Bloomberg Surveillance: Microsoft, OpenAI and Sam Altman

This is the Bloomberg Surveillance Podcast.

I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. With Richey Jealia, this is the interview of the day

Richie, honored, you're with us this morning.

Okay, they're going to walk in two guys, five guys, five hundred engineers and they're going to make two chips or whatever to compete with Nvidia. Let's start with the why why does Microsoft, enormous Microsoft have to compete with Nvidia, Yeah, and.

Thank you so much for having me in the warm introduction. I think there's two reasons. Number one is the unit economics. You know, we can all look at Nvidia's gross margins and obviously the amazing rally the stock has had and the revenue growth, and Microsoft knows that there's a lot of ability to save money and bring down costs. But I think the more important factor of why they want to bring in their own tips is because there is eight major GPU shortage out there, and you are in

How do you bring those costs down?

It starts with the hardware, and you want to bring that cost curve down to make it more useful and ultimately you get generative AI to become a much more prevalent technology.

On a percentage basis, how Nvidia ish is Microsoft? Is it a two three percent bolt on to Nadella's ginormous company or can it be out three five years a germane part of Microsoft. Compare the potential size of what Allman can do to the total of Microsoft.

Yeah.

From a broader AI perspective, this is going to be more like the cloud. And then, you know, that's the big thing about AI is it is that seismic technological change similar.

To what we saw with the cloud.

Look at what happened to Microsoft when they were an on premise company. Look at where they are as a cloud company, not just their stock price, get their revenue growth, look get their profitability, and look at their relevance in the technology world. And I think AI can be a similar accelerator.

You know.

And the great thing about having Sam and Greg and whoever else joins if this is how it proceeds, and obviously this is changing by the hour that Microsoft not only is continue to be a leader in AI, they're actually in control of their own destiny. That was I think one of the few knocks that people had against Microsoft is they didn't control their destiny.

They were up to open AI. Now this happens kind of all internally.

So this can be a major accelerator for Microsoft, and I think this can be a much bigger company as a result.

Risia, I'm still stuck on this idea that it costs about five times based on how expensive some of the hardware is for generative AI to get certain workloads done as it does the traditional means of just hiring people.

Does it basically mean.

That in Vidia's access is success so far? Is the reason why the Microsoft's of the world, the software focused area, have not been able to monetize AI in as material a way.

I don't think it's because of the GPU shortage. I think that is one factor.

And then by the way I would maybe push back, I think Microsoft is monetizing AI in a big way. By my estimates, AI is already a half billion dollar arr business for Microsoft after what two or three quarters, which is kind of an amazing, unheard of trajectory for the rest of software.

However, I think there are a couple of reasons.

You know, Microsoft, remember has a huge head start when it comes to generative AI. They invest in open AI back in twenty nineteen. A lot of other companies are playing catch up. I think a lot of enterprises are also maybe have concerns around data privacy, residency, and they just you know, security, and that's also a limiting factor. Another think, maybe lastly, is a lot of companies are figuring this out.

Remember generally I is a little bit of.

A blank canvas and you have to figure out the right way to use it. Think about the way you and I use chat GPT today versus what you know a year ago when it first got launched. Part of it is obviously it's gotten more powerful, but part of it is we had to figure out what's the right prompt to ask it, what's the right way to tweak it? And you know, with APIs it's maybe ten times more complex and difficult.

I think the monetization is going to come.

I just think for software it's probably a twenty twenty five event when it starts to be material for you know, the hubspots and the Mango DB's of the world. But for Microsoft, I would say it is already material and rapidly going.

So when you keep talking about GPU, it's graphics processing. You and one of the key components for some of these chips that are required for generative AI. Do you think that Microsoft canterially get into the chip creation, the physical word world, the hardware game as it ramps up to the software monetary prowess.

I think they can't. Now.

I would say they're not going to be directly selling

Versus how things have been.

So I think this is more of a unit economics for Microsoft and a boost Azure.

For she gets a slow day here, we got to make some news. Everybody's piled on Microsoft. Now it's one big love fest. You know, we're on our way to three trillion dollars. I think it's four to four. You're at a three ninety. The well dressed, dan Ives and the rest of them are up there. Are you going to be a justin a higher year? When you see this unfold? Can we get you out over four to twenty on Microsoft right now?

Yeah?

Obviously I can't comment on the price target changes that I may or may not bring. I would point you in our note we do talk about, you know, a bowl case, which would be beyond that, and you know you can kind of draw your own conclusion.

Come on, come on, no listen where among friends? What's your bookcase? Give me a number or can you out ives? Dan Ives?

Uh, look by by bookcase, you know, and the note would be above about four hundred dollars this year. I think the thing we have to say is, right now, I'm not modeling huge generative AI revenues in my model. If we start to think about Officer sixty five copilot, for example, that's all kind of gravy on top of this.

And I haven't even really brought in you know.

A calendar, your twenty five calendar, your twenty six numbers. So again I would say you can draw a lot of conclusions based on those sort of things to get you significantly above where this dock is today, but published price target during our ninety.

Bucks Rischie, thank you, camplonsistent in bet, don't worry about it, Rischie, Jeliria about me, sick capital, Marcus, they wake up about a thirty c k.

Victoria Fernandez with his chief market strategist at cross Mark Global Investment. I have no idea how you reallocate rebellance, Victoria for next year.

What's the cross Mark strategy?

Yeah, well, Tom, as you know, throughout the last year, when a lot of people were trying to make the decisions of what it would be in or out of the market for our clients, we were completely in the market, but we were being very cautious as to where we were putting our money to work. We had a lot of defensive names in our portfolio while still having a

You mentioned energy. That's one area where we've been.

Adding some exposure to names like Conico Phillips. We actually are adding in healthcare too. Healthcare has been decimated, but you look at the balance sheets of some of these companies and you have a lot of opportunity there adding a little bit of fixed income, having a little bit of cash, using some alternatives in your portfolio like covered calls.

Do you get uncorrelated diversification and fixed income right now versus equities?

You know, not as much as you probably used to.

But what you're going to be using your fixed income for right now is for the cash flow for our client. So you can get a five percent yield on the short term part of the yield curve. It's an opportunity to have something a little bit better than cash, a

When you look forward, there's a real question about whether rate cuts next year are good or bad for risk. How do you think about that at a time when people are expecting the soft landing as the base case.

So I think there is a misconception here that the FED is going to cut in the first half of next year.

If you look Lisa, over.

This hiking cycle, we've already had six dubvish headfakes where the market has gotten ahead of itself.

Assumed the FED was going to be more dubvish than.

It was, and they've had to price that back out of the market. I think we're seeing a little bit of that now. I don't expect the FED to cut rates until the second half of next year, and I think it will be more because we're seeing a deterioration in the economy than it is because of inflation expectations.

I mean, look at delinquencies right now.

We're back up at pre COVID levels in regards to autos, in regards to credit cards, especially in that eighteen to twenty nine year old age group, where they've got student loan debts coming as well. And as delinquencies go up at a time with very low unemployment, what does that mean for banks, it means they're going to increase their low loss reserves. It means low growth goes down. These

So when you take a look at risk appetite heading into next year, do you think that people are overly optimistic about both rates coming lower and equity is continuing to do well led by the names that have done best this year.

I do think there's a little bit too much optimism right now.

And I'd like to be optimistic.

I like to say good things are going to happen, but look we've said for the last year, you've got to be cautious. You look at leading economic indicators down again. Even coincident economic indicators are flat right now.

Consumer is weakening.

You've been talking about mister McMillan's statement about deflation going on and worries about the consumer. We've heard it in the retail earnings that have come out. And I think you're going to see some of the things that have been propping up the equity markets, like buybacks, start to come back.

But Victoria you're living in Texas. The Austin boom and the Austin boom is a broad sense is service sector in technology. How do you underweight the Magnificent seven.

It's a tough decision to make on what you do with this Magnificent seven. Obviously, the AI tailwind to those names has been tremendous, and we assume Nvidia is going to report.

Good earnings and that's going to continue.

Then to lead that narrative and help that Magnificent seven, you have to have exposure to these names. You do, but I just think you have to be a little bit cautious and putting all your eggs in that basket.

If you have, you've done well this year, so I can't deny that.

But as we assume that we're going to have a pullback in this economy and the consumer is going to come back, and capital expenditures and spending by corporations is going to slow down, I think you have to be a little bit concerned about what those earnings look like going forward.

So have your.

Exposure, but like we said, add that diversification and other areas as well.

Victoria, thank you. We've got to leave it there. Happy Thanksgiving enjoy the next coup of night guys. Thank you, Victoria Fernandez. There a Crossmark Global Investments.

Right now and fixed Income Michael Collins joined Senior portfolio manager Page and fixed Income. Michael, what is the symbolism of the inflation adjusted ten year yield coming in and in? I got a two point zero nine percent print this morning. That's extraordinary. What does that mean for our viewers, our listeners.

Well, as you know, you know the world's discount rate, you know, the US real yield is what's driving valuations on everything in the world, and that real yield TOM at two point one or so is probably still one hundred basis points too high, right.

I think it's supposed to.

Be somewhere between zero and.

Two, So I think there's still room to go there. I think if you believe the real yield should be above two permanently, remember it was at two and a half just a few weeks ago. You're buying into the notion that we're going to have this continuation of really strong real growth in the US and around the world, and it feels like that that's not in the cards.

What is your xxis to get even halfway there? That's a bold statement by you that the inflation is just a yield two point five to zero down to two point one zero and it will I'm going to use this word carefully, Michael plunge Lower. What's your timeline to make that happen?

You know these things tend to happen more quickly than the market's price in right. I mean, just a few weeks ago, the markets were pricing in a funds rate that ended at four and a half percent and never got lower than that over the next ten years. And now that number is four, right, So the markets are pricing in kind of a permanent funds rate at four and again that probably is one hundred or maybe two hundred basis points too high as well. And we do

That's the worry of equity investors as well.

Mike.

Let's talk about bigger picture, and I'll do this for you because you're fun too modest. About ten years ago, you and a team I'm thinking Robert Breck Peters were really known for this call of low interest rates, low inflation, range band yields, low and range band. I remember the phrase. It was the low ranger. Now Mike, that was ten years ago. You guys won awards for all of that.

I mean, certainly, you're in a world right now, Jonathan, where you're seeing a kind of generational high in capital investment in this country in technology related things that you've been talking about AI all morning, right, and it's happening, and it's real, and it's increased our productivity in this

Have you gotten more conviction over the past four weeks, Michael Is? The market seems to be accepting the idea of possibly more aggressive rate cuts.

Next year, you know, more conviction on rates, maybe a little bit more, you know, I think the inflation side is really what's given us more encouragement. The disinflation story seems to be kind of embedded now and we're not as worried about a permanently higher you know, inflationary environment. Right, So that's really a big delta that we're seeing recently with goods prices in deflation right now, right, and services.

It feels like a much tough of co on the credit side. My thank you, sir. It's gonna catch up with you. Mike Cullins. They have PGIM fixed income.

Sometimes you get lucky, and we do that always with Robert Hormatz. He is of tough in of generations of presidents. This could easily be a three hour conversation, Ambassador Hormatz with the Yale School of Management. So many narrors, Bob, you and I could go for three hours right now. We got about seven minutes.

There's James Earl.

Carter with Saddat from another time and place. We have a nostelgia for that moment that you lived in the success of with Brazinski and the rest that you lived. What image were are we going to see when we extricate ourselves from this war in Gaza?

I think at that point there was there were two interloctors that Carter was trying to pull together and was able to do that. Now you have a much different environment. You have Hamas, you have the Israelis. The Israelis are divided. Hamas is a very inco it kind of operation. You know, it's not quite clear how much power the center of Hamas has. It's a very dispersed organization, and we really with hostages, as you've correctly pointed out, you really don't

Robert Gates my essay of certainly of November and Foreign Affairs magazine. It's a primal wake up call on American diplomacy is being efficacious.

You have said this for decades.

Bob Rmance, that we can't let down our diplomacy. What does our next diplomacy look like after what we've lived the last eight or even twelve years.

Well, that's the interesting point that that is. During the Cold War, diplomacy was Washington Moscow essentially, and now you've

Which is the reason why there was a lot of focus on China's meeting recently with Arab leaders and wondering how exactly they were navigating something that they really haven't taken a particular stance on. What did you clean from that?

Well, that's a very good example of this. The Chinese really for years played virtually no role in the Middle East. They have a base in Djibouti, but that's sort of north and out of the framework. It's really on the tip of Africa, but they were not engaged in the Middle East. Then sort of a surprise, we find that they broke heer to deal between Saudi Arabia and Iran. So it's clear that they have a new, positive, proactive, and I would say, in that case, quite constructive diplomatic approach.

The more I read, the less I feel like I know about what's going on in the Middle East right now, in terms of where the power centers are, who's brokering, how whether Saudi Arabia is getting more sort of aggressive with Israel or not. Do you have a sense of just whether there still is this animosity between Iran and Saudi Arabia, of whether there is this move from Cutter and Egypt and others to move away from israall. Do you have any sense of exactly how this tide is shifting.

It's very hard to read the tea leaves. I would say that Iran and Saudi Arabia probably still have a lot of questions about each other and a lot of suspicion, but at least they're engaging in conversation in a way that they weren't before, and I would say it's probably true as well. I do think that the sunny Arab countries in the region did want to have and still

You just celebrated your eightieth birthday, and I think I can say, between you and Michael Bloomberg, you are as well preserved as anybody.

I know.

What's the damn secret to look at this good at.

Eighty getting up early and coming on this show.

Okay, that's the right answer.

I want you to talk right now about this crazy American gerontocracy that we're living right now. The president's eighty one, the other guy seventy eight. How did we get half of Congress is ninety two? How did we get here?

Bob Mormtz, Well, you've asked a question with really two powerful ingredients. One is, we certainly need to begin to tap the younger political leaders. And there are plenty of very good people who are in the process of moving up in the political process, but the older leaders have sort of taken the oxygen away from them. They don't get to participate in a lot of the proactive debates that are going on because you know, you've got two leaders who are older, who take a lot of that oxygen,

This book from a couple of years ago, when's the second edition out?

And I too, I just did an article for Fortune magazine explaining why this was a problem and what it was going to mean for social security, what's going to mean for the budget for contingent liabilities? And the numbers are up and up and up. Who's going to pay the interest our children and grandchildren? We're leaving them with a burden. That's one climates and other breaking news is getting in the way. Bob Horme has I got to cut you off. Thank you so much for joining us.

O'clock hour, just that we remain very close to getting this hostage deal done. We also did hear from the Israeli Prime Minister, the Benjamin net and Yahoo in the Israelis are tweeting that you will have a cabinet, a war cabinet meeting this evening.

Stay for this and Emory hoard and balance of power look for that at this evening. We say thank you to Robert Hormats of the Yale School of Management. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern on Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always. I'm the Bloomberg Terminal.