The Exchange from the New Statesman. Weekly, in-depth, long-form interviews with guests, including Salman Rushdie. Would you say you are in the 11th Hour of Life? I hope I'm only in about the 9th or 10th. Ai Weiwei. So if you were to put on an exhibition called Ai Weiwei, The Last Work, we shouldn't believe it. Actually, you shouldn't believe anything I said. And Masha Alyokina from Pussy Riot. Is there a world in which you could ever go back to Russia? Politically, we exist there. Physically, we do not exist there. Covering politics. The most governmentally illiterate Labour Prime Minister in history. Culture. I'm not in the mood to take any risks lately. Society. Should education be a commodity? No. And philosophy. Sex is both personal and political in public. Listen wherever you are listening to this. Bloomberg Audio Studios. Podcasts. Radio. News. This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-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 6 to 9 a.m. 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. We begin this out with stocks inching lower following a chip-led rally. George Concarvus of MBFG writing, the inconsistencies in various market metrics will be ironed out, helping bring back convictions into the fall. George joins us now for more. George, good morning. Good morning. What do you have convictions about this Friday morning? I have convictions that it's Groundhog Day every other week. We have a bond market that always goes to 4.5 in the 10-year, 5%. On the 30-year, you get tech stocks kind of rebounding, and you get all-time highs, but we're kind of just stuck in nowhere's land. Yields are range bound, 4.2%, 4.1% on twos at the front end of the curve. We've seen that quite a few times. But there is an aggressive push from both corporate America and the tech trade worldwide to raise capital in this market. We started the show by talking about the distinction in the equity market, the debt market right now. What do you see? Yeah, look, I think it's interesting. If you actually take from an upside-down pyramid perspective, there has been dispersion within leveraged loans. There's been dispersions within high yield. But IG has been very homogeneous. It's been very, very tightly knit. Almost every spread kind of tracks the overall index. If there's going to be more kind of discerning nature coming from the credit investor world, we should start seeing it in IG. IG is way too tight. And there should be some sort of concession, given all the capital has to get raised. So do you think there's any takeaway in some of the spread widening, at least in the new issues in the bond market, versus the robust demand for some of the equity offerings? Do you think the pendulum is shifting more to the bond investors? Do you think bond investors are getting a little bit more wary about a high-yield environment more broadly? What's your take on that? No, I think your opening remarks were spot on in the sense that, yeah, now you have to kind of pay to play. And so I think that that aspect is going to be with us. It's been an amazing year so far, a lot of issuance. But in the second half of the year, if there's a lot more capital raising that's needed, I think the yields and spreads are going to have to widen to facilitate. When is spread widening the window closing? And this is the distinction that we're having trouble understanding because at one point it was investors pushing back could potentially curtail some of the spending ambitions of big tech. At this point, it's just it's going to cost them a little bit more. Is there a tipping point where suddenly it becomes a constraining factor? I mean, given sort of estimates for sort of revenue potential, if you pay an extra 10 basis points, that's really not going to move the needle. I think it really starts to matter when you have bigger, bigger moves. And it's going to be a function of both bond market volatility as well as spread widening that's going to really, maybe not necessarily curtail credit availability, but might kind of close down markets. And that's where you get nervous around the fall. We should know we're picking up on small signals here, getting deeper into the summer. It's still quite snoozy, 260 on high yield spreads, which historically, as you know, Lisa, better than most, incredibly tight. It's incredibly tight. When you take a look at bond market volatility, it is absolutely nowhere. So when people start saying, well, it could get more volatile, is not getting volatile in any way, shape, or form, either in bond or overall stock index level types of metrics. So again, not necessarily screaming warning bells. Step up, Kevin Walsh. Does Kevin Walsh make things more volatile, the reluctance to communicate, to provide forward guidance? Well, I do think that it's kind of refreshing that we're taking the opportunity to kind of slow things down a little bit. I mean, perhaps we've had over-communication in some angles, right? And so I think it's good to see kind of a rethink about the communication strategy. I mean, the five task forces are now fully in motion. I think it's an opportunity to kind of rethink what is the appropriate policy, like how to communicate with markets. And markets, you know, the bond market's a sophisticated group of individuals. We can discount things, too. We don't have to be kind of handhold. At the same time, to the degree that we are hearing anything, it is increasingly hawkish. Even New York Fed President John Williams yesterday came out, and he has been actually pretty dovish for the past couple of meetings. and he came out sounding really hawkish, saying that the inflationary problem is not necessarily just tied to oil prices, but AI is his bigger inflationary concern. Are you starting to change your perception of the reaction function at a Fed that has no doves left? I'm not sure if it's no doves left. I mean I think people are kind of falling in line I mean you heard it even last week at Cintra and the idea that we want to reduce forward guidance is now becoming a theme amongst all central bankers both here and abroad I'm not sure if it's dubbish. It's just that we're used to having too much information so that anything less than that is going to be viewed as hawkish. Maybe they're just kind of letting us figure things out on our own. Yeah, I'm not thinking that's a signal per se. Tuesday at the moment, close to 420. That is still a decent gap above where policy rates are right now. Max Kettner of HSBC is still quite bullish on equities and overweight risk more generally. And he points out that it will be difficult for this Fed to out-hawk market expectations. I think that's an important question. How hard will it be for this Fed to out-hawk what is already in the price? Yeah, well, the thing is interesting. I mean, what does out-hawk mean when you look at the WIRP page on Bloomberg? You have the market pricing in one hike and then followed by cuts. That, to me, looks like risk management. It doesn't look like a market that's really that hawkish. They're just scared of this unknown that there may be a risk of a hike. I don't buy it. Do you have a base case if you don't buy it? We think that the Fed's on hold, and in fact, that they're going to end up coming back to square one, which is that neutral still is somewhere close to 3%. And at the end of the year, this is going to be a big exercise in just kind of figuring out that we're coming back towards 3%. I want to go back to where John began the show when he was talking about Japanese bond yields and the fact that you did see a rally into them and this question around Japan being the big repatriation trade that hasn't happened for about 20 years. This does seem like it is potentially a bazooka later in the year. Should there be true policy efforts to support Japanese investment firms bringing back their investments thesis to their home country? Is there any teeth in this? I mean, look, the Japanese, you know, both investment base, a banking system is so integrated with the U.S. economy on so many different levels. it's very difficult to see a wholesale kind of repatriation. But we all know that it's on the margin that prices are set. And so it really comes down to how much capital could come back to Japan, or is it more a function of there's going to be less capital leaving? I think it's more about the capital will stay at home and look for the higher yields within the Japanese bond market, and Japanese banking, like regional banks, the pension systems, they could allocate more there. yields are more tight. Do you think markets will achieve that without it being mandated? I think at the right price, people will be interested. We'll be close to that right price. I think we're close to that right price. And that's why we have a pretty decent reaction overnight, just on one headline, and you see the Japanese bond market favorably move over 10 basis points. If less money is leaving Japan, that means less money is available to buy into some of the issuance in places like Europe that the Japanese have turned up to buy. Where do you think it's vulnerable if you do start to see that turn. Yeah, that's a great point. I mean, I think that the U.S. bond market left to its own devices will be fine and will be able to find capital. Yeah, I'm more worried about the smaller markets, even emerging markets that benefited from carry type trades like that's probably would be more at risk. Stay with us. More Bloomberg Surveillance coming up after this. A new chapter in global growth is being written and much of it is happening in Africa. Africans need to invest. There are deals to be done and business to be won. I'm Jennifer Zabasaja. Every week on the Next Africa podcast, we track capital flows and political shifts shaping the continent's future. The digitalization of Africa is going to power its growth. Reading the world of something like HIV is possible. Population growth is so enormous in Africa. Listen to Next Africa on Apple, Spotify, or wherever you get your podcasts. Jay Goldberg of Seaport writing the following. The entire AI trade is driven by spending from seven companies. So long as they keep spending, semis will see earnings growth. But any hiccup and a stock market gets spooked. Jay joins us now for more. Jay, welcome. Do you sense any deceleration in spending on the horizon? I don't. I don't. Now, in all fairness, I'm not a hyperscaler analyst. So I don't have the contacts at Meta and Google and Amazon that some others do. But certainly what I'm seeing from the supply chain and from people in my community locally in the Bay Area, there's no slowdown in sight. So do you think that, Jay, what we've seen in terms of the valuation reset or the sell-off in semiconductors is creating an attractive entry point? Or do you think that ultimately there's something else driving some of this activity? I think your previous guest, Lizanne, had it right. It's a very confusing time. It's a really difficult trading environment right now. If you look at some of the spending plans that are out there, and these are committed contracts, data centers that people are going to build, there's a huge, huge ramp starting next year, late 27, early 28. Numbers get really, really big. The problem is a lot of that is already reflected in the share price, and timing is always a little uncertain. And I think we have a situation where sentiment got a little ahead of fundamentals, and that was sort of the correction we saw this month or last month. I mean, the way I sort of think about it, there are stocks in my sector which could double or triple from here. The numbers are that big. The problem is they could all trade down 50, 60 percent before we get there. So it's a difficult trading environment. Jay, it seems like a difficult moment, especially considering that a lot of people are increasingly skeptical. And yet the market can continue rallying for longer than they can remain skeptical As someone who does have a sell rating on NVIDIA and Qualcomm and as someone who has been more bearish in some of the trades how difficult has it been to remain bearish given sort of the freight train that seems to be recycling back in every time anybody sees any kind of dip? It's tricky. I'm not universally bearish, right? I am picking my targets here. I have buys on AMD and Intel. I think both of them have pretty strong prospects next year. Intel is fundamentally re-rating. It's a company we'd left for dead two years ago and has a new CEO and a new lease on life. And if you look at NVIDIA, it's the lowest performing, the worst performing stock in the SOX index this year to date. So I've been saying all along, NVIDIA is going to underperform because we have a really good sense of where that company is selling, what their prospects look like. That's the most scrutinized company on the planet right now. I think that what we've seen this year is people have been looking towards other sort of less appreciated corners of the industry that are benefiting from this just as much. Well, South Korea being part of that story as well, Jay, just to jump in, they've now got a listing here, ADRs. How do you think about that in terms of competition for capital in the sector with other names listed here? I think it's a big and growing issue in the industry. 30% of that AI capex this year is going to go to memory. It's going to be 40%, 50% next year. We're talking about a trillion dollars of capex, and a very large portion of that is going to memory. It's a phenomenal time to be a memory company. Right now, would you say it's the peak? No. I don't think we get into supply-demand equilibrium from memory until 27 or 28. I, you know, calling memory stocks is very, very difficult. They're very, very cyclical. I think there's still a lot of room for the fundamentals, for the earnings to go up. How that gets reflected in the share price is difficult. That's the key phrase, Jase. You said it. You just said it. They're still very, very cyclical. Some people don't believe that. They believe the story's changed. Why do you believe that's still the case? Every bubble somebody says this time is different. Look, there's obviously huge, huge demand for memory. But at the same time, the memory makers are expanding very heavily, right? Micron is building five plants, five fabs right now. Hynix is raising a lot of money at this IPO. They're going to plow that back into building more capacity. Samsung announced a massive investment plan a few weeks ago. So this is how these cycles work. There is lots of demand. They build, They spend a lot on CapEx to catch up. I think the only thing that's different here is they have a lot of customers paying for it up front, paying cash up front. That levels it out a little bit. But there's a lot of capacity that's going to be coming online in 28, 29. We'll see. We'll see what memory looks like then. Stay with us. More Bloomberg surveillance coming up after this. Get the latest headlines from our nation's capital every weekday. Hi, I'm Joe Matthew. And I'm Kaylee Lines, inviting you to join us for the Balance of Power podcast. Every weekday, we deliver unbiased insight and analysis on the latest news from the White House and Capitol Hill, along with in-depth conversations with lawmakers and the people making policy and shaping our world. Get the straight story without the spin. Listen and subscribe to the Balance of Power podcast on Apple, Spotify, or anywhere you listen. Lizanne Summers of Charles Schwab writing the following. Stay in gear with AI theme by avoiding crowded direct plays and leaning into less crowded derivative plays. Lizanne joins us now for more. Lizanne, welcome. I just want to take you from the top. And I want to pick up on something I heard you say earlier this week, that unlike what we saw more than 25 years ago in the dot-com bubble, that this time the bubble might be in the earnings and not the price. Lizanne, can you flesh that out for us? How different are things now versus then? Yeah. And thanks for having me. I think maybe not the earnings where we stand right now, but the earnings expectation is, I think, where there could be a bubble. And I think we got a little bit of a flavor of that with the recent Samsung report that pretty nicely beat the sell-side estimate. That's the consensus that analysts publish. But there's also a buy-side estimate out there, and that's not something published. It represents maybe the whisper number or the hyped up number and the higher bar. And we saw what happened to the stock. That is one of the things I'm paying close attention to during earnings season is whether that sell side versus buy side estimate has a very wide spread and what's the sensitivity in terms of the market reaction. I think it probably continues to fuel these rapid fire rotations that just have become the name of the game in this kind of market. Do you expect that to be a recurring theme across earnings season or just in select industry groups? I think probably select industry groups. I think in those higher beta segments like tech and comm services, anything AI related, I think you have that wider spread between the sell side and the buy side. But we're seeing just a huge increase in dispersion. I think Kevin shared a chart with you guys this morning that shows a record spread between a relatively subdued VIX and that dispersion you seeing it in terms of the retail trading cohort The turnover has never been higher They a little less active in individual stocks and more on the thematic side of things as well as ETFs. But the dynamics of how the market is trading, who the players are, and the way they're attacking this has also shifted quite a bit. And it's just a different backdrop than what might be defined as a normal sort of earning season backdrop. Is it healthy? I think that that's what a lot of people are wondering. Or does it signal, Lizanne, that potentially you could see some sort of crack if there is this incredible churn under the surface in specific name volatility? You know, the churn is not necessarily detrimental because it can lend support when you get some of the leadership names pulling back. You know, when we saw the big, you know, bout and many cases ongoing bout of underperformance by a cohort like the MAG-7, you saw a lift in other segments of the market, in industrials, in healthcare at times, and enough underlying strength amid this rotation, not to mention the intra-sector, intra-industry rotation. So I think the base case is probably a continuation of this type of a backdrop, where you don't see an aggregate whoosh down on the part of the indexes, but a lot of churn under the surface. An example is the Nasdaq's up 13 percent year to date. The average member maximum drawdown within the Nasdaq year to date is negative 40 percent. So that's a that's a sort of the poster child for that type of activity. Perhaps a bigger question for a lot of people is whether this signals an exhaustion in some of the tech names and potentially that rotation that we saw try to assert itself before the reignition of the conflict over in the Middle East. How much Do you see that as a path of travel in the last six months of this year? The idea that people will go into other names, expecting them to benefit from AI efficiencies and other types of growth and maybe fade what we're seeing in some of the tech names. Yeah, first of all, I do think it's a tricky trading environment. And at least our message that we impart to our $13 trillion worth of individual investors is to not necessarily think that the only way to perform well in a market like this is to try to get ahead of these really short-term rotations. There's so much short attention span money in the market. And maybe it's a little more boring to talk about or to think about, but I think the diversification story is more powerful than it's ever been, particularly within asset classes and even within sectors. But then consider portfolio or volatility-based rebalancing. A lot of rebalancing gets done based on the calendar. It might be quarterly. It might be annually. move away from that calendar-based rebalancing and take advantage of these rapid-fire rotations by, you know, adding low and trimming high a bit more frequently and stay in gear that way, as opposed to trying to get ahead of some of these short-term trading. Lizanne, I wanted to pick up on something that you've noted. We often talk about these short-term tactical rotations, these shifts in the market, and we point to small caps. Small caps will have its moment. To your point, small caps has been having its moment for quite some time now. What's been driving those gains? So, you know, there's been different forces driving small caps. And you're right, John. It's been the trailing two-year period that Russell 2000 is pretty handily outperforming the S&P 500. So, this is not some new story. A couple of years ago, I think the impetus for the initiation of that outperformance was a move by the Fed toward easier monetary policy. Of course, we've had fits and starts with that. Almost two years ago, the Fed embarked on an easing campaign after three cuts and included to 50, they had to pull back because the economy accelerated again. Same thing happened last year when the Fed embarked, but then you had the much more sticky inflation problem driving that. And I think now the story is one about opportunity in that let me look beyond just the mega cap AI plays and look for opportunity. And you're finding in other areas like health care and like biotech and smaller names. But what I would say about the small cap space is last year was a year where the non-profitable components of the Russell 2000 had double the performance of the profitable components. It was up 20% versus up 10%. That is starting to shift this year. And you're seeing this convergence where you're going to have a little better performance on the part of the profitable. So that's the way I'd look at the small caps. I would sort of lean into the profitable side, the higher quality, the high interest coverage and strong cash flows and fade the non-profitable lower quality segment. This week on Leaders with me, Francine Lacqua. I speak to tennis legend Rafa Nadal about how he stayed competitive despite injury. I was able to enjoy the victories probably more than if I will not have this issue. One iconic match. In my mind was, I am almost dead. And whether he misses playing. I don't miss tennis because there was nothing else to offer. Listen and watch Leaders with me, Francine Lacqua, on Bloomberg Television or wherever you get your podcasts.
