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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 Stock's extending gains on another chip field search, Mark Hayfley of UBS raising his year end price target to seventy nine hundred, writing, continued economic growth and AI adoption should drive further US earnings increases, supporting additional market gains over the medium term. Mark joins us now for more. Welcome to the program. Maybe this is a gut check on sentiment with the following question are you bullish enough?
That's a good one, Thank you. You know, I think that we're bullish on the SMP, but we're probably even more bullish on this rally. Broadening out from kind of the top names and extending.
Globally from here. So you know, for.
Those people who haven't been in on the rally and are afraid to get in, we think there is a lot of opportunity globally.
Now, how much is.
This coming from the AI sectors that have already gotten bid up, and how much is this coming from the broadening out that is sensibly will come with some sort of resolution in the Middle East.
Well, I don't think you can discount the AI impact in a broader sense, which is that you know, the capex spend from AI is probably having two times the impact of the negative effects of the rise in oil prices on global GDP, so that's factoring into this as well. Now, of course, our economist Paul Donovan talks about the wily
coyote effect, where you know, behavioral economics. At some point, if oil prices continue to be elevated, or they continue to surge over one hundred, behavioral economics can take over and things can start to break and we can see this unravel. But I like that AI to oil statistic a little bit because it gives people a sense of you know, there are.
Other factors besides what's going on.
In the oil story, Mark, we were just talking about how difficult it is to really price some of the moonshots that we've seen in the tech universe, how far some of the prices have come of the shares as well as price targets that can't keep up with how fast it's moving. How do you price a moonshot? How do you price a technology where we don't have a sense of what the ultimate goal is or frankly even how quickly it's moving.
Well, the good news is I don't have to do that because we've had AI power and resources and healthcare as long term themes for a considerable period of time.
And you know, playing.
It that way, you uh, you can you can benefit from this without trying to pick one or the other names. And I think that's even more important now as we've had some very large moves.
Uh.
You know, I think if you're gonna, if you're gonna start picking names, you really have to dig in, be very selective, or you can just play the larger themes that we think are going to be durable.
Mark, the big person right now is just to highlight where the constraints are, the so called bottlenecks. Do you see that shifting in the years ahead. Do you see a visible runway to so called over capacity, which is the ultimate worry, that's the bus further down the road that people worry about. Do you see any runways towards that in the medium term.
I think it's very hard right now to get to over capacity.
And as as you point out, it's.
More like there's more and more bottlenecks in the chain as just the the cap X projections keep growing and so uh, you know that that's I think a little bit more more The worry at this end is where's the you know, where's the power going to come from? Where are the transformers that are going to the ground, you know what, where's all these parts of the value chain? How are they going to add up? And who's going to benefit from that and who may not benefit from it.
Now that now that the realization that there is this scarcity uh is out there, the risk reward on kind of just the pure play, say chip names is a little harder to make mark.
How a clin's stating with this, How are they avoiding so called company specific risks? How do you mitigate them? What kind of advice are you offering?
Well?
I will say that our clients have been very sanguine through this. I think many of them, uh, you know, as we get together and talk and talk about the impact of AI on people's businesses, it's generally been positive. I do think a lot of clients have stayed invested and they have not really been phased by this situation. And you know, we've kind of said, don't don't get too caught up in the headlines, stay focused on the data.
You know, oil prices being one on the negative side, but also, as you pointed out, this tremendous earnings growth, this tremendous cap X build. And then something that we have to keep in mind is what usually kills these bull markets is FED hikes. And given what's going on with with wages and the fact that a lot of the inflation is probably driven by energy, we still don't see the FED hiking anytime soon.
Is that one of the bigger concerns so that investors are bringing up with you. They're concerned that the Federal Reserve is going to potentially hike interest rates this year.
Well, I think that you know, for our international investors, there are two of big concerns out there that are related of course, one is inflation and then what does that mean, probably in particular for the dollar, because last year a lot of international investors saw their US gains eaten up by dollar weakness compared to other currencies, and so I think d dollarization is a topic that comes up a lot.
Now.
We think that getting the global diversification and for many of our international investors looking at China and China tech as a way to be invested in an almost completely different system. At this point, it remains an important theme. But given what's going on, we like the US market. Given what's going on in the US market, investors haven't given up on the US yet.
Mark.
For about twenty years, a lot of people talked about the financialization of money and how people would invest and they'd make money and then they put it back in investments, and it wasn't making its way in to the real world. And suddenly it's making its way to the real world in a big way. I just wonder if you can see these incredible valuation rises, these incredible capex budgets without
some of it producing inflationary results. We're talking about how you aren't going to see some sort of persistent inflation. Doesn't some of this lead to a persistently higher inflation moment at a time of deglobalization and reindustrialization.
Well, it's it's look, it's a great point, But there again, I think it's one of these races.
Uh. You know, I think we can all point.
To the potential for deflationary forces from ai.
Uh.
You know that that could be out there, I think, But to your point right now, given given just this uh, this scarcity of tokens, we're all we're all focused on scarcity. We're all focused on, you know, the need to settle prices higher, uh, perhaps to even create some demand destruction. But I think one of the points you made at the beginning of this is that there is there is so much uncertainty around it.
So the way that we.
Think about it is that you know, a little bit of inflation and even a little bit of higher rates, as long as that's driven by growth. And we you know, we're expecting twenty percent earnings growth for the S and P five hundred. The equity markets are likely to tolerate that.
And I think, you know, one of the things that we've talked about in the past is how we have been more focused on equities now that we've come out of the zero interest rate policies, as as a place for asset allocations, because they are more likely to weather bouts of inflation, say, of course than bonds can do.
What'd you think gold fits into that?
Well, we still like the gold.
I think it's it's you know, I think gold Actually when there was talk around the FED and things like that, you know that that was driving money into gold. And now as people think that interest rates are going to go higher, that's taken money out of the gold trade.
But when we look at the fundamental drivers that got us into the gold trade, which is concerns about the weaponization of the US dollar with sanctions, what our clients tell us about their interest in d dollarization, we think that the gold trade is still going to have legs in the future and it does provide something of a hedge in portfolios.
Stay with US mult Bloomberg Surveillance coming up after this. The President gathering his cabinet today as the administration continues high stakes negotiations with Iran, the former US Sentcom Commander General Joseph Fotel saying Giran is using the straight of foremost a strategic leverage in a wider confrontation. The likely trajectory for future US military operations is a prolonged mission. General Votel joined US now for more, General, welcome to
the programs. We're all well familiar with the situation in the Middle East. We understand the importance to energy. We can just about identify the stratiformers on a map. General for people haven't been there, who don't understand what it actually looks like to go through that waterway. Why is it so difficult to get energy flowing even now?
Oh? Thanks, good morning, John, it's good to be with you.
Well.
First of the reason geographically, it's a very narrow passage where the main transit routes are only about two miles long.
The water in the.
Got in the strait is generally pretty shallow, it's very rocky, particularly on the Omani Ammaradi side, UH, and it's really subject to weather.
It's it's when you go.
Through the straits of Homos, it's very difficult to see, it's very difficult to you know, kind of be oriented to where you are. So it's just a very very difficult UH portion of water to get through. And of course it's dominated geographically by Iran. You can't dispute the fact that on at least you know, three sides of it as you go through, the Iranians have the geographical advantage there general.
Yesterday the Wall Street Journal said the Navy started assisting in terms of escorts of vessels to the Straight and then Syncome came out and said, they're not currently.
Escorting commercial vessels.
If we were to see mass escorts, what would that look like?
Yeah, and real with that, what generally look like as the commitment of a number of our destroyers, probably someone in the order of fifteen to twenty that would be dedicated to the mission. And what they would basically do is not only ticket and what maritime assets and key positions where they could provide protection over the top of these of these convoys, but they'd also be in a
position where they would be escorting them. Sometimes we would try we might try to, uh, you know, bring together a number of tankers and then move them as a package through the through the golf with with close escort by US Navy destroyers, or we may move in smaller packets, or we may try to do what, you know, what I would describe kind of as his zone defense create up bubble under which these uh, these ships can move.
But important to do that is we have to be certain that they can move through safely, so they aren't going to bump into minds, they're not gonna have they're not going to be subject to attacks from the Iranians. And that's what takes up a lot of the resources. It's the mind clearing, it's uh, the defensive resources we have to put in place. There's a number of ships that we have to have there, uh in order to do that to relieve the pressure in the in the golf right now.
Well, based off the US presence right now, would the United States be able to undertake this.
Well, I think there's certainly a considerable amount of a maritime resources in the region, and I think probably I'm an army guy talking here, but I think probably with the resources that are in place, we probably could certainly begin to do some type of escort emissions, but that would likely come to the cost of other things are doing, so it would be difficult for US to maintain a blockade and to escort And of course, you know it isn't just maritime assets, it's US Air Force assets, in
some cases ground resources without marines or military army organizations that have to man air defense sites and have to be paired to board ships and have to be prepared to go ashore if we need to to remove threats. So it's a more comprehensive effort. So there's enough force to probably do some of that right now, but it would really limit our ability to do anything else.
General. This doesn't seem to be what a lot of people are talking about with respect to striking a deal. They expect a resolution to the conflict. How do you understand some of the discussions around the negotiations between the US and Iran and assertions that we are close to reaching some sort of deal.
Well, we're working through interlocutors right now, and for the last several weeks has been the Pakistanis and now most recently the Kataris are joined. Of course, they're recognized and very capable negotiators where we have a lot of trust in and so I'm sure there are discussions going back and forth and some communications that would give people the impression that we are making some problemies on this, and
I hope that we are. I mean, I think it's in our interest to resolve this, but you know, fundamentally, negotiations and are about trust. It's about trust between both sides, and of course that's lacking between the United States and Iran right now. And then there are fundamental differences on the major issues, whether it's non proliferation, whether it's the highly enriched uranium and what happens with that, whether it's what happens with sanctions and and frozen assets, or the
status of the straits of hormones. How do we get back to kind of the open passage way that it was, or the situation in Lebanon. And I think it's important most Americans are not necessarily paying intention to what's happening in Lebanon, but it is directly linked, certainly in the eyes of the Iranians, to what is happening in the goal.
Stay with us more Bloomberg surveillance coming up after this. Minneapolis FED president Nil Kashgawi and the Dallas FED president Lori Logan both warning of increasing price pressure and pressure on the broader economy. Blarina, you're Richie a t rou price writing. The FED outlook is now a fork in the road. The most likely outcome is the fed stays
on hold for the next twelve months. Blarina joins us now for more Now, Blarina, if that's the most likely outlook twelve months on hold, where's inflation and how easy is the Federal Reserve getting in the meantime, it's a very good question.
The art look for inflation has become much more uncertain that it was, let's say, three or six months ago, and I think that's what is driving that fork on the road language for me, in the sense that we have some structural things building up in the inflation pipeline, including the AI story, which you discussed with your guests
earlier in the show. We don't know how much of that AI price boost is actually going to feed to consumer prices, but the risks are to the upside clearly, at least in the near term, and that's the narrative that the market is prepared for. We also have a story from China where for the last two years, China PPI has been trending lower. It's been helping with this inflation in the goods sector globally, not just the US. But now we're hearing anecdotal evidence from companies in China
for raising prices. Again, it's a question how much of that does get feed through to consumer prices, but it does present upside risks. And then you have the energy price shock where we're seeing first round effects into energy services and at the pump we might see airfares increasing again. But in this environment where companies are used to passing through prices to consumers, are we going to get second round effects spillovers into core goods and services inflation this year?
And a lot of that has to do with how much higher is the oil curve going to be from here? And this headline news on the conflict with Iran? Are they going to lead to a resolution of the conflict and the oil traveling freely through the strait of Hormus? So where is inflation going to be over the next twelve months? I'm afraid it's very uncertain and it does feel like a binary outcome whether we move towards two percent or we stay at three percent or both higher.
And in those scenarios, I could see a path for the FAT cutting interest rates. They could start in December or January of next year, or I could see path where the Fed could actually have to hike interest rates even sooner than the market has currently priced.
There's a lot to unpack there blorin now. I'm just curious how much of the inflationary story truly is oil. Oil prices today WTI down some six percent and just fluctuating on that level. After some headlines came out. People are looking for this conflict to end. How much does that relieve the bulk of the inflationary pressures that have led to a lot of the upside surprises.
So I would separate the oil story with a core inflation pressure story. Here we have seen a big build up in energy prices because of the oil shock. I don't think we have seen that spilling over to core services besides airfares yet, or to core goods prices. So a resolution of the conflict, an oil price is coming down, I think it's going to be great news for headline inflation, and then it leaves a little bit intact the progress on core inflation that I had expected before the war
in the second half of the year. So I think that oil story is really key for the path for core inflation in the second half, but also for core inflation expectations.
The good news.
So far is that when you look at diffusion indices, the ISMS and pmis and the regional PMIS. We have seen a spike in input costs, especially from energy and other raw materials. What companies are reporting is that they don't plan to pass through much of that yet, maybe twenty to thirty percent of those cost increases. And that's
good news, I think for core inflation. But if that dynamic were to change because the war is lasting longer and oil prices increase from here, I think we could be looking at a different story.
This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, angiopolitics. 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 Bloeberg Terminal and the Bloomberg Business Amp.