The Chip Supply Chain Is Getting Harder to Trade

Bloomberg Business Weekend iTunes, SoundCloud, or Bloomberg dot Com. You can also listen to our radio show at two pm Eastern Time on Bloomberg Radio or watch us on YouTube search Bloomberg Global News. Well, yes, the sector I stole for Tim for the top of our three pm simulcast,

it is the semiconductor index. The socks rear seeing chip stocks jump today, Sam, some electronics coming out with better than anticipated jump in revenue, and that really just sent the whole sector booming in uh, the U S trade. I mean it also sent it booming over in the Agia trade. Overnight. You have a really interesting commentary coming from our own Ryan the Stellica and subrot Pat Nike,

all about the chips supply chain. We've talked so much about it Carol and over the US two years, how it has been really challenged, not just for automakers but for anyone who wanted a chip. It's actually getting harder to trade because not all chips are created equal. Ryan the Stelica is equities reporter for Bloomberg News, and he joins us on the phone from Chicago. Ryan, great to

have you with us. I want to go back to this idea that that not all chips are the same here because we are starting to see a glut in some types of chips, but others are still hard to come by. Please explain. Yeah, absolutely, Well, Obviously, different chips are used in different types of product categories, and we are seeing differences in demand and supply depending on what level you're looking at and what's part of the market

and what their use case is. So last week we had a little bit of a warning sign out of Micron, which talked about flowing demand for issues like computers and smartphones, suggesting maybe a little bit of a weaker demand outlook for memory related chips in particular. Now you mentioned before, we just had sam some come out better than expect to jump in revenue. So that's a positive sign for

this group. So again, some mix mills there, but this is an area where people are still trying to suck out what does demand look like and so on and so forth. Of course, there are other areas that we can get into this. Well. I feel like a story like yours, Ryan is one that really kind of educates us because it reminds us that not all chips are the same. And then it also reminds us that this is when it really turns out that if you're a big buyer of chips, thank you, Apple, you tend to

be in a better position. So talk to us a little bit about kind of the specifics the nuances of the semi trade. Yeah, well sure, I mean you mentioned that Apple is a huge buyer of chips, especially from Micron and from Qualcom and from other names like that.

Because of, you know, the weight it throws around, it has been able to navigate some of these supply chain issues a little bit better than a smaller players, although and it's most recent quarterly reported did kind of come out and suggested it was seeing a certain amount of headwind from this. Of course, now there's questions about demand and in its ability to continue getting supply, so again

very complicated picture in the chip sector. UM, different areas are seeing perhaps some stronger tail winds than others right now. It depends on what the use cases. Okay, Ryan, let's talk autos here. Help us get an understanding for what's going on in the car industry, specifically here in the United States, because it's still pretty tough to get a new car. Yeah. Absolutely. We just saw a GM come out last week talking about chip shortages and being sort

of an issue that if spacing. So that is an area where they're continue to be extremely strong demand for chips, and there's more and more chips are being put into cars, especially electric vehicles, to unitor all the different kinds of computers and UM you know, you know, everything that goes on to those cousins to make sure that they're operating and finding all the necessary data they need. So that is an area that continues to see very strong demands.

UM and TATA companies, UM, you know, like Texas Instruments STM UM finding on NXB UM food companies like that are heavily involved in this particular area. All right, So you've got you know, you talk about the different ships in your story. You know, smartphones tablets, computers. We just talked about auto Tim brought that up. There's data centers, there's um AI artificial intelligence, and then you've also got the chip eqipment makers. I almost think about when I'm

reading this story. I think about the energy sector. Right, You've got integrated oil companies, You've got the e m P, the exploration production companies, You've get utilities. Like there's different ways of playing with it. Talk to us about like the data center and AI guys or the chip equipment makers. Is that opportunity for investors potentially well? Data center is an area that so far seems to be holding up pretty well. Data centers of course us in cloud computing

and so forth. So what has really major enterprise spending behind it, especially named like Amazon and Microsoft and Alphabet or of course the biggest players within the cloud space. So companies like the media tend to see a lot of demands for these types of products. A and B is another one. Even Micron does have a data center division, which it said was holding up pretty well in contrast to the consumer side of things. So this is an area, um,

you know so far as holding well. People I've spoken to said, um, they're really waiting to see whether this continues to hold up. If it doesn't, then that does have some pretty negative implications for what broader economic looks like. Yeah, I feel like Tim, these are things like the hedge fund guys right there watching like all these different kind of indicators to give an idea of what comes next exactly.

And it's interesting to see. Two, we didn't even get a chance to talk about crypto and the declining interest around crypto, the decline price around crypto. That has an effect on the chip industry as well, because that decreases demand too. Do you know the sucks is up within six percent since last Friday. I didn't know that I was gonna I'll find that out at three o'clock at that maybe maybe maybe a good one might pay a good sector for the top of that three pm. Simcast Um, Ryan,

thank you so much, Ryan Pastelica. He's equities reporter at Bloomberg News. Joining us on the phone from Chicago. You're listening to Bloomberg Business Week with Carol Masser and Bloomberg Quick Takes Tim Stinovic on Bloomberg Radio Demand Destruction anyone, Because this story is definitely a sign of the times, as searching power bills are forcing the U. S. Industrial complex to slow down. Tim This is a story you will find on the Bloomberg Terminal online at Bloomberg dot

com slash business Week. It really just speaks to so much of what's going on, and I feel like what we just talked about for some of our audience, high energy prices the bane of industrial production. Joe Do writes all about it, along with Narraine Mallet Carroll. As you mentioned, you can find this story at Bloomberg dot com slash business Week. Joe Do is Medals and Agriculture Agriculture America's

deputy team leader for Bloomberg News. He joins us this afternoon, also with us as Joel Webber, the editor of Bloomberg Business Week. He's with us in the Bloomberg Interactive Brokers studio. This is remarkable, remarkable, Joel. At one plant here in the US, the electricity bills have tripled in recent months and as a result, they've had to idle the plant and more than one plant. Um. This is gonna have um and this is gonna be a story that I

think we're going to continue to talk about. I mean, look like the world is obsessed with the energy story right now, we've seen it um just kind of devastate Europe. And what really got us interested in this story by by Joe and Noreen was that some of these early signs are starting to show up here, that the surging costs of electricity are gonna kind of break America's industrial

complex and that that factory might that makes America hum um. So, so, Joe, what are we wrestling with here and what are those factories and manufacturers looking at. Yeah, I think it's the first time the United States is seeing a power crunch itself, right. Uh. Europe obviously hit very early on with Russia's invasion of

Ukraine and then this spread into Asia. And for months now, our European colleagues have been calling us on the commodities desk here in the United States saying, aren't you guys seeing similar problems for your steel mills and for your aluminum mills and all the other manufacturing facilities, And kept saying, no,

it's just not happening. Well, when Century Aluminum, which is the second largest US aluminum producer in the United States, just a few weeks ago, announced that they were closing down their largest facility due to power costs nor In and I got on a call and said, what what are we missing here? And and so this this is ultimately what became this story. And she had been learning already previously that a lot of manufacturers across the Midwest

were complaining about their power costs. They weren't shutting down necessarily, but they were worried they were going to have to

throttle things back in the summer. And of course what our story goes into is that not only are their feeling these but they are actually you are starting to see some some shuttering of of manufacturing production across the US, including one source telling me that two finishing facilities UH for steelmakers have already had to cut back on production because they need to cut in some places so they can continue to do, you know, their their main work. Joe.

What I love about your story is I learn about within the industrial complex here in the United States kind of how it all, how it all works, and especially when you're you know, tapping into utilities and power, I mean facilities, how have to pay for something as you lay out something known as capacity. So in other words, they kind of need to keep things functioning even if they don't need to use it. Yeah, it's it's the

way we describe it is an insurance policy. So if you're a big factory, or let's say you're you know, you're a utility, right, and you need to make sure that in the middle of August, the entire city of New York has enough power to turn on all of their air conditionings on a hundred degree humid day. Uh. Well, you have to pay ahead of time to make sure

that capacity will be there if you need it. And what we're finding because the grid ist aging, because we've been phasing out old fossil fuel plants, you know, because of the war between Russia and Ukraine, all of things, things are converging in pushing up the cost even of

the capacity. So you combine the capacity, which is an insurance that you sometimes need but sometimes you don't need, and you add that with what you're actually paying uh per kilowatta or and it's really just stressing these companies. Um and And I'm curious here, Joe, like, well, when where we gonna know how bad this gets? Like right, we're early right now, right, Like how bad could this get?

So the forecast that we had pointed out which was a government forecast, said the worst is yet to come, and it's probably gonna come here in the third quarter, towards the end of the summer, as obviously power use goes up UM to its highs and it's going to hit a high of all time. Um. You know. This is something I was just discussing earlier with Limberg Television,

which is, well, what does that mean? Right? And I think we're going to be paying very close attention to earnings in the next coming weeks for the big manufacturing companies, in which they'll tell us. You know, all they've said all year is that demand is good in order books remain healthy. Um. But we're actually starting to see economic data show a bit of a slowdown in the economy. Obviously GDP was negative um. And it's going to start the question will come up from analysts, well what about

your power contracts? Are those starting to be a problem for you? Does that mean you're gonna have to shut down? And are you getting it on the other end, which is demand? Uh. You know, listen, I'm not saying that we're we're it's for sure, right, things could could turn and maybe suddenly things improve, um, But right now, it's like Noreene wrote in our story, Um, there's just not enough renewables out there to offset what's going on right now,

and people are going to start feeling the pain. Well, let's talk about some of those renewables here, because I do like how the two of you wrote about a potential silver lining here, the idea of investment perhaps in renewables, barges full of batteries, startups getting investment as a result of this. Help us find the silver lining here, Joe, Yeah, I mean the silver lining is is that comes online. Um. The bad part of the silver lining is it comes in line over a number of years, and it's not

something that can just happen now. And I know we've all and having this conversation this year, especially in Europe, right, which is the short term pain. Suddenly everybody's looking back, Uh, Suddenly everybody is looking back at uh fossil fuels. Right. We need power now and um, and and that's the struggle.

So eventually we are going to get important solar coming online, and we're gonna have important wind coming online, and these things, included with the ability to store all of that power, are really going to change the dynamics of the grid. But at this moment, it's just not there. And and that's why you're feeling this squeeze, right, and we're like far from that. So look, if if this is going

to hit industry, Joe, like, what do we expect. Is this is something that consumers are going to feel the energy prices or are they gonna have the knock on effects of suddenly like this becoming yet another thing that plays into inflation and inflationary concerns? Yeah, I mean I'll

put it this way. They could feel it. Uh, you know, you could see a pass through of cost, but that won't happen if demand, uh suddenly dissipates even before then, right, if you have real concerns of an already problematic issue of inflation, you have the already problematic slowdown in the economy. Um, suddenly, if that demand disappears, uh, you know, than than you know, passing through those costs, maybe maybe isn't entirely possible and and and maybe suddenly you're looking at cutting back on

a lot of manufacturing capacity. I mean, listen, this is pure speculation, but I am kind of playing out the potential possibilities here well, and it certainly seems to start, you know, fitting in with some of the other economic data points that we're starting to get about the global economy, certainly in the US economy. Um, Joe do, Thank you so much. Medals and Agriculture America's deputy team leader at Bloomberg News, along with Joel Webber, the editor of Bloomberg

Business Week. This story you can find on the Bloomberg and at Bloomberg dot com slash business Week. This is Bloomberg Business Week with Carol Masser and Bloomberg Quick Takes. Tim Stinovic on Bloomberg Radio. Alright, full disclosure, I didn't do a lot of reading while I was sick out with COVID. To be quite honest, I did periodically say, Hey, Google, give me a news update. And when I did yesterday, that's when I heard about Amazon and Grubhub teaming up.

I kind of say that, Tim, We're still trying to figure out, you know, what this relationship does and means, and can New Yorkers actually get it. Grubhub and seamless are the same company, but it can't get it on seamless. You know, We're we're trying to figure out what's going on. Fortunately, We've got a great person to help us do that. Jackie Devlos, this technology reporter for Bloomberg News. She's with

us right now in the Bloomberg Interactive Broker studio. So this is a great Day two story, Jackie, because I think a lot of people who are paying attention yesterday understand the news, uh that grub Hub and Amazon half teamed up for Amazon Prime customers to get what free Grubhub delivery. Absolutely, at the end of the day for customers, this is a much better deal. Prime has a really impressive,

very loyal membership base of Prime subscribers. I mean you can get your shampo toilet paper, and now you can get your dinner delivered. So um. At a time where people are really pinching pennies, you don't want to have to be paying you know, fee after fee tips, and so this is just a good way to clean it up and provide a deal to their customers. Okay, So what's in it for Grubhub and for Amazon, Well, this is an especially good deal for grub Hub. They have

been needing a lifeline of sorts. Um. If you remember, at the beginning of the pandemic, they lost a ton of market share to door Dash and Uber eats, and especially in their top markets like New York and Chicago. So they've really been looking for ways to kind of get some of those customers back and keep them on. And they've still been struggling. Their pairing company has been looking to sell them, and no one, no one's really

up for the buy right now. And so this is not only a good way to kind of really boost that user base again, but also make them a more attractive acquisition target for other companies. Scrubhub is like I finally got a day, Thank God for the big dance. Um, So there's a little bit of that going on. But I also feel like for Amazon, man, they are thinking so much about how to hold onto all of us

who are part of the Amazon Prime deal. Absolutely, and you know a lot of us forget that they actually did wait into the food delivery industry a while as it didn't unfortunately it was back in and you know it's called Amazon Restaurants, and you know, Jeff Bezos himself was really reticent to get into the space because if you think about it, the moment hot meal gets to

your door, it's a toss up. It could be perfect or you know, if you order sushi on the wrong day, it could really just ruin that Prime experience for Prime subscribers. And so he didn't invest a lot into it, and um, it kind of folded. And so this is kind of a way of inching back into the space for sure. So for Amazon it's kind of like, yeah, I'm gonna date you a little bit, but I've got to back

up or I can back at it anymore. I mean, it just feels like, because having been homesick, I did a lot of ordering of food, and man, so many times things are messed up. Oh yeah, And you know, it's pretty interesting how they structured this partnership. They didn't exactly take a stake out right. It's an initial option to do so through warrants um and then they can increase that up for up to fifteen percent if things go well. So it's you know, a lot of protection

and it's a cautious move in. But absolutely for us that you know, are so used to going on door dash, Uber Eats and rapid delivery, now it's just going to bring that you know, fee notch down a notch a bit. Okay, So what does this mean for Amazon Prime customers who are getting a price hyke up to a hundred dollars a year at a time when, in your own words, Jackie customers are pinching pennies because everything is more expensive

right now? Does this make that Amazon Prime subscription that much more valuable and somebody less likely to cut their Prime sub I think overwhelming yes, because when you think about how much that grubhub last membership is worth, you don't just get free delivery, you get um a slew of other perks and deals, and um that's worth a month that pays for itself if you order, you know, at least three to four times a week, which many

people do. And so for Prime subscribers that have already dealt with this Prime increase, this is just an added bonus and you know, just a free perk for a service that many of us use. So doesn't mean for the other food services. Have you been thinking about, you know, what does this mean for other players, either in big tech or or other world. I don't know that Amazon competes with or just the other food delivery services or they kind of need to be thinking about maybe hooking

up with someone. I have to it up to the anti a bit, because I think many had thought that grub hub was just kind of a dead asset at this point, and given they've lost so much market share, this kind of puts them back in the game in a way. And you know, you saw it indoor Dash and Uber stock price yesterday. They were under pressure a bit because you know, if you're going to have a partner,

you wanted to be a logistics giant like Amazon. Interesting, and I wonder about the logistics part of this, because Amazon does have that part figured out, But delivering food is tough. Margins are really tight, and there is a lot of competition. Jackie, just in the last thirty seconds, does this tell us anything about what Amazon's ambitions are not for food delivery, but for last mile area that

it really has covered. I think it means that they're looking to um get into a space that has had a tough time figuring out how to make the economics work. And they already have a really big network of drivers, and so expanding into something like this um can only help, especially as they're looking to tap other areas of growth. So I'm going to order like my paper towels and I'm going to get like a salad al with it.

Oh my god, it's just Amazon taking over the world. Anyway, It's really kind of cool to see how this is all evolving. Jackie Devola's technology reporter at Bloomberg News back in our interactive Brokers studio. I don't know, Tim, what do you think? Look it makes sense. A question that I have just over and over again is what this means for Seamless, which is a grubhub company. Yeah, because that's what we use here in New York. So is it couldn't work here? I'll have to try it out

because I'm a Surprime sub driver exactly. All right, you're listening to Bloomberg I'm bro journal. Yeah, but you let me drive? Oh no, no, no no, no, please, I'll do I want to drive. It's a good question. This is the drive to the clothes on Bloomberg Radio. All right, We've got just about ten and a half minutes left in the Thursday trade Carl Master along with Tim Stanevik right here on Bloomberg Business Week and Tim, we've got stocks up, bonds down, yields moving up. I'm trying to

figure out which trade do I try? I mean that sounds about right right. If stocks go up bonds typically go down, but I'm trying to figure out which one really hasn't right. Maybe Brad McMillan has the answer for you. He's joining us now, his chief investment officer at Commonwealth Financial Network. Brad joining us on the phone from Waltham, Massachusetts. Commonwealth has got approximately two two point five billion dollars in assets under management. Brad, how are you? I'm doing great.

I hope you guys are having a good summer too. We are, we are well, We're not, No, we're not, because we both are dealing with COVID issues, but we are. We are healthy, Our families are healthy, and that's that's certainly what's important here, Brad. But you know, you you ask and you get the answer you might not want with us. Okay, that's that's the thing here. Let's talk markets, um help. He'll bring us up to speed about what you're seeing, not just in the trade today, but the

recent trend that we're seeing. And I'll ask you the question that I ask everyone, is the worst behind us? I think the worst is behind us for a couple of reasons. First of all, when you look at everything that's been driving this, you know it's it's really been about interest rates so far, and you know, inflation is starting to top out. We're seeing commodities start to pull back,

We're seeing supply chains normalize. The FED has pretty much been as hawks that can be, so fears are going to go down, and when interest rates start to stabilize, that gives us the ability to start moving ahead. And I think that's where we are now. Most of the damage has been done, okay, but the the impact of that damage can stick around for a while, and that

has certainly been the case of higher inflation. So even if we come down a bit, we're still at pretty higher, you know, high levels, maybe not historically, but certainly high compared to recent history. So that damage on the economy as well as on the markets can stick around for a while. Fair. I think that's fair, and I think you're absolutely right, Carrol. That's what's dry. That's what drove

the market last month. It's more about are we going to get a recession and what's that to do to earnings? Then what our interest rates doing and what are we you know, what does that mean for evaluations? That damage is done, but I would argue the economy still has a ton of momentum and a lot of that fear is overdone. Where where are you seeing that momentum right now? Because you know, we we just had this great story

from our own Joe Dough in Bloomberg Business. We're talking about higher energy prices are actually leading to the closure of some industrial firms because those those prices are have tripled that they're paying. We see food costs coming up. Um, tell me where you're seeing the bright spots right now? And look, we know that consumers did a good job saving during the pandemic, but they can only pay for five dollar a gallon gas for so long. Absolutely true.

But the one, the one bright spot that we're looking at here is employment. And yes, I know the job's report is coming up. I get that. But if you look at where we've been, we'd continue to add jobs at about four thousand a month. That's about twice the pace of what we were doing before the pandemic, and we still have millions of jobs available. So you know, we don't typically get a recession as long as people

are working and can work. And I think until we see the employment market turnaround, I'm betting against a recession. So what does that mean in terms of betting your financial bets. What does that mean you're advising clients to do or how are you putting, you know, their money to worth well? Well, when you look at the markets, I mean there's been a lot of fear about what bonds have done. Okay, fair enough, we've seen an unprecedented

trade down in bonds. But why was that? That was because interest rates moved up, and now seems to be the interest rates are normalizing, So bonds, all of a sudden, you're getting paid more than you've been paid the while I don't I don't mind bonds at this point. When you look at stocks, okay, stocks are now cheaper than they've been in the past couple of years, and all of a sudden, the you're earning yields of free cash vote flow yields are competitive with what we're seeing in bonds.

In other words, I look at a market and I see a normal market with some potential moving ahead. I don't see a taking time bomb, which is what you know a lot of the coverage is suggesting. Okay, so let's talk about what you're going to start to see here. Carol had the great question about you know where what the what where to put money Right now, I want to go back to your macro outlook, because you have

a really really it sounds like you're really optimistic. You're much more optimistic than a lot of the people that we've spoken to. But you're also speaking in a way that a lot of our people who cover the FED and cover economics, I think, which is with you know, half a million people added to the payrolls every month so far this year, it's hard to look like the US is in a recession right now. When when do

you start to worry? Is it if we get a softerwre than expected jobs report tomorrow or do do those numbers have to start going negative each month? I think if I'm going to be I'm going to continue to be reasonably cheerful. As long as job growth stays about two thousand a month, Okay, okay, As long is the number of jobs out there available stay in the millions. That says to me businesses are hiring and people are working.

So if we go below two hundreds, that means we're going below pre pandemic levels, and that's when I start to pay attention. Okay, So I mean I do feel like we don't have the playbook on all of this, right, you know, pandemic coming out of a pandemic, you know, taking away unprecedented amounts of stimulus that was different stimulus from the financial crisis. Is it fair to say, though you know some of what we're doing right now, we're really making some big guesses. Oh? Absolutely, you know, but

the thing has Carol, that is always the case now. Yeah. So for all the sense that you know, we know what's going to happen, we can make some educated guesses and overall we do pretty well. But when we get into situations right now, I think you have to go back to the fundamentals. And that's why I am where I am. You know, I can tell you a lot of scary stories, but businesses are still hiring, people are still working, people are getting raises. You know, things are

getting better, not worse. And I think that's ultimately where I've got to stand. I like the optimism here, Okay, apart from job declines are two K a month, um, where else should we be keeping an eye on? Just in the last thirty seconds that we have with you, Brad, I think oil prices at the big book. You know, the question really is is Russia're going to change the oil market structurally going forward, and we don't know yet. That's the big negative wild card in my mind. Yeah,

I think that's a big one. I agree with you. Um, we gotta run. Hey, Brad, good to check in with you, get your thoughts in your perspective, and I do like the level headed, uh feel of it. Brad McMillan, Chief Investment Officer, Commonwealth Financial Network, joining us on the phone from Waltham, Massachusetts. And roughly two hundwritten thirty two point five billion in assets under managements have fall for Brad.

Thanks for listening to Bloomberg Business Week. Download the podcast on iTunes, SoundCloud, or Bloomberg dot com, and you can also listen to our radio show at two pm Eastern on Bloomberg Radio or watch us on YouTube search Bloomberg Global News m