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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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 six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this out with stocks inching lower following a Chip led rally. George Cancarvers of NBFGEN writing, the inconsistencies in various market metrics will be arned out, helping bring back convictions into the fall. George joins us now for more. George, good morning, Good morning. What do you have convictions about this Friday morning?

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Speaker 3: I have convictions that it's Groundhog Day? Every other week. We have a bomb market that always goes to four point five and the ten year five percent. On the thirty year, you get tech stocks kind of rebounding and you get all time highs. But we're kind of just kind of stuck in nowhere. Nowhere's land be.

00:01:09
Speaker 2: Able to range bound four point two percent four point one percent on twos at the front end of the curve. We've seen that quite a few times. But there is an aggressive push from both corporate America and a tech trade worldwide to raise capital in this market. We start the show by talking about the distinction in the equity market in the debt market. Right now, what do you see?

00:01:26
Speaker 3: Yeah, look, I think it's interesting if you actually take from an upside down pyramid perspective, there is some there. There has been dispersion within leverage loans, there's been dispersion within high yield, but IG has been very homogeneous. It's been very very tightly knit. Almost every spread kind of tracks the overall index. You know, if there's gonna be more kind of discerning nature coming from the credit investor world, well we should start seeing inn ig IG is way too tight and there should be some sort of concession given all the capital has get raised.

00:01:53
Speaker 1: So do you think there's any takeaway in some of the spread widening, at least in the new issues in the bond market versus robust demand for some of the equity offerings. Do you think the pendulum is shifting more to the bond investors. Do you think bond investors are getting a little bit more wary about a high yields environment? More broadly, what's your take on that.

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Speaker 3: No, I think your opening remarks were spot on in the sense that, yeah, now you have to kind of pay to play, and so I think that that aspect is going to be with us. But it's been an amazing year so far, a lot of issuance. But in the second half of the year, if there's a lot more capital raising that's needed, I think that yields and spreads are going to have to widen to facilitate.

00:02:28
Speaker 1: When is spread widening the window closing. And this is the distinction that we're having trouble understanding, because at one point it was investors pushing back could potentially curtail some of the spending ambitions.

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Speaker 2: Of big tech.

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Speaker 1: At this point, it's just it's going to cost them a little bit more. Is there a tipping point where suddenly it becomes a constraining factor.

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Speaker 3: I mean, given the sort of estimates for sort of revenue potential, if you pay a next or ten basis points, that's really not going to move the needle. I think it really starts to matter when you have bigger, bigger moves, and it's going to be a function of both bond market volatility as well a spread widening that's going to really maybe not necessarily curtail credit availability, but might kind of close down markets. And that's where you get nervous around the fall wish.

00:03:10
Speaker 2: And now we're picking up on small signals here, getting deeper into the summer, it's still quite snoozy. Two sixty on high yoade spreads, which historically unit lakes a better than most incredibly tight.

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Speaker 1: It's incredibly tight. When you take a look at bond market volatility, it is absolutely nowhere. So when people start saying, well it could get more volatile, it's not getting volatile and any way should perform either in bond or overall stock index level types of metrics. So again, not necessarily screaming warning valves step up.

00:03:35
Speaker 2: Kevin Wash. Does Kevin Wash make things more volatile? The reluctance to communicate to provide forward guidance, Well, I.

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Speaker 3: Do think that, you know, it's kind of refreshing that we're taking the opportunity to kind of slow things down a little bit. I mean, perhaps we've had over communication in some angles, right, and so I think it's good to see kind of a rethink about the communication strategy. I mean, the five Task Force are now fully in motion as an opportunity to kind of rethink what is their appropriate policy, like how to communicate with markets and markets. You know, the bond market's a sophisticated group of individuals. We can discount things too. We don't have to be kind of handhold.

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Speaker 1: At the same time, to the degree that we are hearing anything, it is increasingly hawkish. Even New York FED President John Williams yesterday came out and he has been actually pretty dubbish for the past couple of meetings, and he came out sounding really hawkish, saying that the inflationary problem is not necessarily just tied to oil prices, but AI is his bigger inflationary concern. Are you starting to change your perception of the reaction function in a FED that has no doves left?

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Speaker 3: I'm not sure if it's no doves left. I mean I think people are kind of falling in line. I mean, you heard it even last week at CenTra, and like just the idea that we want to reduce forward guidance is now becoming a theme amongst all central bankers, both here and abroad. I'm not sure if it's rubbish. It's just that we're used to having too much information, so that anything less than that is going to be viewed as hawkish. Maybe they're just kind of us figure things out on our own. Yeah, I'm not you know, thinking that's a signal per se.

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Speaker 2: Say you at the moment, close to four twenty, that is still a decent gap above where policy rates are right now. Max Kenner of HSBC is still quite bullish on equities and overweight risk more generally, and he points out that it will be difficult for this FED to out hawk market expectations. I think that's an important question. How hard will it be for this fed to out hawk what is already in the price?

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Speaker 3: Yeah? Well, the thing is interesting, I mean, what does al hawk mean? When you look at the WRP page on Bloomberg you have the market pricing in one hike and then followed by cuts that to me looks like risk management. Doesn't look like a market that's really that hawk ish. They're just scared of this unknown. Then there may be a risk of a hike. I don't buy it if you have a base case.

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Speaker 2: If you don't buy it, do you.

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Speaker 3: So we think that defends on hold and in fact that they're going to end up coming back to square one, which is that neutral still is somewhere close to three percent, and at the end of the year, this is going to be a big exercise in like just kind of figuring out that we're coming back towards three percent.

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Speaker 1: I want to go back to where John began the show, when he was talking about Japanese bond yields and the fact that you did see a rally into them, and this question around Japan being the big repatriation trade that hasn't happened for about twenty years. This doesn't seem like it is potentially a bazuka later in the year. Should there be true policy efforts to support Japanese investment firms bringing back their investments thesis to their home country.

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Speaker 4: Is there any teeth in this?

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Speaker 3: I mean, look, there are the Japanese, you know, both investment based. A banking system is so integrated with the US economy and so many different levels, it's very difficult to see like a wholesale kind of repatriation. But we all know that it's on the margin that prices are set, and so it really comes down to how much could know how much capital could come back to Japan or is it more function of there's going to be less capital leaving. I think it's more about the capital will stay at home and look for the higher yields within the Japanese bomb market and the Japanese banking, regional banks, the pension system, they could allocate more of their yields more.

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Speaker 2: Do you think markets will achieve that without it being mantateted.

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Speaker 3: I think, you know, at the right price, there's you know, people.

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Speaker 2: Will be close to that right price.

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Speaker 3: I think we're close to that right price, I mean, and that's why we have a pretty decent reaction overnight, just you know, just on one headline and you see the Japanese bomb market favorably moved over ten bases point.

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Speaker 2: If less money's leaving Japan, that means less money is available to buy into some of the issuance in places like Europe that the Japanese have turned up to buy. Where do you think it's vulnerable if you do start to see that turn.

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Speaker 3: Yeah, that's a great point. I mean, I think that the US bon market, left to its own devices, will be fine and we'll be able to find capital. Yeah, I'm more more worried about the smaller markets, even emerging markets that benefited from carry type trades like that's probably would be more at risk.

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Speaker 2: Stay with us more Bloomberg Surveillance coming up after this, Jay Goldberg of Seaport Rights in the following, the entire AI trade is driven by spending from seven companies. So long as they keep spending, semis will see earnings growth. But any hiccup at a stock market gets spooked. Jay joins us. Now for more, Jay welcome. Do you sense any deceleration is spending on the horizon?

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Speaker 4: I don't. I don't now in all fairness, I'm not a hyperscalar analyst, so I don't have the contacts at Meta and Google and Amazon that some others do. But certainly, what I'm seeing from the supply chain and from people in my community locally in the Bay Area, there's no slow down insight.

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Speaker 1: So do you think that Jay, what we've seen in terms of the valuation reset or the sell off in semiconductors is creating an attractive entry point or do you think that ultimately there's something else driving some of this activity.

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Speaker 4: I think your previous guest, Let'sann, had it right. It's a very confusing time. It's a really difficult trading environment right now. If you look at some of the spending plans that are out there, and these are comitted contracts that people are data centers that people are going to build, there's a huge, huge ramp starting next year late twenty seven, early twenty eight, numbers get really really big. The problem is a lot of that is already reflected in the share price, and timing is always a little uncertain, and I think we have a situation where sentiment got a little ahead of fundamentals and that was sort of the correction we saw this month or last month. I mean the way I sort of think about it, There are stocks in my sector which could double or triple from here. The numbers are that big. The problem is they could all trade down fifty sixty percent before we get there, so's a it's a difficult trading environment. Jay.

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Speaker 1: It seems like a difficult moment, especially considering that a lot of people are increasingly skeptical, and yet the market can continue rallying for longer than they can remain skeptical. As someone who does have a cell rating on Nvidia and Qualcomm, and as someone who has been more bearish in some of the trades, how difficult hasn't been to remain bearish given sort of the freight train that seems to to be recycling back in every time anybody sees any.

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Speaker 4: Kind of dep It's tricky. I'm not universally bearish, right. I am picking my targets here. I have buys on a m D and Intel. I think both of them have pretty strong prospects next year. Intel is fundamentally rerating. It's a company we'd left for dead two years ago and has a new CEO and a new lease on life. And as you know, if you look at Nvidia, it was the it's the lowest performing, the worst performing stock in the Socks Index this year today. So I've been saying all along in Vidia is going to underperform because we have a really good sense of where that company is selling, what their prospects look like. That's the most scrutinized company on the planet right now. I think that what we've seen this year is people have been looking towards other sort of less appreciated corners of the industry that are benefiting from this just as much.

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Speaker 2: Well, so you have been pound of that story as well. Jay, Just to jump in, they've now got a listing care ideas. How do you think about that in terms of competition for capital in the sector with other names listed here.

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Speaker 4: It's I think it's a big it's a big and growing issue in the industry. Thirty percent of the of that AI capex this year was going is going to go to memory. It's going to be forty to fifty percent next year. You know, we're talking about a trillion dollars of cappex and a very large portion of that is going to memory. It's it's a it's a phenomenal time to be a memory company right now. Would you say it's the peak, I'm no. I think I don't think we get into supplied demand equilibrium from memory until twenty seven or twenty eight. I you know, calling memory stocks is very very difficult. They're very very cyclical. I think there's still a lot of room for the for the fundamentals for the earnings to go up. How they gets reflecting the share price is difficult.

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Speaker 2: That's the key phrase, Jays, you said it. You just said it. They're still very, very sick the code. Some people don't believe that. They believe the story is changed. Why do you believe that's still the case?

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Speaker 4: Every bubble, somebody says this time is different. Look, there's obviously huge, huge demand for memory. But at the same time, the memory makers are expanding very heavily. Right Micron is building five plants, five fabs right now. Uh Heynex is raising a lot of money at his IPO. They're gonna they're gonna a plow that back into building more capacity Samsung and that's the massive investment plan a few weeks ago. So this this is how these cycles work. There's there is lots of demand, they build, they spend a lot on CAPEX to catch up. I think the only thing that's different here is they have a lot of customers paying for it upfront, paying cash up front, and that levels it out a little bit. But there's a lot of capacity that's going to be coming online in twenty eight, twenty nine, we'll see, we'll see what memory looks like. Then stay with us.

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Speaker 2: Multile Inpex Savana's coming up. Off to this.

00:12:58
Speaker 4: This on some as a child.

00:12:59
Speaker 2: Swap right to the following stay and get with ai theme by avoiding crowded direct plays and leaning into less crowded derivative plays. Lizen joins us now for more, liz An, welcome. I just want to take you from the stuff from the tub, and I want to pick up on something I heard you say earlier this week that, unlike what we saw more than twenty five years ago in the dot com bubble, that this time the bubble might be in the earnings and not the price. And can you flesh that out for us how different things now versus then?

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Speaker 5: Yeah, and thanks thanks for having me. I think maybe not the earnings where we stand right now, but the earnings expectation is I think where there could be a bubble, and I think we got a little bit of a flavor of that with the recent Samsung report that pretty nicely beat the cell side estimate. That's the consensus that analysts publish, but there's also a byside estimate out there, and that's not something published. It represents maybe the we whisper number or the hyped up number.

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Speaker 3: And the high bar.

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Speaker 5: And we saw what happened to the stock that is one of the things I'm paying close attention to during earning season is whether that cell side versus byside estimate has a very widespread and what's the sensitivity in terms of the market reaction. I think it probably continues to fuel these rapid fire rotations that just have become the name of the game in this kind of market.

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Speaker 3: Do you expect that.

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Speaker 2: To be a recurring theme across s earning season or just in select industry groups.

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Speaker 5: I think probably select industry groups. I think in those higher beta segments like tech and com services, anything AI related, I think you have that wider spread between the cell side and the buyside, but we're seeing just a huge increase in dispersion. I think Kevin shared a chart with you guys this morning that shows a record spread between a relatively subdued VIX and that dispersion you're seeing it. In terms of the retail trading cohort, the turnover has never been higher. They're a little less active in individual stocks and more on the thematic side of things as well as ETFs. But the dynamics of how the market is trading, who the players are, and the way they're attacking this has also shifted quite a bit, and it's just a different backdrop than what might be defined as a normal sort of earning season backdrop.

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Speaker 1: Is it healthy? I think that that's what a lot of people are wondering. Or does it signal lasan the potentially you could see some sort of crack if there is this incredible turn under the surface and specific name volatility.

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Speaker 5: You know, the churn is not necessarily detrimental because it can lend support when you get some of the leadership names pulling back. You know, when we saw the big bout in many cases ongoing bout of underperformance by a cohort like the mag seven, you saw a lift in other segments of the market, in industrials, in healthcare at times, and enough underlying strength amid this rotation not to mention the intra sector intra into rotation. So I think the base case is probably a continuation of this type of a backdrop where you don't see an aggregate wash down on the part of the indexes, but a lot of churn under the surface. An example is a nasdac's up thirteen percent year to date. The average member maximum drawn down within the Nasdaq heere to date is negative forty percent, So that's a sort of the poster child for that type of activity.

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Speaker 1: Perhaps a bigger question for a lot of people is when this signals and exhaustion in some of the tech names and potentially that rotation that we saw try to assert itself before the reignition of the conflict over in the Middle East. How much do you see that as a path of travel in the last six months of this year, the idea that people will go into other names expecting them to benefit from AI efficiencies and other types of growth and maybe fade what we're seeing in some of the tech names.

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Speaker 5: Yeah, first of all, I do think it's a tricky trading environment, and at least our message that we impart to our thirteen trillion dollars worth of individual investors is to not necessarily think that the only way to perform well at a market like this is to try to get ahead of these really short term rotations. There's so much short attention span money in the market, and maybe it's a little more boring to talk about or to think about, but I think the diversification story is more powerful than it's ever been, particularly within asset classes, it even within sectors. But then consider portfolio or volatility based rebalancing. A lot of rebalancing gets done based on the calendar might be quarterly, it might be annually. Move away from that calendar based rebalancing and take advantage of these rapid fire rotations by adding low and trimming high a bit more frequently and staying geared that way as opposed to trying to get ahead of some of these short term training.

00:17:55
Speaker 2: Liss and I want to pick up on something you've noted. We often talk about these short term tactical rotations shifts in the market, and we point to small caps. Small caps will have its moment. To your point, small caps has been having its moment for quite some time now. What's been driving those gains?

00:18:10
Speaker 5: So you know there's been different forces driving small caps And you're right, John, it's been the trailing two year period that Russell two thousand is pretty handily outperforming the S and P five hundred, So this is not some new story a couple of years ago. I think the impetus for the initiation of that outperformance was a move by the FED toward easier monetary policy. Of course, we've had fits and starts with that. Almost two years ago the FED and barked one an easy campaign. After three cuts that included a fifty, they had to pull back because the economy accelerated again. Same thing happened last year when the fedembarked, but then you had the much more sticky inflation problem driving that. And I think now the story is one about opportunity in that let me look beyond just the megacap AI plays and look for opportunity, and you're finding it a their areas like healthcare and like biotech and smaller names. But what I would say about the small cap space is last year was a year where the non profitable components of the Russell two thousand had double the performance of the profitable components. It was up twenty percent versus up ten percent. That is starting to shift this year, and you're seeing this convergence where you where you have a little better performance on the part of the profitable. So that's the way I look at the small caps. I would sort of lean into the profitable side, the higher quality, the high interest coverage and strong cash flows, and fade the nonprofitable, lower quality segment.

00:19:38
Speaker 2: This is the Bloomberg Surveillance podcast, bringing you the best in markets economics, antient Politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.