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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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. We begin this out with the IPO pipeline heating cup at Semi staging a comeback. Jack Caffrey of JP Morgan Asset Management calling it a moderation Monday bounce, writing this one was even more likely given the sharpness of the sell off. Jack joins us now for more. Jack and Mornick, Good morning. He's still constructive on the secretary market chain. I'm still constructed on the mort What makes you constructive?
Earnings? This is really, I think in earnings driven story. We came into through last year with a mid teen's earnings gain, several years into an economic expansion. Now we're looking at twenty two plus percent earnings growth for this year and looking to next year, we think that turns into still another mid teen sort of earnings gain.
The biggest pushback we've had so far to earnings is technicals just feel very stretched. Friday in the minds of some was inevitable, and they'll be further follow through. Mak.
I think that the issue is one of if you ask me what's going to happen in the next fifteen minutes, I have no particular insights. If you ask me what happens over fifteen to twenty four months, I'm going to come back to the interplay between earnings and expectations, where expectations a bit high. Ya look at the collapse in the vicks, look at how tight credit spreads are, but they're certainly telling you not a lot to be worried
about here. So I'll come back to if we continue seeing positive earnings revisions, there are still legs to the story. Will we have bounces along the way, will we have some setbacks, will we find something new like, oh, I hadn't thought about that inevitably? And I think that lends it to a situation where the pullbacks will be short, but they will be sharp.
You have tech and tech adjacent sectors, and of course the earning season was super for a lot of those. What about everyone else, What about the ones that aren't getting the benefit of the tech build out?
Well, I think you have to when we think about the scale seven hundred and eight hundred nine, a couple of trillion dollars in capital spending over the next few years, in all likelihood, not all of that actually winds up going into semiconductors. You start off by having to build a shell. Then you have to build an ATRAX system in place, and you actually have to consume a lot of copper in order to actually tie that data center
to the grid. You have to build the grid. You know, we have electric demand growing for the first time since the seventies, are materially growing since the seventies, and so I do think that there is maybe not trickle down that's a different part of the economy, but a trickle through.
And I think it's important to consider the interplay between what people say and what people do, and when we think about the scale of backlog growth, it would suggest things are actually a little bit more than just asking people are you happy?
So that filters through to the top line. Does it filter through to the bottom line as well with an hour of increased expenses for all these companies.
Yeah, I think on the shorter term, we do have the acknowledge we live in a world of pretty interestingly high nominal GDP. When you think about you know, the Lanta Fed survey and Lanta Fed survey of GDP now pointing to four percent growth. You've got the Cleveland Fed survey of neartime CPI at four percent. You know, eight percent, that's pretty a robust environment. Would have in some sense have been thrilled to have in the in a decade ago.
We are still seeing positive incremental margin expansion as companies still have fixed costs that they're absorbing. And so I do think that's how you can turn eight percent sort of top lines into twenty percent earnings gains in terms of companies still making their assets sweat harder and you know, perhaps with the threat of aim making their people sweat harder.
They fed us let this run. Some people might say they've encouraged it. They reduced interest rates three times last year, three times the year before that. Is the FED about to step in and ruin the party.
I'm really happy I'm not on the FED in terms of having to think about balancing between the policy pushes and pulls. You've got a very loud cheerleader who's going to be very active in social media expressing what policy they want, and then you've got a group of equally strong minded individuals on the FED board, most of whom have been indicating they think the situation requires moderating the punch bowl, if not actively taking it away.
Short This headline might moderate the punch bowl. It just crossed on the Bloomberg terminal. Taiwan mullin curbs on ai Chipex sports to China to align with the United States. As we try and digest that headline as it just crosses the Bloomberg terminalor equity features taken just a little bit of a dip, We're still positive on the session by about a third of one percent on the S and P five hundred, that headline crossing just seconds ago. Taiwan considering curbs on ai Chipex sports to China to
align with the United States. Scout at the latest on the Bloomberg terminal this morning.
Yeah, that it.
Gives you this sense that Taiwan is going to not bend over backwards, but make sure it aligns with the US in order to get the kind of arms deals and fulfill those contracts that had wanted from the United States. And we're already seen how President Trump is going to make sure that he is going to huge to what Hu Jing Pin wants in order to be able to move forward with their trading relationship.
Too.
With attempt to bring you about details on that stony in just a minment features still just a band positive on the S and P five hundred. Let's turn back to the Federates. Jack, you mentioned the cheerleader at the White House. You allD it to that. Does it make a difference that the president is calling for more right counts? Does not actually change up perception of future FED policy.
I think that the President is an active user of the bullue pulpit, and in terms of whether it's what he would like to see in interest rate policy, clearly he did not have the impact that he was hoping to have in terms of the direction of rates over the last several months. He's certainly much more effective in terms of what he's doing with the oil market. I think certainly seemingly every weekend. When I talked about moderation Monday, I also thought maybe you would have called yesterday's step
back Sunday. In terms of remain calm, oil prices are going to be going down any moment now, and effectively we're seeing that actually follow through at least right now from a trader's perspective.
So let's bring it back to the equity market, because you have pointed out that energy is the most interesting sector in equity market because it sits at the intersection of so many different dynamics. How are you feeling about it right now versus a month ago.
I think that ultimately the one thing I can subbout oil prices to start is oil prices are wrong.
They're wrong.
They're wrong. They if you look at the future's curve, they should be trending lower. I think the question is at what rate do they trend lower? At the same time, tankers aren't really transitting. We were reminded the blockade this morning remains one hundred percent effective, and that means we, I think, are not paying enough attention to the actual declines in physical inventory, and that even if you start actually getting crude flowing tomorrow or forty five days away
from actual new supplies reaching to demand centers. And so in that environment of there's very few barrels to be bought, the possibility of very few barrels to be bought, you wind up with having these scenarios where oil might go not to ninety, not to one hundred, but potentially two one hundred and twenty five one hundred and fifty dollars, and that has an inflation knock on, and that is not something that FED can can easily control through thinking about either rates or money supply.
Who seems to understand this better short term traders or long term investors.
I think that there's probably an interesting time arbitrage between the two. Where the short term traders are looking at, you know, oil prices easing, they're looking at airline stocks making all time new highs. Forces you to scratch your head if you think about the possibility of physical shortages of someone who's certainly very operationally leveraged to what fuel prices wind up being or what they presold their tickets
as being. And so I think that's where traders are responding to them is literally tweet by tweet, truth by truth versus investors are saying, interesting, I don't really see the path forward. And yet as much as you think about an energy dominance theme, large oil companies are at least being very slow with increasing their Historically, the rule of thumb as high price is secure high prices, and yet normally the cure for high prices is actually increasing supply.
No one's really rushing to increase supply, and I would suggest over time oil needs to be higher because I think the world has realized that the choke point, which is the Strait of Horror Moves, is probably unacceptable for the global economy. And so how do you incentivize more production out of South America, more production out of Africa?
Reroute around some of the other choke points, which is not just the Strait of horm Moves, but potentially even the Suez Canal, depending on what total victory looks like in terms of where parties settle out.
Stay with us.
More Bloomberg Savanance coming up after this.
We thought the President was breaking some news on Friday when he was gaggling with reporters, including myself on Air Force one, and then we get these reports that actually it was news to those companies themselves anthropic, opening Eye SpaceX. But the direction of travel is clear in terms of what this White House wants to do when it comes to these AI companies, especially as all of them prepared to go to the market. Jennifer Huddleson joins me, now
Senior Fellow in Technology Policy at the Cato Institute. Jennifer, good morning, Thanks for joining me. Good morning, Thanks for having me. So you're spending a lot of your time right now focused on this. The President talks about concepts of ideas in terms of how there could be more of a public private partnership when it comes to these AI companies. What do you think some of the policy proposals this White House maybe Congress could actually land on.
You know, there's a big difference in kind of the idea of a public private partnership and what we're seeing in terms of calls for government investors in some of
these leading companies. One of the real concerns is that if we see government investment, if we see significant government involvement, that could lead to the government picking winners and losers at a time when this industry is incredibly dynamic and where we don't necessarily know where the full applications of the technology are going or who those leaders are going to be when it comes to what consumers actually need and want.
Do you feel that this White House already has done that?
Though?
So why would they stop here when you think of MP Materials and Intel? Why would they stop at the AI companies? Which is also a welcome policy perposal on the far left.
You know, you mentioned there does seem to be this odd horseshoe where you have Senator Bernie Sanders proposing a sovereign wealth fund to invest in AI companies, and then you've had these kind of rumors out of the White
House of a very similar proposal. You mentioned the past actions around for example, Intel, and one of the things we can see there is the impact that this can have on private investment, on presumptions around how these companies are going to develop, And that's something to also consider. What does this mean not only for these companies and for the AI industry, but what does it also mean for the market environment around these companies.
Jonathan and I have been speaking about this all week, and a question he brought up yesterday is do the companies want to share in the profits with the US government or do you think they want to get involved with the US government to potentially protect against the downside?
One of the big concerns with the kind of government investment is a risk of cronyism, a risk that only those large companies could be the ones that could potentially navigate these things. What does that mean for smaller players who might emerge as leaders in the future, and also what does that mean for the involvement of the government in this technology that's so critical to access to information,
to the opportunities for many potential innovations and applications. Is that the type of thing where you may see a politicization of certain policies, of companies not being willing to offer certain products because they're worried what government regulators might think about that.
Or how they might find that disfavored.
Do you think the IPOs are pushing the government to act because we're going to see SpaceX go public on Friday, then it's going to be open AI and Inthrapic, and we're seeing these companies inc valuations that are so not normal when it comes to IPOs and going public on public markets.
There's a lot of excitement around AI, around its potential both in the markets, as well as in individual businesses and their potential applications of AI. I think that we're also in a moment where we're still seeing a lot of potential fears, a lot of potential concerns around AI, and a lot of uncertainty of what that means.
For jobs or things like that.
So I don't think that we can say hard and fast whether this is a result of interest in IPOs, but more just a continuing question of what the US approach to AI policy should look like.
You mentioned this.
You have Bernie Sanders on the far left. I asked Trump about this, and he said that they actually share some economic thinking similarities, and that he took some of Bernie's voters. Then you have individuals like even Steve Bannon on the far right who think Bernie Standers doesn't go far enough.
It does feel like Washington will do something. What do you think would be appropriate?
I think it's really important that we remember why a light touched approach to innovation has allowed the US to be a leader in the Internet era, and then we consider how that might play out in the AI era. There may be a need for clear policy guardrails around
some of the issues like government use of AI. But when we're thinking about how this technology could potentially evolve in its most beneficial ways, we should want consumers and innovators in the market to be the ones that decide all the potential application, rather than bureaucrats dictating that this technology can only evolve in one particular direction.
Do you think executives are more willing to work with the government on this and potentially even give them the stake because they know there's going to be public backlash When we've seed so much public backlash, especially recently at commencement speeches, there's a lot of anxiety. Bernie Standers is talking about the fact that AI models run based off of all of our collective work as a society.
There's certainly a lot of discomfort in the public around AI, and I think it's important that we remember all the benefits of AI and that AI isn't just products like chat GPT. We're seeing things like amazing medical research advances,
We're seeing better predictions for natural disasters. We're seeing a lot of applications of AI that the average individual might not be aware about or thinking about, and that therefore, when we're thinking about AI, we have to think much bigger, including when we're thinking about AI policy.
You're very optimistic on the future of AI. A lot of people are nervous that it would mean loss of jobs in this country.
You know, I think it's okay to be nervous on an individual level, but we've been there and we've had this uncertainty around other automation technologies in the past, whether it was questions of what would ATMs do to teller jobs or the rise of EXCEL in the financial sector.
What we find is that typically when these new technologies come in, yes, there is some displacement, but there is also a lot more opportunities that are created by those efficiencies, and there are also opportunities that often lead to more enjoyable work and more opportunities in the future as well.
We talk about what the government is using in terms of AI right now. It was a little bit confusing because clearly the DoD is still running Anthropic, but they're giving them six months. The dd is giving itself six months to wind that down and use other partners.
What does it mean for ANTHROPIC.
To be used especially methos across other agencies in the government but still be a supply chain risk considered a supplying chain risk at the Pentagon.
This is a really complicated question and wine of the questions we really need to be discussing when it comes
to potential guard rails for artificial intelligence. There are certainly benefits of the government using artificial intelligence to better service constituents, to better service citizens, but there are also unique civil rights and civil liberty concerns when it comes to the potential use of AI, for concerns related to domestic surveillance or autonomous lethal weapons, many of which were at the heart of the dispute between the Pentagon and Anthropic.
A few weeks ago.
I spoke to Under Secretary of Neil Michael about this and he said, there's no talks anymore left between DoD and Anthropic, but we have seen the Andthropic CEO have meetings in Washington, even with the Chief of Staff Susie Wilds. Do you think that's going to get patched up?
You know, it's a complicated situation, and I think there are two factors there. There's the question of the decision around the contract, which could be a normal dispute between a government contractor and a government agency. But what made this so unique was the supply chain designation, and that's what raised serious concerns when it comes to questions around free speech, around the potential government influence in this very important market.
Stay with us multiple IMPEX surveillance coming up. Off to this, Let's get to those IPOs. Open AI entering the race to go public submitting it's confidential filing for an IPO, Gil Loria of DA Davison writing, what open ai does not want is for the public market capital to exhaust itself. It does not want to be the third and last of the large IPOs. Gil joins us now for more
and Gil, welcome to the program. There might not be the only thing to worry about, not just the IPOs, but also Alphabet with an upsized capital raise as well in the last week. And Gil, as you pointed out, before we even got the rumor from the ft on Meta, you might see Meta and the others follow. It will just frame for us how much equity we could see come into this market in the next six months.
Hundreds of billions of dollars of new equity because Microsoft, Amazon, and Meta just took note that Google, that Alphabet just had a very successful equity raise. Did the stock held up even as they issued for already something billion dollars of equity. They're able to raise dead at the same time, all at a very low cost of capital. And this is a war for capital, so this is where it's at.
And these companies are filing a secondary so they can do that overnight, while the IPOs take time to go through. So the big companies that are all ready public are going to the capital markets and draining them before many of these IPOs are happening. SpaceX will hopefully happen this Friday, but open AI and Anthropic may get to a market that's somewhat depleted.
Now.
The demand for those IPOs is going to be so great that they'll do fine, but the market is finite, and we've already seen some volatile days where investors have been selling stock to free up capacity to participate in these offerings and IPOs, So it's getting crowded out there.
Gill, how much tolerance is there at say a METSA to ready stomach the pushback. What was intriguing about Friday was just how quickly that stuff rolled over, just on the mere report in the ft that maybe they'd follow Alphabet and do something similar it's that something they can stomach. Are we underestimating that tolerance for that?
Well, mister Zuckerberg has controlling interest, and he's shown that his perspective is always long term. He rarely tries to satisfy investors in the short term. If he feels like this is the time to go out and get the capital, he'll do so. He'd rather do it at a higher price. But he's shown through his spending and through being very clear about the fact that he's investing ahead of demand,
that he has tolerance for that. And if he thinks capital is the key to compete right now, he'll go out and get capital regardless of where the stock is.
Gil you said the market is finite. Where is the market finite? It's not for the big aiipos that we're talking about here, whether it's SpaceX, Anthropic and eventually Open AI. It's not for Alphabet's equity raised and upsize equity raise at that. Potentially it might be for Meta or at least a hint of it. But where do you see that really the rubber hitting the road.
Yeah, it's all the public companies, especially in technology, could sell off as we get this supply of capital. Including the largest companies, right, so they're they're trying to get out. That's why Google was ahead of the curve. They guide out while well at a peak, and the other ones may not get that benefit all. Meta, Microsoft and Amazon are already off their peaks, so there's going to be selling in those selling and a lot of other technology stocks.
As we get these ideas, it doesn't it can happen anytime. It happened the day before, and it can happen weeks before. But investors do have to free up capacity. Investors are mostly invested at this point. There's been not as much cash on the sidelines as usual, and so they're going to have to Investors are going to have to free up capital from all their public company holdings, especially in technology and including the largest ones, in order to fund
their investment in these ips. These floats are pretty decent sized. We're talking about SpaceX doing at least seventy five billion on Friday. Open Ai and Anthropic may be at the same scale. They all need the capital, they're all losing money. They all need to fund their compute and their buildouts. So they're going to go out with pretty big floats, and the capital has to come from somewhere.
The capital has to come from somewhere.
You mentioned it might mean people lightening up on some of their holdings in big tech. But what other parts of the tech universe are most vulnerable?
Yeah, I mean the AI trade in some parts of it has gone up quite a bit, right because investors haven't been able to invest in open AI and anthropic yet they've been investing in increasingly remote parts of the AI trade, some smaller semis companies, optical companies, nuclear companies, all of these have been played on AI because you couldn't buy open I and anthropic. Those with the higher valuations and those tangential parts of the AI trade are most at risk. I'd say that some of the core
AI trades are actually not that expensive. If you look at Nvidia and Micron and Microsoft, these are companies that are critical for deployment of AI, their multiples are still low. But as you start getting further away from that, with AMB and Intel and optical and again even nuclear or quantum, you're starting to get really high valuations. Those are the most vulnerable.
Good.
I just wanted to finish off on a lot of questioning that skin opened up a little bit earlier on this morning on open AI and why they're still private, and when they seem to be dragging their feet a little bit as well, why they're choosing ultimately to be lost one of the benefits of them staying private at the moment, why do you think they're somewhat hesitant.
There's a lot of gamesmanship Opening happening between Open AI and Anthropic. Whoever goes first gets to drive the narrative for what metrics are important, how to report their numbers, and you don't want to be second because of the conversation we just had about capital. So the reason Opening I rushed for a confidential filing is to make sure they have an opportunity either to either before Anthropic or soon after and continue to drive the narrative. Otherwise they let Anthropic do that.
Now.
As they did that, Sam Altman communicated that he'd rather stay private, And the reason he'd rather stay private is he's losing quite a bit of money and he can as a private company only disclose the metrics he wants, so he'd rather stay private. But he also doesn't want to go after Anthropic. That's the gamesmanship that's happening right now.
This is the Bloomberg Sevendents podcast, bringing you the best in markets, economics, an gie 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.