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
Speaker 2: live on Bloomberg Television weekday mornings from six to nine
Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business app. We begin the South
Speaker 2: with stocks and bonds holding steady. Patrick Armstrong of Plurimi
Speaker 2: Wealth Writing, I expect thirty year bond yards to continue
Speaker 2: to move higher on terrible debt dynamics until it forces
Speaker 2: more prudent government spending. Patrick joins us now for more. Patrick,
Speaker 2: good morning, good to see you. Are you not buying
Speaker 2: the stability of the last twenty four hours.
Speaker 3: No. I think Beside actually had a bit of a
Speaker 3: knee jerk reaction, and the correct call would have been
Speaker 3: something more prudent about where the government was going to
Speaker 3: get with fiscal sustainability, rather than trying to manipulate yields,
Speaker 3: which is a very short term measure, and it's something
Speaker 3: he can't follow through on. Unfortunately, it's something that the
Speaker 3: Fed could do, but the Treasury won't have enough power
Speaker 3: to control the thirty year yield. Treasury Secretary should say
Speaker 3: market forces drive thirty year. He controls the two year.
Speaker 2: Patrick So that point, what do you think has spooked
Speaker 2: the Treasury secretary? He's got more experience in financial markets
Speaker 2: than many of us. He understands these dynamics. He also
Speaker 2: understands that relatively speaking, the thirty year piece of the
Speaker 2: yield CUB is not as important either to the Treasury
Speaker 2: or to the economy. What do you think has prompted
Speaker 2: this move?
Speaker 3: It's hard to understand it, actually, just because it is
Speaker 3: a very knee jerk reaction for someone who's supposed to
Speaker 3: be the steady hand, thoughtful secretary, and it is surprising.
Speaker 3: I think it's probably backfired. It's probably going to push
Speaker 3: him to do more to follow through. And anytime you
Speaker 3: try to control thirty year yield, it's always going to
Speaker 3: be the market that wins. Unless you're the FED that
Speaker 3: has the unlimited balance sheet, you can't do that as
Speaker 3: the Treasury secretary.
Speaker 1: Well, this also isn't just a US issue, Patrick, And
Speaker 1: I'm curious, how much do you think that the US
Speaker 1: has control at a time where long term yields around
Speaker 1: the world are rising to multi decade highs.
Speaker 3: I think it's the market forces acknowledging but still not enough.
Speaker 3: The populist policies, the protectionist policies, nationalistic policies, trade wars, wars,
Speaker 3: environmental volatility creating supply shocks. All that's unequivocally inflation area,
Speaker 3: and the market's still far too complacent. Over the next
Speaker 3: ten years, two point two percent inflation is the break even.
Speaker 3: Over the next thirty years, you've got two point three
Speaker 3: percent break even. And there's so many forces that governments.
Speaker 3: Populist governments won't consider austerity, they won't consider tax increases,
Speaker 3: so a debasement strategy becomes the corner solution.
Speaker 1: Why has the why have these fears not undermined some
Speaker 1: of the risk appetite that we've seen so far this year, Well, they.
Speaker 3: Have been relatively contained. The thirty year yields moving higher,
Speaker 3: it's not spiking higher. You still have the FED that
Speaker 3: I think is going to be on hold for this year,
Speaker 3: so you're still getting a lot of liquidity at the
Speaker 3: front end of the curve and speculative activities driven by
Speaker 3: phenomenal earnings growth. Equities are delivering incredible top line growth,
Speaker 3: improving profit margins, and earnings growth continues to be consensus estimates,
Speaker 3: driven primarily by the hyperscaler spend and all the companies
Speaker 3: that are servicing those hyperscalers.
Speaker 2: Patrick, you said the devicement trides back. There's many different flavors.
Speaker 2: You can sell the dollar, you can buy gold, bitcoins
Speaker 2: at a massive week is the equity story. Part of
Speaker 2: the deviasement trade is not a place to be.
Speaker 3: That's a reasonable place. I prefer to bitcoin or to gold.
Speaker 3: I much prefer gold miners to gold itself, because if
Speaker 3: gold spikes higher on debasement, the gold miners are already
Speaker 3: so profitable, and that profitability just spikes higher with gold prices.
Speaker 3: And there's also scenarios where gold does nothing, but the
Speaker 3: gold miners are very profitable. Equities are a nominal earnings
Speaker 3: glows story as well. So if you do get inflation,
Speaker 3: you may have higher yields that discount multiples, but nominal
Speaker 3: earnings equities do give you that as well. So I
Speaker 3: do think equities are a good place to be if
Speaker 3: it is a debasement trade.
Speaker 1: Patrick John was talking about how dramatic this year has felt,
Speaker 1: even though we really haven't seen necessarily the drama come
Speaker 1: through in either volatility metrics or in any kind of
Speaker 1: risk off moment that is significant. Do you expect that
Speaker 1: to change or is this the new normal for you?
Speaker 1: Even with the underlying fears of this debasement, of this
Speaker 1: overhang of fiscal imprudence.
Speaker 3: It will come to a point if the fiscal situation
Speaker 3: does keep deteriorating and paying back tariff revenues, not increasing
Speaker 3: the tax space really and huge spending on wars, it
Speaker 3: isn't sustainable, and the bond vigilantes get more and more
Speaker 3: powerful every day that the fiscal situation deteriorates, and there
Speaker 3: will come a very important moment where yields do put
Speaker 3: pressure on the whole economy, on the whole equity market
Speaker 3: as well, because multiples come down as yields go higher,
Speaker 3: and there's so much borrowing now. The hyperscalers used to
Speaker 3: produce so much cash, they used to be net cash positive,
Speaker 3: and now they're borrowing issuing equities, So there is a
Speaker 3: huge amount of debt isshuents from companies Corporate America as
Speaker 3: well as the fiscal side of things of the government.
Speaker 3: It's very difficult. It's an elastic on a brick, but
Speaker 3: that elastic keeps getting pulled further every day.
Speaker 2: Stay with us Multilomberg surveillance coming up after this pressure
Speaker 2: building on French share cabin watch as he gives up
Speaker 2: for his debut keynote. Speak to jenckson Hole next week
Speaker 2: with markets seeking policy clarity, Money Brooks of TV Securities writing,
Speaker 2: I don't think a one hundred and eighty shift on
Speaker 2: forward guidance. Some investors maybe expecting a shift due to
Speaker 2: recent messaging, but he could disappoint markets if he doesn't
Speaker 2: tell us enough. Molly joins us now for more money.
Speaker 2: Good morning, it's going to say thanks for thin kit.
Speaker 2: What are the questions that you think this fetchen needs
Speaker 2: to answer a week today.
Speaker 4: I think that the best thing that he can do
Speaker 4: is to give some type of reaction function here. Obviously,
Speaker 4: the I guess likelihood of giving actual forward guidance going
Speaker 4: forward seems unlikely at this point, but giving some type
Speaker 4: of reaction function would be very helpful to markets. I
Speaker 4: think that it would be taken well, But in terms
Speaker 4: of Jackson Hole, we do think that there is somewhat
Speaker 4: of an asymmetric risk. It's most likely going to be
Speaker 4: disappointing to markets if he doesn't come out with enough
Speaker 4: information here, whereas there's not that much to gain in
Speaker 4: terms of if you does give us some clarity on
Speaker 4: a reaction function, just because we don't think he's going
Speaker 4: to give us quite enough there.
Speaker 2: If it's limited in communication, is that a reason to
Speaker 2: sound the long end? That was the story the news
Speaker 2: conference a few wednesdays ago, is that the story for
Speaker 2: next Friday.
Speaker 4: I think that there will be some concerns around the
Speaker 4: long end, but the recent backup in the long end
Speaker 4: over the last month or two was actually driven more
Speaker 4: on term premium and growth expectations rather than the inflation
Speaker 4: credibility that had been driving it posts June, f O,
Speaker 4: and C. So I think that some of the backup
Speaker 4: is not actually due to the FED here. It's actually
Speaker 4: due to external factors such as AI issuance. But montary
Speaker 4: policy uncertainty certainly feeds into higher term premium, so it's
Speaker 4: certainly not helping. But I don't think the entire story
Speaker 4: here is the FED for the long end.
Speaker 1: John asked the question earlier, and I think it's a
Speaker 1: really important question. What did Scott vest and see that
Speaker 1: made him want to take action now this week when
Speaker 1: it came to thirty year yields.
Speaker 4: Yeah, that was very unusual just in terms of it being,
Speaker 4: you know, two weeks after the refunding, we got the
Speaker 4: tentative buyback schedule two weeks ago, and then two weeks later,
Speaker 4: we're not that much higher in the thirty year and
Speaker 4: we decide to, you know, surprise markets in terms of
Speaker 4: issuing this spyback. It might just be a bit of
Speaker 4: a kind of way to surprise markets and to kind
Speaker 4: of send that message out there. In the refunding, they
Speaker 4: did change the language in terms of instead of increasing
Speaker 4: auction sizes, are increasing the treasury composition. They did change
Speaker 4: it to changes. So that did signal that they are
Speaker 4: maybe willing to cut long and supply. But this kind
Speaker 4: of sends more of a signal to markets, I think,
Speaker 4: and that's why we see that reaction.
Speaker 1: How difficult is it to have a rates forecast when
Speaker 1: there are a lot of different actors that have a
Speaker 1: lot of different desires and a lot of different tools
Speaker 1: that they're using to try to maybe target specific levels
Speaker 1: or specific paces of a sell off for some sort
Speaker 1: of rally.
Speaker 4: Yeah, there's definitely a lot of different factors at this
Speaker 4: point that we're that we're looking at. In terms of uncertainty,
Speaker 4: it's definitely increasing. We do see as monetary policy and
Speaker 4: certainty and market uncertainty increases, we see increasing volatility in markets.
Speaker 4: And because of that, it also makes it more and
Speaker 4: less likely to be you know, having these large moves.
Speaker 4: So even if you have a forecast it's you know,
Speaker 4: maybe twenty thirty basis points from where we are today.
Speaker 4: I don't think anyone really thinks that's that out of
Speaker 4: touch at this point, just given that we can move
Speaker 4: you know, ten basis points on the long end of
Speaker 4: the day.
Speaker 2: Stay with us mult Bloomberg surveillance coming up off to this.
Speaker 2: Judy bial of Cain Andison Roundnick writes in the match
Speaker 2: up in interest rates is a headwind to the economy,
Speaker 2: particularly an economy building gowns some critical infrastructure. Judy joined
Speaker 2: just now for more Judy framing ready matches and welcome
Speaker 2: to the program. You could easily frame this as a
Speaker 2: reflection of strength nousewhere equally as you have done, you
Speaker 2: can frame this as a potential headwind to future growth
Speaker 2: and returns in markets. Are we much closer to one
Speaker 2: ano the other now?
Speaker 5: I do think that for me, you know, the concern
Speaker 5: that a lot of markets have is that we're overbuilding
Speaker 5: and that this is a bubble. And I think that
Speaker 5: what's kind of nice if you have a perverse perspective
Speaker 5: like I do, is that we've created a lot of
Speaker 5: friction that kind of slows the ability for the bubble
Speaker 5: to really get out of control. It still can, there's
Speaker 5: it's got lots of potential given the level of capex,
Speaker 5: but I do think that the level of interest rates
Speaker 5: acts as a moderating force. I think the public protest
Speaker 5: over data centers is also its own kind of form
Speaker 5: of you know, modulator on the expansive growth. But I
Speaker 5: think that the economy, unfortunately on the stock market specifically,
Speaker 5: is quite dependent on further growth from here. And so
Speaker 5: while I think that economically it's probably going to push
Speaker 5: a little bit of the expansive growth, I do worry
Speaker 5: a little bit of what that means for the stock market.
Speaker 2: Jinny, you think it begins to way then on the
Speaker 2: AI trade, that's been building up in a big way
Speaker 2: in what part of the AI trade.
Speaker 5: More specifically, I think that for now people feel really confident.
Speaker 5: I think that in the very near term, when we
Speaker 5: look at the semiconductor earnings reports, they're really quite strong,
Speaker 5: and for the most part, I think people think, Okay,
Speaker 5: for the rest of the year, probably everything is fine,
Speaker 5: everything can kind of get done. I think is in
Speaker 5: twenty twenty seven that people start to have questions, Okay,
Speaker 5: this level of growth that we've had in capex, it's
Speaker 5: really hard to beat it. You know, it's the law
Speaker 5: of large numbers, and that's kind of where we are
Speaker 5: in the Capex cycle. So I think that there's concern
Speaker 5: that the being able to hold that momentum is hard.
Speaker 5: I think for us, when we're thinking about all of
Speaker 5: this AI investment, why not look to the beneficiaries of
Speaker 5: the ones actually using the software, using the technology to
Speaker 5: make their businesses stronger. And the reason why is I
Speaker 5: still worry. I don't think it's totally true, but I
Speaker 5: still worry. What if artificial intelligence is like airlines, where
Speaker 5: we as consumers really benefit from the CAPEX investment, but
Speaker 5: it takes the airlines and the aircraft manufacturers decades to
Speaker 5: really make a great return, Julie.
Speaker 1: In some ways, isn't this what we're seeing with a
Speaker 1: twenty percent return in small caps so far this year
Speaker 1: that investors have been looking to the adopters rather than
Speaker 1: just investing in the hyperscalers and the other tech giants themselves.
Speaker 5: I think when you look at the Russell, for the
Speaker 5: most part, the early gains that we saw were in
Speaker 5: the picks and shovels in terms of the semiconductor companies
Speaker 5: and then the industrials that are anything that touches electrical
Speaker 5: or grid. Those stocks have really rallied. A lot of
Speaker 5: them have just doubled, and they're at multiples they haven't
Speaker 5: seen before. Now those have gotten taken out of the index.
Speaker 5: It makes the index really have to stand on its
Speaker 5: own two feet. But if I think about smaller businesses
Speaker 5: and I think about the Russell versus the SMP, the
Speaker 5: Russell has a much higher labor component than the SMP does,
Speaker 5: and so you would think that there are more businesses
Speaker 5: you can find there where the ability to automate is
Speaker 5: actually going to drive more earning's growth than the potential
Speaker 5: you would see in large cap.
Speaker 1: Julia Ford moving away from some of the really rapid
Speaker 1: growth in tech names. Does it start to make sense
Speaker 1: to invest more in the debt side of things, for
Speaker 1: you're clipping a coupon that's significant at this point, rather
Speaker 1: than the equity that's already levered to pretty fast growth.
Speaker 2: Yeah.
Speaker 5: I mean to me, that starts to make sense, right.
Speaker 5: I think it was so easy being an equity investor
Speaker 5: when interest rates were at zero percent. It's like, wow,
Speaker 5: I can really easily compete with that. It's harder now
Speaker 5: as an equity investor when a lot of these fixed
Speaker 5: income credits, you know some what are you are safer
Speaker 5: than US Treasury, Which that's a much longer discussion I
Speaker 5: don't want to really get into, but I can, you know,
Speaker 5: I can really understand it. It makes a lot of sense.
Speaker 5: I think the question is how crowded does that debt become?
Speaker 5: How easy is it to sell it if there is
Speaker 5: any kind of a hiccup? I think you really want
Speaker 5: to be able to find a certain amount of balance.
Speaker 5: But to me, it does make the equity have to
Speaker 5: work that much harder to compete against what are some
Speaker 5: really juicy yields in in fixed income.
Speaker 2: This is the Bloomberg Surveillance podcast, bringing you the best
Speaker 2: in markets, economics, and geopolitics. You can watch the show
Speaker 2: live on Bloomberg TV weekday mornings from six am to
Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify,
Speaker 2: or anywhere else you listen, and as always, on the
Speaker 2: Bloomberg Terminal and the Bloomberg Business app.