Bloomberg Audio Studios, Podcasts, radio News.
This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie 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. Joining usna's Tiffany
Wilding of Himco. Tiffany, Welcome to the program. It's there a stagflationary light mix coming together here on the data that you see.
Yeah, so I think we're getting what we expected on inflation. We're getting some pass through of tariffs. It looks like it's predominantly the firming categories are in goods, and otherwise things look at a little bit better. I think the more concerning news from the data this morning is the
jumping claims. It's been relatively contained despite the labor market, you know, really slowing to a halt over the last year and now the jump today looks a little bit more concerning, like we're moving out of of just a period of you know, very little activity or very little hiring or firing, you know, to potentially some more separations. And that's certainly that's going to be super concerning. I think for the Federal Reserve, you know, I agree with
Mike McKee. I think over all the data this morning, I think confirms a twenty five basis point cut. There's probably going to be discussion around fifty, although that's not our base case, you know, and I think there's there's reasons if you continue to see this kind of momentum on the labor market, you know, to get several more cuts in the back half of the year.
Tiffany, What I find interesting about the market reaction is that yes, so picking up on this idea that claims came in the wrong kind of upside surprises. John was saying that the trailing average is picking up at a remarkable, alarming speed, but that longer term, we're seeing the tenure yield now break below four percent for the first time this year. I mean, we're looking at a tenure that
is also responding. Are you changing your longer term trajectory for US growth prospects and the heels some of these labor market revisions and the sort of negativity that we're seeing from the claims.
Well, you know, I think that you know, just the fact that the US treasury market continues to be a hedge for for macroeconomic risks, for riskier asset volatility, you know, I think is why you're seeing movements, you know, in
the longer end of the interest rate curve. You know, I think when when we look at you know, sort of valuations, you know, we think kind of intermediate sector looks attractive here, does still provide risk you know against downside protection, you know, And it's something that you know that we've we've been very focused on. So it's not surprising necessarily to me that you're seeing it in longer
data and interest rates. You know. I mean, I think I think overall on the you know, on the economy side, you know, we are really entering this kind of period of weakness, potential weakness. You know, we'll see some fiscal supports that are offsetting the tariff effects, but they don't kick in until you know, the beginning of twenty twenty six, you know, call it February March, when when consumers are starting to get really big refunds from retroactive tax cuts.
But until then, we're really kind of in this period of weakness. And to us, the question is some of these smaller and mid sized businesses that are really having to shoulder the effects of tariffs, maybe they're not getting as much benefit from the one big beautiful bill tax cuts. You know, can they really hold on here without firing people? You know, and it seems like, you know, maybe there's there's more concern around that, you know, as as we as we're as we're watching the data.
Tiffany wild think of PIMCO. Definitely great to catch up with you, and you've got to catch up with clients too, So thanks for making sign for us this morning. Let's move in the bond market. This data is good for bonds, it's questionable for equities. Equity is just about unchanged. We'll see if this move sticks. But at the front end of the curve we're down six basis points, and as Lisa pointed out, we're down across the curve and this is largely because of the way the Federal Reserve chairs
set things up coming into September. He basically told us the following that you could have one off effect on inflation, but not all at once, and the labor market data was concerning him, Which is why we're seeing yields down this morning, because there's a much more emphasis on what we're seeing on claims.
And it seems like the idea that you're seeing a pickup in layoffs, to Tiffany's point, raises the question of how companies are adapting to some of the higher input costs. I was looking at some of the specifics here in the CPI print. Airline fare is up five point nine percent on the monthly basis, So again it talks about the K shaped economy and how the FED is trying to cater to people who cannot afford to pay that those who can are.
David Kelly of JP Milgan Asset Management standing by David, you've been looking at the data. Just when your first reaction please, I.
Think, both of regard to the CPI and with regard to the claims, everyone should sort of take a deep breath and not overreact to them on claims. Key thing to think about is last week was a week that contained a Monday bank holiday or a Monday a bank holiday called in the UK, but a Monday holiday labor day. The unemployment claims data are notoriously bad in a week that contains a public holiday. They've just had never figured
out how to seasonal adjust that properly. So I think that's an overshoot on claims, and I would not be surprised to see that number come down next week. Now, it still fits into a mosaic of a slowing labor market. I don't deny that I think the economy is gradually grinding into a halt here, but I think that overstates the deterioration in the labor market. And then similarly on the on inflation, these numbers are very close to in
line with what we thought. The big surprises were probably an increase in motor vehicle repair costs two point four percent month over month, and then as East was just saying, a five point nine percent increase in airline fairs. But remember they felt very sharply over the course of the summer as the airline travel was down. Now it's picking up again in this case shaped economy, So overall the economy is still moving forward slowly. Inflation's gradually going up. The
economy is gradually slowing down. That's what That's what we thought tariffs are going to do. It's going to slow growth and it's going to add to inflation. But I don't think it's nearly as dramatic as either of these numbers suggest this morning.
Well, David, let's just stay on the labor market story, because that seems to feel that the market is moving on, at least initially. Do you think the claims data maybe overstates the weakness. Do you think they step down in payrolls growth overstates the weakness too.
No.
I mean we saw the big down revision yesterday that or earlier this week. That was not a surprise. No, I mean there's there's weakness that The thing is, as j. Pallace pointed out, it's a very curious kind of labor market because we're having a huge reduction in labor supply at the same time. So this does not speak of significant, you know, labor markers weakness. I mean, it's still a
tight marker. It's still hard to find good people. But I do think it's it reflects the fact that people that businesses don't want.
To hire here.
I don't think there's a huge ongoing jump in layoffs, but it's getting harder and hard to find a job because businesses are just frozen because they don't know what the playing field is going to be with regard to tariff's going forward. And I think that is, you know, that's the biggest thing that I think.
People are ignoring here, David.
A lot of people are hoping that things pick up in twenty twenty six, that the growth story gets better fueled by the right cuts we're about to see. Speaking of things, maybe that we underappreciate something you've been talking about for a while, this tax bill, the kind of stimulatory effect it might have in twenty six. Could you just sort of outline that for us this morning.
Absolutely really important. All these new tax cuts, getting rid of the tax on tips over time, increases, standard deduction and so forth, the sole tax break, all of them were made retroactive to January one, twenty twenty five, but the irs is not changed. With holding schedules, that means that there's going to be basically a full year's worth of refunds on all of those tax breaks kick in in the first few weeks of twenty twenty six, or first few months or twenty twenty six. That is the
equivalent of big stimulus checks last year. The average incompact three fund is about thirty two hundred dollars. This next year in twenty twenty six, we think it's going to be over four thousand dollars, seventy percent of households receiving that. That is like one big stimulus check, one big lump of sugar put into the economy early next year, so we can get to the first quarter without slipping into recession.
There is you know, there'll be some stimulus there, but I do think that between now and then the economy is going to be slowing in the fourth quarter.
Stay with us, mul Bloomberg Surveillance coming up after this, let's tand to tack Oracle shares hiring the free market after gaining the most since nineteen ninety two. On an aggressive outlook, vadimas AzaC of the global head of Digital Infrastructure at KKR right in the following we're living through the largest build out since the Interstate Highway system, a ten to fifteen trillion dollar wave to rewire the global
economy around power, compute, and activity. Vatama joins es now for Marko Monitor, Good morning, it's going to see you. Thanks for being here. Let's talk about these demand numbers. The demand we're seeing is real. Yes, yeah, there is still this conversation about a monster misallocation of resources coming together. What do you stand on there?
It is a really the right question to ask. We don't see it, honestly. I think if you look at the fundamental spent relative to any other indicators from a bubble stand perspective, right, I mean, often comparisons and drawn to the dot com bubble and you know, other housing bubble, et cetera, it doesn't appear so and all of that compute that is ultimately being procured is getting consumed and deployed.
I think the question that you're sort of leading into is is there ultimately a business case for AI to be made? And I think there are a lot of great data points that would suggest, you know, adoption is increasing, use cases are increasing, is enabling it? Tromento, There's amount across the economy and society generally speaking, but there isn't the killer app so to speak, that would suggest that the ROI may be justifiable.
I think the issue for many people as well who experienced the dot com bubble, the bust, and the boom that followed. Really afterwards, it took a long time to find out who the winners were. And to begin with, you had to have everyone throwing money at the wall.
To see what sticks.
And if we go through this process now there are risks involved in that. How do you navigate some of those risks at the moment it is?
It is again another excellent question which you would expect on a morning show from you guys. But I think you know, our approach at KKR has really been pretty simple on discipline, right. I think we focus. We clearly are one of the leaders in digital infrastructure and in the power ecosystem totality about sixty five billion dollars of capital that we've invested in that. Over the last few years, we have seen the convergence of those two mega themes,
which is really interesting. I think we talked about this on the previous show, and I think it's now really applicable. You're seeing data centers are no longer about rex, it's about watts and megawatts of power compute right, They're AI factories, And I think that convergence is really in place. So I think for us so we've been focusing on core and core plus markets for most of our compute. This is where ultimately data is being generated and processed by users.
We focus on high quality customers. We do not chase yield on very speculative business models. I think we focus on fungibility in the use of these assets. It may have been enterprise five years ago, today it's cloud, tomorrow, AI, whatever may come next. And we ultimately are not making
bets on field of dreams sites. It's really trying to focus on things that if there is a contract high quality counterparty, we start building and deploying capital against that that Maybe all of that seems logical, but I'm not sure that's universally adopted in the industry, and I think we differentiate ourselves in that approach.
I guess one of the fears in John was alluding to it is this idea that everyone gets incredibly leveraged to a couple of key names and makes really big bets for a long term development at a time where we don't have a great deal of visibility into how this is going to be adapted, how this is going to be really transforming the economy, and frankly, the way
that we live our everyday lives. So how do you hedge that concentration risk at a time where what you offer is the balance sheet to really deploy to these big blue chip players.
Yeah, I think you're right. It is almost a Barbell strategy. I think if you look at the market and if you look at the performance and the haves and have nots, it's been sort of that Barbell view. And certainly the mag seven are such an incredible driver of the growth. Thirty percent of the US spent on AI is driven by those three names. Seven hundred billion dollar capex thirty
five percent a year over year. That's, by the way, seven hundred billion is equivalent to the entire spend for the fiber buildout in the nineties and we're now spending that on an annual basis, which is sort of incredible to think about the quantum of dollars. And so I think if you look at that, certainly needed the Meg seven, all of those names, pristine balance sheets, incredibly free cash flow generative.
Right.
I think we are looking at certainly trading multiples and p racials and spend, but they're not overspending relative to the free cash flow that they're generating from either their existing core businesses or the convergence of AI integrated within their sort of existing business models. So you're right, you have a customer concentration, but the customer concentration is in fact with the highest quality names that you probably want to do if you're investing in infrastructure.
From our point of view, where's the concentration investment when it comes to data centers versus energy production? And this is another sort of key question at a time where people are building data centers as quickly as they can with a question around deep seek and whether we can do this more efficiently with smaller data centers and less energy, and then we don't have the energy to actually fuel those data centers that are getting built.
So where do you sort of stack up on sort of.
The dissonance between the development of those.
And this is why it's such a wonderful time to really be alive and doing what we're doing. And certainly, you know, an infrastructure investor wouldn't think about being in sort of such a growth industry, but it's really incredible. I think if you look at a couple of stats, we certainly have had stagnated sort of demand growth in the US and the power industry for the best twenty years.
That is now a massive inflection point. Globally, the expectation is that data centers will consume something like ten percent of global power in the next ten years. By the way, that's equivalent to India by two thousand and thirty. So if data centers were a country will be third after China and US. So certainly power consumption is increasing. There are a couple of dueling factors. You do have efficiency which is certainly driven by chip manufacturings by algorithms, which
is incredible. That's ultimately driving the cost of the delivery of the compute. So just in eighteen months, if you think about the tokens which are being used for I think of it, you know, Training for America we talked about earlier, it's calories for AI. Token price has gone has decreased two hundred eighty x over the last eighteen months, which means the adoption is increasing. If you look at about token usage has increased four and a half thousand percent,
So certainly usage is increasing. I think if you just go back to your question, I think most of the capital today is being spent on data centers, and then there is an increased capex being put in grid and certainly power generations. So we're starting to see that trend line actually converging. But in terms of growth on an adjusted basis, it's really been those two that are probably the biggest drivers of the.
Capex is deregulation and getting rid of some of the red tape. What comes when when you have to make these AI data centers actually keeping up though with that capex fend you're.
Seeing is it is really interesting because sort of from a policy perspective, there's two dueling factors that are.
The collision course.
One is when the AI race globally, and the second is protect the rate payers, which you know in the US over the last five years we've seen about twenty five percent increase in power price. And I think there are a couple of things that are happening and including I think elimination of some of the red tape and streamlining of approvals, and I think those are great things by the administration to help enable the build out of
this infrastructure. You can just turn power on overnight. It's a four or five year cycle to build this infrastructure, and I think that is a great step towards that. Now we're even cutting through the red tape that is helping solve things three four or five years from now. We have a gap in the next twenty four to thirty six months. So what can be done. I think we can optimize the grid. There is dynamic line rating,
there's investment in superconducting cables which minimizes the loss. There is sort of a There are all sorts of innovative solutions like the one we just deployed in Texas, where you collocate a data center with a power plant. You have a way to effectively augment and draw electrons from the power plant. You have a way to support the
grid in cases of emergency. I think innovative solutions like that will help bridge us into the next phase when we see this massive development cycle of most likely natural gas power plants, and of course at some point we'll talk about nuclear and nuclear will be five ten years from now. I think that's the long game. From a carbon carbon efficiency and just a general efficiency of power generation.
There's a feeling on Wallstreet right now. They're scared of this. They're saying, maybe it's gotten over its skis you travel to Silicon Valley and there's just absolute object euphoria. Can you bridge that gap the idea that everyone's trying to poke holes over in New York and in San Francisco, people are just running around saying we can't invest enough.
It's yeah, it is interesting. I do spend time on the West Coast quite frequently, and it's incredibly energizing when I'm there and coming back and you sort of have this wet blanket put a new in terms of all the skepticism. But I do think that there is a
bridge there. I think there is now. I think a bridge and understanding of certainly, I think the technology mindset of you know, move fast and break things has to come and somehow be bridged in terms of building of this infrastructure, which is really a very different investment cycle, very different risk cycle, and a very different cost of
capital cycle. And so I do think that we're helping bridge that gap and saying this is incredibly obviously exciting, but you have to obviously capitalize as.
An efficient way. And by the way, the quantum of.
Dollars that we're just discussing, whether it's ten or fifteen trillion dollars, the annual spend requires all sorts of different innovative, creative and sort of a holistic solutions to help build out this infrastructure. I mean, Oracles earnings yesterday, which we touched on earlier this morning, were just terrific. It's incredible to see that. So you have a half a trillion dollars of backlog, and then the news this morning that's
another three hundred billion of backlog. The numbers are starting to sort of seem silly. We're moving from billions to trillions. And you know, that amount of infrastructure will require many many gigouts of power, many many gigouts of compute. And that's why you see, you know, or power companies move up on the news. You see the chip manufacturers move up on the news, you see data centers move up
on the news. Because it just suggests that we're still in a very early evenings of that investment cycle that is taking place.
Stay with us. More Bloomberg surveillance coming up after this. Let's turn to Thomas Show of KPW, a Stifel company, for more. Tom, welcome to the program.
Good good morning, good morning.
Before we talk about this, let's just talk about what day it is you were headquartered in the World Trade Center lost sixty seven people that day. I want to spend a few moments with you just to think about what that day still means to you today, and how we ensure that this generation that's now coming on to Wall Street who weren't alive that day hadn't been born, how we make sure they don't forget either.
Correct, thank you. Yes, we think it's very important to not forget. We said that day we were never going to forget, and there have been a lot of big pieces to what never forget means, because never forget means different things to different people. One of the things that we're doing is making sure that nine to eleven isn't
defined just by the people who flew airplanes into our building. Instead, I'm working with a group nine to eleven Day dot org, which is a group that KBW helped found to think about the resilience and the goodwill and the rebuild and honor the victims of that attack with that spirit. So we worked with Congress and in two thousand and nine we got Congress to pass a law making nine to
eleven a national day of service. And we think today they're going to be thirty three million Americans who participate in the Day of service to remember the victims of nine to eleven and to remember the resilience and to remember the goodwill that it took to rebuild. There is one service project in particular that we support. We're going to be in twenty four cities in America today. We're going to pack close to nine million meals for those
who are food insecure. We have over eight hundred corporate customers, it's our corporate partners. In this next year, our aim is to try to double that for the twenty fifth recognition and anniversary of nine to eleven. To continue to talk about what it took for America to.
Rebuild after the attack.
So you don't end up with nine to eleven being two paragraphs in a history book.
We're not going to let that happen.
You'll contribute in to a lasting legacy and making sure it's a positive one. So I think we're all right behind you, sir, and thank you for being with us today to talk about it. We need to talk about the broader business world too, need to talk about what's happening with banking activity. Things are bouncing back and you can see that and hear it in the words of Jane Fraser of City, you seeing that too.
So I've been a guest on your show many times over the last couple of years. The factors that were headwinds are now tailwinds. I'm about as optimistic on the fundamentals of the banking sector and financial services in general as I've been in several years. There's revenue growth, there's earnings share growth. We're looking for ten percent this year and next. The economy is okay enough, So that's all very bullish.
And then there's the other stuff.
Which is, rather than regulatory attention slowing down financial services, it's now resetting to where it typically is, which is one that's more supportive of growth. So the consolidation is going to restart in the industry, and the other things. I heard you talking earlier about how the market's at an all time high six straight days. I think in the NASDAC of records, the reality is you don't have the downside risk and the valuation for the financials.
While the stocks have done well, they're still well.
Far away from their historic norms. There still is a lot of valuation upside in the financials. And my experience is is that when earning's estimates are going up, profitability is improving, the stocks tend to do well.
So a lot to unpack there.
I want to just hone in on the idea of the mergers and acquisitions we have seen some of those announced in recent days, the PNC one coming just a couple of days ago. Where are we in this process? How much more of that do you see in six months?
So my opinion is we are approaching the endgame. There are one hundred and forty banks in America north of ten billion in assets. Ninety six percent of the banks in America are below ten billion, our community banks ninety six percent of any numbers almost all of it.
There are very few banks above ten billion.
And I think the bigger banks are beginning to think about what the endgame's going to look like, and they're being very strategic and thinking about these acquisitions. In the previous administration, it had an antim and a bias and wouldn't even give an answer to bank merger applications unless they were forced to. Now the administration's gone back to what historically had been the case, and they will give
you an answer to a merger application. That's all the industry needed to restart the consolidation wave and where it's underway right now.
So what does it look like in the end? Is it just a couple of sort of the megas and then this sort of media megas, anyone else.
To take the funnel real quickly? Remember the non banks we were talking You were talking about Larna earlier. Financial banks used to be half of the SMP five hundred waiting in financials.
Now they are a quarter of it.
We think Areas is going to get added to the s and P five hundred next. That's a very big, eighty billion dollar market cap company. So banks are a smaller piece of the financial services industry. They're competing with Klarna. They need to have the scale and the capacity to do that. Otherwise the industry will evolve with four really big banks and then a lot of other ones that
are much smaller. The best thing to do for the economy, in our opinion, is to allow these regional champions to get the scale to compete with the big four banks and then compete with non banks. And I think our economy and main street America will be better served if that happens.
She's incredibly optimistic about bank stocks right now? How hinged is that to a reacceleration underlying economy versus a secular shift.
Let me talk to you about the one thing that can stop it. The one thing that can stop it is credit quality. So this past week was the Barkley's Conference in New York. It was the last big channel check we get for the quarter. Everybody's saying the same thing. Credit quality continues to remain pristine. The industry is over earning on credit at the moment. It shouldn't always be this way, so there will be a moment where credit costs go up. That shouldn't be the surprise. The surprise
is for how long it's been essentially zero. So as long as as we have a solid enough economy, then I think the bull story is very much intact.
Usually, if we.
Get a credit cycle, investors tend to sell bank stocks first and ask questions later. So the fact of the matter is we don't see a credit cycle on the horizon in the banking sector. So our view is that that is what's necessary. And one point nine percent GDP growth is good enough to keep the fundamental story in play. And actually the banks are talking about accelerating loan growth, which is a positive part of the story.
Can you just remind everyone, it's my favorite stat of yours. Just remind us all of the top ten mortgage providers in this country now and how many banks are in the top ten compared to say, a decade plus so.
Pre global financial crisis, eight of the top ten mortgage originators were banks. Today three of the top ten are banks now. The question along that line, John, is did banks forget how to make mortgages? They're all primarily founded to make mortgages, and that is regulation. Because the response to every crisis is regulate the banks, which tied their hands, which is why the non banks have so much market share.
The right thing to do is to take the foot off the banks, let them compete with the non banks. And I think you can do it without putting too much risk in the system because the risk has just gone elsewhere, and it's gone out side the supervisory umbrella. And when we get the next cycle, we're going to find out if we were better off.
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.