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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at seven am Eastern on Apple CarPlay or Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.

00:00:27
Speaker 2: This is the interview of the day. Francisco Blanche joins us in studio, driving all of commodity coverage worldwide from mister moynihan and his Bank of America. This is a hugely sophisticated note. I want to get away from what's a gallon of gas in America? And I'm going to look here. It's something I don't understand called nwe low sulfur gas oil cracks to bring crude in that if you look at the refinery in distillates and say Europe, it's a moonshot. Am I close it is?

00:01:01
Speaker 3: It is a moonshaw, Tom. We We have the difference between a diesel and crude oil wider in many places than the crude oil price itself, which has almost never happened before. We have a major, a major refining shortfall which is happening across three main areas. We get as you mentioned earlier. We got Russian refineries being struck by Ukraine. We have the Middle East still on a double blockade, and of course with refineries also instruct in the last but least, the Chinese have been curtailed. They're exports to the region to protect the domestic market. Uh, the exports of products of fuels, and so that leaves the US of A as the only place open for business. Tom It's uh. If you don't need gasoline or diesel, you got to come by here, which means inventory is here dwindling very quickly.

00:01:58
Speaker 4: What is the refining story here in US? Do we are we adding refining capacity here in US?

00:02:03
Speaker 2: Are we not? Where?

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Speaker 3: Are we? We really aren't for a long time. And part of it, of course, is the transition to electric vehicles, plug in hybrids, all that fuel efficiency, which means that frankly, neither the US nor many developed markets are really demanding more fuel. It's just the weird destroying supply at an alarmingly high rate. That's the story.

00:02:26
Speaker 2: So across the Bank of America spectrum, what are you studying to see quote unquote if the market breaks or it recovers, it snaps, whatever the drama is which of the myriad of things you look at matters.

00:02:41
Speaker 3: Well, So I think the most important thing here is inventories, right, because if you think about inventories and the role they're playing commodities, that that's what makes them different than let's say, currencies or bonds or increase. Inventories are are the glue that keeps the man in supply together. And I would say that if you think about last six months, right, we've had this massive negative supply shocking oil and may people are surprised that it hasn't created a collapse in economic activity, But part of the reason is we have very high inventories that we've been drawing for a good amount of time. We've lost about twelve to thirteen hundred million barrels of oil as a result of the run war, and again about two thirds of that has been met. Two thirds of that gap has been met by inventories, which means GDP growth has only come down maybe thirty forty basis points globally as opposed to one three percent.

00:03:40
Speaker 2: That's the story. How long can that?

00:03:42
Speaker 4: Can we play that game for?

00:03:43
Speaker 2: How long?

00:03:44
Speaker 3: Well, so we can play that game for a little longer, but we're getting close to the end of the rope. I think for thislts to Tom's question, i e. Diesel and jet fuel. We are almost there. We got a month two months before we run out of rope, and then what happens, Well, then what we are saying happens in a more extreme, magnified way. It's just shown in price, shown in price, and you need the demand rationing. You need a lot of volatility, Tom, that's what needs to happen. You have very sharp movements up and down in the price to force people out or maybe to create I don't know. Maybe we had Spirit Airlines earlier in the year. Maybe we have another couple of airlines or truck companies.

00:04:25
Speaker 2: Francis com Blanche with us driving all of commodity coverage for the Bank of America in studios with us, with our question, our interview of the day, good morning across America, the way you choose to listen to us, good morning in Spain, good morning to say that good morning across Europe, and of course of the evening of the Pacific rim. I want to code to the in Madrid, to the Merca Madrid effect, which is the food juggernaut that comes into Madrid I mean you go to the Prado ast Musicum in the world. We all know that that the lighting in the Metropolitan Museum of Art was copied off the Prado. That's how successful it is. Give us a granular view of diesel in Spain well.

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Speaker 3: So, so demand for diesel in Europe is taking already a bit of a hit. So it's coming down to tad and part of it is prices have been doing their work, and but of course it's it's been a strong summer from a tourism perspective, right, you have a lot of a lot of views. I mean, in Europe, diesel is an on road fuel for cars, and you've had a lot of people on vacation, you have a lot of foreigners traveling in remember uh in terms of tourist season is going to be a record tourism tourism season for for Spain and southern Europe because because there's not a lot of other places to go, people aren't going to vacation to Dubai.

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Speaker 5: So you know.

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Speaker 3: So, But but on the other hand, if you look at the northern side of the continent, like Germany, they were trying to get a recovery going. They were trying to get the industrial activity going. But now that's and then slipped starting to saw that's the thing.

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Speaker 2: It's like the second wave here of this dis refinery crisis.

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Speaker 4: If the shade of the moves gets open tomorrow, that's not going to fix things necessarily, right, I mean you're talking it seems like refined distillates as Tom's been focused on. That's kind of what we need to be focusing on now. As opposed to the price of oil.

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Speaker 3: Yeah, I mean, the crude reality of oil really goes through distald right now. And I mean gasoline is also frankly running in a bit of an empty tank. Remember were at the end of summer, this is the shoulder season. I mean, we should be seeing lower prices. We are instead seeing a lot of pressure on these fuels. And we are a month and a half to two months away from the first bits of cold start kicking in, right and by the way, we don't even have European natural gas in store, even though he started forty three percent. I mean, we're really starting to hope that we get saved by a warm winter again.

00:07:01
Speaker 2: Unfortunately, just time for one final question to bring it back to the United States of America this discussion. We're immune from it, I.

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Speaker 3: Mean not fully immune. But the one thing you have to remember is that US is the world's largest petro state right now twenty percent of the world's oil, a third of the world's gas. And there's policy tools that can be used to mitigate the impact on the lower income households in this country that you don't have in other places that will have a huge fiscal cost. Here's just the transfer. I mean, you could tax what's coming out, you could create some quota. I mean, there's things you can do now. You can pressure companies to bring prices lower the pump, so but you cannot do that elsewhere elsewhere. You got to buy it.

00:07:46
Speaker 2: Really intelligent question comes in. This is of course Bloomberg dot com subscribers in terminal clients, this is Bloomberg dot Com slash ask Radio. This is a brilliant question. Paul John from New Jersey emails in and says, ask for instance, go is the gall of the guests at the wall walk going to crack three dollars? Are we going to get to two dollars ninety eight cents in a gallon of guess?

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Speaker 3: I don't think so, right, now going down. We have a major challenge. We're playing all the tricks in the book, like, for example, we've relaxed summer gasoline rules and we're now running on winter gasoline. So there's not much scope.

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Speaker 2: Here, are you? In speaking terms of Sevina, of course, would you tell Savida she's got to get into the studio. I mean I emailed Boyne hand the other day and I said, what is this. I need Savina super Madian in this studio with Frienstance. The two of you together would be lights out, all right? That would be an amazing Francisco Blonde. Thank you so much. Again, we protect the copyright of all of our guests. Go to Bank of America for the brilliance of Francisco Blanche. And oh and John from New Jersey, thank you for that question. Stay with us more from Bloomberg Surveillance coming up after this.

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Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube.

00:09:19
Speaker 2: Nelson you joined the Super Alliance bursting always brilliant. Oh, my what a sentence. The market is moving from investing in stories to investing in proof gospel. What is proof.

00:09:33
Speaker 6: Proof is really about our companies able to carry through more than just the narrative. And what we're seeing is that through this earning season, it's been a great earning season, but companies that have been able to deliver on things like margin, expansion, durability, right capital allocation, they've really outperformed companies that have just gained revenues because of a strong order book.

00:09:58
Speaker 4: So we're in prop I don't know, maybe year four of this AI story in the marketplace. How do you guys frame out the AI story here? Given again a few years of experience here?

00:10:09
Speaker 6: Yeah, Look, I think with AI, it's a very well known story. Obviously because it's so crowded, it's so volatile. We could see what's going on with the costby on a day day basis. But I think this is a place where really doing your research and thinking locally can really help. And I think you could still find by doing distinctive research, you could still find uncovered bottlenecks. And here's a great example. Think about the whole AI investment supply chain. So we all know about d RAM. We all know about high bandwidth memory and the need to invest in that. Those prices have been going up for a long time. But what you don't know is actually even deeper what it takes to make these higher performing chips. You need substrate, you need materials. And now what we're seeing here is these are the companies that are uncovered and benefiting. You go into Taiwan and you find these smaller companies that have a lock on the market and very specialized materials.

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Speaker 4: So does that mean, you know, running the equity business alliance bursting? Are you upping? Are you finding just because you are looking for some of these names, you're upping your allocation to non US companies these days.

00:11:22
Speaker 6: I think international equities is a really great place to be looking. And actually you've got many more themes besides just AI across the outside of the US. And you think about European defense, here's another place where you're looking for proof. You've got the defense been picking up, You've got a strong order book. But what really is different. Gien companies are companies that are able to grow their margins and improve their profitability.

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Speaker 2: So I did this with a this is Google Jenini folks, which is my foundation here they make the show go forward with Nelson you it's perfect. I wrote in does Anthropic have a cash conversion cycle? I mean when you get back, folks to fundamentals improve the micro of that is, the dynamics of payables, receivables, et cetera. And they maintain a near zero or negative operational cash conversion cycle. Does Alliance Bernstein traditional accounting work with fancy AI companies.

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Speaker 6: We actually have been working with the AI companies, but it definitely is a struggle. We were just debating yesterday in terms of our own token usage and how we can economize and optimize around our token usage because Anthropic is going to push you to their highest class.

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Speaker 2: So do you go to China?

00:12:43
Speaker 6: I think that's that is We're going to have to use a hybrid of technologies. And you know, look, whether you use Gemini, whether you use Claude.

00:12:52
Speaker 2: Okay, this is brilliant, folks. The dumbest guy in the room is four times smarter than us an Alliance Bernstein. You're having token angst. What's the sele to token angst?

00:13:01
Speaker 6: I think what you have to do is you have to you have to think about optimizing and productionizing. We were talking through one workflow that you might have twenty different queries.

00:13:12
Speaker 2: Eighteen of those queries.

00:13:14
Speaker 6: Are actually things that you could have just done with the code, just a legacy Python and you don't need AI.

00:13:21
Speaker 2: We'll come back. I did Python for one weekend, ran out of Jen Nelson, You with us. We're going to continue with Nelson and you of Alliance Bernstein. Here we have economic data a little bit late. I'm sorry for the alexis. I apologize. Our economic data.

00:13:36
Speaker 7: And wholesale prices in July unchanged after a drop of three tenths of a percent in June. That drop in June was mostly due to a huge pullback in energy prices. Excluding food and energy prices, month over month, core wholesale inflation up two tenths of a percent. That is a bit cooler than the three tenths of a percent rise we were expecting and matches the prior month's two tenths of a percent rise. Taking a look at year over year, the producer price index up four point seven percent versus five and a half percent in June, and also less than the four point nine percent expected PPI. If you take out volatile food and energy the core up four point two percent, a little bit hotter than the four point one percent expected and less than four point seven percent in the month of June. Of course, this comes a day after an inline reading on the Consumer Price Index, so once again headline numbers here a month over month PPI unchanged year over year, up four point seven percent. That is your PPI index report for July. Back over to Tom and Paul killed it.

00:14:39
Speaker 2: She never thought she'd be doing that at CBS for a few year, so just killed yep, the PPI report. Nice chure into the market here yields pretty much where they were, yields in a little bit this morning, futures up nine with Nelson you alliance Bernstein on token. That's really important discussion, Paul.

00:14:57
Speaker 4: Swings and the PNL item. You got to pay for this AI U sit here. If you want to look for value outside of the AI story, where are you guys spending time these days?

00:15:08
Speaker 6: We're finding a lot of places. And you talked about international markets. The Actually let's think about Korea. Okay, you know Korea is all dominated by the AI story, but underneath that you'll also have this value up program that's going on in Korea, and so the Korean banks are actually making tons of profit, making great capital allocation decisions and returning capital to shareholders. We're seeing the same thing in Japan also with their stewardship programs. And again this focus on profitability and improving shareholder returns has actually been great for these companies.

00:15:43
Speaker 2: Can you gauge, interpret, or predict profitability at the hyperscalers.

00:15:49
Speaker 6: That's really difficult because we don't know the trillion dollar question, which is how much productivity are you going.

00:15:56
Speaker 3: To get out of this?

00:15:57
Speaker 2: Also, we don't know price dynamics on revenue is a two part price in unit study off of your incredibly important meeting yesterday on tokens. Do we know the revenue dynamics? It's like Jack Welch one on one.

00:16:16
Speaker 6: I think the other interesting thing is the cost of producing these tokens is going up because of the cost of memory, because of all these bottle necks. And so if you think about some of these hyperscalers and the investments and capex that they've had to make, I thought what was really interesting, you know, with some of the increasing capex numbers, is they were just doing it because of inflation, right, they weren't getting more data centers because of that. So this spiraling of costs, it's who's going to wind.

00:16:45
Speaker 8: Up think of that.

00:16:46
Speaker 2: That's fascinating. Thank you so much for mentioning, you know, just one little window, one vignette folks into these so called tokens.

00:16:55
Speaker 4: Your managers told me you got to look at your people and say, you know, your AI usage hazard fixed hard cost me as your manager, you know, justify to me your use of whatever AI.

00:17:07
Speaker 2: And some people are saying it's really like a large cost.

00:17:12
Speaker 6: Now I think, I think token transparency is so important, and so as a manager, we're looking through what's the token use? Now we're not there yet, but we're putting in the plans and the scorecards for understanding how we're utilizing the fence.

00:17:25
Speaker 2: Come back tomorrow, Nelson, you were this alliance Bernstein. Stay with us. More from Bloomberg Surveillance coming up after this.

00:17:41
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube.

00:17:54
Speaker 2: Let's get right to it. I love I've been finding so that the fiery research not always very opinionated, and smart Tiger's financial will jump into that right now. Okay, I want to go Ivan to one of your paragraphs on backlog. The gurus that I talked to over a beverage always end up circling back to a ginormous backlog. Discuss what that changes in a by rating out three or five years. When you've got that backlog, you just.

00:18:25
Speaker 5: Have huge visibility into demand and it goes pretty far out that the cloud companies, the AI platforms, the hyperstealers like Microsoft, Google and Amazon Aws just cannot meet the incredible demand and they have to keep investing so that they have the capacity and keep investing in the speed to handle more and greater inferences, which is requiring faster processors, more dynamic memory, and high speed storage. So these all bode well for the cloud service provider, for the memory providers like Micron and sand Disc, and this is just the beginning of it.

00:19:08
Speaker 4: So, Ivan, one of the many reasons that investors liked some of these big tech names is because of their tremendous free cash flow. For a lot of these particularly the hyperscalers. That's not the case recently. I mean, yes, they still have tremendous operating cash. That's great. The boy they're spending it all and then some is that a problem? Is that a headwind for the Microsoft's, the Metas, the Amazons of the world.

00:19:33
Speaker 5: No, it's the opposite. Free cash flow is your cash flow minus your cap X, your capital investment. In fact, the reason that free cash flow is lower than cash flow is because they continue to invest, and they need to invest, and that investment helps the entire economy, especially the tech sector. But it's driving demand for trades people and labor for electricians, for construction people. This is helping companies like Caterpillar, which makes obviously bulldozers and stuff for construction, but they also make diesel generators because you need backup power excuse me, in all of these data centers. So it's helping the future of power like which I believe is nuclear excuse me, with companies like Aclow. So this is just an incredibly broad and powerful investment theme.

00:20:28
Speaker 4: In terms of the capex ivan, is there any way to gauge where we are in this? Because these CAPEX numbers have been so huge and people are wondering how sustainable. Is that are these investment levels.

00:20:42
Speaker 5: I think it's the capex is sustainable. But your point you made before, Once the capex spending slows, then the free cash flow increases. And it's most importantly about free cash flow yield, which creates the compound growth of the stocks of these companies.

00:21:00
Speaker 4: So we know that the hyperscalers are going to continue to invest Apples. Apple is a different story here.

00:21:06
Speaker 2: Just give us your.

00:21:07
Speaker 4: Sense of how you position Apple as a company within this AI story.

00:21:13
Speaker 5: Well, it's all about how you access It's compute at the edge, how you access data, information, computing, and all of the services out there, whether it's retail, entertainment, booking, travel, buying, movie or concert tickets. It's the device that powers it all. It's how most people engage with the web with AI. So this and also Android. Google's Android with his Android operating system dwarfs that of the number of Apple users.

00:21:49
Speaker 2: Right, I even finds it with us he and I aren't and coffeth on today it's working on as a tigers and you know what, I love your Ivan. I want to get out front of this. Microsoft of the recent pot was Bill Ackman bought it and everybody said on board. I guess so I got a six to ninety target on Microsoft. Just as one example, even McDonald's you got to buy on after the struggles there in Vidia a four to twenty five A strong by an Nvidia Apple strong by up to seventy five points from here as well. Even so on page four you've got the Tiger's financial risk factors. What do you stare at the ceiling about at night.

00:22:31
Speaker 5: Well, first of all, we have geopolitical issues that are artificially increasing the price of oil right now, which is somewhat constraining consumer spending. I believe we will see an eventual opening of the straits the straight up from moots, and oil will flow. First of all, we do have an abundance of oil, and we are the world's largest producer of oil here in the US. So I think that once this is somehow resolve, we will see a tremendous drop in oil prices, and that will be helpful. That will put downward pressure on inflation, and I think shift the FED potential easing. I still think the FED fund rate should be closed three percent than the three seventy five that it's at right now.

00:23:16
Speaker 2: I think that will be find because the time I've been I got to go. I love that you covered Callaway golf in a cushion it holding.

00:23:24
Speaker 3: Yeah, absolutely, he does at all.

00:23:25
Speaker 4: I have Callao irons.

00:23:27
Speaker 2: This is amazing. I don't be a stranger. Ivan finds it with the Seren technology. Stay with us. More from Bloomberg Surveillance coming up after this.

00:23:45
Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Apple Karplay and Android Otto with the Bloomberg Business app, or watch us live on YouTube.

00:23:58
Speaker 2: So I along with all of them. America deeply disturbed by reports just today Ed Pilkington in the Guardian of London with a brutal story about hardship on the USS Abraham Lincoln. It has gone viral on social of suicide, attempts, of distress conditions, two hundred and fifty days at sea. This is why Harrison Mann went into the army. I'm making light of it, folks, but it's deadly serious. Harrison Man has a distinguished career serving the nation and joins us this morn just thrilled, thrilled Harrison to have you on here, director for Campaigns and Policy, Win Without War. How did you respond when you saw this painful essay in the Guardian.

00:24:46
Speaker 8: So incidentally, even though I was an army officer, we were actually assigned to the US Navy headquarters in Bahrain, and I had several soldiers who did a tour on Davy Stry joining their boarding team. This was back in twenty nineteen. There was a some kind of illness that forced the ship to be quarantined, and so my soldiers were on that ship much much longer than intended. You know, these are people who are not sailors and had never spent an extended amount of time at sea before, and it took quite a clear psychological toll on them. I mean, the story about the Lincoln is another reminder that at least when it comes to Iran, the US cannot fight a war on the cheap. We cannot fight a war and ignore the consequences, which is what we'd like to do as a country, or at least as a political class for the last twenty odd years of the War on Terror. I think this problem, and the straight up formulation in general, is the problem that Trump just wishes would disappear. But the fact that we are straining our military, including you know, this carrier and its crew, is another sign that basically the status quo is not sustainable, even if Trump says he wants to low key it and basically wait for Iran to collapse from pressure.

00:26:10
Speaker 4: Harrison, you know, as it relates to Iran, I think you know, administrations going back, you know, decades have recognized that Iran is a serious problem. Iran is a bad actor. But the reality, you know, you do the war games and the war plans, and you game it out, and there's really not many you know, military solutions there unless you want to put hundreds of thousands of boots on the ground there. What did the Trump administration see differently here? And why do you think they went in and started this war? Wind Boy, it just seems like it's not going to plan.

00:26:44
Speaker 8: Trump, at least Trump himself and maybe heg seth It made it pretty clear that they expected overnight victory like they think they got in Venezuela, that was totally detached from reality. I think it's worth examining why the president of United States was convinced that would be the case. You know, why very hawkish DC think tanks and officials, and why the Israeli Prime mister had enough access to him to convince some of that. But that's that's clearly what Trump had in mind going going in, and when you get to say, like March tenth, where it's clear that you're not getting regime collapse or surrender overnight, they have not had any idea of what to do and how to extricate themselves from this problem. And that's why we see, you know, threats of bombing, bombing that doesn't accomplish anything. Trump trying that multiple times and now trying a blockade for the second time, even though he tried it from April to June leading to the first MoU and that didn't make the Irnan government really concede or back down. Either. You're right, there's no there's no strong, clear military solution here. I think to their credit that Trump administration recognizes that, because if they didn't, we'd see them putting a lot more troops at risk. They do seem to understand that basically, anything beyond kind of taking potshots at Iranian coastal areas or going after shipping is going to put more US troops at risk, and they are they're thankfully not willing to do that. But as we see, even that is having a human cost on US forces. When we talk about the USS Lincoln.

00:28:20
Speaker 2: Harrison, I look at your track record, your history of serving the nation, and you were at the embassy in Tunis, and I think in nineteen forty one and forty two and maybe over to forty three of America coming across Africa learning about World War Two. Rick Atkinson Folks does a great job on this in the first volume of his trilogy. Harrison, Man, what are we learning now that we can apply in Iran in the Eastern Mediterranean come November or December.

00:28:53
Speaker 8: Yeah, An Army at Dawn was required reading for all of us who work in the military office at that embassy about the US going to war basically totally unprepared and learning a lot of lessons at the cost of tons of US troops getting killed while we figured out how to fight properly. Unfortunately, I think the most important lesson is not something that's going to take months to rectify, right, It's that it's really, don't get into this war in the first place unless you ate.

00:29:21
Speaker 2: Yeah, I know that I agree with that, but I don't mean to interrupt sir, but major my man, what I would say is, we're in the war now, so then what do we do?

00:29:32
Speaker 8: I mean, I would say, in my view, nothing in the straight of four moves, nothing in Iran is worth the death or maiming of one more US service member. And that's really the binary look at it. We can draw this out and inevitably get more US forces killed, because Iran is demonstrated that can reach out and touch us pretty much everywhere in the region. Or we can just cut our losses and get out of this as quickly as possible. That means making concessions to the running government that Trump will find embarrassing. It may mean removing US forces from the region, which I think is a good thing given that they've mostly proven to be a liability. But that's the really only logical solution here. Otherwise we're doing you know, we're like a gambler who can't quit. Trump keeps doubling down, and even though he thinks this is sustainable. You know, there's not just the economic cost. There's the fact that, you know, if this blockade doesn't work, if Trump keeps saying I can low key it and he keeps demonstrating to Iranian leadership that he doesn't feel pressure.

00:30:31
Speaker 2: Well, they can still ratchet up to pressure, not just.

00:30:33
Speaker 8: With economic warfare, but again by going after more US troops. And there's not really a solution to protect them again other than either negotiating good faith or moving them out of theater. If we want to talk about fighting to a finish here, there's just not a realistic option.

00:30:52
Speaker 5: You know.

00:30:53
Speaker 8: Even escalating militarily, which at this point would mean some kind of ground operation, is far from certain and would really entrench US even deeper in.

00:31:02
Speaker 2: This Quadmark Harrison and a former US Army major win without war.

00:31:07
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