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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. 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 hour with stock struggling to rally following bank to bank losses. Cameron Dawson of New Edge Wealth writing equities became overbought and narrow with an upside driven by a small cohort of names. This was a recipe for a pause in the recent powerful moves. Cameron joins us now from more Cam, good morning, Good morning. Is that what this is just a pause or something more than that?
Well, it's perfectly normal and perfectly prudent to see markets pause after having what was a very parabolic advance and as narrow cohort of names that were driving the vast majority of the upside in the overall market because they became such a huge weight in the index, and we were seeing certain extremes in some of this trading.
You saw flows into.
Leverage ETFs, option flows being very extreme, and you also saw this this narrowness really not be consistent with an overall new high end market, so it made this fragile. We think it is a pause, but at the end of the day, when you had an over eighteen percent weight in a cohort of names that went vertically up, a simple correction in those names back to trend could be damaging.
For the overall market cap weighted index.
What do you think the bond market fits into this new numbers?
Again?
This morning, we're back to four sixty thirties, pushing five twenty now getting closer at five p fifty eight and up two basis points today. Why does that fit into your outlook?
I think that equity markets were able to ignore the bond market and ignore oil as well for a period of time when it was effectively re rating semis after a huge upside move in those earnings, meaning that the earnings were moving up so much that you had the ability to look through everything else now you've effectively reset the earnings, You've reset the valuations on those semiconductor names, and so now the overall equity market has to look
around and say, is this valuation consistent with a tenure at four point six percent? And what does that tenure tell us? Because it's not necessarily just because growth is coming in a little bit better than expected. It's also because inflation is coming and hotter. What does that mean for policy? What does that mean for financial condition?
Let's get to the policy call. So I mentioned the name over at City Jim McCormick. Of course, Andrew Honenhols will have its ow view on things. I think they're still looking for three rate cuts. But from the market's perspective, do you think but underpricing a rate hike and a right hike that might come this year?
Yeah, the warp screen shows a sixty two percent chance of a rate hike by the end of the year. You have a two year yield that's now about thirty basis above the basis points above the Fed Funds rate. So we've been saying is it's not a very warm worsh welcome because that's a really tough position to be in.
When you are expected to cut rates. So there has been a little bit of an easing in some of the commentary we think coming out of Trump about the urgency to cut rates, which just means that we had been talking about the potential that worsh could be pushed to dissent at his first meeting, which would be absolutely wild,
a bit unprecedented. It seems like he now has a bit more wiggle room to say, given the movement higher in inflation, given the ability for unemployment to remain stable around four point three percent, that we don't have that same urgency. It really depends on whether or not you see inflation metastasized throughout the overall economy, meaning that core measures start to pull up in a more meaningful way that could get them to hike rates. We think for now it's a hold.
And he's getting sworn in on Friday, So potentially maybe that's why the President is lowering the temperature in terms of the rhetoric. But at the same time, he's going to be there without a Steve Myron who would line up with him in terms of the descent.
Yeah, it's a really good question because he's takening my ren seats so we effectively remove a dubvish dot from the dot plot, assuming that the dot plot does stay around, but it does move the center a gravity of the FED over into a more hawkish stance, which just puts them in a tougher position to be able to get everybody to coalesce around his views. The question we have is whether the bond market believes in their willingness to
defend the two percent inflation target. The thing that continues to catch her eye. Look at ten your break events. They're at the highest level they've been since twenty twenty two. They've moved up by about thirty basis points. That doesn't sound like a lot, but that is a lot for break even since the start of the war. So the bond market seems to have a lot more consternation that maybe this new FED isn't as serious as getting inflation back to that two percent target.
If the war persists, are they going to be forced to hike and not just look through this?
It depends again on the metastasizing of this inflation. If we continue to see inflation really just be in that headline number where it's remains contained in energy prices, we do expect it to move into food prices but not show up in other portions of inflation measures, then they can have this potential to look through it. It really depends, i think, also on wage growth as well. That's really the ability for higher inflation to be passed on and
into other areas. And what we're seeing now is that wage growth remains anemic because the job market isn't necessarily as robust for new jobs. But the problem you have for consumers in that environment is that real wage growth is now negative, and so as you think about the consumption outlook through the end of the year, you have effectively little upside for consumers simply because real wage growth is negative. You're seeing that in the way that markets
are training as well. Equal Weight discretionary versus staples is rolling over and you're seeing a concomittant cut and consumer household consumption forecasts within GDP they've gone from two point one percent to one point eight percent, So the market is pricing in some of this consumer worry.
Do you think a lack of clarity around the incoming FED chair and his personal view on his reaction functions, so to speak, do you think that's complicating things as well?
I think it is to an extent.
I mean, the old phrase is that the bond market always tests a new FED chair, and potentially he was more dubvish in the interviews and will be more hawkish going into it. But at once he's in the seat. But this is a global phenomenon. Look at what you see, of course, with UK yields, Japanese yields. I thought that
the Japanese GDP data was really interesting. It came in hot on real GDP, the GDP deflator came in hot, so effectively have nominal GDP in Japan at five and a half percent with a two point eight percent tenure Japanese yield. So as much as we're talking about what's going on with the FED, the reality is this is a global bond market that has a lower and lower appetite for duration.
Stay with us.
More Bloomberg surveillance coming up after this.
So here's the laces.
This morning, the Cgate CEO Dave Mosley issuing a warning for the AI buildout, mostly telling a JP Morgan conference that building new factories would take too long. The comments wank on memory and hardware makers after plunging in Monday session Jeff Curry of Abak's Markets, writing capital has chased the AI trade while ignoring the physical assets it requires to run assets that have quietly become the best performing asset class of the decade. Jeff joined us now for more. Jeff,
welcome to the program. Been excited to catch up with you. Seth think we need to take a giant step back and think about the mining bust post China boom. We need to think about the shale bust of a decade ago and why that's set the stage for this period of what you call capex starvation. Just where are we and why?
Well, when you look at history, going back to the entire post war area, there's two sectors that lead the equity market. One is energy, the others tech. If you can't turn on the lights happens. If you can't innovate, you never progress, and that's what you see.
So we go back.
Tech was a leadership in the nineties all the way up to two thousand and two, then we transitioned into energy. Two thousand and two to twenty fourteen, fourteen to now has been technology. And the way you think about it is in those periods when energy lead and commodities lead you build over capacity that lowers the overall price. Inflation gets low and stable interest rates drop and investors chase duration, which is gross stories tech.
And the rest of it.
But eventually you run out of energy, run out of commodity capacity, and that's where we are today with this geopolitical event.
It just pulled forward.
Now, you know, Jonathan, we've been on here talking about the revenge of the old.
Economy over and over and over.
This rotation out of tech into hard assets that was already underway before this happened. What this did is just accelerated.
Actually, now, Jeff, discipline is really hardened. Some of these say, Suites, what will it actually take to break out of this campex starvation phase that we're currently in, And do you see us breaking out of it anytime soon?
Higher prices, higher returns. But the ultimately you ask what creates that huge upward trend in prices that you saw in the seventies and you saw on the two thousands. It's once investors take capital out of tech dump it into commodities, they begin to spend, and then you get cost inflation. The PPI that came out last week at five point one percent is telling you you're already seeing signs of it, combined with a huge supply shock that you're seeing in the Middle East.
So in you know, in terms of thinking about.
You know where we are on that we are just in the i'd say the bottom of the first inning of the super cycle, despite the fact commodities are the best before meing asset class this decade. So you're already six years into it in terms of pricing, and when we think about the forward, you've probably got another decade to twelve years left.
Just looking at history, Jeff, it's simple and let's just compare what's happening with take then, So I imagine you think is capital intensity picks up, compacts intensity picks up of the tech clients, we get a rewriting, and then you get the rotation into the more energy sensitive parts of the market, the mining sector, the energy sector. We're not seeing that equal and opposite moved on fact, Jeff, those particular parts of the market have lengthd so far.
That's interesting to me that the energy names haven't done much at the moment.
What gives.
I think there right now there is no concern about the supply of energy and commodities even with the largest supply shock the world has ever seen, two acts what we saw in the nineteen seventies, and I think there's three reasons why they're not concerned.
One, we're in the middle of the shoulder months.
This is the weakest demand that goes down and then back up. We're in that weakest demand part of the entire year right now, so there's no stress on the system. The second reason is right now we're in a deficit, meaning that demands up here supplies down here.
We're drawing inventories.
Once you exhaust inventories, boom, you have to push demand down in line with supply.
That's when the shortage hits.
That's when the pain hits, and that's when prices go nonlinear. The third point I want to talk about is that every policy maker you know, macro forecaster, central banker, you know, tech promoter is telling you right now there is no problem. Every commodity ceo, commodity trader, anybody who gets their hands
dirty is telling you you have a problem. You have seen this movie before, back in twenty twenty, twenty twenty one, when remember infleetion is transitory, and then you know a few months later, boom, you hit the wall, and you know, we went to double digit inflation.
And I think you're seeing the.
Same dynamic here, you know, I you know, one last point though, Carter in nineteen seventy seven made a fatal mistake. It was the sweater speech. It was you know, February nineteen seventy seventy is a sweater kind of like this went out was Burgher and told everybody turn your thermosts down, and then prices of commodities explode. And I think every policy maker has learned from that.
You know, you don't want to create fear.
My job is you know, if I was advising the president telling him to do the exact same thing, keep everybody calm. But my job is telling you how to make money. And you know, at this point, right now, this is really serious.
Yeah.
Trump definitely doesn't want to come out, especially with the ninety five degree weather saying don't put your air conditioners on. But Jeff, you say that at this moment, supply has that would be more constrained. Yet Brent can barely hold on to one ten.
You have that seasonal weakness right now. You're not in a shortage, but another really important point here is because nobody is buying the energy companies in the back end of that forward curve is anchored to the cost of capital of those companies.
It is too low.
And you know, I call this the biggest asymmetric trade in modern finance and historical terms.
Why when you look.
At the free cash flow yield of the oil companies, they're fifteen point five percent.
The hyperscalers are zero.
Let me say that again, fifteen point five percent you know, free cash filll yield for the oil companies, zero percent for the hyperscalers. We call those oil companies the Munificent seven. What does munificent mean? Giving you lavish gifts? And at fifteen point five percent free cash flow yield, I'd call that.
A lavish gift.
And just when it comes to supply and demand, you mentioned this, it's going to get rough when inventories are drawn down. When will we hit tank bottoms?
In your analysis, and it depends on where you are in the world and what products. Some products you're you're already there, like motor oil in the US. And by the way, motor oil in the US is critical because you couldn't even turn on your car without motor oil. Even if you had gasoline items like sulfuric acid, you're out.
What does that cause.
That's why copper hit an all time high last week, because.
You need the sulfuric acid to produce.
But when we think about diesel, jet fuel, gasoline, those you know parts of the world jet fuel, you're there. We would expect to see here in Europe diesel and jet fuel run into very serious problems by the end of this month, the United States gasoline by July. And at that point is when you start to get to that nonlinear part and see prices go higher. But I want to emphasize when we look at the spread between spot prices in the back end, this spread has never
been higher. And everybody goes, oh, we had you know, prices were at one twenty two in the Russian invasion, by the way, the back end of the curve was ten dollars lower. And then everybody goes, you know, we saw one forty seven in two thousand and eight, by the way, the back end was like one forty one forty seven. What is miss priced here right now is the back end of the oil sitting somewhere around seventy seventy five. This is a long term problem. The cost
structure is going to go up. There is no spare capacity left. It's going to take a long time to re establish it. We need to reprice that market. That's going to reprice the new Munificent seven. That's why I'd tend to think the trade here. You know, just looking at pure economics has the most upside to actually own these oil companies.
Stay with us. More Bloomberg surveillance coming up after this. My bullish port for a long long time has been Steve Uthur federated, and Steve has this to say, stocks can pass through and or manage inflation, especially when productivity is booming due to AI. We're raising our forward earnings and market targets display persistent inflation worries, and please to
say that. Steve joints to surround the table, Steve demonic more engineer the guy turned to and have done for the last decade or so to kind of get me out of this bearish mess or this hole I've dug myself into. Why can you still be optimistic in a moment like this one?
Well, you know, I was thinking of this as Anne Marie was talking about hitting bottoms on tankers and things. You know, we have an expression of federated hermes. If it can't happen, it won't happen. And sometimes you can outsmart yourself. You know, you're looking at everything and saying, you know, this looks really bad.
But we're not the only ones who see that.
And so I have to assume that some combination of Donald Trump presidency the whole crowd, this is not good for anybody. And so I don't think we are going to run out a while. I think they'll figure out a way to solve this one way or the other.
As you say that, I'm reminded of what happened yesterday this Iranian report that part of the negotiation, this is what the Iranians were saying, the United States was willing to give waivers to Iranian crude. The switch situation gets so bad, they're just going to let crude go freely from their enemy that they're in a conflict with.
Well, I think that they do whatever they have to do to have this not be an issue. And in the meantime, the other thing that I think people are sort of missing here is bon yals are up because inflation's up, but.
Bonds are the acid clasts with a problem. Stocks.
Stocks have always been an inflation hedge. It really doesn't matter what inflation is doing. If you look at the data and sort it. As long as growth in earnings is strong, stocks go up. Whether it's driven by inflation or driven by real growth, it doesn't really matter because stocks eat nominal earnings.
And look what just happened.
You know, in the last earning season, eight of ten sectors had double digit earnings growth. People talk about a narrow recovery, and it's one of these fallacies where people look at percentage moves off of lows. Absolutely off the lows. The AI stocks have driven the rally. However, year to date, I was kind of laughing during your last telecaster. You're talking about how is AI led, and in the background they're showing the returns on exon up.
Thirty three percent year to date.
Year to date, value stocks, small cap stocks, emerging market stocks have all performed double digit ahead of the MAC seven, which is up eight percent. So this is not simply an AI driven rally. It's a broad rally. AI itself is spreading out. The AI theme keeps spreading from one thing to the next.
It's all over the economy.
This is one of the biggest technological changes in the history of man and the trajectory of earnings right now based on what we're seeing and what has been coming out of the street. As street estimates keep rising every day we go through earning season, we found that our number, we had a number we used use a three year out earnings number to project a two year forward market return, which at the time we were at eight eighty two hundred. The number keeps going up. We had a four hundred
dollars earnings estimate for twenty twenty eight. We were way ahead of the street six months ago. You know, I woke up Monday morning and we're.
Behind the street.
How could that be? There is at four twenty five, so we're at four fifty. If you look at the numbers, that's what's happening. Stocks are passing through and productivity gains are helping them, you know, pass through, and their margins are going up, not going down.
Steve, this is the struggle people have. And I had this conversation with Alex Sulman over at Barclays that we seem to be putting more emphasis on how we've got here, and not enough on where we are. And a good example of that is, say, look at the charts versus look at the numbers. If you look at the charts and look at the parabolic move particularly in chips coming off the march low, you can see why technical strategist becomes a little bit unnerved about how detached we've come
from the absolutely daily movie ganverridges. But if you look at the actual numbers, there's a source of comfort there. Do you have that struggle speaking to investors at the moment, they struggle to detach one from the other and just focus in isolation, look at where we are, and where we are is okay, right.
I try to.
Focus our clients on where we're going, and that I think helps calm everybody down for sure. As a turn, cical strategists and all the ones we work with are all telling us, you know, we're overdue for a pullback after a sharp runup. Absolutely absolutely, And one reason we'll put out a bullish note like we were about to do here you mentioned our new target on the SMP nine thousand, is we're almost anticipating a correction and we want to get ready, get a peel ready for that.
And actually the situation in our mind, is actually getting better or not worse. Technically, we're certainly overextended. It could be a pullback, but it's never as deep as you'd think it's going to be.
Eve alided to the challenge though, you need to think about pricing this market if the economy will have twelve months eighteen months out further down the line, not the one we've got. That's another struggle for a lot of investors. Like the economy we've got. They look at the energy price move, they hear a ound Maria and the prospect of things getting a little bit messy later this summer, and they struggle the less leasa is not here. There
you go, it could have been even worse. They struggle to think about whether the economy will be twelve to eighteen months on a rolling basis. Just walk us through your discipline with regonds to that.
Yeah, well, we just look at the underlying what's going on in the economy and in the companies. Because we're talking our analysts. We have one hundred and seventy pms and analysts in the Equity Group of Federated Armies, so we're talking to companies every day all over the world, and what they're telling us is that the situation looks pretty good. They're all seeing their sales are expanding, their earning, their margins are going up, and their earnings.
Are going up.
And it looks to us as AI gets more and more adopted into the economy that margin expansion trend is going to continue. This is one of the things that has made us more bullish than the average bear or the average market investor. Most people keep talking about peak margins. We've heard about peak margins for a decade, and yes, that has always been true every time someone has said
that we are at peak margins. And guess what, The margins keep going higher because the mix of companies in the economy is in getting increasingly mixed towards higher margin businesses, and even the older companies are improving their margins partly because they're using AI.
Do you think the story can continue in the way you're describing it if the Federal Reserve has to.
Hike interest rates?
Yeah, I think, Well, I don't think the fat is going to hike interest rates, so that's a loaded question. But even if they did, yeah, the market would probably have all do you think hold back? But I said earlier. I think bonds have a problem, not stocks. Stocks are growing their earnings at double digit rates. Bonds can't grow their revenue stream unless there's a rate I. In fact, they need to get bond eles hired to compete with stocks.
That's been there talking about the e If we've got a problem with the bum market, where we have a problem with the pay in the equity market, the price that people are wanting to pay for those earnings. If you starts continue packing up life.
Fair enough, if the discount rate could go up marginally, But look what's happened with the earnings growth rate over the.
Last three years.
It's way above the increase in the discount right, So I think you can get overly focused on that. It will certainly cause a nearcome correction if the Fed turns around and hikes, which I doubt that they would do. If you think about it, Emory, it's like a bifurcated economy here right. The low end right now is being protected by the one big beautiful bill that's offsetting the gasoline price hike by six to eight months. The high
ends being protected by the wealth effects. So that's why the economy is going along the FED if it doesn't, if it raises rates, what that is going to hurt is the interest rates sensitive part of the economy, which is not as big a hunk of the economy as it used to be, and it's the part of the economy that currently right now is sort of in a recession.
Look at home depots numbers this morning. So the housing market is the thing that's struggling, that employs a lot of people, that's the area that needs lower rates, and worsh understands that. So I think it's really unlikely that he's going to hike. All he's going to do is further hurt the part of the economy, the one part.
That's not growing FED.
And as I have anything to do with AI, the investment there is being driven largely by cash flow, not by borrowing.
So because I'm gonna have any impact on the AI boom.
Just to remind us, just to wrap it up, new price targets, what are they?
We've gone to nine thousand for the end of twenty seven and we're at I want to say eight thousand for the end of twenty six.
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