¶ Intro / Opening
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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
¶ Semiconductor Market Outlook and Risks
Terminal and the Bloomberg Business app. We begin this hour with stocks just about holding on to all time highs. Aaron Canada Clear harborass and Management, writing, this has been an exceptional period for risk assets, and yet the composition of that return should give investors pause.
Aaron joins us now for more. Aaron, good morning, Good morning.
What a move in Semi's five percent Friday, eleven percent last week. What are we sixty percent off the lows from the end of March, maybe more than that at this point? Are we in bubble territory?
Now?
It's a good question. You know.
Semiconductors, like most cyclicals, tend to look really cheap when you know, they tend to be expensive when PE multiples are low, and they tend to be quite cheap when P multiples are high. And you know right now, if you take a look at some of the memory chip names like Micron and skhig Nicks in Korea, you know they're trading at mid to high single digit multiples. But that's because earnings have absolutely shot the moon. If you look at semiconductor exposure globally, you take a look at
emerging markets Skhimix, Samsung and Taiwan Semi. The top three holdings in emerging markets are semiconductor companies.
Thirty seven percent of the emerging market index.
Is it?
You look at semiconductors in the United States eight and a half percent return on the S and P five hundred seven names consisting of seventy percent of that return, All seven focused on semiconductors. Two are more diversified, Amazon and Alphabet, but still they're making semiconductors. The other five are pure semiconductor players. So this is a market globally, both home and abroad, very focused on that move.
At some point you end up with sub coodea ofic capacity. We just know that yet and you mentioned the innings, the innings underpinned by fantastic spending coming from a number of places. What would upend that spending?
Well, I think at the end of the day, the return on investment question for the hyperscalers, for the Microsofts of the world, for the alphabets of the world, may force I wouldn't call a rapid adjustment and a capax
expectations or perhaps a modification of capex. If we're seven hundred and fifty billion this year eight hundred and fifty billion next year on semiconductor AI hyperscaler spend and that adjustment moves from eight to fifty to eight or eight fifty to seven to fifty, that could alter investment perceptions of the slope of the spend that we would anticipate.
I think that could could bring some pause back into the market, into the enthusiasm of the semiconductor trade, and frankly could serve as a tailwind to the MICROSOFCE, to the alphabets, to the hyper scale side of the equation. A focus on ROI would be a welcome tailwind, I think to those areas of technology.
So how much of the rally is being underpinned by people who find it refreshing to talk about SEMy conductors rather than the war in Iran.
Well, it's a good question. I mean, geopolitics historically, Lisa, as we all know, have not really in the medium to long term driven asset prices too significantly. It's always been a sort of a temporary phenomenon, and I think the eyes continue to be on earnings. We had seventeen percent earnings growth on an annualized basis this past quarter, and that's even maybe considered a bit low relative to
some of the headline growth numbers that we've seen. But a lot of these big tech companies and hyperscales have been buying private equity firms, and so you know that twenty six percent headline number is probably closer to seventeen. Growth has been really strong broadly as well, Media and S and P five hundred growing at fourteen percent. So this is a broad earnings growth story.
I guess what I'm trying to get it is when does the real economy start to bleed into this semiconductor hopes and dreams that are driving this incredible rally. Is there some sort of trigger point where you get stiflationary worries baked into the market. That starts to hamper this trade, that starts to hamper how much people will tolerate the increase in spending because prices are going up, not necessarily because they're building more capacity.
Yeah, I mean it's a big question.
It's a big political question that under sort of the undertone of that question speaks to some of the challenges around you know, data center growth, utility growth, the regulatory environment not in my backyard, high energy prices, the inflationary picture, you know, running above trend. Right now, we're going to see you know, CPI tomorrow, and you know, how does.
That feed into the sort of broader market.
But at the end of the day, you take a look at you know, sort of that that the massive thirty six percent of the S and P five hundred is technology boom that we've been seeing across semis and in a lot of the sectors of the economy that are much more sort of consumer focused are just smaller percentages of the overall index and have have have less.
Of a contribution to overall performance.
We've got consumer issues, without a doubt, But right now that's saying political problem. You're going to see that in the midterms. But potentially that is not a market problem.
Because the averages don't really show it. And this is the reason why people are ignoring it. Even as things get key shaped and increasingly so people say, well, that's too bad, and hopefully that doesn't lead to policies that are incredibly business negative. But until then, the music's playing, We're going to dance, and that's essentially what you're feeling.
Yeah, energy is what three odd percent of the S and P five hundred. Materials are less than two percent of the S and P five hundred, and so there you go. These are two big variables that are impacting consumers, but they're not impacting prices in the market.
¶ Federal Reserve Policy and Market Signals
And this fed's not going to count anytime soon yields up. So on the graphic, just that by full banks this points this morning three ninety two, that's above the policy right of the federates of unemployment close to full percent. You might have sea pan close to full percent as well. Lights of this week. How much pressure is on the incoming feed chet It's going.
To be interesting. Of course, you have the.
Thought that maybe this energy price spike due to the straight of horm moves in Iran is going to subside in the weeks and months ahead. I mean it coupled with this idea that not just an idea, or seeing the data. Employment remains relatively strong, unemployments trended up just a bit. If we were to see that soften a bit, I think on the margin, it gives the Fed an
opportunity to cut again. But then you look at two year treasure yields at what three ninety this morning, and the upper end of the FED funds rates at three seventy five. So the market's not saying, oh, maybe the Fed's going to cut or hold. If anything, the market's starting to think, well, maybe the Fed is going to raise rates.
Our view is the Fed's going to stay on hold for a while.
You're going to stay on hold as long as I can, and when they see some easing light at the end of the tunnel that comes, they're gonna be more poised to cut than to raise.
¶ US-China Geopolitics and Trade Dynamics
Stay with us multile Impex Devan, it's coming up of this with us around the table righteous the empire of the Center for a New American Security, She writes the following President Trump hopes to change the conversation from the around war by visiting China and announcing some deals. Right, you're joined us now for more Racha, good morning.
Thanks for having me.
Is it as simple as that. I don't think it is.
In fact, I had started to tell clients a couple of weeks back that I wouldn't be surprised if the meetings got pushed back again, but then you would really run into the midterms and the like. You know, it's interesting to me Treasure Secretary Vessant is meeting with his Chinese counterpart earlier this week in South Korea. You know, there still seem to be deliverable as being worked out right. We're expecting you know, this new board of Trade, maybe
a board of investment. They're supposed to do non sensitive investment between the two countries. I'm not sure what fits in that basket of nonsensitive investment these days.
You know, as you say, there's still.
A war on and China is hurting now, but they also are going to be a beneficiary of this trend towards more coal, more renewables, more batteries, and so I think there's a lot of different leverage going around.
This meeting was supposed to happen weeks ago because of this war. It's happening and the war is ongoing. What changed, Well, it's interesting.
So I think China actually wanted to have the meeting around this time of year. They didn't want to have it earlier in the year. So, you know, I think part of what changed is, you know, things have to you know, things have to go on.
Also, President Trump.
Is hoping that China, you know, China will see in its own interest to bring the war to an end. And as I say, he's trying to reset and focus focus on trade and the like.
Now he's going in having.
Just received a blow again to his trade agenda and tariffs, the one two sort of ruling on Friday. I think it now, I do only that changes things a lot because at the end of the day, the administration was going to use Section three oh one tariffs to bring them back up. But we're at a moment where tariffs on China are the lowest rate they've been for most of the second Trump administration.
Has anything changed in terms of the leverage that one company had, that one country has over the other now versus when they were previously going to be meeting.
I think the main area is probably one of almost the political and strategic elements. I think what it was economist or others who have said that this, you know, don't get involved with your enemy when they're doing something that undermines them. And I do think that was China's original focus there. What's changed now is that the economic costs, the real economic costs are mounting.
Right.
I was talking just before I came on to chat with you guys about how plastics and the downstream effects of this crisis are really increasing. You're right, list So the oil in the water, we don't know exactly what those volumes are, but what we do know is that today we have countries ranging from India to Australia, big allies of the United States at times, are preparing for even more rationing. So I think the industrial impacts are
mounting in terms of leverage. If anything, China is trying to exert more leverage over critical minerals, critical supply chains, you know, and that's something that the US, you know, we have a time and consistency problem about how to address those issues.
To both countries have the same approach of trying to stave off any kind of political pain in the form of consumer displeasure. About higher prices. In other words, is a response from both sides to subsidize different things and potentially increase fiscal spending.
Yeah, I think that's right China, I mean both sides, and many countries around the world have that instinct. The problem is, if you subsidize, then will continue to consume, and then you might end up with real shortages. So that's only maybe a short term solution. I mean here in the United States, I think the instinct is to subsidize, but we actually haven't.
Done much of it yet.
The gas tax could be you know, could be reduced. You know, there are some different ideas of floating around there. In China, they reset prices every month, so there can be some delays in passing that on. The other issue is China has made more strides than the United States to electrify as many things as possible, and so that electrification using coal, using renewables, and you know, we you know, the US government would like us to be using more coal,
would like to convert more plants. But the challenge is also you look at electricity costs, and China has been building out a lot more electricity capacity than.
We have in the United States.
So I think the political sensitivities are different. And of course we got the midterms coming up, right, and China does and I mean what the population thinks does matter, but they're not going to the polls and having to face the electorate and having to face the electorate with another round of you know, supply chain restrictions and inflation.
Stay with us. More Bloomberg surveillance coming up after this.
¶ Global Oil Market and Iran Stalemate
Let's turn back to our top story, crude rising as the US and around remain at a stalemate on a deal to end the war and reopen the stratiformers kai Ibraheim of BCA Research writing the following, If the strait is not reopened, Marcus will grow desensitized to the positive headlines, and prices will increase to reflect a tightening oil market. Rakaia joins us now for more. Rakaia, welcome back to
the program. That quote, of course, was true last month and a month before, and we haven't seen crude explode higher. Why do you think we might be closer to that moment?
Good morning, Jonathan, Thanks for having me on. So I think as we move further out and the strait of hormones remains closed for longer, what we're seeing now is that there is this buffer of massive inventories that are shielding the oil market temporarily, but ultimately these are stocks and their ability to shield the market is not infinite. And as the strait remains closed for longer, you know, these inventories will continue to draw down and that buffer
is removed. And so I think that as we move into you know, further weeks and months ahead, if the strait is not reopened, you know, the path of these resistance for oil prices will be higher.
I'd really appreciate your best guess. So the block out continues, and the administration wants to put more and more pressure on Iran to hopefully get to a moment where they breach storage capacity and compromise their weals. Meanwhile, Iran's trying to sit this out. The blinking contest from their side looks like this. You've got all these inventories and we're waiting for you to drive down your inventory, so you feel the pressure. Who do you think gets wet first?
That's a great question. So I think that you know, what we're going to see is that you know, Iran has proved to be quite resilient in terms of their pain threshold, and I think that, you know, going forward, I would not count on them blinking in the face of greater pain. So I think what we're going to see is that the oil market is going to eventually
bear the brunt of this. We've actually have seen quite a stable oil market for the past month or so, and you know, as I mentioned earlier, that just reflects, you know, the buffer that we've had from the inventories, things like US exports surging, China cutting back on their imports. But as this prolongs, these buffers are going to sort of wear thin, and you know, their ability to shield the oil market is ultimately going to weaken.
Kaya Which of the golf countries are most exposed financially to the prolonged conflict should it go on for a longer period of time.
Yeah, so Iraq is definitely exposed here. You know, their inventories were the first to be filled, and so they've had to shut down their production you know, quite a bit very early on in the conflict. You know, the other golf producers, so for example, Kuwait has also shut down a big share of their production. Bahrain similar situation there, and then the ones that have been able to sort
of weather the storm better. Are the ones that have the pipeline bypassed capacity, So that's Saudi Arabia and the UAE, which are still able to get crude out of their countries bypassing the Strait of Pourmouth through either the East West Pipeline or the port of Fujaira.
In the UAE.
¶ Wider Commodity Disruptions and Inflation
Are there similar offsets not just for crude, but for other commodities as well, because we point to the fact that we are focusing on crude, but we're seeing, for example, cooking oil prices rise five point six percent.
In a month.
This is affecting many other commodity these what's your sense of what else is getting through and how.
Yeah, that's perfectly correct. I mean, what we're seeing also is that there's a massive disruption to fertilizer, which of course is also a byproduct of the energy sector, and so that's translating into upside pressure on agricultural commodities. And also you know, things like the closure of the cuts our Energies rass Tanura plant sorry Rasla fan plant is also a disruption to the fertilizer industry, and so you know, as this closure of this of the strait of Hormuz prolongs.
You know, that also buffer where you know, you have sort of the planting season that's taking place in the spring planting season, and as the props, you know, sort of progress and the harvest season comes and that fertilizer is insufficient. That also poses a massive upside risk to agricultural prices and all those byproducts that.
Come from that.
This is the Bloomberg's Events podcast, bringing you the best in markets, economics, angiopolitics. You can watched 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.