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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Welcome to the Bloomberg

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Speaker 1: Daybreak Asia podcast. I'm Doug Krisner. The US equity market

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Speaker 1: climbed to all time highs in the last session. That

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Speaker 1: was after Wednesday's FED raid cut, and money flowed into

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Speaker 1: riskier corners of the market. Look at small cap shares,

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Speaker 1: they simply soared. We had the Russell two thousand jumping

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Speaker 1: two and a half percent, closing at its first record

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Speaker 1: high since twenty twenty one. Now this index is home

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Speaker 1: to some of the riskiest and most indebted companies in

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Speaker 1: the market. At the same time, today, we had the Dow,

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Speaker 1: the S and P and the Nasdaq finishing at records.

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Speaker 1: In a moment, we'll take a look at how Stephen

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Speaker 1: Myron's appointment to the FED could lead to a weaker

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Speaker 1: dollar and benefit em currencies. I'll be joined by Bloomberg

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Speaker 1: opinion columnist Shuley Wrenn, but we begin here in the States.

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Speaker 1: Joining me now is sham zavsal Managing director at the

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Speaker 1: Carnegie Investment Council. Chams is on the line from Toledo, Ohio.

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Speaker 1: Thank you so much for making time to chat with me.

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Speaker 1: It's very interesting to look at what happened in the

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Speaker 1: bond market today. Yes, we had a rally in equities,

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Speaker 1: but yields were up across the curve. And this seems

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Speaker 1: to be tied to the idea Chams that the Fed

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Speaker 1: is going to allow the economy to run hot. Is

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Speaker 1: there some danger here though.

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Speaker 2: There could be. I'm not quite there yet in terms

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Speaker 2: of overreacting to a single day move, but it can

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Speaker 2: be very much interpreted that way. So if you look

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Speaker 2: at the dot plot, obviously from yesterday, while we did

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Speaker 2: get an extra cut expected for this year from a

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Speaker 2: concessus standpoint, twenty twenty six is really essentially flat, right.

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Speaker 2: If you look at the consensus for twenty twenty six,

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Speaker 2: most people are still gravitating towards barely any movement from

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Speaker 2: where they leave off in twenty twenty five. So that

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Speaker 2: should potentially keep things in check. But you know, the bondmark,

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Speaker 2: it has widely been known as be home for more

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Speaker 2: sophisticated investors than equity, so we have to pay attention

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Speaker 2: that we cannot ignore the bond market.

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Speaker 1: Of course, Yeah, Powell call this move a risk management cut,

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Speaker 1: but he also reiterated the danger of those tariff hikes

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Speaker 1: creating a persistent uplift in inflationary pressures. And that's I

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Speaker 1: think maybe what was being expressed in the Wednesday session

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Speaker 1: after the Fed's decision, because we also had yields pushing

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Speaker 1: a little higher. Are we looking at a situation where

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Speaker 1: stagflation is a possibility?

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Speaker 2: You know, it depends. You know, when we think about

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Speaker 2: the spending of where it's coming from. One dollar worth

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Speaker 2: of spending is the same, you know, whether it comes

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Speaker 2: from one source or five different sources. Right, So, while

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Speaker 2: we are not so enthused with the idea that the

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Speaker 2: AI team is really worth powering a good chunk of

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Speaker 2: the economy, but you know, generally GDP calculation will be

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Speaker 2: fairly neutral to where this boost comes from. My assessment

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Speaker 2: is that for stacklation to truly take shape, we're going

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Speaker 2: to have to a c change in terms of the

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Speaker 2: hype that we have seen over the last couple of

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Speaker 2: years towards data center build out. That number is so

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Speaker 2: substantially high. The fact that it's likely going to touch

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Speaker 2: one percent of US GDP, most likely in twenty twenty

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Speaker 2: six keeps me at bay from thinking that stackflation is

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Speaker 2: around the corner. But I wouldn't be betting that we're

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Speaker 2: going to skirt by a recession over the next twelve months.

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Speaker 1: Either, well, let's stay with that. I'm wondering whether or

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Speaker 1: not you believe, given the ferocity of investment in AI infrastructure,

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Speaker 1: whether investors are going to see an ROI a return

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Speaker 1: on investment.

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Speaker 2: Well, I think the corporations themselves are seeing it. Now.

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Speaker 2: I'm not speaking about the owners of the lms at

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Speaker 2: this point because that's a whole different story altogether. But

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Speaker 2: when you see the way really Fortune five hundred is

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Speaker 2: deploying these things, Obviously there's customer service, and then there

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Speaker 2: is the sort of the first level, brand new graduate

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Speaker 2: analytical abilities. These are the areas where you're going to

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Speaker 2: see a lot of weakness, I think over the next

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Speaker 2: couple of years in terms of the job market, because

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Speaker 2: that's where I think this suset some of the substantial

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Speaker 2: gains in productivity is going to come from. Whether you

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Speaker 2: look at whether it's the health insurance industry, whether it's

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Speaker 2: just a simple chat bot being deployed across the board,

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Speaker 2: or the agentic AI, the no code AI agents that

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Speaker 2: are being deployed to handle a variety of tasks across

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Speaker 2: the board. I think there's some significant productivity gains awaiting

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Speaker 2: around the corner. So I think Fortune five hundred is

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Speaker 2: pretty good. As far as the small businesses that may

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Speaker 2: be still running on Windows eleven, excuse me, windows ten

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Speaker 2: or older, I think there's going to be a significant

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Speaker 2: dichotomy between how the rest of America ends up using

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Speaker 2: the advancements in AI versus how Fortune five hundred ends

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Speaker 2: up using.

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Speaker 1: Well, speaking of small companies, we had a rally in

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Speaker 1: the Russell two thousand today. It was up about two

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Speaker 1: and a half percent, as I indicated a moment ago.

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Speaker 1: Give me your sense on whether this was a little

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Speaker 1: bit of a short squeeze here or whether the market

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Speaker 1: is genuinely convinced that there is going to be kind

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Speaker 1: of a resurgence and some time of economic activity that

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Speaker 1: would justify pushing small cap stocks higher.

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Speaker 2: Well, you know, it's probably not a great idea to

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Speaker 2: read too much into a single day move, but you know,

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Speaker 2: as you mentioned that Russell two thousand is home to

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Speaker 2: a lot of unprofitable companies and therefore risk your companies,

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Speaker 2: high speculation biotech, and frankly a lot of regional banks

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Speaker 2: and mortgage companies for that matter. I think the way

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Speaker 2: we are sort of absorbing this turn of events is

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Speaker 2: essentially to say that look from a historical perspective, when

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Speaker 2: the FETs have cut raid, they have generally done it

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Speaker 2: when it's already too late. So historically speaking, you would

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Speaker 2: have found over the last thirty forty years that a

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Speaker 2: rate cut happens and then we slide into a recession.

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Speaker 2: I think Chairman Powell is going to be one of

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Speaker 2: those you know, people celebrated, I think in later years,

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Speaker 2: because he has had now three different incidents where he's

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Speaker 2: had the chance to raise rates. The first two times

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Speaker 2: he did not drive the economy into a recession. We'll

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Speaker 2: see how it looks this time around. My sense is

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Speaker 2: that goldilocks economy that's growing at around one point seven

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Speaker 2: to one point nine percent, Corporate America still crunching in

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Speaker 2: double legit, you know, profit gains, obviously aided by the

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Speaker 2: weaker US dollar. All of this does lend itself to

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Speaker 2: Russell two thousand finally catching you know, some some ray

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Speaker 2: of sunshine. So I think there's some leg some lamentum

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Speaker 2: that could build up if you do at a goldilocks economy.

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Speaker 2: While we are expecting rate cuts at least four rate

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Speaker 2: cuts between now and maybe summer of next year.

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Speaker 1: So what about the broader equity market today S and

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Speaker 1: P five hundred at a record high and the pe

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Speaker 1: of around twenty five times earnings, That seems to be

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Speaker 1: a little frothy.

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Speaker 2: Very much so. Obviously, the waiting on megacaps is also

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Speaker 2: the highest event since frankly eighteen nineties. If you go

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Speaker 2: back to the last fifty years, on average, the top

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Speaker 2: ten names by market cap has trended around twenty five

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Speaker 2: to twenty eight percent. As of July of last year.

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Speaker 2: The last time I took a look at this, the

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Speaker 2: top ten names comprised of thirty eight percent of the index. Right,

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Speaker 2: so if the mega caps that are all participating in

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Speaker 2: this AI hiph are going to be the ones to

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Speaker 2: be the largest names within an index, you can imagine

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Speaker 2: why we're going to get a little bit stretched on

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Speaker 2: the valuation front. Thing that still concerns me as much

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Speaker 2: because the rest of the index is really around nineteen

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Speaker 2: to twenty times, and that's manageable. If you know you

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Speaker 2: had seven or eight sectors out of the eleven all

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Speaker 2: trading over twenty twenty one time's earnings, that would be

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Speaker 2: more reason to worry than frankly, knowing that the market

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Speaker 2: is concentrated, and as long as the AI boom is happening,

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Speaker 2: you could look the other way. But boy, watch out.

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Speaker 2: When this hardware build out is about to complete its

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Speaker 2: full cycle, that's when the concentration may not be working

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Speaker 2: for investors as much.

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Speaker 1: So having said all of that, chums, give me an

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Speaker 1: investment strategy that you think will be effective over the

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Speaker 1: next six to twelve months.

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Speaker 2: Well, I would say that mega center banks are going

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Speaker 2: to be, you know, a good place to invest at

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Speaker 2: this point. The valuations are not eye watering, and I

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Speaker 2: think between the prospect of just having a better spread

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Speaker 2: in net interest margins as well as the prospect of

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Speaker 2: deregulation over the remainder of the term from the administration,

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Speaker 2: both votes well for financials. Obviously, I think we are

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Speaker 2: still early stage in AI. So to the extent that

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Speaker 2: you were able to find names that have not completely

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Speaker 2: certain gotten blown off with this eyewatering rally, I think

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Speaker 2: there may be some deals there. I think AMD may

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Speaker 2: have given us an opportunity today as a result of

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Speaker 2: the news between Nvidia and Intel, and so a pockets

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Speaker 2: of opportunity within tech, certainly financials, and I wouldn't completely

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Speaker 2: ignore consumer discretionary at this point because the first half

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Speaker 2: was very subdued in terms of economic participation. I think

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Speaker 2: the second half will be much better, and we think

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Speaker 2: twenty twenty six may actually carry the momentum. So there

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Speaker 2: should be some really strong name, both in retail or

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Speaker 2: otherwise within the discretionary sector that can really make, you know, investors,

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Speaker 2: you know, goals come through for the next year.

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Speaker 1: What about foreign markets? We have President Trump returning from

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Speaker 1: the UK, A lot of big tech deals were just announced.

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Speaker 1: Are you inclined maybe to look for opportunities outside of

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Speaker 1: the US right now?

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Speaker 2: You know, it's we have really been underweight in international

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Speaker 2: as a firm for the longest time. And while we

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Speaker 2: felt that, you know, maybe a year ago Mexico would

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Speaker 2: have been an opportunity and maybe some parts of Asia

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Speaker 2: would have been post tariffs, we're not so sure. And

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Speaker 2: when we look at our multinationals here and how they

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Speaker 2: are speaking about where the momentum is across the world,

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Speaker 2: we're not really seeing bright spots out of really any

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Speaker 2: place in Europe. Perhaps maybe Poland into some degree, but overall,

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Speaker 2: you know, it's a very much a very tepid market

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Speaker 2: that is basically burdened by excessive regulation. And so we're

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Speaker 2: just going to be waiting and seeing on whether there's

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Speaker 2: a truly sort of a change of mindset in terms

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Speaker 2: of how they think through the next twenty thirty years. Otherwise,

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Speaker 2: I think the US remains the best bank for the

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Speaker 2: buck as far as we're concerned.

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Speaker 1: Okay, Shams, we'll leave it there. Bank for the buck

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Speaker 1: in the US. Shams Avzal is Managing director at the

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Speaker 1: Carnegie Investment Council. Joining us on the line from Toledo,

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Speaker 1: Ohio here on the Daybreak Asia podcast. Welcome back to

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Speaker 1: the Daybreak Asia Podcast. I'm Doug Krisner. Now, the fed's

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Speaker 1: recent decision to cut its policy rate by a quarter

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Speaker 1: point was nearly unanimous. The newly installed Governor, Stephen Myron,

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Speaker 1: though dissented in favor of a half point reduction. Now

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Speaker 1: that is something President Trump has been demanding for months.

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Speaker 1: Myron was sworn into the fed's board on Tuesday morning,

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Speaker 1: just in time for the meeting. He has taken unpaid

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Speaker 1: leave from his role as chair of the White House

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Speaker 1: Council of Economic Advisors to help us understand what Myron's

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Speaker 1: new role may mean for markets. I'm joined by Bloomberg

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Speaker 1: opinion columnist Shuley Wren, who joins us from Hong Kong.

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Speaker 1: Surely it's always a pleasure. Thank you so very much.

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Speaker 1: I know you're writing about Myron's policy where the dollar

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Speaker 1: is concerned. Fill me in a little bit.

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Speaker 3: He's definitely a dollar beer.

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Speaker 4: He blamed the US society's various economic problems, from the

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Speaker 4: loss of manufacturing to wealth inequality.

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Speaker 3: To the overvaluation of dollar.

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Speaker 4: In a very well read paper published the last November.

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Speaker 4: He basically called that He basically said that the dollar

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Speaker 4: is overvalued and that it should not be acting as

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Speaker 4: a reserve currency. And that's very much freaking global investors out.

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Speaker 4: Like what we're seeing is that the FED was holding

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Speaker 4: the raids right throughout this year until Wednesday, but the dollar,

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Speaker 4: the Broader Dollar Index has come down twelve percent already.

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Speaker 1: Do you think he's likely to have much in a

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Speaker 1: way of influence while he's sitting on the FED Spoard

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Speaker 1: of Governors.

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Speaker 3: He is only one of the seven members.

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Speaker 4: However, his rhetoric and the fact that the Trump will

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Speaker 4: get to decide on the next feed chre does do

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Speaker 4: influence market narratives, and you are actually seeing it already.

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Speaker 3: For instance, Goal is on.

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Speaker 4: Trying to take over US treasuries as a global central bank's.

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Speaker 3: Biggest reserve assets.

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Speaker 4: That's a sign that the global investors are trying to

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Speaker 4: hatch against the instability at the federal reserve. And also

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Speaker 4: what you are seeing is that the global asset managers

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Speaker 4: are increasingly keen to diversify overseas into international stocks, from

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Speaker 4: Europe to Hong Kong.

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Speaker 1: So, to be fair, surely the dollar has been in

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Speaker 1: a bit of a down trend for much of the year.

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Speaker 1: How much of that is due to forces maybe that

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Speaker 1: Myron or anyone else would not be able to control.

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Speaker 4: I think that's a very fair question. What you see

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Speaker 4: with dollar is that it tends to exhibit very long

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Speaker 4: term major cycles, with the boom and the bus faces

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Speaker 4: lasting over a decade. So it does seem that the

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Speaker 4: dollar has peaked somewhere in twenty twenty two, and the

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Speaker 4: consensus is that, you know, after the last boom, which

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Speaker 4: lasted over a decade, the dollar may be entering a

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Speaker 4: bar face. I will only say that the Trump's economic

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Speaker 4: policies and his attitude towards the Federal Reserve is speeding

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Speaker 4: up that decline.

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Speaker 1: So I mentioned that Myron is on lee from his

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Speaker 1: role as chair of the White House Council of Economic Advisors.

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Speaker 1: And we know a cornerstone of Trump's economic policies have

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Speaker 1: to deal with tariffs. And I'm wondering whether we need

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Speaker 1: to talk a little bit about the tariff story as

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Speaker 1: it relates to the dollar as well.

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Speaker 3: Well.

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Speaker 4: And that's another problem, right, Like in the past, a

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Speaker 4: lot of foreign governments they ended up holding a lot

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Speaker 4: of dollar because they were exporting their goods and services

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Speaker 4: into the United States. But if the terror boar is

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Speaker 4: set up, there is less need for them to hold

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Speaker 4: dollar anymore. In fact that there will be in the

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Speaker 4: case of China, there will be few opportunities to earn dollar.

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Speaker 3: Right.

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Speaker 4: That means that there is a lot of selling pressure

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Speaker 4: on the green back.

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Speaker 1: So if we step back and we look at the

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Speaker 1: shift that is happening right now in global markets, is

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Speaker 1: this a time where many, I will say, especially institutional investors,

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Speaker 1: are diversifying, and perhaps some of that diversification is moving

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Speaker 1: assets out of the US.

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Speaker 4: I think we are already seeing that already Europe and

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Speaker 4: China have been doing very well this year. And it's

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Speaker 4: also in part because the US dollar market has become

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Speaker 4: very expensive, right Like if the AI boom is not

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Speaker 4: showing up in the earnings in say twenty twenty six,

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Speaker 4: twenty twenty seven, then the US store market is just

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Speaker 4: way too expensive. So there are incentives to move out anyhow.

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Speaker 1: So we know that when you are involved in the

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Speaker 1: foreign exchange, it's always a pair that you're talking about

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Speaker 1: a dollar related to another currency. And I'm wondering if

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Speaker 1: we can talk about the path of the dollar to

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Speaker 1: the downside, I'm wondering what currencies will benefit on the

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Speaker 1: strong side beyond the Japanese n.

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Speaker 4: So if you look at emergent markets in the last

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Speaker 4: couple of months, emergent markets currencies that the author quality

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Speaker 4: carry trade, and I'm talking about those from Brazil, Mexico

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Speaker 4: and South Africa, they have been rallying the most. It's

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Speaker 4: a sign that the carry trade is back and the

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Speaker 4: people are using the dollar as the funding currency to

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Speaker 4: buy into higher currencies.

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Speaker 1: Surely will leave it there. It's always a pleasure. Thank

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Speaker 1: you so very much. Bloomberg Opinion columnist Shuley Wren joining

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Speaker 1: us here on the Daybreak Asia podcast. Thanks for listening

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Speaker 1: to today's episode of the Bloomberg Daybreak Asia Edition podcast.

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Speaker 1: Each weekday, we look at the story shaping markets, finance,

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Speaker 1: and geopolitics in the Asia Pacific. You can find us

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Speaker 1: on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere

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Speaker 1: else you listen. Join us again tomorrow for insight on

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Speaker 1: the market moves from Hong Kong to Singapore and Australia.

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Speaker 1: I'm Doug Chrisner, and this is Bloomberg