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Speaker 2: This is a really exquisite hour for Global Wall Street
Speaker 2: on Monday. Dive into some conversations. Matt Hornbach from Morgan
Speaker 2: Stanley will be listen critically as tenure in Japan for
Speaker 2: Morgan Stanley years ago. Helene ray you may not know
Speaker 2: the name. Helene ray Ry is exquisite on European macro economics,
Speaker 2: and again we'll look at the transatlantic picture there. But
Speaker 2: what Paul and I wanted to do was give you
Speaker 2: just a tone of the equity market. There's no one
Speaker 2: better to do that. With a lengthy conversation with Lori
Speaker 2: Kelvisena of RBC Capital Markets, Laurie I said this at
Speaker 2: seven o one this morning. I was thunderstruck by the
Speaker 2: repetitive not gloom, but timidity, intentiveness, tentativeness this weekend in
Speaker 2: equity pundits. I mean, everybody's rationalizing a nervous market. All
Speaker 2: this history, this history that are you that nervous?
Speaker 3: Hi? So thanks for having me Tom. Look, I would
Speaker 3: say that I feel pretty neutral on the back half
Speaker 3: of the year. And I know that everybody hates it
Speaker 3: when equity strategists are neutral, because we're supposed to have
Speaker 3: high conviction and come in and pound tables and those
Speaker 3: sorts of things. But I do have some things that
Speaker 3: are concerning me. I sat down with myself, you know,
Speaker 3: sort of around the July fourth holiday when we were
Speaker 3: sort of resetting the second half outlook, and said, you know,
Speaker 3: how much downside do I think those things are worth
Speaker 3: to me? And to be honest, I didn't feel like
Speaker 3: we were doing for another growth scare or retest of
Speaker 3: the April lows that you know, I do see some
Speaker 3: things that I think can challenge us a little bit
Speaker 3: in the short term, but they feel to me like
Speaker 3: garden variety type pullbacks, which are in the five to
Speaker 3: ten percent range and never fun, but something that you
Speaker 3: can recover from.
Speaker 2: Well, but that's normal. We've forgotten. Paul helped me sure
Speaker 2: corrections are normal. Yes, am I right?
Speaker 4: Absolutely, and I balloom this.
Speaker 2: Weekend was comical. We're in this, I mean, come on, Paul,
Speaker 2: we're up annualize it. We're fourteen percent on a twelve
Speaker 2: months solbrid basis.
Speaker 5: Yep.
Speaker 4: And look where we came from from Off that line.
Speaker 2: I just said, I'm lost.
Speaker 4: So, Laurie, I guess maybe one of the key issues
Speaker 4: for investors these days over the next coming weeks will
Speaker 4: be earnings. And we're very, very early into this earning cycle.
Speaker 4: Is there any takeaways plus or minus or are we
Speaker 4: just kind of plugging along here?
Speaker 3: Yeah? And look, I think it kind of circles back to,
Speaker 3: you know, some of the comments Tom just made. Right,
Speaker 3: So we've come off week one. There was sort of
Speaker 3: a drizzle of early reporters that came in prior to
Speaker 3: last week, and I think, you know, maybe this contributed
Speaker 3: to some of that timidity or a little bit of caution.
Speaker 3: But what I heard last week from the financial companies
Speaker 3: in particular, was everything is fine, the consumer is resilient,
Speaker 3: we're managing through we're talking to all our customers. This
Speaker 3: is what we're hearing. But at the same time, I
Speaker 3: was seeing words like guarded and there was definitely some
Speaker 3: conservatism that was still going into the outlooks. And remember,
Speaker 3: these companies are not on the forefront of tariffs for
Speaker 3: the most part that we heard last week, but they
Speaker 3: were still referring a lot to the uncertainty and the
Speaker 3: policy backdropped there. So was there maybe a little bit
Speaker 3: of scarring that's keeping them a little bit you know,
Speaker 3: vigilant and on guard going forward. Absolutely, And that to
Speaker 3: me was the biggest takeaway dumb question.
Speaker 2: Are FED rate cuts good for the stock market?
Speaker 3: I think that the market had gotten maybe a little
Speaker 3: too optimistic in the short term about thinking the rate
Speaker 3: cuts were coming soon. If you look at our rate
Speaker 3: strategy team, Blake Gwenn actually pushed his call recently from
Speaker 3: September for the first cut back into December. And as
Speaker 3: I was talking to investors back in June time, you know,
Speaker 3: and you know, sort running all around the country and
Speaker 3: talking to people, and part of the bull thesis was
Speaker 3: getting those rate cuts sooner rather than later. So I
Speaker 3: think as we dial down some of the short term
Speaker 3: implications or short term expectations for FED cuts, I think
Speaker 3: that could cause a little bit of angst in the
Speaker 3: market in the short term. But I do think, you know,
Speaker 3: going back to Blake's call, he's pushed those cuts into
Speaker 3: next year. So it does feel like they're coming. I
Speaker 3: think if you were to take them completely off the table,
Speaker 3: that would do you know, some damage. I think that
Speaker 3: pushing back the rate cuts because of a resilient economy
Speaker 3: and to kind of wait and see on inflation, I
Speaker 3: think the market, you know, can absorb that without a
Speaker 3: ton of damage, but it may create some short term
Speaker 3: hiccuffs for a market that's come so far, so fast
Speaker 3: in a short amount of time.
Speaker 4: So, Laurie, what August first is going to be another
Speaker 4: date on this whole tariff discussion. It just feels like
Speaker 4: the market maybe has gotten complacent about tariffs and the
Speaker 4: risk they may present in terms of e narmer growth
Speaker 4: or inflation. Maybe that's we're going to get refocused come
Speaker 4: this August first deadline. How are you thinking about that?
Speaker 3: I think that's a great question. I'll tell you my
Speaker 3: macro colleagues and I at RBC, you know, when we
Speaker 3: compare notes on the tariff discussion, you know, we we're
Speaker 3: sort of like, is anybody bringing up the deadline in
Speaker 3: your meetings? And it's like, basically, no, is what we're
Speaker 3: hearing across different asset classes. And I think there has
Speaker 3: been a view, you know, when I've proactively brought it
Speaker 3: up with investors that you know, we're seeing a lot
Speaker 3: of you know, I don't want to use the word theater, right,
Speaker 3: but I think there is an expectation that there there is,
Speaker 3: you know, sort of an image that's going on, and
Speaker 3: things are going to be pushed back and things are
Speaker 3: not going to end up being that dire. You know,
Speaker 3: where I shake out Paul as I do think that
Speaker 3: we're going to have more tariffs than what we had
Speaker 3: to start of the year, and I think that there
Speaker 3: are inflationary impacts. So where I'm concerned about complacency is
Speaker 3: when I have investors coming into me and saying, hey,
Speaker 3: we got this soft CPI print, see tariffs aren't inflationary,
Speaker 3: and I just don't think that's realistic. I think companies
Speaker 3: have been working through a lot of inventory, and they've
Speaker 3: been put plans into place, and you're starting to see
Speaker 3: those gears of price increases turning. They're just turning very slowly.
Speaker 3: But to be honest, this isn't that different from what
Speaker 3: happened back in twenty eighteen. And if you look at
Speaker 3: twenty nineteen earnings, they were flat with twenty eighteen for
Speaker 3: the S and P so I worry that investors are
Speaker 3: kind of saying, hey, we're not getting anything and we're
Speaker 3: just going to get stuff later, and it's going to
Speaker 3: actually impair the outlook for next year a bit.
Speaker 2: We say good morning to all of you and you
Speaker 2: across America. Good morning on Serious Exem Channel one twenty one,
Speaker 2: ninety nine and one FM. Nathan Ager Radio in Washington
Speaker 2: ninety two nine FM. Huge response for Arnold's out in
Speaker 2: East Orleans today. I just so much. It's a killer.
Speaker 2: It's like it's like my childhood. You know, I'm looking
Speaker 2: Paul August one is like this big date. I'm not
Speaker 2: focused because I'm looking at WWE SummerSlam, the two day
Speaker 2: combo ticket out at MetLife Stadium. The seats I deserve
Speaker 2: are nine hundred and thirty dollars.
Speaker 4: Sure, that's for WLF.
Speaker 2: Summer Slam met Light. And you know, with Lauren Calvasina,
Speaker 2: I'm looking at this fixation here and it's just an
Speaker 2: excuse to get in cash. Is there any value to
Speaker 2: cash right now? Or does Lauren Calvasina say forget about
Speaker 2: the WWE SummerSlam, you got to be in the market.
Speaker 3: Well, look, I'm an equity strategist. Right, So I'm always
Speaker 3: going to want you to be investing in stocks. You know,
Speaker 3: that's just sort of the nature of the beast. And
Speaker 3: we did, you know, sort of take the approach, you know,
Speaker 3: when we've had conversations, especially I would say with newer,
Speaker 3: younger investors this year of it's always impossible, you know,
Speaker 3: just sort of in real time call turns in the market. So,
Speaker 3: you know, I think clients have been sort of doubting
Speaker 3: their own ability to sort of forecast some of the
Speaker 3: noise coming out of DC and some of you know,
Speaker 3: the drama and the headlines and say, you know, I
Speaker 3: have sort of a reasonable expectations of where things are
Speaker 3: going to be next year, let me just kind of
Speaker 3: ignore the short term and position for the long term.
Speaker 3: And I don't you know, I think it is a
Speaker 3: little early to be looking at twenty twenty six. But
Speaker 3: I sympathize with the impulse.
Speaker 4: I do small cap mid cap relative to what I
Speaker 4: think I hear most often, which is large cap growth.
Speaker 4: So how do you think about different market cap plays here?
Speaker 3: So it's a great question. I mean, if you look
Speaker 3: at the hedge funds, they like to place small caps
Speaker 3: on dialing up and dialing down FED expectations, and I
Speaker 3: think we're in the moment of kind of dialing down
Speaker 3: short term FED expectations. And these folks tend to be
Speaker 3: short term in nature. They're not making twenty twenty six
Speaker 3: bets yet, and so if I'm, you know, sort of
Speaker 3: in the process of taking small caps, I think that,
Speaker 3: you know, it's hard for me to see the short
Speaker 3: term out performance pop from that perspective. I also think
Speaker 3: that smaller cap companies have a harder time managing around
Speaker 3: issues like tariffs. I've been reading some nine SMP transcripts
Speaker 3: recently and I've absolutely seen that in some of the
Speaker 3: prints that I've looked at, And I think you want
Speaker 3: economic tailwinds back, and that's like two and a half
Speaker 3: percent GDP and FP ramping ism, manufacturing moving up. I think,
Speaker 3: you know, if I look across the street, the expectations
Speaker 3: are for a sluggish economic growth backdrop for quite some time.
Speaker 3: So people are trying to get bullish on small caps.
Speaker 3: I'm really kind of scratching my head on Laurie.
Speaker 2: Thank you. That was brilliant. And the issue here, Lori Calvicina,
Speaker 2: is we've been trying to get bullish in small caps
Speaker 2: for what ten for fifteen years? I mean, it's ridiculous
Speaker 2: on the large cap question, and you're going to say, well,
Speaker 2: it's not something I really look at, But come on,
Speaker 2: everybody listening is wedded to ten twenty thirty stocks. What's
Speaker 2: that vision out three years?
Speaker 3: So look, and you know we do do work on that,
Speaker 3: you know, we just we put our horizons a bit
Speaker 3: broader as well. And look, I would say, if I'm
Speaker 3: thinking very very short term, we do often see the
Speaker 3: megacap growth stocks sort of seed their earnings leadership and
Speaker 3: seed their performance leadership during reporting season. So what do
Speaker 3: I mean by that, Well, you tend to see outside
Speaker 3: of reporting season, the rate of upward divisions are earning
Speaker 3: sentiment is really really strong for the top ten companies
Speaker 3: relative to the rest of the SMP, and that tends
Speaker 3: to down during reporting season as people actually start to
Speaker 3: think about the other companies and then you see a
Speaker 3: little bit more relative excitement there. So we may be
Speaker 3: heading into something like that. Now, if I'm thinking out
Speaker 3: you know, the next few years, I'll tell you what
Speaker 3: I've been hearing on the road from investors is maybe
Speaker 3: a more rational view of where AI is headed and
Speaker 3: it's you know, kind of moved from instant gratification and
Speaker 3: instant you know, sort of injecting optimism into earnings, at
Speaker 3: least outside of those you know, top megacap names. It's
Speaker 3: not going to be the thing that fixes you know,
Speaker 3: things for everybody right now. But I think companies are
Speaker 3: investors are realizing that companies is just going to take
Speaker 3: them more time to get this technology right and additive
Speaker 3: to earnings. And if you look out longer term earnings
Speaker 3: growth forecasts are still stronger for the mag seven than
Speaker 3: the rest of the market. They're just slowing down.
Speaker 2: A little, kay, But you don't do an individual stock.
Speaker 2: There's a small company Redmond, Washington. We won't mention it,
Speaker 2: and the bottom line is it's got a thirty eight multiple.
Speaker 2: But the answer is out three years a Lori kelvisine
Speaker 2: is showing out three years. You just assume they earn
Speaker 2: their way into a denominator which makes a thirty eight multiple,
Speaker 2: right now? Rational?
Speaker 3: Right, Well, what I'll tell you I'm seeing in my
Speaker 3: Decktom and Tom, you and I have known each other
Speaker 3: a long time. I am sort of like anti theme,
Speaker 3: anti fad, like I am never you know, sort of
Speaker 3: drinking the kool aid on the next hot thing. But
Speaker 3: I've been calmed down a little bit on this AI
Speaker 3: theme because when I look at the top ten megacap
Speaker 3: names in the S and P five hundred, which are
Speaker 3: largely AI plays, and I do a median PE of
Speaker 3: those companies, and I compare it to the long term
Speaker 3: growth expectations, and I take those two things right, and
Speaker 3: I look at MAG seven versus rest of the S
Speaker 3: and P. The relative PE line is the same line
Speaker 3: as the relative long term earnings growth line, so they're
Speaker 3: getting different multiples, but it's based on the differing perceptions
Speaker 3: of what the long term earnings growth rates are. And
Speaker 3: that's been very similar to what we tend to see
Speaker 3: over time. I think there was a breakdown in that
Speaker 3: relationship around the GFC briefly, but this is even how
Speaker 3: stocks behaved back in the nineties and early two thousands.
Speaker 3: So I think you've really got to tackle those long
Speaker 3: term earnings growth expectations. And you've either got to just
Speaker 3: like bang down the MAG seven trade and say their
Speaker 3: numbers are way too optimistic, or you've got to look
Speaker 3: at the rest of the market and say it's way
Speaker 3: too pessimistic and move those up and we're just not
Speaker 3: seeing any change in that relative gap, so they're kind
Speaker 3: of each getting the relative pe they deserve.
Speaker 2: That's the key issue, Paul, is we haven't seen a
Speaker 2: change in the zeitgeist. Everybody's publishing and all that opinions
Speaker 2: in that, but it's still the way it is. Paul,
Speaker 2: get one more in here with.
Speaker 4: LORI evaluation here, Laurie, how do you kind of break
Speaker 4: that down for your clients here? Just of the market
Speaker 4: in general?
Speaker 3: So look small caps, you know, had hit recession lows
Speaker 3: on April eighth, and they're now back to average, so
Speaker 3: they're fine, but they're not super cheap the way they
Speaker 3: were S and P. If I look at a market
Speaker 3: cap weighted multiple, never got cheap, did work its way
Speaker 3: down from peak, and no, it's right back up to peak.
Speaker 3: If I look at rest of S and P and
Speaker 3: just do an equal weighted multiple over there, think we're
Speaker 3: trade around eighteen times. It had been down around sixteen. Again,
Speaker 3: never got to average, but it's not quite back to peak.
Speaker 3: So I feel like in the short term there's a
Speaker 3: little bit of a catch up tray that the rest
Speaker 3: of the market needs to do relative to the mag
Speaker 3: seven you can watch that Russell pe really closely, because
Speaker 3: what it did this past time was peak out around
Speaker 3: the twenty sixteen through twenty eighteen highs. We're way far
Speaker 3: off from that yet, so maybe that's an uber bowl argument.
Speaker 3: But I see different valuations in different parts of the market,
Speaker 3: and the capwaight at SMP is getting worrisome again.
Speaker 2: Laurie, thank you so much. Lori kelviseen a terrific brief there,
Speaker 2: RBC Capital Markets. What we'd like to do on a Monday,
Speaker 2: Folks's iniquities, Bond's currencies and commodities.
Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live
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Speaker 2: Just one of the things you're doing here mid July
Speaker 2: into a July thirty FED meeting or any is coming
Speaker 2: out stillantis can? I isn't stillantis Chrysler, Yes, but it's
Speaker 2: a combo like yeah, I think Fiat Renault Poojit like
Speaker 2: I don't know what's in there.
Speaker 6: I don't know.
Speaker 2: Bob Michael's looking at me like Tom you're butchering the pronunciations.
Speaker 2: We started with Troy Guyski in Deborah Cunningham and now
Speaker 2: Bob Michael with JP Morgan here, and my great theme
Speaker 2: is over the weekend, just lots of be careful, lot
Speaker 2: of worry and caution and all that. I looked at
Speaker 2: a famous blended bond market fun not JP Morgan, and
Speaker 2: I think year to date, if I make it an
Speaker 2: annualized statistic, is a six and a half percent return
Speaker 2: in the bond market. Things aren't that bad, are they.
Speaker 6: They're not.
Speaker 7: There's a phenomenal resilience to both the US economy and
Speaker 7: US markets or bond markets globally. To be honest, if
Speaker 7: you look at some of the things that have gone
Speaker 7: on this year, none of them are good for the
Speaker 7: bond market. You've got tariffs that means higher prices, higher inflation.
Speaker 7: You've got the one big beautiful Bill Act that means
Speaker 7: a lot more spending, which supports higher prices. Each of
Speaker 7: those two are north of three trillion dollars. Then you
Speaker 7: have the sell American noise out there constantly that should
Speaker 7: be putting pressure on US bonds. And then there's talk
Speaker 7: of global issuance in bonds going through the roof. You're
Speaker 7: seeing some of that that should put pressure on bond
Speaker 7: But through all of that, here we are with the
Speaker 7: ten year treasury flat to the Fed funds rate where
Speaker 7: it's been for most of the year. You're grabbing the coupon,
Speaker 7: you're getting the coupon, and as long as there's no
Speaker 7: recession on the horizon, you're buying credit and picking up
Speaker 7: the incremental yield.
Speaker 4: Where do you see value in credit these days? Because
Speaker 4: again it looks to me, I'm just looking at the
Speaker 4: end go function, the Bloomberg terminal. The best performance has
Speaker 4: been US corporate high yield.
Speaker 7: It has been and we've always said, in any backup
Speaker 7: in high yield, you buy it unless you think you're
Speaker 7: going into recession. Then by definition that's when you worry.
Speaker 7: That's when you get out because there will be de risking,
Speaker 7: that's when corporate profitability drops. And everyone's worried about the
Speaker 7: false rising. But the reality is there's a ton of
Speaker 7: money on the sidelines looking to get into the bond market.
Speaker 7: Both institutional and retail investors feel under allocated to fixed income.
Speaker 2: Can I ask a rude question? First? One a Monday
Speaker 2: Room question at JP market. How much is a ton
Speaker 2: of money? Like if somebody shows up, is it like
Speaker 2: one hundred million? Ah? You know what's the measurement of
Speaker 2: a ton of money?
Speaker 7: Bigger than a couple bushels?
Speaker 4: So why are they underinvested market? Because for the first
Speaker 4: time in fifteen years we can actually get total coupon
Speaker 4: return here.
Speaker 3: Why are they under.
Speaker 7: Yeah, that's as you just said it, the first time
Speaker 7: in fifteen years. It was the fifteen years before that
Speaker 7: the zero and negative interest rate policy. People looked at
Speaker 7: bonds and said, eh, not going to do it, and
Speaker 7: either left money in cash or went into alternatives. Now
Speaker 7: they feel overallocated to alternatives, under allocated to bonds and.
Speaker 2: Our global Wall Street question of the day adding in
Speaker 2: your intern slash junior analysts whatever they're calling them, a
Speaker 2: JP Morgan summer analysts, summer analysts. How many people are
Speaker 2: under Bob Michael just twenty thousand, four hundred, four hundred,
Speaker 2: four hundred is how many of those people have never
Speaker 2: really seen a coupon market? How many of this is
Speaker 2: all new? Out of four hundred? Seriously, is this all new?
Speaker 7: Now? You're you're right, the majority of people in our
Speaker 7: business have been in the industry post Great Financial Crisis,
Speaker 7: so central bank intervention di stortion of bond markets looks normal.
Speaker 7: Whereas we as a franchise the broader JP Morgan Chase Field,
Speaker 7: we are going back to a world that existed pre
Speaker 7: financial crisis.
Speaker 2: When Russia blew up. I went back and read the
Speaker 2: history of JP. Morgan in Russia in nineteen oh seven.
Speaker 4: That's how far back we go, exactly right, what a history?
Speaker 4: So our Federal Reserve? How are you parsing through the
Speaker 4: noise and so on about leadership at the FED as
Speaker 4: and then getting down to where policy may shake out
Speaker 4: for the FED?
Speaker 7: Well, I do believe that the FED members the FOMC
Speaker 7: do come in every day, look at data and try
Speaker 7: to make the best possible decisions. So they understand the
Speaker 7: importance of their role. They understand the judgment that history
Speaker 7: will make. They get all of that. They're in a
Speaker 7: difficult position because they know prices will go up once
Speaker 7: the full strength of tariffs hits, and maybe even this
Speaker 7: quarter there will be more passed through from corporate America.
Speaker 7: They also feel that it could slow down growth, that
Speaker 7: if there are higher prices, businesses and households will probably
Speaker 7: spend a bit less, So why not just hold rates
Speaker 7: where they are for now and see some of these
Speaker 7: impacts in the real data. I think that's the right
Speaker 7: thing to do. And as we start out with, markets
Speaker 7: are doing great, the economy is doing it fine.
Speaker 2: And pomportant to zeitgeist this weekend, mister Bessan, sitting on
Speaker 2: the couch in the Oval office, Yes, suggested to the
Speaker 2: president slow things down.
Speaker 4: Yep, exactly. I'm looking through your notes here, Bob. One
Speaker 4: of the things that jumped out of me is local
Speaker 4: emerging market.
Speaker 6: That tell us about that.
Speaker 4: How do you think about emerging markets today?
Speaker 6: Local?
Speaker 7: Well, Emerging markets in general have been overlooked for the
Speaker 7: last seven or eight years, and when we look at
Speaker 7: flows into different assets classes, they've gone into equity, some
Speaker 7: have trickled into different parts of the bond market, but
Speaker 7: with shocking consistency, there have been outflows from emerging market
Speaker 7: equities and emerging market debts. So they've been orphaned, yet
Speaker 7: they've done well. And this tells you that there's greater
Speaker 7: support in emerging market debt than crossover buyers. Investors like
Speaker 7: me who run global aggregate funds and look at emerging
Speaker 7: markets as an ow to benchmark bet When we look
Speaker 7: at the emerging markets, they have very high real yields
Speaker 7: to them. They've got central banks who are as efficient
Speaker 7: as any central bank in managing policy for growth and inflation,
Speaker 7: and they also have the benefit of very strong domestic support.
Speaker 6: There are wealth.
Speaker 7: Management platforms, pension funds, and insurance companies that go in
Speaker 7: and support the local markets. We can get higher real yields.
Speaker 7: I can put together a portfolio of South America and
Speaker 7: Europe and parts of Asia that will yield close to
Speaker 7: eight percent.
Speaker 2: All eight percent, phenomenal. Yeah, And what's the real yield
Speaker 2: off that get out over three percent?
Speaker 7: Oh yeah, it's going to be close to four percent.
Speaker 2: What's what's a tension point on the ten year US
Speaker 2: real yield? One point ninety three one point ninety four
Speaker 2: this morning, by my measurement, is that like not four
Speaker 2: percent obviously, but like two point five percent? Our world changes.
Speaker 7: Yeah, it's amazing the amount of disinflation and deflation we
Speaker 7: had pre COVID, the amount of inflation we had during COVID.
Speaker 2: And now we're going the other way.
Speaker 7: Yeah, And how break evens somehow always hovered between two
Speaker 7: and two and a half percent above two and a
Speaker 7: half percent would weary men.
Speaker 2: The late Great Stanley Fisher told me the day Paul
Speaker 2: Samuelson threw the chalk in the room and almost bounced
Speaker 2: it off his head. When you're lecturing the cherubs at
Speaker 2: JP Morgan on the real yield, have you ever thrown
Speaker 2: the chuck when they say it doesn't matter?
Speaker 6: You know?
Speaker 2: Have you ever gotten upset in a lecture on the
Speaker 2: inflation ajusting yield is a residual?
Speaker 7: You know. I hear a lot of things that make
Speaker 7: me upset, but I've been in the markets for a
Speaker 7: long time. You just absorb it and move on.
Speaker 2: I can't say enough, folks at Wisdom, they're nominal GDP
Speaker 2: and real GDP dynamics in nominal yield, the current yield,
Speaker 2: the one we all know is in the real yield
Speaker 2: is the residual after you take out inflation and those dynamics.
Speaker 2: You have to tattoo to your brain and massage every
Speaker 2: single day of your career to keep up with people
Speaker 2: like Bob Michael.
Speaker 6: Not Michael.
Speaker 2: Thank you so much for JP Morgan.
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Speaker 2: There's a point in Hong Kong, and it's confusing. There's
Speaker 2: two mandarins. There's the old bandarin and there used to
Speaker 2: be an mbire and something new with it, and there's
Speaker 2: a new mandarin if you go over by the old mandarin.
Speaker 2: Across from the charming little trolley car is the fortress
Speaker 2: of the Hong Kong Shanghai Bank in Corporation. And as
Speaker 2: you can imagine, HSBC, Yes, out of London, but so
Speaker 2: much out of Hong Kong is absolutely definitive on all
Speaker 2: the stuff that makes it go. Driving that in our
Speaker 2: guest in studio here in New York today is one
Speaker 2: of the most important voices in semiconductor out of Wharton
Speaker 2: Frankly joined us with HSBC. This morning. You're given a
Speaker 2: lecture in America on the Pacific rim semiconductor market. What's
Speaker 2: the first thing you talk about.
Speaker 6: I think when you think about semiconductors, it's that the
Speaker 6: dominance of where Asia is, especially where Taiwan is in
Speaker 6: terms of how dominant TESMC is. I think people often
Speaker 6: now are starting to recognize how important that supply chain
Speaker 6: is right now.
Speaker 2: I mean, I look at tay I learned this Taiwan
Speaker 2: is seventy percent of Taiwan is seventy percent owned by
Speaker 2: the foreign you know people that INTERSBC represents in that
Speaker 2: Would that change at all within the geopolitics? Do we
Speaker 2: just still see a dominance of international investment in Pacific
Speaker 2: RIM semiconductor and technology.
Speaker 6: Yeah, I mean, I mean TSMC is seventy five percent
Speaker 6: owned by foreigners, foreign investors. But also I think this
Speaker 6: past year does a lot of changes because they're now
Speaker 6: spending more money and production in the US. So they've
Speaker 6: talked about thirty percent of their most advanced two nanometer
Speaker 6: production will be in the US over the next few years.
Speaker 6: So I think this investment process is been surprising, frankly
Speaker 6: to most of us in terms of how quickly it's
Speaker 6: moving in the pace.
Speaker 4: So how do you and your clients think about global
Speaker 4: trade tensions? Uh, teriffs, just the instability it seems like
Speaker 4: in global trade because your business is semiconductor business, that
Speaker 4: the technology business is truly a global business. Global supply
Speaker 4: change everywhere. How do you guys account for that?
Speaker 6: I think like most industries, you know, everyone's dealing with
Speaker 6: the uncertainty around tariffs. But I think what's different is
Speaker 6: the the importance of semiconductors right now in the global economy,
Speaker 6: especially with AI, right it is is such an important
Speaker 6: engine of all the AI and infrastructure investment. So I
Speaker 6: think there is going to be you know, there there
Speaker 6: will be ongoing uncertainty when it comes to tarifs, but
Speaker 6: I think the market has started to shrug this off,
Speaker 6: right And I think you know, especially you know, if
Speaker 6: you talk about AI infrastructure, you know a lot of
Speaker 6: it is you know, it's been driven by enterprise. So
Speaker 6: this the tariff impact is not going to be as
Speaker 6: significant because I think if you talked about consumer, they
Speaker 6: will become a bigger impact because you're going to consumer
Speaker 6: is going to feel that immediate impact of terrorists.
Speaker 2: On a thermodynamic basis, where does the energy come from
Speaker 2: out five years, ten years to just appease your industry?
Speaker 2: I mean, where do you have a worry, like a
Speaker 2: lot of other people that the electricity just won't show
Speaker 2: up to make all this stuff go.
Speaker 6: I think it is an issue that people talk about,
Speaker 6: but we haven't really seen that really materialize yet. I
Speaker 6: do think the infrastructure build will continue. I think everybody
Speaker 6: recognizes the importance of AI right now and why it's
Speaker 6: so important to invest it in. You know, for example,
Speaker 6: if you look at Sovereign AI right now in the
Speaker 6: announcements earlier in the year about you know, Saudi Arabia
Speaker 6: going to invest this huge amount of deness. But there's
Speaker 6: also the question are they ready yet because they need
Speaker 6: to build the infrastructure in terms of the energy. But
Speaker 6: I think it will eventually. I think it'll go hand
Speaker 6: in hand.
Speaker 2: A year ago, my book of the year two years
Speaker 2: trailing was Chris Miller's Chip War to me is an
Speaker 2: ignorant one was just fabulous and Morris Chang was front
Speaker 2: and center through that, the eminence of Taiwan's semiconductor. Who's
Speaker 2: the next Morris Chain? Did they just BCC's on the
Speaker 2: Pacific rim?
Speaker 6: I think you're going to start to see some sort
Speaker 6: of right now in China. What you're starting to see
Speaker 6: is that they are basically creating their own infrastructure, their
Speaker 6: own ecosystem, right So you're basically developing almost two sets
Speaker 6: of two sets of systems one for China and one
Speaker 6: for outside of China. Now in China, right now, I
Speaker 6: think if you look at the foundry business, this SMC
Speaker 6: is probably going to be the national champion in China,
Speaker 6: but there will be a lag in terms.
Speaker 2: Of will they have the sophistication of nanos or are
Speaker 2: they more like a micron just crank out the chips.
Speaker 6: They are doing foundry, which is similar to tastem see,
Speaker 6: but there will be many generations behind. But what I
Speaker 6: think the Chinese industry has managed to do is to
Speaker 6: become to manage to be much more effective in terms
Speaker 6: of producing without having to spend as much money. They
Speaker 6: will not quite be at the equal footing, but they
Speaker 6: can make some inroads.
Speaker 2: We said good evening to all of you across a
Speaker 2: specific RAM and good morning on your commute across America.
Speaker 2: Frank Lee does he's with HSBC on chips, Paul, Frank,
Speaker 2: where are we?
Speaker 4: I mean a lot of folks like myself this AI
Speaker 4: think we're trying to get our heads around AI. A
Speaker 4: lot of folks are telling us, hey, man, think in
Speaker 4: the scale of the Internet. Think in this is the
Speaker 4: scale of like electricity. Where are we in that evolution
Speaker 4: of AI. Where do you think we are in that
Speaker 4: game here? How earlier, how late?
Speaker 6: I think no one really knows the answer to that.
Speaker 6: But we do know that these companies, these massive hyperscalers,
Speaker 6: the way they're investing is unprecedent, and it's the first
Speaker 6: two years of the AI story was really just these hyperscalers,
Speaker 6: this four or five companies investing. There was always this
Speaker 6: question about, well, can they actually make money? Can he
Speaker 6: monetize that question? And it's still being somewhat unanswered today.
Speaker 6: But it's clear that the spending needs to continue. But
Speaker 6: it's not just these hyperscalers. Now it's cleared out the enterprise,
Speaker 6: you know, and and even sovereigns are now looking at this.
Speaker 4: You know, we think about we were talking about China,
Speaker 4: and it's become more and more apparent. I think over
Speaker 4: the last three, four, five, six years that there's this
Speaker 4: tech cold war between China and maybe the rest of
Speaker 4: the world. A is that is that accurate? And B
Speaker 4: is that problematic? I mean for just tech development. I mean,
Speaker 4: if you can't sell into China or your limited way
Speaker 4: you can sell into China, if that maybe we don't
Speaker 4: get some of the China tech coming out of China.
Speaker 4: How do you think about that?
Speaker 6: Yeah, it's a very complex one because you do see,
Speaker 6: you know, the latest change for the end video chip.
Speaker 6: They were banned earlier in the year and now they're
Speaker 6: actually allowed to sell in. So it shows you I
Speaker 6: think there's a lot of there's still a lot of unknowns,
Speaker 6: and I think both signs are still working in terms
Speaker 6: of trying to figure out what's the right balance. And
Speaker 6: then if you look at what China has done really
Speaker 6: well is the EV I mean the EV industry they
Speaker 6: have and they pulled their own semic counter industry with
Speaker 6: it because a lot of the chips that go in
Speaker 6: through the Chinese evs are now being produced by Chinese companies.
Speaker 2: But those are basic chips, right.
Speaker 6: They're not as advanced, right, They're not as advanced as
Speaker 6: you know, the Nvidio chipper goes into AI me.
Speaker 2: I know, Nicholas cout callos and covers Apple for you.
Speaker 2: I don't want you to give me a bihold cell
Speaker 2: an Apple. But do you just assume that the technology,
Speaker 2: the nanowness of Apple and others like Apple just continues
Speaker 2: that we continue to see technological innovation down to minimum nanos.
Speaker 6: Well, I think if you attend to the minus nuts,
Speaker 6: oh oh bullieve yeah. I think if you look at
Speaker 6: particularly economy like Apple, right, one of the challenges that
Speaker 6: you see they are facing is their AI angle is
Speaker 6: not very right now because it's very much driven by
Speaker 6: consumer and iPhone right. So this is ultimately the problem
Speaker 6: today is that the AI investment is on infrastruture.
Speaker 2: Okay, I got to get you in trouble here so
Speaker 2: you can't go home. We're you gonna stay here and
Speaker 2: be with us once a week. Frankly, Apple's just got
Speaker 2: to do an agreement with somebody who's very AI. Right,
Speaker 2: Why do they have to do their own AI?
Speaker 6: Well? I think right now they made it push for AI.
Speaker 6: They basically talked about Apple Intelligence last year, but it
Speaker 6: didn't stick because it hasn't resulted in selling more iPhones.
Speaker 6: But what's very interesting is this morning there's you know,
Speaker 6: just talk about a foldable iPhone coming perhaps next year.
Speaker 6: So will that be the start? Because I think a
Speaker 6: year and a half ago, two years ago, everybody thought
Speaker 6: ultimately we're gonna have aipcs, we're gonna have AI smartphones,
Speaker 6: but it hasn't really materialized. Like people are saying, well,
Speaker 6: do I need to change my SHND?
Speaker 2: So who's gonna cut to the chase? No one's listening.
Speaker 2: Compliance isn't listening, Frankly, who's gonna win?
Speaker 6: Who's gonna win? What the AI race right now? It's
Speaker 6: the people that do the picks and shovels, It's Nvidia,
Speaker 6: It's it's all the chip guys because they're making money
Speaker 6: and they don't. There's no angle of monization. So keebo spending.
Speaker 2: We got to do one stock with Frankly, just to
Speaker 2: get them in trouble. EMC is not EMC of Boston,
Speaker 2: Good morning, ninety two nine Elite MC two two three
Speaker 2: eight t T or whatever. Who is this tiny company
Speaker 2: in Taiwan? I don't know.
Speaker 6: It's interesting this company is they make what they calls
Speaker 6: very upstream material as the CCL lamin in and it
Speaker 6: goes into all the high end chips. Right So what
Speaker 6: nvideo is doing right now, this is one of the
Speaker 6: very upstream components that sells into it. So again it's
Speaker 6: a very niche area, but it's an important part.
Speaker 2: Did I do? Okay? I talk like it's just it's
Speaker 2: just amazing how dumb I could be.
Speaker 6: No, I mean, it's very impressive. You know this company
Speaker 6: is a very extreme company.
Speaker 2: Well, you know that's the way we rock and roll here.
Speaker 2: I think we need to be an on Kong. I
Speaker 2: got twenty I got thirty seconds. We're hearing Hong Kong
Speaker 2: is beginning to amend adjust to the politics of the region.
Speaker 2: Is you're a changed in new Hong Kong now.
Speaker 6: I think there's been a renewed confidence in Hong Kong
Speaker 6: and in China in general since the beginning of the year.
Speaker 6: I think the last two years they've been the last
Speaker 6: couple of years, it's been a very tough time, but
Speaker 6: it feels like they're turning the corner right. And so
Speaker 6: you see there's a lot especially after Deep Seek, I
Speaker 6: gave a lot of people in China confidence because they
Speaker 6: now feel like, look, we have an AI solution. Right.
Speaker 6: It may not be the best solution as us, but
Speaker 6: it's a solution that works for us. Right.
Speaker 2: Shrill to have you with listeners, studios, Frankly, thank you
Speaker 2: so much, Thank you.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
Speaker 1: starting at seven am Eastern on Apple Coarclay, and Android
Speaker 1: Auto with the Bloomberg Business app. You can also watch
Speaker 1: us live every weekday on YouTube and always on the
Speaker 1: Bloomberg terminal.
Speaker 2: So I cheated. I looked at Jordan Rochester's research. Okay,
Speaker 2: out of Miszoo. Cheated a second time, I looked at LinkedIn.
Speaker 2: We're at a glorious update out of LinkedIn. Okay, thank
Speaker 2: you Miszoo for letting mister Rochester do that over the weekend.
Speaker 2: LDP in power for seven decades, sort of out the
Speaker 2: door within a goofy parliamentary system. Here to explain strong
Speaker 2: yen in ever stronger? Yeah, I think that means week dollar.
Speaker 2: Jordan Rochester at Missuo frame out the yen move in
Speaker 2: a year from now, Jordan, where can the en be?
Speaker 5: Good morning, everybody.
Speaker 8: Well, look, I think Doddian's gonna be on a one
Speaker 8: thirty five to one thirty eight handle in a year's time.
Speaker 5: That's sort of where we'll be trading.
Speaker 8: And that's predicated Tom on the Bank Japan raising rates
Speaker 8: and that's still on track.
Speaker 2: Does that destabilize Japan in particularly the inflation that caused
Speaker 2: the anger of the voters, particularly on the course staple.
Speaker 8: Rice should bring down goods inflation, so it should be
Speaker 8: benefiting the Japanese consumer. In that way, it'll be dragging
Speaker 8: on the Japanese exporter, so all harm profits. But the
Speaker 8: difficulty for the Bank of Japan tom has been as
Speaker 8: you've kind of mentioned there, rice inflation. Food inflation has
Speaker 8: been one of those things that I've made the boj
Speaker 8: wrong footed.
Speaker 5: For most of this year. We've had CPI prints.
Speaker 8: We've had about seven of them now this year, but
Speaker 8: for four of them they've come in stronger than expected,
Speaker 8: and that's thanks to the food inflation, sushi, rice prices
Speaker 8: and the correlation between a stronger yen usually leads to
Speaker 8: lower inflation for Japan.
Speaker 5: We haven't had that in the past six or seven months.
Speaker 4: So Jordan, is that the reason. I mean, I think
Speaker 4: a lot of folks hearing that the Bank of Japan
Speaker 4: is raising rates seems kind of out of step with
Speaker 4: the rest of the world, where many of the central
Speaker 4: banks are cutting rates, including potentially here the Federal Reserve
Speaker 4: a couple of times here in the US this year.
Speaker 8: Yeah, Japan has completely decorated it south from the global
Speaker 8: monetary cycle. It's quite rare, actually, It's usually all center
Speaker 8: banks go up and down in rates in line with
Speaker 8: whatever the Fed does.
Speaker 5: But Japan's had a.
Speaker 8: Very structural, big shift in its labor market that we
Speaker 8: had a lot of FX depreciation in previous years that
Speaker 8: essentially released the genie from the bottle.
Speaker 5: So inflation is out there.
Speaker 8: Inflation expectations amongst firms and households are higher than what
Speaker 8: they are. And what Japan's long term story has been,
Speaker 8: it's been about demographic decline and a shrinking labor force.
Speaker 8: But what we're seeing now is demand for Japanese labor
Speaker 8: going up. We're seeing record exports of semiconductors in Japan,
Speaker 8: for example, But the labor force has been shrinking, and
Speaker 8: so combine that together you've got stronger wage growth.
Speaker 5: And that's the genie that has been released from the bottle.
Speaker 2: What is the significance? Jordan is a student of this.
Speaker 2: I think a Robbie Feldman over at Morgan Stanley as well. Jordan,
Speaker 2: you are a huge student of this. What's the so
Speaker 2: what for the United States? If we get strong yen
Speaker 2: LDP in the parliamentary system destabilizes, what's the so what
Speaker 2: for someone living in des Moines?
Speaker 5: What a great record?
Speaker 8: So what is one of the ones I've actually bothered
Speaker 8: to learn in terms of what it means for Japan, Tom, what.
Speaker 2: Does it mean from America? From America? Stop des Moines
Speaker 2: is in Iowa? Okay, it's not in order to showgun Okay.
Speaker 2: What's it mean for Iowa?
Speaker 8: Well, it means that Japanese exports are going to become
Speaker 8: less competitive if you have a stronger end, and it
Speaker 8: means that the US car industry will have something of
Speaker 8: a bit of a boon to it. You've also got
Speaker 8: throw on top of the tariffs. Domestic production of US
Speaker 8: cars should go up, so it should you combined, it's
Speaker 8: it's it's what Trump wants.
Speaker 4: Well Jordan, for years, when nobody's talked about Japan until
Speaker 4: just recently, isn't a little inflation or even a modern
Speaker 4: amount of inflation isn't that good for the Japanese economy
Speaker 4: in general?
Speaker 8: If you asked Governor you Wade at the Bank Japan,
Speaker 8: he would probably say yes. But if you ask the
Speaker 8: consumer on the street who's finding that.
Speaker 5: Real wages a weeker, they would disagree. So it depends
Speaker 5: who you ask.
Speaker 8: But from an economic point of view, this is the
Speaker 8: moment we've been waiting for. It's why I start climb
Speaker 8: meetings off by saying how excited I am about Japan.
Speaker 8: There is a structural shift hire and rates. There are
Speaker 8: trades to do, there's money to be made, but there
Speaker 8: are people who are struggling to put money together to
Speaker 8: buy the groceries.
Speaker 5: So you have to think about who you're asking.
Speaker 2: Hugely valuable, Jordan Rochester, thank you so much and really
Speaker 2: appreciate your effort on LinkedIn. Hugely informative how to fick
Speaker 2: a macro strategy from Missuo Jordan Rochester in London and Japan.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
Speaker 1: starting at seven am Eastern on Applecarplay and Android Auto
Speaker 1: with the Bloomberg Business app. You can also listen live
Speaker 1: on Amazon Alexa from our flagship New York station, Just
Speaker 1: say Alexa play Bloomberg eleven thirty There.
Speaker 2: People emailed me yesterday and they said, she's got like
Speaker 2: fourteen minutes worth of newspaper. Should we get right to it?
Speaker 6: Right to it?
Speaker 2: I think we should Lisa Manteo for the Monday newspapers.
Speaker 9: Okay, this is something I noticed, but I wasn't sure
Speaker 9: if it was just me because I'm cheap or.
Speaker 2: Thrifty thrifty fifty fifty.
Speaker 9: As I like to say, Amazon is apparently quietly raising
Speaker 9: its prices. Back in April, it said it would keep
Speaker 9: a lid on them. So the Wall Street Journal they
Speaker 9: looked into some e commerce data. They found that prices
Speaker 9: rose on about twelve hundred of the cheapest household goods,
Speaker 9: even those that are made domestically saw some increases, a
Speaker 9: lot of them Melissa as everyday essentials few examples. So
Speaker 9: this is price changes from January twentieth to about July first.
Speaker 9: The highest price rise was one hundred and thirty six percent.
Speaker 9: It was for this ear rinse for dogs and cats.
Speaker 9: I don't know what that's about, but but it's a
Speaker 9: big price increase. Using eye drops up about seventy three percent.
Speaker 9: Even some say isn't so protein shakes twenty five percent?
Speaker 9: And what small is at Walmart lowered their prices on
Speaker 9: the same items by nearly two percent.
Speaker 2: So why is it tariffs? Is it they just wan
Speaker 2: to make you know, they're trying to make more money, Like.
Speaker 9: The company is saying the products weren't representative of their
Speaker 9: prices overall, so they're kind of addressing it that way.
Speaker 9: But that's what this and that's pretty broad big.
Speaker 4: I mean, that's the question. I mean, to the extense
Speaker 4: the turfs impact prices. I mean, are companies going to
Speaker 4: take it in their margin? Are they going to pass
Speaker 4: on to consumers? To date, it seems like they've been
Speaker 4: taking in their margin. I guess the question for a
Speaker 4: lot of folks is how long will that last?
Speaker 2: Okay? Is it quickly? There's never enough time? But Lisa,
Speaker 2: is Amazon a cardboard box company doing other stuff? Or
Speaker 2: is there a fancy cloud company moving boxes?
Speaker 4: If you're a consumer, it's the retail. If you're an investor,
Speaker 4: it's the cloud next.
Speaker 9: Okay, have you heard of the gen z stare?
Speaker 2: This is driving me?
Speaker 3: Okay, let me give you an example.
Speaker 9: Coffee counter right, and you ask for it and they
Speaker 9: sit there. If you're watching on YouTube and they go
Speaker 9: and they just stare at you, it's this blank stare.
Speaker 9: Sometimes there's long.
Speaker 2: House.
Speaker 9: It does not, but I notice it when I go
Speaker 9: out and I see the kids behind the counter. They
Speaker 9: say it's all the talk on social media, but they
Speaker 9: say they talk to experts at them at about it,
Speaker 9: and they say sometimes silence is the best way to handle.
Speaker 9: But they say the real big thing is that these
Speaker 9: kids grow up on screens. You know, gen Z is
Speaker 9: what thirteen to twenty eight, So they grew up on screens.
Speaker 9: They're used to just staring, So that could be the
Speaker 9: issue behind it. But gen Z says they don't even
Speaker 9: notice they're doing it. They're saying it's overblown, We're not
Speaker 9: doing it, even though their parents are telling them that
Speaker 9: they are doing it.
Speaker 2: I go to Jeffrey Sachs with a great book fifteen
Speaker 2: years ago, and we're fifteen years on from his iconic
Speaker 2: statement on kids fallen behind, and it's just been sped
Speaker 2: up with those technology. I read an entire I read
Speaker 2: ae hundred and fifty page book yesterday. Tiny book, not
Speaker 2: a big deal. How many kids are reading a book
Speaker 2: over a weekend like zero? We used to live on them.
Speaker 9: Yeah, My daughters has her summer reading Project Life.
Speaker 2: Until Brian gotta be there.
Speaker 6: She came home and said, Bruce, who.
Speaker 9: Okay, last time quickly because we touched upon it earlier.
Speaker 9: The cancelation of the late show it's talking about with
Speaker 9: Stephen Colbert is at the end to late night TV,
Speaker 9: so screen time. Bloomberg Lucas's Shaw newsletter said a couple
Speaker 9: of things. First, fewer people are watching. It's the most
Speaker 9: watch of the three major talk shows, but it attracts
Speaker 9: less advertising. And then he gets into the numbers. The
Speaker 9: show costs about one hundred million a year to produce.
Speaker 9: It's on pace to lose more than forty million this
Speaker 9: year an additional fifty million next year. And the reasons
Speaker 9: they say why people are falling off is because a
Speaker 9: lot more people are watching the clips on YouTube or
Speaker 9: Instagram or TikTok. They don't want to watch the whole show,
Speaker 9: you know, short term attentions. Man, They just want the
Speaker 9: nuts and bolts of it. And then trying to get
Speaker 9: a host is hard because comedians can actually earn more
Speaker 9: money doing those you know, those stand up shows that
Speaker 9: they do it.
Speaker 2: James Kimmel's out in the Hamptons with his kids, right,
Speaker 2: You're like, you know, we're waiting for the infie. Yeah, exactly,
Speaker 2: Howard start, you know, hang it out. Lisa Poteo, thank
Speaker 2: you so much for the newspaper. Did your daughter get
Speaker 2: home from the concert? She did.
Speaker 9: I picked her up in the lot, the mom and
Speaker 9: dad lot.
Speaker 2: Lisa Poteo, thank you so much.
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