Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Welcome to the Daybreak
Speaker 1: Asia Podcast. I'm Doug Krisner. The tone in markets this
Speaker 1: morning is very much risk off ahead of those new
Speaker 1: US tariffs. Reciprocal levies are set to be unveiled on Wednesday,
Speaker 1: and in a moment we'll get some perspective from the
Speaker 1: US side from James Abat at Center Asset Management. But
Speaker 1: we begin in Asia where many industries are especially vulnerable
Speaker 1: to those new US tariffs, among them the chip makers.
Speaker 1: You know, this group is already struggling given signs of
Speaker 1: slower data center growth, and it puts a company like
Speaker 1: Taiwan Semi in a very tight spot. Nearly seventy percent
Speaker 1: of the company's revenue comes from the US, and TSMC
Speaker 1: is obviously not alone. Consider Apple for a moment. It
Speaker 1: is still unclear whether Apple will be exempt from these
Speaker 1: new US tariffs. The story on Apple is certainly complicated
Speaker 1: by the fact that the company he's got a very
Speaker 1: close relationship with China. Apple supply chains seem to be
Speaker 1: woven right into the Chinese economy. Let's take a closer
Speaker 1: look now at the Apple situation with Bloomberg opinion columnist
Speaker 1: Katherine Thorbek, who's joining from our studios in Tokyo. Catherine,
Speaker 1: thank you so much for making time to join us.
Speaker 1: Can we begin with you giving me a sense of
Speaker 1: the degree to which Apple is entangled in China right now?
Speaker 2: Right, so, we just saw Tim Cook in China last
Speaker 2: week for his first visit to the country of the year.
Speaker 2: And you know, we've really seen over the years over
Speaker 2: Tim Cook's tenure, really Apple just becomes sort of more
Speaker 2: and more entangled in China, and at this point it
Speaker 2: would be very, very difficult for Apple to sort of
Speaker 2: unentangle its supply chains from China. But it's also one
Speaker 2: of the rare US companies that's also very reliant on
Speaker 2: Chinese consumers. You know, it does have a big presence
Speaker 2: in China. So it's a very very difficult task for
Speaker 2: Cook right now. As you mentioned, it's not immediately clear
Speaker 2: if he'll be able to get out of tears this
Speaker 2: time around the same way he did during Trump's first term.
Speaker 2: And at this point we really don't know, and I
Speaker 2: wouldn't be surprised if he doesn't actually get an exemption
Speaker 2: this time, but we will have to see.
Speaker 1: I remember, during the first Trump administration the trade war
Speaker 1: with China, when Chinese consumers were favoring domestic smartphone brands
Speaker 1: out of a sense of let's call it nationalism, And
Speaker 1: it seems like the Chinese smartphone industry now is in
Speaker 1: a much stronger position to compete with Apple. Is that fair?
Speaker 2: That's right, Doug. And you know Tim Cook has said himself,
Speaker 2: the Chinese market is the most competitive market in the world.
Speaker 2: And you know, one thing that's really a disadvantage for
Speaker 2: Apple right now is that they still haven't brought their
Speaker 2: Apple Intelligence features to the latest iPhone to the China market.
Speaker 2: And Chinese you know, consumer interest in personal AI features
Speaker 2: personal artificial intelligence is very, very high. So this has
Speaker 2: been a real stumbling point for Tim Cook. And you know,
Speaker 2: we saw in the December quarter iPhone sales in China
Speaker 2: actually fell eighteen percent, which is quite a dramatic drop. So,
Speaker 2: you know, Cook was just in China and we've really
Speaker 2: seen him, you know, trying very hard to sort of
Speaker 2: appeal directly to Chinese consumers and sort of build up enthusiasm.
Speaker 2: But he really needs to find a way to bring
Speaker 2: this Apple intelligence to the China market. So he has
Speaker 2: made some headway. You know he is working with Ali Baba,
Speaker 2: which has sort of become an AI darling in China
Speaker 2: and bay Do as well, but it still hasn't rolled out,
Speaker 2: and I think that's really sort of holding back iPhone
Speaker 2: sales at a very very critical time for Apple right
Speaker 2: now in China.
Speaker 1: What are some of the big smartphone brands in China.
Speaker 1: I'm thinking Huawei as one that really represent the greatest
Speaker 1: threat to Apple in that market.
Speaker 2: Yeah, and so we did see a sort of hangover
Speaker 2: from some of the anti American sentiments was Huawei was
Speaker 2: really sort of propped up by Beijing, and Huawei has
Speaker 2: really sort of come back stronger than ever. Huawei has
Speaker 2: definitely become a very big threat in the premium smartphone
Speaker 2: segment in China. There's also Shaomi, but yes, there's just
Speaker 2: been the rise of so many domestic brands, and many
Speaker 2: of them are already offering AI features on their smartphones,
Speaker 2: and so you know, consumers now in China are sort
Speaker 2: of going for those models over Apple right now.
Speaker 1: You and I have spoken in the past about the
Speaker 1: Deep Seek moment. It seems like that only that was
Speaker 1: the spark that started a lot of this in terms
Speaker 1: of attracting interest and generating capital flow. Are there many
Speaker 1: more companies now playing in that same space and at
Speaker 1: the end of the day becoming a competitor to deep Seek.
Speaker 2: Yes, the deep Seek excitement has absolutely lit a fire
Speaker 2: on the Chinese AI sector. And we did see Tim
Speaker 2: Cook visit sort of the home base of this which
Speaker 2: is Hung Joe, which is where deep seek was founded,
Speaker 2: and he visited the university where deep Sek's founder went to.
Speaker 2: He praised deep Seek on his trip, and he sort
Speaker 2: of met with some of the young developers, some of
Speaker 2: the what he called the next generation of developers, and
Speaker 2: announced a new sort of donation to this Chinese developer's fund.
Speaker 2: And I really think it's going to take sort of
Speaker 2: the enthusiasm of these Chinese programmers and of these you know,
Speaker 2: young Chinese minds to build consumer products for the AI iPhone.
Speaker 2: I think that's what it's going to take to really
Speaker 2: sell the iPhone in China at this point.
Speaker 1: But when you look at the attempts that the Chinese
Speaker 1: government has made to try to really address the vibrancy
Speaker 1: of this kind of entrepreneurial mindset in technology, particularly artificial intelligence,
Speaker 1: it seems like Apple has a very very difficult challenge ahead,
Speaker 1: right because there's so much pressure kind of coming from
Speaker 1: the government to focus on domestic technology companies.
Speaker 2: Absolutely, you know, I think Tim Cook is in a
Speaker 2: very very difficult spot right now, and we're seeing it
Speaker 2: a little bit from both sides. Both sides. You know,
Speaker 2: there's the obviously tariff threat coming from the US, and
Speaker 2: then on the Chinese side, you know, there's you know,
Speaker 2: been a sort of a rise in anti American sentiment
Speaker 2: and so many domestic consumers, so many domestic competitors is
Speaker 2: sort of taking off. So I think it's you know,
Speaker 2: going to be sort of the biggest tests yet for
Speaker 2: Cook in his tenure. So I think, you know, as
Speaker 2: we've sort of spoken about, is AI is huge, and
Speaker 2: we've actually seen Apple Intelligence. The rollout of Apple Intelligence
Speaker 2: outside of China, you know, in the US has been
Speaker 2: a little bit underwhelming. I think this month, you know,
Speaker 2: even some of the most long standing Apple supporters have
Speaker 2: sort of realized that their their in house AI efforts
Speaker 2: are not as far along as you know, people had hoped,
Speaker 2: and they did have to sort of indefinitely delay some
Speaker 2: of the more exciting features that they had really advertised
Speaker 2: to sell the iPhone sixteen, So I think in some
Speaker 2: ways it's almost a blessing in disguise that they've had
Speaker 2: this delay in China. But I think at this point
Speaker 2: they really need to get it right when they do
Speaker 2: eventually launch it, and we're expecting it later this year,
Speaker 2: hopefully by May. And I think, you know, being forced
Speaker 2: by regulators in China to work with these partners, with
Speaker 2: Ali Baba and Baidu, I think that can actually really
Speaker 2: help them in China. But at the same time, you know,
Speaker 2: as you mentioned, there's so many headwinds right now, so
Speaker 2: it's going to be very difficult for Tim Cooks.
Speaker 1: I'm listening to you, I'm wondering whether or not this
Speaker 1: puts some much more pressure on Apple to diversify itself
Speaker 1: away from China and move even more aggressively into a
Speaker 1: market like India.
Speaker 2: I think absolutely. But at the same time, you know,
Speaker 2: they've been trying to do this for years and in
Speaker 2: a lot of ways, and you know a lot of
Speaker 2: data that sort of suggests that they've actually become more
Speaker 2: reliant and more entangled with China in that same time,
Speaker 2: and I think it's going to be very hard for
Speaker 2: them to sort of replicate the supply chains that they've
Speaker 2: built over really decades in China, in India and Indonesia
Speaker 2: and in other places. And you know, I think that
Speaker 2: there's some consequences to sort of becoming so beholden to
Speaker 2: Beijing at this point. And we've sort of seen that
Speaker 2: with you know, Cook going to China now and you know,
Speaker 2: really sort of laying it on thick in terms of
Speaker 2: sort of trying to appeal to the Chinese and you know,
Speaker 2: really complementing Chinese technology and developers and deep seek. And
Speaker 2: I think that's, you know, become a very difficult time
Speaker 2: to sort of play both sides the way he's done
Speaker 2: very well for the past twenty years.
Speaker 1: And he's also, we should point out, spend a little
Speaker 1: bit of time at the White House speaking with President Trump.
Speaker 1: And whether or not he is successful in getting some
Speaker 1: type of exemption from these new tariffs, we'll have to
Speaker 1: wait and see. Catherine. Thank you so much for joining us.
Speaker 1: Bloomberg opinion columnist Katherine Thorbeck joining us here as we
Speaker 1: talk Apple on the Daybreak Asia podcast. Welcome back to
Speaker 1: the Daybreak Asia Podcast. I'm Doug Chrisner. There'll be a
Speaker 1: flurry of market moving events in the coming week. Obviously,
Speaker 1: we have the announcement on those US reciprocal tariffs that
Speaker 1: is set for Wednesday. We've got a list of FED speakers,
Speaker 1: and then on Friday it's the employment report. Joining me
Speaker 1: now is James Abat. He is managing director also the
Speaker 1: chief investment officer at Center Asset Management. James, it's always
Speaker 1: a pleasure. Can I begin by getting your take on
Speaker 1: the most critical event of the week. I'm going to
Speaker 1: imagine you think it's the tariff announcement on Wednesday, right.
Speaker 3: Clearly that's what's been driving the markets in terms of
Speaker 3: giving pressure to indices because in essence, what we're doing
Speaker 3: is you're, you know, taking a complete revamp of the
Speaker 3: foundations of the stock market. You know, clearly, you know
Speaker 3: what we think about. You know, what's driven the market
Speaker 3: over the last twenty plus years has been globalization and
Speaker 3: all the benefits that that's basically brought to profits. So
Speaker 3: when you think about, you know, what Trump's plan is
Speaker 3: to bring back manufacturing and on shing, you know there
Speaker 3: are some hidden pitfalls that you know, people I don't
Speaker 3: think are yet aware. So clearly the generally recognized you know,
Speaker 3: risk are that you know, profit margins in the United
Speaker 3: States have been much higher due to lower tax rates,
Speaker 3: lower interest costs, but also and probably most importantly, much
Speaker 3: lower labor costs. And that's easily seen on an income statement,
Speaker 3: and is if we progress to more on shoring of
Speaker 3: manufacturing and labor. Clearly, if labor costs go up, profit
Speaker 3: margins go down. I think the thing that's being missed
Speaker 3: by markets which could lead a further derating and perhaps
Speaker 3: even a bear market. And remember Wall Street is not
Speaker 3: the same thing as Main Street. And what I mean
Speaker 3: by that is what's missed is the balance sheet aspect
Speaker 3: of corporate America. You know, we've moved a lot of
Speaker 3: our cyclicality offshore to China, Mexico, et cetera, since you know,
Speaker 3: two thousand with just in time, inventory management, outsourcing, and
Speaker 3: factory production in particular. So what we've done here in
Speaker 3: the United States is that we've reduced the amplitude of
Speaker 3: our own business cycle tremendously. I would argue, you know,
Speaker 3: since the early nineteen nineties and naft IS introduction and
Speaker 3: then later with China's into the WTO. You know, even
Speaker 3: if you look back at the two thousand and one,
Speaker 3: two thousand and two recession. It was very mild compared
Speaker 3: to typical business cycle downturns like we had in the
Speaker 3: nineteen sixties and seventies for example. Well, even the global
Speaker 3: financial crisis was really a banking in real estate regulatory fiasco,
Speaker 3: not a classic business cycle bust. So, you know, the
Speaker 3: Keith remember is that there's a reason why the US
Speaker 3: stock market trades that are premium multiple to other more
Speaker 3: cyclical markets like China and Europe. You know, they trade
Speaker 3: it like ten or twelve times earnings, not twenty two
Speaker 3: times like the United States. So the point that I'm
Speaker 3: trying to make is that you know, there are you know,
Speaker 3: keen inferences that one needs to look at in terms
Speaker 3: of the market, not just in terms of profits, but
Speaker 3: also in terms of bringing back a higher level cyclicality,
Speaker 3: potentially from on shoring, if that's the objective of what
Speaker 3: the tariff argument is.
Speaker 1: But the tariff argument has created, i think, and inflection
Speaker 1: point that could be, as you point out earlier, quite damaging.
Speaker 1: I'm looking at the latest GDP now estimate from the
Speaker 1: Atlanta FED. I think they're looking at first quarter growth
Speaker 1: contracting at a rate of two point eight percent, and
Speaker 1: if you look at the recent data from the University
Speaker 1: of Michigan on Consumers Center. But yes, it was weak.
Speaker 1: Maybe a little bit more troubling though, the fact that
Speaker 1: consumers now see inflation rising five percent over the next
Speaker 1: twelve months. So when we're talking about slower growth and
Speaker 1: higher inflation expectations, this is a situation where stagflation as
Speaker 1: a term becomes a real threat.
Speaker 3: Right absolutely, And that's why, you know, this has been
Speaker 3: such a difficult year. And you know, people say, well,
Speaker 3: you know, if we want to look at price charts,
Speaker 3: I'm not a technician, but you know, one of the
Speaker 3: things that looks like it, you know from a perspective
Speaker 3: of you know, breaking through two hundred day moving average
Speaker 3: and kind of the you know euphoria that you've had
Speaker 3: with the Magnificent seven and having lived through and managed
Speaker 3: mon you know during that time. You know, is this
Speaker 3: like the year two thousand and one prior to nine
Speaker 3: to eleven, So it's not a crash, you know, but
Speaker 3: kind of like a controlled demolition. I hate to say,
Speaker 3: but I would argue it's it's harder to navigate than
Speaker 3: two thousand and one because you know, first off, you
Speaker 3: don't have a natural hedge long treasures back then offered
Speaker 3: an excellent alternative. You know, today the correlations between socks
Speaker 3: and bonds is not persistent of swipping back and forth,
Speaker 3: so you don't have a natural hedge in net regard
Speaker 3: even options. You know, while where they've worked for us
Speaker 3: earlier in the month when the VIC spiked, it's been
Speaker 3: relatively low, and it's really highlighting the no safe harborst
Speaker 3: So to your point, what we're seeing is and as
Speaker 3: you could appreciate, any CFO or CEO who's faced with
Speaker 3: a high degree of uncertainty with regard to the tariffs
Speaker 3: is going to hold back on capital spending plans, They're
Speaker 3: going to hold back on hiring. So we have an
Speaker 3: environment now which is service is starting to slow for
Speaker 3: the first time. And as we could recall, you know,
Speaker 3: global manufacturing has been in a malaise really for the
Speaker 3: last three years, but we're starting to see, you know,
Speaker 3: global manufacturing, not just the United States but Europe and
Speaker 3: olth places starting to basically come out of that two
Speaker 3: to three year malaise.
Speaker 1: So if we can accept the notion that the administration
Speaker 1: has been very deliberate in telegraphing its economic policies to
Speaker 1: the market and the FED at the same time has
Speaker 1: been as transparent as possible. Yes, they're data dependent. I'm
Speaker 1: wondering about the extent to which a lot of what
Speaker 1: we have been describing has already been discounted by markets,
Speaker 1: or is there a lot more in the way of
Speaker 1: downside as that price adjustment continues.
Speaker 3: Yeah, I think there could be, because again, where you're
Speaker 3: seeing is a lot of contradictory statements out of the
Speaker 3: White House. So there's a lot of talk right now
Speaker 3: about the Mara Lago Accord, which is, you know, some
Speaker 3: people are using a parallel to the Plaza Accord to
Speaker 3: weaken the US dollar. Now, if you're sitting here and
Speaker 3: having a policy which is specifically geared towards bringing inbound
Speaker 3: US investment, having a weaker dollar explicitly contradicts basically that
Speaker 3: type of policy. And then when you sit here and
Speaker 3: announce a strategic crypto reserve, you know, why would the
Speaker 3: US government want to undermine the US dollar when it
Speaker 3: needs to attract foreign investment and capital flows. So I
Speaker 3: think the problem that you have, and this can go
Speaker 3: from a correction to a bear market, is that, you know,
Speaker 3: when we entered the year, we were looking essentially from
Speaker 3: the valuation perspective through our lens, which is essentially future
Speaker 3: growth reliance. And what we said was the measure wasn't
Speaker 3: this optimistic on future profit creation since two thousand and
Speaker 3: nine and also back to the all time high which
Speaker 3: was two thousand and two. Both of those were at
Speaker 3: the bottom of very deep recessions on the on the
Speaker 3: cup of very sharp cyclical recovery. Also in the s
Speaker 3: and P five hundred was trading at multiples at eleven
Speaker 3: or thirteen times, respectively, not twenty two times now. So
Speaker 3: if you continue to essentially for go economic growth because
Speaker 3: of uncertainty, and you know the big elephant in the room,
Speaker 3: which is the Magnificent seven, which essentially you know, has
Speaker 3: contributed all of their earnings growth for the last couple
Speaker 3: of years, and we start to see that to slow down,
Speaker 3: particularly with the deep Seak announcement and the dud ipo
Speaker 3: of core Weave this week, raising questions about the efficacy
Speaker 3: of these investments. It's quite possible that we have in
Speaker 3: an environment of stale to flat or maybe even declining
Speaker 3: earnings coupled with a negative derating and that's essentially the
Speaker 3: definition of a bear market. And that's what played out.
Speaker 3: And I lived through, and you lived through during two
Speaker 3: thousand and one and two thousand and two and didn't
Speaker 3: really bottom until the this spring of two thousand and three.
Speaker 1: So, James, have you turned barish then on the AI trade?
Speaker 3: Well, what we've seen is and one of the things
Speaker 3: that's really changed my mind is that, you know, going
Speaker 3: into this and studying this greatly, is that I've always
Speaker 3: been raising the questions and trying to figure out, you know,
Speaker 3: what makes us different than the bus back in the
Speaker 3: dot com era, you know, having managed equity funds and
Speaker 3: technology funds back then, because the key was, you know,
Speaker 3: where's the leverage that can bring this down, you know hard?
Speaker 3: You know. For example, you know, back in two thousand
Speaker 3: and one, Exodus Communications, I don't know if you recall,
Speaker 3: but at that point in time was the world's largest
Speaker 3: web hosting provider, and it was the data center darling
Speaker 3: at the dot com and telecom build out, and it
Speaker 3: went from having a market value over thirty two billion
Speaker 3: dollars at that point in time in two thousand to
Speaker 3: being bankrupt you know, a year later, because it was
Speaker 3: leveraged and its biggest customer at that point in time.
Speaker 3: Global crossing was highly leverage as well. You know, in
Speaker 3: two thousand and eight we saw the leverages in the
Speaker 3: banking sector.
Speaker 1: Today.
Speaker 3: The thing that's kept me somewhat optimistic about Magnificent seven
Speaker 3: is that we have a closed loop, you know, where
Speaker 3: I AI instructure is being paid for by Microsoft, Meta,
Speaker 3: ALP Belt, Amazon, etcetera, who are enormously casual positive and
Speaker 3: have very large cash CHRISTI and so capex is high.
Speaker 3: You know, Amazon is going to spend thirty five percent
Speaker 3: more this year. So it's tough to call the end
Speaker 3: of in Vidia's you know gains and so forth. But
Speaker 3: I think this all that's being said. You know, thing
Speaker 3: that opened up my eye this week is that the
Speaker 3: dout IPO of core Weave, you know, the new data
Speaker 3: center Darling has some glaring problems worth examining if the
Speaker 3: AI boom is really going to you know, move in
Speaker 3: a different direction. You know, seventy seven percent of its
Speaker 3: revenue comes from just two customers, sixty two percent of Microsoft.
Speaker 3: It's got eight billion dollars in debt due next year.
Speaker 3: So it's data centers are also stacked within vidious Hopper GPUs,
Speaker 3: which are you going to be outdated as soon as
Speaker 3: Blackwell comes out. So, you know, like Exodus, you have
Speaker 3: a highly leveraged business with you know, equipment that's got
Speaker 3: a useful life of two to three years and the
Speaker 3: concentration in a customer base that could pull the plug
Speaker 3: at any time. You know, in the words of Warren Buffett,
Speaker 3: you know, only when the tide goes out are we
Speaker 3: going to see who's swimming naked? As Buffett used to say. So,
Speaker 3: you know, there's a lot more outside of the Magnificent
Speaker 3: seven that in this AI infrastructure that you know, we
Speaker 3: may not be aware of the leverage it's in the system,
Speaker 3: which was very apparent back in two thousand and one,
Speaker 3: but it's starting to become more and more evident as
Speaker 3: we move forward.
Speaker 1: Here, great point, James will leave it there, always a pleasure.
Speaker 1: Thank you so much. I hope you have a productive
Speaker 1: week ahead. James Abonte there. He is a managing director
Speaker 1: also the chief investment officer at Center Asset Management. Joining
Speaker 1: us here on the Daybreak as your podcast. Thanks for
Speaker 1: listening to today's episode of the Bloomberg Daybreak Asia Edition podcast.
Speaker 1: Each weekday, we look at the story shaping markets, finance,
Speaker 1: and geopolitics in the Asia Pacific. You can find us
Speaker 1: on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere
Speaker 1: else you listen. Join us again tomorrow for insight on
Speaker 1: the market moves from Hong Kong to Singapore and Australia.
Speaker 1: I'm Doug Chrisner, and this is Bloomberg