Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and a Marie Hortern. Join us each
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Speaker 3: Socks rebounding following a rough day on Wall Street, Jim
Speaker 3: Karen of Morgus Stanley Investment Runage Management, writing, we expect
Speaker 3: turbulence in Q four as we gain more clarity on
Speaker 3: what the initial conditions will be for twenty twenty six.
Speaker 3: Jim joins us. Now, Jim, We're always supposed to see turbulence.
Speaker 3: Why have we not seen any turbulence in the face
Speaker 3: of so much doubt? And yet, frankly, AI companies, they'll
Speaker 3: just keep on delivering.
Speaker 1: Good morning and Happy Halloween. So look, I mean the markets.
Speaker 4: I don't think the markets are experiencing the turbulence for
Speaker 4: a lot of the things that you were just discussing
Speaker 4: is that the big leaders the narrowness of this rally
Speaker 4: that we've had, which is a large cap tech are
Speaker 4: printing really strong numbers. Now, those might be just a
Speaker 4: handful of stocks. When we look at the rest of
Speaker 4: the stocks and the S and P five hundred, there
Speaker 4: are some cracks, and it is reflecting some of the
Speaker 4: weakness in the broader economy. I know we haven't gotten
Speaker 4: any of the data yet, but we understand that things
Speaker 4: aren't necessarily accelerating. What we have to recognize is that
Speaker 4: the market is not the economy, and the economy.
Speaker 1: Is not the market.
Speaker 4: So when you think more broadly about the S and
Speaker 4: P five hundred, say the S and P four ninety
Speaker 4: three x the mag seven, what you're really looking at
Speaker 4: is a broader picture also of the economy. So therefore,
Speaker 4: if the economy is moderating at some point, then you're
Speaker 4: likely to see those broader equities also some moderate But
Speaker 4: the dominance of those mag seven is so strong, and
Speaker 4: the earnings and the numbers that they're printing are so
Speaker 4: monstrously strong, it's carrying the rest of the markets. So
Speaker 4: that's why we're not really seeing the turbulence. It really
Speaker 4: just depends where you look. If you look in other
Speaker 4: broader sectors of the markets, you might see some of
Speaker 4: that turbulence. And that's really where we think some of
Speaker 4: the opportunity is going into twenty twenty six.
Speaker 5: Can you build on that?
Speaker 3: Where do you think we're going to see some sort
Speaker 3: of rebound given the fact that some people are speculating
Speaker 3: you can see a growing amount of this pain, given
Speaker 3: the fact that prices are expected to continue to rise,
Speaker 3: albeit not necessarily at the levels that we find twenty
Speaker 3: twenty one in twenty twenty two, and there is this
Speaker 3: feeling that this weakness in the lower income sphere is
Speaker 3: just continuing to build.
Speaker 1: Yeah, so we have to look at the full picture here, right.
Speaker 4: So one of these things goes back to the tax
Speaker 4: package that you know, one big beautiful bill that got
Speaker 4: passed and effectively starting to think about the consumer and
Speaker 4: what stimulus package they're going to get next year in
Speaker 4: the form of bigger tax deductions. That number in terms
Speaker 4: of what the consumer what tax payers are going to
Speaker 4: pay less is somewhere on the order of one hundred
Speaker 4: and sixty one hundred and seventy billion dollars, So that's
Speaker 4: money that's going to be in the pocket of the consumer.
Speaker 4: As we know consumption seventy percent of GDP. That can
Speaker 4: keep consumption relatively robust, even though the labor market picture,
Speaker 4: which is weak right now, it's currently weak right now,
Speaker 4: might start to improve as we move into twenty twenty six.
Speaker 4: Most economists forecasts into twenty twenty six is that we
Speaker 4: will have better economic growth versus twenty twenty five. So
Speaker 4: if you have a growing economy, likely in twenty twenty six,
Speaker 4: and you have enough slack in the labor market at
Speaker 4: this point to keep wages at a reasonable price, than
Speaker 4: the profit margins and the earnings margins from any of
Speaker 4: these companies can stay somewhat afloat. So we have to
Speaker 4: recognize that whether it's accelerated depreciation, all of the various
Speaker 4: things that came out of the tax package, this is
Speaker 4: going to be a tailwind as we move into as
Speaker 4: we move into twenty twenty six.
Speaker 6: And Jim, I know you, and is the old adage
Speaker 6: of many people saying that the stock market is not
Speaker 6: the economy. Is that kind of changing though, because nearly
Speaker 6: half of all household's own equities. It is a record
Speaker 6: exposure from everyday people to this equity market. Have we
Speaker 6: entered a scenario where this time around the put from
Speaker 6: take your pick from the fed from the President has
Speaker 6: gotten all the more important just because of household exposure
Speaker 6: to equities.
Speaker 1: Yeah, so it's a good point, right.
Speaker 4: So the way I think about this is that conditions
Speaker 4: have become increasingly fragile. As this market has moved up,
Speaker 4: people's overall equity exposure has also moved up too, meaning
Speaker 4: that their wealth effect is tied to what's happening in
Speaker 4: the markets. And like any other time in markets, there
Speaker 4: tend to be drawdowns and corrections and things like that,
Speaker 4: and that can have a more of an outsized impact
Speaker 4: on consumer spending in consumer psychology, because as you point
Speaker 4: out that there is an attachment to the markets. But
Speaker 4: that being said, most people, I would hope, when they're
Speaker 4: investing in the markets, have a diversified portfolio that if
Speaker 4: we do see this correction that may happen in the future.
Speaker 4: At some point in the future, I think it's likely
Speaker 4: to happen amongst the leaders currently right now, it's really
Speaker 4: probably a large cap tech correction. Maybe that comes I'm
Speaker 4: not forecasting that, but maybe that comes at some point.
Speaker 4: But if you have a diversified portfolio, I think that
Speaker 4: people's broader portfolios, well diversified portfolios, will hold it better
Speaker 4: than what the actual headline of an equity drawdown might
Speaker 4: actually show.
Speaker 1: So it really gets down to that.
Speaker 4: It's a hard question to answer because I don't know
Speaker 4: how everybody's positioned, but I would expect that most people
Speaker 4: are pretty well diversified.
Speaker 6: A lot of the diversification, though, Jim, this year has
Speaker 6: come in the form of gold, and we've seen incredible
Speaker 6: volatility starting this week out with a three percent decline.
Speaker 5: Is that a concern?
Speaker 6: Is gold a good way to diversify, especially at these
Speaker 6: levels where some serious volatilities being introduced.
Speaker 4: Yeah, look, I mean it's one of these subjects here
Speaker 4: where the price has gone up quite a bit. So
Speaker 4: so anything that you say against that is like, well,
Speaker 4: you've been wrawing in the markets and what we don't
Speaker 4: have a position in gold in our portfolios?
Speaker 7: Do?
Speaker 1: I think it's a reasonable way to diversify.
Speaker 4: Sure, you know, if you have, you know, a longer
Speaker 4: term view and a broader portfolio, absolutely holding some gold
Speaker 4: is always going to be a good idea, But are
Speaker 4: there other things that you could also own too?
Speaker 1: Could you own high quality US treasuries?
Speaker 4: Could you own high quality investment grade bonds? Earn some
Speaker 4: income and at least get some positive carry that should
Speaker 4: be able to preserve capital and preserve income and things
Speaker 4: like that.
Speaker 1: So when I think about a portfolio for people who
Speaker 1: you know.
Speaker 4: Who are broadly investing, they generally need some liquidity that
Speaker 4: and they also want to get some income. So that's
Speaker 4: why we think about the you know, the more of
Speaker 4: the broader equity market, including large captach, but then also
Speaker 4: thinking about other items. But really at the margin gold
Speaker 4: and I think gold has become very speculative at this point,
Speaker 4: and I think people are chasing a lot of those returns.
Speaker 2: Stay with US, MALPLINPEX, Savana's coming up off to this.
Speaker 3: Apple's AAA is getting a boost following a revenue beat
Speaker 3: and an upbeat holiday forecast. Gene Mounster of Deepwater Asset
Speaker 3: Management writing this, I expect Apple to be the best
Speaker 3: performing A mag seven through the end of the year.
Speaker 5: Gene joins US.
Speaker 3: Now Gene Apple best performing.
Speaker 8: Why it's pretty straightforward. There's two big levers. First is
Speaker 8: that iPhone demand for the next three quarters is likely
Speaker 8: going to outpace the street. The street's looking for around
Speaker 8: seven percent. I expect it to be ten percent. That,
Speaker 8: of course, is one of the big focus. That's why
Speaker 8: the stock was moving around after market yesterday. It's all
Speaker 8: about the iPhone. So that piece, and it begs the
Speaker 8: question of why is the iPhone going to be better?
Speaker 8: It's not about AI features, It's less about product features.
Speaker 8: It's more about this massive upgrade pool they had back.
Speaker 9: In twenty twenty one.
Speaker 8: As a reminder, that year, iPhone group thirty nine percent,
Speaker 8: huge growth, and then the subsequent fifteen quarters it basically
Speaker 8: was down a half of percent. And now we're starting
Speaker 8: to reap the benefits of that big cycle. So that's
Speaker 8: one piece is just we're going to see some better
Speaker 8: iPhone numbers and expectations. And the second is that the
Speaker 8: Apple Intelligence bar is just so low coming into the
Speaker 8: new SI next year, and I think that hope springs
Speaker 8: eternal when it comes to investors, and when it comes
Speaker 8: to a feature like Apple Intelligence that I believe is
Speaker 8: going to be the biggest step forward since the iPhone itself.
Speaker 8: I mean, this is a massive potential for them to
Speaker 8: contextualize personal data with some of a digital assistant, and
Speaker 8: you know they've set this high bar out that it's.
Speaker 9: Going to be next year.
Speaker 8: Your own Mark German is seeing that it's going to
Speaker 8: be kind of March March April timeframe, and I think
Speaker 8: that anticipation that's going to be good for the multiple.
Speaker 8: So when you put those two together, I think that
Speaker 8: sales are going to be better because the iPhone upgrade pool.
Speaker 8: And then separately, I think the multiple expands because anticipation
Speaker 8: of what's going to happen with Apple Intelligence gene.
Speaker 3: We were speaking with Dan Ives earlier of what Bush securities,
Speaker 3: and he said that he expects Apple to partner with
Speaker 3: the likes of Google with some sort of a Gemini
Speaker 3: partnership to provide some of the heavy lifting for the
Speaker 3: AI effort.
Speaker 5: Is that something that you're expecting.
Speaker 3: Is that kind of the underpinning of the optimism around
Speaker 3: Apple AI.
Speaker 8: That's part of it, And I think Dan's definitely onto
Speaker 8: something that what's going on with Gemini and just Apple
Speaker 8: working beyond GPT and OpenAI, and what they have told
Speaker 8: us back at WWDC in June is that they are
Speaker 8: open to other helpers, other platforms, other large language models
Speaker 8: and they've specifically pointed out to Gemini. The essential question
Speaker 8: is just how much is this just in terms of
Speaker 8: the menu for developers. Are they going to just allow
Speaker 8: developers to use the Gemini model when they build iOS
Speaker 8: apps or is this something bigger where they really lean
Speaker 8: on Gemini to power this new serie experience. And so
Speaker 8: it is a daunting task to take this personalized data
Speaker 8: and do this contextual build these personalized bots around it,
Speaker 8: and so I expect them to pull from more than
Speaker 8: one more than just opening eye to deliver that. So
Speaker 8: I think he's onto something that One of the other
Speaker 8: big questions around this is what does this mean in
Speaker 8: terms of financially And in the case where they would
Speaker 8: be doing something with Gemini, this is a little bit
Speaker 8: of a different piece where there actually licensing technology from Google.
Speaker 8: It's most likely where Apple would pay Google for that.
Speaker 8: Now they've given guidance to expect some of their CAPEX
Speaker 8: and some expenses around AI to go out modestly next
Speaker 8: year a few billion dollars, which seems like chump change
Speaker 8: when you look at these hundreds of billions of dollars
Speaker 8: that are being spent. So the bottom line is that
Speaker 8: this is a cost if they do end up leveraging
Speaker 8: more around Google, is a cost that Apple can easily
Speaker 8: manage and maintain the margins that investors love so much gain.
Speaker 5: Is there any regulatory risk to that?
Speaker 6: Is this a relationship that regulators would welcome and not challenge.
Speaker 8: I mean, clearly the regulatory piece has been something that
Speaker 8: is concerned investors, that that has been diminishing over time.
Speaker 9: And I think what we.
Speaker 8: Saw with the regulatory around Google and their search deal.
Speaker 8: Of course, this is about a fifth of Apple's or
Speaker 8: earnings come from this Google search placement, and so the
Speaker 8: fact that that kind of went in a good direction
Speaker 8: I think is a sign of a little bit of
Speaker 8: a softening tone on the regulatory side. So I think
Speaker 8: that this piece, you know, this dynamic around Google, it
Speaker 8: largely won't have a regulatory topic. There is a question
Speaker 8: about if Apple does want to do something bigger, if
Speaker 8: they want to acquire somebody like a perplexity, which I
Speaker 8: think would make a ton of sense for them, that
Speaker 8: is something that may be a little bit more of
Speaker 8: a challenge these big tech companies want to get a
Speaker 8: hold of perplexity andthropic But I think that regulatory piece
Speaker 8: is something that's going to make that less likely.
Speaker 6: So, Gene, if a strong iPhone seventeen upgrade cycle allowed
Speaker 6: Apple to play for time when it comes to their
Speaker 6: AI offering, just how much time did it give them?
Speaker 6: How patient are you willing to be to allow Apple
Speaker 6: to figure out and solve the mess that currently is serie.
Speaker 8: I mean, really, the central question for Apple over the
Speaker 8: next two years, three years, maybe even five years of
Speaker 8: how much time investors are going to give them to
Speaker 8: figure this out. So point in time today is that
Speaker 8: the bar is really high because they've set that bar
Speaker 8: high about what the next series is going to look like.
Speaker 8: But if we fast forward into April and let's say
Speaker 8: that it's a disappointment, I think that the stock will
Speaker 8: clearly trade off, but investors are going to give Apple
Speaker 8: more time. Competitively, All that's on the horizon next year
Speaker 8: is this new device that will see for the first
Speaker 8: time from open AI will be available likely in twenty
Speaker 8: twenty seven. But there has been essentially nothing that's happened
Speaker 8: when it comes to consumer hardware AI that has changed
Speaker 8: the competitive field, and so at the end of the day,
Speaker 8: consumers love their Apple devices.
Speaker 9: This resurgence we've seen.
Speaker 8: With the iPhone in the last two quarters, and the
Speaker 8: guidance for December is all about that commitment that Apple
Speaker 8: customers have to the platform that upgrade pool. And so
Speaker 8: the reality is is that these devices just become entrenched
Speaker 8: in our lives just surround us. It's not just the phone,
Speaker 8: and I think that that's going to give them much
Speaker 8: more time. Yes, the stock is going to have some
Speaker 8: variations around how people feel about any given change to
Speaker 8: their AI, but ultimately they're going to Investors will give
Speaker 8: them more time, and most importantly, the consumers will because
Speaker 8: they've made such a big investment into Apple's products over
Speaker 8: the last decade.
Speaker 3: Jane just quickly hear you. So that Apple is going
Speaker 3: to be the biggest gainer through the end of the year.
Speaker 3: Who do you see in the magnificent seven names as
Speaker 3: being the biggest loser?
Speaker 9: I mean, I think that surprising.
Speaker 8: I think Amazon is going to have its surge today,
Speaker 8: but expectations that have shifted higher. I still think that
Speaker 8: they're struggling with their losing share within cloud. Yes, they
Speaker 8: had a good quarter with Aws, but that losing chair
Speaker 8: piece and so it's been a laggard.
Speaker 9: It's getting its stay in the sun today.
Speaker 8: But I think that that's probably going to be towards
Speaker 8: the bottom of the list.
Speaker 2: Stay with US mulblindex Savana's coming up off to this.
Speaker 3: Also some discussion with respect to Nvidia speaking in South
Speaker 3: Korea about potentially restarting Blackwell sales into China. At least
Speaker 3: that is Jensen Hwank's goal going forward.
Speaker 5: Joining US now is at.
Speaker 3: Mills of Raymond James, ed, I just wonder your takeaway
Speaker 3: about how the geopolitical chips are falling after this jijinpaying
Speaker 3: Donald Trump meeting.
Speaker 7: I think they're basically where we would expect them to be,
Speaker 7: which is getting a de escalation, getting delay. But the
Speaker 7: real question now is how long does this last? And
Speaker 7: I don't think there's anyone who thinks that we're going
Speaker 7: to go through the next year or through the term
Speaker 7: of President Trump without kind of some more hiccups.
Speaker 1: This is a roller coaster ride.
Speaker 7: I am sure there's going to be more export controls
Speaker 7: that are going to be kind of suggested by either side,
Speaker 7: But really the big question that we've been getting here
Speaker 7: at Raymond James is how much semiconductors can go into China,
Speaker 7: how much relaxation of some of those tech controls. We've
Speaker 7: talked about that de risking in the last eight years,
Speaker 7: that's been about blocking what China can buy. D risking
Speaker 7: now in DC is making sure that China gets hooked
Speaker 7: on our AI technology so that we don't have the
Speaker 7: risk that China developed something else, and as a competitor globally,
Speaker 7: that's a fundamental change that is going to potentially drive
Speaker 7: a lot of this AI trade even a bit higher
Speaker 7: as we get those kind of de risking sales into
Speaker 7: China that were not expected to.
Speaker 6: Lisa's point ed, the President had said that Blackwell would
Speaker 6: be discussed. Jensen Wong said he hoped he'd be able
Speaker 6: to sell Blackwell back into China, but it appears that
Speaker 6: wasn't on the table during these negotiations. What do you
Speaker 6: make of the fact that that specifically.
Speaker 5: Was left out?
Speaker 7: So Danny, the President said that in Nvidia in China
Speaker 7: are going to have conversations and that he was going
Speaker 7: to let Nvidia be the referee.
Speaker 1: He did say that Blackwell late.
Speaker 7: You know, in Nvidia's ladyship, the Rubin is probably off
Speaker 7: the table, and I think that's appropriate. What we do
Speaker 7: know is that the Trump administration had previously banned the
Speaker 7: age twenty, they banned one of the AMD chips. They've
Speaker 7: reversed those bands. China hasn't purchased that because they want
Speaker 7: to see what else they can get. I do think
Speaker 7: that there is a version of Blackwell that probably can
Speaker 7: be sold into China. I do think that that is
Speaker 7: going to be part of future negotiations. So on a
Speaker 7: scale of one to ten, if I had been hoping
Speaker 7: for a ten, what came out of this is probably
Speaker 7: a six or a seven. And if we can get
Speaker 7: those negotiations ongoing, it can go up from here. But
Speaker 7: the opportunity to possibly relax tech standards versus where we
Speaker 7: are where we've been is a fundamental shift in and
Speaker 7: of itself, which gives optimism for a lot of investors
Speaker 7: that I talked to.
Speaker 5: So notably not a twelve.
Speaker 6: As the President said that the outcome of the meeting
Speaker 6: was ed, what else was it discussed?
Speaker 5: Also?
Speaker 6: TikTok Taiwan trans shipments. What do you make of just
Speaker 6: what was left out of the discussions.
Speaker 7: You know, it is a to our meeting, but that's
Speaker 7: not very long when you kind of have all these
Speaker 7: different negotiations. I think as it relates to TikTok that
Speaker 7: has been moving along, that has had a lot of
Speaker 7: other negotiations. One thing that I've always heard about President
Speaker 7: she is that he likes to go into these meetings
Speaker 7: with things ninety eight ninety nine percent settled. So I
Speaker 7: think what was discussed in the meeting was what what
Speaker 7: Bessen and his Kundter part were able to do the
Speaker 7: week before. There is a desire to have another meeting
Speaker 7: first half of next year, where Trump goes to China,
Speaker 7: maybe she comes to the United States at an appropriate time,
Speaker 7: so there is opportunities to follow up from this on
Speaker 7: rare Earth. Yes, they are going to have this pause,
Speaker 7: but because there's licensing, there's plenty of opportunities for China
Speaker 7: to tighten in certain ways that will get us response.
Speaker 7: So the fact that we have more to discuss at
Speaker 7: later dates and other dates already set to kind of
Speaker 7: have the leaders come together seems fairly appropriate at this point.
Speaker 5: Just really quickly here.
Speaker 3: Do you think they're going to get a completion to
Speaker 3: this government shut down by Thanksgiving so we cannot worry
Speaker 3: about flight de lies?
Speaker 7: I think Thanksgiving, yes, But I think that that's where
Speaker 7: I kind of have been putting the over under. Once
Speaker 7: we get to November twenty first, which is the date
Speaker 7: of the cr that passed the House, the conversation changes
Speaker 7: because it's not that the Senate could just vote to
Speaker 7: turn it on because there's nothing to vote on. I
Speaker 7: do think that there's going to be a conversation today
Speaker 7: and over the next week about nuking the fillerbuster. That's
Speaker 7: what President Trump is put on true social I don't
Speaker 7: think the Senate goes in that direction. I think that's
Speaker 7: about Trump trying to regain negotiating leverage. But because of
Speaker 7: those social media posts, this does go on at least
Speaker 7: another week. As the pressure builds, President Trump is probably
Speaker 7: going to have to be the off ramp. But as
Speaker 7: we get closer to kind of November, you know, kind
Speaker 7: of twenty first, and as we get closer to Thanksgiving,
Speaker 7: that's really I think where this finally comes to a head.
Speaker 7: I think we're at the beginning of the end, but
Speaker 7: unfortunately we're still at the beginning, not the end.
Speaker 2: Stay with us Mold Blindbeck Savannah's coming up off to this.
Speaker 3: Meta defying AI spending gloom with a record break bond sale,
Speaker 3: the social media giants selling thirty billion dollars of bonds
Speaker 3: while drawing.
Speaker 5: Record interest for the debt.
Speaker 3: I think that there were offers of something north of
Speaker 3: one hundred billion dollars. Winnie Caesar of Credit Sites writing this,
Speaker 3: the acceleration in debt financed CAPEX on AI related initiatives
Speaker 3: is weighing on free cash flow and credit metrics. Meta
Speaker 3: could turn free cash flow negative next year as capex
Speaker 3: reaches fifty percent of sales. When he joins US now, Winny,
Speaker 3: great to see you, Thank you so much for being here.
Speaker 5: How much are you getting.
Speaker 3: Concerned about the amount of debt issuance tied to some
Speaker 3: of these big tech companies?
Speaker 10: Hey, good morning, Lisa.
Speaker 11: So we are definitely seeing a shift away from cash
Speaker 11: flow financed investment, equity financed investment back into intentional releveraging
Speaker 11: and some debt financed investment, which is very typical of
Speaker 11: that middle stage of the credit cycle where you start
Speaker 11: to see more m and a more financial engineering as
Speaker 11: bump up and in capax and spending.
Speaker 10: And that does come with some additional.
Speaker 11: Concerns around where valuations are and are they appropriately reflecting
Speaker 11: the potential return on that investment.
Speaker 3: At this point, do you think that investors just throw
Speaker 3: caution to the way and as soon as they see
Speaker 3: the word artificial intelligence in any kind of perspectus.
Speaker 11: Well, I think it's a little bit of a more
Speaker 11: nuance to you than that. I think that people realize
Speaker 11: that AI is going to be a defining trend probably
Speaker 11: for the next five, ten, twenty years. There was definitely
Speaker 11: sustainability and durability there, but there are a lot of
Speaker 11: open questions. Adds to the magnitude of return on investment,
Speaker 11: the timing of that, and I think that people are
Speaker 11: looking at things like metabond deals, which is still a
Speaker 11: pretty high quality issuer, and thinking this seems like a
Speaker 11: reasonablyful place to continue to put cash to work, especially
Speaker 11: because that new bond sale did come with a pretty
Speaker 11: significant new issue concession, which is something that a lot
Speaker 11: of investors have not been getting this year in the
Speaker 11: primary market. So there's that balance of are these valuations
Speaker 11: compensating me for the potential risk in a higher quality company. Now,
Speaker 11: if this is where a single BEE or triple C
Speaker 11: related bond deal, I think that we'd have a very
Speaker 11: different conversation.
Speaker 6: When it's notable though, that the debt being raised isn't
Speaker 6: just in the syndicate market. It's also private credit that's
Speaker 6: been participating in this too. Meta also doing this a
Speaker 6: JV with Blue Owl and PIMCO that leans on Meta's
Speaker 6: credit worthiness without actually impacting Meta credit because it's off
Speaker 6: balance sheet debt?
Speaker 5: Is that concerning?
Speaker 6: Especially with off balance sheet debt and that being used
Speaker 6: as a way to fundraise it seems problematic in some areas.
Speaker 11: Yes, I think that off balance sheet debt is always
Speaker 11: a very appropriate Halloween topic. It gets your spooky senses
Speaker 11: rising a little bit because there is a historic track
Speaker 11: record of off balance sheet debt sometimes going a little
Speaker 11: bit sideways. Now when it comes to the AI investment spend,
Speaker 11: there is just the reality that so much capital is
Speaker 11: being raised and needed to be put to work in
Speaker 11: such a wide variety of initiatives that some sort of
Speaker 11: diversification of financing does make some sense. Now that being said,
Speaker 11: anytime we see off balance sheet we're definitely taking a
Speaker 11: closer look, trying to ensure that we understand kind of
Speaker 11: the stream of cash flows and where the risks.
Speaker 6: Really lie well for things like project finance. In general,
Speaker 6: things happen whennie there's forced masure. There are big events
Speaker 6: that disrupt specially physical plants. Are those types of risks
Speaker 6: fully appreciated by this market.
Speaker 10: Yeah, that's a great point. Project finance can be a
Speaker 10: really challenging.
Speaker 11: Road sometimes, and I think when we look back at
Speaker 11: valuations and where they stand, the reality is corporate credit
Speaker 11: spreads are very very tight. Now, that doesn't mean that
Speaker 11: they necessarily have to widen, but the balance of risks
Speaker 11: does seem to be skewed much more to the widening
Speaker 11: rather than incremental compression or tightening from here on out,
Speaker 11: and that does leave us a little bit more cautious
Speaker 11: just in terms of the direction of travel of spreads
Speaker 11: more broadly, as we have this mix of kind of
Speaker 11: broader macroeconomic risk with what's going on in the consumer complex,
Speaker 11: and then also just capital structure and balance sheet risk
Speaker 11: with how things are being financed, where the capital is flowing,
Speaker 11: and whether that return on investment is going to be
Speaker 11: realized in the relatively near term.
Speaker 5: All of that, and spreads are barely moved. Winnie.
Speaker 6: What would it take to significantly and sustainably wide spreads
Speaker 6: at this point?
Speaker 11: That is the question that every client is asking us,
Speaker 11: and I think that it comes down to some sort
Speaker 11: of acknowledgment that the fundamental picture is perhaps less healthy
Speaker 11: than what people are currently anticipating. Earnings expectations for twenty
Speaker 11: twenty six are pretty lofty.
Speaker 10: The most recent earnings have come in I would.
Speaker 11: Say, relatively well in aggregate, though we have seen some
Speaker 11: signs of pressure in some different sectors. Now, what usually
Speaker 11: changes that technical demand for fixed income is concerns around downgrades,
Speaker 11: around defaults, around the potential recession word. And I do
Speaker 11: think that over the next twelve months there is that
Speaker 11: risk that some of these lofty expectations start to be
Speaker 11: a little bit disappointed. And that's where you start to
Speaker 11: introduce some of the conversations around what is the true
Speaker 11: fundamental trajectory of corporate credit. We've enjoyed a massive ratings
Speaker 11: upgrade cycle. Is that going to start to reverse and
Speaker 11: start to spook investors a little bit.
Speaker 3: I'm looking at a cuddly cockroach costume from Halloween cost
Speaker 3: that looks.
Speaker 5: Like it is definitely going to do the trick.
Speaker 3: When you without government data, I'm just wondering, from your perspective,
Speaker 3: is there any sign whatsoever that we do have that
Speaker 3: downturn that could potentially call people's bluff.
Speaker 11: Yeah, So I think then when we look at the
Speaker 11: composition of economic growth recently, we do realize that so
Speaker 11: much of the momentum in the broader economy and also
Speaker 11: the market has been linked to AI spending, to tax spending,
Speaker 11: to all of those initiatives. When we think about the
Speaker 11: current health of the consumer, it's a little bit more
Speaker 11: of a mixed bag, with the bank saying, hey, we're
Speaker 11: not seeing a lot of signs of pressure here on
Speaker 11: the consumer, and then some of the consumer products companies saying,
Speaker 11: this is the worst consumer sentiment, the worst consumer environment
Speaker 11: that we've seen in a very very long time. Trying
Speaker 11: to reconcile all of those things, I think indicates to
Speaker 11: us that the job market is going to be the
Speaker 11: lynchpin here.
Speaker 10: We've already seen a pretty significant downdraft in the pace
Speaker 10: of job ads.
Speaker 11: Of course, we are flying a little bit blind as
Speaker 11: it relates to official economic data, but there are some
Speaker 11: substitutions there that would generally point to not a super
Speaker 11: encouraging labor market overall, and we're very much focused on
Speaker 11: those announcements.
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