:10:27 Speaker 1: At the same time, there's a larger question here about whether this is a SpaceX problem or whether this is an endemic problem with a lot of big tech companies that have solid businesses that are doing great things, but are also promising to spend trillions of dollars in CAPEX for plans that have not been realized yet in a very competitive environment. At what point do you see some of that as becoming increasingly a liability. I'm thinking of meta, I'm thinking of others that are trying to expand their definitions. 00:10:54 Speaker 6: I have always promised myself. I always say I don't know when I don't know, and I don't know, so I go to the fundamentals of the company. The losses have been caught in half, and that's great, and there's a ton of investment, and none of us on this planet know whether this stuff is going. 00:11:10 Speaker 4: To pay off. 00:11:11 Speaker 6: I started early, guys in AI this is ancient history twenty five years ago, but we don't know. 00:11:17 Speaker 4: You were right. 00:11:18 Speaker 6: All these companies are investing big time in AI AI. 00:11:21 Speaker 4: I think they've got to do it. Will it pay off? We don't know. 00:11:24 Speaker 6: So that's why we drift back to how is this company doing with customer acquisition profits in the basics. 00:11:31 Speaker 1: At a certain point, there's also this war for talent, and we just saw it with Google yesterday. We closely see it with SpaceX. With this belief that Elon Musk has a singularity and vision that can potentially propel the names hire and realize these dreams. I just wonder, do you think that some of the individual talent is being overvalued when you see things like these one hundred million dollars payouts for some of the AI specialists. 00:11:55 Speaker 6: Yes, yes, but again, this is an arms race. This happens in every great industry, automobiles one hundred years ago. You get all this growth and what's happening, You're going to have fewer, fewer companies, and they're all fighting for talent. So these people are overpaid, there's no question on one of them. You know, I was one of them. 00:12:16 Speaker 4: But that's the way it is. 00:12:17 Speaker 6: I mean, because you know, that's the beautiful thing about tech, as you know, is it's intellectual property. 00:12:22 Speaker 4: So if they can get the. 00:12:23 Speaker 6: Best talent, there's a non linear relationship with how that company will be valued. 00:12:29 Speaker 2: Stay with us, mult Bloomberg surveillance coming up after this. 00:12:41 Speaker 4: So here's the latest. 00:12:42 Speaker 2: This morning, investors a waiting July payrolls data, as mixed employment data complicates the fence policy path. The latest ABP employment report coming in below expectations but suggesting those looking for new jobs are getting rewarded maybe. Richardson of ABP writing job changes are highly sensitive to real time economic conditions, and the rapid pay growth implies supply constraints in parts of the labor market. Nia joins us now for more. 00:13:05 Speaker 4: Nat A good morning. 00:13:06 Speaker 2: It's two data points that I love in the labor market. One is quits and the other is the pay that you get for switching your job. Because I want to see confidence in the labor market. You see some confidence pick up slowly, well. 00:13:18 Speaker 7: A little bit. I mean that seven percent number is remarkable. We haven't seen that level of pay growth for a job changers since August of twenty twenty five. So when we saw that number, it jumped out to us. It was the biggest number in that report in our view. I know a lot of people looked at the forty four thousand and said, oh, that's a mess. 00:13:37 Speaker 4: It's not a. 00:13:37 Speaker 7: Miss for us. Because we've been tracking it every week. So if people were paying attention, that's where you and have landed. But what was remarkable was the fact that this labor market is tighter than job gains suggest. And so when you're looking at the number, either with ADP or on Friday, it's the why that's important. Is this a low or high number because demand is high or. 00:13:59 Speaker 4: Low, or so apply is hire low. 00:14:01 Speaker 7: Supply is a big factor, which is why that job changeer pay growth is. 00:14:05 Speaker 2: Can you flash that out a little bit more, how much the supply bakdrop has shifted in the past twelve months or suck. 00:14:11 Speaker 7: Probably the best way to do that is through an actual example in construction. So we're seeing the hiring rate for new construction workers high. It's the highest job changer pay growth we track. It's almost fourteen percent. That's the highest we've seen on record. And yet the number of jobs that were created in July was a thousand. 00:14:32 Speaker 4: That's a big. 00:14:33 Speaker 7: Acceleration from the second quarter. There's just not enough people to hire. People are retiring out of that field. It's a field that is aging rapidly, and so what the hiring rates suggest is replacement hiring rather than new jobs. So the signals are muddled. They're not telling you what they typically tell you because a lot is going on in the slave. 00:14:54 Speaker 1: In the past, when we saw the headline number, you pull the hood back and what you get is a lot of education and healthcare jobs. And that isn't exactly a robust signal about the overall economy, since it's a more static pool independent of the economic cycle. 00:15:07 Speaker 4: Has that started to shift at all. 00:15:09 Speaker 7: Yes, we saw a deceleration and it's mostly driven by healthcare. It's mostly driven by these aging demographics that are overlaying their hire labor marke care. And we actually saw this pattern last year too. We saw a shift down in July and then acceleration in the fall. This is something that's also very interesting about the labor market because there's so many macroeconomic shocks and trends that are hard to call. Firms are changing their hiring patterns. When they hire is not typical anymore. They're hiring strategically. It's like firms are playing dodgeball with all the macro news and they're going to shift and shift, and so a strong hiring month in one month like in spring may be followed by a weaker hiring month just to balance it out. 00:15:56 Speaker 1: What I thought was fascinating in your data is that you show that healthcare is do selllerated, but that white collar jobs have actually reaccelerated, and sort of this question of AI not exactly having the same kind of ramification on the business community as people previously thought. 00:16:10 Speaker 7: Right, So we track this really closely. We track it with our partners at Stanford in this what we call the Canaries dashboard. But when you look at the overall labor market, finance information, professional business services actually increased jobs relative to the second quarter. So yes, AI is having an impact, but it's not this brand sweep of impact that is part of the popular narrative. Those jobs actually accelerated and the pay is following as well. 00:16:36 Speaker 5: Where employers caught off guard then because a lot of them do feel like they were holding back. They thought AI was going to have to replace these workers and they're realizing they're not, and now they're have to actually have to go to the market and pay even more to get that talent. 00:16:48 Speaker 7: Yeah, I think employers have been caught off guard by AI, by interest rates, by geopolitics, by you know, consumer sentiment, are cautious consumer. There's so many things that they're navigating right now, and that's why they're changing their hiring patterns a little differently. So when we look at a number like forty four thousand in July, we don't rest there because there's so much going on under the surface of that number. 00:17:15 Speaker 5: How much also is it the employers have to pay up because they have to not just attract new talent but also keep in line and some with inflation. 00:17:23 Speaker 7: The competitive environment for especially in places where there are supply gaps, is really extreme because you're not just talking about a local market. We're talking about a national, sometimes global market for talent. This hybrid bridwork thing is a real factor. 00:17:39 Speaker 4: Now, it's a. 00:17:41 Speaker 7: Live factor, and so not only do you have a wider talent pool as an employer, so does the person you're trying to recruit. And we know from the research that we're doing. The way workers outpace inflation is the change stops because you get that pay them. And so if inflation is higher than normal and the competitive landscape in some sectors is tighter than normal, you are going to see that kind of acceleration in pain. 00:18:09 Speaker 2: This is the Bloomberg surveillance podcast, bringing you the best in markets, economics, and geopolitics. 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.