Bloomberg Audio Studios, Podcasts, radio News.
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. This roundy coming undone just to touch the massive run for Semi's taking a bit of a breather as potential cracks emerged. Broadcam leading the retreat, adding to losses after a raising over two hundred and eighty billion dollars in market venue. Gil Lurier of DA Davidson remaining neutral on the stargwall, raising his price target, He writes the following, We found out how on edge investors are a bad technology. If the beat
isn't big enough, the consequences were severe. Value was shifting quickly as the bottlenecks merch. Gil join NAP for more. Gil Welcome Lisa Shannick called it a bit of a bit of a red flag for the semis trade. Do you consider it a red flag or just a small crack?
A small crack.
Let's not forget Budcom just grew revenue fifty percent. It grew its AI revenue one hundred and forty three percent, so it's a very good result.
But investors had now been.
Trained to expect a lot more than that because some of the upside results from companies like inte, La and d and Dell were so spectacular that investors just raised their expectations too much. You're talking about a cycle, and semis are always a cycle. This is not any different. None of us know how long the cycle is going to last. We all speculate and estimate, but it could last through next year, and it could last through twenty thirty, and those are very different outcomes.
What we do know is.
That different socks are trading differently on cycle. I would argue that companies like Intel or even AMD, and many of the optical stocks and the nuclear stocks are trading as if the peak of the cycle is until twenty thirty, where stocks like in Vidia and Micron are trading like the peak of the cycle is next year, So that's where we see the opportunity and betting on the ones
that not a lot embedded in the valuation. And Vidia twenty two times, Micron at ten times look a lot safer than broad Coom at thirty five, a MD at forty, Intel at one hundred times, and that's where we see the opportunities because there is going to be a cycle.
We just don't know how long it's going to last because the developments and AI are so rapid that it's very hard to predict when we get to peak functionality, when we get to a quicker adoption, So we have to play the cycle carefully by going to the less demanding valuations.
There's also a degree of uncertainty kill about the addressable market, and that clearly was put on display with SpaceX and some of their projections, and maybe it's what's at stake with Nvidia as well. I mean, is this an issue of people saying that the peak might be next year or is it people saying that the run rates cannot continue at the pace that it has.
Yeah, two sides of the same coin.
We look at the hyperscalers, they're spending most of their operating cash flow. Google just went out and raised eighty billion dollars of capital. By the way, think of that as coming on top of the capital demand from SpaceX, Anthropic and then open Ay. You also have Google going out for that much. Next you'll have Amazon, Microsoft, and
Meta going for more capital. So the capital demands on the market are impacting the stocks already, and if the hyperscalers raised that much money, they can continue to raise their capex rates. They do see this as a good return on invest and I know that's a controversy, it's not for them.
They are growing revenue.
At an accelerating rate at the same margins. That indicates a good return to the economy. You can see the return from the run rate of open Ai, Anthropic and Google's products. Those are products that are being bought by consumers and businesses. That's real economic value. And right now we're at more of one than one hundred billion dollar run.
Rate, so there is return.
We do expect these hyperskillers to continue to spend, but again, part of that's going to come with more capital demand, which is going to have even more of an impact on stocks as they sock up the demand combined with those IPOs doing the same thing. So that's a lot of volatility ahead from all these directions.
At what point do the semiconductors lose pricing power? At what point do you have some of these companies and frankly, their creditor is pushing back and saying, I'm going to lend you ten dollars, and then they're going to charge you twenty dollars, and then you're going to ask for ten more dollars, and you're going to ask for thirty dollars, and it's going to keep going up. I mean, this
is what it feels like an auction house. At what point do a lot of the hyperscalers say enough stop it already with the price increases, at what point does that leave them potentially with some capped margins.
The hyperscalers don't have that many options. They are still buy and large relying on in Nvidia chicks almost entirely. That makes a videos growth smart around mid seventies relatively safe. Now they're going for alternatives. They're trying to make their own chips with Broadcom, and they're trying to ramp up production at AMD, but those are still at very early stages.
And those are coming in the mid seventies, so right now those are the only options, So the hyperscalers are not necessarily in a great negotiating position in that regard, So that makes those semi margins relatively stable even in memory the supply is just not there, so those companies can be in the high seven in the high seventies.
Even how long that lasts again is a matter of how long the cycle lasts, but right now it looks like it could last through twenty eight, twenty nine, twenty thirty, which for most of our investors is their investment time horizon, and they can be comfortable with that. But again that's only if AI continues to progress, if diffusion of AI happens into companies that generate productivity from that, if consumers are willing to subscribe, are willing to accept ads in
their chat. Only if those things persist will the hyper scalers continue to invest and keep the margins high at those semi companies.
Stay with us more Blindberg surveillance coming up after this would begin this as investors pulled back from the time trade headinggainst the latest jobs report, NAT the level of UBS writing stay positive, but diversified. We will like the AI value chain, but we think leadership broadens from a narrow set of megacaps. Natia joined us for more. Nattie, good morning. What drives the improvement in breadth?
I think you continue to see. You know, as you've been talking about the AI trade, I wouldn't say that it's broken or any sort of cracks.
It's more of a scratch, right.
Particularly given what's happened this week, But in terms of how we're thinking about it, we continue to think that diversification across AI value chain is quite important. We've been squarely focused on where the bottlenecks are and investing in
those areas. Who think about memory, think about compute, think about networking, think about platform, software, platform, and so despite the fact that you're seeing some weakness today, we do think that ultimately what's going to drive this market higher is going to be continue to be the AI trade.
The AI trade and the earnings that it's created. We mentioned it earlier a bit of snack, but I'd love your reaction to it. Whether we're just seeing a massive wealth transfer from hyperscalis to the chip players, and that's all the earning story has been so far is it more than that.
It is more than that, right, because the demand is there that's also driving the pickup in the hyper scale or spent in. I mean, we know that this year that the four largest hyperscalers have already airmarked over seven hundred billion dollars in capex. We think that global AI capex is going to be over eight hundred billion dollars, and then we think that that gets too close to
a trillion dollars. And even those estimates might prove to be conservative just given the capital raises that we're seeing this week and the announcements around Alphabet and so forth, and so we could potentially see even more of those kind of announcement coming from the rest of the hyperscalers, and that's going to push off the capex numbers even more. Again, there's an increase in demand from the enterprise. You're seeing AI move from sort of an experiment so phase and
more to deployment. You're seeing more bad race wide enterprise phase deployment across the adoptions, adoptions are going up. Depending on numbers that you look at, you could see already sixty percent adoption rate. Some numbers even put it close to eighty percent adoption rates. So the fact is that the monetization cycle has started. We're still early in the phase of it. So it's not just what transfer. You know,
one capex is another person's revenue. Eventually, there is monetization that's already underway.
What's paying for it right now? Is it the labor market?
I would say, you know, it's a combination, right, A little bit on the margin in terms of that. We're seeing already pull back in terms of hiring and headcount reduction attack. It hasn't hit the broad based economy yet, and so I think what's paying for it right now? Of course, a lot of this is being financed upon operations, from cash flows from operations. Also, now, capital markets are quite open, and you know, the constraint is not capital
right we're seeing that. We're seeing that very even in the debt race this year by the hyperscale over subscribed ten times over subscribe. The constraint continues to be these model necks that I talked about earlier.
Is the excess and the ample liquidity for some of these tech companies. The potential constraint for other companies not related to this trend. In other words, do you see clients that are you recommending to them to sell other assets, other loans, other debt instruments, other stocks of companies not participating in this to finance the purchases and investments in the SpaceX IS and anthropics and opening eyes of the world.
What we have been really focused is really advised in our clients to manage concentration risks so where they have. Yes, you know, over the last several years, we see like the MAC seven has driven a good portion in the appreciation in a stock market, and now you're seeing a diversification again as I talked about earlier, across the value chain.
So what we've been advised in clients is to do making sure that they have exposure, diversified exposure to these transformation and innovation opportunities and not includes AI, that also includes the electrification and also includes the longevity that you talked about earlier. So it is not it's not it's not limited. So my point is, it's like the air trade has and is and continues to broaden out. I think that's an important message that it's just not one
or two stocks anymore. I mean, look at the strong performance this year. It's it's not the Mac seven. It's the memory, memory stocks, it's a packaging stocks, it's a network in stocks and so fortunate. And that's how key message to clients diversification. But exposure to these secular growth trends are importance. They cannot be missed out. These are not cyclical bursts, right. The spending that has happened is
not cyclical. It's really structural, and it's an infrastructure story that clients must have exposure to.
Job Fridays have changed so much, haven't they. They already have. We just don't talk about jobs on payros Fridays. You join us every payros Friday, and the conversation has shifted so much. We spend so much more time talking about tech and.
We will start to talk about jobs mentions when it starts to impact in the labor market in a more meaningful way. I'm sure that would be the topic of comp.
In the meantime, How relevant is the number to this market?
And you're cool look in terms of, of course the outlook of the FED. It is important to us number well, of course we're watching the unemployment rate. It seems to be stabilized in around four point three serpents we're also watching wage growth just given the implications for inflation. I mean, right now we know that the market is pricing in hikes. The FED we still think that there's a possibility for cut this year, but of course inflation has proven to
be more sticky. The labor markets is important to the FED call. If we see any weakness in the labor market, then that could cause effect to move later this year. But we think that that, you know, even though December is sort of our official call for the next cut, that could get pushed out into twenty twenty seven.
I'm actually fascinated for this labor market report. I'm excited to look at the details, and the details have been really interesting. I'm not just talking about wage growth. I'm not just talking about the unemployment rate. But if you take a look at where the gains and losses have come from, the tech sector said last month the planned to eliminate thirty eight thousand positions. That was the greatest
going back two years to August twenty twenty four. You're seeing them say it's because of artificial intelligens Do you expect this to be a leading indicator of what we can look for in other sectors? Particularly the white collar areas that have been seeing some job reductions on the margin as a whole.
Maybe not the magnitude that you're seeing it intact, but historically that has been the case. That's where you know, technology gets adopted first, right. But you could argue, like you know, post pandemic, like some of these tech headcounts got bloated, right. So I don't think it's all AI are related. Some of it is just normalization and right size and business. Yes, like AI is impact in tech, but if you look at the data so far, you're not seeing any sort of wide based impact to the
labor market. Is that the future to come on the margin? Yes, I do think that to some extent you will start to see impact in the labor markets in the ARSCO, but it's more gradual. It's not going to be because at the end of the day, we are still a consumer driven economy. Someone has to pay for spent in
and that's the consumers. So it's a balance and out for these companies as well of how much do you reduce headcount and what impact does that have of overall consumer spending, which ultimately drives.
Apparently the person doing the spending, right, now is people's parents. Do you see this stat yesterday? It's amazing. Almost half of Americans rely on their parents for financial support, including thirty three percent of gen X thirty three percent of gen X. This came from Northwestern Mutual. Forty two percent of all Americans say they're financially dependent on their parents. Twenty percent of Americans believe they will never be independent.
Stay with us more Bloomberg Surveillance coming up after this we begin this hour. We're still struggling to extend a night week Winn's streak. Lisa Shant of More Can Stanley writing, now is the time to evaluate where true secular growth may be on relative sale. Continue to reduce overboard semiconductors, favoring AI build out diffusion over the most scarcity priced epicenters. Lisa joins us now for more. Lisa, good morning, Good morning.
That first line is really interesting true secular growth. Just how cyclical do you think parts of this market?
I think that the entire market is one trade, and I think right now we are in the boom part of the trade, which means the entire thing is cyclical. And I would go further than that that one of the things we're pointing out to folks is, particularly in the semiconductor trade, what portion of it is price? So not only do you have to think about what are normalized earnings here? What is the fundamental underlying secular growth right here? So how much volume goes away and how
much pricing power goes away? Because there's a lot of pricing power that folks are mistaking for productivity, you know, because pricing right now for the semis are flowing right to the bottom line, and folks are looking at those margins as in, oh my god, you know, increase the long run forecasts and our view as so much as is not sustainable.
Did you think Broadcom then was just a crack or a red flag?
Probably a red flag.
It is. It is.
It's just a reminder that these businesses are really, really hard. They're capital intensive, and you know, you can't you know, you may be able to see your order book, but you know, we're seeing you know, all kinds of pressure on the inputs right commodity inputs. We're seeing global commodity inflation. So I think I think it's a warning flag.
I love this idea that pricing power people are mistaking for productivity gains. How much are we seeing that with stock prices as well, in the sense that there has been a scarcity of paper for so long that there was a power of equity valuations that's getting now diluted to some degree by some of the massive IPOs that are coming to market.
Yeah, so you know, I mean, this is one of the things we've been talking about for a long time, and this is where we talk about pe valuations, right, and we've said to folks, look, multiples have peaked and you're probably going to get compression. So that's why earnings power is so important. You're not going to get scarcity premium, right, So, uh, you know, and in addition, you know, you guys talked at the top at the top of this hour about
you know, the movement of capital. We're we're seeing you know, share repurchase, which used to be a huge source of demand in this market, and it was coming from the hyperscalers, uh, you know, begin to go away. So all of these things, you know, kind of put together, are are saying, you know, we are now uh seeing an erosion of the scarcity premium. We're seeing capital that is you know, much more ample.
It is not precious.
There is an issue right now that we keep asking people about how much they're selling to try to buy into some of these IPOs, like what are they selling?
Is it?
Is it bitcoin?
Is it some of the non tech related names.
What do you see?
Yeah, so it's so interesting, you know that you brought up the crypto trade. You know, one of the hypotheses we've had for a really long time. I mean, you know, we've tried to illustrate this analytically. Is the extent to which bitcoin has been a liquidity oriented asset, meaning when liquidity and financial conditions are ample, it rallies, and when you know financial conditions are beginning to tighten, it pulls back.
And I think that what you're seeing is all the folks who were in at crypto simply for the speculative price appreciation are coming out and they're chasing other things in the equity market, in semis in, you know, potentially accessing new deals.
You think it might be a sign of capital constraints emerging that was seeing that move in crypto.
Yes, potentially, I think, And to your point, I think we're over the next twelve to eighteen months. I think as everyone is issuing debt as everyone is issuing stock, we're going to start to tighten up here. I also think you know this idea you know that you raised Jonathan about, you know, is it the risk free rate
versus you know, the credit premium. I'm not so sure here that that that the overall scarcity of capital here doesn't cause that risk free rate to go up, right, And you know, folks need to kind of care about that because they could say, Hey, I don't care, I'm just playing for the corporate But hey, at the end of the day, everyone's cost to capital is based off of that, right.
So.
You know, so you could have build on that because you're saying worried about the equity pace and on the selfri and pace as well. Yes, that's a difficult moments to be in.
It is unbelievably difficult. So another theme that we're talking about with clients is not only you know, to have more realistic forward expectations about both stocks and bonds vs. V. History, but the need because both of those asset classes are now tied to these same exact themes and they are very positively coral related, that you need other things in your portfolio to be diversifiers.
So It's why we've.
Been so avid about adding real estate, about adding other real assets like commodities, energy, infrastructure. It's why we've had some appetite for alternatives, not all alternatives, but we've had an appetite for alts because you need that ballast in your portfolio because stocks and bonds now are being driven so much by the same exact trade.
We've talked a lot about financial market dynamics. What does a real economy matter? I mean, how much do you actually if you look at the jobless numbers, that the jobs numbers that come out in about an hour and twenty minutes.
So look, I think the real economy has absolutely mattered.
Right.
We are in this unbelievably interesting moment where this technology revolution is different than the prior to We are transforming the infrastructure, and we're transforming manufacturing. Data centers are the manufacturing factories of our future. That's a great thing in terms of overall economic productivity, but it is a cautionary thing because we manufacturing and infrastructure are cyclical businesses. And this brings us back to my very first point about
look for true secular growth. A lot of what we're seeing in the market is not sustainable secular growth. Things that are growing fifteen and twenty percent are not sustainable in a world where global GDP is growing five and maybe seven nominal. It's just not right.
It's just not This is the Bloomberg Sevandans podcast, bringing you the best in markets, economics, an gient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Easton. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, the Bloomberg Seminal and the Bloomberg Business Out
Mm hmm