00:00:00 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 Amrie Hordernt. 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. We begin this out where stops pushing KaiA. Bob Elliott of Unlimited Funds writing, It's becoming increasingly clear that most AI investment will experience poor returns even if things go well. Future income growth is getting increasingly squeezed from all sides. Bob joins us now from more Bob good monic warrying. Is it becoming increasingly clear? What are you looking at? This's painting that picture for you. 00:00:55 Speaker 1: Well, I think the. 00:00:57 Speaker 3: Basic picture of if you look at a plan five trillion dollars of capex over the next five years or cumulatively through twenty thirty, and you think about what sort of revenues have to come on that five trillion of capex in order to get anywhere close to a reasonable return. You're talking about at a minimum a few trillion dollars, right two three four trillion dollars of revenue in order to make a good return, and that is an extraordinary amount of revenue that has to happen. If you look at hyperscalers today, what do they make in the last twelve months one point five trillion, So you're talking about over the next five years they're going to add on top of the one point five trillion, they're going to add, you know, three four trillion dollars of additional revenue. That is an incredible amount of revenue that they have to get. Now, each one of those different hyperscalers is seeing the opportunity to be the lead, and so each one may be making a rational decision, but in aggregate, it is largely impossible that we're going to see this sort of revenue. 00:01:53 Speaker 4: Let's build on that. 00:01:54 Speaker 2: The biggest source of comfort for this equity market right now is earnings. Are you saying that could be the source of risk in the ist toccount, Well, I think. 00:02:02 Speaker 1: Anytime you're looking at a market. 00:02:03 Speaker 3: What's going to end up happening is how things come in relative to expectations, and so it's really important to look at what the expectations are right now and right now. 00:02:11 Speaker 1: Over the next three quarters. 00:02:12 Speaker 3: Markets are expecting your antists are expecting thirty one percent annualized earnings growth on top of the extraordinary. 00:02:18 Speaker 1: Quarter in the first quarter. We're not talking about. 00:02:21 Speaker 3: Five years forward type earnings, although even those are at the highest level they've ever been in fifty years, the highest level they've ever been in terms of expected earnings growth. 00:02:29 Speaker 1: And so you have very very high. 00:02:31 Speaker 3: Expectations, and mostly what people are doing is penciling out what was a great quarter in the first quarter to exist not just through the end of the year, but through twenty twenty seven and out into the future. And that is a recipe for disappointment. You're already starting to see lots of cracks in the view of how productive the AI trade is going to be, how much investment's going to occur. We actually see data center growth slowing considerably. 00:02:57 Speaker 1: It was double, it was doubling a. 00:02:58 Speaker 3: Year ago, today growing at about fifteen percent from the latest data. Those are the sorts of numbers that are not going to achieve thirty one percent annualized growth rates in earnings across the entirety of the equity market. 00:03:12 Speaker 5: That said, slowing is not exactly a terrible proposition considering how fast some of these have been growing. I was looking at ESK Hihniks and the revenue increase year over year for the first quarter, it was about two hundred percent year over year. When you take a look at just the overall revenues, I mean, if they just come in at one hundred and fifty percent growth year over year, if people going to start crying. I mean, what is the pace of deceleration that you're expecting. That really could cause some concern. 00:03:36 Speaker 3: Well, in order to get trillions of dollars of revenue on all this hyperscaler investment, you need revenue growth in the AI sector to run at more than one hundred percent a year compounded over five years. What are the odds that that's going to happen. Well, it's never happened in any sector at any scale in history. We're talking about cloud computing, you're talking about you know, back in the web days, smartphones, None of those have seen that sort of compounded type revenue growth in a sector. Not to mention the fact we're talking about four trillion dollars of revenue growth that's more than ten percent of GDP of the US economy going to hyperscaler revenues. That is a largely implausible outcome. 00:04:21 Speaker 5: So a lot of people are probably listening to this nodding along, saying, yeah, yeah, yeah, he'll be right. 00:04:24 Speaker 4: But maybe in a year. 00:04:25 Speaker 5: And in the meantime, the music's still playing, so we're going to keep dancing. What do you do with this even if eventually you're right, do you act on it now? 00:04:33 Speaker 3: Well, trading bubbles is a tricky proposition for anyone who's anyone who's been in markets for a little bit of time has has gone down the road of the early short and feeling the pain from it. And so there's sort of i'd say, two different, two different ways to approach this. First of all, if you're a largely long only investor, the trade off here is do you lean into this mania or do you say, are you thankful for the gains? Rebalance back and prepare for a little tougher environment ahead. And so really it's about rebalancing. That's the most conservative way to deal with this is to not lean in. There's all this pressure to lean in. Don't lean and rebalance back and wait for There's going to be a time, And the question is what is the spark in the sparks that pop bubbles are very very hard to recognize on a forward looking basis, but there will be something. Maybe it's this tiff for skirmish that happens in Iran that starts to create expectations of FED tightening something like that. Maybe that's what drives it, but you have to be prepared that this could shift, and it could shift very very quickly. 00:05:39 Speaker 2: Well, last time, in some ways it pushs people back into the tech trait. Do these renewed tensions create any different kind of results? 00:05:46 Speaker 1: Well, I think it. 00:05:46 Speaker 3: Then comes down to what's going on. As Lisa mentioned at the outset and the financing markets. If we get a world where the FED is forced to engage in more tightening because this Iran trade or because the Iran conflict starts to heat up again, we start to get inflationary pressures. The FED really does have to be a little more restrictive. That's the sort of thing that could easily start to funnel back right, if you can't get the debt issuance that's expected, if the equity markets aren't quite as open as people are expecting, that. 00:06:17 Speaker 1: Sort of tightening of liquidity is the thing. 00:06:19 Speaker 3: In the financing markets that would then start to lead back in terms of what's going on in how much capex they can do, and from the capex the earnings and back. 00:06:28 Speaker 2: A few FED officials got the edge of the gin mating. Do you believe July is live? 00:06:32 Speaker 1: Certainly? 00:06:33 Speaker 3: I mean, I think if you look at what's going on with oil prices, the only reason why July wasn't live was because oil prices were down basically at where they started the war. 00:06:42 Speaker 1: That's changed now. 00:06:43 Speaker 3: It's hard to know exactly how far this is going to go, but I think it's important to recognize from a macro fundamental perspective, the conflict in Iran and the Hormuz problem has not really been resolved. I mean, we only got ship flow through that was maybe a third at peak of what it was pre pre conflict, and so what that means is we are barreling towards a loss of inventories. That's still happening. You see what's going on with the spr it's going down. You saw what was going on with Chinese impoil imports that was at five million barrels a day in June, even after the MoU was largely signed. 00:07:19 Speaker 1: And so this inventory draw down. 00:07:21 Speaker 3: Is basically creating the illusion that everything's fine and people sort of look past the political element. 00:07:27 Speaker 1: But if that ramps up, we're still we're still. 00:07:29 Speaker 3: On a knife's edge in terms of creating a loss of inventories that would create a price fike ahead and oil. 00:07:36 Speaker 2: Stay with us, multilandeg. Savannah's coming up off to this on the Savannahs this morning, treading sile with a run. 00:07:53 Speaker 6: We just hid it very hard. And I say we hit up twenty to one. Every time they hit us, we're gonna. 00:07:58 Speaker 1: Hit up twenty. They didn't little. 00:07:59 Speaker 6: Something today, but it was really retribution for last night. They hit actually three votes, not two, and when they we hit back butcher. 00:08:09 Speaker 4: So here's the lacest this morning. 00:08:11 Speaker 2: The US military striking about ninety Iranian targets and a second straight day of attacks, Tehran retaliating against American allies in the Persian Gulf, nearly halting traffic through the straight Offormers. Let's build on this conversation with General Karen Gibson of Academy Securities, writing, when President Trump says the ceasefart is over, it is a political, potentially operational signal that it may not longer be committed to using restraint when employing military force. General Gibson joins, US now for more, general, welcome back to the program. What do you think that means for the next three months. 00:08:41 Speaker 7: Well, I think this is very reminiscent, obviously of the tip for tat strikes and counter strikes that we went through in late June at essence at Core. I think it is a difference of opinion, a difference of interpretation between what how the US and Iran are viewing the rules that we agreed to in the MoU, supposedly for the transit of vessels through the Strait of Hormuz. There are many other areas of potential conflict in the MoU. This is just one that will have to work through. The Iranians are insistent that they will control the transit of vessels through the strait, and of course that's something that we staunchly oppose, and I see very little room for overlap between these differing viewpoints between Iran and the United States. 00:09:34 Speaker 4: I don't see a speedy. 00:09:35 Speaker 7: Resolution of this essential difference. 00:09:37 Speaker 1: General. 00:09:38 Speaker 5: In the meantime, a real question about what the US will do to ensure that oil tankers can continue to pass through the Straight. Up from moves, you have a sense of what the US's appetite will be to protect non Iranian crude tankers that are trying to traverse the Straight. 00:09:55 Speaker 7: I think the United States is probably prepared to do that. Certainly, it's a capability that we have. Decision to do so would be a political decision. The US Navy has that ability, and in fact has been assisting some of these vessels with their transit through the Omanian side of the Strait. The question is, really, though, to what extent can we protect against vast numbers of drones and missiles shore launched missiles that are difficult to detect, that are very agile, and that provide a very minimal warning before they are fired. 00:10:31 Speaker 5: General, the trip presidence that we currently have that the United States currently has in the region, how much do you expect that to be sustained at the level that it currently is at for the foreseeable future as a result to what normal, Ule was yet saying is the new normal going forward? 00:10:46 Speaker 7: Yes, So, I think the heaviest burden obviously is on the naval forces and the air force, and some of the vessels have been there for some time rotating through those vessels. It's also a very heavy lift on intelligence to valance and reconnaissance aircraft and the various sensors that we have for detecting threats, because that's really a very heavy lift. And protecting commercial vessels that would be as well as our own forces and our own bases that would be transitting through. They're not such a heavy lift for our ground forces. We do have ground forces deployed there, but they are obviously less engaged in this stay. 00:11:21 Speaker 4: With US Multblemberg. 00:11:23 Speaker 2: Savannah's coming up off to this, what do you do with claims two fifteen? 00:11:36 Speaker 4: Do we just stop talking about it? Stop reporting the number? 00:11:39 Speaker 5: Well, right now it seems like the FETA stopped reporting number. They have stopped talking about it because they are not looking at the labor market because it is flatlined in terms of not necessarily not existing, but just in terms of the number changing. 00:11:51 Speaker 2: I think that's interesting as I'm saying that Nada Richardson of IDT alongside. We just got neck. We've got to. 00:11:55 Speaker 4: Talk about claims. 00:11:56 Speaker 8: I am, I'm sorry, I'm not you as well. 00:12:00 Speaker 4: That's why I did we claims to fish. 00:12:02 Speaker 8: We're going to give you a fresh take. 00:12:03 Speaker 1: Please. 00:12:04 Speaker 8: So we've had enormous stability and jobless claims. But the health of the labor market is how it's treating new entrants. So let's go there. If you look at very early career I wrote a blog this week about teenage unemployment. It's the highest unemployment rate we've seen outside the pandemic period in the last decade. It's around fourteen point five fourteen point six percent. It's harder for these inexperienced workers to get a job. And then I'd like to push back to those who are trying to get into this labor market, those who have been unemployed for twenty seven weeks or more above twenty percent, twenty seven percent. Now, we haven't seen this level in four years, going all the way back to the pandemic recovery. It's hard to enter this labor market as an inexperienced worker, and it's hard to get back into this labor market. And that's what we're seeing. It's not just the layoffs. It's the rollofs. I think that's what you're going to see because one thing about being unemployed and getting unemployment insurance is that you have to be active in looking. If you give up, you're no longer counted as part of that active in looking. That leads into the unemployment rate. And the longer and higher we see these long term unemployed, the more likely we're going to see that discourage worker share go up. And so this is the cost of a very stagnant labor market. This low higher, low fire labor market has a cost, and it's a cost we don't see because these people aren't in the labor market. 00:13:38 Speaker 2: To your point, you don't see it because when you see a four point two percent unemployment rate, it would imply this labor market is quite tight, right, how would you characterize it? 00:13:46 Speaker 8: I think it's quite still. 00:13:48 Speaker 5: There. 00:13:49 Speaker 8: And we've talked about this before. There's just not a lot going on. There's not a lot of dynamism. Some of this is because of demographics. People are leaving early. Maybe they got there their their retirement boom already, there are a house price boom already, and they're ready to leave. There's plenty of other stuff to do besides work in this economy. Maybe it's just that they just never found their footing in the slavery market because the turnover is so low, those opportunities are so uneven. They're not opening up in the same case, and they've given up. And so we have to look at this. We can't look at this initial jobs club number in isolation. If you pack on the other data, what we see is a labor market that's not very inviting to those on the outside. 00:14:35 Speaker 5: Is it wonderful though on the inside? I mean, I'm asking because are the people who actually are employed getting more effective, getting more efficient and getting paid a lot more and seeing wage increases at a faster club. 00:14:45 Speaker 8: You know, at ADP Research, we've been writing a lot about how there's very little turnover, that workers are kind of stay input and some would stay stuck, some would say happy. There's a lot to be happy about in the labor market. If you already have a job, you have stable way, that's great. You may have some hybrid work from home, that's great. But there might not be a lot of upward mobility because we're not seeing the turn the churn. So it's a mixed market. But if you're happy where you are, you're likely to stay happy because the job, the wage growth has been fairly robust. 00:15:20 Speaker 5: You know, I want to go back to where you began about youth unemployment or the idea that teens are having a harder time getting a job. Is this an issue of the jobs not being available, or is this an issue of the jobs. 00:15:31 Speaker 4: They want not being available. 00:15:33 Speaker 5: That they get out of college, they want to go to an office and push the paper around rather than say I'm sorry, go become a plumber or an electrician, or build a data center if they. 00:15:42 Speaker 4: Want to go to an office at tool Brama. 00:15:44 Speaker 5: For some of them, stay home and push papers would be their pets. I'm just seriously curious about whether it's the skills mismatch here. 00:15:50 Speaker 8: Well, when I talk about early career, i'm talking about the earliest. I remember my summer job as a sixteen year old at a pizza place with their regular hours, their regular play, but lots of points because I can feed my friends free food. Then I went to a library with really predictable hours and pay, and the economists and me love that more. But we're not even seeing that. We're not even seeing the retail sector or the leisure or hospitality sector. Take very young workers and teach them about the labor market. There are things that you can only learn through experience, and even a sixteen, eighteen, nineteen year old gains from being invited into a summer higher we're not seeing it in the same levels. And then you get to slightly older workers, those who are in college, who may be home for the summer. Again, unemployment is higher for them now than we've seen in the last few years. And then you get to the college grads and we already know we told that story that it is harder to enter into the slabor market. So our early career trajectory is stagnating along with the slow, higher low fire a labor market. It's something we should talk about more and not dismiss when we think about the health of the labor marw. 00:16:58 Speaker 2: Wlshed dishes and refined my time in speaking skills. 00:17:01 Speaker 8: There you are. 00:17:02 Speaker 2: You got a deep understanding of Cursinger Italian right and. 00:17:05 Speaker 8: The necessary sides, and an unappreciated skill in the way or market. 00:17:09 Speaker 4: For sure, without a doubt. 00:17:10 Speaker 2: Should see how fast I'm at home now just clearing the kitchen. This is the Bloomberg Surveillance 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.