PCE, Yields, and the Tech Trade

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1:04This 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. Mike Rhee is going to say I shouldn't do this. Senior U.S. economist, RBC. But I got a good ADP number 14 minutes ago. And so I look at the yield and we are 5.57 in a 30-year bond. Are you guys micro looking at yields coming off 18 lines of economic data here today? I mean, you said it. There's a lot to digest, right? So you're going to have the employment data. We got the sneak peek this morning.

1:45We get the inflation data. we get the revisions to gdp and we do get some of those other measures i think that are important signs for ai investment we do think that continues when you look at things like durable goods order so a lot to unpack but at the end of the day if everything is looking positive i think you can expect that rates continue to move higher i mean let's just set oil aside because the whips around every day based upon social media posts here underlying inflation how do you view that because it's there, it's sticky, and I think it's definitely got the attention of the Federal Reserve.

2:22How do you think about underlying inflation? Yeah, we are concerned about it right now. And the way we're thinking about it is kind of putting it into three buckets. And you have your services, which we're splitting out. You have the housing component, which we think the disinflation there is largely done for this year. Maybe you get a little help next year, but for the most part, it's just gonna move sideways. And that's a big chunk of the bucket. Then you have core services, ex-housing. And with the labor market doing as well as it has been, there's really little disinflation. So the wage component, what's contributing in terms of compensation there, unlikely to provide any help.

3:03And when you look at what's left to provide that help in core goods, I'm concerned because when you think about the energy story, it's freight prices that are starting to look like they're moving higher. And when you look back at 2020, they're comparable in terms of a year-over-year change. And that's going to start to bleed through into the core good space. All of this says inflation is moving in the wrong direction. Yeah. So, I mean, we'll see core PCE today on an annualized basis 3.3%. So that's not what the Fed is looking for here. So on the other side of the equation, the labor market, I mean, it seems pretty darn solid, right?

3:43Is there any cracks underneath the surface that we should be paying attention to? No, and we've been looking. We put a piece out last week, and it's something I look at. Some of these measures that most people don't pay attention to, things like part-time work for economic reasons, aggregate hours. and when you look at those, it's really hard to find any weakness. The aggregate hours really continues to grow. That just shows a continued demand for labor. And when you look at things like part-time for economic reasons, again, suggesting hours aren't being cut. In fact, they're being expanded. And I think despite some of the headlines about recent grads struggling, at the end of the day, at a 4-1, it's hard to argue there's weakness in the labor market right now.

4:29Mike Reid with us as we go on to the economics. Alexis will have that for you in a moment. The privilege he has of working with Francis Donald. Pretty solid. Five days a week. Mike's got to have patience. Summarize, is it Nathan Jansen who does your Canadian-US border? Yes. Are these reports, and particularly PCE, affected by tariffs? Yeah, they are. And so one of the things we're thinking about is, certainly on the Canadian side, how that's going to impact the Canadian economy. It's going to be more impactful there. You know, right now, based on the current environment, we do think it could reduce employment there up to about 90 ,000 jobs.

5:10What about here? Is it part of our inflation calculation? As far as the direct tariffs on Canada, not so much. We think it's more about kind of a negotiating strategy between the two sides. But more broadly, we still have tariffs that are in place. And one thing we're concerned about is the rundown of the pre-tariff inventories that we saw last year. We still think you have about a quarter or two of inventory drawdown. Inventory drawdown. Very interesting. Mike Reed with us. We're going to come back, give you the best we can on the economic analysis here. Equities lift, futures up 11, into the report.

5:50It's Bloomberg's surveillance. And the Fed's preferred inflation gauge is out, and it shows inflation heated up in August. The personal consumption expenditures price index rising three-tenths of a percent month over month as consumers paid more for many goods and services. Year over year, though, the PCE index up 3.4 percent. This is less than the 3.7 percent expected and less than the 3.7 % we saw the prior month. Let's move to core PCE, which excludes volatile food and energy prices month over month, rising two tenths of a percent. So less than the three tenths expected and right in line with the prior month.

6:32Core PCE year over year also coming in a bit softer here, up 3 % versus estimates for 3.3%. The prior month was also a 3.3%. wireless telephone services and airfares driving core inflation higher. Meantime, consumer spending rebounding sharply in August, up nine-tenths of a percent in line with estimates, and a lot higher than the two-tenths of a percent rise we saw the prior month. Meantime, personal incomes up a scant two-tenths of a percent. So we were spending more than we were bringing in. So once again, a bit of a surprise here, a softer-than-expected read on PCE. PCE up 3 % core, that is, year over year.

7:16Estimates were for 3.3%. So still, guys, well above the Fed's 2 % target, but a bit better than expected. Tom and Paul. Alexis, thanks so much. Markets lift. Futures up 10 now, up 33. NASDAQ up half a percent as well. Yields come in and they begin to come in as people digest Alexis's report. 10-year yield in three basis points, 5.20%. We're advantaged. Mike Reed with us because Francis Donald and Mike Reed do nominal GDP analysis like nobody. Major shout out to the economists who noted domestic nominal GDP. Mike, 6.1 % GDP price index plus an upward revision on GDP annualized 2.2. I'm rocking 8 % simplistic nominal GDP.

8:08That's a banana republic. How do we bring that down successfully? I don't know if you can. I mean, a big part of this is the AI story. And if the Fed is in a hiking cycle, that's not going to stop the continued investment we see in AI. As we saw earlier, look, the data for the consumer is concerning. You have spending outpacing incomes. You have inflation moving in the wrong direction. Yes, we got a weaker number than expected, but I think that's due to methodology. So looking ahead, this is just you have forces at play that aren't going to be resolved by a hiking cycle. And you mentioned the spending here.

8:49I mean, personal income rose 0.2 percent. Personal spending rose 0.9 percent. That's not sustainable. I can't keep hitting my credit card every week for that stuff. Oh, and that's where we're really concerned. One of the measures I like in this report is the measure of non-mortgage personal interest payments. And when you look at that as a share of disposable personal income, which is the same denominator as the saving rate, it's about 2.5%. So I'm curious to see what it is today. But when you think about what's ahead, if the Fed continues to hike, that's going to move higher. And the number that concerns me is 2.8%.

9:27If you take out the COVID recession, the past three recessions prior to that, when you've hit 2.8 % of that non-mortgage personal interest payment, we've gone into recession. So that is to say, it's really something that's going to squeeze consumers. Okay, repeat that again. That's so important. You said what is 2.8 %? So it's the amount of interest consumers are paying in terms of non-mortgage payments. So things like credit card loans, auto loans, student loans, any personal loans. we have and that's becoming elevated and and it and it didn't shift lower when the fed was cutting and so if you continue to see consumers to your point you know use credit cards to spend um this is going to continue to squeeze them mike don't be a stranger mike read with us thank you so much rbc i'm gonna i'm sorry folks rbc people it's the royal bank of canada and always will be mike read of RBC to give us perspective.

10:25Future's up 30 now. They launch a Nasdaq up four-tenths of a percent. The VIX comes in from that 16 level to 15.76. A little bit of dollar weakness here. Haven't seen that since Eric Winograd was, you know, ages ago studying Chinese history. I mean, I'm looking here, 10-year yield and two basis points. I'm shocked the 30-year bond doesn't come in 5.56 says all sorts of good things. We have wonderful conversations today. You go from Max Kettner to Mike Reed. Now, Eric Winograd with his chief economist, Alliance Bernstein, always with important perspective. I look, Eric, at where we are in your idea that inflation is sticky and not accelerating.

11:13I think to all our listeners, that's the key debate. Discuss that. Yeah, look, when the Fed embarks on a tightening cycle, typically it's because inflation is going up. That's not really what we're seeing here. We're just seeing it not come down. And if you look at today's data, there's more of that in there, right? The PCE index, the core PCE index are running above the Fed's target, but they're gradually moving in the right direction. And so that's a different type of tightening cycle than many people are used to. They're not trying to slow the economy. They're not trying to crimp things down here.

11:44They're just trying to accelerate this process. So what happens with the next to the second, the third? We had someone in earlier five rate increases. It's nonlinear. When do those rate increases click in to bring your inflation where it is down to something more acceptable? So that's the classic challenge for central banking is that you can raise rates today and it doesn't move inflation tomorrow. It takes nine to 12 months. And that, to me, particularly in an environment where you're trying to get inflation to move just a little bit quicker, is a recipe for a very gradual cycle. There's no urgency here, right?

12:18Inflation is not accelerating. They just need to get conditions or they believe they need to get conditions a little bit tighter to make it go a little faster. To me, that's a recipe for a constrained gradual cycle rather than a rapid aggressive one. U.S. second quarter GDP was revised up to 2.2 percent annualized compared with the second estimate of 1.5 percent. Sherman Powell would say that's solid. That is solid. So, I mean, the economy is strong, but part of the cost of having a strong economy is having a certain amount of inflation. And some folks are coming in here saying, hey, you know, the 10 year yield at, you know, five and a quarter, whatever it is, that's consistent with how this economy is growing.

12:59Is that fair? So I guess I would look at it and say, yes, the economy is solid. And the way I think the Fed is thinking about this is the economy is solid enough to allow them to embark on a cycle to get inflation to come down a little faster. If the labor market were weak, if the economy were weak, they probably wouldn't be doing that. They'd figure the economy would bring inflation down on its own. As far as the 10-year yield, what's really interesting is, you know, if you look not just at the last rate move, but go back to the last several rate moves, all of which were cuts, by the way, right?

13:27This cycle is unusual because when the Fed was cutting rates, long bond yields were going up. And now that they've raised rates, long bond yields are still going up. Right. So that tells us that this cycle isn't really about the Fed. What is it about? You know, that is a mystery. And I'm sure that you have lots of people who come in here to you. There's an elephant in the room called the debt and the deficit. Sure. But that's been true for a very long time. And there's no particular reason to think it's accelerated. Well, during the entirety of this cycle, the answer to that is yes. And there is nothing that changed at the point when long bond yield started to go up.

14:00I strongly agree with you that that plays a role in this, but I don't think it's the only variable at play. Yes, we're running irresponsible fiscal policy. To have a 6 % of GDP budget deficit in an economy that is strong or solid or stable or whatever you want to pick doesn't make any sense. You combine that with policy volatility and unpredictability, right? You have tariffs on, tariffs off. You have oil prices up, you have oil prices down, geopolitics on, geopolitics off. The Treasury Department changing its issuance calendar. We're intervening in FX markets. All of those argue for higher risk premium as well.

14:33So when I look at where the long bond yield is, I don't think it's any one explanation. I think it's a smorgasbord of all these different variables that are combining to put it there. Chairman Warsh is just absolutely adamant about getting that inflation number down to 2%. You know, based upon my two semesters of economics at Duke, I feel like I'm an expert. I don't see the real magic of 2%. I mean, we're at 3 % core PCE today that just got reported. Maybe that's where our economy is. I mean, we're reshoring all this stuff. We're cutting immigration. So we got some wage inflation. I don't know.

15:07Maybe that's the new number. So the magic of 2%, and you're right, there's nothing magical about 2%. When the Fed picked 2%, they picked it because it seemed like a reasonable number and because the New Zealand Central Bank picked 2 % first. It's not like there was some deep mathematical analysis that concluded 2 % was optimal. But now that you've picked it, that's the target. and in order to retain their credibility, they feel like they need to adhere to that 2 % target. I believe and have believed for a long time that in the grand scheme of things, they'll be satisfied if inflation runs between two and two and a half, as long as inflation expectations stay contained, precisely because there is no magic to 2%.

15:46What they're really looking for, what any central bank is really looking for is the idea that when households and when businesses make their plans, they don't think about inflation, right? And that's what they're targeting. And I suspect that for most people, the difference between 2 % inflation and 2.25 % inflation is a rounding error that they won't perceive in their daily life. But in order to get back to that point, the Fed believes that they need to reinforce their credibility. And that's what they're doing by starting, again, what I expect to be a limited tightening cycle, but by raising rates at this point.

16:19Eric Winnegren, thank you so much. With Alliance Bernstein this morning out of Dartmouth with all of his good academics here and to have back-to-back Mike Reed and Eric Winograd is what it's about. Stay with us. More from Bloomberg Surveillance coming up after this. If you invest, lead a business, or allocate capital, one-sided views aren't enough. Join me, Brad Rogoff, the Global Head of Research at Barclays, on the Flipside Podcast. Each month, I go head-to-head with one of our expert analysts on my global team to debate the economic and market issues that matter most. From inflation and AI to equity and credit trends, each debate helps you see what headlines might miss.

17:02Find the flip side wherever you get your podcasts. With ChatGPT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask Chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and ChatGPT can help you do it with confidence.

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17:48you'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 this is joy i've been saying for like three weeks get nordvik get nordvik you can't get nordvik he's still recovering from the world cup jens nordvik joins us ex-diving data with his wonderful work on foreign exchange but it's really broadened out Does foreign exchange tell us, inform us, is the deepest system about fixed income, about commodities right now? I think it's pretty clear that the epicenter of what has been happening over the last couple of weeks, couple of months really has been the fixed income market.

18:30And like we merged Exanta data with Vanda earlier this year to get the equity coverage as a part of what we offer. and even the equity space. Like all the questions are fixed income related now. Like when is this dramatic rise going to stop, right? When is equity going to be okay again? So I think that epicenter is very clear. Do you need dollar to break as a change agent? Do you need to see DXY go 100, 99, 94? Does it need to finally break? So I think we're in this kind of really interesting environment, right, where currency markets haven't really moved that much, except the Korean one that has been on this crazy AI, maybe not crazy, understandable AI trend.

19:19But I think what we're looking to in currency markets is we're going to get to a point where the fixed income markets are going to be at a kind of breaking point where we're going to have to have some kind of intervention. We can't have 30-year yields continuing to go up You know, every few months, 50 basis points. It's not going to be sustainable. And we've seen it already in the U.S., right? Scott Besson came in and said, we're going to try to stabilize with the buybacks. You discussed it earlier this morning, right? It hasn't really had a huge impact so far, right? But eventually, we'll have to have some type of backstop from central bank balance sheet to other balance sheet to stop it.

19:58And that will be when the currencies react, right? Because that's when the market will see, okay, there's a liquidity that's coming in to stop the yields rising, and that's going to then move into the currencies. We're not there yet, but I think this year is a transition year where we'll get to that point. Yeah, and just looking at your notes here, and as you talk about the long end moving higher, you talk about a corporate bond deal that may be impacting. The paramounts in the market was$52 billion worth of investment grade, high yield, bank loan, a lot of paper coming into the market. But I've never heard or seen anybody discussing whether a corporate bond deal could impact the broader treasury market?

20:36No, I think it's when the markets are so on edge, as we're seeing right now, like the catalyst kind of broadens out and even smaller things can actually kind of destabilize the market. So obviously there's a lot of focus on the hyperscale issuance, right, which is now starting to compete in the long end with the U.S. treasury market as being like an equally important issuer from the U.S. Treasury, right? It's something that a couple of years ago, if I've said that on - Do you agree with that? When we do the projections into 2007, it looks like the issuance above 10-year, because the data centers are very long-term financing projects, it could be of roughly the same magnitude as the Treasury is.

21:19Yeah. If I come here and said this a couple of years ago, you'd probably kick me out of the studio saying, okay, what are you smoking? So, but this bond sell-off, it's been a global issue. It's not just the US. So what is that telling you? Yeah, so we've seen it over the last couple of years, right, that global bond markets are so tied to the US that it's quite hard to see any decoupling. But I do think if you look at the curve shapes, you can see, like the most extreme example is Switzerland, right, where they have no debt. You don't have curve steepening there. So there is some differences. And I would also say if you look at this week, right, and even today, like which curves are steepening?

22:02The U.S. curve is still steepening today. The French curve is still steepening today. So there does seem to be a trend where, OK, global bond yields are correlated, right? But the slope of the curve is more problematically steep in the places where the debt issues are the most severe. Jens Nordvig with us with the Kastani. We're going to continue with him coming up. Lisa Abramo is with Ken Griffin on his very important day for Pittsburgh's Carnegie Mellon as they look to Miami. I'll give you treatment on there in a moment. We are advantaged to have Jens Nordvig with us with these headlines. Let me go through these bombshell headlines.

22:43BMW of Germany targets shedding a fifth of managers for AI. BMW targets 3 % to 5 % automaking return on sales two years out. BMW expects management cuts to be completed by summer of next year. BMW's management job cuts are part of an AI buyout, whatever that means. BMW to add more high-end models above the X7. BMW to reduce variance to discontinue some models. I look at this yen, and it just speaks of the impact of China. I mean, it just screams for Volkswagen, BMW, for Ford of Jim. Your thoughts on how China is pricing their goods? yeah absolutely like we a couple of decades ago there was this concern that Japan was gonna take over right and the Japanese automakers were gaining market share from everybody including the the US ones and now we look at what's happening in China right and the speed at which China is taking market share globally is so much faster than what Japan ever did and obviously the The headlines you're reading out, right, is a reflection of that.

24:00Like German car producers are just really pressured. Number one, because they don't sell cars in China almost at all anymore. And number two, because they're also getting threatened at home from the EVs. So this is a very challenging situation for Germany. The only offset they have really is that some of that production capacity is moving to military production because Germany is ramping up their defense spending. That's the only offset. But we also have the much higher natural gas prices. So the challenges are multifold. Don't be a stranger. Jens Nordvik, thank you so much for the Xante. Brilliant research notes.

24:36I will say his book of a lifetime ago on the euro was absolutely definitive. Stay with us. More from Bloomberg surveillance coming up after this.

24:54you'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 let me explain paul sankey folks for years you'd get the deutsche bank research and this is before the internet it was chiseled in granite it's chiseled excuse me just let's go let's get into this right here chiseled into ground chiseled into ground we used to get the pep the paper research reports all right you know we were sitting here with paul sankey lead analyst at sankey research he is the go-to voice on global energy paul i've been reading over the last 24 48 hours that a lot of crude is getting through the straight of hormuz like a lot of crude why is brent still at 103 why are we trading this stuff at 80 a barrel oh well i think it's going to come down because yes you know the numbers we're getting are actually 20 million barrels a day right now the very latest so the u.s has absolutely thrown uh the military the air force particularly into for example i was told they have eight f-15s constantly running up and down the petrol line uh to protect the petrol line and the f-15s apparently are faster than the drones so you know makes you wonder about top gun and stuff but you know what what strikes me obviously is the enormous expense of this effort.

26:16And it's clearly an all-in military effort by the U.S. to get the oil flowing. And that's succeeding. I think the problem is, you know, what happens once we get through the midterms, because it's clearly an unsustainably expensive effort right now. And what you're seeing, I was just looking at the charts, is actually year forward crude is now moving up quite aggressively. So, you're above 80 for one-year delivery. So, you know, this time next year, the price of oil has gone up quite a lot. Why is that? Because I think everything you're looking at now is pointing towards 2027 being a problem as well, you know, because we've drawn down, we've run through the six or seven buffers that we had in global oil, which would be some of the less well-known ones were, for example, that Saudi and UAE had major inventories in Asia already stored.

27:03An obvious one is the Strategic Petroleum Reserve. Those are getting tight. There is another release of the Strategic Petroleum Reserve coming through, but you've gone from one and a half million barrels a day of drawdown to more like 150 ,000 barrels a day there, and that simply can't go on forever. So this is a short-term sort of sugar rush of crude that we're getting that is clearly, I don't think, the U.S. military effort can be sustained, quite frankly, at this level of expense. When you get the oil out, then what do we do with it? We've got to refine it, right? That's the second problem.

27:36I keep saying you're pushing on a string. And the fact of the matter is the constraint is not crude. The constraint is diesel. And we're getting almost no diesel out of the Straits of Hormuz. The Q8 refinery used to supply 60 % of Heathrow's jet fuel. That's all now missing. And you really have basically an energy crisis again in Europe that we're hoping won't be as bad as it might be because we're looking for a warm winter with El Nino. But I think we're also looking at a very volatile winter. As you know, we just had a nor 'easter here in September. And that's very early. It's not unknown. But it looks like we might have energy disruptions from force majeure, from God himself or herself.

28:19Paul Sankey with us, folks. Sankey Research Throwney could be with us today. I should say in the plague that I'm getting over, now I have two people on the Bloomberg money team, Paul, with it, out today. Yes, I saw that. Folks, if you've got this flu thing going around, this pneumonia thing, go to the doctor. Don't be a hero. I can't say enough the care I've gotten. We're working it in every day. Paul's saying, I think Paul's dead on here, in that the public is looking at simplistic politicians and their rhetoric. If you were talking to the politicians with their simplistic, you know, primetime news sound bites, what would you say to them that they need to understand?

29:00What's the come to Jesus moment the politicians need? I think free markets. You know, I think the idea that we would we would ban diesel exports in order to short term bring the price down because the Russians banned diesel exports and the Chinese banned diesel exports. You know, that's one of the sort of comparisons that makes you realize what a terrible idea it is. It's like, no, you know, we got to this position of the world's biggest oil and gas producer and exporter, an amazing position that's greatly underestimated by almost everybody in terms of the benefits that it's bought to the U.S.

29:32And then to turn around and start mucking around with it at the margin in a way that, you know, you get a six, you get a whatever it would be, a 90 day benefit of lower diesel prices. And you get a 20 year discount for not being an investable place to put money in. So then how do you perceive, say, next summer, a gallon of gas or a gallon of diesel or just the price of Brent? Well, one comparison that we're using regularly is if you're at 650 diesel, you're at$250 a barrel. I think that would help people realize what the issue is. You've got$100 crude, you've got 250 diesel, and we use diesel.

30:05Everything that is out there is that because of what's happened in Hormuzin, because it looks like it's structurally going to be very risky, what's happening here as well is the Iranians have no radar. are. So they're just randomly throwing missiles, hoping to hit a boat. You know, it's a very inefficient way to do it, thankfully. But it really tells you they're not stopping. You know, we're going to have to either continue massive military presence down there. Now, that military presence right now is causing massive spikes in tanker rates because the tankers, the state companies are using the state ships to get through the strait because they're prepared to risk.

30:37And then they're putting it on commercial tankers outside the straits. That's adding$25 a barrel to the price of crude to get from Saudi to China. Last year, it was under$2 a barrel. So you have a structural transport increase. This week, just on Monday, I was at the Total Energies analyst meeting here at Columbus Circle. And a couple of things they did, one I thought was brilliant, is that Total Energies voluntarily put a cap on gasoline and diesel prices in France. So the company actually did it themselves. And that would be a suggestion to me for a Valero, So, you know, let's get, you know, 100 ,000, 200 ,000 barrels of price capped diesel to the farmers.

31:17And that will probably satisfy the politicians a lot. But broadly speaking, because of the enhanced risk, you actually need higher inventories, arguably, than you were holding before the crisis. And inventories have been radically drawing down. So a couple of important numbers just to finish. You drew down 4 million barrels a day of global inventory suddenly in September. So the drawdown suddenly accelerated because we'd blown through the buffers that we talked about. And then, of course, you lost the petrol line. So the market got panicky, and that's why we're at 100. But at the same time, actually, the U.S.

31:50military effort was massively ramping up the crude, which takes 50 days to reach its destination. So I think we're going to come off these level of crude prices quite aggressively, assuming they maintain the 20 million barrels of exports that they're achieving right now, apparently. But you're going to remain in a major issue for diesel because you're actually doing nothing to address the diesel problem. The other thing I'm watching, Tom, finally is just whether or not treasury rates, interest rates disconnect from oil. Because as you know, for the past eight weeks, six weeks, we've had a one-on-one oil moves at percent.

32:23Those guys, you know, you can just check, overlay the charts. I've just seen this week the beginning of oil trading off, but the interest rates continuing to rise. And I think that's going to be very scary for the market if that starts happening. Get one more in here, Paul. All right, here's the simplistic question of the day, because I'm sure 99 % of our audience wants to just know this. When do we get back to normal? Do we ever get back to where we were January, December, in terms of global energy, and all the way from your world in the oil fields all the way down to my pump on Route 36 in the Jersey Shore?

32:55Well, can I tell you this? My standard line is if you're worried about World War III, you shouldn't be because you're in it. and you know this is world war three and there's a number of higher levels than the usual trench warfare in ukraine uh you have a situation here where you have an ai world war you have a finance world war you know we call it of facts against ucavs which is the u.s sanctions against drones and that's just that's you can split the world east west basically with a second front line through tokyo and and korea and taiwan and australia how do we resolve this i really would love to see the Chinese get on the same page as us.

33:33But, you know, I think Wall Street always supported Trump taking on China. The execution at times has been suboptimal, we can say, but I think the general idea is, you know, was that we have to make some sort of new industrial policy in the US and reduce the power of China over time. And that's, you know, hopefully something that can happen in the future. But at the moment, it's pretty intractable. It's pretty difficult to see how we normalize, certainly how we normalize ever again the straight-to-form moves, because it's a structural damage that we've... Paul, thank you, thank you, thank you.

34:04Paul Sankey folks with us here. Stay with us. More from Bloomberg Surveillance coming up after this. With Jatchy BT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask Chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team.

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35:56You'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. Julie Beal is incredibly gifted. I knew her ages ago at Merrill Lynch when she was 15. And she's worked her way through with some sterling West Coast academics at Kane Anderson Rudnick. So usually we talk to her about, you know, economic and that. But Julie, your note is just incredibly prescient on AI. You've been going to the boring meetings of people trying to figure out data centers and all that.

36:33Here's George Noble, the giant of fidelity overseas this morning. This anthropic IPO is the most dangerous deal I've seen in my 45-year career. Julie, from your perspective, where are the mega people? Where is AI, Sam Altman, Darius played on Saturday Night Live this weekend. Where are they in six months or for that matter, six years? Oh, my gosh, that is a big question. I think the real challenge that they have is that they're in this chasm in their business model where they really are just huge users of capital. And they need that in order to continue their growth. And they need the growth in order to continue to draw investors in.

37:16And I think that the problem that they have is that they've unleashed this technology and taken very little responsibility for a lot of the problems that it has. And I don't think that that's something that people are going to put up with. Right. Like if my kid in preschool bit another kid, that's on me. I can't just pretend that that wasn't on me. And I think that that's the real struggle is we're looking for them to have some real accountability or else why should these models be as large as they are? George Noble, brilliantly, he quotes the Canadian philosopher Wayne Gretzky. You've got to skate to the puck.

37:51Julie knows this because he was an iconic at the LA Kings as well. Now the puck is going to the customer, Mr. Noble says, and the customer is scared. Is there a customer out there, Julie, based on the meetings you've gone to at Morgan Stanley and other shops? I think there absolutely is a customer. And I think that this technology has applications that are going to be really life changing for all of us. The problem is, is trying to predict it with any kind of certainty is to me really, really difficult. Like think if you were an accountant when spreadsheets came out, you would be pretty worried about your job.

38:27But if you look forward, we've actually hired more accountants over time. So it's really difficult to know exactly what the implications of the technology are going to be. I think I like investing in companies that I think will be beneficiaries of it from a standpoint of they're going to integrate it and become more profitable on their own side, rather than saying, I want to be in the picks and shovels because I just don't know what the duration is and how big it's going to really need to get. Julie Beal with us right now with an active market, Dow up 26 points. Paul, I got a headline here. Italian bond risk is now up in a full stick, 100 beats.

39:01French Germany has just exploded out seven basis points to 125. If you don't know what that means, it doesn't matter. We'll say it in French later. But then, Paul, the 30-year bond, we all understand that, rounded up 5.61%. Yep. I mean, Julie Beal can't move up to 6 ,000 square feet in Hollywood. Exactly. So, Julie, how does higher interest rate environments, which Thomas is pointing out, just moving more and more on the high end here, what does that mean for stock investors? Maybe small and mid-cap investors. It's got to be a headwind. I think if you're thinking about small cap as a group, in general, higher interest rates are harder because most of them are borrowing at the banks, and so they're on variable rates.

39:44And a lot of them are highly levered. I think if you can avoid companies that have a lot of leverage, that's what you definitely want to be doing. But the reason why interest rates are going up is important, too. Right. If it's solely about inflation, that's not great. But if it's also about their strong economic growth and their strong labor markets, that tends to be actually better for small caps. You have to kind of take a more nuanced look at it. So how are we thinking about just an environment where this stock market has been driven by earnings and earnings have just been extraordinary over the last several quarters?

40:18What's the earnings growth story going forward from your perspective? I think going forward, we want to continue seeing a broadening of the growth in earnings, right? The numbers have been pretty eye-popping, but the problem is that it's concentrated in technology with a huge chunk of it being the revaluations of these private companies, right? Non-operating earnings, not actually selling more stuff, but non-operating earnings. And then what we're seeing in energy, and it's hard to know how long that improvement in earnings is going to last. We want to see more breadth into manufacturing and into other pockets of the economy in order to feel really, really confident that the growth is durable.

40:56Julie, thank you so much. I have to run with breaking news, but just love, love, love your research. Julie Beal with his chief market strategist, Kane Anderson Rudnick. 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 iHeart Radio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

41:58We'll see you next time. We know kids don't hold back, and I wouldn't want them to. Get in there, make a mess, slide for home, bring on the stains. I've got OxyClean Versatile Stain Remover. It works on over 100 stains, and it's America's number one stain fighter additive brand. It's color-safe and chlorine-free, so I use it on whites, colors, and dark fabrics. And OxyClean isn't just for laundry. Mix it with water for use all around the house, kitchens, bathrooms, and even floors. When my kids go all in, I say go for it, because I've got OxyClean to get the stains out. It's not clean unless it's OxyClean.

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