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 Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. 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 6 to 9 a.m. 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. Stocks mixed as yields push higher. Barbara Reinhardt for you. writing, if current bond yields posed a serious threat to economic growth and corporate profits, equities should be screaming danger. They aren't. Barbara Joy, just now for more. Barbara, good morning. 00:00:49 Speaker 1: Good morning. 00:00:49 Speaker 2: How bullish are you into your end? 00:00:51 Speaker 3: Look, you're only 1% off the August 13th highs for the S & P 500. You've got very solid earnings growth. You don't have PE multiple expansion. The economy is not falling into recession. There's reasons to stay bullish on equities. 00:01:05 Speaker 2: What kind of earnings growth do you need to put up in the next few quarters to keep that view? 00:01:09 Speaker 3: Yeah, look, I mean, you've got earnings growth. As long as you have 12-month forward earnings growth that's positive, you're in relatively good shape. 00:01:15 Speaker 2: That's sufficient. 00:01:16 Speaker 3: That's exactly, that is sufficient. The rate of change, of course, starts to matter. And if the rate of change starts to decelerate at a pretty significant pace, then you've got a much bigger problem on your hands. But you've got solid earnings growth, you've got solid labor market growth, you've got all the things that are kind of generally good for equity markets. However, there is the thesis of you're at a very dangerous part of the year. September and October are generally weak seasonal parts of the equity market. 00:01:45 Speaker 1: You've got the midterm elections, you've got the Fed. 00:01:48 Speaker 3: So there are certainly reasons over the near term to be a little bit concerned. But I would say the broader overall picture for us over the next six to 12 months is positive. 00:01:57 Speaker 4: Does it give you more confidence that this U.S. equity market has seemed shockproof? Or does it give you pause that maybe people have gotten overly complacent and levered up in places that haven't been tested? 00:02:08 Speaker 3: Lisa, we always worry about complacency, but our short-term sentiment indicators have had some of the air taken out of them, which is relatively good news. And if you take a look at the global markets, they're actually behaving really well as well. So you take a look at kind of the technical indicators on 85% of the broader global equity markets are in relatively good shape. 00:02:29 Speaker 1: That's good news. 00:02:30 Speaker 4: How much is this ultimately completely predicated on the idea that AI companies can keep raising capital? 00:02:35 Speaker 3: There's always that thesis that's underneath it, right? If the AI companies cannot raise capital, if the capital market's suddenly closed to them, you're in a much different dynamic. But that doesn't seem to be the case at this point, right? You have two big IPOs still coming to the market. We do worry about equity supply and equity demand. Equity demand is very strong, but it's also being met with very big supply. We had a similar dynamic in 2004. 2014 and 2015. Then you came into the China currency deval in 2016, and you had an equity bear market associated with it. You know, you are predicated on somewhat of a very fine definition between those two. If equity supply starts to swamp demand, that's a bigger issue. But we don't see that dynamic at this time. 00:03:18 Speaker 5: Do you think the political pushback, though, on AI is actually going to start hurting the trade at some point? 00:03:21 Speaker 3: Boy, you cannot see anywhere where you see data centers are having a very big kind of, you know, protest from the people that live in those communities. And it's certainly understandable as well. That will be an issue that I think has to probably be worked out. And I think you need to have somewhat of a reset, honestly, from technology having a little bit more of a positive view from the consumers that use it and saying, I don't want AI in my backyard. 00:03:47 Speaker 1: You mean how executives are speaking to the electorate? 00:03:49 Speaker 3: I think how executives, and I think also really kind of the underlying ground swell also from the communities that have data centers put in them as well. 00:03:58 Speaker 2: Is that what makes that trade difficult over the next few months? Does that start to matter? 00:04:02 Speaker 3: Well, it certainly, I mean, look, according to The Economist magazine, it would tell you it certainly does, right? And you do have a significant delay in getting all the parts and equipment that are going into building out the data centers as well. So that's automatically kind of a slowdown in the data center buildup. You do have to think longer term about how to make these data centers more efficient in terms of their consumption of water and consumption of energy. I do believe that will be figured out at some point, but it is a near-term headwind for sure. 00:04:29 Speaker 2: The risk of offending people in the media industry is the economist, the contraindicator. 00:04:33 Speaker 1: It certainly is, certainly from their cover on the dollar. 00:04:35 Speaker 2: Has been in the past, right? 00:04:37 Speaker 1: But they had a great article on it just this weekend. 00:04:38 Speaker 2: When you start to see things like that, it gets your attention, doesn't it? 00:04:42 Speaker 1: It certainly does. 00:04:43 Speaker 3: And look, I think also the other piece that you have to think about is you've got a very important and the midterm election is going to be a big issue, right? And while the markets generally don't pay attention until after Labor Day, it certainly could cause some indigestion in the equity markets. And we're very mindful of that. 00:05:00 Speaker 4: Not to get into some of the science fiction that we devolve into in breaks, but there is this fear of some of this technology moving too quickly. 00:05:08 Speaker 1: And these two big names. 00:05:09 Speaker 4: Anthropic and OpenAI, have both voluntarily restricted the release of certain models for fear of what it could do. We're talking about the GPT-6 Astra model and the Mythos model coming from OpenAI and Anthropic, respectively. At what point do you think that could potentially be a real problem given some of the security concerns coming from autonomously directed agents that are hacking into different things? 00:05:37 Speaker 3: I know they're getting out of their box all by themselves. It certainly is a concern, but I think that's really a call for better regulation, which I think is something that's always a concern. We have a new technology that is out, and I think that that probably will maybe slow some of the productivity that you see from AI. But the fact is, it's on everyone's phone. It's on their laptops. It's in their workstations. And a lot of people are using it. And a lot of actual corporate workers are using it as well. And it is giving you some type of productivity lift. You may not see it in the data for a couple of years, but it's making everyone's lives a lot easier. 00:06:16 Speaker 2: Stay with us. More Bloomberg Surveillance coming up after this. The AI build-out becoming an increasingly difficult political issue across the U.S. as local opposition ramps up the big effort to block new data centers. Gil Luria of D.A. Davidson writes, as data center pushback grows, the land power and shell constraints are likely to grow too. And it's an important factor for more longer-term AI chip demand. Gil joined us now for more. Gil, welcome. Is this becoming a headwind already to growth? 00:06:54 Speaker 6: I think what it's doing is that it's managing the cycle. It's actually preventing the investment from getting out of control. I think a good data point we got was from Jensen Wong that said that he expects to grow 70% next year, but demand would actually justify far better growth, far higher growth. So let's say he could have doubled next year. And that gap... is the limits on data center construction. It's the pushback at the local and national level, not to mention all the bottlenecks around it. So because we're afraid of the data center development, we're actually slowing down the rate that otherwise this would have grown. Anthropic is willing to pay 25 million a gigawatt right now because they're generating more than 50 million a gigawatt. So that means they buy far more compute if it was available than But because of all of the constraints, because of the bubble talk, we're actually not building data centers as fast as the demand would justify. 00:07:53 Speaker 2: So, Gil, do you see it as a welcome regulator to make sure there isn't a sloppy build-out? 00:07:59 Speaker 6: Yes, I think that the good way to prevent a bubble from happening is by talking about a bubble. And everybody these days wants to predict a bubble. 00:08:07 Speaker 7: Everybody wants to be. 00:08:08 Speaker 6: The next Michael Burry from the big short, including Michael Burry. And that's helping create higher CDS rates. It's creating more a tempered market for lending. And it's creating this pushback. So, yes, it's helping manage the cycle, which should extend the cycle, which is a good thing. It should prevent it from going too fast right now, but maybe extend the cycle so we have a little bit of a healthier build out with more thoughtful approach to it. Let's not forget part of what let me restate what the president said in a little bit of a nicer way. 00:08:43 Speaker 7: What he's saying is, look, if somebody. 00:08:45 Speaker 6: Wants to build a $ 50 billion data center in your backyard, your choices aren't yes or no. Your choice is to go to the builder of the data center and say, hey, you know what? If you're willing to spend that much, build me a new school, repave all my roads, and no tax breaks, and please install clean energy to fuel that data center so there's no noise and pollution. 00:09:10 Speaker 7: That's the real choice. 00:09:12 Speaker 6: And I think municipalities and localities are starting to realize that. So again, it's slowing the build out of the data center in a good way, in a way that can build better, cleaner, less polluting data centers, extending the cycle. 00:09:28 Speaker 1: Gil, that was going to be my question. 00:09:30 Speaker 5: How much is it going to cost, do you think, some of these energy companies in terms of what they need to be willing to give back, the subsidies they need to be willing to give back to these communities? 00:09:40 Speaker 6: Yeah, so if you're building a data center and you're trying to connect to the grid, that's really hard. And if you do and increase the demand on the grid, you're going to have to subsidize rate payers, which is expensive. Which is why most of the data centers, many of the data centers right now, are actually building the energy infrastructure based. 00:10:00 Speaker 2: The meter. 00:10:01 Speaker 6: So they're building their own energy infrastructure through either turbines or reciprocal engines or bloom energy servers. in order or solar and in the future other types of clean energy. So they don't have to subsidize ratepayers, so they control their own energy. That's creating a new bottleneck around the supply of energy and around the supply of turbines and turbine blades and rotors and bloom energy units and those things that and the natural gas eventually will become a bottleneck too over the next few years. So it's straining the system. But again, when you're building a $ 50 billion data center, you're willing to pay through some of these bottlenecks to make that happen because you're going to be able to get a two, three-year return on that data center right now, which is a very good payback for these companies building these data centers, especially the largest ones, Amazon, Microsoft, Google. 00:11:00 Speaker 4: Just quickly here, Gil, which of those hyperscalers are doing the best job building this out in a way with enough handouts to communities to make it palatable? 00:11:09 Speaker 6: I think Meta has actually been a good case study for instead of waiting for a community to push back, they're proactively going to these communities and offering them these types of concessions and subsidies to the communities in order to. 00:11:24 Speaker 7: Make it palatable. 00:11:25 Speaker 6: But they're all very proficient in building data centers. Let's not forget Microsoft, Amazon, Google have been building data centers for 10, 15 years already. They know how to deal with communities. They know how to make it worthwhile for that community to take their data center and help build the community in a healthy way. 00:11:43 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Stephen Stanley of Santander writing, growth remains resilient. Inflation remains well above target. The Fed It's likely headed towards a September rate hike. Stephen joins us now for more. Stephen, good morning. 00:12:04 Speaker 7: Good morning. 00:12:05 Speaker 2: Put my phone back down and have some good manners around this table. Good to see you. Let's talk about the kind of number that converts the holdouts. I think that Anne-Marie asked the question a number of weeks ago that was the right question. What pushes the doves across the line... to join the dissenters from last time around. What does that number look like? 00:12:21 Speaker 8: So, as I see it, the burden of proof is kind of the other way at this point, given Warsh's message at Jackson Hole. And I think the reason I say that, what's changed from the July meeting to now is we got another month of inflation data. And it was the June inflation data that I think pushed the committee to stay on hold again in July, right? 00:12:44 Speaker 7: We got a very low inflation. 00:12:45 Speaker 8: Number in June, And the question was, is this the beginning of something or is it a one-off? Well, the July number suggested it was a one-off. And so, I think we're back to inflation doesn't seem to be making much progress, which is the message that Warsh gave us at Jackson Hole. 00:13:01 Speaker 2: Can I jump in? It's not the message we got from Williams and Waller. 00:13:04 Speaker 7: Not everybody's on board. 00:13:05 Speaker 2: Does that matter? 00:13:07 Speaker 8: I think we might very well see dovish descents if the Fed hikes next week. 00:13:13 Speaker 7: So, you know. 00:13:14 Speaker 4: So dovish descents and potentially hawkish descents if some people think that the. 00:13:18 Speaker 1: Fed needs to go further. 00:13:20 Speaker 8: I don't know that anybody's going to push for a 50 basis point move. 00:13:24 Speaker 7: I don't know. Maybe there's one. 00:13:26 Speaker 8: But I think most everybody on the hawkish side would be content with the 25 basis point move with the potential of further hikes down the road. 00:13:36 Speaker 1: Here's the issue. 00:13:36 Speaker 4: And the reason why I ask, I don't think that anyone's expecting a 50 basis point rate hike. Nonetheless, there is this discussion around what would actually make a difference for this market. 00:13:44 Speaker 2: And for expectations. 00:13:45 Speaker 4: And ultimately, what we've heard from Jim Caron and for others is that two 25 basis point rate hikes won't materially shift the needle when it comes to risk appetite in this market. How much is the sort of risk management way of doing things, just hiking by a couple of times and then being done. And ultimately, they accomplished what they can with signaling without having actually torpedoed anything in the underlying economy. 00:14:09 Speaker 7: Yeah, this is the modern Fed. 00:14:11 Speaker 8: So the old way of doing things was you just jacked up rates until you broke something, right? And then eventually you'd have a recession and then they would come down and it was just. 00:14:20 Speaker 7: Back and forth. The more modern. 00:14:24 Speaker 8: monetary policy received wisdom is you get to where you want to be relative to neutral and then you just stay there for as long as it takes. And the Fed wants to be modestly restrictive. 00:14:35 Speaker 7: And I think where we are today versus where we were. 00:14:38 Speaker 8: Let's say nine months ago, the Fed thought they were modestly restrictive when they stopped easing late last year. And that if they just left it there, the economy would eventually cool down and inflation would come off. And I think what we've learned from then to now is that the current policy stance probably isn't restrictive. Warsh made that point specifically at Jackson Hole. So I think in a way, what you should think about if we're going to move 50 basis points is we're just moving the goalpost. 00:15:06 Speaker 7: We're just getting. 00:15:07 Speaker 8: Back to where we thought we were at the beginning of the year, which is somewhere modestly restrictive, not excessively restrictive, but enough restrictive that if you leave it there for long enough, eventually the economy will cool off a bit. 00:15:22 Speaker 1: Stephen, how do you think this is going to go in terms of sequencing? 00:15:26 Speaker 5: If the Fed does hike interest rates next week, what is going to be the reaction from this White House? And how does that make the Fed potentially have those questions once again about an independent Federal Reserve? 00:15:36 Speaker 7: Yeah. 00:15:37 Speaker 8: I mean, clearly, based on the rhetoric from the president, he's not going to be happy if the Fed hikes. 00:15:43 Speaker 7: So I think it'll be very interesting. 00:15:45 Speaker 8: I always assumed that the relationship between the White House and Chairman Warsh would be better than the relationship was between the White House and Chairman Powell, partly because Warsh and Trump have some degree of a relationship. And I thought that Warsh would probably get a bit of a honeymoon period. We'll see if that honeymoon period ends next Wednesday. 00:16:07 Speaker 2: Can we discuss the relationship between Walsh and the rest of the committee? When I asked you whether the opinions, the views of Waller and Williams might matter, you said, well, there might be some dissent. And I sat here thinking that would have been remarkable to see the New York Fed president and a Fed governor dissent on a decision that might mean they're on the other side of the Fed chair. Traditionally, we think of a Fed chair, the vice chair, who's now Jefferson, together with the New York Fed president as being the core of the committee, acting as one. What's the core of this committee with Fed Chair Kevin Walsh? 00:16:38 Speaker 7: Yeah, that's a great question. 00:16:40 Speaker 8: And I think, to your point, The chemistry of this committee is very different, and I think that's something that Warsh is intentional about. He said, I want to see more dissents. I want to have a more vibrant discussion. 00:16:54 Speaker 2: Intentional, just dealing with reality, that that's what he's inherited. 00:16:57 Speaker 8: I think that I would say that Williams is probably not part of the core. I view him as kind of part of the old guard, right? And Warsh is this new guy that's coming in trying to shake things up. Waller doesn't seem to be on the same page as Warsh. I don't know if there's any residual There from the fact that the two of them were kind of two of the main candidates to get the job. But he doesn't say I guess the bottom line here is. there's a question as to how many votes the chairman brings along. Traditionally, if the chairman pushes in a certain direction, everyone that doesn't feel super strong about it is willing to go along. 00:17:36 Speaker 7: And we'll see. I mean, that might still be the case, but maybe not. 00:17:40 Speaker 2: These dynamics matter, and they're not well understood right now. Stephen Stanley there of Santander. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. 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