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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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.
And we begin this hour with stocks rising as risk appetite returns after a stretch of volatility. Amy Silverman of RBC Capital Markets writing, there's actually a lot more hedging. There's a lot more demand for hedging than is currently priced into the market. The risk of missing out is almost worse than the risk of a drawdown. And I'm pleased to say that. Amy joins us now and Amy. Matt and I were talking to you about a week ago, in the midst of some of this downturn in the market.
You were talking about the shadow hedges, the desire for hedges, and the places people were turning to get them. How has that evolved over the past week as markets have recovered.
I think part of the problem that I had described was this idea that there is actually a lot of concern about the fragility of a lot of the trades because they're not only related to AI, they're related to the concentration risk that you see in the mag seven.
But obviously this year it's been much more about that upcrash being something that investors have to be concerned about, that fear of missing out, And so when you do get the down days, you get a little bit more pile on and you do see that in the SKW in the market, meaning that downside demand remains quite sticky. Even when you reverse the market moves and you have more updates, that SKEW hasn't quite changed as much, because again, that fragility is at top of investors' minds.
What about the treatment of tech amy because before it was a market that was pricing in all the AI winners all be that that they would all be winners.
Things have started to change.
We're looking at another day of Nvidia losing in the pre market and Alphabet gaining. Has the treatment of these stocks shifted? Has that narrative and the way we price it in started to move.
Yeah, and I think to some degree that actually might be a good thing. So one thing we look at isn't just inter stock market dispersion, but obviously inter mag seven dispersion. And so you know, on a day where you have Nvidia going down but Google going up, and obviously that story is tied to each other, then it becomes maybe something that's also more diversified, because one of the biggest concerns has been if correlation rises because it's
all one big trade, it's quite incestuous. That fragility is not good for the market, even in a time when things are going up. So if it is the case that one is more of a diversifier for the other and you don't get that spiking correlation, I know, for our investor base when they're thinking about weltility and hedging, that is a big component in the market market structure that you know, it's very key for how they diversify the portfolio.
Don't we necessarily have less correlation now among the mag seven? Right, they were all working together, investing in each other. It was a very incestuous circular.
Economy.
And now you've got one against the other. It seems like it would reduce correlation and maybe even reduce concentration risk.
Yeah, exactly exactly, Matt. So it's that diversifier aspect that is important. I mean, I think the thing is there's still that incestuousness hasn't fully gone away, you know, and that's not just in terms of what kapax investments are, but obviously there's issues on the credit side as well that investors are watching for. So I don't think, you know,
this alleviates the whole picture. But I actually think even though it's like Google is going up in videos going down, the way that investors are thinking about it is we at least my implied correlation on the intermag seven is something that could be a diversifier. So this whole market isn't all reaching at once.
Amy.
How strong does the retail bid look to you right now? Because we finally had more than five percent draw down, just barely, but it happened from peak to trough last week. Our retailer is going to continue to be buying the dip. Is that still a huge presence in this market?
So it has wane and you've seen that in some of the sentiment markers, Matt. But it is something that you know, we're watching very closely because I think one thing we've talked about is the reason that investors have that institutional misters, just to be clear, have been afraid of, you know, really piling it on hedges. That's why we call it shadow hedging, is that retail bid has continued
to stay in the market. Now there are these extraneous forces, so for instance, how cryptocurrency is doing, how other factors are doing that are actually quite correlated to that retail bid. So we are watching those extraneous factors closely as well, because it is interesting to see when you you know, like crypto is always supposed to be this hedge asset that in reality is a risk asset, and then it's also very correlated to that bit that you see in
n ASTEC. So I think those things, even though they're not directly tied into the stock market, are very important as factors for sentiment amy.
In terms of finding other places to hedge, there was a goldmn Socks report about what hedge funds are shorting, and one of them that's at historic levels, albeit at a relatively low level, is utilities two point three percent of free float. Again, that doesn't sound terribly exciting, but that is the most in history. I wonder if that could be interpreted as a hedge for AI given the close proximity and the correlations we've been talking about, And if it is a hedge, does that make sense as one?
Yeah, I think it does. You know, when you think about what everything comes down to and what could be the bottleneck for large parts of the AI trade, it's just getting enough compute right, and that has implications not just for the United States, but if you think kind of bigger, it's also geo politically, the race that is going on right now between China and the United States. Again, it's that ability to do compute and what bottlenecks happen.
The only issue I see when you think about doing it through utilities is one, there's just not that much market cap relative to other sectors. And two you know that liquidity is traditionally not as I guess free flowing as other sectors. So if that you think about that as your hedge, I don't know if that is the cleanest that you could have versus you know, outright owning something.
As a hedge in AI underliars.
Stay with US multile impex savanas. Coming up off to this.
Joining US now is Wendy Schiller, directman of the Tomman Institute for American Politics and Policy at Brown University. Wendy, these negotiations as they're happening in the background, we're getting deer earnings that look really poor because of suffering consumer confidence, that plunging elections, That affordability was at the forefront. How is this coloring the administration's approach as it talks to President Sheet as it negotiates with Europe in trade deals?
Hello, Donnie, I think that the President's got to balance his international clout in delivering for the domestic US political market, economically and politically, and he's getting so much pressure on all fronts, and it's now reflected in his poll numbers. On the economy, Republicans typically have an advantage managing the economy.
They still have an advantage.
Over the Democrats on managing the economy, but the President Trump's managing of the economy have flipped.
They were more confident now he's underwater.
In particular, there's also some dynamics of the midterms in twenty six Iowa, for example, big farm state relies on exports.
They have a Senate race, and that.
Senate race looked you know, maybe i was gone red, but now it looks like Iowa.
The winds are change a little bit there.
They've got a strong contender on the Democratic side, and we'll see who emerges on the Republican side.
And that's something that's concerning the Senate.
John fun in particular, has really been in the President's ear on agriculture, exports and China. An understanding that this doesn't just affect President Trump now, it could affect the standing of the Republicans in the Senate in twenty six.
Yeah, for sure.
I mean, we see that farmers don't have enough money to order more John Deere equipment. They lowered their profit forecasts for next year.
We have seen already.
Automakers that have had to put production on hold because they're not getting enough rare earths. And then President Trump has this call with si in which the Chinese call out Taiwan as a major sticking point. It's not even in the US President's readout, making it look like we're downplaying the important Taiwan issue in order to appease the Chinese.
Are we losing this trade war.
Well, Matt, I mean at the moment the American peak, as evidenced by a number of different polls across different polling companies that sort of tilt one way or the other politically, that the American public things we are that the tariffs are now being blamed for affordability, high prices, layoffs. And this is something I think the Jouman Institution did not anticipate when.
He forged the sort of mantra that he was going.
To stick up for America, get a better deal, negotiate a better deal, and bring manufacturing home.
But every economist with a pulse warned the president about this.
Well, Donald Trump marches to his own tune, his own drummer, and he will emerge claiming credit for deals. China did agree to buy more soybeans about a month ago after John.
Fune pleaded with the President on this, But it still looks like we're gonna have to pay out subsidies to the farmers from the US Treasury to.
Make up for these losses, and the President pivots, as we know all the time.
The question is.
How will the Republicans in Congress treat this going into the midterms in twenty six because American public is starting to blame the Republican Party and that's bad for them. So how effective are they in persuading Donald Trump to maybe renegotiate deals.
But right now it looks like China is still driving the bus on this and.
Affecting because of our geopolitics in the United States, how we elect people, which states are important.
You know, they understand that.
In China, they understand which markets are ware and how that affects our politics.
And twenty six looms really.
Large is is the president too focused on international relations when you know, we need someone to deal with the problem of skyrocketing health costs here. Apparently they're going to lay out another two year extension to these really inefficient ACA subsidies, which the Republicans really wanted to avoid, but now it looks like we're just going to keep, you know, paying these bills.
Well, Matt, I mean every president of this, you know, when things are going a little bit south domestically, every president turns the page towards foreign relations.
It's not a partisan thing, it's not a Trump thing. But this is what I'm watching. I'm watching.
Will the Republicans, particularly in the House, come with the President. He clearly wants to sign an extension of these tax subsidies. He doesn't want to have millions of people who can't afford health insurance on his watch next year.
That's what he wants to avoid.
But the House is making noises that they don't want to do it, that they are uncomfortable doing it. Does he still have the same sway with the House GOP that he has appeared to have all year long.
That's what I'm watching over the next couple of weeks in into.
January, stay with us multple imperg Savannah's coming up off to this.
Barbara Duran of BD eight Capital Partners, writing for now, the AI play is still the place to be. Avoid small cap staples, stick to quality large cap secular growers over six and Barbarrown please to say it joins us now.
Really wonderful to see you this morning. Nice to see you, Danny.
I'm interested by the fact you're not looking at cyclicals right now or small caps, especially since there's this hope that we're going to get fed cuts, maybe you add in fiscal stimulus and there's this reignition.
Why are you still ignoring those sectors.
Well, I think the FED cut that we may have one more now, but the economy has been doing fine without aggressive FED cuts, so that we've had about one and a half percentage points in the last fourteen months. But we've seen a number of false starts in terms of cyclicals and the small caps. And I see the small caps really as a trade because even with rates coming down a little bit, you still have forty percent of the russel two thousand don't make money.
They have much higher cost of capital.
Than return on investment typically, and unless rates come down significantly on the long end, I don't see them being helped. So I see that a's continuing as a trade. And in cyclicals, I think you have to be very selective. And industrials, for instance, I mean you want to be I think doing industrials that are play on the AI build out and infrastructure, automation, robotics, that sort of thing. But it's hard to see a big reignition here of
the economy. I think we're in for good growth, decent growth, and certainly we've seen that with the forward earnings guidance from the companies who just reported a great quarter and certainly do have the big beautiful tax bill, you know, the incentives coming there for CAPEX, and also bank de regulation which should free up more capital to lend and spend.
So next year is setting up nicely.
I'm kind of confused why that's kind of like a muddling along versus a growth reognition, because all of those do seem like powerful forces.
Barbara, Yeah, well, I think it is muddling long.
And we've seen this, you know, this year, even with high supposedly high interest rates that are quote restrictive.
You've seen the economy do okay. And the earnings.
We just had the ninth quarter in a row where earnings were up. In fact, they were better than expected, some thirteen plus percent versus eight percent expected, you know, but it's still you know, we talked about AI. That
is still the driver. I mean, if you look at what the MAG seven did in earnings x Meta, I take Meta out of the mix because they had a six team billion dollars one time charge, right, But looking at that the overall MAGS seven, we're up thirty percent, you know, in in aggregate earnings, and that's versus a twenty eight plus percent for the last four quarters.
So that's still the driver here.
I wonder about the massive capex plans that these companies have you mentioned meta right, they want to spend I think one hundred billion dollars next year. Is that depreciation scary? As Michael Burry warns us about the fact that they're going to buy all these chips which may be worth you know, twenty percent less the moment they drive them off the lot.
Yeah, I mean the depreciation.
What's what I really keep my eye on is the demand, you know, and if you're looking at very credible sources, you know see this market data infrastructure, data center infrastructure going five times what it is now, So that really speaks to the demand that's out there. So I mean he's arguing about what are the real earnings this and that, But to me, it's really what's the demand, what's the revenue potential? And that is very real. I mean, just
saw an acceleration there. I think that continues. We are still in the early stages of this AI. So the concern about you know, we're in a bubble, there's too much money being spent.
I don't think at all.
You're going to see increasing usage of AI as it gets developed.
When do we get that revenue because I you know, started this job covering tech companies as Cisco was, you know, the the darling of the market, and we were spending as much as we could to lay fiber for the Internet in the late nineties early two thousands, and lo and behold, the revenue didn't come quickly enough. Cisco fell and only now, like last week, have you made money on Cisco if you bought it in nineteen ninety nine or two thousand.
No, that's true.
And I think so much though, is about the timing, you know, because some of the great tech companies in the past you had great long runs and made a lot of money. But all things do come to an end. There's innovation, you know, there's markets mature. I think the AI play this is so big and what we're seeing. I always mentioned Meta as the poster child, you know for what's happy in AI. They have been very early on applying it to their own business. Then you've seen
the results very quickly. They even increase their user base, the engagement is up. They've really increased their improved their ad targeting, so they've improved more dollars and you've got very early penetration. AI is still you've heard it from Palo Alto last week. They talked about it in their AI security. It's still scaling up because their customers and big enterprises are still figuring out how they're going to you know, what AI they need and how they're.
Going to apply it.
So this is going to be You're going to see these increases in productivity over the next year or two. Exact timing hard to know, but it will just increase. I mean, look at chat GPT. I don't know about you all, but I use it all the time, and I increase my usage as I discover more things. And they have six hundred million users a week, and so this is really still and I talked to most of
my friends. They're like, yeah, I should try it. There's still so much more to come, both consumer and enterprise.
It definitely feels like something we're waiting for, right Like, when do the other companies benefit from productivity? I was looking at a Brooking study that was published recently. We're only nineteen percent of their respond in said that AI increase their productivity. Only four percent said it significantly increased productivity. Roberts your point, we're still trying to figure this out. So as you're looking for who benefits from AI, who can use it, where does productivity come from?
Is it just too early to say? I think it is. I think it is.
I think we see different companies that are benefiting. But I think over the next twelve to eighteen months there's going to be some dramatic stories to be told about the improvements. And you look at we're early on autonomous driving, we're early on the deployment of robotics. I mean, for instance, you know, you've got Amazon, you know has a million robots out there, and so they're very early on the curve, but a lot of people are not. And so those
are things that over the next year. And again it's about competition. That's where we're seeing so much spending going to this because people know, I've got to do that. When you see people like Meta or Amazon who are already early users of all this and the productivity gains they are seeing. As a company management, we've got to do it too, and that requires spending up front.
Isn't there a chance though, that they go too far with that spending and at some point it no longer gets rewarded by the market. You're already starting to see that in some of the hyper scalers, right, does that continue on?
There's always that concern, and I think it's a legitimate concern because at some point you can and this is think in a capitalist economy, you know, you don't have central planning, so everybody's rushing, you know, to go up to the profitability typical margins come down. But I think where we are, the demand is so explosive. It's not a six to nine month phenomenon. So at some point
that will be a factor. Right now, you know, as far as the eye can see, you've just got this demand, this virtuous circle that will just keep going and going. But it is something you always have to watch. We know that the lifespan of industry is what happens. You attract players, they all want to make money, and eventually you can overbuild. I don't think it's like fiber though, you know, fiber was much more limited. That was a very specific application and very prone to being overbuilt.
This is just yeah, so much.
At the end of the day, data centers are just like empty boxes. Those can't really be used for anything else besides data centers, at least on the infrastructure side, there's a chance we overbuild.
Now you could mind bitcoin, Yes, so true, but.
That is that is a place that it feels like we could go too far, and a lot of money has been put into that.
Yeah, no, it is. It is real estate. In the end, you know what's going on there. But at the moment, again, well everybody's watching that. It's like we're watching private credit. You know, in terms of possible systemic risk, it's not there yet, you know, and so you just still make a lot of money.
And that's what we're going to continue to have these frights.
Like you know, I remember the years when Amazon made no money and they kept reinvesting, reinvesting, and at least once a year investors will throw up their hands and say they will never make money and they sell the stock off. Well, we now know how that story has ended. And I think we're going to continue to see these concerns with AI and the legitimate concerns.
I just think it's way early, Barbara.
Where do you an investor who already has exposure to the megacap hyperscalers, an investor who already has exposure to energy, where do you put new money?
Yeah, it's a pro because you know, in terms of because you will have new companies starting new applications and all that sort of things. So a lot of people. You can look at the food chain, you know, it goes into energy. Like you look at a company like g i Vernova, very expensive, they have great backlog, but they can only build so fast.
So where do you put the money there?
You can look at the suppliers and the components and all that sort of thing. But for now, you know, it's not only the hyperscalers, it's the broad comes of the world. I mean, you saw it Broadcome did with the announcement that Alphabet, you know, is going to be selling their TPUs, which are basically a six you know, customer customer chips to their customers, and so you still a lot more to go there, and you're going to have these kinds of announcements you know, going on, and
so that will change. Look at Alphabet, you know it is, you know, outperformed, and just earlier this year it was a laggard. They had any trust problems. People are like, oh, they're gonna be left behind in the AI And now look at it, it's like, oh, the darling, the star of the show.
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