This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. Right now we get interesting GDP revision perspective from j Brice and
the chief economist at Wills Fargo. Jay, do you get a lot of value out of a second look at GDP? And dare I say the third look?
You know, there's a little bit of value in the sense of what you get in the second release is the first estimate of gross domestic income. It's the income side of the national accounts. It should, in theory be the same thing as GDP, So you know, I'm not sure what that came out. As you get some of that, you also get corporate profits, which are also important for the economy. So you know, I look at more of the income side of things that in the second look here than I do.
And you know, in terms of the demand components.
Jay, how to data dependent? Can you be if you can't rely on the data.
Well, you know, it's you're always flying blind in this economy. And I guess what I would say, at least right now, is is you know, there's a lot of choppiness, there's a lot of noise out there. I mean, I kind of the big picture here, I think in terms of the economy, is it continues to expand. It seems a a I call it modest pace at this point. The labor market, I think, in general, is holding in there. And I think we know that inflation has come down,
but it remains kind of elevated. And so I think that's the real narrative that we have to you know, we have to manage to at this point.
Well, the narrative has been all over the place this year, as we all know, as we've all been trying to track. And I'm wondering whether this idea of immaculate disinflation moved to perhaps rapid inflation. Now it'll slowly go away and we don't have to worry about it anymore. Is the market underpricing the risk of having to worry about inflation for a longer period of time forcing the Fed's handle a little bit more.
I think least that there's something to be said for that. I mean, if you look at market pricing, and you folks were talking about it earlier, you know, at the end of the year there's rate cuts priced in there. I think some way to make sense of that would be the market isn't really good at making precise estimates of probabilities. One way to look at that is a low probability of a really big move by the end of the year because something has blown up, whether it's
the debt ceiling or something else along those lines. But if that doesn't happen, then I think that there's a really good possibility that or there's a possibility that you could get stuck at an inflation rate that's higher than three percent, And I don't think the market is priced for that, because I don't think the Fed would be cutting in that situation, nor would they actually probably.
Be on hold, probably raising rates even higher.
Jay the heritage of Wells Fargo economics, from John Silvia to J Brice and has just been brilliant on the demographics, the movement, the fabric of this nation. Do you believe in a rolling recession. I mean, we're aggregating in even to the silliness of an Nber estimate of this dreaded our word. But should we have a belief in a rolling recession given all of the fractured parts of the American experiment?
Well, yeah, Tom, and I think there's you know, it depends on your definition. And rolling recession is I tend to think of one as hitting different sectors at different times. And so you know, if you look at housing, Housing clearly slumped last year, there's some evidence to suggest that's probably stabilizing. Manufacturing at best has kind of topped out. The thing that's holding in there right now is consumer spending.
And you know, if you kind of go forward here, if you do have weakness in housing, if you do have weakness in manufacturing, you could see some job losses there and then that could then bleed over into consumer spending.
And so you could have not all sectors.
Going down at the same time, but you could have this, you know, as you talk about this kind of rolling, you know, sort of recession thing going.
On, and you Madge, the smartest thing I've heard today was Lisa Bramowitz, our airline analyst on Delta Airlines. I mean, that's a single smartest thing I heard this week. Is completely ginormous sold out. And that's personal consumption, and in one way that's personal consumption.
It's absolutely personal consumption, so your whole paycheck if you try to travel a lot. I do wonder Jay, though, just going forward, whether we do see some sort of seismic shift coming down the pike for the US, given in Nvidia, given AI, given the tech giants that were left for dead sort of and then suddenly reprise their greatness this year. Do you think that this is a lasting trend that has implications for jobs, that has implications for a gross domestic product.
Oh yeah, absolutely.
I Mean the way I think about it is AI is a potent a productivity game changer. You know, it's it's another you know, I don't want to get too dramatic here, but you know, industrial revolution. You know, maybe it's not an industrial revolution, but it's kind of like when we first went to the networking of computers and the internet back in the late nineteen nineties.
I think it's even bigger than that as it comes along.
You know.
The issue though, obviously, is not only is that a productivity game changer. It has profound right, social and political implications and that's going to last for years and years and years.
Doctor Bryson, thank you so much for joining us. Brilliant Jay briceon there, Wells Fargo, Parson, Yes, claim some news there. Thank you to our Washington team for that great reporting on Massachusetts claims fraud. This is a joy. Douglas Holtz, ecan out of the Princeton Shop, has done serious work
on the debt and the deficit. I'm not going to demean him by asking him about Oval Office discussions of that, but I mean I canna ask him about where we are, of course, is work with the Congressional Budget Office and President of American American Action Form, Doctor Oltzik. And I'm going to cut to the chase you go where the CBO goes, which is to try to estimate our growth rates of revenues, which I think is called taxes and spending.
Where are those glide pasts going to be after this debt crisis.
I think it's important to recognize that regardless of what deal has ultimately struck, it will put the tiniest of dents in our fiscal challenge. The fundamental problem is in the large and titlement spending programs, they're off the table. There's a room to raise more revenue that's off the table. So we're not addressing the issues that face the federal government, the budget and awestly. Until we get serious about slowing the growth rate of the big and talent spending programs,
the budget will never end up. They'd simply grow much faster than revenue. Ever plausibly will.
I mean, I look where we are, and we need a commission. So we need a commission with people with z in their names, so I can really see orzeg, whole teaken or whole teacn orzeg is an intelligent commission that Americans would know as intelligent people coming to an intelligence solution. And yet we're not talking about that. Why not?
This is politics, That's all there is to it. The issue is not the debt ceiling issue, not default. There's unionimity that we have to raise the debt ceiling. There's unionimity that we should not even come close to defaulting. There's a big disagreement about the future of fiscal policy. I think it's healthy that this has been highlighted to
the American people. My concern has been that in the twenty first century, we've never seen the debt do anything, would go up, even relatives to the economy, and there's never been the political wherewithal to stabilize it, which is I think the necessary condition for the US, and we really haven't talked about it if you think fact to the presidents we've had. I worked for George day Bush I fron greatly, but his budget said let's win the war on global terror. Look at the eight years of
the abodm administration. The only thing that they said about the federal budget that might be a problem is the rich didn't pay their fair share. The Trunk administration said nothing for four years on and deficits, and the Biden administration came in with really enormous plans to just expand spending. And so the American people can be excoose or not understanding.
We have a big problem and we do well. But it's time they were told that and that, you know, addressing it is the thing that we have to do next.
And Doug they've perhaps been told that, but as Leslievinjamory said of Chatham House earlier in the show, it doesn't mean that they're going to accept that they get less at any given day, that they're going to get fewer benefits, and there does seem to be a shift on both sides of the aisle to adding whether it's respect to investing in technology, whether it's respect with respect to investing in infrastructure, or whether it's just the spending that we
already have in place. It doesn't seem likely that we're going to see restraint in the near future, regardless of what comes from this budget. What's your view in terms of what it would take to make people truly care about a debt limit that doesn't really seem to matter. If they could just kick it up and they can keep borrowing at relatively low rates.
They shouldn't care about the delimit there's no real economic crash now for having a delement or the major economy and the globe that has one, and it doesn't make any economic sense. They should care about the fact that the spending exceeds the revenues as far as the eye can see, and that leads to real threats. They should care even more about the fact that because the entitlement spending is claiming all the revenue, there isn't money for
real investments. We're squeezing out national security, basic research, infrastructure, or education, the things our founders saws the role of the government, and that's a serious problem for having more prosperous feisure. And they should care a lot about the fact that those big programs are taking all the money and they're not financially sustainable. So Street is going to
go bankrupt in ten years. Someone who's fifty five literally can't play and their retirement because they haven't fixed social security. That's just unconstable. That should wagh people up.
What's your sense of the tax revenues. We've been talking about how bumpy and lumpy it's been, and that it's been underwhelming. How much is this a lack of investment in the IRS and a lack of tax collection.
We've had a long standing problem with the IRS. It's beyond merely the technology. It's an organization whose culture has been deeply broken, and so it is time to get the IRS back to its job, which is to collect the taxes and do it effectively. We somewhere along the line decided everything should be a refundable tax credit and
turn them into a benefits paying organization. They weren't built to do that and they struggle with it and so identifying its mission, getting it staffed up, giving a modern technology are all essential.
Great to catch up doc. As always on this Douglas Hall Teak in the American Action Forum.
It is wonderful to have Diana a MOA with this, your chief investment Officer of Long based Strategies, Kirkanswall Capital Partners. This morning, I want to go right to the pro discussion, which is you people say be an EM participate in EM. Every textbook, every paper says you have to hedge, to hedge or not to hedge. Is the core issue with EM. How do you hedge EM right now?
Well, if I'm assuming we're talking about hedging the currency risk.
Here, I go either way you want. But the answer is in financial media nobody talks about this reality that you have to hedge EM.
Well, the reality is when you look at performance in the marging market, it's actually been quite resilient. Two things that have been quite notable in the last few months. Realize, volatility in emerging market currencies and also in a marging market fixed income has been much lower than in developed markets.
Argue part of that is one inflation outlook in development market is much stickier, whilst in the emerging market things appear to have picked but there was some support coming through from a week of dollar in the first half.
Of the year.
So that's the reality that emerging market right now this year, If you'd hedged out your currency exposure, you'd have actually been regretting it because most for the most part, EMFFS has done well. Where we are right now, I would say you still want to have em duration. It's a trait that works in multiple scenarios of the world. Irrespective of whether we have a recession in the US, whether the FED cut rates or not. The outlook for emerging currencies I think for the next few months might be
less clear cut. But if you have a rangebound dollar, I would suggest actually maybe not hedging that urging.
Let's annoys some people with Diana. It's about it a clot had the coffe They've woken up that we really engaged when we talk about em Are we talking about the US, the UK, Europe? Who are we talking about?
Well?
Typically people say it's the distress stories that you need to watch about. Where are we talking about default?
Now?
John?
The US?
There you go.
But you know, classic definition would argue, you know, US doesn't qualify for an emerging market, but certainly what we're seeing right now with this default talk and the lack of consensus on how to manage the fiscal situation is raising some red flags and making emerging markets look relatively not too bad.
I have a simple am test. I've had it for a long long time. Go something like this, if things get bad in that country, do you buy or sell the debt? It's as simple as that. Now, typically in development markets, what you do when things get bad in that country, you buy the debt. Typically an EM you sell it. What's happening with treasuries right now, because I'm struggling with it. I know it's all at the front end, the bulk of it, but treasuries is selling off and
have been for like the last ten days. What's going on there?
Well, the thing that's interesting with the US market, you're seeing these locations, particularly in front end paper, things that are going to be impacted by X date the June paper.
We are definitely seeing this location in pricing, and that's just a fact of the fact that there's no cross default closes in treasuries, so they can't technically default on a paper without it affecting the rest of the curve, and so markets are treating it that way, and the assumption is if you do get a technical default, it's going to be a short, short lived story and actually
might tip the economy into recession. So you're seeing this sort of inversion in the curve where people are buying some safe, safe haven duration just to hedge against this outcome.
So for people who might consider some of the developing world's emerging markets, some people on the set who might make that suggestion about the US, Others would come out and say, what about Nvidio, what about the tech giants that have performed really well? And they relate this to the bid for US stocks, a bid for US assets
over the past decade as being a huge driver. How do you sort of play that story at a time when emerging markets have gotten bid up so far this year and all of a sudden, people are realizing perhaps there's something like to the US.
Well, if you look at the performance in US equities, I think there's a huge amount of dispersion within that. So it's not a one trade for the whole U S equity markets. I think it's specific themes that are more longer term and structural, things like the adaptation of AI. What's that doing to various companies and sectors. I think
that's a theme that's here to stay. I wouldn't say that that means you buy the whole equity market, but you definitely look for some of these more resilient stories that are going to play out irrespective of whether we go into a recession Lisa, and then from an em perspective, most of these innovations are quite commodity intensive, so that's
also another theme. Whether you're talking about things like AI, electronic vehicle adaptation, the drive towards more sustainable sorts of manufacturing, that's a commodity theme that's going to be also a longer term story.
How do you.
Understand the valuation at a time or when some of these starcks are trading like penny stacks, even though they have nearly a trillion dollar valuation.
It's less about that than more about for more in my view, So markets don't know what to do with equities. We've been talking about recession, going from recessions to default. People are jumping on the stories that look sustainable. So the valuations right now are It's hard to say it's based purely on fundamentals and more about investors being underinvested in equity markets and not wanting to miss out on the winners.
If you look at all the cash out there, and I don't mean just you know, typical investment cash, but private equity crash, just the genormous amount of cash has been raised, do you just assume it will float to equities or does it just stay like a brick in cash.
No, I don't think we're in that world where equities is the no brainer play anymore, especially not when you have such interesting yields in fixed income. And I think for investors that's probably the consideration where whether you're looking at cash yielding close to five percent or even duration in certain parts of the market. So there is money
definitely on the sidelines. But I think the days of just buying equities blindly because you had easy monetary conditions are behind us, and the investors will look at a much more balanced portfolio.
Diana, awesome as always, I'm really good to see you in person, Diana Ramo. There of Kirkus World Capital Partners joining us now is Larry Adam, the chief investment officer at Raymond, James Larry. Let's break this interview up in two. We can talk about the debt scening. At the moment, I want to talk about this row and rally in tech so far this year. Is that something you want to fight or participate in?
Now?
We want to participate in it.
I mean, if you'd look at tech, it continues to reinvent itself over and over.
The latest generation is going to be AI.
And I think as you look at the visibility of earnings, you continue to see a strong earning's coming. And I think that that's important because a lot of people continue to say that tech has gotten expensive. But when you start to factor in how much tech has been able to beat their earnings, I don't think it's as expensive as what people think.
And I think that trend is going to continue.
Is tech just big tech or is it all tech? Is basically time to go into some of the beaten up smaller tech stocks that aren't necessarily as profitable.
I prefer bigger tech.
I mean, first of all, they're much more diversified than the smaller tech companies.
I think that's an important discriminating factor.
Right back twenty years ago, tech was one trick ponies where they had one product, one piece of software hardware software, where they had to fight the upgrade cycle.
Now they're much more diversified.
They have plenty of seeds planet that can continue to generate their earnings going forward.
So I continue like the big tech names.
And by the way, from the index levels, you guys have just stated that's what drives the index.
So I think you have to be there.
Larry, just because you're down south, they want to go to DeSantis. And the conference call with mister Musk that ran like a Raymond James Swiss watch that we saw last night, you really emphasize second half of a third year of a presidential administration. Discuss the second half of a third presidential year.
Well, I think it's important because what tends to happen in the markets is that momentum tends to beget momentum. And if you look at the strong start that we've had to this year, the first one hundred trading days, which by the way, today's the one hundred trading day of the year, when it's up more than eight percent, the rest of the.
Year tends to be strong.
If you look at this presidential election cycle that you're referring to from June to the end of this year. Historically, ninety two percent of the time the market continues to be positive, and that's been consistent through time. That this third year of a presidential term is fairly strong.
Does cash of five percent, four point eight percent, whatever? Is that competition for your bullish view?
I mean, it's clearly become more competition today, right. I think at the beginning of this year we were much more positive on the equity markets with upside of fifteen percent. But clearly we've had a rally and our upside to our target now is around six percent.
So clearly it's become more competition.
But I still like the equity markets longer term for people that have a long term horizon.
Some went to the politics finished there, Larry, the desk sitting debate at the moment, what do you actually came in the clients should do?
I still think that this what's going on down in Washington is still pretty much noise, right.
I mean, I think.
The looking putting, you know, the US on watch by Fitch is just another warning sign across the bow. I think in the end we get a deal at the very last second. If we don't, I think the downside in the market is probably five to seven percent. But then, as I always say, the fourth arm of the government, the stock market, will come to the rescue. We see it down, you know, we see that downward movement in
the equity market. That'll bring people back to the negotiating table and we'll get a deal done and we'll move forward.
Is there a signal here that you're sealing dollar strength despite the concern of a US default. This is basically fly in the face of people who were questioning the pre eminence of the dollar as the global currency and prompt you to actually go more into the dollar.
Look, I still think the dollar will continue to be the dominant currency. I really don't see any other currency out there that can really challenge it.
This is not a news story. People have been.
Talking about the dollar being challenged with the yen back in the eighties, the Euro in the nineteen nineties, in two thousand, I don't think there's any question that the dollar will remain the dominant currency going forward. I think the two factors out there right now is when you focus on the Euro, the Euro and Land is probably going to continue.
To raise interest rates.
The US is going to continue to have better, more dynamic growth going forward, So we're looking for more of a range bound, particularly versus the Euro between one oh five and one ten, and for the most part, that's where it continues to be.
John, he's way too optimistic for six h nine am. I mean, Larry's way too optimistic.
That's Raymond James.
Thank you say that's great.
We talk, we speak, we're amateurs. He's not. Mandy Singh joins US now senior Technology and Vidia Analystic Bloomberg Intelligence for a really important conversation. I got a bunch of questions, Mandy, but let me just simply start with the addressable market out there over the next decade. There's been some pretty good work on this. Is it like the cloud where it seems never ending for Nvidia excellence, I think so.
And what they have done really well is they have gone beyond this narrative of you know, Nvidia being just a chip company and they have actually proved it in the way they have gone about their product launches. So now they have been partnering with the hyperscaler, especially Microsoft, and it's an application that sits on top of Microsoft cloud,
which is how you consume generative AI. And I would say the addressable market for that is north of trillion dollars simply because when you look at how these services are deployed the underlying infrastructure, that will become a much bigger portion of overall IT spending. So whether the hyperskillers let Nvidia kind of continue with that, I am doubtful.
I don't think AWS is on board with that strategy or Google is, but Microsoft definitely is, and that is what is working for them in terms of that cloud plight mandate.
What was amazing about yesterday in the guidance was the timeline. It was the fact that this demand seemed to have already appeared in their outlook and the near term outlook for the current coredroom beyond mandate. Have you've got a sense for where this has come from, how they're able to monetize it right now?
Yeah? And I think what is very clear right now is Intel has given up its leadership when it comes to being the primary chip at the data center level. So CPUs used to be, you know, the main chip that you would need to run a server. Guess what going forward, You're going to need a lot more of in Vidia GPUs, and Nvidia has bundled their networking GPUs switches all in one package, which is the beauty of
how you can tube things on cloud. So clearly that shift from CPUs to GPUs is very visible right now in terms of the trend, and that is sustainable, that is not going away anytime.
So but to build them what John was talking about the company's forecast for sales during the forward looking period was fifty three percent higher at and analyst estimates. Where did the surprise come from?
Well, so that is a real surprise in terms of what they saw on ninety days back versus last night. And clearly I think the generative AI wave is catching up. Everyone right now wants to invest in this. So the other aspect of it is the supply side. Last year we were in a supply cront situation where Nvidia was one of the vendors that was going to DSMC. Now that supply has normalized, they can make a lot more of these and they can satisfy that insatiable demand on
the data center side. So I do think the supply easing, supply chain easing is helping them, and it's visible in the gross margin. The gross margin is close to seventy percent for next quarter. That's like a software white margin. And you're seeing that gross margin expansion on the back of very high demand, which is a very good sign when it comes to fundamental I.
Hate being negative, Nelly, but I do wonder where China plays into this, especially as there are certain bands being placed or at least restraints on what US or non Chinese companies can sell to China with respect to highly capable chip technology. So at what point does that become a headwind or sort of an unknown the challenges some of the absolute runaway valuations of Nvidia.
Yeah, so you bring up a great point.
It happened to Micron this week and right now there are export controls around in video chips, and to my mind, they are actually still undershipping demand on the data center side, so that demand is actually higher, which is somewhat reflected in the guide now. But still I think if the China market is huge for them, and if you know, the export controls were to increase, that would certainly hurt them. But I don't think NBDIA is the only company that gets hurt in that scenario.
Mandy. There are twelve months at a fifty times earning, It's really not all that big of a peopled company seventy thousand, whatever the employment is. Maybe they're not a takeout candidate, but why doesn't big money come in and take out ten or fifteen percent of this is a stub out five years or ten years. It just makes to me it's a no brainer.
Yeah.
Well, I think part of it has to do with just how the market is positioned right now. There are certain pockets that are in high demand because of the AI weight, and then there are certain segments on the semi side which are in a mode where they are inventory clearing and that sort of thing. So clearly you will see a rebound across different chip segments at different times, and right now it's anything to do with GENERATORBI that is doing well, and there's a good.
Reason for that.
I think in terms of a transformative.
Aspect mandate, can we just finish on where Tom started? Basically essentially, how do you value some of these companies at the moment?
Look, I think for a stock like Nvidia, a lot is pricing. It was priced for perfection last night too, but then when you delivered this kind of beat. It's hard to be negative simply because you know, as I said, they're still undershipping demand on the data center side, and the data center business will double in the next two years, so it will grow into its valuation. But any slightness, and we've seen that only with semi companies. They can have a big beat like this, a monster beat, or
they can miss big as well. And I don't think it's going to happen to Nvidia in the next couple of quoteras. But that is always a risk. If the hyper scalers were to develop their own chips, their customer base is concentrated. I mean it's three customers that's buying fifty percent of their chips, you know, the hyper scale cloud customers. So if they decide to make our own chips or even you know, anything along those lines, that will hurt us.
Talk just amazing, absolutely amazing, man, Dave, Thank you Mandave Sinc. There Bloomberg Intelligence on the back of the success of Nvidia.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg Dot com the iHeartRadio app tune In, and the Bloomberg Business App. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg