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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordert. 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. So here's the latest this morning, US manufacturing activity expanding at his fastest pace in four years. Investors are waiting more data to reinforce bets on the path for interest rates. Kit Jigs of Self Gen Writing, While President Trump's hopes for FED easing may be disappointed, hikes are off the table for now. Kit Jigs joins us some more. Kit Welcome to the program, Buddy, good to see my apologies about the result over the weekend.
I've squeezed that into the end of the conversation.
Kit.
How high is that bar for that rate?
Hik of this feder reserve?
It seems very high. Now, it's not going to feel so high in six, nine, twelve, twelve months time. I think the world will eventually change. Look, the US economy is, without doubt not just out growing the rest of the world, but it's grown pretty strongly.
If that's the case, kit, what is the barrier potentially raising rates and not just once but several times. And we were just talking to somebody talking about how is the ten year yield getting onmoored? With all of the capital spending from big tech giants. We're seeing inflationary pressures coming from Myria at different places. I mean, would it be a problem if they hight rates?
Well, if you leave it too long, and you height rates too much, too fast, too late, then you you know, that is a recept recipe for a recession. Equally, I almost want to flip it sideways over here where the danger is with the slowing economies. We're going to raise rates the market things. We're going to raise rates at the ECB several times, which seems to me a sort of a quicker way to a problem. But yeah, I
think that. You know, I've always assumed the Fed's fast, smart enough that they don't get too far behind the curve, and that what we'll find is that the story just changes through time, and that one of the things about Kevin Walsh now turning up and being there will be that it'll be possible to turn that story around, make it clear that this economy is doing better than others. The terms of trade shocks in its favor. Obviously, the technology boom is still happening, and gradually, gradually.
There'll be a rethink if that's the case.
I'm wondering if you push that through the currency channel what that means. If you have rate hikes that are a mistake in your view from the ECB, they could potentially create an economic problem, and you have a US economy going strong in a federal reserve that sits on its hands.
Do you want to own the dollar or do you want to sell it?
I want to own it.
I mean, I know I'm not relaxed about it, but I get asked, you know why if you think, if we think that the rates are going to go up in Europe, why don't I want to own the Europe Because they're going up despite their not being enough growth. Fundamentally, that's the issue that tightening into wheat growth environment's just going to make things worse, Whereas in the United States, what's holding me back is a central bank that doesn't recognize the problem at hand. But they'll get there because
you know, that's the kind of organization it is. There's a lot of people on the FMC, a lot of regional governors will who will react to what they see in front of them with the economy, and I think in due course that's going to argue that, yeah, we're neutral, not at super easy policy, but we need to be better than that. Numbers like this morning's they just push in that direction.
Kit though there was an ECB report that says gold replaces US treasuries as the world's top reserve acid.
Are you worried about d dollarization.
Yet the margin, I mean that the dollars being the world's reserve currency to a much greater degree and for longer than, for example, the pound was so that the global economy is so dependent on it that we get de dollarization at the margin in the same way as that there's not enough gold in the world to replace a fraction of the US treasuries that people might want
to own instead. So yeah, at the margin that there'll be some of that and the dollar will be less dominant, but it will probably still be more dominant than Sterling was one hundred and fifty years ago.
What does the ECP have in common with Arsenal Football Club kit.
That they are too defensive. That's the fundamental issue in my heart, that their game plan isn't going to win them the Champions League. That's probably the quick way of putting it. The US is the FED is much more like much more like Bar Saint Ramin. And in the end, you know, this could be long drawn out, it could be painful, it could go to extra time and to penalties. But I don't think the ECB can win this with premature tightening and such a defensive strategy.
Stay with us more Blindberg surveillance coming up after this. I'm a QE of PSP growth. Right in the following, Berkshire is effectively putting its stamp of approval on the idea that AI is not just market hyphe but a durable infrastructure shift worth funding at scale. Mama's in the studio, MA make a morning and to see you morning. It's great to see you in person. Let's talk about the supply tons of it? Is it going to be met with a lot of demand.
I think demand is showing no signs of slowing down. And we're talking about building out essentially the real roads and the electricity grids of AI, right, so everyone's piling on. Everyone wants to grab as much as they can. This is almost like a war on oil. That's like the new compute. So I don't see demands slowing down at all.
I asked this question earlier on this morning, how much runway do you think there is here? People are wondering what innings we're in. You know that cliche kind of question on Wall Street? How much runway do you think there is here?
I think it's the early innings.
I do think the questions will start to be asked in terms of when is the payback on this capex because these numbers are staggering. I think Alphabet or the reason they're raising this much equity is their CAPEC spend this years it's going to be two hundred billion dollars, and of the Max seven together, I think we're talking six hundred and seven hundred billion, maybe even more depending
on what we q acid is. And so far, no one seems to be asking where's that return going to come from who is going to fund it?
But I think we will soon.
But the fact that people are not asking that question yet shows me that we're still in the early innings of AI and this is just the land grab.
Demand is outstripping supply again and again and again. With HPE, we saw that as well, that really this is an issue of just supply not being able to keep up.
How much pricing power is there?
I mean, can they just keep raising prices to the moon for some of these parts that are in the choke points that essentially are necessary for the build out?
It sort of seems that way, doesn't it.
I think you touch on an interesting point, which is where is the choke point? And I do think if you look at sort of the core suppliers GPUs memory, yes, like you're strictly where the bock is and that makes sense, and I think they probably will commit pricing power for quite a bit. But where I start maybe start to worry in the market is if the rally becomes broader.
I could see a world where there's so much frenzy around AI that anything that even touches the supply chain gets seen as a AI beneficiary.
And I think that's when you get into trouble.
Is I don't know if this is a good example, but data center cooling right, this is marginally touching the space, but also obviously very different than memory.
I do think for the core.
Spaces of memory and GPU, you probably see that rally go for quite a bit longer.
Yeah, like when a shoe company becomes an AI company, then potentially that.
Raises some concerns.
I just wonder, you know how much companies have to show return on investment going forward to keep investing at the pace that they are to rebuild their entire infrastructure or is that not necessary yet?
Yeah?
And I think in some ways, right, we can talk about the anthropic IPO in a little bit see anthropics numbers could be interesting on this front.
Well, first of all, we at PSP we think about this a lot.
We actually hosted an event a month ago where we gathered fortune five hundred CEOs and AI entrepreneurs together in one room and be like, what is actually valuable to being built? Like when do you see ROI or does it just build build build and was pa some some interesting insights there. But back to anthropic the interesting thing we could see from them is From the very beginning,
the narrative has been about enterprise adoption. It's not just about having the best model, it's about having how do we drive actual productivity in customers. And they've done well as a result, but seeing their numbers, hopefully we will soon will show that if retension is good, if we're continuing to see spend increase among the largest corporate spenders, then maybe AI skeptics could be a little wrong in terms of how far we are in the AI ad option curve.
After all, let's talk about the Anthropic IPO.
You say it's going to be not just a massive deal in terms of being first for open AI, but also along the entire AI stack.
What are these smaller A companies going to be looking for?
Yeah, I think everyone will be watching them. It's going to affect the whole AI stack because.
Essentially, Anthropic is the first AI in need of company to go public, and they're going in public at a trillion dollar valuation, And there's this belief in the market that AI is going to be so much bigger than traditional software. So if traditional software is a trillion market globally, AI could be ten times that, twenty times that I've heard fifty times, like fifty times as the highest I've heard in terms of how much bigger AI will be
than traditional software. So if you're thinking there's a market that creates fifty trillion dollars of new market cap, obviously that has implications.
Up and cross the sack.
And if you look at any of the listings around top AI companies, I think Bloomberg has one that's top twenty four AI companies to watch. You can look at the Forbes AI fifty as a rough proxy for what the market thinks is like the top tier AI companies, all of them are valued at at least one billion or more, which means investors think they're going to be ten civilians, they're going to be a trillion dollars. And it's every part of the sack. It's not just the
models like open to AI or anthropic. You have infrastructure infrastructure companies so this is like Base ten foul together. You have application layer companies so this is like Synthesia, This is like Decagone, a Bridge Harvey. All these companies sitting at billions of dollars of value. Issues is going to be looking an anthropic to see if the public markets will truly view EI as a different crop of companies.
Stay with us more Bloomberg Surveillance coming up after this. We begin this out, we'll stop holding on to record highs as Alphabet is planning to raise eighty billion dollars in equity capital. Monica dissent serve JP Morgan Private Bank, saying the following, stay invested in the AI supercycle, but b selective. Monica joins US now for more Monica, good morning, could see you, Thank you. I'm just thinking about the clients that you speak to, investors, individuals, families, family offices.
How much exposure do they have to these names already through private markets.
It's funny on private markets with everything that's happening lines overnight. I think so many people assumed that's where you had to be to get the value today to play AI, and then you see this news over night and you realize maybe there are more opportunities in public markets.
Now.
You look at a name like Alphabet, which has run over one hundred percent in the last year, and to see it holding in this well this morning, it is pretty interesting. And so I think the bottom line is there are absolutely opportunities in private markets, but there's still at to do in the public side as companies make investments, and you look at these companies like alphabet with a significant free cash flow generation, it still feels like there's value on both sides.
Why do you think the value is then in the equity market, let's explore that a bit a bit more on the public side, where do you stay at the moment?
You know, at the beginning of the year, we were a little worried, right because you looked at valuations over twenty times, you know, earning's growth pising of digits, and you said, okay, maybe that's about where it should be, maybe a little stretched, and then you know all the geopolitical fears, and you said, okay, can we actually hold on to twenty plus times? And now here we are and what's happened. Obviously, your earnings have significantly outpaced what
we thought. But it's not just earnings growth, it's revenues are accelerating, margins are expanding, and again it's not just tech.
You're actually seeing breadth.
Because a year ago, with the big concern was it's just the mag seven, it's just tech. We're seeing that margin expansion in most sectors actually, and So that's what's really interesting that you're finally seeing some of this follow through in the market. To me, that tells me fundamentals actually might be better than people fought and maybe twenty times isn't outlandish for equity markets.
What's driving the broadening ad It's certainly not coming from a cheaper commodity prices, it's not coming from disinflation, So where is it coming from.
It's funny because a year ago, year plus ago, everyone would push back and say, how can margins expand? And that's where you get this AI story and you haven't seen it, I think as significant as it will be, but I do wonder, are you're starting to see some benefit from these investments. Again, it's really hard to put numbers around it, and I think that's where the market struggles. That's where investors struggle because if I can't put an estimate on it, how can I look at evaluation and
say this stock is worth X in two years? But it seems like it has to be there. And then you wonder, Okay, if companies raise prices never actually took them back down, if there's been some moderation in the rate of inflation in that up if it helps on the margin side as well.
There's always someone know when you're investing in technological technological cycle. But if I think about, say the Industrial Revolution with the train, you're investing a train to get from here to there.
With this, it's different.
People don't totally understand exactly what iteration is going to be one at the end of.
Whatever this is.
How difficult is it.
To remain nimble and to remain live at a time of such incredible uncertainty around the thesis that's raising trillions of dollars.
I think it's really difficult, and it's why you've seen this concentration. I think in these tech names right, those are the deep pockets, clear beneficiars at the beginning when we talk about being nimble, being selective. Now most of my clients are saying, where else can I invest? Where are the sectors that haven't worked who could be a
bit efficiar of AI? And I look at something like financials sector that's been down while the SMP is up over the last few months and yet probably stands to benefit from rates hanging in here, And certainly if you're a financial institution, you will benefit from AI makes it easier to underwrite credit. Maybe you get a little smarter, a little more nimble than some of your businesses, and suddenly you can make an argument.
For another sector to benefit.
And so I think that's where we're trying to look is who hasn't participated in this rally?
Another sector that I love?
Looking at healthcare? If you believe in AI, how can there not be significantly more innovation on the biotech side globally? And you have seen a dislocation between healthcare and tech over the last couple of years.
And so is it on the margins?
Is why you say the upside is underappreciated when it comes to AI. Is it on the margins of these other sectors that could benefit?
I think it's I used to be a selfide analyst, We'd estimate numbers going be at one or two quarters.
That's kind of what you did.
How do you predict three four years out and actually do a DCF and figure out what these stocks are worth when you have really no idea how to put pen to paper on this. And I think that's what the market struggles with, It's what an investors struggle with. And so when you have these like game shifting things that happened in the dot com bubble as well. People struggle because it's really hard to see five years out,
and so that makes equity investing a bit challenging. And I think again it's why people go to the obvious places. But now we're starting to see money want to shift to other areas, and this is going to be the challenge over the next year. Who are the next year two to three sectors that will benefit when you.
Start the critical question for every clients your portfolio built for a waald of high and more volatile inflation. Are your clients right now more concerned about AI and the future and how to predict this four or five years or actually the conflict in the Middle East, or people have just completely moved on.
It's so funny the questions around the conflict in the Middle East. The beginning of the year, it was all about AI and is it a bubble that has dissipated? I think because this earning story has started to calm those fears, then it's about the Middle East. Yet to your point, I don't see portfolios that reflect this fear about higher rates, higher inflation, and so that's normal. People tend to kind of lag a little bit with these shifts.
But after this secuity rally, I think you have to look even at some of these techniums and say, Okay, should I take a little bit off the table and think about rebalancing. Do I have enough in the sectors that will benefit if inflation remains sticky slash higher? So I think again, core real estate infrastructure, things like that.
We look at large family offices we work with still significantly under allocated to where they say they want to be, and I think no one wants to chase, but like it does feel like you probably have a little more balance there. These things didn't matter in your portfoliofivey, ten year go and roads for lower Now they're rely much more important.
I think this is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, a gio politics. 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.