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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordernt. 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 Terminal and the Bloomberg Business app. Let's talk about tech.
The tech trade Steady and head of Micron earnings due after the close today, shares that more than two hundred and fifty percent so far this year. Danives of web Bush writing, there is some added nervousness on the important memoryship trade. We continue to believe that in this market we will continue to go through a number of gut check moments. Dan Ives of Webus joins us now from what Dank and morning, is this one of those gut check moments?
Is thing you saw it with the cost be down ten percent? It look the golden childs of this tech boom a lot. It's in Korea in terms of memory chips. When you think about what's happening with SK and obviously Samsung a SK overtaking Samsung Micron such an important quarter relative to what we see in terms of demand ripple, What does that mean for Nvidia hyperscalurs? But I continue to look our checks in Taiwan, in Korea, no cracks
in the armor. And that's why I just continue to believe third inning one out in terms of the AI game.
Further downstream, though you're starting to say some pushback to price increasingly, does that uppend some of the story.
Look, I think on the edges that could look right now demand the supply called twelve fifteen to one in terms of where we are relative to chips. So my view is like you still even if you had some events to even take some demand off, you don't have an equilibrium probably for another year and a half two years, which in my view just continues to weave like the
chip trade is what you continue to own. Look hyper scours obviously, right, I know that those are kind of the penalty box to some extent, but you will see some push against price, but it's our view like over time price comes down it's all part what we're seeing with tokens.
Profit margins self kind of a key point here because profit margins have been just going to the moon. They've been incredibly, incredibly robust at some of these semiconductors, in part because they can charge whatever they want, and that's changing. You are seeing some competition with Google and with Amazon coming into the four. At what point do you start to see those margins really compress.
Look, I think right now, if there's a pressure point, you probably don't see that for another nine twelve months. But just like you said, like competitions coming across the sport, it's an arms race, you know really when you think from what Meta is doing, to Amazon, to Microsoft, you have software companies and now they'll start to produce chips. Look what's happening even on the Intel side with Apple. So that will definitely only start to pressurize the situation.
But in my view, it just continues to be like we are still so early relative to the build out, and that's also you're going to have these gut check moments, you'll have these white knuckle periods, But we continue to view these as opportunities where you own the AI winners.
Well the AI winners though, is the key point here? How do you know who they are when they're shifting around so quickly? And I say this, I thought one of the most interesting stories was when Microsoft came out and they said that they were going to be using deep seek to lower the cost of deploying some of their large language models. I mean, is this indicating that cost is now a much higher factor on the list for a lot of these big tech companies when it comes to who they're going to go with.
Yeah, I think it's obviously technology scale, but cost clearly puys in. There's also the models. Over time, the model is going to be a cheaper and cheaper. I mean the value you actually start to thinking about it's in the data, it's in the chips, less about the models. Which is why ultimately anthropic open AI, they're so focused on enterprise compute, They're focused on all these partnerships because
essential what's happening. Everyone's building out their own moot for their own forward And that's why it's a game of musical chairs because eventually someone's left without a chair. Now,
who are those losers? Look, that's that's our job, that's other people's in terms of trying to understand who the winners are because you you are starting to see a separation in terms of you can't just own the space, you can't just own to it speaks to our view you have to be selective relative to own the winners, making sure that you're not sitting.
When it comes to enterprise, though, is an anthropic way ahead of open AI.
Look, I think anthropic clearly from a model perspective. I mean, it's their world. Everyone's paying rent relative to what they've done. But that gap could be narrow quickly. I mean open AI is just not going to sit there on a treadmill. So open AI they had their bulls eye on their back. Anthropic. But you see what's happening with anthropy, Like in terms of going after talent from you know, from Google, it's this arm because a lot of it is going to
be it's about the engineers. It's about compute power, and that's going to drive more and more debt raises, equity raises, and that will be also tests for the market in terms of how it handles it.
I haven't seen you since the President briefed me in a few reporters looking into you know, maybe doing something public private partnerships in these companies. What do you what do you make of that government taking a stake.
I think it's selectively. It's important if it's done the right way, because you could argue if you think Intel Intel now I mean they're you know, they're obviously in a glorious situation. Look where they were a year and a half go. If government doesn't take a stake there, which ultimately led to Nvidia and more. Now you look at Lip and Intel their core in terms of the trade when it comes to quantum I think that's really
important in terms of some of the government initiatives. And I think IBM and Arvin have been kind of front and center there because what's happened in China because of this arms or.
Can we finish on two losers? Meta? Microsoft? What do I do with those names now? They're in bad markets. Everyone's getting all built up on the text story. Some of the biggest tech names on the planet. We're in a bad market. What you do with those names now?
I think you have to separate amount of what Microsoft I think is the most oversold large cab name. Just to my view, have they made stumbles on Copile and some other aresa. But in terms of enterprise, their backyard as your growth, compute supply issues, I think that's ultimately a stock that you know, five five hundred and fifty hours stock. So I actually think that continues. Just like a year ago, the narrative on Google was so negative.
Look where we are now from meta Look it's approved me like right now, like they're going up Mount ever Is without you know, oxygen or whatever. What they're trying to do. That will be the prove it moment for Zuck as he ultimately tries to go and change the model. I think they're going to be successful doing it, but they have You can't just spend on cappacks and not showing.
Results by this.
More Bloomberg surveillance coming up after this, let's talk about the debt dlage facing some PUSHBACKSPACEX selling twenty five billion dollars of investment grade bonds and paying Cup to get
it done. The company's bond mere shuring a twenty thirty six pricing at a premium of one point four percentage points above treasuries, roughly half a percentage point wider than the average spread on other triple B rate of debt to discuss A man in the no joining US now is JP Morgan's global cohead of IG Financing, John Servedea. Good morning, sirs, good to see you.
Good to see you.
That's a bit of a gut check, I think for investment grade debt. How do you think things went in the last twenty four US.
I think it was another positive signal of the availability of capital. If you just take a step back. So far this year we've seen six transactions of twenty five billion dollars or greater. In all of twenty twenty five there were two, So the scale of the capital needs
continues to grow. Everybody knows that what we're really encouraged by is that the market is available and understands that and is positioning themselves on the investor side to make thoughtful investment decisions to help finance this secular trend that is not going anywhere.
For obvious reasons, we won't spend too much time on this one single issue, don't want to get you in too much trouble. But further rount along the curve, the longer dated maturity, Just how much wider that was trading relative to other triple B rated debt, other triple B rated pairs. What's the takeaway from that, doubts about the credit ratesing agencies? How are you thinking about that the way.
That we're thinking about the market generally and specifically to your question, if you take a big step back, and this is no surprise, but credit spreads are at historic tights, and so in our view, across the investment grade credit spectrum, there should be differentiation based on different ratings and credit profiles. So one of the things that I take great comfort in is the fact that investors are not blindly buying
everything right yet. Yes, there's a tremendous amount of capital being deployed here, but investors are taking the time to do credit work, to understand the stories and to figure out relative value in pricing. So to me, a healthy sign for the market.
How nervous are investors getting about the concentration risk that's developing given that so much of this debt is tied to the AI store.
Yeah, it's something we're clearly watching very closely. We're still at a point where there's a lot of capital available and investors are figuring out how they want to play this theme. Again, as I just said, this is arguably the biggest secular theme in any of our professional lifetimes. So as an investor, you have to be part of it.
The question is how, and so I don't think we're at a point yet where concentration limits are a huge concern, but it is part of the dialogue because you're absolutely right. As a proportion of the overall market, it is growing and growing very quickly.
This is the reason why you're seeing a lot of companies look to tap every single corner, picking up quarters in the couch questions of Canada and the couch of Japan. And at what point is this capital coming from other bond portfolios versus new pools of capital, whether it be cash, whether it be equities, whether it be private equity. I mean, how much are you seeing that really unleashed?
Well?
As a debt person, the really exciting part of this for me has been there have been a lot more coins in the couch cushions, right, and so if you look across the global markets, we've led the biggest Canadian dollar deal ever done, the biggest Euro deal Stirling deal.
So these other global markets which have always been there have grown in relevance in a very material way such that the available capital is much larger, which helps the overall ecosystem in terms of how we finance these massive CAPEX numbers.
What's most attractive if you're going to do one of these offerings outside the United States, out of all of these countries you're talking about.
It is a combination of diversifying funding sources and demonstrating that as an issuer you won't be solely reliant on the US corporate bond market, which remains the largest, deepest, most liquid buy a lot. In certain cases, there's a pricing benefit to it. In certain cases, it's just establishing a new investor base so that in the future, you know you can go back there. So it really is again helpful in the context of we're still in the earlier mid innings of this.
Does it worry you when a company doesn't have cash flows that really compensate over the debt and over the expenses that they have, And yes, I'm talking about SpaceX, but there are a number of them that are probably going to be coming to market. I'm thinking if this is a model, we could see something similar from open AI and Anthropic. Once they IPO, then there's going to
be a follow on debt offering. How important is it for people to see the show me the money, the sort of the cash flows that can continue in perpetuity to overcome some of these huge debt piles.
Yeah, it's going to be interesting to see as the story plays out. And you're absolutely right that the cash flow profile of many of these companies is very different from what your average investment grade investor is used to seeing. The reality is there our investor bases getting so up to speed on all of these stories in and around the IPO that I think they're prepared to deploy capital
as needed pretty quickly. Again, it will play out over time in terms of cash flow profile or what the capex curve looks like relative to servicing the debt.
We're not there yet, John, You've been in the market a long time. How would you frame this moment historically if you ever seen anything like this?
No, this is again to me, this is the biggest theme we've seen in a very long time. What's particularly exciting for me as well is the level of creativity
that is required to finance all of this. Right, if you go back one year, there was a very predominant market narrative that the hyperscalers would finance a lot of this through free cash flow from there to several hundred billions of dollars of debt issuance around the world, a lot of asset level project financing equity issuance in twelve months.
That's an incredible journey as a capital markets person, and so for us, thinking about how to raise this capital in the most efficient way requires a lot more creativity, a lot more product agnosticism. It's not just if your capital need looks like X, then go to this market.
They're getting creative. And I wonder there's something on your dashboard that would trigger concern and I don't think with that again, listen to you right now, But what would come up on your dashboard that would say, I think things againstuphon? When would the red lights star flash.
In the red lights would start flashing if it felt like there was blind euphoria, And again, it does not feel that way, whether it's underlying credit work or in project financing, where it's looking at the actual contract terms. Investors are doing the work and understanding what's actually happening here. If you move it away from the AI ecosystem theme, what we're all watching is and I said this at
the outset is credit spreads are just historically tight. If you buy a generic investment grade bond today, eighty five percent of your coupon is a treasury yield, and so effectively it's an enhanced treasury, right, and so I think about you know what that means in a rockier economic environment.
Well, the question we've been asking is why people so much more comfortable taking the credit risk when the additional yield is so small. And I seem to be more concerned about the trenchery than they on the corporate credit. Yeah, you hearing the same think.
Yeah, And it's interesting. Part of it is corporate credit fundamentals in general remain very strong, and so there's a comfort level with that. But there is also just a tremendous amount of capital that has to be deployed. But I do think again with even within the investment grade universe, there is differentiation. But you're absolutely right it is to me, that's what we're watching is it's a historically tight spread.
Stay with US multile imperg savans coming up off to this the next read on inflation twenty four hours away with PC data just around the corner, Francis Donald of RBC, writing, the new wrinkle in our outlook is Wash positioning the FED as keen to return inflation back to two percent. Should the Fed begin hiking, the heat under inflation may be more contained. Francis joins us now for more, Francis,
good morning, good to see you. Debate we've had so far this morning and over the last week is whether this is a change in style or substance, a change in policy or how we communicate policy. How would you describe it?
Certainly a change in style, and we'll wait to see whether it's a change in substance. But John Artik has always been follow the data. The data will tell us where central banks are going to go, give or take a little bias to one side or the other twenty five to fifty basis points. And right now the problem is inflation, which finally we have a share of the
Federal Reserve which is calling it out. You know, thirty percent of the CPI basket is running above I'm sorry, forty percent of the CPI of basket is running above three percent right now, including food, daycare, healthcare, even pet services are running above three percent, way away from that FEDCE target. And there is more inflation in the system outside of energy. This is a central bank that is
going to have to contend with that. But more importantly, this is an American per people that is going to have to contend with ongoing inflationary pressures in core services all the way to food. And this is a central bank that is finally acknowledging there is a problem here and something needs to be done about it.
And can they address the problem of for inscis how right sensitive is that demand that's leading to this price pressure?
Well, this is the challenge. There is a lot of breadth under inflation and who's bearing the challenges of that. While it's low and middle income Americans. And while our take has been that the inflation issue is not really an energy issue, that has been one compounding factor, what's happening under the surface is there are cracks starting to form amongst low and middle income Americans. That's saving rate has dropped pretty precipitously since the start of the energy crash.
We've seen an uptick and credit usage, real wages have gone more negative, and so there are signs yellow flags, I would say, for low and middle income Americans that are struggling. Now if we raise interest rates, it's a catch twenty two. And this is a central bank that hasn't really had to deal with this challenge of the K shaped economy, which is being divided by demographics and also by income uses. So this I think will be
Warsha's biggest challenge, not inflation. If it was straightforward inflation and the regular pre pandemic economy, you could hike interest rates bring down. But now with a very weak bottom ninety percent of American consumers, you hike interest rates just too far, you risk a much bigger slowdown in the consumer.
What's a bigger hit on the income of lower income consumers for insis interest rates going higher or the way that inflation has ticked up at a number of different components.
I'm continuously worried about food price inflation, and a lot of our leading indicators tell us there is still some impact coming from that from the conflict in the Middle East that will be more lagged. Food inflation is one of those pieces of inflation that Americans see every single day and they cannot substitute away from it. Sometimes we see some moves from beef to chicken to peanut butter. But everybody has to eat, so keeping your eye on
food price inflation is going to be critical. And here's the big challenge is the part of my job is to talk to everyone from hedge funds who are looking at headline inflation and how rates are pricing that in but all the way over to CEOs. Now, markets are going to be very relieved because inflation has probably peaked in headline terms, and by Q two of twenty twenty seven. Once we get to the summer of twenty twenty seven, our call is at headline inflation will be sub two percent.
But if you're CEO running a business, particularly one that's exposed to consumers, consumers are still going to be struggling with price pain that isn't going backwards. So you're going to get a dichotomy here between headline inflation that maybe soothes the FED, maybe soothes markets, but doesn't impact real America, and navigating that transition is going to be challenging through the rest of twenty twenty six and into twenty twenty seven.
Are you seeing any, for lack of a better phrase, trickle down from the hyperscaler investment the capex et cetera, to middle and lower income just average consumers, given the fact that so much of the growth has really come from there, and if you strip that out, the US would probably be in a shrinking type of condition.
Well we wouldn't be shrinking, but we certainly wouldn't be close to two percent, which is about where we see the trend economy going right now. That two percent is coming, of course from this massive infrastructure build out, it's also coming from big government and of course the savior of the headline consumer, which is that top ten percent. What's going to continue to matter for consumers and why we think that the US economy can persist a two percent
is because the labor market is very, very tight. That will continue to be the most important thing. And the labor market is going to stay tight and has nothing to do or almost little to do with what's happening in AI. It has to do with mass retirements, a shrinking labor force, par anticipation rate, and a consumer that now is not going to be judged on whether they have a job or not, but are they making enough money and working enough hours in order to pay for life.
So you've got many structural themes that are happening under the surface, and the core message I have for clients is don't use the pre pandemic way of thinking about a cycle as a good element or a good way to think about where the economy is going to go next. These structural trends from AI to labor first, participation rate declining are changing the way we have to think about the American economy and it means that markets are going
to react differently. Businesses are going to operate differently.
Well.
When it comes to the Federal Reserve, I mean, Kevin Moore said, the monetary policy is somewhat restrictive in some sectors. Them raising interest rates is not going to hurt the AI build out, but might continuously restrict those certain sectors like housing.
That's exactly right. Monetary policy is a poor tool for an economy that is fragmented by sector, by income group. And we've seen this. We've seen central banks across the entire world who are struggling with what do you do when your regions look very different? What do you do when your incomes look very different? For now, the mandate of the central bank is price stability, oh and labor. But FED chair worships maybe put that to the side for a little bit, and if your mandate is inflation,
then that's what you've got to target. So the biggest risk moving forward to me is not a huge move in the bond market. It's not a collapse of the US economy. It's what happens to middle and low income Americans in a hiking environment. In our view, it's probably going to take a lowercase K economy and move it to an uppercase K economy.
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