Bloomberg Surveillance TV: July 25, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg

Well, I think the technical backdrop is part of the story.

And obviously you know the technicals were very stretched coming into I would say June for technology shares in particular, whether you looked at physicianing, whether you looked at the overbought conditions. Remember we were the relative strength indicator over seventy for quite some time.

So I think that explains partly on wine.

When you see a setup like that, you think, well, something's going to happen to take us down. But I do think also there's a more fundamental story here, which is their earning surprises. As I mentioned, that's what really lifted the Max seven stocks higher. If you look at buy how much they were beating expectations.

That's one way to look at it.

The rest of the S and P was not doing much, but the Max seven was doing a lot. The other thing to think about is how much were their earnings revisions going up for some of those technology stocks, And again it's by a significant amount. That is not likely to be the case going forward, and case in point, Alphabet and Tesla did not see the positive surprises or saw a negative surprise, and to your point, the market

Surprise factor as you did before.

So that's why I think investors will continue this on wine trade.

This is a very confusing market to me because on one hand, I believe in this sort of unwined story, and then it doesn't seem so pernicious. It's just basically taking chips off the table cashing in just technically for

Doesn't that reflect this.

Feeling of sort of the unknown of how much and how quickly growth is weakening?

Yeah, but I think the expectations were probably not low enough coming into this quarter. If you think about how much the expectations typically get revised down it's let's say three or four percent this time around that got revised down by all of half of a percent. So I

Quite some time.

If you look at the US consumer, Lisa, I think I'm now maybe finally joining you in that camp. There is a weakening in the US consumer, and there's the unemployment rate that did go up from three point four percent to four point one percent.

That's not something to disregard.

So I think that's the squaring that we have to do in the markets is acknowledged, the fact that earnings expectations were too high for the economic growth that we have today.

What does that mean for how bullish bearish you are on say, tech stocks, which you used to really love and you used to lean into you so you can't just throw them out because everybody loves them. Yeah, at this point, are you looking to buy?

Is this sort of a biable dip.

Or is this thing that you stay away from because you don't want to get in front of a freight train.

I think you don't buy just yet, or maybe you buy very slowly, but with the with the idea that this is likely to play out over the coming months.

And you know the reason I.

Say that lease is there's this, you know, Gardner's hype chart that I'm sure a lot of us and a lot of viewers have seen, and you go through this peak of inflated expectations cycle and what's on the other end is actually the trough of disillusionment. And I'm not saying that we're necessarily going that way for all of the AI stocks, but I think for some of them we're likely are or it's going to take longer to monetize the AI that we're all so excited about.

So that's why I think that part is going to take a little bit longer to play out.

You know.

The other part is just given how.

Long investors have been some of the artificial intelligence stocks, I think there's still a lot of selling pressure that is likely to come forth. So that's why I would think about having a shopping list. But executing that shopping list probably over the next few months. The other thing too, the market is typically consolidate into the first or I should say after the first rate cuts. So whether it's July, whether it's September, the market is three months after the cut tended to consolidate.

Information technology.

If you use the nineteen ninety five cycle for example, as a soft landing scenario, infotech rallied into the first rate cut, but again it's sold off or consolidated after.

So that's why I don't.

Think it's a quick buy the dip here intoechnology, but think about is more of a protracted, let's say three months consolidation frame.

Given you've now come on to Lisa's side about these concerns in the consumer.

Where will that play out in the market.

If consumers aren't spending, what does that mean for potentially stocks you want to begin on or pull.

Well, first of all, what I would say, the consumers are spending, right, but they're not spending as much as they used to. If you look at credit card spending data, for example, if it was up seven or eight percent year of year, right now it's maybe three to five percent, depending on what kind of a consumer you look at, so I think it's a slow down story versus a

So it's probably not.

As levered to the consumer as it is to the commercial real estate market for example, but regional banks are really levered to lower interest rates.

I think the one or D that we have.

In this market environment is the FED is likely to cut rates, if not this month, then probably in the next couple of months. And if that's the case, you want to go to those rate cutting beneficiaries.

If you have.

Lower rates than some of those unrealized losses on the balance sheets of those banks should maybe become less so.

Than they were before.

If you have lower rates, you should also have better income margins that interest margins for those banks.

So that's where I.

Would be looking to position in regionals and small caps and utilities, which all of those sort of avoid the consumer.

Smozampi film in this morning equity features on a rush, so by about two tens of one percent just a opsode nation. More and more people sort of shift into Ramo's camp on the consumer. You notice that it always pointed view. They're like, I'm in your camp.

It's like you run the count, run the camp.

I'm sort of big pessimists.

I'm a sort of gloom and doom.

I think about the sixty forty and Sebastian page is Allocation Committee, and basically the bond people are on one side, the equity people on the other side, and there's sort of a cloud hanging up from bond people and equity.

Without a die.

You are a bond person and a stage amoroso of my capital and a stage of thank you. So here's the latest. Donald Trump ramping up his attacks on Kamala Harris, criticizing her record as San Francisco District Attorney and her stance on abortion rights. Harris taking aim at Trump and the GOP's ties to Project twenty twenty five Lebby Cantrill of PIMCO, saying this, well, Trump remains favorite to win

Yes, I would say that not a lot right now. I think that the polls will be much more telling if after the convention and then really in September. And this is what we have been telling clients even before all this drama, is that really wait until September because that's where and just statistically.

Pulling becomes more predictive.

Obviously, Poland's never going to be completely clearvoydt in terms of who actually shows up to vote, but it becomes more predictive as you get closer. So and I say especially this because it is so dynamic, because she really is reintroducing herself to voters.

That's good and that's bad.

I mean, she has a very progressive record that she ran on in twenty twenty that she's going to have to sort of defend and clarify and what have you. But I wouldn't necessarily, I would take all of this pulling with a big grain with a big grain of salt.

It's hard to have a cocktail given the past few weeks that we've been dealing.

With in US politics.

But now there's a lot of emphasis on who she's going to pick as her running mate, who do you think is best for her, not just to support her and expand her views because you say she is very progressive, but also the.

Math when it comes to electoral college. Yeah, and so I mean, is she very progressive? We don't know.

I mean, just to clarify, I mean, she ran on a very progressive platform. She was a Democratic primary. Yeah, yes, no, And again she was running for national office even when she was in the Senate. So for sure she has a progressive record. I think that's the thing. Though it's unknown about hers where does she stand on in many of these issues. But you're absolutely right, her running mate is going to be a really, really important both because it.

Is sort of the first public.

Decision that she is going to make, and oftentimes, you know, picking your running mate is really a reflection of the top of the ticket's judgment, but also, as you talk about, is really the electoral college strategy Arizona, as John just said, I mean she's lagging in Arizona. Mark Kelly, the Senator from Arizona, who's more moderate, particularly in border issues, that's going to be a big liability for her, but also could help shore up support in Arizona and then Pennsylvania.

So Josh Shapiro, the.

Government popular governor who also has a more moderate stance on things like fracking, which she said she was going to ban. So yes, no exactly, and she says she's talked him a medicare for all, she's talked about defending the police, she's talking about banning fracking. I mean, again, she has a platform that will be untenable for her to run on and win. And that's why I think she will need to start clarifying much of that.

Now.

The other challenge, sorry, the other challenge is that she's the vice president and current city vice president, and she can't necessarily distance herself so much from Biden as well. So this is she has a lot of challenges, a lot of twists and turns ahead in terms of really navigating like the policy front.

You said, the top of the ticket is the judgment of the candidate. What does that say about Trump and his pick of JD.

Vans. Yeah, well, as we were.

Just talking about, I mean this, this decision to pick Jade Vance was really a moment in time, right. It was on the heels of the assass a Nation attempt. It was when Biden was still in the race. It was when folks had odds of Trump winning at seventy five eighty percent. Republican sweep looked more likely than not, and so he wasn't necessarily as concerned about expanding his voter base. He wasn't as concerned about as being tight as it might end up being.

So, you know, we'll see whether he, you.

Know, how how he feels about that Jake Advance. But it is much more a doubling down on kind of MAGA and on trump Ism than say a Doug Bergham or even a Marco Rubio or certainly a Nicki Haley some of the other folks who were in the mix.

So you note that Michelle Obama is still not going to do the nominee for.

Get here, hold on a well, but hold on that was full.

Okay, efinitely that was for us.

But I really I'm not going to ask you about Michelle Obama. I don't think that I was the genesis of that. I do want to ask you, though, about the tenor of the discussions that you've been having with clients overseas outside of the US, how they're viewing this, how that affects their investment decisions, what questions they're asking to understand the potential ramifications of this.

Yeah.

So actually I'm still getting questions about Michelle Obama from our Asian clients and about Jamie Diamond. So you know, hope spring's eternal, I guess. So I would say there's sort of in two lanes. One is around fiscal and of course a lot of our clients overseas have a lot of dollar and a lot of treasuries exposure, so just trying to navigate that, and I think, as we've talked about, really the punchline here is that the deficit

With him, whereas maybe a Biden.

Or Harris may have more of an ideological view. So I'm not sure that's actually I'm not sure that's right. I mean again, I think the direction of travel here around tariffs, around export controls, around even capital flows, around scrutiny around you how US investors invest in China is going to be sort of pervasive, regardless of who wins.

The message from get a cocktail, enjoy the beach.

Last week, how'd that work out?

Yeah?

Not well, I'll tell you, yes, this is what I'm trying to do, and sort of self something, but it's not really working out very well.

Thank you.

I like that advice.

Levi's good to say. Thank you. Letty Cantroll and fim Co on the like to. Let's turned back to big tech. I spending on AI program and computing needs at Google parent Alphabet, prompting a sell off in big tech stocks as investors look for more return on AI spending. One area companies are investing heavily is in data center capacity.

Yeah, it's great, it's a great question. I mean, I think to ask the journal. Infrastructure really has three big pillars. There's mobile infrastructure traditionally think of it as towers, telecom towers. There is the fixed line infrastructure, so it could be you know, fiber that delivers connectivity to homes or enterprises.

So let's talk about the investment opportunities and how much is going to be invested over the next several years. I want to reflect on a quote that came from the Google CEO, the Alphabet CEO in the last couple of days, when he said, the biggest risk here in a cycle with a theme like this is underinvesting and not over investing. I sent from your perspective, you're going to agree with that stance, am I right?

Yes? Yes?

Why is that? Why is this such a big moment and why is that the right way to look at the balance of risks?

Well, I think if let's look at the computing piece right of it, I think two mega themes that we have are obviously under computing and last mile connectivity. And I think maybe we'll touch a little bit later on Metronod, which is a deal with announced yesterday with a partnership

Six to gigle whatts.

No longer do we think about data centers in terms of square feet. It's really about the amount of power that the data centers have. So that's an important factor there to consider, and we'll touch on that in a second. So Internet infrastructure two gigabots, the next phase was Internet two point.

Zero and cloud eight gigabotts.

About fifteen years, technology cycles have accelerated, so we're now talking about AI build out, Cloud two point zero, Internet three point zero as a five year cycle and twenty five to thirty gigabotts of power required to fuel this. So I think, you know, you had a more patient, sort of highly visible investment cycle that's now gotten compressed and perhaps is creating I think scaring some of the investors out there.

Well, some people would argue that this might be one big reason for the selloff we've actually seen in big tech There is one investor who said this in a recent story. The overarching concern is where is the return on investment in all the A and AI infrastructure spending.

It'll pay off.

In a few years, but it's not going to come anytime soon. That is what the fear is of our How much are you seeing near term returns some of these infrastructure projects that a lot of people would agree may be crucial in say ten years.

Yeah, I mean, I think it's a great question. You know. I would draw an analogy to similar questions.

Raised during the buildout of cloud in two thousand and six and seven. So, you know, when Amazon really emerges the cloud provider in two thousand and seven, I think similar questions were raised about where is the ROI. A tremendous amount of investment is needed to help facilitate the build out before you actually start seeing the applications of that. And if you fast forward two thousand and seven to today, Amazon stock is up almost three thousand percent, right and it's been forgotten.

So I think the concerns are valid.

You know, I do think that there will be there's frothiness in parts of the ecosystem within digital infrastructure at least how we're positioning ourselves. We don't see that most of the capacity on the data center side it's coming online is fully leased. Most of it is leased to the large hyperscale customers. So the type of risks that we're looking to take, we're not necessarily exposed to perhaps some of their volatility. But I think it's a fair question to ask, what is the ROI. I think AI

That said, you said that there are certain pockets that feel fraudy in certain pockets that seem very worthy.

What are those pockets? How do you distinguish the two?

Yeah, I mean that's why I think, you know, we're trying to figure that out. So a big part of what we're doing at KKR is really trying to map the entire ecosystem from the silicon side, which is I think we're talking about chips to the ultimate end point of applications layer and trying to figure out how do we participate to the different strategies that we have within KKR. We're not a venture investor, so we're staying away from that.

Today there's only one.

So public markets, perhaps there isn't as much of a fraughtiness private markets. There's fifteen billion dollars of capital that has gone from venture capital funds into generative AI platforms.

That's ten x the prior trend line.

So I think perhaps there are parts of fraughtiness in the private markets versus the public markets. But I think we think of it as as you know, as a long term trend sort of an industry three point zero if you think about it in terms of long term, three hundred year sort of a cycle, and we're pretty confident we're still in early innings of that.

When you look at the investment, is it actual market demand or some of this has to do with the fiscal push coming out of Washington.

It's fundamental market demand. I think we're seeing government part of this investment has not played a large role. Now we think that in the long term, I think a comprehensive solution which includes private capital, includes obviously a combination of the tech companies, intervention from some government policies to help facility to build out some of this power infrastructure, which ultimately is a key component of this will be required.

Know it's the deal.

And it was actually not on high falutint cyber prowess in artificial intelligence. It was in medium sized, smaller cities getting connectivity, basic connectivity to the internet, to the cell phone.

How far behind.

Are we basic infrastructure at a time when we're trying to build out a massive network.

Yeah, So two mega themes we touched on the cloud computing. The other big theme we have is fiber to the home. We've made over ten investments globally, over ten billion dollars of capital just in the fiber to the home.

Strategies over the last decade. We're pretty bullish. We think this is pretty important.

So in the US, about fifty million homes still don't have access to full fiber. We think that's that's unacceptable

It's it's it's pretty inadequate.

So I do think that we believe that there is a large decade long investment cycle to help build out fiber infrastructure in United States, and we're really happy to be part of it and happy to partner with a premier telet come operator.

Like T Mobile to do that.

You need to come back soon. We've only scratched the surface. Seven way. This was great. It's going to catch up.

The surf raise love too.

Thank you of KKR. This is the Bloomberg Seventans podcast bringing you the best Markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.