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 Ferrow, along with Lisa Bromwitz and Amerie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. 00:00:36 Speaker 1: We begin this hour with stocks and Bonds, kicking off the treating week Little change. Eric Johnston of counter Fitzgerald writing, equities will need to battle the negative seasonality over the next two months. We think stocks can power through these headwinds and will be led by the tech sector. 00:00:50 Speaker 3: Thank you so much for. 00:00:51 Speaker 1: Joining us, Eric. Now from more Eric, I just want to start on all of this financing that is expected coming out. We're seeing this from Intel, We're seeing this now from orient Anthropic. At what point does it get concerning based on just the ability to monetize in quick fashion, So the amount. 00:01:08 Speaker 4: Of capital that is going to be required is clearly going to be you know, enormous. We're going to see a big step up in cap X next year to over you know, over a trillion dollars from from the Big four. But the bottom line is is that what they're what they're starting to show is the ROI and this is what the market has been looking for. We saw it from Microsoft and Amazon's earnings where cloud growth has accelerated and so you're seeing margins expand and you're seeing rent prices for compute starting to move higher. And so part of this story is about the cash flows from these businesses increasing and likely reducing the need for as much you know, capital markets uh as people expected before, and so I think that's incredibly important. Now the reality is is that equity and debt is going to be needed, and that's been part of the pressure that we've seen on treasuries because the amount of paper that's going to need to come to the market from a corporate perspective is going to be very significant. But I think the key point is that you're going to see these cash flows from operations increase and that will likely reduce the need for the capital markets. 00:02:29 Speaker 1: Eric, I just wonder what some of these companies know that we don't. Why are they frontloading all their capex now unless it's a market that is frankly looking really good to them. In other words, they think it's only going to get more expensive for them to borrow, which means that yields are only going to get wider, which means that anyone who's buying in right now is probably going to lose money on a market value perspective. And the same sort of goes for the equity side of things. Why is this such a good time for the borrowers? 00:02:57 Speaker 4: Yeah, I mean they're starting to finally explain how this capex is going to work and talking about how very soon revenue growth is going to exceed capex growth. And also the fact that you know, you brought the point about front loading capex when they're building a data center. There are parts of the data center that have a thirty year life. There are other parts that have a much shorter life related to the chips. But the point is is that the capex requirements early on are a lot more than what they are in you know, two, three, four years from now, and so that's going to likely inflect their free cash flow. We're already seeing it from you know, someone like Microsoft, where their free cash flow this quarter came in higher than than what the market was expecting. I think that's a trend that is likely going to continue in the quarters to come, and so that's going to be a very favorable dynamic from a borrower perspective. I would also say that although the amountunt of supply is clearly very large, and that has been part of the problem around the backup in some of these spreads, but the reality is is that their balance sheets are still extraordinarily strong and a year from now and two years from now are also going to be extraordinarily strong, even with all the spending they're doing. 00:04:23 Speaker 5: Eric every earnings quarter, it feels like for these tech names, the bargets higher that they have to clear. But you think this last season was an inflection point. 00:04:31 Speaker 4: Why so part of it was how they actually handled the conference call in terms of really explaining the dynamics of the capex. The second thing is is that margins are starting to expand, and so because the demand for compute continues to outstrip supply, pricing is going higher, margins are going higher, and you're also seeing it in the revenue growth. So if you looked whether it was Google, Microsoft, or Amazon, you know, they all came in higher than what, uh the street was expecting. And the growth is accelerating. So you're seeing revenue growth you know, for their for their cloud business, depending on who it is, you know, between forty and seventy percent. And the likely scenario is that this acceleration is going to continue into next year. And that's you know, very very powerful h dynamic. 00:05:32 Speaker 5: You're bullish on the momentum factor. You're very bullish on what's going on the semiconductor sector, lab by memory. 00:05:38 Speaker 3: What do you make of Intel this morning? 00:05:41 Speaker 4: So this was somewhat expected that at some point they were going to need to raise equity. So their business is a little bit you know, different than than others because of this you know, foundry build out and this you know, thought to be able to build foundry here in the United States. And so I think this, you know, the stock is call it thirty forty percent off the highs, and so I think investors were you know somewhat expecting this. Ultimately, it's a supply of equities, so I'm not surprised to see the stock you know, down this morning. Considering this supply that needs to be absorbed. But you know, I don't I don't think it's necessarily a indication of you know what other for example, semis are going to need to do. Most of them are generating significant cash flow where they're going to be doing the opposite and actually buying back you know, shares. So we'll see how this plays out. I do think that the overall equity supply story is a real story, will be a headwind for equities over the course of the next year. And this is an example that's certainly, you know, part of it. 00:06:55 Speaker 1: Eric, we beat any leverage out of the systems and situational awareness or is it all come roaring back in the four days subsequently after? 00:07:05 Speaker 4: So I think we've certainly have taken a lot of the faster retail money from a global perspective out of the market. You know, certainly, you look at what's going on in South Korea and some of these celebritytfs are down, you know, seventy five eighty percent, significant number of brokerage accounts have been shut down, the margin calls have been of you know, significant proportion. And then here in the US we saw a major d risking not only you know from a little bit from retail, but really from institutions who were in this momentum trade. And the momentum trade ultimately is highly correlated to the AI infrastructure trade, and so I think what we saw was a pretty significant event that we think was a clearing event from both a positioning standpoint for the momentum trade, and it's for a that it was crowded for good reasons. The fundamentals are really strong, and we think the fundamentals are going to continue to be strong. And so now you have this cleaner positioning that I think is going to allow this group to work in the coming weeks and months. 00:08:17 Speaker 2: Stay with us, Mulblindex, Savannah's coming up off to this. 00:08:30 Speaker 1: Sarah Kundsta Cleo Capital writing, I've said for years TSM is a lynchpin of AI. It is essentially irreplaceable in ship production for the next three to five years with no real competitors on the horizon. 00:08:41 Speaker 3: Sarah joins us now for more. 00:08:43 Speaker 1: Sarah, thank you so much for being with us. 00:08:45 Speaker 3: I want to take a step back. 00:08:46 Speaker 1: Because what we've seen over the past week is a real sense that tech is safe again. We've had leverage kind of pushed out of the system. We've had earnings, particularly from the hyperscalers, that seem to confirm the story that they're able to monetize more quickly than people. 00:08:59 Speaker 3: Previously expect did. 00:09:00 Speaker 1: Do you think that it makes sense to lean into the bull case with TSMC just one pillar of the overall positive. 00:09:08 Speaker 6: I think it makes sense on a case by case basis. 00:09:11 Speaker 7: So I think TSM is in a pretty safe place as long as you think that the sort of overall demand for chips is going to stay pretty much flat or even a. 00:09:20 Speaker 6: Little bit up over the next few years. 00:09:22 Speaker 7: I think Alphabet is in a potentially really interesting situation when you look at the stock. 00:09:27 Speaker 6: Price versus the revenue. 00:09:29 Speaker 7: But I think that there are still a lot of other names in the space, like the SpaceX's that are really really overpriced and that make me nervous. 00:09:36 Speaker 6: Coreweaves another one of those. 00:09:38 Speaker 3: There's an issue right now. 00:09:39 Speaker 1: People are trying to imagine what the world looks like in an AI universe, and there's this question of hyperscalers versus the adopters. As Mike Wilson is talking about that he's looking for, how are you expecting us to understand consumer products. 00:09:55 Speaker 3: That might have AI. 00:09:56 Speaker 1: And I'm thinking about Google and their phone that will be coming out later this week, or potentially even Apple that's going to be talking about their foldable phone, but maybe with less AI coming out in September. 00:10:08 Speaker 7: Everybody's making foldable phones and glasses. It is unclear if anyone wants them, but I mean, I think one it's a great reminder. Hey, Google makes phones, and also Google Power is the Android ecosystem of three billion devices, right. Google touches across a lot of their properties, well over four billion people every month, and so that's one of the reasons why I do think that they will. 00:10:29 Speaker 6: Be ultimately the AI winner. 00:10:32 Speaker 7: They have a baked in user base across devices, across consumer products and enterprise that just dwarfs any of the competitors. 00:10:39 Speaker 5: Can they be the winner when it comes to mobile phones because of where they are in the AI race? 00:10:44 Speaker 6: I mean, are we all going to have pixels now? But are we do? 00:10:47 Speaker 7: A huge lot of people, particularly globally, have androids? 00:10:50 Speaker 2: Yes? 00:10:51 Speaker 6: Do we know that? 00:10:52 Speaker 7: Very often Apple has ambitions on its own and then sort of goes back to Google and says, actually, can I just borrow youuros can I borrow your search bar? 00:11:00 Speaker 6: I'll pay you for it? Right, So we know that it is likely that Google. 00:11:04 Speaker 7: At the end of the day, will power, particularly in mobile, the vast majority of on device AI and I think that that is a pretty logical step in when you pull back and look at their dominance with the Android. 00:11:19 Speaker 3: OS when it comes to about phones. 00:11:21 Speaker 5: Lisa and I were just talking about how there's this journal report of the weekend how Apple is testing CXMT memory tips to put in their product lines. Are we opening up of can of worms here in the United States. 00:11:33 Speaker 6: In terms of Chinese chips? I mean, I think that we are. 00:11:37 Speaker 7: We are going to sort of surface what has been happening underneath, which is we know that China gets their hands on a lot of Invidio chips that everyone swears they don't have, and I think a little bit of vice versa, which hasn't happened a ton in the last decade, is not shocking. I also think that it opens up the competition more to say, hey, maybe we have to drive these prices down. And the reason that the Apples of the world are curious about using these other chips is largely because of price. And then obviously the political climate in China, and so if these chip companies have to be a bit more competitive on price, I think that that is not necessarily a bad thing for the market, even though it might be a bad thing for their stock. 00:12:20 Speaker 3: I'm glad that you mentioned that, Serrex. 00:12:22 Speaker 1: It seems like increasingly the AI story is a financial market story and a capital intensivity story. The idea that you have to raise potentially three four trillion dollars in the next couple of years in order to build all of the hopes and dreams of these companies. 00:12:36 Speaker 3: How important is it going to. 00:12:37 Speaker 1: Be that margins compressed in some of these places, whether it's memory chips or other potential components that go into this universe At a time where investors are that much more focused on rapid monetization before they hand out more cash. 00:12:52 Speaker 6: I think it's going to be really important. 00:12:54 Speaker 7: I think that we're going to see pressure that Hey, look, Nvidia, it's great that your margin are so big, but one that means there's a lot more sort of competition happening. We know that the Googles of the world, a lot of companies are working on their own chip design, but then on the other side. There's only so much that people can bear, right, and when we look at Apple having to raise their prices and because they can't get their hands on chips and everything else, a lot of these price increases are starting relatively small, but they eventually snowball against a consumer that is really feeling the pain. I think we're going to see more of that in the University of Michigan. 00:13:29 Speaker 6: Report this week. 00:13:29 Speaker 7: So I think that we are at this point where all the VC dollars in the world don't make a difference if at the end consumer, the end small business can't afford to buy what you're selling because they just don't have the cash. 00:13:43 Speaker 1: It seems like Apple has been rewarded for a number of months for not having as much capital intensivity as some of the other AI related companies. 00:13:51 Speaker 3: Do you think that can last? We're just saying, or. 00:13:53 Speaker 1: Report it at Jeffrey's analyst, who's really attracked closely edisonally by the Wall Street community downgrade their expectation for Apple. You're seeing shares down some one point two percent. In response, I'm just wondering if that makes sense to you based on its recent rise, and frankly, some of those questions that you were just talking about with consumer health. 00:14:13 Speaker 7: So I think you also have to remember there's another big narrative happening inside Cooper Tino, which is they're getting a new CEO, and they have a long beloved CEO who's done a really good job, and the new guy, while not new internally, is pretty new to the market. And so I think some of this is a little bit of a question mark, a little bit of a let's see what he's like. 00:14:35 Speaker 6: Do we like this new boss? And so I would put some of that downgrade. I would put some of those concerns in. 00:14:41 Speaker 7: The bucket of would this be happening if Tim Cook was still in charge doing the same thing. And on the other side, I think there's a problem that Apple has, which is a good problem to have for consumers, which is their products are so good and they're relatively reliable that you're not constantly buying more, and so where do they get that extra money? If your phones aren't getting stolen or you can get them back right and if your computer isn't breaking and you don't really need more memory, And so I think that's part of this problem for them, even though it points to the fact that their products are really really good. 00:15:17 Speaker 2: Stay with us. Mult Blomberg Surveillance coming up. 00:15:20 Speaker 1: Off to this, Emily Banister, the head of private credit Wellington Management, writing, the bigger the AI opportunity gets, the more selective lenders need to be. This is becoming a market of winners and losers. Emily joins us now for more. Emily, great to see. Thank you so much for joining us. 00:15:44 Speaker 3: Emily. 00:15:45 Speaker 1: What does it mean to be more selective when it comes to AI investment? 00:15:49 Speaker 8: Well, one thing to really think about with the AI financing ecosystem that's going on right now is that it is incredibly broad. We are certainly seeing the large data center deals come, but we are also seeing opportunities to finance the AI build out through multiple different lenses. You're seeing it in power generation, You're seeing it in cooling. You're seeing it really across all of the physical infrastructure that will be needed to support AI. And that means you have opportunities to really pick your spots. So when we hear things about one part of the market getting hotter or having a lot of issuentes coming in the future, we are also seeing those other SEMs, those other areas where you can really structure something unique for a need that is supported by the same demand but may have really different dynamics for a lender. And that's got us very excited about areas like within investment grade private credit or commercial real estate debt, where you can really look at these themes and then look at the individual structures and investments and find the ones that are going to be the great opportunities for lenders going forward. 00:16:52 Speaker 1: How do you immunize yourself emily at a time when we're getting trillions of dollars of capex into an investment theme that, yes, everybody believes in, but is murky as far as what the end state looks like and exactly the degree to which it can be monetized. 00:17:06 Speaker 3: How do you. 00:17:06 Speaker 1: Evaluate the type of yield you need to offset the risk. Also, it made an inflationary moment. 00:17:13 Speaker 8: I think you make a great point, which is that not every deal in the AI theme is going to go well. I think that's a guarantee from here because this is a very broad space and in many cases we've seen some thematic ideas in the past where if you identify the theme correctly, you can invest across it and the rising tide will lift all boats and you'll do well. I would say AI is the opposite of that. AI is a place you need to be selective because it's becoming increasingly complex. When we think about underwriting a data center type deal, you need to think not only about the corporate exposure, because it's not only a corporate exposure. You're thinking about the tenant risk. You're thinking about the ability for construction to meet its milestones. You're thinking about what the opportunities for power generation, how contracted are those, And you're thinking about the structure that you've agreed to and whether it protects you in addition to your grade point, what are you getting paid, what are the yields? 00:18:12 Speaker 6: So in a complex space. 00:18:13 Speaker 8: Like this, really being able to dig in is incredibly important. I think the best way to immunize yourself is actually to have a lens across markets, because this market is also becoming a place that where markets are intersecting. We actually did some work on the more than three hundred data center deals over the last two and a half years, and we found something interesting, which is that about a third of those were financed by banks, about a third by the public markets, and then about a quarter by private credit. So this is an ecosystem that is getting financed by multiple different parts of our financing options, and you need a lens across all of them to see where the structure's right, where's the pricing right, And having a full picture across all of them, I think is the way to immunize yourself going forward. 00:18:58 Speaker 5: Emily, you mentioned a bunch of risks when you look at how to invest in AI. 00:19:03 Speaker 3: What about the political risks? 00:19:04 Speaker 5: You know, we're sitting here in New York and there was a mematorium a ban for a year basically on data centers. People don't want them in their backyard and this is becoming a huge election issue, especially into the midterms. 00:19:15 Speaker 8: Well, you couldn't possibly talk about something more fun for a credit person than risk. 00:19:19 Speaker 6: So definitely a good place to go. 00:19:21 Speaker 8: But I would say that really gets to the main point, which is that there is incredible complexity underneath data center financings and each project can look different. They're in different geographies, with different permitting processes, with different community engagement strategies, and we do expect that you need to understand what's underneath each deal as opposed to just investing thematically, because that's really where I think lenders can support great projects and do well over time. 00:19:50 Speaker 1: Intel just came out and announced a proposed fifteen billion dollar stock offering. This isn't just a dead story, This is a financing story across the entire capital struct Sure, we're seeing the shares lower by about three percent free market trading. It just highlights how if there's trillions of dollars necessary over the next couple of years to build out the incredible tech infrastructure, it's going to be required to come from all places. 00:20:15 Speaker 3: Do these equity issuances. 00:20:16 Speaker 1: And we've seen this from other companies as well earlier this year improve the profile of the private credit space of the credits brace overall, or potentially increase the risk of correlation between stocks and bonds to a degree that we haven't seen for a long time. 00:20:34 Speaker 8: I think both are important considerations. What we're seeing here is a trend that even goes beyond AI and data centers into really one of the important emerging trends in private credit, which is the interconnectedness of markets. We're seeing increase in convergence between public and private credit, and to your point, we're seeing increasing overlap between issue exposure in credit and equity markets and really being able to understand how those are pulling together, and for an investor to be able to look across a portfolio and understand the aggregate risk that they have to a certain theme and to a certain issuer and to a certain credit profile is going to be one of the most important trends going forward for investors. 00:21:16 Speaker 1: Emily, just quickly here, how concerned are you about leverage that's building out in the system that was really highlighted by the situational awareness but frankly has come roaring back since a small washout period. 00:21:29 Speaker 8: Yeah. In many ways, what I'm seeing right now is a market that is really, because of its maturity and its increasing maturity in private credit, becoming a market that you can't tag with just one brush. So there are pockets of private credit and the overall market where we are seeing leverage increase. There are other areas where we're seeing really modest leverage and where we're seeing really strengthening profiles. And I think the breath of the private credit market that has now moved magnificantly beyond sponsor backed corporate direct lending to really include many other types of financing for assets, for projects, for high quality companies. You get to see multiple different profiles, and that makes it much more important to be selective. Because there are certainly areas where you'll find stress or leverage, there are also areas where you'll find incredible growth profiles going forward. 00:22:22 Speaker 2: This is the Bloomberg Survendans podcast, bringing you the best in markets, economics, angiopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app