Market Uncertainty Ahead of the Midterms

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1:25This 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. Peter Chair joins us here, head of macro strategy at Academy Security. He's joining us live here in our Bloomberg Interactive Broker Studio. Peter, thanks so much for joining us here. what's your discussion with investors these days as it relates to kind of just the ai narrative a is it a decent rri b how are they funding it what's the conversation you're having with your yeah i think increasingly people are getting nervous about the amount of debt that's being issued and potentially equity that's coming out for this so you've seen some pushback recently in the fixed income markets you're seeing the spreads widen out i think people are just saying hey if you're going to keep coming with this we might as well charge you more and see where you're coming, which might be a response to the equity.

2:18I think there's a degree of nervousness there. And I think we've been talking a lot at Academy Securities about the potential for cheap Chinese compute to come on the market. And we feel that's one of the biggest threats that you're seeing the Chinese chip companies get better. You're seeing their compute get better. You're seeing them catch up a little bit. I do think they have an advantage, unfortunately, in energy production where they have spent more on the electricity grid going forward. So I'm a little bit worried whether these first mover advantages will truly hold. And as our nation seems to be pulling away from data center, compute build or the desire, you're certainly running into more and more red tape.

2:50Where does this wind up? Well, last Thursday was an interesting trading day because you had the S &P 500 down more than one percent, but then you saw 300 stocks that were higher. Obviously, that reversed somewhat on Friday. But the last time we saw a dynamic like this, this was Jim Reed from Deutsche Bank talking about this, was in 1998. So the only other time was in DeepSeek in January of 2025. So there's only twice we've seen that kind of divergence there. So I'm curious when you're thinking about the Chinese compute and the risks there, when we have kind of those events like DeepSeek, obviously that was almost two years ago at this point.

3:23How much of that is a one-off or how much of that is a concern when you're speaking with your clients? You know, I think it's not as much of a concern. We bring it up a little bit more. I think people are now more focused on the cost of the debt, the rollout. The one thing that, you know, I think you talked about, we had the divergence last week. What I'm starting to concern myself with is AI spend has been such a big part of the economy. One thing that really caught my eye was Treasuries rallied last week while we were seeing the AI compute spend crisis. You know, questions come up. I think that's part because, one, the good part would be if there's less AI debt coming out, it would help Treasuries because there's not as much other supply that they're competing with.

3:59But is the Treasury market starting to whiff out that they might see some sort of slowing down in the economic growth, right? Compute spend has been such a huge part of our GDP growth. If that slows, what happens to our economy? So my fear is right now, if I look at fixed income and credit markets, it's very isolated to the compute story, maybe a little bit to France, that we start pricing in some risk that the economic slowdown starts. Then we get a more widespread credit widening. And I do not think equities can handle that. Peter, you've been talking a long time about kind of this on-shoring aspect and for security.

4:32How concerned are you that maybe there is some pushback on these data centers across the country here? That's something I don't think we thought about initially. No, it's something I thought was going to be like a 2028 election issue. And it's, you know, come up right away. I also think there's been a lot of inconsistencies within our policy, right? One day you have Besson saying how important it is to build out data centers and AI. And at the same time, then we're tariffing aluminum from Canada and other countries. And aluminum is making the cost of the data centers go higher. So I think we're going through some, you know, growing pains in what we're trying to do.

5:02I think you're seeing the chip industry grow here. You're seeing this. What's been really exciting to me is actually I think this concept production for security or what we've been calling ProSec. It's going global. Ruta talked about the need to build refineries. You've seen Australia announce refineries. I think every single country across the world is going to look a little bit more like a vertically integrated nation. So bond yields have tended to correlate with oil futures since April and when markets bottomed in late March. But we saw a little bit of a break with that last week. Do you think that's temporary or do you think that's something that can sustain itself?

5:32You know, I think it's going to be hard for bond yields to go much lower if oil prices keep going up and, you know, particularly diesel prices. having said that, I do think there is this little bit of a break where all of a sudden, for the first time, people are starting to say, if we don't do the spend, if oil prices stay high, will we see an economic slowdown? And I think that's what's starting to get priced in for the first time. And it's just a little whiff of it. I don't know that it's going to become the core trade, but I do see that potential, right? If you see questions about the AI spend, some questions about the economy, again, some of the stuff that was designed with the big, beautiful bill is starting to run off as well.

6:07So. Well, what do you think people are underestimating when it comes to because we'll have Microsoft reporting after the bell on Wednesday after the Fed decision, Alphabet as well. And then we'll have Amazon on Thursday, Apple next Monday after the closing bell. But what do you think people are underestimating when it comes to these types of earnings? Because it feels like each earning season, there's the concern about the data center debt and the spending. But what's the other side of that? You know, I think the other side of what we're all trying to figure out, right? We have some of the most transformational technology ever.

6:34We have no idea what this is going to look like two years from now or five years from now? Will the same chips be involved? Will the same things? Will we be able to fit a data center into the size of a suitcase if Qwanda comes around? So we are trying to price in this earnings and we all get these, okay, earnings are good. And we've locked in a year's worth of supply or two years. The reality is, I don't think we really know what this is going to look like in three to five years. You're starting to get more and more people question, are we even getting the benefit? If we spend on AI as a corporation, are we really saving that much money?

7:01So I think there's so many things about this narrative that the earnings are only a temporary relief. And then we get back to what's this really going to look like? And I think for the first time, we're getting some pushback. Even Elon Musk is pushing back on some sorts of it. Peter, Academy Securities, much of your senior leadership at your firm is ex-U.S. military. What is the current thinking about Iran and U.S. policy and how this thing may resolve or not resolve? That's a great question. So, yeah, our leadership is basically a lot of former Naval Academy grads. Then we also have our geopolitical intelligence group, which is about 40 former admirals, generals, a couple of UK flag officers and some CIA and other three-letter agencies.

7:40I think we're preparing for more attacks post the election. I think you're seeing that come up. You know, the one question is always, do you prepare for more attacks, hoping that pushes Iran to the table? Because I think you do have to threaten. What we are watching closely is to see if we put hospital ships within the vicinity of the islands in the mouth of the strait, because that would be an indication that we're actually prepared to put boots on the ground. Right now, we think most of it's going to be attacks along the shoreline to kind of deteriorate what they can do in terms of attacking shipping in the strait.

8:10And there's probably a high likelihood that we make one more run at a lot of their nuclear facilities if we kind of want to do the scenario where... If you invest or lead a business, one-sided views aren't enough. Join me, Brad Rogoff, and my team at Barclays Research as we debate what's driving markets on the Flipside podcast. Find the Flipside wherever you get your podcasts. This is the Bloomberg Tech Minute brought to you by Chachi PT. I'm Carol Masser. Millions of Americans are taking peptides, short strings of amino acids that can act as biological signals for cells. Bloomberg's Anika Inampudi reports peptides may be exploring their next frontier, the brain.

8:49People are taking peptides for mental clarity and cognitive benefits, and to gain a competitive edge or stave off the effects of aging. Both insulin and semaglutide are approved by the U.S. Food and Drug Administration. Because importing or selling unapproved peptides for human use is not legal in the U.S., many people turn to online forums for guidance and overseas vendors with questionable credentials to obtain them. Unapproved peptides, which are marketed as research chemicals, have been circulating in what's become a billion-dollar gray market amid the rise of do-it-yourself medicine as people increasingly turn to social media or artificial intelligence for medical help.

9:26That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com. We took away their nukes and they can't do anything. You have to hit those nukes one more time. No one really sees that there's a real clear path though to quick victory. We can do more damage to them, but it's only going to help drive them to the negotiating table. It's not going to end this. Okay, Peter, thank you so much. Appreciate it as always. Peter Cheer, head of macro strategy at Academy Security. Always appreciate getting a few minutes of his time. Stay with us. More from Bloomberg Surveillance coming up after this.

10:06You'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. Big, big week for earnings here, including some of the big tech names. We want to get an update on kind of what the AI theme means for investors these days. Nate Tuff joins us here. He's the CIO, Equity and Multi-Asset Solutions at Manulife Investment Management. Thanks so much for coming into our studio, Nate. What is the AI story for you guys at Manulife these days? How are you kind of framing that out?

10:42It's great to be here, Paul. I mean, the AI story for us is that it's a much broader ecosystem of players. And the discernment between winners and losers is becoming much, much greater. And we're seeing that in the markets on a daily basis, right? The winners and losers are starting to become much more pronounced. And the next stage of this process is where do we actually see companies that can continue to spend the dollars that they're spending while at the same time start to get realized benefits from that through either productivity gains or actually the outcomes of better usages of AI? But more importantly, the discernment of that in the market is going to be between who can actually continue to spend these dollars, but do so in a way that they don't continue to eat away at their free cash flow and actually show some realization of return on capital.

11:31And that's where the markets are really starting to sniff out some of those winners and those losers. So let's talk positioning. Where do you think the winners are? Like which stocks within that AI universe are you buying and which ones are you getting out of? For us, it's less about specific names. It's more about some of the broader themes. And so we're looking increasingly at areas of the market that are truly the beneficiaries, not the builders of AI. And so increasingly, we're looking at leaning into areas like health care as an example. I think health care is woefully underappreciated because, one, the market has hated it for years.

12:03Also, that's been trading around all-time highs. But more recently, it's showing some life. And I think people are starting to realize that underneath the hood, there's a lot of potential benefits from AI within health. Well, it's interesting because within health care, you have biopharmaceutical companies, but then you have medical device companies like we're specifically. And then you have like a Johnson and Johnson, which can be viewed as a staple type of related company, even though it's health care. So we're specifically. So for us, it's the companies that one are going to be able to use AI and new productivity tools to create more customized medical outcomes.

12:36That's either through better diagnostics that are much more efficient and much more accurate. So those type of companies, so diagnostic companies, but also companies that are building new drugs that are much more personalized because they can now do it. What about GLP-1s? And there's going to be no shortage of flavors of GLP-1s is what we're already seeing. And there's going to be winners and losers there as well. And there's going to probably be more customization there as well. So for us, the AI ecosystem isn't just about tech names anymore. It truly is a broader subset of sectors. And we refer to them as LIFT, life sciences, industrials, financials, and tech.

13:11And they all play a role in that ecosystem because some are beneficiaries, some are still building it out in the infrastructure behind it, and some of them are getting benefits across the board. They're getting a little bit of the build out and they're getting the benefits of both financing it, deploying it, and actually benefiting from it. We've got higher interest rates, higher than we've seen in a very long time. And the folks that do this stuff for a living tell me it's going to be higher for longer. How does that impact your equity outlook? That's become increasingly a challenge. You know, we've been underway duration as a call for a long time, but it's now really hard to dismiss the idea that yields in fixed income are actually competitive and they're getting more interesting, right?

13:51Which is a negative for equity markets. And we're already seeing that. Now, the positive is the power of earnings has been so strong that even though we've seen some sizable valuation resets in equities, it hasn't actually shown up in most people's accounts because earnings have overwhelmed the valuation discounts that we've seen. At some stage, though, earnings cannot grow at 30 plus percent per quarter and in perpetuity. They just can't. And so we are seeing the fact that the competitiveness of long term return potential and fixed income is now looking much more attractive versus what we would have said five years ago versus equities.

14:28And so it's a tougher call. Now, I don't think you should dismiss the idea that equities still have longer term, better return potential. But at the same time, fixed income is increasingly becoming a good tool for better returns. Well, in addition to these tech related names that are coming up this week, we also have energy companies that are reporting. So Exxon, Chevron, both reporting before the opening bell on Friday. They're also both trading around records and the energy sector, the S &P 500 best performing sector year to date up more than 50 percent. So at what point do you think the pendulum has swung too far in energy's favor?

15:02How are you positioning there? That's such a binary challenge right now, because so much of this is tied to the outcomes of what's going to happen in Iran, right? But at the same time, we take a step back and think about the challenge in Iran isn't unique to just Iran. We are living in an environment where geopolitical concerns and geopolitical fragmentation is higher than ever. And so it's not just about Iran. We're seen it elsewhere in the world as well. So our general view is we are in the early innings of a broader commodity cycle. And so I think even though there's going to be maybe some loftiness priced in right now because of the specifics of Iran, we think that energy and the commodity cycle have multiple years of potential positivity, both from commodity prices being potentially higher, but also the companies that are playing in that area benefiting in the long term.

15:51Nate, we're going to hear from the Fed Wednesday. What do you expect to hear? What do you think the markets need to hear? How are you approaching it? The Fed is likely going to hold. I think that's consensus, but I think just broadly speaking, it's the right decision right before the election cycle. Two, we obviously did have a weaker inflation print last month. We'll get another one later this week, so we'll get some insights there. So the Fed's going to hold, but I do think they need to toe the line and continue to sound fairly hawkish. The positive is I think the market expects that as well.

16:21So I think we're going to have somewhat of a nothing burger as long as they stick to the script, deliver a pause, but deliver it in a way that we still care about inflation. And we are that is the priority and we need to get it under control. So if you were able to go to the press conference on Wednesday when Kevin Warsh is speaking, what question would you ask him? You know, the reality is whatever question you ask him, you're going to get a very simple answer that he doesn't project future outcomes. Right. And so for me, it's really about, hey, do we see signs of light that inflation under the hood is coming under control?

16:56And I personally don't believe that's the case yet. And I would love to have a real honest opinion about what that means from his perspective. Nate, thanks so much. Appreciate it. Nate Tuft. He's the CIO Energy. I'm sorry, Equity and Multi-Asset Solutions for Manu Life Investment Management. Joining us live here in our Bloomberg Interactive Broker Studio. Stay with us. More from Bloomberg Surveillance coming up after this.

17:44Heidi, it is we got elections coming up a week from tomorrow. Typically geopolitics, global geopolitics don't figure that much into voters thinking here. How do you think that plays out this time around in these midterm elections, given what's going on with the Ukraine and maybe more notably with Iran? So you're absolutely right. I mean, foreign policy is rarely top of mind when Americans go to vote. But foreign policy is domestic politics right now because the Iran war has raised gasoline prices, diesel prices, fertilizer prices. Tariffs have raised grocery bills. And so and trade war, the trade war is is basically, you know, getting a lot of backlash from lost exports.

18:29Farmers are unhappy. And in the case of Canada, we're losing friends over over trade. So I think this this time around, they're actually between between war and tariff wars. We're we're going to see this playoff in the affordability debate. Of course, when it comes to that affordability debate, just a week over until those midterm elections. Speak to us more. I was looking at your notes about how even despite whatever the outcome is, what that ends up meaning for foreign policy over the next couple of years. So, I mean, you have always a president has the has the executive authority in foreign policy.

19:08So I think we need to buckle up and whatever the election outcome is, the next two years are going to be about an expansionist foreign policy. It's really where the president retains some very broad executive authority. So whether it's Iran, Ukraine, Russia, Venezuela, and probably, you know, lands beyond, I think Trump will have a substantial amount of latitude to act. And this, of course, sorry, going back to just the affordability. This means that we're going to that he's going to double down on what's going to be negative for affordability running up until 2028. Yeah, it just he does not seem to care about the politics of it all here as it relates to Iran here.

19:48I mean, that doesn't seem to be an off ramp here and it doesn't seem to be incentive for this administration to end this war. How do you think it plays out post midterms? So, I mean, you already have a decent expectation that the administration is going to is going to really go in strongly and attack Iran after the midterm elections. And so I think, you know, it doesn't I don't see any end in sight. I don't see any reason for Iran to give up its chokehold in Hormuz. I don't see any any upside where you don't have a counteraction, whether it's cyber attacks, whether it's kinetic attacks against the infrastructure in in the rest of the Gulf.

20:41You have so this is really where, you know, we're going to we're going to probably see this continue to play out over a long period of time. That also increases the fiscal burden of having to actually, you know, replenish our domestic defense industrial base because we're running through our, you know, our munitions, our weapons. And we have to we need to rebuild those pretty, pretty substantially. That's going to be a huge fiscal burden moving forward. Heidi Kribo-Redeker, Senior Fellow for Geoeconomics at the Council of Foreign Relations. Heidi, the other hotspot out there is Ukraine. Again, any sense that we're going to have just another tough winter for the folks in Ukraine?

21:27So I think that Ukraine is bracing for that for that tough winter. And, you know, just going back to the question about about how geopolitics is playing out in the in the midterm election. This is Russia, Ukraine is not top of mind for voters. It doesn't have that impact on that that the war in Iran does on sort of the kitchen kitchen tabletop issues of of inflation and spending and what you what you what you pay at the gas pump. But I think voters are very confused because overwhelmingly Americans poll that they are really negative towards Russia and Putin and they overwhelmingly support Ukraine.

22:17So the fact that you have Trump and his family and his associates really just, you know, giving Putin the benefit of the doubt, doing the business deals with Putin, turning off, you know, supporting Musk, turning off Starlink and then having I mean, we were really seeing the U.S. pull back any and all support and actually counter with some pretty overt support for Vladimir Putin. And I don't I don't see that necessarily changing. Europe really needs to step up here. I think they're doing what they can for Ukraine. But again, you've got these fiscal challenges all around these days. So it's it's it's it's really the conversation is live in Brussels today.

23:04Yep, absolutely. Heidi, thank you so much for joining us. Really appreciate getting a few minutes of your time. Heidi Kriber-Redeker, Senior Fellow for Geoeconomics for the Council of Foreign Relations. Stay with us. More from Bloomberg surveillance coming up after this.

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25:10you'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 well you got stocks within two or three percent of all-time highs you got some nice yields you can get on some paper i mean the 10-year treasuries you know right around five percent yield that's not a bad place you're not taking much credit risk if at all. How do you allocate funds here? Stocks, bonds, commodities, U.S., non-U.S.? Let's check in with our next guest, Ella Goud. She thinks about these things.

25:43She's head of investment strategy and asset allocation at BNY Advisors. Ella, thanks so much for joining us here. Love to get your thoughts as just to how you're thinking about broadly defined asset allocation, stocks, bonds, alternatives. Where do you guys start the discussion? of course i mean we base a lot of our longer term expectations on uh sort of cap m uh basis and strategic asset allocation so those are you know they take account of some of the cyclical components but predominantly they're more longer term in nature but of course uh as we know the the world evolves and these days pretty rapidly and so you have to also account those in terms of your asset allocation.

26:25So if you like, for example, this year and what's interesting for us now, clearly the real assets have been very attractive over the last couple of years to have as a component of your investment allocation. Also, because we've been seeing higher and stickier inflation overall, particularly over the last five years. So that remains an important tenant to have. But over the last year or so, we've also seen much higher bond yields, as you've just alluded to now. And so, as you say, 5 % yields are not too shabby, right, in terms of your asset allocation. So, that's also an area that we've been looking at to increase for our client portfolios.

27:06We've been running underweights in that sector, particularly because of the concerns we had around inflation and the inflation feed-through. Those still pertain, but what's changed, the price has changed or the level of yields, if you like, has changed. So, all of a sudden, bonds do become more interesting here, whether it's in credit space or in core space. In terms of equities, we're a little bit more neutral here, slightly more defensive in the interest at allocation spectrum. Why is that? Predominantly because we've obviously had a pretty good run. So that's been a significant rally. probably if you look at the last three plus years, you've had returns in excess of what you would expect for particularly, let's say, U.S.

27:53equities. Typically, you expect about 8 % to 10 % returns, and we've had double digits for several years. In the meantime, we're sort of in that cusp of finding whether productivity will play out, which would be great, of course. So, that's why you don't want to necessarily get very bearish here. But at the same time, you're basically looking at pretty excessive levels and seeing some concerning signs in markets. And so when you compare the two, you look at rates versus equities. I think you're paid here to take a little bit of the chips down out of the table, if you like, and put some money into bonds, just because the uncertainty starts to rise at this late stage of the cycle with these types of valuations that we see.

28:34So talk to us about specifically the positioning then that you're doing in fixed income. What are you buying? What are you selling? I mean, core bonds are attractive. A local EM still is attractive for us. So those areas remain attractive. But in an investment grade credit and high yield, we've seen quite a bit of repricing over the last couple of months. But investment grade credit has a higher duration component. So if you want to take a bit more exposure to that interest rate sensitivity here, which I think makes sense in terms of balancing portfolios, then actually investment grade credit makes sense.

29:11And in lots of places, you're getting something like 6 % yield, which is not insignificant in terms of your asset allocation component. And it's actually a little bit higher than what we would expect in our market assumptions for the long term. And so that's a good place to put some money. High yields repriced, but perhaps we have a little bit more repricing to do, but that's also still an attractive part of the market. Ella, how do you think about, from a geographical perspective, U.S. versus rest of the world? How are you kind of allocating there? Yes, what's interesting is when we do our annual exercise in terms of our market expectations, actually a lot of the foreign markets look interesting here, particularly U.K.

29:55So we obviously have to calibrate our portfolios to allow for the lower liquidity of that market. But you've got stocks that are attractively priced that give you attractive income. So that's an area where we've been parking some capital. But broadly speaking, international is interesting here because if you are concerned about the level of, let's say, concentration of the AI theme, so you like it. It's not necessarily that you're bearish, but you just want to diversify, not put maybe all your eggs in one basket. So given that concentration, perhaps you want to take some capital and put it in international markets where valuations are a lot more attractive.

30:30And also, if you have some concerns around the dollar, which actually international investors do have some concerns around the dollar at this time, then actually international stocks are actually a bit more interesting to own. You also mentioned real assets. Walk us through more specifically. Are you talking about real estate infrastructure, natural resources? Where specifically within real assets are you allocating? Yes, absolutely. I mean, you said it. It's very much natural resources have been an area we've really liked to own. Infrastructure as well. I mean, infrastructure, just the one caveat to make there is that it has quite a bit of exposure to data centers.

31:09So that's one thing that we've been discussing with the team. You know, is this a too high a beta? Are we comfortable with that? But it has given you sort of much lower beta to the overall S &P 500 and actually pretty decent return. So it's been a good place to park capital. But also things like precious metals have repriced quite a lot here. I mean, we were saying earlier gold at 4030 and a big correction. So maybe not too bad a spot here, technically speaking, as well, to own a little bit of that, you know, ultimate hedge, if you like, which I believe is gold, really. Is that is gold probably the best hedge for AI, Ella, because a lot of folks are starting to worry about, boy, I have so much concentration in AI, direct and indirect exposure.

31:58Yeah, I'm a bit of a gold bug, so do with that what you will. You know, taper down a little bit, I guess, when you hear the opinion. But no, I think, you know, jokes aside, it's attractive. It's the ultimate hedge. If you've held it for a long time, you've done okay with it. It hasn't done so well in risk-off environments of late. And, of course, it got absolutely hurt with the repricing of real rates, which makes sense because it's a non-dividend, non-coupon paying asset. But the correction and sort of taking out a lot of that speculative positioning should make it more attractive here because we're at a juncture where potentially we believe data could get a little bit weaker going forward.

32:40So data surprises could get a little bit weaker. We have central banks that are engaged with tightening. And at the same time, a little bit of nervousness around the AI theme with investors. So for that, in that sense, you know, whether it's inflationary concerns that you have or it's market correction concerns, it will actually play, I think, in that sort of more medium term run to own it. Ella, thanks so much for joining us. We really appreciate getting some of your time this morning. Ella Good, she's head of investment strategy and asset allocation at BNY Advisor. She is based over there in London.

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