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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie Hortern. 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.
Socks rebounding following a rough day on Wall Street, Jim Karen of Morgus Stanley Investment Runage Management, writing, we expect turbulence in Q four as we gain more clarity on what the initial conditions will be for twenty twenty six. Jim joins us. Now, Jim, We're always supposed to see turbulence. Why have we not seen any turbulence in the face of so much doubt? And yet, frankly, AI companies, they'll just keep on delivering.
Good morning and Happy Halloween. So look, I mean the markets.
I don't think the markets are experiencing the turbulence for a lot of the things that you were just discussing is that the big leaders the narrowness of this rally that we've had, which is a large cap tech are printing really strong numbers. Now, those might be just a handful of stocks. When we look at the rest of the stocks and the S and P five hundred, there are some cracks, and it is reflecting some of the
weakness in the broader economy. I know we haven't gotten any of the data yet, but we understand that things aren't necessarily accelerating. What we have to recognize is that the market is not the economy, and the economy.
Is not the market.
So when you think more broadly about the S and P five hundred, say the S and P four ninety three x the mag seven, what you're really looking at is a broader picture also of the economy. So therefore, if the economy is moderating at some point, then you're likely to see those broader equities also some moderate But the dominance of those mag seven is so strong, and the earnings and the numbers that they're printing are so monstrously strong, it's carrying the rest of the markets. So
that's why we're not really seeing the turbulence. It really just depends where you look. If you look in other broader sectors of the markets, you might see some of that turbulence. And that's really where we think some of the opportunity is going into twenty twenty six.
Can you build on that?
Where do you think we're going to see some sort of rebound given the fact that some people are speculating you can see a growing amount of this pain, given the fact that prices are expected to continue to rise, albeit not necessarily at the levels that we find twenty twenty one in twenty twenty two, and there is this feeling that this weakness in the lower income sphere is just continuing to build.
Yeah, so we have to look at the full picture here, right.
So one of these things goes back to the tax package that you know, one big beautiful bill that got passed and effectively starting to think about the consumer and what stimulus package they're going to get next year in the form of bigger tax deductions. That number in terms of what the consumer what tax payers are going to pay less is somewhere on the order of one hundred and sixty one hundred and seventy billion dollars, So that's money that's going to be in the pocket of the consumer.
As we know consumption seventy percent of GDP. That can keep consumption relatively robust, even though the labor market picture, which is weak right now, it's currently weak right now, might start to improve as we move into twenty twenty six. Most economists forecasts into twenty twenty six is that we
will have better economic growth versus twenty twenty five. So if you have a growing economy, likely in twenty twenty six, and you have enough slack in the labor market at this point to keep wages at a reasonable price, than the profit margins and the earnings margins from any of
these companies can stay somewhat afloat. So we have to recognize that whether it's accelerated depreciation, all of the various things that came out of the tax package, this is going to be a tailwind as we move into as we move into twenty twenty six.
And Jim, I know you, and is the old adage of many people saying that the stock market is not the economy. Is that kind of changing though, because nearly half of all household's own equities. It is a record exposure from everyday people to this equity market. Have we entered a scenario where this time around the put from take your pick from the fed from the President has gotten all the more important just because of household exposure to equities.
Yeah, so it's a good point, right.
So the way I think about this is that conditions have become increasingly fragile. As this market has moved up, people's overall equity exposure has also moved up too, meaning that their wealth effect is tied to what's happening in the markets. And like any other time in markets, there tend to be drawdowns and corrections and things like that, and that can have a more of an outsized impact on consumer spending in consumer psychology, because as you point
out that there is an attachment to the markets. But that being said, most people, I would hope, when they're investing in the markets, have a diversified portfolio that if we do see this correction that may happen in the future. At some point in the future, I think it's likely to happen amongst the leaders currently right now, it's really probably a large cap tech correction. Maybe that comes I'm not forecasting that, but maybe that comes at some point.
But if you have a diversified portfolio, I think that people's broader portfolios, well diversified portfolios, will hold it better than what the actual headline of an equity drawdown might actually show.
So it really gets down to that.
It's a hard question to answer because I don't know how everybody's positioned, but I would expect that most people are pretty well diversified.
A lot of the diversification, though, Jim, this year has come in the form of gold, and we've seen incredible volatility starting this week out with a three percent decline.
Is that a concern?
Is gold a good way to diversify, especially at these levels where some serious volatilities being introduced.
Yeah, look, I mean it's one of these subjects here where the price has gone up quite a bit. So so anything that you say against that is like, well, you've been wrawing in the markets and what we don't have a position in gold in our portfolios?
Do?
I think it's a reasonable way to diversify.
Sure, you know, if you have, you know, a longer term view and a broader portfolio, absolutely holding some gold is always going to be a good idea, But are there other things that you could also own too?
Could you own high quality US treasuries?
Could you own high quality investment grade bonds? Earn some income and at least get some positive carry that should be able to preserve capital and preserve income and things like that.
So when I think about a portfolio for people who you know.
Who are broadly investing, they generally need some liquidity that and they also want to get some income. So that's why we think about the you know, the more of the broader equity market, including large captach, but then also thinking about other items. But really at the margin gold and I think gold has become very speculative at this point, and I think people are chasing a lot of those returns.
Stay with US, MALPLINPEX, Savana's coming up off to this.
Apple's AAA is getting a boost following a revenue beat and an upbeat holiday forecast. Gene Mounster of Deepwater Asset Management writing this, I expect Apple to be the best performing A mag seven through the end of the year.
Gene joins US.
Now Gene Apple best performing.
Why it's pretty straightforward. There's two big levers. First is that iPhone demand for the next three quarters is likely going to outpace the street. The street's looking for around seven percent. I expect it to be ten percent. That, of course, is one of the big focus. That's why the stock was moving around after market yesterday. It's all about the iPhone. So that piece, and it begs the question of why is the iPhone going to be better?
It's not about AI features, It's less about product features. It's more about this massive upgrade pool they had back.
In twenty twenty one.
As a reminder, that year, iPhone group thirty nine percent, huge growth, and then the subsequent fifteen quarters it basically was down a half of percent. And now we're starting to reap the benefits of that big cycle. So that's one piece is just we're going to see some better
iPhone numbers and expectations. And the second is that the Apple Intelligence bar is just so low coming into the new SI next year, and I think that hope springs eternal when it comes to investors, and when it comes to a feature like Apple Intelligence that I believe is going to be the biggest step forward since the iPhone itself. I mean, this is a massive potential for them to contextualize personal data with some of a digital assistant, and you know they've set this high bar out that it's.
Going to be next year.
Your own Mark German is seeing that it's going to be kind of March March April timeframe, and I think that anticipation that's going to be good for the multiple. So when you put those two together, I think that sales are going to be better because the iPhone upgrade pool. And then separately, I think the multiple expands because anticipation of what's going to happen with Apple Intelligence gene.
We were speaking with Dan Ives earlier of what Bush securities, and he said that he expects Apple to partner with the likes of Google with some sort of a Gemini partnership to provide some of the heavy lifting for the AI effort.
Is that something that you're expecting.
Is that kind of the underpinning of the optimism around Apple AI.
That's part of it, And I think Dan's definitely onto something that what's going on with Gemini and just Apple working beyond GPT and OpenAI, and what they have told us back at WWDC in June is that they are open to other helpers, other platforms, other large language models and they've specifically pointed out to Gemini. The essential question is just how much is this just in terms of
the menu for developers. Are they going to just allow developers to use the Gemini model when they build iOS apps or is this something bigger where they really lean on Gemini to power this new serie experience. And so it is a daunting task to take this personalized data and do this contextual build these personalized bots around it, and so I expect them to pull from more than
one more than just opening eye to deliver that. So I think he's onto something that One of the other big questions around this is what does this mean in terms of financially And in the case where they would be doing something with Gemini, this is a little bit of a different piece where there actually licensing technology from Google. It's most likely where Apple would pay Google for that.
Now they've given guidance to expect some of their CAPEX and some expenses around AI to go out modestly next year a few billion dollars, which seems like chump change when you look at these hundreds of billions of dollars that are being spent. So the bottom line is that this is a cost if they do end up leveraging more around Google, is a cost that Apple can easily manage and maintain the margins that investors love so much gain.
Is there any regulatory risk to that?
Is this a relationship that regulators would welcome and not challenge.
I mean, clearly the regulatory piece has been something that is concerned investors, that that has been diminishing over time.
And I think what we.
Saw with the regulatory around Google and their search deal. Of course, this is about a fifth of Apple's or earnings come from this Google search placement, and so the fact that that kind of went in a good direction I think is a sign of a little bit of a softening tone on the regulatory side. So I think that this piece, you know, this dynamic around Google, it
largely won't have a regulatory topic. There is a question about if Apple does want to do something bigger, if they want to acquire somebody like a perplexity, which I think would make a ton of sense for them, that is something that may be a little bit more of a challenge these big tech companies want to get a hold of perplexity andthropic But I think that regulatory piece is something that's going to make that less likely.
So, Gene, if a strong iPhone seventeen upgrade cycle allowed Apple to play for time when it comes to their AI offering, just how much time did it give them? How patient are you willing to be to allow Apple to figure out and solve the mess that currently is serie.
I mean, really, the central question for Apple over the next two years, three years, maybe even five years of how much time investors are going to give them to figure this out. So point in time today is that the bar is really high because they've set that bar high about what the next series is going to look like. But if we fast forward into April and let's say that it's a disappointment, I think that the stock will clearly trade off, but investors are going to give Apple
more time. Competitively, All that's on the horizon next year is this new device that will see for the first time from open AI will be available likely in twenty twenty seven. But there has been essentially nothing that's happened when it comes to consumer hardware AI that has changed the competitive field, and so at the end of the day, consumers love their Apple devices.
This resurgence we've seen.
With the iPhone in the last two quarters, and the guidance for December is all about that commitment that Apple customers have to the platform that upgrade pool. And so the reality is is that these devices just become entrenched in our lives just surround us. It's not just the phone, and I think that that's going to give them much
more time. Yes, the stock is going to have some variations around how people feel about any given change to their AI, but ultimately they're going to Investors will give them more time, and most importantly, the consumers will because they've made such a big investment into Apple's products over the last decade.
Jane just quickly hear you. So that Apple is going to be the biggest gainer through the end of the year. Who do you see in the magnificent seven names as being the biggest loser?
I mean, I think that surprising.
I think Amazon is going to have its surge today, but expectations that have shifted higher. I still think that they're struggling with their losing share within cloud. Yes, they had a good quarter with Aws, but that losing chair piece and so it's been a laggard.
It's getting its stay in the sun today.
But I think that that's probably going to be towards the bottom of the list.
Stay with US mulblindex Savana's coming up off to this.
Also some discussion with respect to Nvidia speaking in South Korea about potentially restarting Blackwell sales into China. At least that is Jensen Hwank's goal going forward.
Joining US now is at.
Mills of Raymond James, ed, I just wonder your takeaway about how the geopolitical chips are falling after this jijinpaying Donald Trump meeting.
I think they're basically where we would expect them to be, which is getting a de escalation, getting delay. But the real question now is how long does this last? And I don't think there's anyone who thinks that we're going to go through the next year or through the term of President Trump without kind of some more hiccups.
This is a roller coaster ride.
I am sure there's going to be more export controls that are going to be kind of suggested by either side, But really the big question that we've been getting here at Raymond James is how much semiconductors can go into China, how much relaxation of some of those tech controls. We've talked about that de risking in the last eight years,
that's been about blocking what China can buy. D risking now in DC is making sure that China gets hooked on our AI technology so that we don't have the risk that China developed something else, and as a competitor globally, that's a fundamental change that is going to potentially drive a lot of this AI trade even a bit higher as we get those kind of de risking sales into China that were not expected to.
Lisa's point ed, the President had said that Blackwell would be discussed. Jensen Wong said he hoped he'd be able to sell Blackwell back into China, but it appears that wasn't on the table during these negotiations. What do you make of the fact that that specifically.
Was left out?
So Danny, the President said that in Nvidia in China are going to have conversations and that he was going to let Nvidia be the referee.
He did say that Blackwell late.
You know, in Nvidia's ladyship, the Rubin is probably off the table, and I think that's appropriate. What we do know is that the Trump administration had previously banned the age twenty, they banned one of the AMD chips. They've reversed those bands. China hasn't purchased that because they want to see what else they can get. I do think that there is a version of Blackwell that probably can be sold into China. I do think that that is
going to be part of future negotiations. So on a scale of one to ten, if I had been hoping for a ten, what came out of this is probably a six or a seven. And if we can get those negotiations ongoing, it can go up from here. But the opportunity to possibly relax tech standards versus where we are where we've been is a fundamental shift in and of itself, which gives optimism for a lot of investors that I talked to.
So notably not a twelve.
As the President said that the outcome of the meeting was ed, what else was it discussed?
Also?
TikTok Taiwan trans shipments. What do you make of just what was left out of the discussions.
You know, it is a to our meeting, but that's not very long when you kind of have all these different negotiations. I think as it relates to TikTok that has been moving along, that has had a lot of other negotiations. One thing that I've always heard about President she is that he likes to go into these meetings with things ninety eight ninety nine percent settled. So I think what was discussed in the meeting was what what Bessen and his Kundter part were able to do the
week before. There is a desire to have another meeting first half of next year, where Trump goes to China, maybe she comes to the United States at an appropriate time, so there is opportunities to follow up from this on rare Earth. Yes, they are going to have this pause, but because there's licensing, there's plenty of opportunities for China to tighten in certain ways that will get us response.
So the fact that we have more to discuss at later dates and other dates already set to kind of have the leaders come together seems fairly appropriate at this point.
Just really quickly here.
Do you think they're going to get a completion to this government shut down by Thanksgiving so we cannot worry about flight de lies?
I think Thanksgiving, yes, But I think that that's where I kind of have been putting the over under. Once we get to November twenty first, which is the date of the cr that passed the House, the conversation changes because it's not that the Senate could just vote to turn it on because there's nothing to vote on. I do think that there's going to be a conversation today and over the next week about nuking the fillerbuster. That's what President Trump is put on true social I don't
think the Senate goes in that direction. I think that's about Trump trying to regain negotiating leverage. But because of those social media posts, this does go on at least another week. As the pressure builds, President Trump is probably going to have to be the off ramp. But as we get closer to kind of November, you know, kind of twenty first, and as we get closer to Thanksgiving, that's really I think where this finally comes to a head.
I think we're at the beginning of the end, but unfortunately we're still at the beginning, not the end.
Stay with us Mold Blindbeck Savannah's coming up off to this.
Meta defying AI spending gloom with a record break bond sale, the social media giants selling thirty billion dollars of bonds while drawing.
Record interest for the debt.
I think that there were offers of something north of one hundred billion dollars. Winnie Caesar of Credit Sites writing this, the acceleration in debt financed CAPEX on AI related initiatives is weighing on free cash flow and credit metrics. Meta could turn free cash flow negative next year as capex reaches fifty percent of sales. When he joins US now, Winny, great to see you, Thank you so much for being here.
How much are you getting.
Concerned about the amount of debt issuance tied to some of these big tech companies?
Hey, good morning, Lisa.
So we are definitely seeing a shift away from cash flow financed investment, equity financed investment back into intentional releveraging and some debt financed investment, which is very typical of that middle stage of the credit cycle where you start to see more m and a more financial engineering as bump up and in capax and spending.
And that does come with some additional.
Concerns around where valuations are and are they appropriately reflecting the potential return on that investment.
At this point, do you think that investors just throw caution to the way and as soon as they see the word artificial intelligence in any kind of perspectus.
Well, I think it's a little bit of a more nuance to you than that. I think that people realize that AI is going to be a defining trend probably for the next five, ten, twenty years. There was definitely sustainability and durability there, but there are a lot of
open questions. Adds to the magnitude of return on investment, the timing of that, and I think that people are looking at things like metabond deals, which is still a pretty high quality issuer, and thinking this seems like a reasonablyful place to continue to put cash to work, especially because that new bond sale did come with a pretty significant new issue concession, which is something that a lot of investors have not been getting this year in the
primary market. So there's that balance of are these valuations compensating me for the potential risk in a higher quality company. Now, if this is where a single BEE or triple C related bond deal, I think that we'd have a very different conversation.
When it's notable though, that the debt being raised isn't just in the syndicate market. It's also private credit that's been participating in this too. Meta also doing this a JV with Blue Owl and PIMCO that leans on Meta's credit worthiness without actually impacting Meta credit because it's off balance sheet debt?
Is that concerning?
Especially with off balance sheet debt and that being used as a way to fundraise it seems problematic in some areas.
Yes, I think that off balance sheet debt is always a very appropriate Halloween topic. It gets your spooky senses rising a little bit because there is a historic track record of off balance sheet debt sometimes going a little bit sideways. Now when it comes to the AI investment spend, there is just the reality that so much capital is being raised and needed to be put to work in such a wide variety of initiatives that some sort of
diversification of financing does make some sense. Now that being said, anytime we see off balance sheet we're definitely taking a closer look, trying to ensure that we understand kind of the stream of cash flows and where the risks.
Really lie well for things like project finance. In general, things happen whennie there's forced masure. There are big events that disrupt specially physical plants. Are those types of risks fully appreciated by this market.
Yeah, that's a great point. Project finance can be a really challenging.
Road sometimes, and I think when we look back at valuations and where they stand, the reality is corporate credit
spreads are very very tight. Now, that doesn't mean that they necessarily have to widen, but the balance of risks does seem to be skewed much more to the widening rather than incremental compression or tightening from here on out, and that does leave us a little bit more cautious just in terms of the direction of travel of spreads more broadly, as we have this mix of kind of broader macroeconomic risk with what's going on in the consumer complex,
and then also just capital structure and balance sheet risk with how things are being financed, where the capital is flowing, and whether that return on investment is going to be realized in the relatively near term.
All of that, and spreads are barely moved. Winnie.
What would it take to significantly and sustainably wide spreads at this point?
That is the question that every client is asking us, and I think that it comes down to some sort of acknowledgment that the fundamental picture is perhaps less healthy than what people are currently anticipating. Earnings expectations for twenty twenty six are pretty lofty.
The most recent earnings have come in I would.
Say, relatively well in aggregate, though we have seen some signs of pressure in some different sectors. Now, what usually changes that technical demand for fixed income is concerns around downgrades, around defaults, around the potential recession word. And I do think that over the next twelve months there is that risk that some of these lofty expectations start to be a little bit disappointed. And that's where you start to introduce some of the conversations around what is the true
fundamental trajectory of corporate credit. We've enjoyed a massive ratings upgrade cycle. Is that going to start to reverse and start to spook investors a little bit.
I'm looking at a cuddly cockroach costume from Halloween cost that looks.
Like it is definitely going to do the trick.
When you without government data, I'm just wondering, from your perspective, is there any sign whatsoever that we do have that downturn that could potentially call people's bluff.
Yeah, So I think then when we look at the composition of economic growth recently, we do realize that so much of the momentum in the broader economy and also the market has been linked to AI spending, to tax spending,
to all of those initiatives. When we think about the current health of the consumer, it's a little bit more of a mixed bag, with the bank saying, hey, we're not seeing a lot of signs of pressure here on the consumer, and then some of the consumer products companies saying, this is the worst consumer sentiment, the worst consumer environment
that we've seen in a very very long time. Trying to reconcile all of those things, I think indicates to us that the job market is going to be the lynchpin here.
We've already seen a pretty significant downdraft in the pace of job ads.
Of course, we are flying a little bit blind as it relates to official economic data, but there are some substitutions there that would generally point to not a super encouraging labor market overall, and we're very much focused on those announcements.
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