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