00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this out, which starts looking to bounce back from a week full of tech jitters. Alisha Lavina BNY Wealth Writing, expect a summer of volatility, a midterm election year, AI backlash and IPO supply will produce a consolidating market. Alisha joins us now for more. Alisha Gimrnig, Good morning. Given all of those things that long long list, what's the road the path to ek? 00:00:56 Speaker 3: So the path to. 00:00:57 Speaker 4: AK is the earnings, right, It's the earnings and the fact that it's not just focused on the AI beneficiaries, but it's actually broadening throughout the S and P and that's what gets you to the eight thousand. Also, you know, the multiples are really not that high. We're back to twenty one times forward earnings and market that's growing at twenty three or twenty four times on the earning side. It's pretty extraordinary. And we're still looking for seventeen percent growth for next year. So you're following two very strong years with a multiple that seems fine, but you're going to get volatility. There has to be consolidation here. I mean, some of those charts are parabolic with the memory names, you know, like you know, that's the center of that, and it's going to pull some of the market down with it, just because they are the leaders right now. Right, it's not the mag seven, the lag seven. Right. Maybe there's a buying opportunity there, frankly, but that's what's led the market higher. So you've got to so it's not just tech, it's not just memories. All over the industrial space. Healthcare is you know, is raising its head here as an interesting sector to look at the charts likele lot better, but those are not large enough to get your index higher. So you know you're going to have a rotation, but you're challenged probably on the index level for the next few months. 00:02:10 Speaker 2: Our performance on the equal Waite performance on small caps you alluded to, it is it time to start thinking about the hyperscatus gain, which have really. 00:02:17 Speaker 4: Lacked and they look terrible on the charts. But I think that you have to believe that the managements there are not going to let their businesses go quietly into that dark night, right. I mean, if you think about some of the other companies in the hyperscaler world, where we thought that was the end of it, it's never going to happen, and then they revamped their businesses, and we have to believe that the managements there are going to do that. The headlines don't look great, charts look terrible, but given the massive outperformance on the hardware side, I think there's some room here for the hyperscalers. I mean, what's happened is is the eight hundred billion dollars that five companies are spending is funding theps of every you know of sixty companies. So that's where the investor base has gone, playing capital from the spenders into the recipients. And so the question you have to ask is one, how long can this funding go on? And to what's the reversion trade? 00:03:10 Speaker 1: Are you expecting them to cut back on cappex and actually push back on the pricing for some of these chip manufacturers, So the. 00:03:15 Speaker 4: Market is telling them to do that. The market is saying you're not going to get the multiple if you keep on spending like this. Yet at the same time, the AI beneficiaries still move higher. So there's a bit of a schizophrenia here about what actually is the path to, you know, sort of a peaceful place for the market. At some point, you're not growing CAPEX one hundred percent year over year, right, the growth rate is going to slow, still positive, but a negative rate of change. That's where you're going to get the negative impact on the AI beneficiaries, and that's where you're going to start getting some movement out of the hyperscalers. 00:03:52 Speaker 1: Where is the pushback the greatest when it comes to the financing of this. Is it just in the share price of the hyperscalers? Where is it actually in the recent performance of this FACEX debt and equity as well as the potential delayed open open IPO. 00:04:05 Speaker 4: So I think it's most it's really in the hyperscalers because the question fundamentally is can the spending justify the businesses that are going to come out of this in the next three to four years. And so that's really you're seeing it in the equity market. And don't forget the business models have changed. You know, we used to talk about the hyperscalers as bond equivalents, right, throwing off cash stable businesses, very high margins, high free cash flow margins. We don't have that so much anymore, right, So you've got two or three of them, you know, actually selling debt, having to sell debt, not just equity, but debt. That's a very different business model. And that's what's happening on the equity price. It's just reflecting a different business model. 00:04:46 Speaker 5: Well to that point, bi Aske when we talked about this in the last hour, the Bank of International Settlements is warning against these threats of the circular financing. It's not just equity, it's debt. When it comes to the AI build out. Does that give you caution? 00:04:58 Speaker 4: What gives me caution is that I see correlations everywhere, right, So there's something of a concentrated correlation. Now on a bull we have an a thousand price target on the SMP. But we have to be cognizant of the risks, and the risks are that you have more or less twenty percent of the S and P driving the earnings of the rest of the market funded by six companies of the S and P, and you have a bond market which is now reflecting AI as well because the hyperscalers are funding themselves with debt to do this. Then if you think of emerging markets, think of the indices right South Korea, Taiwan, Well, fifty percent of the M index is now AI as well. And so when you put all together in a what we do a diversified portfolio, you're starting to look at concentrated risk in AI across all your asset classes, and so as an asset allocator, that's what you really have to be focused on, like how do you how do you hedge that risk? 00:05:55 Speaker 2: How do you okay? 00:05:56 Speaker 4: So we think, you know, for infrastructure and real assets are a must in a higher inflationary world. You know, it's not popular to say good bye Europe, but Europe really is not the AI play and other developed markets that are not focused on AI. So you have to really think about, you know, how does your em exposure pair with your US exposure. If it's all being driven by the same factor, which is AI investment and AI beneficiary. I mean that's the issue. 00:06:23 Speaker 2: That's the big. 00:06:23 Speaker 4: Issue for all of us who do us an allocation and think about building our portfolios like withstand this. 00:06:30 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Look at how much money is sloshing around right now? Look to South Korea upin gets planned the AI race announcing massive investments in chips and data centers. We make you of PSP growth. Writing on one hand, its signals demand is reird enough to justify the scale of investment. The cautious read is that the cost of serving A just keeps going up, and so does the burden of proof. Mama cue joined us Now for more, mamma, welcome to the program. There's two arguments there, which one would you put more whites on At the moment, I. 00:07:11 Speaker 3: Think no, good morning. 00:07:12 Speaker 6: I think the overall sentiment in AI is still positive today. But the big question, the elephant in the room is AI capex is not only just massive, but the estimates keep moving up and we don't know when it's going to stop. 00:07:25 Speaker 3: First, the bottleneck is. 00:07:26 Speaker 6: On GPUs, and now you see with the recent pair of investments that that bottlenecks has shifted to memory and now we're talking about power. 00:07:34 Speaker 3: So the one thing that is certain is the expenses keep going up. 00:07:38 Speaker 6: But on the demand side, we are seeing optimism and we're seeing enterprise adoptions starting to come in, but the timeline for that is still stretched out. 00:07:46 Speaker 3: So the question in. 00:07:47 Speaker 6: Everyone's mind is eventually, if this is critical infrastructure that is going to pay off, that everyone's going. 00:07:52 Speaker 3: To adopt, then it's worth it. 00:07:54 Speaker 6: Otherwise your capex keeps expanding upwards and investors are going to be inpatient. 00:08:00 Speaker 1: Well, may have you noticed a shift in market sentiment over the past couple of weeks, not the belief in AI and the promises, but the willingness to finance some of this as evidenced by SpaceX's IPO, or the price did trade down and the bonds have lost value as evidenced by open ai delaying their IPO potentially to mid year next year. 00:08:20 Speaker 3: Yeah. 00:08:20 Speaker 6: Absolutely, I think the question for AI now has shifted from technology to financing, where the question of the day is not just on ROI, but let's assume demand does come but who is going to finance and for how long? And to your point on the public market side, there was a time a few weeks back when we thought the public equity investors cannot wait to get their hands on the four trillion of new market cap across SpaceX, across andthropic across open Ai and. 00:08:50 Speaker 3: All those SpaceX. I think it's still trading above its IPO price. 00:08:54 Speaker 6: We're seeing that the demand is not bursting at all out of the seams in terms of everyone just rushing to MS in that and bondholders, I agree, bondholders are cautious that they're demanding higher prices. 00:09:06 Speaker 3: They're seeing on technology risk and years of. 00:09:10 Speaker 6: Negative cash flows that is uncommon in investment grade bonds before. 00:09:15 Speaker 3: So I do think you have that caution, and it's fragile, right. 00:09:18 Speaker 6: You have open Ai delaying IPO needs and all of a sudden you send shares of the whole AI trade down. And today with the k high Inex news and Samsung news, you think demand is back up again and the finance markets are backups. So I think there's just a lot of fragileness in the market, but the overall sentiment, I think people are still pretty bullish. 00:09:37 Speaker 1: As you do get some financing pushback, maybe there is still this bullishness underneath. But as you do get some financing pushback, how much does that advantage the Chinese AI players over say the US ones. I'm thinking of anthropic and open AI given the fact that some of those models are a lot cheaper, they are being adopted by US companies that are constrained by both capacity and price here in the US. How much do you see is becoming a real trend? And frankly the Chinese playbook. 00:10:03 Speaker 6: I think the AA has already moved on from just technology to national security, national competitiveness. You see that with the ice ca Hennix news today, where Korea is starting to take its hold on the memory side while the US has Nvidia and the hyper scalers. And I do think China has a lead today around the open source models, around offering the ability to run AI models more cheaply. 00:10:31 Speaker 3: So I don't think. 00:10:32 Speaker 6: I think that is still shifting and the story is still being written out right now. But every country, because now it's not just about technology, is about national competitiveness, is trying to find its own edge in terms of where it can have a hold in the market in terms of its advantage in competitiveness. 00:10:50 Speaker 5: Speaking of China, there was a report over the weekend Apple's pressing the White House for approval to get chips from a Chinese company that is actually blacklisted. Do you see potentially more pressure in the policy arena because of what is going on with the chip sector, the demand issue, But at the same time de Lisa's point, the cybersecurity and national security issues at play. 00:11:14 Speaker 6: Yeah, I think those are all intertwined again. AI has shifted now from technology to a national issue, and I think you will see this tug of war between the economic side of things of the national security side. I mean a few weeks ago we saw this conversation happening with Nvidia, Right, should Nvidia even be supplying. 00:11:36 Speaker 3: GPUs at all? 00:11:37 Speaker 6: It's of China, and I don't think we have an answer today, but I think that's going to be part of the conversation for the next few weeks and months to come. 00:11:45 Speaker 5: There's another report about Google putting limits on Meta's use of tim and AI models. Everyone is just trying to get compute. There's just not enough demand. At some point, when do you see this leveling out? 00:11:57 Speaker 6: Well, we are building out the ground work right of AI infrastructure. So I think the things that everyone's paying attention to is AI now going to become something durable, and I think you won't get to see that until the costs are really coming down. There's a lot of focus on costs in inference right now, and you have to believe that the enterprise adoption is going to. 00:12:21 Speaker 3: Come, and that is still waiting to be proven out. 00:12:25 Speaker 2: Stay with us mul Bloomberg surveillance coming up after this. USMCA facing its first test since being signed by the President in its first term. 00:12:43 Speaker 6: The USMCA is the largest, fairest, most balanced, and modern trade agreement ever achieved. 00:12:49 Speaker 5: I would rather not have the agreement, but I may sign it. 00:12:52 Speaker 3: We do better as a country. We don't have an agreement. 00:12:55 Speaker 2: The US, Mexico and Canada sets a blow pass that July first deadlines renew their trade. 00:13:00 Speaker 4: No. 00:13:00 Speaker 2: Christiani, the head of Latin America Investment Strategy jpm morkan private bank, writing the base case is an extension with modifications, but the tails are asymmetric and underappreciated by markets. No joint to staw for more. No good morning, good to see you, Thank you, John so refresher if we can. 00:13:16 Speaker 4: So. 00:13:16 Speaker 2: It wasn't after became USMCI under the president's first term, and now he wants to redo the thing that he came up with. The best agreement in the world makes wants please. 00:13:28 Speaker 7: Yes, So, when NATA was turned into USMSEE, instead of a set of guidelines were put in place for periodic reviews. We're coming to that first periodic review. 00:13:39 Speaker 3: I think it's. 00:13:40 Speaker 7: Next Wednesday or Thursday, July first. And what it calls for is if there's no agreement between the three parties, it goes to another annual review, and another annual review, and another annual review until the agreement expires. 00:13:52 Speaker 2: In two thousand and thirty six. 00:13:54 Speaker 7: If there is an agreement, the whole USMSEE can get extended up until I leave twenty twenty forty or twenty thirty. 00:14:02 Speaker 2: Son other sixteen years. Yes, exactly. 00:14:04 Speaker 7: So right now we're basically fased upon this check in. I would call it more as a check in between the three parties. Do we all agree with the same terms that were negotiated upon six years ago, or do we need to tweak something or do we need to really change things and bring this review into a whole renegotiation. That's where we stand. 00:14:24 Speaker 2: What do you expecting. 00:14:26 Speaker 7: The reality is that what we are anticipating is very little modifications and that this review will basically kick the can down the road for another annual review. There's very little insight right now that we're having any sort of agreement between the three parties, which means that July first will come, we're going to have the three countries sitting together saying we didn't reach an agreement, and this will take us down into twenty twenty seven review and then twenty twenty eight review. 00:14:51 Speaker 5: If maybe briefly, what does every country want changed? 00:14:56 Speaker 7: There's different things for US and Canada, for example. A lot of it has to do with energy. Between Mexico and the US. There's a lot of concerns around transshipment, especially as Mexico brings on exports or imports from other countries, particularly China. Assembols seeing a different fashion stamps on the label made in Mexico and then sends to a US that's a big thing, and the other one that. 00:15:20 Speaker 2: Is very important. 00:15:21 Speaker 7: So the reforms that have been taking place in Mexico in the last couple of years have challenged to some extent, the rules, rule of law, or investor certainty preclusions that were included in the original USMC. 00:15:36 Speaker 5: Individuals, business c suites definitely want clarity. I was with the President Wisconsin and he was addressing farmers. They want clarity, desperately want clarity on the issue like this, Given corn goes to Mexico and the likes of agriculture up to Canada. How do you see this playing out in terms of level of clarity, in terms of is it going to be like Liberation Day where we get whips out every day by headlines with USMCA, or is this going to be one of those stories that just kind of fades into the background. 00:16:02 Speaker 7: I think it's going to fade into the background when it comes to markets, but it's not necessarily going to fade into the background. If you're a farmer exporting to Mexico, or if you're not a producer in Mexico sending auto parts or cars to the US, that's definitely going to be the case. What has happened so far and what has happened for the last couple of years, is that a lot of the investments that were planned out to happen are being pulled back, are being posted, and the risk of that happening is that right now we're running and you guys know these really well, we have been running in an economy that's capex driven for basically two years, kapex that is very much dependent on all the AI boom. Well, that AI boom is also partly dependent as well on what happens with exports. With exports and imports. Mexico became the largest exporter of advanced technology products to the US in twenty twenty five, and very few people know that. So yes, maybe it's not going to be overnight, it's not going to be from one day to the next, But at some point, if there is more uncertainty playing out in terms of how easily can you bring in Mexican exports, this could even impact the gapex boom that we're seeing in these states. 00:17:06 Speaker 1: Where in markets is this risk misspriced not necessarily on July first, but over the next couple of weeks and months. 00:17:13 Speaker 7: Industrials, mainly auto aerospace, that's where we're seeing the biggest risks that those are the sectors that are the most reliant and dependent on the agreement to continue. 00:17:22 Speaker 2: Is that a Mexico Canada problem or a US problem as well. 00:17:25 Speaker 7: It is a US problem as well. Trade with both Canada and Mexico represent five percent of the US GDP. 00:17:32 Speaker 2: It's not little. This is the bloomberg S Events podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on bloombag 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.