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