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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. To extend the conversation.
Joining us now is Jordan Rochester of Mazoo. Jordan, Welcome to the program, sir. Let's get into this. This could be a big moment, and I think the market's trying to work out what kind of moment. Is this an r Bay like type moment for the FX market or dare I say a trust like moment for the bond market?
Which one it's not trus but it could be. Is what the market's saying. This is sanaomics, This is the new Verde of arbonomics, is what the market's thinking. But I think John, we need to have some level of caution's what politicians say, and there's what they do. And what she can do with this current setup is pretty difficult because the Arbe Nomics faction, the Arbe faction of the LDP is much weaker after a lot of election defeats in their seats, so roughly half the size of
what they were a year ago. So the message we've been giving clients just now, this morning and over the weekend is that Takeichi whilst she stands for a lot of the policies that Arbinomics had, so that would lead to looser monetary policy for sure than what should be the case, and that would lead to a WEEKI yin It's not really clear cut to me, because in order to win the LDP election, she needed other factions to help her get over the line, and a key part
of that was the Asso faction, who are more fiscally prudent, and the intervention from the former Prime Minister Asso himself to arguing to respect of the party member vote where Takeichi overwhelmingly.
Won, is the key reason why she won this weekend.
But it also means that she'll probably have to point appoint a finance minister who might actually see the market move the of way, John, we might see the end sell off and the sort of long end sell off in Jdb's relax a bit once we know who the finance minister is, if they are fiscally prudent and a sort of continuation candidate for that role from the previous administration.
Jordan, how high is your conviction level that what she does is somewhat different from what she says? Meaning are you recommending the clients that they buy the yend here with the dollar at one point fifty, surpassing that one to fifty level versus the Japanese currency.
I'd say it depends on the timeline, so medium to high. I'd say high conviction that with the current setup in the Parliament, the LDP don't have a mandate, they don't have a majority, They rely on a coalition part to comito that doesn't even get them over the line. So they're entering into coalition talks. So I've got a pretty high conviction she can't suddenly do very large, bold policies because she might lose members of her own party or
make those code talks quite difficult. For example, the consumption tax cut, which is all the talk last time around, in the elections last year. When it comes to take Eachi's own beyond that watered down significantly. So I don't think we're going to have a big fiscal agenda, that is, until we see her polling.
Once we see the polling.
If the LDP shoots up to something of a forty to fifty handle, if you see her own personal ratings improve, then we can't rule out elections. And once she if that happens, Lisa, if we get an election this time or early next year, let's say, then I can't rule that out.
It feels so much different though, even than a Liz Trust moment Jordan, or potentially what could become a Liz Trust moment, because this is global, this is Japan, this is France, this is the United States. For the government to shut down, where a lot of governments are showing a real reluctance to climb down on deficits that have been climbing.
They want to still lean on that deficit lever.
Which is the reason why you see bond yields creeping higher, particularly in the thirty year denomination. At what point does the collective story taken on a life of its own.
It already is I think it is happening right now. So as you mentioned, the US with its own fiscal issuance, Germany with its own fiscal issuance, and now France of course has been with the largest death sit in the euro area or flagging that point. So the only one that stands out as not actually joining in with the party is the UK because of the fiscal rules that the chance has thrown on themselves. But Japan is very
acutely aware of this problem. The Ministry of Finance has been reducing the auction sizes in the long end to try and deal with that. But what's changed in the sort of functioning of the Japanese JGB market is the demand from life insurance insurers for long end jgbs has
collapsed versus what it used to be. And actually the majority of the trading volumes in jgbs from the ten year onwards is from foreigners, and so this means that you get these sort of big moves as you've seen today thanks to foreigners being the overwhelmingly large share of trading volume in ultra long end jgb's, but also around the tenure bucket onwards as well. So all in all, when everyone's suing at the same time, something will break.
I'm not sure how when politicians will take note, but I think they are already, and I think that's why the LDP's fiscal prudence wing has played a large influence in Takhi's changed in her opinions Jordan.
In addition to that, the role of the central bank, I think there's a big question up in the air about that, so let's discuss it. Traditionally, if this was the United States, we'd be talking about a pro fiscal stimulus party or leader. We'd be talking about title monetary policy to offset some of dan. That wasn't a conversation in Japan overnight. In fact, the pricing of rate hikes in the future actually came in now Jord And I wonder,
is this really a unique independent central bank? What is going on with a central bank story in the relationship between the government and the BOJ.
All these independent central banks all they are, for example, the FED, they answer to Congress, so there is a political sort of influence on all of them.
A Bank of England, ECB, etc.
When it comes to the BOJ, there is a pretty strong level of political cooperation. It's written into the bank Coajapan's charter. Now this we've seen this before. Arbenomics is a clear case of this, where most people assume that Arbenomics was both fiscal easing and monetary Sure, it was, but Arbenenomics actually leaned heavily on the monetary policy side of that story, and we saw the Bank Japan expand the QE and so forth, eventually going negative rates too.
So there is the potential for Takeiachi to play a large role. If you think back to last year, Prime Minister sheba this history behind this. John one day after becoming Prime minister, he said now is probably not the right time for the BOJA to raise rates, and they delayed that rate hike from October through to January.
So tak Each you might say the same thing.
We've only had one tweet from her and one victory speech so far, and so we haven't got enough information. But what I will say is it's very different to Arbonomics. When inflation was that near zero. Inflation has been above two for the past two to three years in Japan, and the aim of this government is to try and bring inflation down. You don't really achieve that by stopping the Bank Japan from raising rates, So John, I think they still raise rates.
October is clearly.
Much less likely now because the BOJ might want to wait and see what the budget will be. So that makes December or January still live meetings. But if you're to ask me, John, I'd be paid the October meeting. I think the risk reward is still there. The Bank Japan has lined up loads of speeches this month. We'll hear from Governor you Wade to himself later this week as well. The data is strong in Japan. It all adds up to a rate hike. John, Apart from the politics and the uncertainty.
Stay with us.
More Bloomberg surveillance coming up after this. Another week of economic data at risk as the government shut down enters it's sixth day. Paul Donovan of UBS Global Wealth Management right in the following. The problem is that alternatives like sentiment surveys are even worse, and that's all the markets will be left to work with. Paul joined us now for more. Paul, you're one of our favorites. It's great to finally catch up with you after a period of time. Paul,
I wanted to get your opinion on this. I've heard a lot of people's say, we're flying blind without the data. Were we flying blind already?
We were flying blind, we were perhaps flying quite a thick fog. So for about fifteen years, economists have been complaining about the deteriorating quality of economic data. Nobody fills in surveys anymore. Structural change means that we're missing parts of the economy. You know, where in the employment report is the TikTok content creator and parties and bias. The political bias in the States is getting extreme, and people are answering according to their political views, not according to
what's happening actually happening in their lives. So we've had this problem for some time. But the official data did the best of a bad job. It did the best that it could in order to filter out some of this noise and give us an idea about where the economy was performing in real time.
So how does it.
Change going forward that we don't even have that right that we end up in the realm of speculation and rumor at a time where people just take all of that, put it together and say, well, stocks have to just keep going up.
So this is where I think things do start to get tricky. Pads a little bit less for the equity market than for the bond market. Because of course, corporate data, as long as companies are honest, is going to be still reliable. So the earnings reports that come out, the corporate announcements that are legally obliged the companies are legally
obliged to put out, that should all be okay. But the bigger macro picture is getting more confused, and some of it is reliant on what we're seeing elsewhere in the world. You know, how do we judge US trade data? Well, let's see what other countries are saying when they're talking about exports to the States, for example, we're having to back out data some of the time.
You made a really good point, Paul in your recent notes that right now the market is treating the shutdown it's going on in Washington, DC as negligible, something that will maybe cause a loss of economic activity.
It will just be hooped.
Potentially in a couple weeks, in months time. Why do you think this time really could be different?
So as a baseline, I don't think it is going to be different. We get this with every shutdown, you get a period where data economic activity is suppressed and then you get a period where you rebound, the back pay is paid back, that kind of thing. The only real difference this time is that US President Trump has talked about possibly firing some more government employees.
Now that is.
Different because then, of course you're not getting the rebound from those employees. You are also potentially creating some fear of unemployment amongst people both in and outside the government sector. That would be a more troubling situation because you would get the slowdown, but the rebound that we normally would see would be a lot more muted. I would regard that very much as the risk case, not as the
base case. The base case, I think is this is going to be like every other shutdown, you know, down in week one, up in week two, that kind of thing. But there is that risk if some employees are going to lose their jobs permanently as a result of the shutdown.
Paul, I think we all hope you're absolutely right and we do bounce back and just get back to work, get back to business, and this economy grows. The other thing we wanted to talk to you about was inflation, market based expectations of inflation, how the FED measures things, and ultimately how consumers experience it. Paul, I've heard you
in the past talk about frequency bias. Could you explain that as a concept in economics and why that's important to the difference between how consumers feel and what the FED is tracking.
So this is a very important point.
Everybody is guilty of frequency bias. That is to say, you know, you remember the price is the Snickers bar you buy every day. You do not remember the price of a television you buy every three, four or five years. And so as a result, when prices change in high frequency purchases, it sort of sticks in your mind. And every time I go to the vending machine at work,
I think, oh, that price has gone up. I remember when it used to cost seventy pence and now it's costing me ninety pence, And it sticks in your mind, and that then colors the view of inflation that you have. The fact that the television is twenty percent cheaper than the last one you bought seven years ago, you don't remember that because you can't remember what you paid in the past.
So the problem that.
We have is that when you see basically rising food and rising fuel prices, those are prices that consumers will remember and that will create a sense of dissatisfaction when you have food and fuel inflation. If you have an overall fairly benign inflation environment and there's something weird going on with food supply, that can create a peculiar situation where the central banker is saying, no, inflation isn't a problem at all, and the consumer saying, no, the cost
of living goes up. Look how much I had to pay the supermarket this week. So that's really the issue.
Paul, is that the situation now is that how you describe things and does it shape consumer behavior?
Well, what we've got at the moment, it's quite interesting. It's sort of a reverse of what happened under the last administration. So in the last administration, inflation was coming down, nobody really believed it because food price inflation was very high. There was an episode of profit led inflation from food retail. What has been happening this year until recently, his fuel
prices have been subdued. Food prices until recently have not been a particularly big problem, but durable goods prices have gone from falling to rising. And so you've got the reverse problem there that you've got inflation that people are not necessarily.
So aware of.
But what we've been seeing more recently in the States is food price inflation has been ticking up. Things like the price of beef, for example, has gone up very very dramatically. Coffee prices are soaring, and that is going to be more visible. So I think the noise from consumers about inflation, the political anxiety about inflation is likely to be ramping up as we see these higher food prices starting to emerge.
Stay with us more Bloomberg Surveillance coming up after this.
Sick in wit tech.
Jake Goldberg of Seaport calling the recent moves in AI bubble like behavior. Jake Goldberg joins us now for more. Jay, Welcome to the program, sir. You've got a rare soar rating on Nvidia. Let's just talk about that line bubble like behavior. Does the announcement from AMD and open Ai speak to some of that for you?
Absolutely, It's quite an interesting thing to wake up to this morning. We have a company that's giving away ten percent of its start to to a startup that doesn't have positive free cash flow to buy tens.
Of billions of dollars of their products.
Somewhere down the line, and that company's stock is up thirty percent. You know, on the face of it, I haven't had time to parse it, but it looks like a great, good deal for AMD over the long term. But it just, you know, the market reaction seems to be looking at only the positives and applying a zero percent discount rate to future events, not looking through the whole deal.
At the same time, Jay, in the past, we've seen earnings outperform again and again and again from these companies, and a lot of people will come on and say, if you look at the price to the actual income level, you've seen multiples come down, not go up, even with prices going up significantly. What about that story doesn't work for you in the same way that it did, say three years ago.
So I think, Look, I'm not a bear on AI and general. I think AI has the potential to be very important. But no technology gets adopted in a straight line. They're always going to be fits and starts. We saw that with the Internet, we saw that with with mobile. These things go up and down, they don't just keep running forever. And I think just assuming drawing straight lines, extrapolating from where we are today into some sort of never ending future.
That's not how things are going to work.
And I think we need just a little degree of caution around some of this stuff, where a lot of these things are getting very extended, just based on what the actual deployments are looking like and returns that the hyperscalers are getting on their investments.
What do you think is the most speculative at this point, Jay, I know that your call is on in Video, which is notable given all of the buy ratings that we see on it, But beyond that is in Vidia the biggest defender right now in your mind?
Well, I think the whole thing.
We have this sort of massive AI spend taking place right now, but if you boil it all down, it's really six companies that are driving all of that. Microsoft, Amazon, Google, Meta, open Ai, Microsoft, and.
I understand that their.
Imperatives and why they're doing this, but I think it is worth reflecting on that it's just six companies and none of them actually have a very clear return on their investment even in the works. They're sort of spending it because everyone else is spending. And then you have open Ai, who who is an incredibly capable company coming with great models, but at the same time, you know they're free, casual, and negative. So I think that sort of calls in the question the sustainability of all this.
And J's bringing in multiple sectors. It's energy, it's the capital providers, it's tech. I know based on some of your writing that you think this could exacerbate problems further down the road. Could you build on that just a little bit, that the concentration exacerbates the downside risk.
I think that's that's absolutely the case.
Where you know, when I hear my colleagues on the morning call talk about energy and pipelines and materials, you know, and they all talk about the AI element to their stocks growth, that just makes me pause. Like I've been covering semiconductors for over twenty years now, and I've always had good relationships with my peers, but we usually never talk about each other's stocks. There's never been a lot of overlap, and here we have everybody talking about the same themes.
It makes me wonder, Jane.
The energy piece of it is interesting. There has been a broader conversation people acknowledge the potential for constraints. Do you think that's going to be the first constraint the thing that shakes this up quickly.
Absolutely right, I mean, and I look at in video like I'm cautious on in video. I think if my rating here is more of an underperformed than a cell, I wouldn't short in video. But the issue is at this point in videos is kind of all the good news is priced into in video and none of the potential downside is priced in. There are a lot of things that can go go wrong that are beyond their control, and you know top of that list is electricity.
Right.
We don't know to the extent to which Open Aye is going to be able to deliver on all these all these electricity numbers they put out there, and like in just the last week they've talked about adding sixteen gigawatts of compute capacity. I don't think anyone knows exactly where all that power is going to come from. They have maybe some rough ideas, but I don't think all those are are a lock and that that's a real
that's a real problem. I think it's going to pause things somewhere down the road, Jay, how far are.
We from some sort of energy related constraint on how much the promises of expansion can really meet reality.
I think it's a little a little beyond my my scope, like I'm just a humble semiconductor analyst, But I do think we start to see more concerned about that in next year.
At what point do you see this also being a question of the US versus China, especially given deep seek I mean, do you think that that kind of issue is going to come to the four that there could be some new innovation that renders some of the big tech companies more obsolete in short order?
Well, I think that is.
It's this weird dichotomy we have where the US has chips but not all of electricity. China has all the electricity they need but not enough chips. So both sides face their own constraints. But I do think there are going to be some pretty significant I don't want to say breakthroughs, but sort of advances in China as companies like Huawei find new ways to build their own domestic supply chain that gets.
Them out from under these US restrictions.
They probably won't be as good as the best at Nvidia and amb have to offer, but they may be good enough for them to push ahead. There's a lot of an immense amount of AI talent in China.
I don't want to overstate it.
I think the US still has a pretty big lead in terms of just sort of fundamental foundational models, but there's an incredible amount of talent in China, and I think they're not as constrained as the US government might think.
Jay, just to finish on that, when you frame it in the following terms, when you say that China has the electricity, not the chips, that the US has the chips but maybe has the energy constraints, which problem is easier to fix?
I think it's going to be China getting around US sanctions one way or another, probably by building their own supply chain.
Stay with US.
More Bloomberg Surveillance coming up after this. Lindsay px RA stif will joined US now for more Lindsay, we didn't get payrolls. We're still waiting for that. We might not get CPI. We will get a FED meeting at the end of the month. I'm told they're essential. If they meet, Lindsay and they don't have CPI and they don't have payrolls, do they make the decision to cut interest rates?
Well, I think even without an updated look at the data. I think the conversation is going to be very fierce in the sense that we do have this growing number of FED officials that is increasingly concerned about the lingering level of inflation, that elevated level of inflation, and those
that are focused more on the weakness of employment. So even without a new data point, I think this conversation is going to intensify and complicate the ability for the FED to justify any further movement, and the lack of data, I think is going to reinforce the need for a more patient, cautious approach to policy from here.
What date are you watching right now, lindsay, given that the gold standard data, which is flawed, yes, but also is probably the best that we've got, what are you focusing on instead?
Well, I think right now, again, we still have a lot of information on the price side. We're still waiting to see whether or not we see an updated CPI and PPI report, but we have a lot of information coming down the pipeline to suggest that inflation is not necessarily headed back to that two percent price level. We see some of the Fed's preferred measures of inflation, the piece the core PC still up near three percent, with the most recent reports suggesting some upward momentum in the pipeline.
So again, I think it's very important that the FED stays focused on that mandate for price stability, even with early signs of a cooling in top line hiring. The FED should not completely abandon that price stability component, which it's failed to reinstate years now post the pandemic.
At the same time, we did see that job openings per unemployed people that ratio felt to the lowest in twenty twenty one in the recent JOLT survey. We did see the non farm payrolls in August that was highly concerning to some people, and we did see pretty significant download re visions to the overall payrolls figures for the year ended in March. At what point do you give credence to the idea that there really is a significant shift in the labor market that does also warrant attention by the Fed.
Well, we also see that jobless claims, while volatile, are still in a very low tight range. We also see the unemployment rate is still stubbornly down near four percent. So I think at the very least, the labor market data are not all pointing in the same direction, which isn't to say we ignore the data points that are on the weaker side, but it's to say it's not an alarm bell quite yet. It's something to watch, it's
something to be aware of. That being said, this is a very aged recovery, and I would expect, particularly given the reduction in international flows, that the need for top lying hiring to slow. As we heard from Chair Powell, he previously noted that full employment was roughly around one hundred and twenty five one hundred and fifty thousand in
terms of payrolls. Well, he has significantly rised that lower, and I think that's a more reasonable expectation for top line growth, not necessarily an expanding labor market, but certainly enough to keep stability in place in today's labor market.
Lindsay, can we pay that view with what's happening in stock markets and more broadly financial conditions. Do you think the feeder reserve is risking misplacing its anchor around the labor market, around the step down in payrolls, and ultimately fueling financial accesses and pockets of let's call it exuberance right now? Is that a financial stability concern that needs consider.
It really is, and this is something that we've seen before. We look at investors and they seem to be trading up on good data. That means the economy is relatively solid, trading up on bad data as well. Because this is that FED put the expectation that the FED will jump in and provide monetary policy support with additional policy easing,
even at the expense of maintaining still elevated inflation. And so I do think that the market has become complacent that the FED will continue to support the economy regardless of the balance in terms of the risks on both sides of the mandate tilting to one side or the other.
This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, antiopolitics. 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.
Mm hmm.