Bloomberg Audio Studios, Podcasts, radio News.
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. As we stick with
the markets, let's stay with the US. David Kelly of JP Morgan writing, many investors should likely consider diversifying their portfolios by adding alternative assets and international equacies. David joins us now for more. David, Welcome to the program, sir. Let's get to that statement. Give us the why why, because we've.
Got a tortoise of an economy and the heir of a market. I mean, if if you look at the sentiment, is this practically you know, submarine sentiment. People feel absolutely miserable about this economy, and I think that's overstated. But if you look at the economy, itself. We're slowing down to a crawl in the fourth quarter. We're going to pick up a bit next year, but I think it's going to be less than two percent real GDP growth.
But meanwhile, we've got this extraordinary stock market. We've got very high corporate margins, and on top of that, we've got price earnings ratios which are close to the dot com bubble peaks. And when I look at that, it is out of whack. And so people should do everything they can to diversify their portfolios. They've drifted into being very overweight large cap us equities, and so I think they need to row against the tide and add other assets which are.
Just not that expensive.
David, that's the struggle, because the nights we're talking about abandoning Nvidia, Microsoft, Amazon, Meta Alphabet, these have delivered fantastic gains AMD, Broadcom on any given day, up ten to fifteen percent. David, you really want to give that up?
Well, there are two things.
First of all, you got you've got to be taxed smart about this, so you should use new cash stuff that you don't have to pay capital gainst tax on to try and rebalance the portfolio. But second, if you go back to the dot com bubble and there are you know, growing echoes of that and what we're seeing here. You know, every company was not a winner. There were some great companies which exist today and which are leaders today, which were leaders back then, but there are other there
are many other companies, more companies who disappeared then. So I think people just have to be very careful about valuations company by company here, and it's you know, I just think that we that everybody is essentially overweight the most expensive part of global capital markets right now.
So where should where do you suggest they should be looking?
Well, the first thing is that US investors are chronically underweight the rest of the world. And one of the things we've seen so far this year is that dollar has been coming down, and we know that the FED is very likely to cut the end of this month and probably cut again and just keep cutting even though the economy is moving forward now. The European Central Bank is not going to be that dubbish. I don't think
the Bank of England's going to be that dubbish. The Bank of Japan's going to be raising rates, so all that tends to push the dollar down. So we think the dollar will fall, and what we've seen in the past, and we show this in our Guide to the Markets, if you have a long period of dollar weakness, you also get a long period of international equity.
Out of performance.
And so I think that's the first place I would go, is you know, why do I only have five percent or ten percent or zero percent of my equity money in international's That's the first place I go. And then the second thing is just alternatives. Alternatives in general have not runied as much as these sparkly, champagne filled public markets in the last three years, and that does leave some opportunities there.
David, though, when you think about international, do you have any pause or concern in terms of what we're seeing in terms of the rhetoric out of Washington and potentially companies and countries that can get caught up in this trade war between China and the United States.
Well, yeah, I think you've got a look company by a company, But ultimately the rest of the world collectively is economically stronger than the United States is. So if you pick a fight with every kid in the playground, you know you may have a problem here. I think what's happening is a lot of countries are trying to find ways of operating outside of the US sphere of influence. So I think what you will see is over time
other countries. First of all, they're doing more physical spending and places like Europe.
I think in China they.
Are very aggressively building up their technology base so they don't have to rely as much in US technology.
So I'd want to have a bed outside the US.
I realize that what the US is doing is not helping them, but it's not helping us either.
Well, David, let's talk about Europe. So European banks around by fifty eight percent, so father share, and the ACP is projecting growth for twenty twenty six of one percent. Now, if the US economy is a tour soyce and the market is the hair, what an earth kind of an animal is Europe right now? With the economy basically stagnant and the equity market rip in, Well.
Europe is a bit of a tortis.
But remember you don't you could first, you know, population growth in Europe, so on a per capita basis, it's not quite quite that bad. But these these these companies, you know, the banking industry in Europe has been very cheap for a long time, so I think that I think the the rally that we're seeing in European financials
makes sense. But I think you also just go company by company and you know, also recognize that the Euro is I think, very undervalued and if the Euro goes up in value, and every time the Euro goes up five percent, your European stocks are going to go up five percent.
So it's a lot of the games.
We've seen in European equities so far this year have been because of a rising euro, and we think that that trend has gone a long way to play out.
The pushback I think we're getting around Europe at the moment, David, and I'd love your input on this is when it comes to the major theme at the moment supporting both the economy and the market, which is ai the Europe's in no man's land that they barely have any competitors on the tech front, and when it comes to the energy needed to supply it, they're trapped by the left of the green lobby and can't do any to think in response, David, what can they do to break out of that?
Do you see any sign.
Of that happening.
Well, yeah, they're not. They're not leading this charge right now. I think that. I think that's true.
You know, it still doesn't doesn't mean you should avoid individual European companies. And remember this, you know, in the US there's a tremendous investment going on in AI.
There's not quite as much.
Cash flow coming in from genuine users at the at the at the end, and people are getting real value out of AI. So it's quite possible the capital spending cars will get ahead of the sort of income horse
in AI in the US anyway. And also we have to sort of look at this over time, you know, is AI really going to be a technology that you can sort of fence in the way that for example, you know, Apple was able to fence in hardware and just you know and make money out of hardware for forever or Microsoft or Meta.
So it's not it's not clear in AI space who.
The ultimate winners are going to be this a Is this a technology that really there will be one winner today, it's going to be the same winter ten years out or will it mutate over time? And will that give an opportunity to to companies aren't necessarily needing the charge here, but are able to catch up.
Stay with us. More Bloomberg surveillance coming up after this, Let's stick with the Federal Reserve. Tifnitey want to pimicat rights. In the following chem and Pal's comments were consistent with our expectations that they FED will cut rates again. And the October f WEBC meeting, tifnany joined us now for more TIFNIC Good morning. So that's October. How much visibility do you have beyond October?
Yeah, well, I mean, I definitely think there's going to be more discussion around the December meeting, and it does seem like October at this point is is another cut, you know, and I think part of it will see will be looking at the data that the government has
not been able to issue since the government closure. And I think the concern actually is that the longer the government stays shut within October, there's not an obvious catalyst for it to reopen like there has been in the past, a date that you could have major issues around collections and Octobers as the BLS field workers literally just can't collect the survey, so you could have an October where we, you know, we it's not about a delay in the data,
but a skip and you know, and that's going to be, you know, a difficult situation for the FED come the December meeting. And I think it's going to make you know, their job even even harder, Tiffany.
But how uncomfortable is it going to be for the FED to cut with potentially not having the latest labor market report but having a CPI report that estimates are showing a hot print.
Yeah, I mean so I think that they'll, you know, they they'll look at, obviously, look at a wide range of data. We have gotten other private indicators of labor markets, the ADP data in particular, which has been you know, very consistent I think with the signals that we've gotten
from the official the BLS data. The labor market activity has has slowed quite dramatically, you know, and as Mike Mhee discussed, there's definitely supply and demand factors that are slowing that We've seen immigration policies that have reduced labor force potentially even reduced labor force supply certainly slowed the
growth of it. But on top of that, though, you know, you've also had these trade policies, tariff policies that are increasing costs across industries, making it a very challenging environment for some industries to work in, and that is resulting in a reduction in labor demand as well. So at the current point we've seen a reduction in both. Of course, the Federal Reserve is worried about the downside risk to you know, to employment, and so I think, you know,
that's that's the consideration going into October. You know, certainly we will continue to see some inflation reports that are above above the Central Banks target as you get additional price adjustments, but you know, it does look like that that's relatively contained, that is, you know, and that will wear off eventually.
The impact of terrorsts will that become a bigger story in December. Given a lot of companies even during this earning seasons, we're talking about the fact that they were able to bear the brunt of it, but at some point they're going to have to pass on the cost to consumers.
Yeah, I mean, and I do think that as you know, the the thing about uncertainty is, and we've had elevated policy uncertainty is that you don't really want to make any adjustment to your business because you don't know, you know, you don't know the sort of rules of the game, if you will, you don't know what the policies will be.
But as companies become more certain that the tear iff policies are here to stay, then that means they need to make the adjustments that that they maybe have been holding off on to kind of see how this shakes out, you know, And I think companies have you know, various ways that that they can react to this, and within industries, they'll be competitive forces that they'll have to deal with.
And you know, that's been one reason that we think that you know, the price adjustment piece of this might might not be you know, where the full adjustment lies. And it does look like when we look like across a range of data that the labor markets and companies you know, trying to manage costs, and labor costs in particular is also being part of the adjustment here as well. So if you have larger companies that can hold down prices, they can afford to do so, you know, then that's
a really tough operating environment for everyone else. They're going to have to cut costs, They're going to have to cut labor in order to you know, to continue to manage in that environment.
Given the some of the forces you described, Tiffany to write cuts help.
So, you know, the Federal Reserve would still characterize their policy as being restrictive in restrictive territory, you know. And I think when you look at investment trends excluding AI, they are quite you know, quite stagnant, maybe even contractionary. You know, that's both business investment XAI as well as residential investment. Just looking at that alone would suggest to you that that interest rates, you know, are in restrictive territory.
So I think the Federal Reserve would say, just given the balance of risks, moving back to a more normal stance, more neutral stance at least is a very reasonable policy. And that's what we think they're doing.
Of course, there's some debate about what neutral is definitely, and it's a wide range of estimates. Where are you and where do you think the Fed ultimately is?
Yeah, I mean we think, you know, we we've sort of argued that on a real basis, you know, kind of a zero to one percent these things are very uncertain, as you suggest, is zero to one percent, So that kind of suggests you know, you know, you to three percent real neutral interest rate. We think that that could be higher within the band. There are various factors that have contributed to you know, a potentially higher a slightly higher neutral rate within that band over over the last
you know, number of years, you know. But but ultimately that's going to be something that the Federal Reserve has to figure out. And you know, as they adjust policy slowly, they will get indications from the economy and as they're
cutting interest rates. If they see the economies, you know, reaccelerating and inflation is stickier than they expected, you know, then you know, they can stop, they can continue, you know, they can pause, see what happens, and they'll kind of get more they'll they'll sort of feel their way to neutral, if you will, and get more information.
You know.
One one other thing just to note as well, is that fiscal policy in the US. We will get you know, more of the benefits from the offsetting tax cuts in the One Big Beautiful Bill Act in twenty twenty six. So that's something else that the Federal Reserve is going to have to navigate that could be that could be tree as well.
Stay with us more Bloomberg surveillance coming up after this, Gloria at Day Davison joined us Now for more, GIL, Welcome to the program sir and Video center stage. In the last five minutes, big upgrade from HSBC Big Price Target to Street High three twenty GIL. When you think about things regarding in video, is it still the only game.
In time town?
Or does AMD provide a bit of an alternative?
And Vidia is not the only game in town but will continue to be the main game in town. All of its customers are trying to diversify. They've been trying to diversify, but it's hard because in Vidia continues to introduce product at such a fast pace that it's very hard for other products to even be comparable. Which is to say, Google especially and some extent Amazon are going
to increasingly use their chips more. That's Broadcom, and then all of these customers Microsoft, Amazon, Google, Meta Xai are going to have some AMD componentry just because they want to have diversification. But unless the AMD chips catch up in performance next year ten videos chips, that is going
to be a small proportion one way or another. Even if AMDs chips are great and Broadcom continues to generate a lot of good ask chips, the custom chips for these customers, and Video will continue to have overwhelming share of this market for a while longer.
These companies continue to chug along. Stock price is higher. We're seeing upgrades likes this morning of HSBC at the same time where their rhetoric between China and the United States is really heating up. How are they going to get potentially caught in the crosshairs between Washington and Beijing.
They already have fact has missed its last two quarterly reports because of China. China is somewhat out of the numbers. It's not completely out of the numbers, but it's somewhat out of the numbers. And unless the US and China can arrive at some sort of broader framework for an agreement, and Vidia's sales into China are going to be very much impacted for a while longer. And as long as that's happening. They have been all year, and it's been
on Dragon. Nvidia already having said that the market is growing so fast right now that Nvidia can probably live up to expectations without significant contribution from China. If China does come back, which it may not, Nvidia can do even better. But the demand right now is so big that in Nvidia can probably do okay, even if the demand from China is limited.
Who can't do as well as in video? If the demand from China is limited.
It would Video more than any other company, but also AMD and Broadcom and much of the rest of the ecosystem that sells into China will be impacted and long term, whether or not there's a full decoupling from China, we're already well on our way to having a much different supply chain than we had even a couple of years ago. You are just having a conversation about the fact that we're going to have to build a lot more of the supply chain in the United States. It's going to
be a long process. It's very complicated. It goes well beyond Intel and TSMC. It goes through their whole supply chain that we will be gradually moving into the US and into other countries that are not China and not Taiwan in order to make the supply chain more of US. It's a matter of national security, and one way or another, we're having some level of decoupling from China. Whether both
sides agree to that or not. Companies are all ready the understanding that there's never going to be stability in this relationship, so they need to diversify.
Stay with us more Bloomberg surveillance coming up after this stops finding a firmer footing as big bank results to roll in Steve author federated right to the following. It is possible that many companies will fail to be whisper numbers of bigger than expected beats. This could cause some modest pullbacks for the stock market and for the market generally. Steven joins us now for more. Steve've got to see
a second morning. Good morning, thanks for being here, you said earlier this year, tie us after the mouse, close your eyes, shut out the noise, and just keep moving forward with the ship because it's going to be okay.
That's still the approach.
Yeah, we actually just said, are at this time of the year where we said our two year target. We have a one year target also, but I like our clients to think forward a little bit for that's kind of our and we've got a two year target on the S and P of eighty six hundred, and we don't think it's unrealistic. You get there, you have a GDP that's reaccelerating next year. You've got multiple drivers of
that that we've talked about extensively. You have an AI industrial revolution going on that we think is very very real and importantly, and this is a key element of our forecast, is we have margins expanding on the S and P. And you know, most people at this time of the year tell us that we're at peak margins.
How many times have we heard that? So I had my guys go back and check this.
We have relentlessly expanded margins on the S and P. Okay one or two years, you might dip a little bit, but the trend has been higher every year, and we think that's a combination of the mix of the S and P shifting towards higher margin, higher cash flow, lower asset businesses that just have higher margins and productivity enhancements which are increasing, partly due to policy and partly due to AI. So when you add that all together, it's pretty realistic, frankly, to see.
Earnings on the S and P by twenty eight.
Which is where we'll be looking at in twenty seven, getting close to four hundred dollars this year.
So it's been about of the multiple when you describe the mixshift, what kind of multiple does that mixshift warrant.
So this is another heuristic that we've been talking about on this show for a while now, but that really I think fails people.
The heuristic is, oh, a fair multiple.
For stocks is eighteen times and in a three percent inflation environment. That's roughly been the case over a long period of time, but that's when the S and P was largely an industrial and financial index.
If you adjust for the mixshift of the.
S and P over the last five years where it's now largely a tech indux, these are businesses with high cash flow, high return on investment. They're clearly mathematically worth a higher multiple of earnings, and when you adjust for that dynamic, we think the right multiple in the S and P is about twenty two times. So we would
say it's fairly too cheaply valued right here. So we're using eighteen for the everything else, and we're using twenty five to twenty eight for the MAC seven if you will, and we get to a fear multiple of twenty two. So I think those two things are what make us more optimistic, and I think they're actually quite realistic.
I just want to say this up front that they finally statement are not my words. It's John Stonefis of Oppenheimer. He said the boomer mentality was holding people back and keeping them out of the market because of what you just said. Is that what you're confronting on a daily basis with investors.
Yeah, I mean so many investors.
You know.
This is there's one reason why we've been talking about a secular bull market. You buy a secular ball, I mean a market that does ten x over twenty to thirty years, you get only one a generation.
I mean we've only had two up to now. We're in the third one.
I'm counting the move from off the Great Depression lows we had a twenty year run, then the move off the seventy three seventy four crisis and which ended in ninety nine, and then in twenty thirteen, once we broke through the old highs, we've started this new secular bull. And one thing you always need to have is you need some sort of an industrial revolution happening.
We've got that.
And two you need to have people have nearly lost their shirt in a historic way as the base, because that creates the wall of worry.
That's very hard. And you mentioned it the boomers.
A lot of boomers got almost white doubt in seven o eight.
It was scary that condition by that, Yeah.
And then you have you know, that's why you have these corrections along the way that just reinforced that fear. I mean, look what happened in late March early April. Even Wall Street was running for the exits and a lot of people raised cash. And now we've got this wall of cash. Everyone is very anxious to get back in. They've realized they're wrong, but they don't really want to say it. And that's why the corrections I think. I mean, we've had a thirty percent move here without a five
percent correction. That's like almost unprecedented over six months. So you know, we're feeling that there probably should be some kind of a pullback. My guess is it'll be lighter than you think, because you know, because so many people are anxious to get back in. And we put out a piece this week that listed six ways you could get a pullback, and you know, thinking through each of them, and you know, some are obvious, like you know, the FED shut down goes longer than thought, but a lot
of them are self correcting. I mean, you know, if the government shut down goes much longer, the pain on either side is going to be so high that you know they're going to have to come back to the table.
You know.
The ones that I think could be more serious are China. I you know, I think frankly, the comeback this morning on cooking oil was actually an attempt to de escalate because cooking oil is not really important to China, so in a way, they kind of pulled it a thing there that's like saying, hey, by the way, we do have other things too, but let's try to de escalate this talk. But I think his she's use of his one real ace, which is rare earth, I think that
was a mistake on his part. I think even the Europeans are thinking, well, we have to figure out another way. You know, we got to we got to detach ourselves from these guys, and you know it's going to take time, so we'll have some sort of interim deal at least, but we're probably on a program to get out of that. We can't have China controlling the rare earth production.
So you know, if this is your case about the potential choke points to the one big beautiful world in your piece and trade you think potentially is going to offer the biggest headache from now on, Chill when these two individuals meet. Is that going to be an opportunity for a catalyst for these people that are sitting on cash to get back into the market.
Well, I kind of we're seeing that, right am, Marie. I mean we had to pull back on Friday again on Tuesday, and money just keeps coming back in.
So we'll see, you know. I think if they come away.
At the end of this month with a kind of divorce, which I think is highly unlikely, but if they do, then then we.
Could have a more serious correction.
If you're so nervous about China's hold on rare earths and they're dictating what they're going to basically be able to export the rest of the world. Do you think the US is doing is having the right approach by buying getting it, having equity stakes in companies that are important for national security?
Yeah, yeah, he is. It distorts capitalism.
Well, I'll distort capitalism in this case because we need to have rare earths, right, And what happened, what Trump understands is the Chinese were subsidizing rare earth production and they drove the US and European rare earth producers out of the market. Basically, they underpriced the market and drove
them out of business. So if it's such an important element of almost everything in the economy, including our military, I think it's the right call here to say, Look, whatever is the Chinese are going to do, We're going to support production of this key element of what it takes to because otherwise you're in a real vice gript.
Free markets and open trade only works if everyone embraces free markets and open trade, and China over the last few decades did not do that, which is why you've seen the Republican shift in the last five ten years. They went into sacrifice elements of capitalism at the ultar of national security. I think President Trump has led the way on.
There, and Steve is exactly right. The big issue, of course, is what it means for the supply chain to the US Defense Department. Almost every single weapon has these rare earths in them, and that is why it is a challenge when China has ninety percent of the market.
There's a few contradictions that kind of make me laugh. But one of them is the auto market over in China. People would say that tariffs don't work, they'll be the same people that celebrate the auto market over in China.
You know, just try and.
BMW twenty years ago into China.
Impossible.
They were all pushed to go in there and produce there, and everyone's celebrating the auto market in China. That's quite a contradiction, isn't it.
Yeah.
And what we're thinking and looking at here, Jonathan, is we're thinking that post the settlement of this, let's call it the near term plan for these economies to detach, which will take three to five years, which companies have major exposures to China, and you know that how is
that going to play out? And that I think it's not a surprise that you see Apple today making a big investment in China because they they're one of the companies in the S and P big ones that have major China exposure, Tesla being another one as an example. So they're going to have to play both worlds tackles China investments. I can sure you are not to export from China. They're to keep a Chinese market. They need it for their revenue base, so and you know that's
possibly a viable option. But this is going to be one of the things they're going to have to sort out here is who really depends on China like, because that's going to be I think that market is going to be kind of increasingly separated from the rest of the world. I think it's partly I think even the Europeans kind of woke up over the weekend and.
She pulled this.
Yep, took long enough. This ace.
You know that he thought, well, let me play this card. See and Trump's known he's had that card. That's why he's after Greenland, so you know, he didn't need to do that to make it.
But I think I think it was a mistake.
I don't know.
I'm not you know, I'm not at the table.
This is the Bloomberg Survendans podcast, bringing you the best in markets, economics, ancient politics. You can watch the show live on bloombag 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.