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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie 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. Stocks in chin KaiA as investors look past credit concern Sarah Hunt of Alpine Saxon Woods, seeing the wall of worry becoming somewhat Steve Hurt, She writes, the following credit is usually the culprit in stock market selloffs. Add to that concerns about equity market valuations and we go a pop pyre and volatility and lower in yields and equities.
Sarah joins us now for more.
Sarah, good morning, good morning. Have we got a credit problem or an isolated fraud?
Isha, That is the big question, and I think that that is something that is going to come under increasing scrutiny. You saw what happened with the regional banks. You saw some of the business development companies have some issues with their stock prices because people start to worry about that whole private credit boom and what is underneath the surface where you can't see it, and whether or not that's
going to be a problem. Right now, it looks to be somewhat isolated, but every time there's another thing that comes out, it becomes a bigger problem. And that sort of goes to Jamie Diamond's comment, right, So I think that is going to be the issue and how much that continues for the next couple of weeks, months, days, it really depends on whether or not something bigger happens.
So did you find it odd that the Diamond comment became the headline for last week at the same time earnings knocked it out of the park on Wolf Street and stocks finished the week.
Hia, Not really, because it sort of goes to that list of things that people are concerned about, and I think that people have been talking about private credit and talking about some of those illiquid areas of the market and whether or not there are going to be issues in there, and you can't see what the valuations are for a while. So it's more that once something comes out,
then it becomes a bigger problem. So I think that part of that was just the fact that something did happen and everybody was a little bit worried about that happening. So it's not surprising that that got latched onto.
It's hard to make the argument right now looking across the banks that net charge officer spired and out of control nonperforming loans are increasing, and I see much of that at all now. It's not to say that it can't happen, right and I can see why people are worrying that we go from zero to sixty pretty quickly. I understand all that, but it's the one I think outside of the issues we've discussed the support that need to worry.
I think the issue in credit is not with the big money center banks, which reported first and reported really good numbers. I think it's more down in the regional banks and in some of those private credit areas, and I think that that's the concern, and to the extent that that's not the biggest spending cohort. To your point earlier, then it's not that it doesn't matter it's more that who's caught up in it and how bad is it going to be? And if it's not that bad, it's
not going to matter. If it's a few banks that have a problem here or there, it's not an issue. But this sort of reminds me of the issue with treasuries last year, when it was like, oh my goodness, now all of a sudden, these banks that you would have thought of have the gap because of the marked to market problem. So it really depends on where this goes. If it stays somewhat small and contained. I don't think it's a big issue, but it's definitely one of the things that people are concerned about.
It's staying small and contained, at least at the moment, is what it feels like. Do you think all this spend and focus on AI investment can kind of put pest infiltration to the side.
As long as that continues and it doesn't look like that's got to crack in it, right, Because every time you see a crack in the AI story, whether or not there was something that went around I think last week about how many hits this happened and whether or not that was smaller than it was and what does that mean? And I think that anytime you get a question about that, people start to question the premise of
why valuations are so high. On the other hand, we do have rates coming down, and that makes a difference as well, whether or not it makes a difference to the economy as such, it definitely makes a difference to investors into the stock market because lower roads do make room for those.
Multiple Jentathan access question last hour. Is it more important to hear from the tech mega giants than it is from the federal Reserve?
It's both, But right now, if there's any slippage and earnings from the tech guys, I think you're going to see a more wobbly, more volable market because with the lack of data and with the assumption that the Fed's going to cut at the end of this month, I think that right now that is not as much of
an open question. But if you see anything in the earnings, or if you see any concern in the earnings on the tech side, or a slowdown meaningfully somewhere that can't be explained by we don't have this capacity to give people something, and then I think people really start to worry about what that looks like and that spend direction looks like I have You've.
Got a company it'd be more focused on than others. Next Wednesday, the same day the FED meets, will have Microsoft meta alphabet. The rest will follow. Is the one that stands out more than others.
I think it's the compendia of those who are spending the most right, So it's all of them. And if anybody says something odd and everybody else doesn't say it,
then I think it's okay. If you get a bunch of different comments that are like, well, we're pulling back a little bit here, or the year of a year spend is going to be x instead of X plus ten, I think it's really going to be a question of what they say collectively, because collectively that huge spend in the top of the you know, basically data center market is what's been driving a lot of this stuff, So everybody kind of has to be on the same page.
I think there's two very different approaches between China and the US. Of course, those two countries will become the folks of attention over the next week when the two leaders get together at the end of this month. China's shooting for efficiency we saw that with Deep Seek at the start of the year. America at the moment, based on what we're hearing from these companies, is just shooting
for massive capacity, investing tons and tons of money. It's then approach that as an investor you feel more comfortable with.
Well, I think that right now it's harder for the US to jump in and do the efficiency thing. They're going to have to because the reality on the ground is the power that's needed for currently what is extrapolating from the demand is way bigger than we have. So there has to be an efficiency argument ultimately, and I think that there will be. The question is going to be, hoo does that effect the most? And I think at the moment right now, it's just a race to get
all the chips on the board. It's sort of like the dark Fiber in two thousand. It's like, we just need to put fiber down. We just need to put fiber down, and at some point that has to work together. And I think that there will be efficiency in the United States because I think there has to be, and the innovation will get there because you just don't have power.
Prices are already higher.
It's already an issue, it's only going to get worse, and I think that that's something that will end up being solved. How exactly and who benefits the most, I'm not sure yet.
Yeah, how exactly is it going to be solved, because obviously potentially government regulation have to come into play. When you think about the trade talks, that's I'm sure part of your wall of worry. Were you given some comfort over the weekend by the President's comments?
I think it's really difficult a comfort just in the de escalation, right. The words themselves are not as important as the tone, and if the tone is de escalation on both sides, that's probably better for markets. It's when the tone started to get very hot on both sides
that market's got very wobbly. And I think that that's one of the things where we just can't know the outcome, and what they say and what actually happens on the ground are not necessarily going to be the same thing, because it almost never is when people are doing negotiations, So we won't know what the final terms are in any near term. But the idea of less fighting versus more fighting is better.
But when you look at a meeting like that, are you concerned that it just bleeds into twenty twenty six if it doesn't go well, some of those hot rhetoric.
Well, all of the tariff stuff is bleeding into twenty twenty six, right Like in April of this year, we were all convinced that something was going to happen, and it was very short term, and now all of a sudden, that has been pushed out throughout the entire year. So now, yes, it will bleed into twenty twenty six. And I don't think that's necessarily a concern as much as it's reality on the ground that piece of the wall of worry is going to continue to have to be climbed, and
not just with China, but in general. China is obviously one of the biggest issues.
And just quickly, what's your favorite sector right now?
And why?
Well, I think if you look at some of the places like defense, which has already run a lot, but you've got some big thematic stuff that's not just AI right, so Golden Dome, so some of the spending that's going to come that you know is coming is very helpful.
So there are areas in the industrials and defense that are going to play into that and I think that this is a very good time to be looking a longer term thematic investing because you know that there are places where they're going to continue.
To spend Least Favorite.
Least favorite is tough. Consumers really hard right now, because I think that a lot of the low end consumer is having a hard time. So consumer is mixed, and even high end consumer is not perfect. So I think that there are some issues there. But it's interesting that the iPhone is finally getting that upgrade cycle that Danives has been looking for, So I think that there's some good I think there's some good news in that in that regard.
Stay with us.
More Bloomberg Surveillance coming up after this. Investors looking for signs of strength beyond AI, with a busy week of erning still ahead. In this, McFee of Oxford Economics saying, outside of AI, the world and the US are in an investment recession, but it's unlikely to become a broader downturn.
And it's joints.
It's now for more and it's good morning and welcome back to New York. Well, can you play twn the numbers for us? So what is AI and basically what does the rest of the world look like yes.
I think the first thing to mention really is that a lot of people are focused a lot on the AI investment numbers, and they're not necessarily thinking about imports associated with them, so their net impact on growth is actually quite small just from the investment portion outside of AI. Of course, investments been contracting for a couple of quarters, but you know, we don't need to get too worried
about that. Investment recessions are relatively common. Go back through the G seven for example, They're about twice as common as normal recessions, so one doesn't necessarily lead to the other. I think the key point for growth really is how these tech stocks are doing the wealth impact on the high end consumer and how that's actually driving growth, not necessarily just the AI investment.
This goes to the bifurcation of the US economy right now. The low income cohort is really really struggling, and it has been for a while a number of years. Is there any reason to believe that's going to migrate up to upper income A cohorts as well?
I think that's the real uncertainty. Remember, the low income households, the bottom twenty percent of the income distribution are only about nine percent of overall consumer spending, so it's manageable if it stays there. But they are driven by very different things than the top end, so there's not a not a direct move from one to the other. We are, of course in a very regressive tax environment in terms of tariffs, but also in terms of the one big
beautiful bill that we'll see. Low income consumers have their income fall by two three percentage points, whereas at the top end go by two or three percentage points. So I'm not sure that there's a direct link between the two. I think we've got to watch the stock market really to worry about that contagion.
How fad does a stock market go to explaining how we can have an economy where employment levels have dropped off to the extent they have and retail sales have remained run up there.
Well, I think that's a big part. But remember with the labor market, we're seeing two shocks, and this is the thing we've got to get a bit used to in economics, actually, as we've had twenty years of demand side shocks and supply side being relatively benign nowadays, though of course we're seeing much more adverse supply shocks, and
that's what's happening in the labor market. We've got negative supply side shocks alongside a cooling and demand, and that's how you can have this no fire, no higher labor market.
When you talk about this investment recession and the fact that we're not going to have a real recession, can you US remain exceptional even with this investment depression?
Almost?
Yeah, I think it can because ultimately, you know, let's think about the three big shocks in the world at the moment. First, you've got deglobalization, the impacts of tariffs that clearly is going to impact to the surplus countries Germany, Europe, China much more than it is Europe. There's a strong correlation in our forecast revisions over the last year given
trade balances. Secondly, you know, on the AI side, clearly the US is not only benefiting much more at the moment in terms of the investment and consumption picture, but should also do so in long term productivity. And then thirdly, on the sort of policy dynamics, the US is not constrained in its fiscal position, whereas you look around the world,
there are a lot of economies who are at the moment. So, if anything, there's more upside I think to the policy stimulus in twenty twenty six for the US.
Given this backdrop and the investment we are seeing in AI, how important is it going to be these tech earnings that are upcoming.
I think it's really crucial. Actually, you know, it's a rally that for some has built on these earnings. If there's any sort of pullback in the market, really might well pull out the rug from underneath those high end consumers. I don't see that happening at the moment, but that I think is the key risk.
Do you think it's become more important than the FED decision? And by important, I mean more important for the economy the onies we get from the megatech fires next week versus what Chairman Poun's got to say.
Well, this is probably my unpopular opinion, but I have to say I'm not sure that FED rate carts really mean a huge amount for the economy, Certainly not in the next six months. Well, you know, if you look at the structure of debt in the economy, it's far longer now than it has been in the past. We've got a situation, where As in most rate culling cycles, we're seeing rates come down, but the long end of
the yell curve rise deepening happening. So financial conditions aren't pulling back or easing as much as many people might think just by looking at the FED funds, whereas obviously equity stocks are having a much bigger impact on overall financial conditions in that first phase of path through.
Interest rates are going to come down again next week. Most people think they're going to continue to come down. Are you suggesting that's not going to alleviate some of the issues in the labor market.
Yeah, I think that. You know, fundamentally, FED rate cuts don't have a huge impact on employments, certainly not in the next six months. And remember that a big part of what's going on in the labor market is a supply shock, and central banks can't really touch that.
What kind of risk is the feder reserve embracing if they're going to be lulled into an easing cycle by misdiagnosing the labor markets the extend that obviously, based on what you've said, you think they are.
I wouldn't say that they're going to make a huge polity mistake or anything like that. Ultimately, we're talking about moving at twenty five basis points, you know, and ultimately from a stance that's pretty restrictive by all measures to something that's a bit more of a gray area. Who knows where neutral is. So it's not like we're going to go in most forecasts anyway into a period where
we'll have really really loose policy. So I don't think it's going to be a big mistake, but you know, clearly it's something they can correct pretty quickly.
On our lead, not this side of May, the other side of May, once we get a new leadership of the Fed Reserve, who knows for the future holds? How's that debate plan? And in Europe what kind of conversations you guys have in looking across the pond to the US At the moment.
I think there's a lot being talked about institutional quality of the US and whether that plays some sort of role in the obvious decline and the dollar that we've seen so far this year. To be honest, I think
that's a little bit overplayed. You know, who knows who we'll see as the next FED chair, But if they move, you know, rates by let's say fifty one hundred basis points relative to where the market has some price Now, I'm not sure that's actually a massive change, to be honest with you, And frankly, you know, we've got a
very very data dependent FED at the moment. Maybe a FED that looks a little bit more towards the forecast and things where policy should go and what impact it should have would be a good thing.
Stay with us.
More Bloomberg surveillance coming up after this gold bouncing offer selloff and precious metals on Friday, Ongoing economic uncertainty keeping the commodity close to all time highs. Tom's haid saw Us of tatig Us, writing, we suspect the gold is telling markets that the usc old curve needs to steepen in order to tends to maintain their status as the primary safe haven. Tom joins us. Now for more, Tom,
welcome to the program. Understand the theory, but based on a price section, does it back it up?
Yes?
Absolutely, I think the price action is telling us that there are overflows into safe havens, and those overflows are going into gold rather than treasuries. You know, we've gone through a period we'll call it fifteen where anytime there was a bump in the night anywhere around the globe, whether it started in the US or it started in France or anywhere else, the flows into ten year treasuries were just astronomical.
And that's just not happening this time.
Yes, you're getting some safe haven flows as we're seeing stories about bad loans and worries about systemic credit risk, and so ten year yields are rallying, but they're not rallying as much as you would see in previous cycles, and so gold is getting the overflow of that safe haven flow, and that's really the big reason why you've continued to see this momentum trade in gold in my opinion.
Obviously there's folks following into that, but it's the overflows from lack of appeal from the traditional safe haven that I believe is really the big driver in gold right now.
So if you think of how deep these polls are, the gold poll just isn't deep enough to be the alternative to treasuries. I've I've hurt that directly from Goldman two when they come on the program, which is why you've seen this massive exponential move in gold. Can it really replace treasuries, Tom, given the depth of the polar invitable liquidity and the treasury market compared to site Goat, Oh.
Oh absolutely not. It can't.
And so eventually, if these fares of credit contagent, if they really were to spread and we start to see more signs of pests in the attic and stuff like that, then you're going to see ten year treasure yields not just dropping below four percent, but rallying down to close to where two's are right now.
And that's not happening yet.
But there's just the gold market's not big enough, the precious metal market's not big enough, the entire sovereign g ten markets not big enough. Treasuries are going to have to be the final outlet if there is that type.
Of risk, Tom, you're looking a lot about what gold is doing in terms of the treasury market. Are you also concerned about d dollarization and countries trying to get their hands on gold because they don't want to touch US dollars.
Well, you know, there's two reasons why we said the US curve has to steep in here in order for the floes into gold to stop. One is that if there's an economic contraction and the credit cycle, which everybody's focused on right now.
The other scenear is that we have.
Strong growth in the US, the FED eases into that, we have loss of FED central bank independence, and de dollarization just amplifies this, and so the curve has to steepen just to accommodate that. So two scenarios, a weak economy and a strong economy both would suggest that one gold is going to continue to see flows, and two the US treasury curve in order to compete with that needs to be steeper.
We just don't know whether it's going to be a strong economy or a weak economy.
But in both scenarios, yes, absolutely, you see the curves.
Should steepen and gold should continue to see safe haven flows.
But the de dollarization story is another reason why gold is rallying or picking up those overflows into safe havens that would otherwise go into treasuries.
So you don't think we're seeing gold move into a speculative stage. You think there's going to need more flows. How much higher can we see gold go?
Well, I'm probably not an expert on the precious metals market, but I will say this that near term we look overbought.
But if you think about all the potential flows into gold over the next let's say year, a reasonable estimate of five thousand parounds, I mean, that's not unreasonable at this point in time, because you're going to continue to have central bank buying, because you're going to continue to see the global we'll call it a trade environment deglobalize, and there's going to be less demand for dollars.
That's absolutely true.
You're very lucky to see inflation reaccelerate next year driven by service sector inflation, not tariffs and goods inflation, but service sector inflation as the US economy begins to stimulate and reaccelerate ahead of midterm elections. So all of those would suggest there's a fundamental driver for gold to push higher.
But near term, I would.
Argue that we're probably overbought here because the flows definitely seem speculative very near term.
So Tom, that's gold.
This is where the bond market move gets interesting for me, at least if you believe that's going to happen. We've got a bond market managing into potentially hotter inflation prints and a federal serve that given Howmus communicates it, over a last month is willing to ignore those hot inflation prints. Now, if the Fed's willing to ignore hot inflation tom well the market will investors.
Uh No, I don't think so.
So. I think in that scenario you're talking about, yes there's credit concerns, but they're manageable. The real issue is that the US economy begins to reaccelerate, and in that scenario, the curve bear steepens, with tens pulling away from twos, but eventually twos pushing higher as well as the market probably takes one of those rate cuts from twenty twenty six.
And just takes it off the table, so you get a bear market steepener.
Everything's pushing higher, but tens push higher at a slightly faster clip. That's our base case forecast for this year, with tens forecast to end the year back around that four point thirty zone, and next year tens pushing back up close to five percent as the market realizes.
That the fear is gone.
There is an economy that is still reasonably healthy, and treasury yields have to push higher to accommodate the slightly higher pace of inflation and still slightly higher pace of growth too.
Stay with us.
More Bloomberg surveillance coming up after this. Terry Hanes of Pangaea Policy writing this, China had best show movement on some other hot button issues or the US is capable of broader direct movement against China's economic interests. Terry joined us now for more. Terry, welcome to the program. So now my initial reaction to reading that quote is what's left to tariff? So what's left to do here? Well, good morning all.
I think what's left to do here, frankly, is to understand that the economic issues of the moment, soybeans and fentanyl and the rare earths, are part of a broader geopolitical struggle. And I think that's the reason why we're not going to see any serious movement on this anytime soon.
We'll probably get some action on soybeans, we'll get another nod on fentanyl, they'll continue ropidoping on rare earths, and in return, what you get from Trump is not a calming effect by saying tariffs are unsustainable, because what Trump and Besset have always meant by unsustainable is that they're unsustainable for China. So it's not an attempt to calm.
It's an attempt to tell China, look, we're perfectly willing to keep ramping this up if you want to, but if you don't, then you need to back off now.
But Terry, hasn't it shown that it is unsustainable what we're dealing with right now, especially when it comes to farmers. It's unsustainable for the United States as well.
It's not a pretty picture by any means, and I don't mean to minimize the problems that American farmers have at all, but this takes place in the context of a much greater geopolitical chess game, and the export markets for soybeans are one small part of that.
So China is holding on to rare earth. They're not buying US soybeans. What do they want out of the United States besides lowering the tariff threshold.
Well, they'd like to keep talking, and they'd like the United States to go away. Akin to twenty nineteen twenty twenty, what the Chinese very likely hope for is that they get some sort of small deal with Trump that gets trumpeted as a big deal, and what ends up happening is that the United States then goes away on bigger issues and I think this time out, Trump's not inclined to do that. The reason I think that is because
that's very clearly what he's signaling. I mean, they see the rare earth issue as a threat to military plus Western economic power and influence and ability to continue frankly, and they'll defend that. And so this thing isn't going away anytime soon.
It's not going But what you're describing is the contours of a maybe small deal on three specific issues that could be done with Holy Fang and Scott Bessont. Why do we need President Trump meeting with Shijiping.
We need that because both both Trump and Chijinping want that meeting to be able to show that jaw jaws better.
Than war war.
And they're continuing to talk, and in this case, the any kind of seeming rapprochemont between these two leaders, you know, lifts all boats, whether it be in China, which wants respect and wants to be seen as an equal, or the United States, you know, where Trump knows he's going to get a pretty large market bounce out of a continued rap rushmop.
Sorry, this amount of escalation really started with China a number of weeks ago. They flexed their superior rare res refining capacity. That's a move that does not come without risk, and Ry, I just want it from your standpoint, whether you believe that was a strategic mistake on the Chinese half.
I think it was clumsily handled at the very least, So I think I'll mostly agree with you on that. But also I found the timing interesting because what you had in a situation. In this situation is in the broader geopolitical context, you've got a Gaza broker piece, which right now, of course is teetering a little bit, but you got that. You got the US Argentina bailout, which from a geopolitical perspective is a pushback against China in
South America. And you've got Russia under a lot more pressure, not only because they're not winning in Ukraine, but because the price of oil and other things imperil their ability. That together describes a Chinese and client state proxy defeat. So China, among other things, is reminding everybody that they're.
Still here, Terry, before we let you go on China, Today's day twenty of US government shutdown. We're just mentioning it now, twenty three minutes into the program. When do you think the goarm will actually opened?
I got early November after the New York City elections. What I think about this is that this is now morphed into a struggle for the broad center of the American public, who's more reasonable. There's a lot of evidence out there that Democrats aren't winning that battle right now, and what Republicans see an opportunity to do now is kind of use the kind of no King's amused Bush, plus the Mamdani election in New York City to continue to paint Democrats as extremists.
So I think this goes on for a while, Sarry, just quickly. Then you don't see that as a coincidence at a calendar. You actually think that's a connected story, what's happening in New York City and what happens in Washington.
Oh absolutely, because what they'll end up doing is and you know, this gets teased all over the place and has been for a while. Trump mentioned it over the weekend. I think too, is that you know, this is the face of the Democratic Party, that's what these people are up to, and noticed, by the way, and not incidentally that you know, neither Schumer, nor Jeffreys nor anybody else
in New York wants to stand up to them. This is your Democratic Party, folks, as compared to us, who are leading on already leading with the public on economy and crime and a bunch of other major issues.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geopolitics. 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 Bloomberg Terminal and the Bloomberg Business app.