WEBVTT - Can Apple Dodge New US Tariffs?

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News. Welcome to the Daybreak

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<v Speaker 1>Asia Podcast. I'm Doug Krisner. The tone in markets this

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<v Speaker 1>morning is very much risk off ahead of those new

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<v Speaker 1>US tariffs. Reciprocal levies are set to be unveiled on Wednesday,

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<v Speaker 1>and in a moment we'll get some perspective from the

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<v Speaker 1>US side from James Abat at Center Asset Management. But

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<v Speaker 1>we begin in Asia where many industries are especially vulnerable

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<v Speaker 1>to those new US tariffs, among them the chip makers.

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<v Speaker 1>You know, this group is already struggling given signs of

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<v Speaker 1>slower data center growth, and it puts a company like

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<v Speaker 1>Taiwan Semi in a very tight spot. Nearly seventy percent

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<v Speaker 1>of the company's revenue comes from the US, and TSMC

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<v Speaker 1>is obviously not alone. Consider Apple for a moment. It

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<v Speaker 1>is still unclear whether Apple will be exempt from these

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<v Speaker 1>new US tariffs. The story on Apple is certainly complicated

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<v Speaker 1>by the fact that the company he's got a very

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<v Speaker 1>close relationship with China. Apple supply chains seem to be

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<v Speaker 1>woven right into the Chinese economy. Let's take a closer

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<v Speaker 1>look now at the Apple situation with Bloomberg opinion columnist

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<v Speaker 1>Katherine Thorbek, who's joining from our studios in Tokyo. Catherine,

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<v Speaker 1>thank you so much for making time to join us.

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<v Speaker 1>Can we begin with you giving me a sense of

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<v Speaker 1>the degree to which Apple is entangled in China right now?

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<v Speaker 2>Right, so, we just saw Tim Cook in China last

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<v Speaker 2>week for his first visit to the country of the year.

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<v Speaker 2>And you know, we've really seen over the years over

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<v Speaker 2>Tim Cook's tenure, really Apple just becomes sort of more

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<v Speaker 2>and more entangled in China, and at this point it

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<v Speaker 2>would be very, very difficult for Apple to sort of

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<v Speaker 2>unentangle its supply chains from China. But it's also one

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<v Speaker 2>of the rare US companies that's also very reliant on

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<v Speaker 2>Chinese consumers. You know, it does have a big presence

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<v Speaker 2>in China. So it's a very very difficult task for

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<v Speaker 2>Cook right now. As you mentioned, it's not immediately clear

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<v Speaker 2>if he'll be able to get out of tears this

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<v Speaker 2>time around the same way he did during Trump's first term.

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<v Speaker 2>And at this point we really don't know, and I

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<v Speaker 2>wouldn't be surprised if he doesn't actually get an exemption

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<v Speaker 2>this time, but we will have to see.

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<v Speaker 1>I remember, during the first Trump administration the trade war

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<v Speaker 1>with China, when Chinese consumers were favoring domestic smartphone brands

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<v Speaker 1>out of a sense of let's call it nationalism, And

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<v Speaker 1>it seems like the Chinese smartphone industry now is in

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<v Speaker 1>a much stronger position to compete with Apple. Is that fair?

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<v Speaker 2>That's right, Doug. And you know Tim Cook has said himself,

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<v Speaker 2>the Chinese market is the most competitive market in the world.

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<v Speaker 2>And you know, one thing that's really a disadvantage for

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<v Speaker 2>Apple right now is that they still haven't brought their

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<v Speaker 2>Apple Intelligence features to the latest iPhone to the China market.

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<v Speaker 2>And Chinese you know, consumer interest in personal AI features

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<v Speaker 2>personal artificial intelligence is very, very high. So this has

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<v Speaker 2>been a real stumbling point for Tim Cook. And you know,

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<v Speaker 2>we saw in the December quarter iPhone sales in China

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<v Speaker 2>actually fell eighteen percent, which is quite a dramatic drop. So,

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<v Speaker 2>you know, Cook was just in China and we've really

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<v Speaker 2>seen him, you know, trying very hard to sort of

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<v Speaker 2>appeal directly to Chinese consumers and sort of build up enthusiasm.

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<v Speaker 2>But he really needs to find a way to bring

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<v Speaker 2>this Apple intelligence to the China market. So he has

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<v Speaker 2>made some headway. You know he is working with Ali Baba,

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<v Speaker 2>which has sort of become an AI darling in China

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<v Speaker 2>and bay Do as well, but it still hasn't rolled out,

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<v Speaker 2>and I think that's really sort of holding back iPhone

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<v Speaker 2>sales at a very very critical time for Apple right

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<v Speaker 2>now in China.

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<v Speaker 1>What are some of the big smartphone brands in China.

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<v Speaker 1>I'm thinking Huawei as one that really represent the greatest

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<v Speaker 1>threat to Apple in that market.

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<v Speaker 2>Yeah, and so we did see a sort of hangover

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<v Speaker 2>from some of the anti American sentiments was Huawei was

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<v Speaker 2>really sort of propped up by Beijing, and Huawei has

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<v Speaker 2>really sort of come back stronger than ever. Huawei has

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<v Speaker 2>definitely become a very big threat in the premium smartphone

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<v Speaker 2>segment in China. There's also Shaomi, but yes, there's just

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<v Speaker 2>been the rise of so many domestic brands, and many

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<v Speaker 2>of them are already offering AI features on their smartphones,

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<v Speaker 2>and so you know, consumers now in China are sort

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<v Speaker 2>of going for those models over Apple right now.

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<v Speaker 1>You and I have spoken in the past about the

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<v Speaker 1>Deep Seek moment. It seems like that only that was

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<v Speaker 1>the spark that started a lot of this in terms

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<v Speaker 1>of attracting interest and generating capital flow. Are there many

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<v Speaker 1>more companies now playing in that same space and at

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<v Speaker 1>the end of the day becoming a competitor to deep Seek.

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<v Speaker 2>Yes, the deep Seek excitement has absolutely lit a fire

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<v Speaker 2>on the Chinese AI sector. And we did see Tim

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<v Speaker 2>Cook visit sort of the home base of this which

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<v Speaker 2>is Hung Joe, which is where deep seek was founded,

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<v Speaker 2>and he visited the university where deep Sek's founder went to.

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<v Speaker 2>He praised deep Seek on his trip, and he sort

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<v Speaker 2>of met with some of the young developers, some of

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<v Speaker 2>the what he called the next generation of developers, and

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<v Speaker 2>announced a new sort of donation to this Chinese developer's fund.

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<v Speaker 2>And I really think it's going to take sort of

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<v Speaker 2>the enthusiasm of these Chinese programmers and of these you know,

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<v Speaker 2>young Chinese minds to build consumer products for the AI iPhone.

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<v Speaker 2>I think that's what it's going to take to really

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<v Speaker 2>sell the iPhone in China at this point.

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<v Speaker 1>But when you look at the attempts that the Chinese

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<v Speaker 1>government has made to try to really address the vibrancy

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<v Speaker 1>of this kind of entrepreneurial mindset in technology, particularly artificial intelligence,

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<v Speaker 1>it seems like Apple has a very very difficult challenge ahead,

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<v Speaker 1>right because there's so much pressure kind of coming from

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<v Speaker 1>the government to focus on domestic technology companies.

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<v Speaker 2>Absolutely, you know, I think Tim Cook is in a

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<v Speaker 2>very very difficult spot right now, and we're seeing it

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<v Speaker 2>a little bit from both sides. Both sides. You know,

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<v Speaker 2>there's the obviously tariff threat coming from the US, and

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<v Speaker 2>then on the Chinese side, you know, there's you know,

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<v Speaker 2>been a sort of a rise in anti American sentiment

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<v Speaker 2>and so many domestic consumers, so many domestic competitors is

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<v Speaker 2>sort of taking off. So I think it's you know,

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<v Speaker 2>going to be sort of the biggest tests yet for

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<v Speaker 2>Cook in his tenure. So I think, you know, as

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<v Speaker 2>we've sort of spoken about, is AI is huge, and

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<v Speaker 2>we've actually seen Apple Intelligence. The rollout of Apple Intelligence

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<v Speaker 2>outside of China, you know, in the US has been

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<v Speaker 2>a little bit underwhelming. I think this month, you know,

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<v Speaker 2>even some of the most long standing Apple supporters have

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<v Speaker 2>sort of realized that their their in house AI efforts

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<v Speaker 2>are not as far along as you know, people had hoped,

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<v Speaker 2>and they did have to sort of indefinitely delay some

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<v Speaker 2>of the more exciting features that they had really advertised

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<v Speaker 2>to sell the iPhone sixteen, So I think in some

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<v Speaker 2>ways it's almost a blessing in disguise that they've had

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<v Speaker 2>this delay in China. But I think at this point

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<v Speaker 2>they really need to get it right when they do

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<v Speaker 2>eventually launch it, and we're expecting it later this year,

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<v Speaker 2>hopefully by May. And I think, you know, being forced

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<v Speaker 2>by regulators in China to work with these partners, with

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<v Speaker 2>Ali Baba and Baidu, I think that can actually really

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<v Speaker 2>help them in China. But at the same time, you know,

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<v Speaker 2>as you mentioned, there's so many headwinds right now, so

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<v Speaker 2>it's going to be very difficult for Tim Cooks.

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<v Speaker 1>I'm listening to you, I'm wondering whether or not this

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<v Speaker 1>puts some much more pressure on Apple to diversify itself

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<v Speaker 1>away from China and move even more aggressively into a

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<v Speaker 1>market like India.

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<v Speaker 2>I think absolutely. But at the same time, you know,

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<v Speaker 2>they've been trying to do this for years and in

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<v Speaker 2>a lot of ways, and you know a lot of

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<v Speaker 2>data that sort of suggests that they've actually become more

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<v Speaker 2>reliant and more entangled with China in that same time,

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<v Speaker 2>and I think it's going to be very hard for

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<v Speaker 2>them to sort of replicate the supply chains that they've

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<v Speaker 2>built over really decades in China, in India and Indonesia

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<v Speaker 2>and in other places. And you know, I think that

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<v Speaker 2>there's some consequences to sort of becoming so beholden to

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<v Speaker 2>Beijing at this point. And we've sort of seen that

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<v Speaker 2>with you know, Cook going to China now and you know,

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<v Speaker 2>really sort of laying it on thick in terms of

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<v Speaker 2>sort of trying to appeal to the Chinese and you know,

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<v Speaker 2>really complementing Chinese technology and developers and deep seek. And

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<v Speaker 2>I think that's, you know, become a very difficult time

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<v Speaker 2>to sort of play both sides the way he's done

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<v Speaker 2>very well for the past twenty years.

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<v Speaker 1>And he's also, we should point out, spend a little

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<v Speaker 1>bit of time at the White House speaking with President Trump.

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<v Speaker 1>And whether or not he is successful in getting some

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<v Speaker 1>type of exemption from these new tariffs, we'll have to

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<v Speaker 1>wait and see. Catherine. Thank you so much for joining us.

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<v Speaker 1>Bloomberg opinion columnist Katherine Thorbeck joining us here as we

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<v Speaker 1>talk Apple on the Daybreak Asia podcast. Welcome back to

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<v Speaker 1>the Daybreak Asia Podcast. I'm Doug Chrisner. There'll be a

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<v Speaker 1>flurry of market moving events in the coming week. Obviously,

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<v Speaker 1>we have the announcement on those US reciprocal tariffs that

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<v Speaker 1>is set for Wednesday. We've got a list of FED speakers,

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<v Speaker 1>and then on Friday it's the employment report. Joining me

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<v Speaker 1>now is James Abat. He is managing director also the

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<v Speaker 1>chief investment officer at Center Asset Management. James, it's always

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<v Speaker 1>a pleasure. Can I begin by getting your take on

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<v Speaker 1>the most critical event of the week. I'm going to

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<v Speaker 1>imagine you think it's the tariff announcement on Wednesday, right.

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<v Speaker 3>Clearly that's what's been driving the markets in terms of

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<v Speaker 3>giving pressure to indices because in essence, what we're doing

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<v Speaker 3>is you're, you know, taking a complete revamp of the

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<v Speaker 3>foundations of the stock market. You know, clearly, you know

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<v Speaker 3>what we think about. You know, what's driven the market

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<v Speaker 3>over the last twenty plus years has been globalization and

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<v Speaker 3>all the benefits that that's basically brought to profits. So

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<v Speaker 3>when you think about, you know, what Trump's plan is

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<v Speaker 3>to bring back manufacturing and on shing, you know there

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<v Speaker 3>are some hidden pitfalls that you know, people I don't

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<v Speaker 3>think are yet aware. So clearly the generally recognized you know,

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<v Speaker 3>risk are that you know, profit margins in the United

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<v Speaker 3>States have been much higher due to lower tax rates,

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<v Speaker 3>lower interest costs, but also and probably most importantly, much

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<v Speaker 3>lower labor costs. And that's easily seen on an income statement,

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<v Speaker 3>and is if we progress to more on shoring of

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<v Speaker 3>manufacturing and labor. Clearly, if labor costs go up, profit

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<v Speaker 3>margins go down. I think the thing that's being missed

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<v Speaker 3>by markets which could lead a further derating and perhaps

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<v Speaker 3>even a bear market. And remember Wall Street is not

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<v Speaker 3>the same thing as Main Street. And what I mean

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<v Speaker 3>by that is what's missed is the balance sheet aspect

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<v Speaker 3>of corporate America. You know, we've moved a lot of

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<v Speaker 3>our cyclicality offshore to China, Mexico, et cetera, since you know,

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<v Speaker 3>two thousand with just in time, inventory management, outsourcing, and

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<v Speaker 3>factory production in particular. So what we've done here in

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<v Speaker 3>the United States is that we've reduced the amplitude of

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<v Speaker 3>our own business cycle tremendously. I would argue, you know,

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<v Speaker 3>since the early nineteen nineties and naft IS introduction and

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<v Speaker 3>then later with China's into the WTO. You know, even

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<v Speaker 3>if you look back at the two thousand and one,

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<v Speaker 3>two thousand and two recession. It was very mild compared

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<v Speaker 3>to typical business cycle downturns like we had in the

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<v Speaker 3>nineteen sixties and seventies for example. Well, even the global

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<v Speaker 3>financial crisis was really a banking in real estate regulatory fiasco,

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<v Speaker 3>not a classic business cycle bust. So, you know, the

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<v Speaker 3>Keith remember is that there's a reason why the US

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<v Speaker 3>stock market trades that are premium multiple to other more

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<v Speaker 3>cyclical markets like China and Europe. You know, they trade

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<v Speaker 3>it like ten or twelve times earnings, not twenty two

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<v Speaker 3>times like the United States. So the point that I'm

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<v Speaker 3>trying to make is that you know, there are you know,

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<v Speaker 3>keen inferences that one needs to look at in terms

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<v Speaker 3>of the market, not just in terms of profits, but

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<v Speaker 3>also in terms of bringing back a higher level cyclicality,

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<v Speaker 3>potentially from on shoring, if that's the objective of what

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<v Speaker 3>the tariff argument is.

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<v Speaker 1>But the tariff argument has created, i think, and inflection

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<v Speaker 1>point that could be, as you point out earlier, quite damaging.

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<v Speaker 1>I'm looking at the latest GDP now estimate from the

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<v Speaker 1>Atlanta FED. I think they're looking at first quarter growth

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<v Speaker 1>contracting at a rate of two point eight percent, and

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<v Speaker 1>if you look at the recent data from the University

0:12:14.960 --> 0:12:17.880
<v Speaker 1>of Michigan on Consumers Center. But yes, it was weak.

0:12:18.440 --> 0:12:20.640
<v Speaker 1>Maybe a little bit more troubling though, the fact that

0:12:20.679 --> 0:12:24.640
<v Speaker 1>consumers now see inflation rising five percent over the next

0:12:24.679 --> 0:12:28.160
<v Speaker 1>twelve months. So when we're talking about slower growth and

0:12:28.320 --> 0:12:33.079
<v Speaker 1>higher inflation expectations, this is a situation where stagflation as

0:12:33.120 --> 0:12:35.119
<v Speaker 1>a term becomes a real threat.

0:12:34.960 --> 0:12:39.360
<v Speaker 3>Right absolutely, And that's why, you know, this has been

0:12:39.600 --> 0:12:42.600
<v Speaker 3>such a difficult year. And you know, people say, well,

0:12:43.559 --> 0:12:45.440
<v Speaker 3>you know, if we want to look at price charts,

0:12:45.480 --> 0:12:47.240
<v Speaker 3>I'm not a technician, but you know, one of the

0:12:47.240 --> 0:12:51.520
<v Speaker 3>things that looks like it, you know from a perspective

0:12:51.520 --> 0:12:54.400
<v Speaker 3>of you know, breaking through two hundred day moving average

0:12:54.440 --> 0:12:57.160
<v Speaker 3>and kind of the you know euphoria that you've had

0:12:57.200 --> 0:12:59.800
<v Speaker 3>with the Magnificent seven and having lived through and managed

0:12:59.800 --> 0:13:03.280
<v Speaker 3>mon you know during that time. You know, is this

0:13:03.679 --> 0:13:06.800
<v Speaker 3>like the year two thousand and one prior to nine

0:13:06.840 --> 0:13:09.640
<v Speaker 3>to eleven, So it's not a crash, you know, but

0:13:09.720 --> 0:13:12.280
<v Speaker 3>kind of like a controlled demolition. I hate to say,

0:13:12.640 --> 0:13:15.719
<v Speaker 3>but I would argue it's it's harder to navigate than

0:13:15.760 --> 0:13:18.720
<v Speaker 3>two thousand and one because you know, first off, you

0:13:18.760 --> 0:13:21.920
<v Speaker 3>don't have a natural hedge long treasures back then offered

0:13:21.960 --> 0:13:25.960
<v Speaker 3>an excellent alternative. You know, today the correlations between socks

0:13:25.960 --> 0:13:28.800
<v Speaker 3>and bonds is not persistent of swipping back and forth,

0:13:29.720 --> 0:13:31.880
<v Speaker 3>so you don't have a natural hedge in net regard

0:13:31.920 --> 0:13:35.120
<v Speaker 3>even options. You know, while where they've worked for us

0:13:35.200 --> 0:13:38.000
<v Speaker 3>earlier in the month when the VIC spiked, it's been

0:13:38.040 --> 0:13:41.480
<v Speaker 3>relatively low, and it's really highlighting the no safe harborst

0:13:41.480 --> 0:13:44.040
<v Speaker 3>So to your point, what we're seeing is and as

0:13:44.040 --> 0:13:47.640
<v Speaker 3>you could appreciate, any CFO or CEO who's faced with

0:13:47.960 --> 0:13:50.640
<v Speaker 3>a high degree of uncertainty with regard to the tariffs

0:13:51.000 --> 0:13:54.200
<v Speaker 3>is going to hold back on capital spending plans, They're

0:13:54.200 --> 0:13:56.800
<v Speaker 3>going to hold back on hiring. So we have an

0:13:56.920 --> 0:14:02.000
<v Speaker 3>environment now which is service is starting to slow for

0:14:02.080 --> 0:14:04.440
<v Speaker 3>the first time. And as we could recall, you know,

0:14:04.520 --> 0:14:08.120
<v Speaker 3>global manufacturing has been in a malaise really for the

0:14:08.200 --> 0:14:11.000
<v Speaker 3>last three years, but we're starting to see, you know,

0:14:11.120 --> 0:14:14.280
<v Speaker 3>global manufacturing, not just the United States but Europe and

0:14:14.320 --> 0:14:18.000
<v Speaker 3>olth places starting to basically come out of that two

0:14:18.040 --> 0:14:19.000
<v Speaker 3>to three year malaise.

0:14:19.320 --> 0:14:22.040
<v Speaker 1>So if we can accept the notion that the administration

0:14:22.200 --> 0:14:26.760
<v Speaker 1>has been very deliberate in telegraphing its economic policies to

0:14:26.800 --> 0:14:29.480
<v Speaker 1>the market and the FED at the same time has

0:14:29.560 --> 0:14:33.240
<v Speaker 1>been as transparent as possible. Yes, they're data dependent. I'm

0:14:33.280 --> 0:14:35.920
<v Speaker 1>wondering about the extent to which a lot of what

0:14:36.040 --> 0:14:39.200
<v Speaker 1>we have been describing has already been discounted by markets,

0:14:39.280 --> 0:14:41.120
<v Speaker 1>or is there a lot more in the way of

0:14:41.240 --> 0:14:44.840
<v Speaker 1>downside as that price adjustment continues.

0:14:45.160 --> 0:14:48.640
<v Speaker 3>Yeah, I think there could be, because again, where you're

0:14:48.680 --> 0:14:51.320
<v Speaker 3>seeing is a lot of contradictory statements out of the

0:14:51.320 --> 0:14:53.880
<v Speaker 3>White House. So there's a lot of talk right now

0:14:53.920 --> 0:14:57.040
<v Speaker 3>about the Mara Lago Accord, which is, you know, some

0:14:57.080 --> 0:15:01.080
<v Speaker 3>people are using a parallel to the Plaza Accord to

0:15:01.200 --> 0:15:04.920
<v Speaker 3>weaken the US dollar. Now, if you're sitting here and

0:15:05.120 --> 0:15:10.040
<v Speaker 3>having a policy which is specifically geared towards bringing inbound

0:15:10.800 --> 0:15:17.760
<v Speaker 3>US investment, having a weaker dollar explicitly contradicts basically that

0:15:17.920 --> 0:15:19.840
<v Speaker 3>type of policy. And then when you sit here and

0:15:19.880 --> 0:15:23.960
<v Speaker 3>announce a strategic crypto reserve, you know, why would the

0:15:24.040 --> 0:15:27.440
<v Speaker 3>US government want to undermine the US dollar when it

0:15:27.480 --> 0:15:31.160
<v Speaker 3>needs to attract foreign investment and capital flows. So I

0:15:31.160 --> 0:15:33.840
<v Speaker 3>think the problem that you have, and this can go

0:15:33.960 --> 0:15:37.640
<v Speaker 3>from a correction to a bear market, is that, you know,

0:15:37.680 --> 0:15:41.400
<v Speaker 3>when we entered the year, we were looking essentially from

0:15:41.480 --> 0:15:45.560
<v Speaker 3>the valuation perspective through our lens, which is essentially future

0:15:45.600 --> 0:15:50.080
<v Speaker 3>growth reliance. And what we said was the measure wasn't

0:15:50.080 --> 0:15:55.280
<v Speaker 3>this optimistic on future profit creation since two thousand and

0:15:55.360 --> 0:15:58.520
<v Speaker 3>nine and also back to the all time high which

0:15:58.560 --> 0:16:01.120
<v Speaker 3>was two thousand and two. Both of those were at

0:16:01.120 --> 0:16:05.120
<v Speaker 3>the bottom of very deep recessions on the on the

0:16:05.200 --> 0:16:09.520
<v Speaker 3>cup of very sharp cyclical recovery. Also in the s

0:16:09.560 --> 0:16:11.960
<v Speaker 3>and P five hundred was trading at multiples at eleven

0:16:12.080 --> 0:16:15.120
<v Speaker 3>or thirteen times, respectively, not twenty two times now. So

0:16:15.440 --> 0:16:20.280
<v Speaker 3>if you continue to essentially for go economic growth because

0:16:20.280 --> 0:16:24.720
<v Speaker 3>of uncertainty, and you know the big elephant in the room,

0:16:24.760 --> 0:16:28.280
<v Speaker 3>which is the Magnificent seven, which essentially you know, has

0:16:28.640 --> 0:16:32.160
<v Speaker 3>contributed all of their earnings growth for the last couple

0:16:32.160 --> 0:16:34.560
<v Speaker 3>of years, and we start to see that to slow down,

0:16:35.560 --> 0:16:39.600
<v Speaker 3>particularly with the deep Seak announcement and the dud ipo

0:16:39.760 --> 0:16:43.760
<v Speaker 3>of core Weave this week, raising questions about the efficacy

0:16:44.120 --> 0:16:47.640
<v Speaker 3>of these investments. It's quite possible that we have in

0:16:47.640 --> 0:16:52.320
<v Speaker 3>an environment of stale to flat or maybe even declining

0:16:52.360 --> 0:16:56.960
<v Speaker 3>earnings coupled with a negative derating and that's essentially the

0:16:57.000 --> 0:17:00.200
<v Speaker 3>definition of a bear market. And that's what played out.

0:17:00.240 --> 0:17:02.880
<v Speaker 3>And I lived through, and you lived through during two

0:17:02.920 --> 0:17:05.000
<v Speaker 3>thousand and one and two thousand and two and didn't

0:17:05.040 --> 0:17:08.560
<v Speaker 3>really bottom until the this spring of two thousand and three.

0:17:08.800 --> 0:17:11.920
<v Speaker 1>So, James, have you turned barish then on the AI trade?

0:17:12.280 --> 0:17:15.080
<v Speaker 3>Well, what we've seen is and one of the things

0:17:15.080 --> 0:17:18.480
<v Speaker 3>that's really changed my mind is that, you know, going

0:17:18.520 --> 0:17:21.159
<v Speaker 3>into this and studying this greatly, is that I've always

0:17:21.160 --> 0:17:24.199
<v Speaker 3>been raising the questions and trying to figure out, you know,

0:17:24.280 --> 0:17:26.800
<v Speaker 3>what makes us different than the bus back in the

0:17:26.880 --> 0:17:30.080
<v Speaker 3>dot com era, you know, having managed equity funds and

0:17:30.119 --> 0:17:33.320
<v Speaker 3>technology funds back then, because the key was, you know,

0:17:33.359 --> 0:17:36.560
<v Speaker 3>where's the leverage that can bring this down, you know hard?

0:17:36.640 --> 0:17:39.080
<v Speaker 3>You know. For example, you know, back in two thousand

0:17:39.119 --> 0:17:41.639
<v Speaker 3>and one, Exodus Communications, I don't know if you recall,

0:17:41.720 --> 0:17:44.480
<v Speaker 3>but at that point in time was the world's largest

0:17:44.480 --> 0:17:47.879
<v Speaker 3>web hosting provider, and it was the data center darling

0:17:48.000 --> 0:17:50.560
<v Speaker 3>at the dot com and telecom build out, and it

0:17:50.600 --> 0:17:53.439
<v Speaker 3>went from having a market value over thirty two billion

0:17:53.480 --> 0:17:55.200
<v Speaker 3>dollars at that point in time in two thousand to

0:17:55.320 --> 0:17:58.639
<v Speaker 3>being bankrupt you know, a year later, because it was

0:17:58.760 --> 0:18:01.120
<v Speaker 3>leveraged and its biggest customer at that point in time.

0:18:01.560 --> 0:18:04.879
<v Speaker 3>Global crossing was highly leverage as well. You know, in

0:18:04.880 --> 0:18:06.560
<v Speaker 3>two thousand and eight we saw the leverages in the

0:18:06.600 --> 0:18:07.359
<v Speaker 3>banking sector.

0:18:07.400 --> 0:18:07.720
<v Speaker 1>Today.

0:18:08.200 --> 0:18:11.200
<v Speaker 3>The thing that's kept me somewhat optimistic about Magnificent seven

0:18:11.280 --> 0:18:13.560
<v Speaker 3>is that we have a closed loop, you know, where

0:18:13.600 --> 0:18:17.399
<v Speaker 3>I AI instructure is being paid for by Microsoft, Meta,

0:18:17.560 --> 0:18:21.960
<v Speaker 3>ALP Belt, Amazon, etcetera, who are enormously casual positive and

0:18:22.000 --> 0:18:26.080
<v Speaker 3>have very large cash CHRISTI and so capex is high.

0:18:26.400 --> 0:18:28.560
<v Speaker 3>You know, Amazon is going to spend thirty five percent

0:18:28.640 --> 0:18:31.199
<v Speaker 3>more this year. So it's tough to call the end

0:18:31.359 --> 0:18:34.600
<v Speaker 3>of in Vidia's you know gains and so forth. But

0:18:35.040 --> 0:18:37.880
<v Speaker 3>I think this all that's being said. You know, thing

0:18:37.880 --> 0:18:39.720
<v Speaker 3>that opened up my eye this week is that the

0:18:39.800 --> 0:18:42.840
<v Speaker 3>dout IPO of core Weave, you know, the new data

0:18:42.880 --> 0:18:47.399
<v Speaker 3>center Darling has some glaring problems worth examining if the

0:18:47.480 --> 0:18:50.359
<v Speaker 3>AI boom is really going to you know, move in

0:18:50.440 --> 0:18:53.000
<v Speaker 3>a different direction. You know, seventy seven percent of its

0:18:53.040 --> 0:18:56.240
<v Speaker 3>revenue comes from just two customers, sixty two percent of Microsoft.

0:18:56.480 --> 0:18:59.040
<v Speaker 3>It's got eight billion dollars in debt due next year.

0:18:59.560 --> 0:19:03.679
<v Speaker 3>So it's data centers are also stacked within vidious Hopper GPUs,

0:19:04.040 --> 0:19:06.200
<v Speaker 3>which are you going to be outdated as soon as

0:19:06.240 --> 0:19:09.320
<v Speaker 3>Blackwell comes out. So, you know, like Exodus, you have

0:19:09.359 --> 0:19:13.520
<v Speaker 3>a highly leveraged business with you know, equipment that's got

0:19:13.520 --> 0:19:16.280
<v Speaker 3>a useful life of two to three years and the

0:19:16.359 --> 0:19:18.680
<v Speaker 3>concentration in a customer base that could pull the plug

0:19:18.720 --> 0:19:21.160
<v Speaker 3>at any time. You know, in the words of Warren Buffett,

0:19:21.240 --> 0:19:23.639
<v Speaker 3>you know, only when the tide goes out are we

0:19:23.680 --> 0:19:27.959
<v Speaker 3>going to see who's swimming naked? As Buffett used to say. So,

0:19:28.400 --> 0:19:30.760
<v Speaker 3>you know, there's a lot more outside of the Magnificent

0:19:30.840 --> 0:19:35.600
<v Speaker 3>seven that in this AI infrastructure that you know, we

0:19:35.680 --> 0:19:38.040
<v Speaker 3>may not be aware of the leverage it's in the system,

0:19:38.080 --> 0:19:41.119
<v Speaker 3>which was very apparent back in two thousand and one,

0:19:41.160 --> 0:19:44.399
<v Speaker 3>but it's starting to become more and more evident as

0:19:44.440 --> 0:19:45.119
<v Speaker 3>we move forward.

0:19:45.160 --> 0:19:47.679
<v Speaker 1>Here, great point, James will leave it there, always a pleasure.

0:19:47.720 --> 0:19:49.840
<v Speaker 1>Thank you so much. I hope you have a productive

0:19:49.880 --> 0:19:52.879
<v Speaker 1>week ahead. James Abonte there. He is a managing director

0:19:52.920 --> 0:19:57.000
<v Speaker 1>also the chief investment officer at Center Asset Management. Joining

0:19:57.080 --> 0:20:01.600
<v Speaker 1>us here on the Daybreak as your podcast. Thanks for

0:20:01.680 --> 0:20:06.280
<v Speaker 1>listening to today's episode of the Bloomberg Daybreak Asia Edition podcast.

0:20:06.600 --> 0:20:09.760
<v Speaker 1>Each weekday, we look at the story shaping markets, finance,

0:20:10.080 --> 0:20:13.199
<v Speaker 1>and geopolitics in the Asia Pacific. You can find us

0:20:13.200 --> 0:20:17.440
<v Speaker 1>on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere

0:20:17.440 --> 0:20:20.520
<v Speaker 1>else you listen. Join us again tomorrow for insight on

0:20:20.560 --> 0:20:24.720
<v Speaker 1>the market moves from Hong Kong to Singapore and Australia.

0:20:25.160 --> 0:20:27.639
<v Speaker 1>I'm Doug Chrisner, and this is Bloomberg