The Shifting AI and Energy Trades

0:00If you invest or lead a business, one-sided views aren't enough. Join me, Brad Rogoff, and my team at Barkley's Research, as we debate which driving markets on the Flipside podcast. Find the Flipside wherever you get your podcasts. Some people treat Chachy-P-T like some kind of smart search engine, and some use it to get work done. Chachy-P-T work is a new way of working in Chachy-P-T that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put Chachy-P-T to work on your most ambitious ideas and projects. Get started at chachy-P-T.com by selecting Work Mode, available on plus and pro plans. This is Robert Smith from Business History. If you're listening to this, there's a good chance

1:01you're a small business owner. And like every small business owner you started with a dream to do what you love and watch it grow. What you probably didn't dream about, keeping up with cyber threats. That's where MasterCard can help, with access to tools that help identify cyber threats to better protect your business. Building a dream business, priceless. For cybersecurity and a changing world, there's MasterCard. Learn more at mastercard.com slash small business. Bloomberg Audio Studios. Podcasts, radio, news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern, on Apple CarPlay or Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts. Or watch us live on YouTube. We know if somebody knows about this tech space here. Dan Ives, he's a partner, your full Ives and company.

2:01So here's the top story on the Bloomberg terminal. Anthropic and open AI are promising measures to rein in the pursuit of cutting edge AI models to better understand the risk posed by the technology. Dan, I'm not sure I saw this coming. I'm not sure the market saw this coming. What do you make of it? I mean, I didn't know there's a few ways to sort of dissect it. One, this is a step in the right direction relative to safety. Because it's our view, self-regulation is going to be the ultimate path. But you know, call it regulatory capture. When you see calls in the bellway looking for more and more regulatory, ultimately open AI and Anthropic, they took it by themselves and said, okay, we're going to ultimately start to now and say that there should be a slowdown. But the reality is China is not slowing down. And if China isn't slowing down, this is all words because US tech's not going to slow down. And I think that is what investors are trying to navigate

3:03to understand what's real versus essentially just more talk. This is coming from the companies themselves, Dan. And presumably they have a lot more knowledge than I do than Tom does and most folks out there do. I think a lot of folks out there are just saying, A, even before this talk over the last week or so, we really didn't know the risks associated with AI. Now if these folks are telling us to put on the brakes, how do you think this plays out? Well, I think part of the problem is that you can take the elevator to the pen house and then stop the elevator so others can come. So there is a competitive issue here, right? Where especially when you demand sovereign AI, while this uppound here and others are doing, I think that will be, I think investors will view it skeptically, relatively often an end graphic. Two, this is not stopping one penny of money that's going into the data center and the AI catbacks.

4:05And I think that, right, you'll have a knee jerk reaction in terms of stocks, but as investors digest it, the reality is China is not slowing down. US tax on it can slow down. Good morning across the moon because the commitment that our guests to get up early, Daniel Ives, killing it out of Los Angeles and away too early, our is well, I want you to fold in here, Dan. Over the weekend, I was deep into AI. No, where are you? Should the Turkey be cooked to 330 or so 40? You know, Dan, I look at AI and all I can think of is the Chinese. I got a massively split Washington, but I have a China with one plan. With all of your tech experience, is this just simply the dawning reality of China with a cheaper, better distribution product that's not quite as good? Yeah, I'd say that as well as China having a government that's trying to pour gasoline on this to really accelerate them

5:10rather than maybe the opposite that's happening in the US. Because for the first time in 30 years, the US is ahead of China when it comes to tech. You don't want people in the beltway, they're still using blackberries to then regulate that AI. Then when you talk about anthropic and open AI, it comes down to like these companies are essentially the top of the mountain. Do they want others not to come up? That's where the industry is going to be. Well, pause to kind on how dumb I am. That was an accurate statement. But all the smart people I talk to Dan Ives are Adam and they don't know where we are in six months. Dan, let's go narrow. Where are we in six weeks? Are we just going to see a new clawed, a new chat, this, the chat, that? I mean, are we just going to just grind forward here? Dumb I think it's also the models over time will become more commoditized. The values and the data. And you're seeing that, you talk about software companies,

6:12I was talking about, having server security infrastructure. You're now going to the second and third fourth derivative because of the trillions of dollars being spent. Clawed, where you see chat, LGBT, those models are going to continue to get better and better. But it's about the data. That's why sovereign AI, Nvidia, Poundtears talked about that front center. That ultimately is really the golden goose. Hey, Dan, whenever I see a kind of a graphic of the global AI ecosystem, I see it in video right smack in the middle of it. What is Jensen Wahn saying about these big, big picture issues? I mean, Jen and I think Jensen talked about, he's going to say the barks worse than the bite. The industry has put, as put the safety sort of guard rails in. But look at the hugging acquisition that they did. You turn it open source. It comes down to, you have to distinguish between the core frontier model players. First, what's happened, the rest of the industry.

7:14I think Jensen, Nadella, if you saw what he thought about over the weekend, George from CrowdStrike, those are much more, I think, realistic and I think very good words of wisdom relative to maybe some of the, you know, kind of fire in a crowd theater type of conversation. Dan, I just think so much. Gotta get a Vianne again here soon to talk about what matters Apple and all that. Into Q4 and into the Q3 earning season as well. Danielized, Yomans duty way too early in the morning here on this tech blow up. Stay with us more from Bloomberg surveillance coming up after this. If you invest or lead a business, one side of you's aren't enough. Join me, Brad Rogoff and my team at Barkley's research as we debate which driving markets on the flip side podcast. Find the flip side wherever you get your podcasts. Some people treat Chachy PT like some kind of smart search engine. And some use it to get work done.

8:15Chachy PT work is a new way of working in Chachy PT that can take action across your apps and files. Stay with a project for hours if needed and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials briefs and scattered information that you have to grind through to turn into something useful can just become something useful. Put Chachy PT to work on your most ambitious ideas and projects. Get started at chachy PT dot com by selecting work mode available on plus and pro plans. You already know how AI is changing how every day work gets done, how much ground you can cover and how fast a team can scale. To stay ahead you need the tools to give you a competitive advantage built for this new era. Welcome to a Gentegrévenue. Adio is the CRM for this world. It meets you where you work. Compounds every customer signal into context, then acts on it across your pipeline to let you move it on match speed and scale with agents and animations for every job in revenue.

9:19Adio orchestrates your work around the clock, built to handle the scale of your workloads extensible with API and MCP and with the infrastructure to keep up with your most ambitious agents. Loved by high growth startups like granola, modal and etched, Adio runs the work behind every win. That's Adio, the agentic CRM, the intelligent system that never sleeps. Picks up leads at 2 a.m. Catchers renewals before they slip. Hands you the answer before you ask. Try Adio free at adio.com slash iHeart. That's adio.com slash iHeart. You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg business app or watch us live on YouTube. I think we need a briefing. Laurie kelvacina joins us right now with RBC capital markets. Laurie, within your really important dense statistical Excel spreadsheet research,

10:25which distinction stands out right now? I would say in my work, Tom, there's a clear line between where we are right now on the 10 year and what's being priced in terms of hikes, which is about three hikes over the next 12 months. Our rates team is still forecast being 10 year yields are going to stay below 5% over the next 12 months. That seems to be what equities can handle. It wouldn't necessarily be pleasant. I'm not saying we wouldn't have a short term drawdown, but when I look out on a 12 month view, the market looks okay. But if we sort of take things up to say six hikes, if we take inflation closer to 4%, then 3%, and if we model in 5.5% on the 10 year yield, then we start to see some real damage done to equities on a year over a year basis. I think we're at a critical juncture right now. My modeling says, as Blake, when our rate strategy is just putting, he's expecting three kind of adjustment hikes over the next three meetings.

11:27I think equities can handle that, but we are kind of pushing up against the ceiling of what they can handle. Post-Rinion real time headline, again, I'm just not capable to translate this. Invidia, Palantir, Booz Allen, to limit and thrompect model use. That's from the information. This is... And this moves the market invidia breaking down to new intraday lows. Futures are negative 51 and negative 58. Futures down negative 61. I have a VIX out two big figures. Lori, what's the view? How do you think about earnings? They've been so, so strong for the first half of the year. If nothing else, cops are going to make it really tough going forward. How do you think about earnings as a continued driver of this market? So, you know, I'll give you two points, Palantir. Is number one, normally estimates start out too high. If you're looking at bottom-up consensus estimates and have to be ratcheted down. And if you look back at 2019 and 2023, so years after the first trade war,

12:31we saw the kind of current year numbers, 2018 and 2022 held up well. But the following year numbers got ratcheted down pretty significantly. When I look at 2027, the numbers just continue. They did the growth rate sort of move down initially, just on the basis, frankly, of upside surprises to early 26. But now we've started to see the growth rates implied in 27 move up again. So, they're defined, defined the typical gravity that you normally see to pulling down estimates. I think the other thing, Pal, that I've noticed is when I talk to investors, you know, there has been over the last kind of month, six weeks, you know, some concerns that maybe the AI side of things is a little too frothy. So, what we've done in our modeling, we were at the beginning of the summer kind of baking and a 5% haircut to consensus EPS estimates for next year. We model now right to the second quarter, trailing 12 months. But now in the last two updates, we've started doing 10% really quickly. So, in the last two updates, we've started doing 10% really to kind of address investor fears and see if equities still have a path higher.

13:32If we bake in all these things, we're worried about on rates, inflation, the Fed, and now a little bit of AI frothy as well. We can still get you to 81.50 on a 12 month time frame right now. But admittedly, you know, those concerns about the AI side of things has started to creep in over the last say four to six weeks. So, we are going to hit one of those across currency mentioned or one of those issues for the markets to deal with. So, we're going to hit the Fed to reserve. And we're going to hear from the Fed this Wednesday. And a lot of folks are saying this is one of the more highly anticipated meetings. How do you think it's going to go? What do you think the market is kind of discounting here? So, you know, I love that I don't have to forecast the Fed. I leave. That was like frozen. There we go. Yeah, he's moved to looking for three hikes over the next three meetings. And we're going to see how the Fed pauses after that. You know, I have one chart I look at in terms of how much hiking is baked in over the next 12 months and compare it to small large performance, S&P 500 performance.

14:35We're seeing that kind of hold steady, you know, kind of in the three hikes type area. And you've seen small caps suffer pretty significantly on a relative basis over the last few months. So, I think that equities, you know, we can watch small caps for a signal to see how the market feels. I would say then the S&P 500 itself, but small caps have really been kind of taking the brunt of the pain on a relative basis for the hike fear trade. Just one final question. And then do you feel like you need to rewrite your message into Q4? I mean, to me, you staggered a September 30th. You come up with Larry Kalfacino wisdom before you write the big 32 page memo for it's like an 85 page PowerPoint. Oh, yeah. I mean, it's not the end of the year. Yeah, sure. What's your mystery September 30th? What are you going to be writing about? So I'll tell you time we moved from a December 31st price target, you know, which is what most strategists do to a rolling 12 month view. And that has really forced us this year to keep our eye on the long term with that price target. So I don't think we have to rewrite much.

15:36I think that new process we've introduced allows us to adjust every single month to what we think the long term view is. I do think that, you know, kind of big question that I have in the back of my head is not just as the Fed stop at three. Do 10 year olds stay contained at this 5% level. But it's also a question of what happens with inflation in the middle quarters of next year. So you would have consensus numbers there in the low two. As I've talked to my economist friends, I'm hearing that has to do a lot with normalizing gas prices. Well, the war kind of throws a monkey wrench into that, right? So, you know, what happens with those inflation forecasts is an open question in my mind. Laurie, thank you so much. Laurie, Kelvus, you know, RBC capital markets. Stay with us more from Bloomberg surveillance coming up after this. You're listening to the Bloomberg surveillance podcast. Catch us live weekday after news from seven to 10 a.m. Eastern.

16:37Listen on Apple CarPlay and Android Auto with the Bloomberg business app or watch us live on YouTube. This is beyond timely as we focus on America. David Tinsley, senior economist at Bank of America, starting with the seminal work of Michelle Meyer, which I think was middle 20th century. The consumption analysis of Bank of America's truly world class. It really is a buoyant consumer, David, isn't it? Absolutely. I mean, just if you look at our latest August data, spending was up 4.5% year over year. That's a very good number. On the month of it rose 0.9. Should be a very good retail sales print this week. Absolutely. The consumer is in resilient good shape. Is it honeydews? Is it like, are they all $23,000? Are honeydews line item $23? I think they were, boy, people were stacking those cups up. I saw one woman with four of her men in her head. Yes, exactly.

17:37Talk to us about the K-shaped economy. You folks at Bank of America with your credit card business and your consumer business. Nobody's got a better view of the consumer than you guys. Talk to us about the K-shaped economy today. How did you guys view it? It's really interesting. For about two years, until a couple of months ago, we were talking month in month out about a higher income consumer outspending the lower income consumer. Often, a margin of one or two percentage points. The last couple of months, we saw a marked acceleration of the lower income consumer spending growth. Right now, they're pretty much neck and neck. Disgressionary spending growth in August was about 5.7% for higher income consumers, 5.7% for lower income consumers. So that K has largely closed. Really? We're either getting the money for this because I'm not seeing which growth, that great relative to inflation. We see in our data and we see wages coming into people's accounts. We get a view on this too.

18:38We do see an acceleration after tax wage growth in our data for lower income consumers. I think of that sort of two-legged. First leg is the hangover of fiscal stimulus. Basically, with holdings, tax withholdings are lower this year. For many people, particularly if you're on overtime or a tip earner. That's boosting take home pay. Second is we see some signs that the labour market at the lower end has improved. People are moving around more, beginning bigger raises when they move. So the reason indication, I think, that at the lower end, there has been some improvement. What's the car for this week for our Federal Reserve because of boy, I tell you, global hot street spending attention to our fed is coming Wednesday. Well, our economists, global research, they've had a long standing call for a hike this week. I know the markets moved around a bit, but they've been on the money for a hike sometimes.

19:38So that's the view. You're out of Cambridge. The blue button, the victorious Detroit Lions blue button, bar sound here. Then I fell this weekend with nuts. Good weekend for your team. So, New York finally. David Tinsley, premier league was nuts this weekend. I'm not shaving until Todd Namscourt. So there is to it. David, you've got to help me here with nominal GDP. I mean, you've got, it's just for starters, you've got Mark Cabana. Okay, at Bank of America, how can nominal GDP come down constructively to maintain a consumer buoyancy in America? Is it all just about pulling inflation down or do we have to pull real GDP back a little bit to get nominal away from this crazy boom, but then a remote look economy we got. I'm guessing you're going to see some cooling in the consumer and that's going to do some of the work. Probably not all of the work by any means, you know, the economy is a dichotomy space at the moment,

20:43being driven by this AI boom too. But for a long time, the contribution from the higher income consumer was really driving consumer spending growth. That's still somewhat the case now, even though the low income consumer has picked up. So you've got to see, and that higher income consumer is of course being stoked by well-forfex. So, you know, there's a circularity here, but you've got to see some slow down, I think, in consumer spending to get real GDP cooler for sure. I mean, leisure and travel-related spending show the largest improvements in January. People are still out there flying around, traveling, right? I mean, wow. Yeah, I mean, when over the world, CUP for example, these are really strong spending data in the host cities. You know, people were going and they were spending just generally air-faith spending some of its price obviously is holding up. But people aren't pulling in despite those high price hikes, restaurant spending, you know, broader leisure spending,

21:46all looking relatively positive, I'd say. What does the Fed rate hike mean for the American consumer totally removed? They're not even honeydews at the US Open. They're trying to get to the next month's paycheck. Well, you know, just like on the way up, we saw essentially a large chunk of the consumer is fairly immune from the short term hikes, just because they're on fixed rate mortgages. It hurts people who aren't in that position. You know, in our data, the millennials and the Gen Z are probably in a tighter spot than the older Gen's who've got the wealth effects and got the housing and got the equity in that housing that's ramped up over decades. So I think I wouldn't expect too big a pullback in consumer spending from a couple of Fed hikes. I think the consumer will wear that. But obviously everything's interrelated ultimately and if the equity market sells off as a result of that, then these wealth effects might dispay going to reverse even.

22:54Are you based in New York? I'm in London. You're in London? Yeah. Come visit again. I will. I love to have you. David Tindley, thank you so much from London with Bank of America in our studio. Stay with us more from Bloomberg surveillance coming up after this. Some people treat Chachy PT like some kind of smart search engine and some use it to get work done. Chachy PT work is a new way of working in Chachy PT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs and scattered information that you have to grind through to turn into something useful can just become something useful. Put Chachy PT to work on your most ambitious ideas and projects. Get started at chachypt.com by selecting Work Mode, available on plus and pro plans.

23:55You already know how AI is changing how everyday work gets done, how much ground you can cover and how fast a team can scale. To stay ahead, you need the tools to give you a competitive advantage built for this new era. Welcome to a Gentech Revenue. Adio is the CRM for this world. It meets you where you work. Compounds every customer signal into context, then acts on it across your pipeline to let you move it on match speed and scale. With agents and animations for every job in Revenue, Adio orchestrates your work around the clock. Built to handle the scale of your workloads, extensible with API and MCP and with the infrastructure to keep up with your most ambitious agents. Loved by high growth startups like Grenola, Modal and Edge, Adio runs the work behind every win. That's Adio, the agentic CRM, the intelligent system that never sleeps. Fix up leads at 2 a.m. Catches renewals before they slip. Hands you the answer before you ask. Try Adio free at adio.com slash iHeart. That's adio.com slash iHeart.

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25:57She came out of school. Naomi think in China was a massive Japan axe. I should say in Japan. Naomi think has just continued to own the high ground over the last number of years of monitoring Japan with the MOVA asset management. Really honored to get a quick brief from her this morning. Naomi, is this the same institutions when you and I first met? Is this a different bank of Japan? Is it a different ministry of finance? Same institutions, but different contexts. We're in a totally different economic context than when we first met. Then Japan was mired in its lost decades in deflation. Now it's staging a remarkable recovery from those lost decades. And institutions, just like everybody else, have to adapt to the times.

26:57So where are we here, Naomi, with the Japanese yen here? I'm looking at it, you know, 154.50. Boy, that's a long way from 163.164. What is it? The Central Bank. Is it the US Federal Reserve? What's moving the yen here longer term? Well, longer term. Let's take a look at measures of fair value of the yen, which we're very far away from. So if we look really long term, which I don't think is a good forecast, the purchasing power parity puts a dollar at about 100 yen. And we're very far from that. I don't expect that we're going to achieve that anytime soon, but it just tells you how cheap the yen was when it was, you know, 10 figures higher. Or five figures higher, even. So I think, you know, there, there, there was an overextension going on. And, and then even though risk tolerance remains plentiful and the relative interest rates are still higher in the US than in Japan, there is a gradual normalization taking place by the bank of Japan, by other Central banks too.

28:11But by the bank of Japan, most importantly for the yen. And so that means sooner or later, there's going to be less liquidity tomorrow in the future sometime than there is today. So where, what is the bank of Japan thinking right now? I mean, where would they like to see the end here? I mean, it's had an appreciable move here. What do you think they'd like to see it? Maybe I don't know, year end or so. Well, so the bank of Japan is not in charge of intervention. That would be the Ministry of Finance, even though the bank of Japan does execute the interventions. So the bank of Japan, as far as I know, doesn't really tend to look at the yen as any type of target. Recently, it's focused on the yen has intensified, but that's only because the yen is the week yen, I should say, is inviting more inflation than there might otherwise be. If we didn't have such a week yet, but that's only one part of the picture. Inflation has been, if we look at the core measure inflation, it's been about the bank of Japan's target for several years now.

29:17I mean, it's as it looks at underlying inflation, which is not quite core inflation, but you know, it's where we have progressed quite a lot from those days of deflation and stagnation. And then, you know, brief us on a Pacific Rim and the not kind of facts of this immense turmoil in Japan. And for that matter, the very different turmoil in China, do you see a Pacific Rim of stability? Or should we be aware of the idiosyncratic moves like Philippine peso that's out there? Well, so I mean, for Asia, there is generally speaking currency undervaluation if we look at it on a purchasing power parity basis to differing degrees. And I think that doesn't necessarily have so much to do with confidence in each of the individual Asian economies. In fact, for Japan, I think it's very dangerous to look at the yen as some type of barometer of economic health.

30:19Economic health is probably better than it's been in a while in Japan, but the yen is weak. So in the end is weak because there's been this large amount of liquidity left in the system. As far as volatility goes, if we do see some sort of risk off trade, then yes, yen tends to strengthen. If we see a whole bunch of risk being taken off the table, then I would expect the yen to strengthen quickly. But that's not my main scenario. And I think that that's a scenario that most policymakers would like to avoid if possible. And Joy, thank you for the brief name. We think we're this through the Mova this morning from Tokyo. This is the Bloomberg Surveillance Podcast available on Apple Spotify and anywhere else you get your podcasts. Listen live each weekday 7 to 10 a.m. Eastern on Bloomberg.com, the I Heart Radio app, tune in and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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