CPI Data Supports Bonds as Rate-Hike Bets Wane

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1:56Trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Business Week Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. Our Bloomberg Markets Live team writing that the latest reason to worry about the stock market is quite the doozy. Earnings growth has actually been too strong. We've got with us Michael Ball, Bloomberg News macro strategist. He's got a great background. He was at the New York Fed during the crisis. That was 2006 to 2013. is when he was there. So I think it's fair to say he's seen some stuff. He was a consultant.

2:30He was a macro analyst advising institutional clients. He was doing some trading. And now we get him here at Bloomberg. Welcome. Good to have you. Thanks for having me, guys. Good to be on the show. So I want to start with this idea that earnings growth has actually been too good. Why is that a bad sign? Yeah, again, it's what is the next catalyst for the lake hire, right? We've been pinned at the SBX. We've seen a healthy rotation within that as July really saw a lot of the prior AI winners come off. And then the earnings picture just improved throughout July, it broadened. And now we have that 20 to 30 % change in how much we're seeing forward EPS growth.

3:03Now, we can't get too much more given the macro backdrop, meaning like, where are we going to lean again on for leadership? Is it going to go back to AI? Or is it going to be continuing breadth of earnings improving? And the actual economic growth story, although very strong, given the uncertainty we're constantly dealing with, with tariffs, with the war, with the general state of the consumer, there's not too much more we can kind of squeeze out. And when I go through all the earnings calls, it's really this margin expansion story because they've been able to hold pricing power. And now you're asking yourself, like, what's the next driver for things?

3:32So it's not like a bad thing. I'm not trying to say you should be getting out of stocks, but if we want to get to the next leg higher, let's say 8 ,000 on the SBX, it's like, how do we get that extra, you know, 5, 10 % now in earnings growth into the year end? And that's the question. Well, didn't JP Morgan come out this week and say, that's what we're going to see? Yeah. I mean, this is it. This is the argument though. The Consumer has to, basically now it can't just be AI CapEx. Okay. Now it has to be a broad, the earnings story did show the consumers there. The data was better for Q2. We saw that in the GDP.

3:59We're going to get retail sales tomorrow. That's expected to be a little weaker. But overall, the consumer is not as bad. Now you've got B of A saying it's a C economy, not a K economy anymore, because they've seen strength in both the bottom and top. So is this real? Is this tangible? Is it going to equate to the earnings? Scott Besson says that too. He doesn't like the idea of the K-shaped economy. Well, sorry, you know, like pick your letter here. But Rebecca Humkes talked about it. And she said kind of the K is still intact, but the lower rung is actually maybe outspending or doing more spending than the upper rung.

4:26But it's still there. Maybe the gap isn't as big as it used to be. Having said that, earnings are important in terms of economic growth, though, right? If we think about – so what does it mean? A normal correction, perhaps? Like where are people – No, I mean, we could tread water. I get your point. I think what I'm a little worried about, and just put this in the grander context, post-July FOMC, we had kind of a grab for upside. Basically, we also had that shakeout of what was going on in a lot of the AI laggards, as we saw Citadel come in, stabilize the momentum trade, basically put a bottom in on the AI winners.

5:00Those guys have obviously done quite a lot. Wait, was that thing with situational awareness, was that considered as a stabilizer to the overall AI trade? I mean, if you look at momentum, which is basically the SOX index or the AI laggards in July, they all sort of bottomed around the same day. Now, obviously, we also had the July FOMC, which was more dovish, give sort of a boost to sort of financial conditions, rates sort of stabilized, oil is being stable. Everything basically flatlined and equities have rallied. But we're up 10 % on the Nasdaq since then. Call spreads, call skew, everything you see for grab for upside is all kind of at very high percentiles now, which means that people now are basically bulled up again.

5:36So again, to go higher now, we need a new catalyst. What is it? I don't know. We're speaking with Michael Ball, macro strategist for Bloomberg News. He joins us here in the Bloomberg Interactive Brokers Studio. So what does all this mean ahead of NVIDIA earnings at the end of the month? Because if you think about the catalyst that I think about it in August, it's like, OK, yeah, we're getting a little bit of economic data ahead of a September Fed meeting. But really, it's Jackson Hole is the next big event where we're going to hear Fed Chair Kevin Warsh communicate with us. The other big event is NVIDIA.

6:06100%. And I think we're getting better at predicting NVIDIA because at this point, we basically have all their customers telling us what they've done. We have TSMC, who they're a customer of, and ASML, all the kind of top, top guys telling us what they've already done. So there's better clarity as we've come to understand sort of the beast that is NVIDIA. Now, interestingly enough, it historically does quite well into its earnings, and it has done quite well. We're back at$220 on the stock price. That's sort of where the high is. $225, I think, was the high prior to the July pullback. So, you know, I'm not actually expecting too much disruption.

6:37I don't know what the exact implied vol for the earning release is, but let's assume it's probably come off a little. But to your point, the Jackson Hole stuff is probably the bigger picture because we need stabilization in the rates market. We saw the long end kind of come unhinged as Worsh gave his FOMC presser in the July. And everyone got worried because he wasn't really committing to any actions. It wasn't really even speaking words that made sense. Like I said, you were at the New York Fed from 2006 to 2013. So you understand the Fed and you spent a lot of time observing Fed communicators after that, I assume.

7:05Do you think he learned lessons in communicating from that press conference? I think Kevin's been around a long time. He would have learned that already. I think he's got a game plan that maybe the markets aren't really hip to yet. This feels like a strategy. Yeah. Really? You think so? It's coordinated with Besson in some ways. And it certainly has a deeper feeling where he does want to adhere some control back to the market, reduce the footprint of the Fed, which is admirable in a lot of ways because financial repression is a real problem. And that's how bubbles are created. We have the boom bust cycles that we've had in the past.

7:36But he's yet to clarify that. And I think these task forces are part of that. But we're talking about a nine month to one year sort of clarity. In the meantime, he's basically saying, I'm going to let markets do the work for me and tighten financial conditions if they think that's appropriate. The long end just said, OK, we'll pick up your job right now. And that's why we had the tantrum sort of right after that FOMC presser in July. Interesting. You know, we're going to have Dan Ives on in the 4 o 'clock hour and talk about what he's up to. But I thought it was interesting, this NVIDIA story where they are signing up six financial powerhouses in an attempt to bring more outside capital into the space and reassure investors.

8:16I don't know. My read, like, how am I supposed to read that? How are market watchers reading that? Because to me it says we're trying to be like, calm down, calm down. Look at all these people who are willing to play with us. financially. I mean, again, I've been speaking to this all day. Obviously it's been 24 hours since I came out. It's an interesting concept because we are well aware of the physical restraints, whether it's electricity, whether it's even labor, electricians, whether it's the GPUs. Now we have this financial constraint where you're trying to push a lot of capital through a tiny straw that needs to be a giant pipeline because the CapEx story, every quarter gets bigger and bigger and the momentum's growing and we have no end in sight for capacity demand.

8:52So this is part of that. Like we want to grow the pie responsibly and it can't all just be cashflow recycled back to a few people like NVIDIA who are really at the top of the food chain there. They need to figure out how to get the capital back in without looking too circular. So again, the devil's will be in the detail. I'm still not really sure either. So I heard your hesitation. I'm with you there, but I think overall, you know, this is going to be something where you'll see a better financing option. And then when we got, like we looked at core weave today, we had an X's, we had the height, you know, the Neo clouds today, they were saying the backlogs are looking good.

9:21but they can kind of collateralize that into securities and get a better sense and a lower cost. The best thing out of CoreWeave today was that their actual debt financing costs were coming down notably, and obviously their backlogs were growing. So that alleviates some of this debt problem, because that was obviously the big thing with Oracle and CoreWeave going into sort of the sell-offs we see, not only in July, but prior to that as well. All I would say is backlogs, great, but what if people cancel orders, right? Like there is always that, and people are starting to talk about power on data centers and multiple contracts.

9:53And there's also reluctance to lock in longer term contracts because the prices keep going up. So you can actually hurt your future earnings growth because we don't know exactly where the demand goes. It's so inelastic right now. All right, we got to run. Michael Ball of Bloomberg News, macro strategist joining us right here in studio. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

10:19What if data didn't sit still? What if intelligence moved with us? Not buried in reports, but activated in real time. Where lives are being shaped. Where decisions are being made. It all starts with a question. Where is the potential? Cotality turns data into clarity. Intelligence into insight. Insight into action. Because when intelligence moves, we all move forward. Cotality. Intelligence beyond bounds. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube.

11:03Well, today and really just moments ago, Bob Diamond's Atlas Merchant Capital announcing a minority equity investment in Edge Focus. It's a firm that delivers technology capital and access to consumer credit. So we wanted to get the details right from the sources, the main sources. Bob Diamond is founding partner and CEO of Atlas Merchant Capital, a global private equity and alt asset management firm focused on the financial services sector. He's also chairman of Hyperliquid Strategies. Welcome, welcome. Might know a thing or two about running a big bank, too. Yes, I bet he has some stories. Also with us, Elliot Lorenz.

11:34He is co-founder and CEO of Edge Focus. They, as the company reminds us, delivers technology capital and access to consumer credit. Welcome, welcome to both of you. Thank you for bringing this to us. I want to first get to the investment. And, Elliot, let's talk about this investment. What does this equity investment specifically do for you? It has to do with, like, operations, doesn't it? It does. The important thing for us is being able to go into more asset classes and really invest alongside of our partners. What we do, as you mentioned, Carol, is provide capital as well as access as well as several different things to the consumer lending market.

12:09What we're ultimately looking to do is to connect. A massive market, by the way. Huge market,$200 million in unsecured consumer last year. We're trying to connect, at the end of the day, big investment firms like a Fortress with really large consumer lending firms like a SoFi. Yeah, Bob, come on in on this investment. There's a lot of noise around credit markets, around private credit right now in particular. You have a very diverse portfolio at Atlas Merchant Capital. Why make this investment right now? You know, we have seen a real unbelievable development in the credit market since 2008, the great financial crisis.

12:44And I think so much of credit ended up on bank balance sheets prior to 2008, particularly outside the U.S. You know, the big banks in France, the big banks in the U.K., all the credit was on the bank balance sheets. And we have seen a real development. Some call it private credit. You know, it's edge focus. It's fortress. There's so much diversification. And I think that's why we have had such a long period without a real blip in credit. It's become, you know, it's a real credit to the U.S. capital markets. I think in terms of consumer credit, and I saw this, you know, through the lens of Barclays.

13:26I saw it very much through Barclay Card, which dominated the credit card and consumer credit market in the U.K. is, again, it's much more diverse. It can be spread a lot. And I think we have originators of consumer credit like SoFi in Edge Focus. We have capital that likes to invest in consumer credit like Fortress. And I think one of the things that we can do together is we can find more originators. We can find more investors. and you know when we look for an investment you know you want to have someone that has a unique position in their market that's edge focus you want to find someone that has strong leadership that's elliott and in the team you want to find a business that's profitable but most importantly for us you want to find a business that has both a willingness and ability to grow and this can be a significant increase over the next three four five years with access to capital to grow this business.

14:27So it's unusual in financial services to look at investments where they can be multiples of where they are today. But what Elliott and the team have built can be multiples of this. It's a big market. You mentioned unique focus that Elliott has and his team. What is that unique focus, Elliott? Because the consumer credit market, a lot of players, a lot of folks in there. What is it that you guys are doing differently? And I'm curious then, Bob, like what you think they're doing differently that's appealing? We do three things really well. We have access to a ton of data, our modeling approach, and then access to various other consumer lenders.

15:01From a data standpoint, hundreds of billions of data points in the U.S. consumer across lots of platforms. We know really well at all times what the consumers look like. Where's that data coming from? Two main sources from platforms themselves who issue loans, as well as the credit bureaus. Lots of alternative data sources as well. From a modeling standpoint, we have PhD researchers where all they do every day is research how to model the consumer, see what the latest trends are, and then finally access. None of this matters unless you have really good access across lots of different platforms.

15:30They have one more thing. They have incredible discipline. This is someone who did, I assume, the due diligence. We did a lot of work on this. They have incredible discipline. And both the originators and the providers of capital love what they see here because of the discipline, with their own capital, but also with their advice and counsel. So it's in underwriting, but also in advising. Does that mean only certain types of consumer credit that you're going to, like certain categories, certain types of, like tell us, is it top tier? Like what are you going for? We look across the board. Generally speaking, we can provide the most value in near prime and subprime credit.

16:05Near prime and subprime. So on that, Elliot, SoFi and Happy Money are two existing deals that our Bloomberg News team has reported on. Would you think about expanding to, I don't know, other places like buy now, pay later firms, for example? Absolutely. I think it's part of the reason for the investment. We want to grow beyond unsecured, which we're really big in right now. We're getting much bigger in auto. We want to be in point of sale medical. We want to be in home improvement. There's a ton of areas for us to grow into. Are you talking right now to any specific buy now, pay later firms or any of those firms in the spaces that you just mentioned right now?

16:42Many of them, absolutely. So we should expect deals to be announced soon? Absolutely. Our LPs are asking for it as well. It's got really neat characteristics. Do you think that? We're actually going to have a pretty big announcement in about two weeks. I love this. So mark the date. But that's appealing to you, that part of the market. You know, Carol, as I said, it's about a unique position, which they have. It's about strong leadership. It's about profitability. But most importantly, what we love is we're not just great investors. We're great operators. We love to roll up our sleeves, go out and visit clients, help them think about expansion.

17:17And when you look at a business that is this disciplined and this profitable and this focused with the market out there and consumer credit and beyond consumer credit, this is exactly the kind of investment that gets us up in the morning. Well, so then what are you going to do, Bob, for Elliott and his team? You know, you say you guys like to roll up your sleeves. You're making this injection of capital. You're now a minority owner in the firm. That's just the beginning, right? Do you have an office there yet? First and foremost, when Carol and Tim call, I come here to Bloomberg. I like that. And maybe, I mean, they're down in Denver, so maybe you could go do some skiing this winter, too.

17:51It's out in the ether now. But yeah, how involved? It sounds like good old-fashioned. So Fortress is a great partner. Yeah. There are other institutions that David Seamus and I and Brian Saunders have been very close to over the years in other investments or in our career. and David was with J.C. Flowers and my time at Barclays. We know a lot of people that would be interested in being capital providers, but until now they have not heard about edge focus, and they have not heard about the business model. Who are the investors already involved with you? What other investors might be coming in? You just talk about the capital providers.

18:28Who are we talking about? All the really large private credit firms you've probably heard of. Like I said, we've talked about Fortress publicly quite a bit, several others as well. Okay, so more. Yes. More. You know, I noticed in the press release that this is focused on hiring efforts, part of this injection of capital, partly focused on hiring efforts to build out a big part of your team. I'm curious about talent that your firm is targeting in a market that's really, really competitive. Incredibly competitive market. The biggest thing for us is hiring researchers, especially in the age of AI, making sure that we can find folks who really understand the data, can use AI tools effectively, efficiently.

19:06It's one of the most important things for us. Over two, there's our firm is technology-based. What goes further? You're already very technology-focused, AI-focused. I'm curious, like, what's the next step? Where do you go with all of this? New asset classes. We've done a lot in consumer and secured. We have a long way to go in subprime auto. We have a really long way to go in point of sale. And there's several other asset classes for us to get into. Bob, provide some context here, given your history in banking and, you know, how what Elliot's firm is doing, in your view, is different from the way that a big bank can profile a consumer?

19:42I think it's a number of things. But I think, first and foremost, you know, the traditional banks prior to 2008 just had a very, very different approach to managing what was in their portfolio. You'd see the quarterly earnings, and you'd see a little bit of provision here and provision there, but it was not really asset or loan-specific. even in BarclayCard, which was really consumer credit, an unsecured consumer credit, it didn't have the depth of this. So it's the incredible discipline and the incredible technology that they've brought to understanding credits so that the separation from kind of near prime to prime and subprime and things like that, the number of gradations on that continuum are incredible, and that's what they've done.

20:31So they're much, much better at managing access to credit and the return that comes from credit. And I think we've seen it broadly in the market. Like since 2008, we haven't had a blip in credit. We've never had a cycle quite like this. And I don't think it's about to stop because there are so many more participants, so much more technology, artificial intelligence that's being applied to analyzing the risks associated with every single piece of credit. Are you saying this time is different? I am saying this cycle is very different because of technology, because of AI, because of firms like Edge Focus.

21:07Okay. Meaning that— By the way, it doesn't mean there won't be mistakes. Right. For people that don't use that technology, for people that don't use Edge Focus, there will still be mistakes, but I don't think they'll be systemic. They're not going to be across the piece. They're not going to be a crisis for the industry. They may be a crisis for an individual fund. So in other words, not just that the risk is spread, but if somebody who doesn't have the great oversight or risk. There will still be mistakes made, Carol. Absolutely. And I think what will separate edge focus is more and more people are going to want to have access to people like Elliot and his team so they can move into that echelon without trying to build it themselves.

21:51So let me ask you, there are always cycles. And I'm just curious how exposed Edge Focus is specifically to consumer credit, and how will you guys be protected if ultimately we see financial conditions tighten? We are. Things go through cycles. And then we start to see end-user delinquencies increase significantly. I mean, these things happen. Absolutely. We're very long consumer credit. There's no question about it. At the end of the day, we need to be— But what do you do to mitigate risk? It's all about having that loan level selection where we can use all the data we have at the individual borrow level to ultimately buy better portfolios of assets for investors.

22:26So you're saying the data, the algorithms, the AI? And we also have to monitor it really well, too. We've built out tons of proprietary internal platforms where we can watch this stuff in a real-time basis and understand exactly how the consumer is evolving. And so far, in terms of issues that have gotten you into trouble, like what percentage? I mean, look, there's no investment that's ever perfect, right? No, no, no, fair. In 2022, 2023, for example, inflation was really challenging on the consumer, there's no doubt. But you learn a lot from that. You add into your algorithms, you add into your models, and ultimately create a much more sustainable, defensible platform.

23:00Well, Carol brings up a good point. And what I heard from you just now speaks to what it sounds like you have this, what you think is a very solid, real-time view of how consumers are doing. We try to figure that out each and every day on this program by looking at the data that we get from the Fed, data that we get from different bureaus, alternative data as well. How is the consumer doing? Yeah, we have a lot of really cool insight into how the consumer is doing. What I can tell you is that applications continue to increase across all the platforms we have. Applications are up year over year on the board.