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Trade wars tariffs may be not top of mind for US voters. What is, though, no doubt about it, is inflation. It does continue to weigh on a lot of folks minds as a November presidential election looms. Consumer confidence last month hitting the lowest level since mid twenty twenty two, way down by concerns about elevated food and gas costs. And that's where we want to go. Is the inflation print that we are getting this week. Let's see what
our team has to say about that. Back with us is Bloomberg News International Economics and Policy Correspondent Michael McKee, along with Bloomberg News Chief correspondent for Global macro Markets Liz McCormick, both here in our study. All right, guys, So Johnny Yella, kind of setting the stage there. First of all, Mike, I want to ask you the possibility of us tariffs on Chinese goods. How does that historically? Tariffs?
How does that impact kind of our economy and really the inflation picture.
It's not good for the economy and it's not good for inflation, and that's been shown over and over and over again. Basically, US companies importing things from China pay the tariffs, not the Chinese, and so then they raised prices to recoup those costs from Americans. So Americans have to pay more money, and of course prices go up, so that hits inflation. The latest CBO numbers studying the Donald Trump tariffs show that they cost jobs, and they
cost the economy. It helps certain sectors, very narrow sectors at times, but not always. The steel tariffs that Trump put on US steel companies simply raised rices but didn't do any more business, and several of their mills ended up closing down. So tariff's economists generally agree are a terrible idea. And then Marie did ask if this would contribute to inflation. Unfortunately, the Treasury Secretary sort of had to. I think it was her job to dodge that question.
Yeah, I bet so. Let's come on in on this. You watch a lot of different things that impact certainly the market's the reaction in the treasury trade. I mean roll that in and just roll into what we really care about is the inflation print this week.
Right exactly. I mean, all this the tariffs looming in the background doesn't help, like we're trying to get over the hurdle like you're saying of this week with the PPI and CPI, But the whole theme of like reshoring in general has been a background inflationary. Then if you add a new kind of let's not say tariff war, that won't help. But yeah, everyone is almost getting like someone said to me, everyone is all I hear is wait till Wednesday, right, Wait till Wednesday when we have
this CPI print. And you know there's the backdrop to this is as we know, the labor data was a little softer, we're seeing cracks, the jolts was a little better. So people are thinking, if we can get this trend of hot inflation to end, maybe it's a lower print. The bond market may be off to the races, but we'll see, right, we've been waiting for a good number before and it hasn't panned out. So there's a lot of focus and of course smart. We have PPI, which
used to be something with a worm. Now we have to talk about PPI.
I know, Mike, you always like.
Somebody put it this morning. It's the undercard for the main.
Event, right, Well, what else are you looking at?
Though?
Are we see PPI? We see CPI. It feels like we're back to good economic data being good for the market. Are we back and does it flip flop covering stocks?
Depends and it depends on what the data turned out to be. Are they good? And then who defines good? Because if the if you're looking for higher market rates and you get inflation staying where it is, that's what you're going to get. It looked like, I mean, from what I've seen in terms of the corporate bond markets, it looks like a lot of companies came to market because they don't they think the possibilities. We get a
higher print and therefore rates go up. So go to market. Now, if you are looking for some progress, it would be good to have the CPI numbers go down, even just a little bit to suggest that we're back on the road to lower inflation, and the FED can once the well fed isn't going to start thinking about cutting rates right away, but the markets will.
Well, Gods, I was going to say, like a few fun facts here, I was looking at stuff.
Is that now Mike knows this, I'm sure.
But so this CPI print people are saying is really going to inform in June. You know, the officials when they have that June meeting will change their dot plot. Right now, there is another CPI, but it comes on the last.
Day of the two day meeting in June.
So this, this CPI matters a lot. I see a lot of people focusing on that that it may inform the dot plot even more than although I think Cherva Pala has said people can change their mind the day of the meeting, so the June one release won't not matter. But there's a lot riding on this, so I think. And you know, when you start seeing people give you three decimal places on CPI, it's really important.
And the last no rounding up here, guys, it really matters.
Yeah, but I mean the last two core rounded two point four. But people will show you each one to three decimals.
So if it could just round down enough.
To be lower, it'll be good for the bond market.
You guys constantly remind us, and I know we have a lot of conversations around this table. It's not just one month, right, we need to see several months when it comes to inflation kind of starting to really significantly or at least trend down and stick down and you know, kind of keep that pattern.
Right.
That's what Mickey.
Bowman, Fed governor said last week. She didn't think we were going to get any rate cuts this year, and she said she needs to see three or more months of inflation getting closer to two percent before she's going to believe it's real. Now she's the most hawkish, but we're in a situation where we're talking about one cut to no cuts is the definition of does.
We're looking at CPI the way with three point six percent ex food and energy, that's not two percent, not even close.
No, no, But at least if it's trending down, like I said, the month over rough, if you can get a little better. But on the flip side, let's just say which is you know, obviously the consensus is a little lower, but if it's hotter like at the last FED meeting, people feel like Chairman Powell, really let's call it in the wonky land caught off the tail risk of hikes. But if it reaccelerates, you wonder if even the options traders price in a little bit that maybe
we get a hike. I mean, that's gone now, so I think that would be more of a surprise if it's you know, reaccelerates, you know, so let's.
Hope that doesn't.
Remember the FED doesn't look at CPI as well, that's engage.
It looks at PCE.
Headline is two point seven percent, So that's a significant difference, and it's largely due to housing. And there's gonna be a lot of focus on the housing numbers in the CPI report. Do they finally start to show the decline that everybody has been waiting for or are they still
hanging in there? But the interesting thing is you take out housing from CPI and you get an index that looks a lot like what they have in Europe because they don't put housing into their CPI, and it would put bullfit about two point four percent, So you know, it's it's an interesting position for the FIT to be in.
Yeah, that's why they kind of focused in on the super core, right ex. Housing and all this there's a lot of you know, in the weeds that they're looking at.
I will say, at Milkin, like a bunch of investors we talked about talked to said, we have such a shortage supply of housing and like none of these inflationary pressures are going to go away anytime soon. And that is not something like you can just build a ton of homes or rental properties or whatever overnight. And so you feel like builders are very, very cautious.
It's a very difficult problem to solve. I saw a commentator on Friday saying, you know, the administration should move to start making more housing, you know, getting more housing built. But the problem is not so much a national policy on housing. It's local policies in each city about zoning and density, and it's going to take a lot of work to really change all that.
Plus the backdrop is you have all these people who have two and a quarter mortgages saying I'd kind of like to sell, but no I'm not. You know, I don't want a six percent mortgage. So that is adding to the lack of availability of houses.
Right Well, I'm looking at the economic calendar we have PPI. As you mentioned, Mike, the undercard, CPI, jobless claims, housing starts. How do we try to filter through each of these data points as they come in, because when I look at the terminal, look at WARP or different ways to track what rates investors are betting on, it's very whiplashy at times.
Well yeah, to.
Say the least, right, yeah, no, And I think, you know, I think for the economy, like the inflation, PPI, CPI, but then retail sales, there's a lot of focus on that because the consumer has somehow seemed to flow along, although I guess it's somewhat bifurcated.
So given up buying food because it's so expensive, so they're just going to buy stuff and travel.
And in fact, I'm like glad when I'm alone and I'm like I could eat peanut butter and jellie, no joke, right, Like.
You look at it, like you think about it, it comes up, you know. Argument.
The interesting thing is that you say that because food prices have been flat for a couple of months, they have not been going up, and yet this is what's in everybody going down to everybody's mind, well, yes, some go down, most just stay where they are. But in food there is a lot of basic commodity prices at work, because your meats, your vegetables, your fruits are all going to be dependent on the commodity markets and whether things are going up.
Chocolate expensive, Yeah, I heard that the other day.
People are upset about chocolate, but that you got to blame the weather and god.
I think, well, so what's the net net? So, Liz, So it's interesting. So it'll be one month's report. So I don't know what's top of mind as we get ready for obviously PPI first, then CPI, because your story is like, okay, the only thing that matters.
Well, it's not just us saying that. The data, you know, if you look at the trading days for CPI, it has really mattered. And I really think the backdrop of some signs of labor cooling a little bit means, like someone said, if CPI is soft, the market's off to the races. I meaning people just feel like that's last shit of we need to see some sign of disinflation picking up again, you know, going the right direction down,
you know. So I think if it came in point two or something, you're gonna see the bond market run, you know, a point three, you know, maybe is good enough for a.
Little bit about core headline. I'm talking about corey.
Yeah, because I think the bond market just feels like, hey, Fed cut off the idea of hikes, at least they put off for now. Labor markets sewing some signs of some easing if we can get inflation to start going in the right direction. And you know, you've had a lot of investors on saying they're buying bonds anyway because they think yields are good and we might not get these yields again. So I think something's got to really
mess up that apple krt, like really hot inflation. Otherwise, I think the market wants to rally.
Anything that you.
Think market does want to rally, well, I think interesting note Jay Powell is speaking tomorrow and he'll be talking about the economy and he's not gotting anything new to say because he won't have seen the CPI numbers. He'll be over in Europe and so he you know, it's kind of a non event for the Fed chairman, which
is unusual. But I think what we may see if we get a lower print on CPI is we start to get the overreaction in markets of oh, we're going into recession now because and especially if retail sales come in as soft as expected, and now they got to cut rates. Because it just goes back and forth.
It's a ping pong pretty madic, right, Like I just feel.
I'll make this very quick. Philip Jefferson, who was who's the vice chair of the FED said, gave a speech on FED communication today. He said, overall, it's good to tell the markets what's going on, but there's a lot of confusion when so many people are speaking.
I agree, I think true. Everybody just stop talking for a while, but not you guys. Listen Cormick, Mike McKee, this is Bloomberg.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five pm Eastern Listen on Apple car Play and then brought auto with a Bloomberg Business app or wants us live on YouTube.
We want to talk about reads. Real estate investment trusts not doing so well this year, but not surprising considering Billy, the higher US interest rate environment.
We're seeing reads under pressure. We've seen analysts pounding the table saying now's the time to buy.
But well, you do wonder right in terms of valuations, maybe it makes sense. I just got to throw some data at everybody. According to Bloomberg Data, US reads as a whole down nearly seven percent year to date. Office reads down about five percent so far this year. Industrial and warehouse reads down seventeen percent year to date. And this is again according to Bloomberg Data. Our next guest invests in the space with us as Steve Brown. He's
senior portfolio manager at American Century Investments. They've got two hundred and forty three billion in assets under management total. He's joining us here in our studio. Nice to have you here with us. How are you, thank you, I'm good, Thanks for having me. Well, it's great to have you here. You know, we were just talking with Liz McCormick and Michael McKee of Bloomberg about the inflation print this week.
It's top of mind for us because obviously it's top of mind for the Federal Reserve and what they might do in terms of monetary policy. What are the metrics you most keep a watch on for your world.
Sure, in our world we really focused on real estate fundamentals, but in terms of the broader economy, we see cpis lower today than it was twelve months ago, so that's a positive.
We also see that.
The FED hasn't cut rates or hasn't raised rates since July twenty three, so they haven't cut rates, but they've maintained short term rates at a flat level since July last year. And then finally, the tenure, which we do spend monitoring. You know, it's bumped around this year. It's around four and a half percent, but it got as high as five percent in October of twenty three, so it is a little lower than it was five or six months ago.
Are you putting money to work right now? Like what's going on in terms of Again, Carol mentioned all the stats about the underperformance in twenty twenty four, we've seen people saying now is the time to put some cash to work.
Sure, we are putting money to work, and what we're focusing on is properties, property sectors that have pricing power, meaning the ability to raise rents higher than inflation. And there's a number of sectors like that to invest in, whether it's senior housing, data centers, single family rental, Class A malls, open air shopping centers, but there are a number of property sectors that do have pricing power in twenty twenty four, well.
It's interesting. So of those, it's interesting data centers something again coming out of milk, and when we talked to artificial intelligence, it felt like the investment landscape was like, okay, data centers and energy, renewable energy to power all of those data centers. What specifically tell us little bit about the activity that you're seeing there and where you're going.
Sure, within our investment universe, we have a couple of data center reachs. They're quite large though, and obviously they're benefiting from the demand created by AI capital spending. There's more demand from the AI tenants to expand or take more space and data centers. The companies we have large positions in data centers are expanding their data centers and are building new ones, and their existing data centers do have access to power to handle the higher demand from
their tenants, the higher power demand. So it's a good setup. So in terms of an earnings outlook, you know, five six, seven, eight, nine, ten percent within the red space, it's pretty attractive in twenty twenty four, in twenty twenty five, driven by AI driven capital spend, they don't necessarily have in Vidia as a tenant, but they have in Vidia's clients as tenants in the data centers.
Right, I'm looking at Digital Realty. They sold one and a half billion dollars in shares last Week's right with raising this cash and the ability to put money to work within data centers, which to me is fascinating. Is that an area where you're looking at individual companies? Are you guys buying it through a basket portfolio?
Like we focused on a couple names that were very excited about. Digital Realty is certainly one. Equinex is another Digital Really Yes, they did a billion and a half equity raised last week. It's the fund development projects in twenty twenty four to twenty five and beyond. They have access to capital, both debt and equity, has proven by last week, the stock's trading at a nice premium, so it's a premium to net asset value, so it's a
good time to raise equity. But they have a good use of the proceeds in terms of expansions and ground up development within their global data center footprint, so they'll get a good return on that money. And I think the stock has bounced back nicely from that large capital.
Race, and when you're looking at some of these sub sectors within reachs just because of the different exposure, do rate cuts kind of predicate how you guys put money to work and how you think about which areas are better set up than others, and how does that kind of play out.
If we do move into environment with the FEDS cutting short term registrates, you know, the question is why is the Fed cutting rates? Is it because inflation is moderated, That'd be one scenario. If they're cutting rates because we're
falling into a recession, that'd be another scenario. I think if they're just cutting rates because the because CPI is coming down from say three point eight to three or something like that, then there's certain property sectors that have sort of been out of favor would probably rally pretty aggressively,
like we saw in the fall of last year. The Reeds had a very aggressive rally when the ten year finally peaked and started to roll over, and there were certain sectors like the office sector and some other sectors that have been that have more highly levered balance sheets
that went up the most in price. They benefited the most from the advent of lower rates that happened in November and December of last year, and if we go into that type of environment this year, that would probably happen again to.
Office anything opportunistic. I mean some would say okay, actually coming off of milk and folks are saying, this might be the buying time of a lifetime in a bunch of office properties because they've been so beaten down.
How do you see it, Well, last year we did generate some alpha in the strategy through our office investments, not really owning in the first half, coming into them in the spring of twenty twenty three when they were training at thirty to forty percent discounts to nav and then they rallied quite strongly when the ten year peaked at the end of October, and then the rates dropped from five to say four percent in last year. They
have hung in there so far. This year, as you mentioned at the top of the show, is really driven by one big New York name, SL Green that's done a lot of interesting transactions. The rest of the names have sort of lagged the inly. SL Green. I would say that you know we're paying attention. We are underwaid office today because we're concerned about demand. They don't have pricing power, meaning that supply is greater than demand on the office sector because of really the embrace of work
from home. But we do think that there is demand for class A office and we do think that if we have a soft landing, you know, job growth will continue and that will point to a better outlook for office I would say, though, many of the companies have above average leverage and they don't have pricing power, So that's a bit of a turn off right now.
And when you look at some of the different central banks and the different effects that that has on a global perspective. Are there areas that you guys are focused on. Are you guys a global fund, Like do you look at US versus say, Europe.
Sure, we do have a global strategy. That's our course strategy actually, and other economies around the world have had lesser nominal growth in the US, so they have more flexibility to cut rates. So we have seen that in Asia. Parts of Asia quite exciting, Europe which is not showing much economic growth, but that sets them up for the potential to cut rates. There's some interesting discount to nav ideas. There discounts to the property value there. It's quite a bombed out area.
Also, are there any names that you can mention that fit kind of that.
Well, I would say a couple of things. One is we've been able to invest in the data center reads or data center real estate companies also in Europe and Asia,
so that's been exciting. And we've we've begun to look through the sort of the wreckage of European properties because they're training a big discount to ANAV And I mentioned regional Class A regional malls have pricing power and there's some regional mall names in Europe that are attractive that we think will have good total return for twenty twenty four.
Well, it's interesting, and we're going to hear, you know, French President Manuel McCrone catching up with our own John Micklethwaite talking specifically about a big event going on over in Paris, all about bringing investment in but was questioned about potentially consolidation among the financial space and whether a French bank cooks up with another European bank or so
and so forth. So I'm just curious how you think about kind of that broader real estate play in terms of some of the bigger macro trends that are going on in Europe today?
Sure, Well, One are the big trends, as you mentioned, is consolidation, were also a reduction in capital to various activities like real estate. Construction lending is down both in North America and Europe because of a variety of reasons, just a higher risk associated with construction lending and poorer returns.
So while that's a fact of life, and that was true in twenty twenty three and it's true this year twenty twenty four, what we're seeing though is a slow down and supply in both Europe, which you mentioned, as
well as in North America. And we think that sets up a good environment for real estate and pricing power as we move through twenty twenty four and twenty five, as supply growth could come into like one to two percent supply growth and demand growth could be two to three, so you'd have a improving the demand would be great and supply both in many sectors in the US as well as Europe.
Well, and one thing I want to ask you, since you are global, and it just feels like all of a sudden, everybody's talking about Japan and opportunities, are you seeing any opportunities in terms of the real estate over in Japan.
Yes, we've had a lot of success in Japan this year,
mostly through the Japanese developers. They're not the j reads, but they're the developers and the option of They own large swaths of commercial property and greater Tokyo, and they've benefited from the improved growth prospects in Japan and the huge discounts to NAV they were trading at, say, six to twelve months ago, it was not uncommon to see Japanese JA Japanese developers trading at thirty to forty percent discounts to AAV and as there was greater confidence in
a sort of a modest recovery in the Japanese economy with a little bit inflation thrown in these names, these Japanese developers really worked quite well over the last sixty months or so.
Where don't you want to be thirty seconds at all? Stay away at any here? China and I don't know if you've got exposure to China quickly.
China's not in our index, but Hong Kong is and Hong Kong's had a nice rally. We still have some questions about that, but I'd say the areas we're concerned about is we're still concerned about US self storage. It's a sector where they don't have pricing power. I mentioned some sectors of pricing power. Well, rents are going down really ten to fifteen percent in the self storage sector. Interesting, so we just we don't have confidence to really embrace that because rents are going down.
It feels like there was such a build out, and I think we're all like enough storing stuff and paying for it. Just get rid of it and go travel. Essentially, Steve Brown, we covered the world. Thank you so much.
Thank you it.
Steve Brown. He's senior portfolio manager at American Century Investments two hundred and forty three billion dollars in assets under manager.
That you're listening to the Bloomberg Business Week podcast. Listen live each weekday starting at two pm. Easter Apple play In Androyd Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
The war zon folks that chip bore that is so far superpower is led by the United States and European Union, have funneled nearly eighty one billion dollars towards cranking out the next generation of semiconductors, escalating a global showdown with China for chips, supremacy and folks. That's just the wave, the first wave of a lot more to come. It's a big topic, trend, industrial policy, and sign of our times.
What is going on in the global semiconductor space. It is also today's Bloomberg Big Take here to continue our coverage on the global semi surge. Bloomberg News US Semiconductor and networking reporter he is Ian King. He is in our San Francisco bureau. Ian, Great to have you back with us. The world we know is spending big time on semiconductors. Just remind us of some of the size and scope that is going on, who's doing it, and what each country's game seems to be in all of this.
Yeah, I mean, there are a number of factors at play here. We're talking about, at least in terms of what's been announced, close to four hundred billion dollars of investments are either being made or will be made. The end goals here are independence and or greater capacity to produce something which is increasingly being seen as fundamental to economic strength and also security. And that's really what's happening
here is we're seeing a reversal of globalization. I mean, this industry was post a child for globalization since it first came into being in the late nineteen sixties.
You know what I find fascinating. It's not like it's you know, China spending on Chinese companies in the chip space or US companies spending you know, are the US government only spending on US companies? You know, they're allocating money around the world to facilities. US government has given you know, right, money to TSMC and Samsung. Like it's interesting that it's kind of an all out of front.
Yeah, I mean, you've got a back winners, right, this industry is down to essentially three or four leading companies in terms of this ability to make the absolute bleeding edge technology in this industry. So frankly, a start from scratch approach just would be hopeless if you're looking at it from the US perspective, Intel, which was the national champion for many decades, frankly falling behind. So you've got to head you bet, you got to give money to
some song. You've got to give money to TSMC, So that's what's happening here. I mean, you've got massive specialization in this industry as well, so you've really got a back winners.
And Ian when I look at the article, not only are you countering or trying to catch up to China, the US lags South Threa, the US lags Taiwan. Are there any expectations of how they can continue to close the gap and actually surpass at least one or two of those as opposed to trying to really catch the giant in China.
Yeah, I mean there are a couple of things to impact with what you said there. We're not catching China here in terms of technology leadership. The US is still well ahead of China in terms of design, even in terms of manufacturing, in terms of capacity of manufacturing certain types of more simpler chips. Yes, China is definitely making a big move and definitely as a threat in that respect, but there's still probably several years behind even the US.
At the same time, the other part of your question, there's no doubt that South Korea and Taiwan are well ahead of whether US is, and frankly, everything rests on Intel's shoulders. If Intel can do what it says it's going to do, then the US is back in the game. SA is addicting twenty eight percent of advance and reconductor manufacturing will be back in the US if frankly, Intel can execute.
And that's a big if, right Ian. I just think about how Intel has kind of been lapped by Nvidia and other rivals, at least when it comes to the stock performance over the last few years.
Yeah, I mean the stock performance reflects really what investors see as the prospects for these companies. What's really happening in Intel is they've outlined this plan, which people think is the right plan, to invest massively in technology and infrastructure and to recast their business model. That's said, though, this is an extremely capital in terms of industry, and that means that in the short term, your innings, your growth,
it's going to be horrible. And that's really what we're seeing at Intel, that they're not the company that they were and the other companies are growing much faster. So that's where the money has gone into the fast growth companies. Whether that is that, you know, is a is a vote on whether people believe Intel will do it or not. That's another question and it's probably going to be a couple of years before we'll really get the answer to it.
Yeah, I just want to look at stock performance within the semi the Philadelphia Semiconductor's Index over the last three years, Carol, Intel down forty three percent, Nvidia five hundred and fifty five percent, Clack up one hundred and forty nine percent, one hundred and three percent. So really a big bifurcation.
Well, and in particular the struggles of Intel, which Ian has written so much about. And we'll see ultimately whether all of these investments. You know, it's a lifeline for them right now, but you do wonder what will happen longer term. Having said that, Ian, you understand, I know I bring this up all the time, but semiconductor cycles, what happened that all of a sudden, you know, everybody is spending big time. Was it the shortages during the pandemic?
Was it?
Is it?
Ai, Like, what is it all of a sudden that it feels like things are ramped up in a big way.
I mean, you've just answered the question in at least two regards. And the other element to that is, of course, this idea of national security that in the past we were happy with this completely diversified, geographically supply chain. Then during the pandemic we got a nasty shock. Then we got out a massive sense of like, hey, these things are actually on the rise. We need the more and more as an answer to our technology needs. And then we also need to guarantee national security. And oh, look,
we're not actually making any of these anymore. Perhaps we should, Perhaps we should rekindle that skill before it disappears. At least that's been the US perspective China economic independence and also independence in terms of its military and security from the West. So there are a myriad of conflicting viewpoints here and conflicting drivers here, But what they're all boiling down to is like everybody's doing a DIY effort. Everybody wants independence, you know.
And what I do wonder about you know, I think about TSMC. You obviously knew how big they were in terms of, you know, kind of building the chips for the world, if you will, But I feel like it's for the general public. It's come out over the last couple of years, maybe coming off of the pandemics sixty minutes, there's just been kind of mass market pieces on their role. What I do wonder about is all the spending, whether it's in the emerging economies, what India's spending, which Pan
is spending? Like how what might be happening today kind of changed some of the longer term trends in the chip industry overall. Could it be happening, could something? Could it be telling some kind of more significant stories longer term?
Absolutely, I mean we're talking about a massive diversification about regional centers of supposed excellence and capabilities. Some of these things will fall flat on their face, There's no doubt about that. Nonetheless, the trend was towards China, that China was the largest market for these things as an end user, as a buyer, and China was pouring huge amounts of money into its own independence. The US has basically tried to stop that in a lot of technological barriers that
have gone up. But you've got Japan trying to get back in the game. Japan in the nineties when I first started looking at this industry was the leader. So there are many things that play here. But I mean, right now, not everybody is going to be successful, and some countries like India are starting from a long way back.
Yeah, And when I look at some of the efforts that have been going on ian China, trying to China being slowed down by some of those restrictions, export controls and some of those kind of geopolitical aspects, how is that shaping out or how can that shape out? Who could win in some of these smaller countries, in some of these regions that aren't as developed right now?
Yeah, I mean the obvious answer for a lot of companies is if you can't sell in China, if China can't be the heartland for where you do business, then well, let's look at where the rest of the world's population is. Let's look at where there's a lot more growth to be had. In India is the obvious answer there with
its massive population, it's you know, it's educational base. The problem I think for India in terms of the semiconductor industry is you need a lot of infrastructure and you lead a lot of experience, and India has none of
those things. It has a lot of expat Indians working in the semiconductor industry, most notably in this country, but in terms of the types of infrastructure that you need and you know, these things are enormously sensitive, really complex facilities are not just you know, slap a factory up and have some workers trained, and it really is the cutting edge. So it's going to be difficult for them to get into this industry in a meaningful way in the near term.
We say about a lot of things, it's complicated, but really in the semiconductor industry really is Ian. Thank you so much, so appreciated. And you know, on this Intel in advanced talks with Apollo Global Management over a deal that would have the investment firm providing more than eleven billion dollars in funding for a chip manufacturing plan in Ireland. This was coming from the Wall Street journal. Ian, of course, is our Bloomberg News US semiconductor and networking reporter.
Mark a journal.
Now about you let me drive?
Oh no, no, no, no, honey, please out of the riding gravels.
I want to drive.
It's a good question. Good time.
This is the drive to the globe. Do well on Bloomberg Radio.
TikTok, everybody, Just about eighteen minutes left in today's trading session. Our next guest says, in general, he and his team are seeing quote a deeper opportunity set overseas when it comes to stock. So let's get to it. Our drive to the closed guest on this Monday. Ben Manash is co founder and portfolio manager at Tobion in Tahoe City, California. Nice to have you here, Ben, Did I say it correctly? I'll sweating it a little bit here. Nice to have
you here with belly and myself. All right, So, deeper opportunity set overseas. I love that you go there. We've kind of had a little bit of a global day. We heard from the French President, just a lot of conversations from some big bank CEOs who are over in Paris, so thinking about kind of the global world. We just talked about the global chip that's on in countries that are spending big time to develop out their semiconductor space. So deeper opportunities set overseas, how so? And why.
Yeah?
Sure? So at the core we to our global value investors and we invest in just a handful of companies globally with a very long term time horizon. So our perspective is always built from that bottom up opportunity set and just weighing up opportunities globally and really valuation would be the first points of order as to why we
see more opportunity overseas. You know, with the US market, the SMP trading and around twenty six times training earnings, MSCIEF so Developed International around sixteen times, and EM equally around sixteen times. We think the broad opportunity in terms of valuation is a lot more attractive overseas and really
skewed by individual companies individual sectors. So for example, the Magnificent seven obviously around thirty percent of the SMP today by waiting and which on aggregate trade it over forty times trading twelvemonth gap earning. So really that's the main anchor why we're seeing opportunities.
Its kind of like the world being on sale versus the United States, simply put.
At the most simple level, yes, and you know you have to look beneath the hood a little, and the margins and the returns on equity are pretty high in the US, which we actually think is somewhat of a risk. You know, the longdon net margin of the SMP today is eleven point six percent. That compares to a long
term of around nine percent. And this is in the context of you know, three and a half percent inflation sub four percent unemployment, of fiscal deficit, all things which at the margin would suggest more of a normalization reduction in margins in the US rather than things continuing to go upwards.
And Ben, when we but when you're looking at that valuation discrepancy, what is normal? Because I cover equity capital markets, and when I talk to some of these CEOs of foreign companies who want to list here in New York, it's because they get a better multiple, they get a better valuation, there's a deeper pool of capital, so that's just naturally maked in in their view.
What do you say to that, Well, i'd i'd quote, I'd quote mister mister Ben Graham, And I'm always saying that over the long term, the market's more of a weying or mechanism, and in the short term it's more of voting mechanism, the flow of funds. And he may have gathered from my accent. I'm not from California, I'm from the UK. And you know, we've we seeing a huge number of companies either being taken out by private
equity or choosing to relist in the US. We saw arm you know, wonderful company with ip and heritage from Cambridge University, choosing to list in the United States for that very reason. But over time, we think, if if the earnings yields are attractive enough from the quality of the businesses are good, I able to deliver good returns on capital over the long term. You feel normalize.
You came to play, and you've got some specific stocks that are on your radar, and I do want to get to them. And while you say deeper opportunities set overseas, we start with a couple of names that are homegrown here in the United States, and I'm thinking about Berkshire Hathaway, which we know you like. We just had Warren Buffett, of course, holding his annual investor meetings, so we've been talking about a lot. It's up about fifteen percent so
far this year. What's the specific strategy are thinking here?
Yes, So, like a lot of people I was, I was in Omaha last weekend listening and it was striking to see how any of the questions focused on succession and what will happen when mister Buffett is no longer with us. So our perspective on Barksher today is actually it's less about how capital is allocated incrementally and actually more about the system of Buckshan where the capital is
coming from. So if I can elaborate on that very quickly, I mean Barksher has created over the past several decades this mechanism which allows them to invest almost twice as many gross assets as they have book value and equity, and the fundling there has come through surplus capital and insurance insurance float which mister Buffett frequently talks about, and
a deserved low cost of debt. And that means, in our opinion at least, that even if the returns on the asset side, both the common start but also the wholly owned businesses and the cash that they have, even if they're let's say average you know, ten hyper returns, you get a baked in leverage on the equity which will give you kind of twelve percent types return on equity for which you're paying one and a half times book and around fourteen times look through earnings, which compares
very favorably to where the S and P is, and some very favorably compared to the intrinsic strength of the structure and the businesses that formula and.
You like auto own interesting name. I want to talk about the foreign companies though, how did you call it the UK home depot? I live in New York, grew.
Up in California, only refits kitchens, and.
Yeah, what's the what's the pitch on how din and I guess coming back to the valuation perspective, how does it compare to real home depot?
Yeah, so it's it's similar to home depot. It's always dangerous to draw these analogies. I did bring it up. But the nuance in the business is twofold. First of all, they focused very much on the kitchen marksucket and the joinery market as opposed to broad home renovation. But the second important nuance is they focus just on trades people. It's an important part of the business for Holbens, but that focus on trade is really important because that relationship
is much stickier. But also trades people value proximity to work much much more than di wires tend to. So Howden's has they have around thirty three percent market share of the kitchen in the UK, but close to a monopoly with trades people. There are over eight hundred depots in the UK, so the tradesman is missing a certain piece a cabinet or something like that. They can be
at and get to a home depot very quickly. That means they're able to generate very very good margins around sixty percent gross profit margins even better than home depot. And the price is great. It's not just comparing. It's on around sixteen.
Fine to go to different companies. I agree with you, belly like, I love going to other places. Ben, Thank you so much, really appreciate Ben Binesh there joining us, giving us a couple of names from Tourbillon Investment Management.
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