00:00:02 Speaker 1: Bloomberg Audio Studios. Podcasts Radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m. 00:00:27 Speaker 3: Eastern. 00:00:28 Speaker 2: Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. 00:00:36 Speaker 3: We begin this out with stocks slower. 00:00:37 Speaker 2: As global bond yields climb near 20-year highs, Cameron Dawson of New Edge Wealth writing, we see potential for higher equity and bond volatility, wider credit spreads, and a continued climb in rates. 00:00:47 Speaker 3: Cameron joins us now for more. Cam, good morning. 00:00:49 Speaker 1: Good morning. 00:00:50 Speaker 3: It's good to see you. 00:00:50 Speaker 2: Look, risk assets have stood up really well in the face of this repricing in rates. I sense from the way you're thinking, you think that's about to change. 00:00:57 Speaker 4: Well, I think that the reason why equities have been able to tolerate the rise in rates is because earnings have been so strong. If you look at the stats, the equity market says the P500 was up about 12% on a year-to-date basis as of yesterday. 00:01:10 Speaker 5: You looked at. 00:01:10 Speaker 4: Valuations, they're down about 12%. And that gap between the two is because earnings have been so powerful. Earnings revisions have been really powerful. 26 and 27 earnings estimates are up 17% year-to-date. So you can tolerate a lot of rise in yields. You look at the 10-year yield. It's up about 80 basis points here to date. That can be digested. But if you stop being able to increase earnings estimates, then it creates a challenge where you have less buffer to be able to tolerate a rise in yields and. 00:01:38 Speaker 5: Thus multiple compression. 00:01:40 Speaker 3: Do you think that's where we are now? 00:01:41 Speaker 4: Well, I do think that 2Q is likely the peak in earnings growth rate. On the headline basis, certainly at 50%. But even if we remove some of those one-time gains at 30%, that looks to be the peak, we think, in earnings growth. I think it also is interesting in the context of ISM data that we get today. We're in an environment where you've had this big acceleration in ISM data. And I think it's important to remember, you typically sell good news and things like that because it's mean reverting. You don't buy good news. So it speaks to we can't drive with the rearview mirror. And so it suggests that the big question is how does it get much better from here? And that also brings us back to this idea of financial conditions. Financial conditions are at their easiest level since 2021. We struggle to think at this point how they get more easy, more stimulative, more loose from this point. 00:02:29 Speaker 6: So what do you do in the meantime? Is this just a moment to get close to the ground? 00:02:32 Speaker 4: Well, I think that waiting for some volatility to come certainly suggests that as we move through September, normal seasonality, we might get better buying opportunities. We're about 3% above our 100-day moving average, 7% above our 200-day moving average. We think that that weakness is ultimately viable. We don't think that we're on the precipice of some kind of big earnings recession, meaning that would be something that you'd have a much deeper and more protracted type of correction. So we would be looking to be able to take advantage of this volatility as we see things like positioning and valuation reset. 00:03:03 Speaker 6: If you do see a valuation reset, are there potential risks for the entirety of the AI ecosystem? Because a lot of these hyperscalers, their spending has been aided by the ability of one issuing stock and being able to issue bonds too to a market that widely recepts it. What happens if there's more pushback? 00:03:20 Speaker 4: I think that's the fascinating question is most people will say, well, hyperscaler spending doesn't really care about where rates are. 00:03:27 Speaker 5: But if rates. 00:03:28 Speaker 4: Tighten financial conditions, which implies a compression in valuations, higher equity volatility, lower equity prices, does that challenge these companies in their ability to continue to spend? Because we know in 2027 that their free cash flow generation will go even more negative, which implies more reliance on capital markets to fill that gap. 00:03:49 Speaker 5: You need strong equity markets. 00:03:51 Speaker 4: You need strong credit markets in order to continue to fund this spending. And if financial conditions tighten, it suggests that maybe that spending gets more challenged. 00:04:00 Speaker 5: And then you have a. 00:04:01 Speaker 4: Negative feedback loop because the weaker spending suggests weaker earnings and thus weaker stock prices. 00:04:06 Speaker 5: And I think that that would be the risk as we go into 27. 00:04:08 Speaker 3: Can I just extend that? 00:04:09 Speaker 2: Are you suggesting that this build out of the AI ecosystem is becoming more rate sensitive? 00:04:14 Speaker 3: At a time when people are saying it's rate insensitive? 00:04:16 Speaker 4: I think by definition it is, because they are having to raise debt in order to fund the spending. So if they were able to fund it completely with their own cash flows, which is what the first few years of this build-out was, it would be one thing you'd say very rate insensitive. But now they're having to tap into credit markets. You're having to see them do off-balance sheet financing. You're seeing a lot more accounting games get played. That's something that is very late cycle, very concerning. You see things like extending receivables or payables. You see off-balance sheet financing, all things that should fall into the camp of potential financial shenanigans and cause us to raise an eyebrow. 00:04:54 Speaker 2: Every headline I see every morning is a new story about the central bank NVIDIA of NVIDIA and the likes. You talked about this yesterday. attempting to keep financial conditions easy for the ecosystem. 00:05:06 Speaker 6: Exactly that's part of their aim if rates go higher people can still borrow by the way it's not even just nvidia it's private companies like anthropic the fd had a great story that there was 160 billion dollar windfall just from the big tech giants owning shares of anthropic i mentioned. 00:05:20 Speaker 2: What spreads have done over the last month and they've been pretty tight for investment great tighter on high yield On individual names, are you starting to see a reassessment of the credit worthiness as they start to use their balance sheet to push this forward? 00:05:31 Speaker 4: It is such a question about how we could see high-yield spreads get down to now 300 basis points. Look at BBBB spreads, effectively the worst of investment grade versus the best of high yield. Those are at multi-decade tights, and yet you're seeing things like Oracle CDS, NVIDIA CDS, Broadcom CDS all widen out. And it could be because some of these things, those aren't in the high yield index, but maybe they're lower weights within the investment grade index. 00:05:57 Speaker 5: So they're not moving things as much. 00:05:59 Speaker 4: We know that there's still a lot of demand for credit because people are seeing that as a buffer for the higher rates that they're seeing within base yields and things like treasuries. But the only reason why people can hide out in credit is because. 00:06:11 Speaker 5: Corporate profits are still so strong. 00:06:13 Speaker 4: If you start questioning corporate profits, then credit is not necessarily a place that you hide. 00:06:18 Speaker 6: One of the places, though, that seems to have had a renaissance is software. It's no longer negative for the year. And I wonder if we're rethinking that sector, if we're rethinking where AI is benefiting, that perhaps this can weather the storm. Have you had a rethink on the sector? 00:06:31 Speaker 1: So I think it's fascinating. 00:06:32 Speaker 4: If you look at the trend of software earnings, it never wobbled all year long. Earnings revisions continued to be up, and the 12-month forward earnings estimate for software continued to make new highs, actually accelerated in 26th. All of the weakness was driven by valuation multiple compression. And what happened back at the lows that we saw in software is that software P multiples were trading at 2022 lows below liberation day lows, which just suggested that if you got a little bit of good news and a positioning chase, we know people were very short software that you would see a chase back into the names and that valuation repricing is effectively. 00:07:07 Speaker 5: What we've seen. 00:07:08 Speaker 2: IGV up 16% in August. That's quite a month for that index, for that ETF. And as for single names, Microsoft ups something like 9% too. So software, to your point, Danny, has had its moment. 00:07:19 Speaker 1: It's had its moment. 00:07:20 Speaker 6: It's doing well now, but the question still stands, what is year five? What does year six look like? For now, you can weather the storm, but still, is there something worse coming in how AI disrupts these companies? 00:07:29 Speaker 2: So Cam, you've given us the framework to think about the story right now. Just express it as a trade. What the conviction calls for you and the team now going into year end? 00:07:36 Speaker 4: So I think some degree of patience when we think about putting equity capital to work, certainly patience on the credit side of things because you're not being compensated given how tight spreads are. 00:07:46 Speaker 5: But we are overall bullish. It's good to remember. 00:07:48 Speaker 4: The worst half of the month, half of the year is the first or second half of September. The best second month or half of the year is the first half of October. So just remember that this week's seasonality, there'll be all sorts of narratives that come with it about worries about maybe oil prices, inflation, the Fed, etc., But we do think that the weakness is ultimately viable and you should be ready to put capital to work. 00:08:10 Speaker 3: Stay with us. 00:08:11 Speaker 2: More Bloomberg surveillance coming up after this. So here's the latest this morning in video. Increasing investments in major players as it works to stay central to the AI boom. Striking deals with companies including Taiwanese chip company, MediaTek, OpenAI, and Anthropic. Sarah Arahi of Franklin Templeton writing, earnings reinforce strong AI infrastructure demand and AI spending remains extremely strong. Sarah joins us now for more. 00:08:44 Speaker 3: Sarah, good morning. It's good to see you. 00:08:45 Speaker 1: Good morning. 00:08:45 Speaker 3: Thanks for being here in New York. 00:08:47 Speaker 2: You've fielded this question a million times, I'm sure. What's the difference between fostering growth in the ecosystem And just circular finance. 00:08:54 Speaker 1: Yeah, look, thank you again for having me today. 00:08:58 Speaker 7: I spoke about this a little bit last week. They are definitely seeding the ecosystem and supporting this ecosystem. Not only their position in the ecosystem, but also, look, we've seen compute demand is strong. Just the anthropic deal this morning. The demand is there. 00:09:11 Speaker 1: We saw signals of monetization. We're seeing, you know, you just talked about it, productivity. 00:09:16 Speaker 7: Is the productivity going to come to support this, you know, the labor force going out of the market? 00:09:21 Speaker 1: We need to have that. 00:09:22 Speaker 7: And so I think over time, what NVIDIA is doing is effectively just investing in an ecosystem that needs, that is coming to fruition. Last week, I spoke about this a little bit. It's a little reminiscent of what John Malone did, actually, in the 80s. He started TCI, and in that period, he wanted to increase the cable network subscription. And with that, he invested in Warner, or at the time, it was Time Warner. He invested in BET, a number of channels to seed that ecosystem and get people. to sign up for cable. Obviously, now they're being cord-cutted. But at the time, that was his way of supporting the ecosystem. You know, you talk about the central bank of NVIDIA. 00:10:10 Speaker 1: That's what they're doing here. 00:10:11 Speaker 3: Well, let's just build on that. 00:10:11 Speaker 2: We've talked a lot about the debt financing of the big hyperscalers, the amount of money that's being raised, the For the smaller companies, what is access to finance actually like and how much they need a company like NVIDIA to step in and help provide that financing to help anchor it? 00:10:27 Speaker 7: I mean, we're seeing that, right? NVIDIA is backstopping a number of these companies. They need that financing. The hyperscalers don't need it. 00:10:35 Speaker 1: Up until a few months ago. 00:10:36 Speaker 7: It was their free cash flow that was supporting this ecosystem, this spending. I do think there's a little bit in terms of now we think about rising rates and how is that going to impact some of this spending over time. But you do need NVIDIA backstopping some of this to continue to support the ecosystem. 00:10:54 Speaker 1: How do you think that will impact things over time, higher rates? 00:10:57 Speaker 7: Yeah, look, I've been thinking about this a lot, especially we went through a period in 2021, right? Zero rate environment to ultimately increasing rates. 00:11:06 Speaker 1: And that happened quite fast. It was fast and furious at the time. 00:11:10 Speaker 7: I think the difference right now is a number of these companies that are, you've seen strong earnings growth. A number of these companies that are coming public are already profitable. And so I think that we're in a different period here as it relates to rising rates. And again, as long as the free cash flow is there with the hyperscalers and the central bank of NVIDIA is funding some of this, I think that's going. 00:11:34 Speaker 1: To support the ecosystems. 00:11:36 Speaker 6: The deals, though, that are being inked with NVIDIA, they feel like they're getting increasingly complex. I was just reading through, or I should say trying to read through, the details of this Anthropic one. So they basically, they buy chips from a company called Lambda, and then they sign a lease, but Lambda's not signing the lease. NVIDIA is, because NVIDIA has a better credit rating than Lambda does. Sarah, does some of this feel like financial engineering that we should maybe be concerned about? 00:12:01 Speaker 7: Look, I think it's complex because there are multiple components here. It's the data center. It's the power around it. It's the chips that go in there. And so there is complexity. There's the multi-year timeline to actually get this data center up and running. And so I think with that, having that, you know, NVIDIA generates a ton of free cash flow. And for them to be able to support this, to get us to a place where that productivity and that monetization come, I think it's, for now, we're watching this and watching signals of this being too much. But at the time, for now, the monetization is there and it's pretty, it's supportive of the ecosystem. 00:12:37 Speaker 2: Sorry, economic history, as you know, is littered with examples of economic evolution and revolution. You go through these massive capex cycles. But once you've laid the railroads, the railroads are there and it's done and you come out the other side. Is there something about this where the increase in capex intensity just becomes an ongoing feature that underpins this technology that you just keep having to invest and having to invest? to keep up and this carries on indefinitely. I don't know if it can carry on indefinitely, but is that a feature of what's happening here? 00:13:05 Speaker 7: Well, I would say, first of all, we saw this, you're talking about the railroads, but really let's talk about the internet boom that we had. At the time, none of the businesses were built to actually support that digitization that was coming. And now you're actually seeing real-time monetization. You're seeing real-time agents being utilized right now. So if it's an ongoing investment, it's because we're seeing the ROI related to it. And if that's the case, that would be great for productivity. That would be an incredible, you know, if we see that and that continues, I don't think there's anything wrong with that because you're actually going to see the return on that investment. 00:13:42 Speaker 1: If you're not seeing that, then. 00:13:44 Speaker 2: That cat-back will slow down. The reason I'm asking this is because some people are wondering, does this go on two years? Does it go on five years? Kind of thinking about it slightly differently, that because of the technological obsolescence, the chip improvement that we're seeing continuously, once you build a data center, that's not it. You're going to have to keep on reengineering that data center and introduce more new chips and more new chips and update it consistently. And I'm just wondering how much longer that goes on for. 00:14:07 Speaker 7: Yeah, but the bare bone putting the data center in there, the power, all of some of those components that are percentage of the cost, that part is already going to be in. And then we're finding out that some of these GPUs are lasting longer than what you're originally expecting. And so I think that does have to happen. But again, no one will make that investment if the returns are not there. So, yes, the number one question is, does this go on for two, three, four or five years? Are we in 97, 98, 99? 00:14:35 Speaker 8: Right. 00:14:35 Speaker 7: That's the sort of we don't we don't know that question. But I think for now, we're still in the early innings. 00:14:43 Speaker 3: Stay with us. 00:14:44 Speaker 2: More Bloomberg surveillance coming up after this. 00:14:56 Speaker 9: I'm thrilled to announce a major expansion of one of our signature affordability initiatives. Affordability, I inherited that from the Biden administration. We had very high prices. This is going to bring down health care numbers that nobody's ever even envisioned before. 00:15:13 Speaker 1: You're going to see. 00:15:15 Speaker 9: Some very big drops in a lot of different categories. 00:15:18 Speaker 3: So here's the latest this morning. 00:15:19 Speaker 2: President Donald Trump taking game at rising costs, striking deals with drug makers ahead of a meeting with oil execs to bring down prices. New polling, though, showing 47 percent of voters say the cost of living is the single most important factor heading into the midterms. Crude this morning at 92. Higher prices not helping. Brent crude higher by close to 2 percent. 00:15:38 Speaker 7: WTI. 00:15:38 Speaker 3: Approach in 88. 00:15:39 Speaker 2: Henrietta Trace of Vader Partners writing, affordability, inflation and prices remain top issues. 00:15:44 Speaker 3: Investors should be prepared. Wait for this. 00:15:46 Speaker 2: For Republican lawmakers to suggest an economic stimulus package coming in late September. 00:15:52 Speaker 3: Henrietta joins us now for more. Henrietta, good morning and welcome to New York. Thanks for having me. What kind of stimulus package are you thinking about? 00:15:57 Speaker 1: Well, we'll find out. 00:15:58 Speaker 8: The House Financial Services Committee is going to have a hearing. French Hill is going to steer it on Wednesday, I think. And they'll talk about how they're going to turn the economy around. At this point, they're talking about something that will happen no earlier than after the election, mid-December at best. But the message right now, as you guys pointed out from the polling, is the president's got a 33 percent approval rating, repeatedly, for now three consecutive polls in a row. And gas prices are, in fact, the number one issue above and beyond just inflation. 31% are saying of all the inflation that we have, of all the higher prices that are an issue, it's gas prices. So they're going to have, like the president's going to do today, the small refiners come in and try to talk about, hey, we're at 98% refining capacity, but can you do more? What can we do in terms of a capital gains tax cut? You know, they love to trot that out before an election every single cycle. So investors should prepare for that. So my note is effectively get ready for a lot of selling and not a lot of things to buy. 00:16:55 Speaker 2: The last thing this economy needs, and you can find a long, long list of economists on Wall Street that would say this, the last thing this economy needs is demand side stimulus. 00:17:03 Speaker 5: Right. 00:17:03 Speaker 2: I'm pleased you talked about new refiners because we need a supply side response. That's going to take a long time, but at least get moving on things. Do you see that happening? 00:17:12 Speaker 1: I mean, I speak with energy analysts all the time. Indeed, I married one. 00:17:16 Speaker 8: And I would say that five to 10 years is what you're looking at in terms of bringing on new capacity. And you go down to the Gulf and you talk to these refiners and they're like, we are doing every single thing that we can. So five years, a decade from now, it's one thing to have Venezuelan, you. 00:17:29 Speaker 5: Know, tar like crude. We can't use that. 00:17:32 Speaker 8: At the gas station, it's not creating diesel. And as you know, the Russia-Ukraine war and the ban that they have on diesel exports is what's driving that cost 51% higher last time I checked. 00:17:42 Speaker 1: So that's the core problem. 00:17:44 Speaker 6: So if everyday Americans go to the gas pump, see prices with a $ 4 handle, look at the headlines, continue to see action in Iran, would stimulus solve anything in the views of the voters? Would that do anything to have that conversation starting in D.C. 00:17:58 Speaker 8: Unfortunately, there's nothing on the stimulus side that they can do to bring gas prices down. There was one option, not to get too wonky here, but the Senate's going to try to pass a budget. And the budget, theoretically, could give you a fast-track authority to have Republicans cut the gas tax. 18 cents for gas, 24 cents for diesel. you could do something with that. That's not so bad. It could get you below $ 4. They didn't even instruct the tax writing committees to get involved in the budget. So even if they pulled the rabbit out of the hat and got a budget passed through the House and Senate, Ways and Means and Senate Finance, who have the authority to do that, are cut out of the entire process. And that's because on the other side of the coin, you have members who want to trim, you know, $ 200 billion from health care and other things that they don't have the votes for going into an election. So they've really locked themselves into a place where we're going to go to the polls with $ 4 gas, just as it has been for 104 days this year. 00:18:47 Speaker 6: And you see that conversation happening among candidates, realizing that this is such a problem. The other problem that is increasingly a conversation is data centers. And for that reason, it was really fascinating to see the president yesterday on Truth Social advocate for them, saying the only reason you shouldn't want a data center is if you want. 00:19:03 Speaker 1: To be poor and backwards. 00:19:05 Speaker 6: What do you make of the president going to bat for big tech and data centers? 00:19:08 Speaker 8: There's a lot of money on the line. And when the president has an opportunity, I would say crypto is another good example. There is a tremendous amount of cash that's about to be injected into the political sphere for the rest of our lives. 00:19:19 Speaker 5: Hundreds of millions of dollars. 00:19:20 Speaker 8: So when you look at what it's going to take to attract that money and to make sure that that comes to your side of the aisle instead of the other, you're going to try to cater to them. And what politicians are doing right now is they're catering to the voter. very shortly after the election, they'll start catering to the actual companies because they're going to need those campaign dollars going into 2028, 2030, and so on and so forth. So I think it's a tale of two times. One is pre-election where you're seeing Governor Abbott and Republicans and Democrats both try to come out and say, hey, let's slow down and figure out what's going on here as the American public turns against AI and against data centers just from apprehension. But as we get into post-November 3rd, they're going to want that money. 00:20:00 Speaker 1: They're going to want those campaigns. 00:20:02 Speaker 3: To come to them. That term has happened really quickly. 00:20:04 Speaker 7: Yeah. 00:20:05 Speaker 3: It's happened aggressively. Where did it come from? 00:20:07 Speaker 8: Well, I mean, the data centers are literally being built in your backyard or. 00:20:10 Speaker 3: In a farm. So people are starting to see it. 00:20:12 Speaker 1: They're starting to see it. And it's chatter. 00:20:14 Speaker 8: You know, you go around to Shreveport, Louisiana, where there is a new data center. And all of a sudden, there's no farm there. And people have lived there for generations, used to that farm. And now, instead, they've got a data center. And they don't want new roads. They don't want a new house. They don't want a new school. They want what they have had. And now it's all disruption. 00:20:32 Speaker 3: Has it become the bogeyman, the thing just to blame everything on? Absolutely. Higher energy prices. 00:20:35 Speaker 8: Yeah. 00:20:36 Speaker 2: Special interest in Washington. That's just become the target for everything. 00:20:40 Speaker 8: It's super easy. I mean, honestly, whoever did their PR needs to be replaced. 00:20:45 Speaker 3: Seriously, right? 00:20:46 Speaker 5: Rough. 00:20:47 Speaker 8: But I mean, that's what we're talking about. You can even blame the noise. It's very easy. 00:20:52 Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App.