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 Hordernt. Join us each day
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Speaker 2: with stocks just about holding on to all time highs.
Speaker 2: Aaron Canada Clear harborass and Management, writing, this has been
Speaker 2: an exceptional period for risk assets, and yet the composition
Speaker 2: of that return should give investors pause.
Speaker 3: Aaron joins us now for more. Aaron, good morning, Good morning.
Speaker 2: What a move in Semi's five percent Friday, eleven percent
Speaker 2: last week. What are we sixty percent off the lows
Speaker 2: from the end of March, maybe more than that at
Speaker 2: this point? Are we in bubble territory?
Speaker 4: Now?
Speaker 3: It's a good question. You know.
Speaker 5: Semiconductors, like most cyclicals, tend to look really cheap when
Speaker 5: you know, they tend to be expensive when PE multiples
Speaker 5: are low, and they tend to be quite cheap when
Speaker 5: P multiples are high. And you know right now, if
Speaker 5: you take a look at some of the memory chip
Speaker 5: names like Micron and skhig Nicks in Korea, you know
Speaker 5: they're trading at mid to high single digit multiples. But
Speaker 5: that's because earnings have absolutely shot the moon. If you
Speaker 5: look at semiconductor exposure globally, you take a look at
Speaker 5: emerging markets Skhimix, Samsung and Taiwan Semi. The top three
Speaker 5: holdings in emerging markets are semiconductor companies.
Speaker 3: Thirty seven percent of the emerging market index.
Speaker 4: Is it?
Speaker 5: You look at semiconductors in the United States eight and
Speaker 5: a half percent return on the S and P five
Speaker 5: hundred seven names consisting of seventy percent of that return,
Speaker 5: All seven focused on semiconductors. Two are more diversified, Amazon
Speaker 5: and Alphabet, but still they're making semiconductors. The other five
Speaker 5: are pure semiconductor players. So this is a market globally,
Speaker 5: both home and abroad, very focused on that move.
Speaker 2: At some point you end up with sub coodea ofic capacity.
Speaker 2: We just know that yet and you mentioned the innings,
Speaker 2: the innings underpinned by fantastic spending coming from a number
Speaker 2: of places. What would upend that spending?
Speaker 5: Well, I think at the end of the day, the
Speaker 5: return on investment question for the hyperscalers, for the Microsofts
Speaker 5: of the world, for the alphabets of the world, may
Speaker 5: force I wouldn't call a rapid adjustment and a capax
Speaker 5: expectations or perhaps a modification of capex. If we're seven
Speaker 5: hundred and fifty billion this year eight hundred and fifty
Speaker 5: billion next year on semiconductor AI hyperscaler spend and that
Speaker 5: adjustment moves from eight to fifty to eight or eight
Speaker 5: fifty to seven to fifty, that could alter investment perceptions
Speaker 5: of the slope of the spend that we would anticipate.
Speaker 5: I think that could could bring some pause back into
Speaker 5: the market, into the enthusiasm of the semiconductor trade, and
Speaker 5: frankly could serve as a tailwind to the MICROSOFCE, to
Speaker 5: the alphabets, to the hyper scale side of the equation.
Speaker 5: A focus on ROI would be a welcome tailwind, I
Speaker 5: think to those areas of technology.
Speaker 1: So how much of the rally is being underpinned by
Speaker 1: people who find it refreshing to talk about SEMy conductors
Speaker 1: rather than the war in Iran.
Speaker 5: Well, it's a good question. I mean, geopolitics historically, Lisa,
Speaker 5: as we all know, have not really in the medium
Speaker 5: to long term driven asset prices too significantly. It's always
Speaker 5: been a sort of a temporary phenomenon, and I think
Speaker 5: the eyes continue to be on earnings. We had seventeen
Speaker 5: percent earnings growth on an annualized basis this past quarter,
Speaker 5: and that's even maybe considered a bit low relative to
Speaker 5: some of the headline growth numbers that we've seen. But
Speaker 5: a lot of these big tech companies and hyperscales have
Speaker 5: been buying private equity firms, and so you know that
Speaker 5: twenty six percent headline number is probably closer to seventeen.
Speaker 5: Growth has been really strong broadly as well, Media and
Speaker 5: S and P five hundred growing at fourteen percent. So
Speaker 5: this is a broad earnings growth story.
Speaker 1: I guess what I'm trying to get it is when
Speaker 1: does the real economy start to bleed into this semiconductor
Speaker 1: hopes and dreams that are driving this incredible rally. Is
Speaker 1: there some sort of trigger point where you get stiflationary
Speaker 1: worries baked into the market. That starts to hamper this trade,
Speaker 1: that starts to hamper how much people will tolerate the
Speaker 1: increase in spending because prices are going up, not necessarily
Speaker 1: because they're building more capacity.
Speaker 3: Yeah, I mean it's a big question.
Speaker 5: It's a big political question that under sort of the
Speaker 5: undertone of that question speaks to some of the challenges
Speaker 5: around you know, data center growth, utility growth, the regulatory
Speaker 5: environment not in my backyard, high energy prices, the inflationary picture,
Speaker 5: you know, running above trend. Right now, we're going to
Speaker 5: see you know, CPI tomorrow, and you know, how does.
Speaker 3: That feed into the sort of broader market.
Speaker 5: But at the end of the day, you take a
Speaker 5: look at you know, sort of that that the massive
Speaker 5: thirty six percent of the S and P five hundred
Speaker 5: is technology boom that we've been seeing across semis and
Speaker 5: in a lot of the sectors of the economy that
Speaker 5: are much more sort of consumer focused are just smaller
Speaker 5: percentages of the overall index and have have have less.
Speaker 3: Of a contribution to overall performance.
Speaker 2: We've got consumer issues, without a doubt, But right now
Speaker 2: that's saying political problem. You're going to see that in
Speaker 2: the midterms. But potentially that is not a market problem.
Speaker 1: Because the averages don't really show it. And this is
Speaker 1: the reason why people are ignoring it. Even as things
Speaker 1: get key shaped and increasingly so people say, well, that's
Speaker 1: too bad, and hopefully that doesn't lead to policies that
Speaker 1: are incredibly business negative. But until then, the music's playing,
Speaker 1: We're going to dance, and that's essentially what you're feeling.
Speaker 5: Yeah, energy is what three odd percent of the S
Speaker 5: and P five hundred. Materials are less than two percent
Speaker 5: of the S and P five hundred, and so there
Speaker 5: you go. These are two big variables that are impacting consumers,
Speaker 5: but they're not impacting prices in the market.
Speaker 2: And this fed's not going to count anytime soon yields up.
Speaker 2: So on the graphic, just that by full banks this
Speaker 2: points this morning three ninety two, that's above the policy
Speaker 2: right of the federates of unemployment close to full percent.
Speaker 2: You might have sea pan close to full percent as well.
Speaker 2: Lights of this week. How much pressure is on the
Speaker 2: incoming feed chet It's going.
Speaker 3: To be interesting. Of course, you have the.
Speaker 5: Thought that maybe this energy price spike due to the
Speaker 5: straight of horm moves in Iran is going to subside
Speaker 5: in the weeks and months ahead. I mean it coupled
Speaker 5: with this idea that not just an idea, or seeing
Speaker 5: the data. Employment remains relatively strong, unemployments trended up just
Speaker 5: a bit. If we were to see that soften a bit,
Speaker 5: I think on the margin, it gives the Fed an
Speaker 5: opportunity to cut again. But then you look at two
Speaker 5: year treasure yields at what three ninety this morning, and
Speaker 5: the upper end of the FED funds rates at three
Speaker 5: seventy five. So the market's not saying, oh, maybe the
Speaker 5: Fed's going to cut or hold. If anything, the market's
Speaker 5: starting to think, well, maybe the Fed is going to
Speaker 5: raise rates.
Speaker 3: Our view is the Fed's going to stay on hold
Speaker 3: for a while.
Speaker 5: You're going to stay on hold as long as I can,
Speaker 5: and when they see some easing light at the end
Speaker 5: of the tunnel that comes, they're gonna be more poised
Speaker 5: to cut than to raise.
Speaker 2: Stay with us multile Impex Devan, it's coming up of
Speaker 2: this with us around the table righteous the empire of
Speaker 2: the Center for a New American Security, She writes the
Speaker 2: following President Trump hopes to change the conversation from the
Speaker 2: around war by visiting China and announcing some deals. Right,
Speaker 2: you're joined us now for more Racha, good morning.
Speaker 4: Thanks for having me.
Speaker 3: Is it as simple as that. I don't think it is.
Speaker 4: In fact, I had started to tell clients a couple
Speaker 4: of weeks back that I wouldn't be surprised if the
Speaker 4: meetings got pushed back again, but then you would really
Speaker 4: run into the midterms and the like. You know, it's
Speaker 4: interesting to me Treasure Secretary Vessant is meeting with his
Speaker 4: Chinese counterpart earlier this week in South Korea. You know,
Speaker 4: there still seem to be deliverable as being worked out right.
Speaker 4: We're expecting you know, this new board of Trade, maybe
Speaker 4: a board of investment. They're supposed to do non sensitive
Speaker 4: investment between the two countries. I'm not sure what fits
Speaker 4: in that basket of nonsensitive investment these days.
Speaker 3: You know, as you say, there's still.
Speaker 4: A war on and China is hurting now, but they
Speaker 4: also are going to be a beneficiary of this trend
Speaker 4: towards more coal, more renewables, more batteries, and so I
Speaker 4: think there's a lot of different leverage going around.
Speaker 2: This meeting was supposed to happen weeks ago because of
Speaker 2: this war. It's happening and the war is ongoing. What changed, Well,
Speaker 2: it's interesting.
Speaker 4: So I think China actually wanted to have the meeting
Speaker 4: around this time of year. They didn't want to have
Speaker 4: it earlier in the year. So, you know, I think
Speaker 4: part of what changed is, you know, things have to
Speaker 4: you know, things have to go on.
Speaker 3: Also, President Trump.
Speaker 4: Is hoping that China, you know, China will see in
Speaker 4: its own interest to bring the war to an end.
Speaker 4: And as I say, he's trying to reset and focus
Speaker 4: focus on trade and the like.
Speaker 3: Now he's going in having.
Speaker 4: Just received a blow again to his trade agenda and tariffs,
Speaker 4: the one two sort of ruling on Friday. I think
Speaker 4: it now, I do only that changes things a lot
Speaker 4: because at the end of the day, the administration was
Speaker 4: going to use Section three oh one tariffs to bring
Speaker 4: them back up. But we're at a moment where tariffs
Speaker 4: on China are the lowest rate they've been for most
Speaker 4: of the second Trump administration.
Speaker 1: Has anything changed in terms of the leverage that one
Speaker 1: company had, that one country has over the other now
Speaker 1: versus when they were previously going to be meeting.
Speaker 4: I think the main area is probably one of almost
Speaker 4: the political and strategic elements. I think what it was
Speaker 4: economist or others who have said that this, you know,
Speaker 4: don't get involved with your enemy when they're doing something
Speaker 4: that undermines them. And I do think that was China's
Speaker 4: original focus there. What's changed now is that the economic costs,
Speaker 4: the real economic costs are mounting.
Speaker 2: Right.
Speaker 4: I was talking just before I came on to chat
Speaker 4: with you guys about how plastics and the downstream effects
Speaker 4: of this crisis are really increasing. You're right, list So
Speaker 4: the oil in the water, we don't know exactly what
Speaker 4: those volumes are, but what we do know is that
Speaker 4: today we have countries ranging from India to Australia, big
Speaker 4: allies of the United States at times, are preparing for
Speaker 4: even more rationing. So I think the industrial impacts are
Speaker 4: mounting in terms of leverage. If anything, China is trying
Speaker 4: to exert more leverage over critical minerals, critical supply chains,
Speaker 4: you know, and that's something that the US, you know,
Speaker 4: we have a time and consistency problem about how to
Speaker 4: address those issues.
Speaker 1: To both countries have the same approach of trying to
Speaker 1: stave off any kind of political pain in the form
Speaker 1: of consumer displeasure. About higher prices. In other words, is
Speaker 1: a response from both sides to subsidize different things and
Speaker 1: potentially increase fiscal spending.
Speaker 4: Yeah, I think that's right China, I mean both sides,
Speaker 4: and many countries around the world have that instinct. The
Speaker 4: problem is, if you subsidize, then will continue to consume,
Speaker 4: and then you might end up with real shortages. So
Speaker 4: that's only maybe a short term solution. I mean here
Speaker 4: in the United States, I think the instinct is to subsidize,
Speaker 4: but we actually haven't.
Speaker 3: Done much of it yet.
Speaker 4: The gas tax could be you know, could be reduced.
Speaker 4: You know, there are some different ideas of floating around there.
Speaker 4: In China, they reset prices every month, so there can
Speaker 4: be some delays in passing that on. The other issue
Speaker 4: is China has made more strides than the United States
Speaker 4: to electrify as many things as possible, and so that
Speaker 4: electrification using coal, using renewables, and you know, we you know,
Speaker 4: the US government would like us to be using more coal,
Speaker 4: would like to convert more plants. But the challenge is
Speaker 4: also you look at electricity costs, and China has been
Speaker 4: building out a lot more electricity capacity than.
Speaker 3: We have in the United States.
Speaker 4: So I think the political sensitivities are different. And of
Speaker 4: course we got the midterms coming up, right, and China
Speaker 4: does and I mean what the population thinks does matter,
Speaker 4: but they're not going to the polls and having to
Speaker 4: face the electorate and having to face the electorate with
Speaker 4: another round of you know, supply chain restrictions and inflation.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: Let's turn back to our top story, crude rising as
Speaker 2: the US and around remain at a stalemate on a
Speaker 2: deal to end the war and reopen the stratiformers kai
Speaker 2: Ibraheim of BCA Research writing the following, If the strait
Speaker 2: is not reopened, Marcus will grow desensitized to the positive headlines,
Speaker 2: and prices will increase to reflect a tightening oil market.
Speaker 2: Rakaia joins us now for more. Rakaia, welcome back to
Speaker 2: the program. That quote, of course, was true last month
Speaker 2: and a month before, and we haven't seen crude explode higher.
Speaker 2: Why do you think we might be closer to that moment?
Speaker 6: Good morning, Jonathan, Thanks for having me on. So I
Speaker 6: think as we move further out and the strait of
Speaker 6: hormones remains closed for longer, what we're seeing now is
Speaker 6: that there is this buffer of massive inventories that are
Speaker 6: shielding the oil market temporarily, but ultimately these are stocks
Speaker 6: and their ability to shield the market is not infinite.
Speaker 6: And as the strait remains closed for longer, you know,
Speaker 6: these inventories will continue to draw down and that buffer
Speaker 6: is removed. And so I think that as we move
Speaker 6: into you know, further weeks and months ahead, if the
Speaker 6: strait is not reopened, you know, the path of these
Speaker 6: resistance for oil prices will be higher.
Speaker 2: I'd really appreciate your best guess. So the block out continues,
Speaker 2: and the administration wants to put more and more pressure
Speaker 2: on Iran to hopefully get to a moment where they
Speaker 2: breach storage capacity and compromise their weals. Meanwhile, Iran's trying
Speaker 2: to sit this out. The blinking contest from their side
Speaker 2: looks like this. You've got all these inventories and we're
Speaker 2: waiting for you to drive down your inventory, so you
Speaker 2: feel the pressure. Who do you think gets wet first?
Speaker 6: That's a great question. So I think that you know,
Speaker 6: what we're going to see is that you know, Iran
Speaker 6: has proved to be quite resilient in terms of their
Speaker 6: pain threshold, and I think that, you know, going forward,
Speaker 6: I would not count on them blinking in the face
Speaker 6: of greater pain. So I think what we're going to
Speaker 6: see is that the oil market is going to eventually
Speaker 6: bear the brunt of this. We've actually have seen quite
Speaker 6: a stable oil market for the past month or so,
Speaker 6: and you know, as I mentioned earlier, that just reflects,
Speaker 6: you know, the buffer that we've had from the inventories,
Speaker 6: things like US exports surging, China cutting back on their imports.
Speaker 6: But as this prolongs, these buffers are going to sort
Speaker 6: of wear thin, and you know, their ability to shield
Speaker 6: the oil market is ultimately going to weaken.
Speaker 1: Kaya Which of the golf countries are most exposed financially
Speaker 1: to the prolonged conflict should it go on for a
Speaker 1: longer period of time.
Speaker 6: Yeah, so Iraq is definitely exposed here. You know, their
Speaker 6: inventories were the first to be filled, and so they've
Speaker 6: had to shut down their production you know, quite a
Speaker 6: bit very early on in the conflict. You know, the
Speaker 6: other golf producers, so for example, Kuwait has also shut
Speaker 6: down a big share of their production. Bahrain similar situation there,
Speaker 6: and then the ones that have been able to sort
Speaker 6: of weather the storm better. Are the ones that have
Speaker 6: the pipeline bypassed capacity, So that's Saudi Arabia and the UAE,
Speaker 6: which are still able to get crude out of their
Speaker 6: countries bypassing the Strait of Pourmouth through either the East
Speaker 6: West Pipeline or the port of Fujaira.
Speaker 3: In the UAE.
Speaker 1: Are there similar offsets not just for crude, but for
Speaker 1: other commodities as well, because we point to the fact
Speaker 1: that we are focusing on crude, but we're seeing, for example,
Speaker 1: cooking oil prices rise five point six percent.
Speaker 3: In a month.
Speaker 1: This is affecting many other commodity these what's your sense
Speaker 1: of what else is getting through and how.
Speaker 6: Yeah, that's perfectly correct. I mean, what we're seeing also
Speaker 6: is that there's a massive disruption to fertilizer, which of
Speaker 6: course is also a byproduct of the energy sector, and
Speaker 6: so that's translating into upside pressure on agricultural commodities. And
Speaker 6: also you know, things like the closure of the cuts
Speaker 6: our Energies rass Tanura plant sorry Rasla fan plant is
Speaker 6: also a disruption to the fertilizer industry, and so you know,
Speaker 6: as this closure of this of the strait of Hormuz prolongs.
Speaker 6: You know, that also buffer where you know, you have
Speaker 6: sort of the planting season that's taking place in the
Speaker 6: spring planting season, and as the props, you know, sort
Speaker 6: of progress and the harvest season comes and that fertilizer
Speaker 6: is insufficient. That also poses a massive upside risk to
Speaker 6: agricultural prices and all those byproducts that.
Speaker 5: Come from that.
Speaker 2: This is the Bloomberg's Events podcast, bringing you the best
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