October 8, 2025 • 39 mins
Watch Carol and Tim LIVE every day on YouTube: http://bit.ly/3vTiACF.
Several participants at the Federal Reserve’s September policy meeting said it was important to continue monitoring money-market conditions and evaluate how close bank reserves are to their “ample” level, as the central bank continues to unwind its massive portfolio of securities.
The remarks come as prolonged funding pressures in US money markets, just as bank reserves held at the Fed are dwindling, are suggesting the central bank may be getting closer to ending its balance sheet runoff.
A few participants noted that the Standing Repo Facility — the Fed’s liquidity backstop — would help keep the federal funds rate within its target range and ensure that temporary pressures in money markets wouldn’t disrupt the ongoing balance-sheet reduction, according to the minutes of the Sept. 16-17 gathering released Wednesday.
Today's show features:
- Kay Herr, JPMorgan Asset Management US CIO of Global Fixed Income, Currency, and Commodities
- Stephen Carroll, Host of Bloomberg Daybreak Europe, on Macron's next two days during which he needs to select a new prime minister
- Mandeep Singh, Bloomberg Intelligence Global Head of Technology Research, on how AI became a trillion dollar market
- Herman Chan, Bloomberg Intelligence Senior Analyst for US Regional Banks on the bank merger outlook
See omnystudio.com/listener for privacy information.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. This is Bloomberg business
Week Daily reporting from the magazine that helps global leaders
stay ahead with insight on the people, companies, and trends
shaping today's complex economy. Plus global business, finance and tech
(00:23):
news as it happens. The Bloomberg Business Week Daily Podcast
with Carol Masser and Tim Steneveek on Bloomberg Radio.
Speaker 2 (00:32):
I want to bring in now Kay Her, she is
US CIO of Global Fixed Income, Currency and Commodities at
JP Morgan Asset Management. And Kate, do you think that
we got anything new from this latest FED minutes? I mean,
we knew that Steven Myron was an outlier, and these
minutes certainly showed that. But what do we learn in
terms of the debate going on inside the Federal Reserve?
Speaker 3 (00:53):
So Scarlett, first off, I'm glad to be here. Thank
you for having me, Nora too. Second off, I think
the short answer to your question is we didn't learn
anything new. And I think one of the best ways
to think about whether we've learned anything new is what
the market's reaction is. And the market's really not giving
us much of a reaction. Maybe at the margin the
minutes are showing us that there was some discussion about
(01:18):
maybe we didn't need to do anything, but it was
pretty clear that we only had one dissent when that
was released September seventeenth, and not a lot of new
information in the minutes today.
Speaker 4 (01:29):
Okay, not a lot of new information. And of course,
as we're looking at the trade still green across the
screen right now, all across the board here when we're
looking at equities in particular. But what do you think
the FED should be focused on right now?
Speaker 3 (01:42):
It's such a great question in Aura. As everybody knows,
we've got a government shut down and we are in
an absence of data. So the FED or the the
Bureau of Labor Services did not release the employment data
on Friday. It's unlikely unless the government reopens, it's unlikely
that we're going to get CPI next week. So what
(02:05):
are we looking at? What's the FED looking at? The
next major piece of data that we think is two things.
I would say The first is corporate earnings start on
October fourteenth, and I think that can be a great
indication of what we're seeing from a bottom up perspective
on the economy. The second one on a macro perspective
that I'm sure the fedal look at is the Beige Book.
(02:25):
So we've got the Beige Book coming out on October fifteenth.
Speaker 2 (02:29):
Yeah, and I feel like the Beige Book has taken
on greater importance in this period of uncertainty where we're
not sure if companies are passing along higher costs to
their customers or how they're dealing with it. We're kind
of in an uncharted territory and every company is doing
things differently based on the experience of their executives when
it comes to corporate earnings. K as someone who is
in the fixed income market, what do you watch for?
Speaker 5 (02:51):
What do you look for?
Speaker 2 (02:53):
Is it the banks that will really tell you the
most about what kind of credit quality we have in
this economy.
Speaker 3 (02:58):
Sure, that's a great thing to think about. I think,
first off, you know, we're not entirely in unprecedented territory.
We have had government shutdowns before, and when we take
a step back and think about the overall impact to
gross domestic product, it tends not to be that material
in the grand scheme of life. So from an earnings perspective,
I think we're going to be looking for a couple
(03:18):
of things. Number One, from the banks, what's the credit quality?
Look at what's the indication of the consumer. As we've
seen in the macro data, we've seen some softening in employment,
so is that going to flow through into reserves, into
credit quality and banks? And then from the broader companies
and the industrials, what are we seeing in revenue growth
versus EBITDAH obviously or earnings before interest, taxes, depreciation cash
(03:43):
flow as it were. So what are we seeing in
cash flow? I think for the most part, companies have
very high margins and are they going to protect those
margins or are they going to pass through costs onto consumers?
And then what's that going to do to demand? I
think that's what we'll be look looking at.
Speaker 4 (03:58):
So as we head into earnings, using just around the
corner here, what sectors in particular are giving you the
most concern? Just based off of what you were saying.
Speaker 3 (04:06):
I'm a bond portfolio manager, I'm paid to worry and
loose sleeve, so very thing gives me concern. You never
know where you might see a pocket of distress, and
it's the unexpected that are the real concerns.
Speaker 2 (04:19):
Well, we've seen pockets of stress in the auto sector.
When you look at first brands, when you look at tricolor,
what does that tell you about the state of the consumer,
especially at the lower end. You know, these were two
credit blow ups that took people by surprise, and a
lot of people will say, Okay, there's it syncratic. There's
some maybe fraud issues that are particular to those companies,
(04:41):
and that may be the case, but these are also
sectors that are very much affected by tariffs, and they
are not the only ones affected by tariffs either.
Speaker 3 (04:49):
So I think there's a couple of things going on here.
Scarlett and yes, on a certain level, tree color and
apparently that's how it's pronounced.
Speaker 5 (04:56):
Oh, thank you.
Speaker 4 (04:57):
I know that's your pro tip.
Speaker 5 (04:58):
I've been saying try credit.
Speaker 4 (05:00):
Thanks there.
Speaker 3 (05:01):
Well, I think there's a couple of things going on
treac a Lore in particular, and I'm not going to
talk about specific credits, but I think we should take
a step back and think about what's going on in
the broader economy and broader financial markets. And the reality
is there's a lot of cash slashing around. And when
there's so much money slashing around, that tends to be
(05:23):
the point late cycle where excesses happen. So that tends
to be the point if you went back to the
two thousands you send to see it's not uncommon to
see corporate malfeasance, and it may be in these types
of instances where are seeing corporate malfeasance. To answer your
question with regard to the consumer, you know, we had
(05:43):
been talking for a while about what we referred to
as a CA shaped economy, and that was high income
consumers with a lot of exposure to stock markets, and
we're doing very well. Lower income consumers had been hit
with inflation. It actually that that seems lower income consumers
he seem to have stabilized some. We're more focused and
(06:04):
concerned about maybe more prime consumers that are going to
start repaying student loans or interesting defaults and type of
behaviors that we're going to see there.
Speaker 4 (06:14):
So let's dig a bit deeper into the lack of
data that you pointed out, just the bit to go here.
So we have traders that are really bracing for a
range of fed outcomes here, some of them even hedging flows,
plate flavoring outlier dubbish scenarios, and others focusing more on
the possibility that the Fed four goes a move at
one meeting. How are you thinking about all this right
now as it relates to the bond market.
Speaker 3 (06:35):
Yeah, a couple of things. I think if you look
at what the market is pricing in now, a twenty
five basis rate to twenty five basis point rate cut
is almost fully priced into the market for the October meeting,
I think is it October twenty fifth, So that's almost
fully priced in October twenty ninth, twenty ninth.
Speaker 4 (06:56):
Sorry, I mean, how can you not know? Easy? How
could anyone not? That's kidding.
Speaker 3 (07:01):
So the market's pricing almost an entire rate hike in October,
and then on the December tenth meeting, the market's pricing
another let's call it twenty basis points something like that.
But I think the other interesting aspect is that volatility
in the rates market has been very low, So you
get this base case that the Fed continues to ease.
(07:21):
And if we go back to the Fed minutes and
what the Fed said on the last meeting on September seventeenth,
is that they are saying that they intend to do
two more cuts this year, And that's the base case.
I think in periods of economic uncertainty, and the government
shut down is perpetuating that uncertainty because we're not getting
regular economic data updates. Then I think that logically follows
(07:45):
that people worry about tail risk outcomes and they look
at unusual patterns in behaviors or in particular markets and
worry about what they could glean from those.
Speaker 5 (07:56):
So we don't have any data right now.
Speaker 2 (07:58):
What we do have are the government auctions of US
treasuries because we need to raise money. So that continues.
Is the risk of a tail event tapering off a
little bit here. For a while, people were monitoring every
single auction with baited breath, and it feels like we're
excelling a little bit here.
Speaker 3 (08:17):
We still monitor them with baited breath, and I think,
off the top of my head, today's auction at one
o'clock was something like ninety one percent end users and
something like a tale of zero point four or five
basis points. So you're right, that's a strong auction, and
I think that has settled down. I think concerns about
the US government US treasury as a safe haven have
(08:39):
abated as people have gotten more comfortable with the macro
environment and the geopolitical environment.
Speaker 4 (08:46):
So safe haven here, maybe abating, But what do you
think is the next story here?
Speaker 3 (08:52):
Next story? Gosh, I don't know. I'm not the reporter
on this. We're just we're just I want to leave
that to you in the market. In the market, I
think it's probably earnings. I think it's going to be
you've got earnings kicking off on. Look, as you all said,
in the absence of any macroeconomic data being released by
the federal government, I think people are going to obsess
about every single earnings release and anything that they can
(09:15):
glean from that. Specifically in as you all know, there's
been an extraordinary amount of investment in AI and looking
maybe starting to look for returns on that, look at
that investment cycle. So I think that's going to be important.
I think to Scarlett's earlier question, always credit quality, return
of capital to shareholders, increases, and dividends, looking at flows.
(09:35):
I think that's that's that's the next story.
Speaker 4 (09:38):
But yeah, where do you want to be on the
yield curve?
Speaker 3 (09:42):
Yeah, we still like the belly of the curve.
Speaker 2 (09:44):
Everyone loves the belly of the curve.
Speaker 4 (09:45):
Everyone loves the belly.
Speaker 3 (09:47):
Is just fun to say that the belly of the curve,
right income Geese. But yeah, I think we think that
the we think that the rates are going to continue
to be pretty range bound here between three seventy five
and four and a quarter, and we continue to like
high quality intermediate duration credit. You know, as my dear
colleague Ian Steely says, spreads are tight, but yields are right.
(10:09):
And that's that's really what the what the driver is
for investors. You know, they're not investors who are thinking
about investing for pension funds, endownment funds, individual investors. They
care more about what the yield is, not what the
spreads are.
Speaker 4 (10:23):
So, of course, as we mentioned, the belly is what
everyone's talking about. But is there any sort of opportunity
on the other end.
Speaker 3 (10:31):
I mean, there are always opportunities, but where we would
are most comfortable in the yield curve is really in
the belly.
Speaker 2 (10:37):
What about gold, I'm curious what you think about the
relationship of gold to fixed income These days, gold continues
to zoom higher, now sixty one dollars an ounce and
just pierce four thousand.
Speaker 5 (10:47):
Dollars this morning.
Speaker 4 (10:48):
Insane.
Speaker 2 (10:49):
Yeah, so, and there seems to be very little that
people can identify that's going to stop this momentum. It's
driven by inflows into gold ets and also central bank buying.
Speaker 5 (10:58):
How does that playoff.
Speaker 2 (11:00):
Of what's happening in treasuries or doesn't.
Speaker 3 (11:03):
So you've just hit on a key aspect of it, Scarlett.
So there are obviously two components of any market, supply
and demand, and you just hit the two main components
of demand and that central bank buying, and that's the
ETF buying. I think the ETF wrapper is providing people
with an easily accessible way to buy gold instead of
buying bullion and storing at someplace. So you've got an
(11:26):
increase in demand for gold. On the other side, if
you look at the supply of gold, it's really been
pretty constant, So you've got this mismatch between supply and demand.
I think in terms of the relationship that we've seen historically,
gold has been correlated with real yields. So when you
see real yields come down, gold prices go back up.
(11:46):
So why is that the opportunity cost is lower? If
you can't get a high rate in treasuries or in
risk free assets, then maybe gold becomes more attractive. Well,
what we've seen really post pandemic. That relationship has broken
has broken down, and I think it's really a function
of the supply and demand. But I think the point
would be that that's broken down really over the last
five years. So I don't read anything different in gold
(12:10):
pricing about you know, US exceptionalism or the dollar flight
to currency or anything like that. I think it's old
fashioned supply and demand fundamentals.
Speaker 2 (12:20):
You don't see it as part of the debasement trade
that everyone keeps talking about.
Speaker 4 (12:23):
Not really now, you don't buy into that.
Speaker 2 (12:25):
I guess someone who's the global head of fixed income,
you know, probably doesn't see.
Speaker 5 (12:29):
Much value in that, but had to ask it.
Speaker 4 (12:31):
I mean, do you think we have more room to
run here on gold?
Speaker 3 (12:35):
You know? My only strong view on that is I
like it as jewelry, as you can see from my necklace.
Speaker 5 (12:40):
I don't.
Speaker 3 (12:41):
I'm not enough in the leeds on supply and demand
to gold to have a strong view on that. I
think I've got a good handle on what's going on
the fundamentals and why we've seen prices going, but I'm
not a technical analyst on gold and whether we've got
more room to run?
Speaker 2 (12:54):
All right, Kay, Always appreciate your joining us.
Speaker 5 (12:56):
Thank you so much for coming into studio.
Speaker 2 (12:57):
Okay, her is us CIO Global Fixed Income, Currencies and
Commodities at JP Morgan Asset Management.
Speaker 5 (13:06):
Stay with us.
Speaker 6 (13:07):
More from Bloomberg Business Week Daily coming up after this.
Speaker 1 (13:14):
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Speaker 2 (13:27):
All right, let's head over back to Europe because we
now have some more details coming out of France, and
I want to bring in Stephen Carroll. He is, of
course the host of Bloomberg Daybreak Europe, and Stephen is
an expert on authings France. He's certainly my expert on
all things Frans. We go to him constantly for the
latest and there's been a lot to stay on top
of here. Stephen Sebastian Lancorneu, who is the outgoing Prime
(13:50):
Minister of France, says that Emmanuel Macron, the President of France,
can name a new prime minister in the next forty
eight hours. He can do that, he may not do that.
Where does leave us what does this mean for his government, Scott.
Speaker 7 (14:05):
Things are a little bit clearer now than they were
earlier today, but not much. What we know is that
the theory that fresh elections could be called for the
National Assembly looks less likely than it did this morning.
For example, what Sebaston mccorney was just said on French
television is that he believes there is now a political
situation that allows Emmanuel Macron to name a new prime
(14:27):
minister and take the next spin on this wheel that
we've been on since June of last year of trying
to build a minority coalition in Parliament that's able to
pass a French budget. Now, he did this after the
forty eight hours of intense consultations with political leaders from
across the political spectrum, not all parties, but most, and
(14:47):
what he was trying to do was see if among
those groups he could find enough support for central ideas
that he believes that could lead to a budget. Essentially,
he wants somebody else to take the reins from here,
That's what he's told to the President Emmanuel Macron. He
came to this interview this evening on French television straight
from the Elise Palace where he spent an hour and
forty minutes with the President briefing him on what he'd
(15:09):
learned over the past two days. He now expects the
President to name somebody else to take on the job
to lead those discussions. He was asked repeatedly, should it
be a candidate from the Left Party, He said, it's
up to the President to decide. Should it be a
technocratic prime minister, It's up to the President to decide.
He has made it clear, though, is that nobody's going
to be in this government should have presidential ambitions for
(15:32):
the twenty twenty seven presidential election.
Speaker 5 (15:35):
It looks like.
Speaker 7 (15:36):
He's pointing towards a sort of technocratic arrangement, but very
much involving the politicians who are in the National Assembly now,
who are on the political scene to be able to
put that compromise together, because they have some pretty big
issues they have to decide, and the calendar on this
budget is already running very very tight. So the rush
is to try and get something done in time that
(15:58):
can be passed through Parliament and actually keep the public
finances running over into next year, avoiding the sort of
emergency measures that we saw at the end of last year,
which as we know, didn't go down very well on
the bond markets.
Speaker 4 (16:09):
Can investors force the hand of the centrist parties who
must decide whether to play ball with Lacornell or for
that matter, Macrum.
Speaker 7 (16:19):
Look, that's a really good question, because what we've seen
so far is a little bit of tension in markets,
but not something that our own economists or any of
the market analysts that we've been speaking to would describe
as a fiscal or financial crisis in France. This is
still a political crisis. We have seen the spread of
bond deals between France and Germany widen, although it did
actually tighten a little bit today when the corn New
(16:41):
signaled this morning that he had been making some progress
in these talks. Realistically, looking at it for markets right now,
nothing's really changed in the past week, or really since
the middle of the summer when the last prime minister
from Sobereru proposed his budget. They're still in this phase
of negotiation. There are still signals that a compromise could
(17:01):
be found. When markets will run out of patience with
France is very much an open question. You don't have
the cliff edge of a government shut down in France
in the way that you do in the United States,
because the way it works as the system runs into
sort of keeping the lights on measures where taxes are
collected and public services operated. That's not a situation any
politicians want to be happening. It's not a situation the
(17:22):
public wants to happen either. But the cliff edge moment
looks that little bit further away, at least for now.
The situation that markets were most worried about is what
fresh elections could could produce national assembly elections or in
an extreme case, a fresh presidential election. Both of those
look off the cards this evening, but things are moving
very quickly, and who am Manual Macron could pick in
(17:45):
forty eight hours time is going to be a very
interesting question.
Speaker 5 (17:48):
So very quickly.
Speaker 2 (17:48):
If you know, legislative elections would be unsettling to investors.
I'm guessing that presidential elections, Macron actually resigning, as some
in the opposition parties want him to do, is not
something investors would welcome.
Speaker 7 (18:03):
No indeed, I mean that would be a much more
dramatic shift in France's both fiscal approach and some of
those big heavy issues like the pension reforms, which is
the central thing politicians here are fighting over at the moment.
If that were to be disrupted, that would change the
fiscal perceptions of France. We've also got some ratings agency
decisions to look out for, too. A presidential election would
be very dramatic. A National Assembly election would be less dramatic,
(18:26):
and getting a new prime minister, while that could produce
another shrug from markets.
Speaker 2 (18:30):
All right, thank you so much, Stephen Carroll. Fantastic context here.
Stephen Carroll is host of Bloomberg Daybreak Europe, but he
is at least my go to authority on all things
in France, certainly the political crisis that has been brewing
for over a year now.
Speaker 6 (18:46):
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Speaker 8 (19:04):
Now, so many aideals and so many questions. So to
answer those questions, let's bring in Mandy Saying, who is
the global head of technology research for Bloomberg Intelligence. Who
can tell us all about whether we are in fact
in an AI bubble. So Mendy, thank you so much
for joining us today.
Speaker 5 (19:23):
Okay, let's talk about.
Speaker 8 (19:24):
This concept of circular funding to start with why has
it created such a fus amongst market observers.
Speaker 4 (19:30):
And what is it?
Speaker 9 (19:32):
Well, I guess the easiest way to frame it is
a company like OpenAI doesn't have the balance sheet of
Meta or Microsoft or Google in terms of the huge
AI infrastructure build out that they want to go ahead with.
And so far they relied on Microsoft to consume all
(19:53):
the data center capacity they needed for chat, GPT and
the enterprise business they have. And now they feel that
numbers and the demand is getting so big that they
are planning ahead. They are looking two three years ahead
where they would need probably two or three times more
capacity than they are consuming right now. And for that,
(20:15):
first they did a deal with Oracle three hundred billion
dollar deal that spends almost five years. Then they did
this deal with Nvidia actually to build ten gigawatt of
data center capacity. Now, the interesting part to answer your
question on circular funding is Nvidia is spending you know,
(20:40):
ten billion dollars and giving it to open Ai for
them to add up to ten gigawatts of capacity, and
that investment could go up two hundred billions, So every
gigawat involves almost forty billion dollars of spend. That's a
rough calculation, so you can imagine for ten giga whats
(21:00):
we're talking four hundred billion dollars in spend. Out of that,
Nvidia is going to put one hundred billion dollars, So
one fourth of that is coming from Nvidia. The rest
open EI still has to raise it through a private
vehicle or some other type of instrument. But that's the
challenge open ai has to grapple with and figure out
(21:21):
the rest of the funding, and they feel they can
do that in conjunction with I mean, I'm not even
talking about the AMD partnership, but that's essentially what they're
trying to do is to build out data centers on
their own as opposed to relying on hyperscale.
Speaker 4 (21:35):
And so we're going to get to the whole idea
of an AI bubble here shortly. But do these companies
have all the money to back it up? Do they
have the financing to support these efforts. We're throwing around
a lot of big numbers here, and it feels like
with the tech space. It doesn't matter what number you
throw out. You could find some company that's saying that
that's what they're going to spend. When we think about CAPEX.
Speaker 9 (21:53):
So you're right, the traditional business used to be asset light.
You needed kapex spend of maybe thirty to thirty five
billion dollars if you're Google or a meta and that
would suffice for the whole year and it would stay
you know, around five to ten percent, give or take.
But now it's already you know, two times larger than
(22:14):
that thirty five billion dollar and next year it's going
to cost one hundred billion dollars. It's going to be
three times larger for existing companies that run data center assets.
And the reason for that is the compute has gotten
so expensive. Plus you need more compute for generative AI.
So think of traditional search. It needed compute that equated
(22:36):
to maybe point zero two cents per query. Now with
generative AI, that chat pot query is almost ten times
more expensive then your traditional search query. So that's where
the compute demand is coming from. And these companies have
no choice but to invest in infrastructure because users are
spending more time. I mean, Google's token usage has grown
(22:59):
fifty x, so people are consuming a lot of these products,
and if the pace continues at this level, then you
have no choice but to add more capacity. And that's
why the numbers are so big here.
Speaker 8 (23:14):
Well, you know you're talking about it seems like it
really is just an insatiable appetite for investment into the space,
right and now we're talking about not just kind of
the chips and the service, but also the physical space.
But when you compare that with the flow of money
and investment into the stock, whether it's from investors on
(23:34):
the street or companies looking to get in on it,
it seems like there are a lot of willing players
still in the market. Do you think there really is
such a mismatch between the flow of money coming out
and also the demand for funding to create and further
fuel this AI infrastructure situation.
Speaker 9 (23:52):
Yeah, everyone, I think now realizes that this is a
very long runway in terms of both the bill out
of the infrastructure and how it will eventually monetize. I mean, look,
there's a lot of upfront investment, and that's where you know,
the Hyperscaler Capex guys, they were willing to invest money
(24:14):
with their operating cash flow. They have the balance sheet,
the Google Meta Microsoft, they have the balance sheet to
put their operating cash flow in the form of capex.
But now the numbers are getting even bigger. And so
if Google generates one hundred billion dollars in operating cash flow,
now they're talking about spending more than that hundred billion.
And that's where the private guys come in. Everyone feels
(24:38):
it's an attractive asset because you can rent it, you
can generate a return over three or four years, and
that's where I do think there will be a lot
more of these deals. I mean, the whole neo cloud
space has come about literally because of this demand and
you know, willingness to rent compute from someone else.
Speaker 4 (24:56):
Right lots of activity happening in the AIS can't stop,
won't stop. A lot of bubble allegations too, anything that
you can point to that would dispute that.
Speaker 9 (25:07):
Well, right now, we are still in that phase where
the demand far outstriped supply. And to me, the biggest
indicator of that is what Nvidia tells us on their
earnings call in terms of their margins they're pricing. I mean,
right now they're in Blackpool architecture, their Harper chip prices
(25:28):
have started to go up because the demand is far
outstripping supply. So when you see a trend like that,
just there will be probably some misallocation of capital that
will find out in retrospect that this capital was misallocated
in some way. But right now, it's very hard to
question the pace of this build out because there's still
(25:50):
that big gap between demand and supply, and until that narrows,
it's hard to question why capital is going in this
domain because I mean it should.
Speaker 8 (26:00):
Well, thank you for mentioning the earning season, because that's
exactly what we want to be asking you about.
Speaker 4 (26:05):
Obviously.
Speaker 8 (26:05):
Yeah, Kapex was such a big theme last season, especially
for Nvideo, but really just in general, right the magnificence
having companies and anyone involved in the space. I think
that's still the big question for investors is is what
companies are spending on AI Does that justify the returns
that they're getting now and in the future. What would
you say to those investors kind of weighing that balance
(26:30):
as we head into the next season's earnings.
Speaker 9 (26:33):
I mean, look at the ear to date performance of
mag seven. The stocks that have outperformed are the ones
that have spent their capex that have increased their spending
on AI, not the ones that have been conservative. Your
Apple and Amazon haven't.
Speaker 4 (26:48):
Outperformed, right, and Vidya the best performer.
Speaker 9 (26:51):
I mean, Nvidia is not the one who is putting
capex dollars. But look at you know, Google, they I think,
so that's where I do think the market is still
rewarding companies that are spending on AI. And if you
have been conservative and just focused on margins, you're multiple
(27:12):
has shrunk. And that's the sort of mood we are in.
So my feeling is you will see this earning season
also reward companies that show higher AI revenue growth, even
if they have large businesses. If that AI component is accelerating,
you will see multiples expanding, and that's where there is
(27:33):
scope to be positively surprised.
Speaker 4 (27:36):
Our valuation is too high though.
Speaker 9 (27:39):
I mean you could argue that, you know, in certain
pockets for maybe the index as a whole, but when
you look at individual companies, I go back to mag seven.
These are wonderful businesses that are investing in AI, which
everyone deems, you know, will have high usage. The question
is how will they monetize and if they can answer
(28:02):
that question in terms of, you know, how it monetizes
over time, not in the next twelve to twenty four months,
but over time, I think investors will be happy.
Speaker 8 (28:11):
Now, of course, part of the jitters around this weather
AI is in a bubble and all that is really
this idea of concentration risk, right, And the fact that
more and more gains and the S Top five hundred
and the US equity market in general are being driven
by such a small number of companies. Is that something
that investors really need to be worrying so much about when,
(28:33):
as you say, at the moment, demand for these companies
products and services is still far outstripping the supply.
Speaker 6 (28:40):
Yeah.
Speaker 9 (28:41):
So I mean again the pigs and shovels trade has
carried on. Now we are in that phase where the
LLM frontier models are you know, clear which ones are
those and which ones have the lead. And now it's about,
you know, how the other software companies adapt in terms
of using these models as a distribution and making sure
(29:01):
they can thrive in the world where llms are also
part of the tech stack. So we'll start to see
that pan out over time. Not every company will be
as dominant as they used to be But then the
businesses that end up using LLM as an intelligence layer
and continue to show positive surprises, I think you will
(29:22):
see a rerating in their multiple Well.
Speaker 8 (29:25):
Thank you so much, Mandeep, as always for providing us
with your excellent insights into this space. Now, for more
insights from Mandeep and the Bloomberg Intelligence team, make sure
to check out their Tech Disruptors podcast that features conversations
with thought leaders and management teams on disruptive trends in
the tech world, covering everything from AI, to EVS, to
(29:45):
VR and beyond. Find it at Apple, Spotify, or wherever
you get your podcasts.
Speaker 6 (29:52):
Stay with us more from Bloomberg Business Week Daily coming
up after.
Speaker 1 (29:55):
This listening to the Bloomberg Business Week Daily podcast. Catch
us live weekday afternoons from two to five East. During
this listen on Applecarplay and Android Otto with the Bloomberg
Business app, or watch us live on YouTube.
Speaker 4 (30:13):
We need to move over into the land of banks.
I mean, earning season is just around the corner. You blink,
and here we are again. Let's talk about banks, Christine,
I think that would be such an interesting discussion here
for our viewers. We're joined, of course, by Herman Chan.
He's a senior analyst for US regional banks at Bloomberg Intelligence,
and he is here with us happily in the Interactive
(30:33):
Brokers studio.
Speaker 5 (30:34):
Bridge down.
Speaker 4 (30:35):
This deal that's going on right We've got Third, This
is an eleven eleven billion dollar deal, sparking hopes for
a bank merger wave. Is there a wave?
Speaker 5 (30:45):
There's a bit of a crust right now.
Speaker 10 (30:47):
I would say that this deal with Fifth Third and
Commergan comes on the heels of a few other large
regional bank deals. P and C's buying First Bank, which
is mostly in Colorado and Arizona, and then Huntington's also
buying a smaller competitor to Camericas in Texas as well
in Veritech. So you're seeing some percolating activity. A lot
(31:09):
of that is really driven by deregulation efforts under the
Trump administration. That's encouraging more banking M and A. And
also the secondary factor is bank stock prices have improved,
so they've got the currency to do deals.
Speaker 6 (31:21):
I talk to us.
Speaker 8 (31:22):
About this wave right of just mergers in particularly in
the regional banking sector. It wasn't too long ago that
you know, we were having issues in this particular space
talking about a couple of years ago. Now fast forward
to this sort of environment where there are a lot
of active deals. Do you think that this kind of
(31:43):
helps mitigate some of the concerns that we got from
that regional banking crisis from a few years right.
Speaker 10 (31:49):
So, one of the key lessons from the SBB failures
that also toppled First Republic and Signature was that deposits
are the lifeblood of banks and you really need to
protect those deposits during events of uncertainty because the positive
flight is real. That's really what took down SBB, and
(32:10):
this deal with Comerica and Fifth Third is a direct
reflection of that. Well, come America really didn't have the
same deposit flight as SVB, they did have some, and
it really showed the need to have a more diversified
deposit base, i e. More retail deposits that fall under
the FDIC insurance so there's no reason to take your
(32:32):
money out of the bank.
Speaker 5 (32:34):
And that's really one.
Speaker 10 (32:35):
Of Fifth Third's key expertises is their consumer banking in
branch banking expertise, and that's that's driving some of that
merger activity that we're seeing today.
Speaker 4 (32:47):
So taking a look at your report that you recently wrote,
you see that Camerica's management missteps and structural weaknesses in
its funding profile have hindered the top line trajectory and profitability.
Here are these risks that Fifth Third can afford to
be a exposed to.
Speaker 5 (33:01):
Yeah, that's that's a good question.
Speaker 10 (33:03):
What's what's great is that, through the magic of bank
merger accounting, when when these deals happen, you get to
reset on day one. So so the issues that affected
co America are are effectively less of an issue for
for Fifth Third, And so they start off with the
clean slates and they can manage their rate sensitivity and
(33:26):
asset management liability without some of the legacy issues that
that co America had, both on the funding side as
I mentioned earlier, but also on the swap side, where
where they added some ill time swaps that really hindered
them when rates were staying high.
Speaker 8 (33:42):
Yeah, and what do you make of the equity reaction
or I guess like the investor reaction to this. Is
this a deal that you know, as you mentioned, you
know there's some synergies here or some benefits, particularly for
coo America, But what are we kind of gleaning from
the immediate reaction industry to this.
Speaker 10 (33:58):
Yeah, I think that the immediate reaction is is there
going to be more ahead? I think the analyst community
and the investor community understood the reason why COO America
was sold, and particularly why they chose fifty third as
a partner, so it makes sense that that would happen. Really,
(34:19):
is there going to be more consolidation ahead? There are
a number of regional banks around the same size as
the Third and PNC and Huntington banks, like Regions and
M and T and Citizens, and that's going to be
a big topic on the three Q earning skalls over
the next couple of weeks.
Speaker 4 (34:38):
Is there more room for consolidation? I mean personally when
I think, I feel like we have so many regional
banks here in the US, and you can inlighten me
as to how that compares globally, But we have so
many regional banks here. Is there more room for mergers
some consolidation trinking here?
Speaker 10 (34:52):
There is? There's about forty five hundred banks in the
United States, and so is.
Speaker 5 (34:58):
There really a need for that many?
Speaker 10 (35:00):
I would say no, And so there's going to inevitably.
Speaker 5 (35:06):
Be con consolidation. These smaller banks.
Speaker 10 (35:10):
They not only have to compete with these regionals that
I'm talking about, but also the largest banks in the
United States like Chase and b of A that are
expanding organically and opening up branches in areas like Alabama
and Mississippi and Pittsburgh and Washington.
Speaker 2 (35:24):
D C.
Speaker 10 (35:24):
And And the fintech challenge is real. You've seen FinTechs
come in and really take share banks. FinTechs like Chime
and so far are really gaining a lot of new
customers and to the to the detriment of banks big
and small, So it's harder to compete. And then you
(35:47):
have the technology and compliance issues that all banks have
to deal with because of the regulations that they have
to adhere to. So it makes for a really tough
operating environment. And so that's something that that is pushing
a lot of banks.
Speaker 8 (35:59):
To Yeah, well, we're of course kicking off earnings season
and next week with the biggest Wall Street banks reporting.
What are you in particular looking out for when that starts.
Speaker 10 (36:10):
Yes, so the largest Wall Street banks kickoff next week.
I think a lot of it will be what's happening
in capital markets driving trading activity, fixed con ecruity trading
activity IPOs have been really picking up over the past
several months, so that's something that bodes well for the
capital markets activity. And also on the lending side, commercial
(36:34):
lending has been pretty strong, particularly lending to non bank
financial institutions, and so it seems like there's some positives.
And also the interest rate high cut that happened in
September should help on the deposit funding side as well.
Speaker 4 (36:50):
And I mean, you mentioned the rate cut that we
just had. What about this October? I mean, are you
if there is one right leading this October? Does that
change your thinking at all?
Speaker 10 (36:59):
Yeah, So it's interesting banks typically will be able to
reduce their funding costs that they cut their deposit rates
for their depositors, so that's an immediate benefits. On the
other hand, there there's still some uh some juice left
with a lot of the fixed rate assets that the
(37:20):
banks added onto their balance sheet when rates for zero,
So those are actually repricing still higher today and so
there there's some really positive sort of dynamics going on
for for banks netter just income, so that'll continue to flow.
Speaker 5 (37:33):
Through over the next several quarters.
Speaker 8 (37:36):
Yeah. Well, I mean, yeah, given that what we've seen
from the Federal Reserve though in their potential for the
rate US this year. I mean, just generally, is the
rate conversation still relevant for banks or has that been
overtaken by just the deal BLENANDSA that we've seen over
the last quarter.
Speaker 5 (37:55):
Yeah, that's that's a good question.
Speaker 10 (37:58):
Rain banks are are naturally reflecting the rate environment and
how their positioned for rate changes. A lot of the
banks have really hedged their exposure, so there's less of
variability going forward for a lot of the banks that
I cover, so that that's helpful. They've already taken some
(38:19):
of the hits on their negatives incombine by adding these
swaps and insurance on their on their balance sheets.
Speaker 5 (38:25):
And then I think the real, the real.
Speaker 10 (38:30):
Positive aspect of my coverage right now is just there's
more M and A activity that really gets the juices
flowing from analyst investors. And it's really good to see
after the Biden administration, because it seemed like the prior
administration really did not have a positive view on bank
m and A and it's been a real one eighty
(38:50):
from from the current administration and that's why you're seeing
more activity today.
Speaker 4 (38:54):
I'm looking at the BKX index. Actually quickly KBW regional
Banks down one point two at the closing bell, Christine, Wow.
Speaker 8 (39:02):
Yeah, Well, I mean a lot to look out for
them when it comes to M and A deals. But
thank you so much once again to Herman Chand, who
is our senior analyst for e US regional Banks from
Bloomberg Intelligence.
Speaker 1 (39:13):
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(00:23):
news as it happens. The Bloomberg Business Week Daily Podcast
with Carol Masser and Tim Steneveek on Bloomberg Radio.
Speaker 2 (00:32):
I want to bring in now Kay Her, she is
US CIO of Global Fixed Income, Currency and Commodities at
JP Morgan Asset Management. And Kate, do you think that
we got anything new from this latest FED minutes? I mean,
we knew that Steven Myron was an outlier, and these
minutes certainly showed that. But what do we learn in
terms of the debate going on inside the Federal Reserve?
Speaker 3 (00:53):
So Scarlett, first off, I'm glad to be here. Thank
you for having me, Nora too. Second off, I think
the short answer to your question is we didn't learn
anything new. And I think one of the best ways
to think about whether we've learned anything new is what
the market's reaction is. And the market's really not giving
us much of a reaction. Maybe at the margin the
minutes are showing us that there was some discussion about
(01:18):
maybe we didn't need to do anything, but it was
pretty clear that we only had one dissent when that
was released September seventeenth, and not a lot of new
information in the minutes today.
Speaker 4 (01:29):
Okay, not a lot of new information. And of course,
as we're looking at the trade still green across the
screen right now, all across the board here when we're
looking at equities in particular. But what do you think
the FED should be focused on right now?
Speaker 3 (01:42):
It's such a great question in Aura. As everybody knows,
we've got a government shut down and we are in
an absence of data. So the FED or the the
Bureau of Labor Services did not release the employment data
on Friday. It's unlikely unless the government reopens, it's unlikely
that we're going to get CPI next week. So what
(02:05):
are we looking at? What's the FED looking at? The
next major piece of data that we think is two things.
I would say The first is corporate earnings start on
October fourteenth, and I think that can be a great
indication of what we're seeing from a bottom up perspective
on the economy. The second one on a macro perspective
that I'm sure the fedal look at is the Beige Book.
(02:25):
So we've got the Beige Book coming out on October fifteenth.
Speaker 2 (02:29):
Yeah, and I feel like the Beige Book has taken
on greater importance in this period of uncertainty where we're
not sure if companies are passing along higher costs to
their customers or how they're dealing with it. We're kind
of in an uncharted territory and every company is doing
things differently based on the experience of their executives when
it comes to corporate earnings. K as someone who is
in the fixed income market, what do you watch for?
Speaker 5 (02:51):
What do you look for?
Speaker 2 (02:53):
Is it the banks that will really tell you the
most about what kind of credit quality we have in
this economy.
Speaker 3 (02:58):
Sure, that's a great thing to think about. I think,
first off, you know, we're not entirely in unprecedented territory.
We have had government shutdowns before, and when we take
a step back and think about the overall impact to
gross domestic product, it tends not to be that material
in the grand scheme of life. So from an earnings perspective,
I think we're going to be looking for a couple
(03:18):
of things. Number One, from the banks, what's the credit quality?
Look at what's the indication of the consumer. As we've
seen in the macro data, we've seen some softening in employment,
so is that going to flow through into reserves, into
credit quality and banks? And then from the broader companies
and the industrials, what are we seeing in revenue growth
versus EBITDAH obviously or earnings before interest, taxes, depreciation cash
(03:43):
flow as it were. So what are we seeing in
cash flow? I think for the most part, companies have
very high margins and are they going to protect those
margins or are they going to pass through costs onto consumers?
And then what's that going to do to demand? I
think that's what we'll be look looking at.
Speaker 4 (03:58):
So as we head into earnings, using just around the
corner here, what sectors in particular are giving you the
most concern? Just based off of what you were saying.
Speaker 3 (04:06):
I'm a bond portfolio manager, I'm paid to worry and
loose sleeve, so very thing gives me concern. You never
know where you might see a pocket of distress, and
it's the unexpected that are the real concerns.
Speaker 2 (04:19):
Well, we've seen pockets of stress in the auto sector.
When you look at first brands, when you look at tricolor,
what does that tell you about the state of the consumer,
especially at the lower end. You know, these were two
credit blow ups that took people by surprise, and a
lot of people will say, Okay, there's it syncratic. There's
some maybe fraud issues that are particular to those companies,
(04:41):
and that may be the case, but these are also
sectors that are very much affected by tariffs, and they
are not the only ones affected by tariffs either.
Speaker 3 (04:49):
So I think there's a couple of things going on here.
Scarlett and yes, on a certain level, tree color and
apparently that's how it's pronounced.
Speaker 5 (04:56):
Oh, thank you.
Speaker 4 (04:57):
I know that's your pro tip.
Speaker 5 (04:58):
I've been saying try credit.
Speaker 4 (05:00):
Thanks there.
Speaker 3 (05:01):
Well, I think there's a couple of things going on
treac a Lore in particular, and I'm not going to
talk about specific credits, but I think we should take
a step back and think about what's going on in
the broader economy and broader financial markets. And the reality
is there's a lot of cash slashing around. And when
there's so much money slashing around, that tends to be
(05:23):
the point late cycle where excesses happen. So that tends
to be the point if you went back to the
two thousands you send to see it's not uncommon to
see corporate malfeasance, and it may be in these types
of instances where are seeing corporate malfeasance. To answer your
question with regard to the consumer, you know, we had
(05:43):
been talking for a while about what we referred to
as a CA shaped economy, and that was high income
consumers with a lot of exposure to stock markets, and
we're doing very well. Lower income consumers had been hit
with inflation. It actually that that seems lower income consumers
he seem to have stabilized some. We're more focused and
(06:04):
concerned about maybe more prime consumers that are going to
start repaying student loans or interesting defaults and type of
behaviors that we're going to see there.
Speaker 4 (06:14):
So let's dig a bit deeper into the lack of
data that you pointed out, just the bit to go here.
So we have traders that are really bracing for a
range of fed outcomes here, some of them even hedging flows,
plate flavoring outlier dubbish scenarios, and others focusing more on
the possibility that the Fed four goes a move at
one meeting. How are you thinking about all this right
now as it relates to the bond market.
Speaker 3 (06:35):
Yeah, a couple of things. I think if you look
at what the market is pricing in now, a twenty
five basis rate to twenty five basis point rate cut
is almost fully priced into the market for the October meeting,
I think is it October twenty fifth, So that's almost
fully priced in October twenty ninth, twenty ninth.
Speaker 4 (06:56):
Sorry, I mean, how can you not know? Easy? How
could anyone not? That's kidding.
Speaker 3 (07:01):
So the market's pricing almost an entire rate hike in October,
and then on the December tenth meeting, the market's pricing
another let's call it twenty basis points something like that.
But I think the other interesting aspect is that volatility
in the rates market has been very low, So you
get this base case that the Fed continues to ease.
(07:21):
And if we go back to the Fed minutes and
what the Fed said on the last meeting on September seventeenth,
is that they are saying that they intend to do
two more cuts this year, And that's the base case.
I think in periods of economic uncertainty, and the government
shut down is perpetuating that uncertainty because we're not getting
regular economic data updates. Then I think that logically follows
(07:45):
that people worry about tail risk outcomes and they look
at unusual patterns in behaviors or in particular markets and
worry about what they could glean from those.
Speaker 5 (07:56):
So we don't have any data right now.
Speaker 2 (07:58):
What we do have are the government auctions of US
treasuries because we need to raise money. So that continues.
Is the risk of a tail event tapering off a
little bit here. For a while, people were monitoring every
single auction with baited breath, and it feels like we're
excelling a little bit here.
Speaker 3 (08:17):
We still monitor them with baited breath, and I think,
off the top of my head, today's auction at one
o'clock was something like ninety one percent end users and
something like a tale of zero point four or five
basis points. So you're right, that's a strong auction, and
I think that has settled down. I think concerns about
the US government US treasury as a safe haven have
(08:39):
abated as people have gotten more comfortable with the macro
environment and the geopolitical environment.
Speaker 4 (08:46):
So safe haven here, maybe abating, But what do you
think is the next story here?
Speaker 3 (08:52):
Next story? Gosh, I don't know. I'm not the reporter
on this. We're just we're just I want to leave
that to you in the market. In the market, I
think it's probably earnings. I think it's going to be
you've got earnings kicking off on. Look, as you all said,
in the absence of any macroeconomic data being released by
the federal government, I think people are going to obsess
about every single earnings release and anything that they can
(09:15):
glean from that. Specifically in as you all know, there's
been an extraordinary amount of investment in AI and looking
maybe starting to look for returns on that, look at
that investment cycle. So I think that's going to be important.
I think to Scarlett's earlier question, always credit quality, return
of capital to shareholders, increases, and dividends, looking at flows.
(09:35):
I think that's that's that's the next story.
Speaker 4 (09:38):
But yeah, where do you want to be on the
yield curve?
Speaker 3 (09:42):
Yeah, we still like the belly of the curve.
Speaker 2 (09:44):
Everyone loves the belly of the curve.
Speaker 4 (09:45):
Everyone loves the belly.
Speaker 3 (09:47):
Is just fun to say that the belly of the curve,
right income Geese. But yeah, I think we think that
the we think that the rates are going to continue
to be pretty range bound here between three seventy five
and four and a quarter, and we continue to like
high quality intermediate duration credit. You know, as my dear
colleague Ian Steely says, spreads are tight, but yields are right.
(10:09):
And that's that's really what the what the driver is
for investors. You know, they're not investors who are thinking
about investing for pension funds, endownment funds, individual investors. They
care more about what the yield is, not what the
spreads are.
Speaker 4 (10:23):
So, of course, as we mentioned, the belly is what
everyone's talking about. But is there any sort of opportunity
on the other end.
Speaker 3 (10:31):
I mean, there are always opportunities, but where we would
are most comfortable in the yield curve is really in
the belly.
Speaker 2 (10:37):
What about gold, I'm curious what you think about the
relationship of gold to fixed income These days, gold continues
to zoom higher, now sixty one dollars an ounce and
just pierce four thousand.
Speaker 5 (10:47):
Dollars this morning.
Speaker 4 (10:48):
Insane.
Speaker 2 (10:49):
Yeah, so, and there seems to be very little that
people can identify that's going to stop this momentum. It's
driven by inflows into gold ets and also central bank buying.
Speaker 5 (10:58):
How does that playoff.
Speaker 2 (11:00):
Of what's happening in treasuries or doesn't.
Speaker 3 (11:03):
So you've just hit on a key aspect of it, Scarlett.
So there are obviously two components of any market, supply
and demand, and you just hit the two main components
of demand and that central bank buying, and that's the
ETF buying. I think the ETF wrapper is providing people
with an easily accessible way to buy gold instead of
buying bullion and storing at someplace. So you've got an
(11:26):
increase in demand for gold. On the other side, if
you look at the supply of gold, it's really been
pretty constant, So you've got this mismatch between supply and demand.
I think in terms of the relationship that we've seen historically,
gold has been correlated with real yields. So when you
see real yields come down, gold prices go back up.
(11:46):
So why is that the opportunity cost is lower? If
you can't get a high rate in treasuries or in
risk free assets, then maybe gold becomes more attractive. Well,
what we've seen really post pandemic. That relationship has broken
has broken down, and I think it's really a function
of the supply and demand. But I think the point
would be that that's broken down really over the last
five years. So I don't read anything different in gold
(12:10):
pricing about you know, US exceptionalism or the dollar flight
to currency or anything like that. I think it's old
fashioned supply and demand fundamentals.
Speaker 2 (12:20):
You don't see it as part of the debasement trade
that everyone keeps talking about.
Speaker 4 (12:23):
Not really now, you don't buy into that.
Speaker 2 (12:25):
I guess someone who's the global head of fixed income,
you know, probably doesn't see.
Speaker 5 (12:29):
Much value in that, but had to ask it.
Speaker 4 (12:31):
I mean, do you think we have more room to
run here on gold?
Speaker 3 (12:35):
You know? My only strong view on that is I
like it as jewelry, as you can see from my necklace.
Speaker 5 (12:40):
I don't.
Speaker 3 (12:41):
I'm not enough in the leeds on supply and demand
to gold to have a strong view on that. I
think I've got a good handle on what's going on
the fundamentals and why we've seen prices going, but I'm
not a technical analyst on gold and whether we've got
more room to run?
Speaker 2 (12:54):
All right, Kay, Always appreciate your joining us.
Speaker 5 (12:56):
Thank you so much for coming into studio.
Speaker 2 (12:57):
Okay, her is us CIO Global Fixed Income, Currencies and
Commodities at JP Morgan Asset Management.
Speaker 5 (13:06):
Stay with us.
Speaker 6 (13:07):
More from Bloomberg Business Week Daily coming up after this.
Speaker 1 (13:14):
You're listening to the Bloomberg Business Week Daily podcast. Catch
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listen on Applecarplay and Android Auto with the Bloomberg Business app,
or watch us live on YouTube.
Speaker 2 (13:27):
All right, let's head over back to Europe because we
now have some more details coming out of France, and
I want to bring in Stephen Carroll. He is, of
course the host of Bloomberg Daybreak Europe, and Stephen is
an expert on authings France. He's certainly my expert on
all things Frans. We go to him constantly for the
latest and there's been a lot to stay on top
of here. Stephen Sebastian Lancorneu, who is the outgoing Prime
(13:50):
Minister of France, says that Emmanuel Macron, the President of France,
can name a new prime minister in the next forty
eight hours. He can do that, he may not do that.
Where does leave us what does this mean for his government, Scott.
Speaker 7 (14:05):
Things are a little bit clearer now than they were
earlier today, but not much. What we know is that
the theory that fresh elections could be called for the
National Assembly looks less likely than it did this morning.
For example, what Sebaston mccorney was just said on French
television is that he believes there is now a political
situation that allows Emmanuel Macron to name a new prime
(14:27):
minister and take the next spin on this wheel that
we've been on since June of last year of trying
to build a minority coalition in Parliament that's able to
pass a French budget. Now, he did this after the
forty eight hours of intense consultations with political leaders from
across the political spectrum, not all parties, but most, and
(14:47):
what he was trying to do was see if among
those groups he could find enough support for central ideas
that he believes that could lead to a budget. Essentially,
he wants somebody else to take the reins from here,
That's what he's told to the President Emmanuel Macron. He
came to this interview this evening on French television straight
from the Elise Palace where he spent an hour and
forty minutes with the President briefing him on what he'd
(15:09):
learned over the past two days. He now expects the
President to name somebody else to take on the job
to lead those discussions. He was asked repeatedly, should it
be a candidate from the Left Party, He said, it's
up to the President to decide. Should it be a
technocratic prime minister, It's up to the President to decide.
He has made it clear, though, is that nobody's going
to be in this government should have presidential ambitions for
(15:32):
the twenty twenty seven presidential election.
Speaker 5 (15:35):
It looks like.
Speaker 7 (15:36):
He's pointing towards a sort of technocratic arrangement, but very
much involving the politicians who are in the National Assembly now,
who are on the political scene to be able to
put that compromise together, because they have some pretty big
issues they have to decide, and the calendar on this
budget is already running very very tight. So the rush
is to try and get something done in time that
(15:58):
can be passed through Parliament and actually keep the public
finances running over into next year, avoiding the sort of
emergency measures that we saw at the end of last year,
which as we know, didn't go down very well on
the bond markets.
Speaker 4 (16:09):
Can investors force the hand of the centrist parties who
must decide whether to play ball with Lacornell or for
that matter, Macrum.
Speaker 7 (16:19):
Look, that's a really good question, because what we've seen
so far is a little bit of tension in markets,
but not something that our own economists or any of
the market analysts that we've been speaking to would describe
as a fiscal or financial crisis in France. This is
still a political crisis. We have seen the spread of
bond deals between France and Germany widen, although it did
actually tighten a little bit today when the corn New
(16:41):
signaled this morning that he had been making some progress
in these talks. Realistically, looking at it for markets right now,
nothing's really changed in the past week, or really since
the middle of the summer when the last prime minister
from Sobereru proposed his budget. They're still in this phase
of negotiation. There are still signals that a compromise could
(17:01):
be found. When markets will run out of patience with
France is very much an open question. You don't have
the cliff edge of a government shut down in France
in the way that you do in the United States,
because the way it works as the system runs into
sort of keeping the lights on measures where taxes are
collected and public services operated. That's not a situation any
politicians want to be happening. It's not a situation the
(17:22):
public wants to happen either. But the cliff edge moment
looks that little bit further away, at least for now.
The situation that markets were most worried about is what
fresh elections could could produce national assembly elections or in
an extreme case, a fresh presidential election. Both of those
look off the cards this evening, but things are moving
very quickly, and who am Manual Macron could pick in
(17:45):
forty eight hours time is going to be a very
interesting question.
Speaker 5 (17:48):
So very quickly.
Speaker 2 (17:48):
If you know, legislative elections would be unsettling to investors.
I'm guessing that presidential elections, Macron actually resigning, as some
in the opposition parties want him to do, is not
something investors would welcome.
Speaker 7 (18:03):
No indeed, I mean that would be a much more
dramatic shift in France's both fiscal approach and some of
those big heavy issues like the pension reforms, which is
the central thing politicians here are fighting over at the moment.
If that were to be disrupted, that would change the
fiscal perceptions of France. We've also got some ratings agency
decisions to look out for, too. A presidential election would
be very dramatic. A National Assembly election would be less dramatic,
(18:26):
and getting a new prime minister, while that could produce
another shrug from markets.
Speaker 2 (18:30):
All right, thank you so much, Stephen Carroll. Fantastic context here.
Stephen Carroll is host of Bloomberg Daybreak Europe, but he
is at least my go to authority on all things
in France, certainly the political crisis that has been brewing
for over a year now.
Speaker 6 (18:46):
This is the Bloomberg Business Week Daily Podcast. Listen live
each weekday starting at two pm Eastern on applecar Play
and Android Auto with the Bloomberg Business App. You can
also listen live on Amazon Alexa from our flagship New
York station, Just Say Alexa played Bloomberg eleven thirty.
Speaker 8 (19:04):
Now, so many aideals and so many questions. So to
answer those questions, let's bring in Mandy Saying, who is
the global head of technology research for Bloomberg Intelligence. Who
can tell us all about whether we are in fact
in an AI bubble. So Mendy, thank you so much
for joining us today.
Speaker 5 (19:23):
Okay, let's talk about.
Speaker 8 (19:24):
This concept of circular funding to start with why has
it created such a fus amongst market observers.
Speaker 4 (19:30):
And what is it?
Speaker 9 (19:32):
Well, I guess the easiest way to frame it is
a company like OpenAI doesn't have the balance sheet of
Meta or Microsoft or Google in terms of the huge
AI infrastructure build out that they want to go ahead with.
And so far they relied on Microsoft to consume all
(19:53):
the data center capacity they needed for chat, GPT and
the enterprise business they have. And now they feel that
numbers and the demand is getting so big that they
are planning ahead. They are looking two three years ahead
where they would need probably two or three times more
capacity than they are consuming right now. And for that,
(20:15):
first they did a deal with Oracle three hundred billion
dollar deal that spends almost five years. Then they did
this deal with Nvidia actually to build ten gigawatt of
data center capacity. Now, the interesting part to answer your
question on circular funding is Nvidia is spending you know,
(20:40):
ten billion dollars and giving it to open Ai for
them to add up to ten gigawatts of capacity, and
that investment could go up two hundred billions, So every
gigawat involves almost forty billion dollars of spend. That's a
rough calculation, so you can imagine for ten giga whats
(21:00):
we're talking four hundred billion dollars in spend. Out of that,
Nvidia is going to put one hundred billion dollars, So
one fourth of that is coming from Nvidia. The rest
open EI still has to raise it through a private
vehicle or some other type of instrument. But that's the
challenge open ai has to grapple with and figure out
(21:21):
the rest of the funding, and they feel they can
do that in conjunction with I mean, I'm not even
talking about the AMD partnership, but that's essentially what they're
trying to do is to build out data centers on
their own as opposed to relying on hyperscale.
Speaker 4 (21:35):
And so we're going to get to the whole idea
of an AI bubble here shortly. But do these companies
have all the money to back it up? Do they
have the financing to support these efforts. We're throwing around
a lot of big numbers here, and it feels like
with the tech space. It doesn't matter what number you
throw out. You could find some company that's saying that
that's what they're going to spend. When we think about CAPEX.
Speaker 9 (21:53):
So you're right, the traditional business used to be asset light.
You needed kapex spend of maybe thirty to thirty five
billion dollars if you're Google or a meta and that
would suffice for the whole year and it would stay
you know, around five to ten percent, give or take.
But now it's already you know, two times larger than
(22:14):
that thirty five billion dollar and next year it's going
to cost one hundred billion dollars. It's going to be
three times larger for existing companies that run data center assets.
And the reason for that is the compute has gotten
so expensive. Plus you need more compute for generative AI.
So think of traditional search. It needed compute that equated
(22:36):
to maybe point zero two cents per query. Now with
generative AI, that chat pot query is almost ten times
more expensive then your traditional search query. So that's where
the compute demand is coming from. And these companies have
no choice but to invest in infrastructure because users are
spending more time. I mean, Google's token usage has grown
(22:59):
fifty x, so people are consuming a lot of these products,
and if the pace continues at this level, then you
have no choice but to add more capacity. And that's
why the numbers are so big here.
Speaker 8 (23:14):
Well, you know you're talking about it seems like it
really is just an insatiable appetite for investment into the space,
right and now we're talking about not just kind of
the chips and the service, but also the physical space.
But when you compare that with the flow of money
and investment into the stock, whether it's from investors on
(23:34):
the street or companies looking to get in on it,
it seems like there are a lot of willing players
still in the market. Do you think there really is
such a mismatch between the flow of money coming out
and also the demand for funding to create and further
fuel this AI infrastructure situation.
Speaker 9 (23:52):
Yeah, everyone, I think now realizes that this is a
very long runway in terms of both the bill out
of the infrastructure and how it will eventually monetize. I mean, look,
there's a lot of upfront investment, and that's where you know,
the Hyperscaler Capex guys, they were willing to invest money
(24:14):
with their operating cash flow. They have the balance sheet,
the Google Meta Microsoft, they have the balance sheet to
put their operating cash flow in the form of capex.
But now the numbers are getting even bigger. And so
if Google generates one hundred billion dollars in operating cash flow,
now they're talking about spending more than that hundred billion.
And that's where the private guys come in. Everyone feels
(24:38):
it's an attractive asset because you can rent it, you
can generate a return over three or four years, and
that's where I do think there will be a lot
more of these deals. I mean, the whole neo cloud
space has come about literally because of this demand and
you know, willingness to rent compute from someone else.
Speaker 4 (24:56):
Right lots of activity happening in the AIS can't stop,
won't stop. A lot of bubble allegations too, anything that
you can point to that would dispute that.
Speaker 9 (25:07):
Well, right now, we are still in that phase where
the demand far outstriped supply. And to me, the biggest
indicator of that is what Nvidia tells us on their
earnings call in terms of their margins they're pricing. I mean,
right now they're in Blackpool architecture, their Harper chip prices
(25:28):
have started to go up because the demand is far
outstripping supply. So when you see a trend like that,
just there will be probably some misallocation of capital that
will find out in retrospect that this capital was misallocated
in some way. But right now, it's very hard to
question the pace of this build out because there's still
(25:50):
that big gap between demand and supply, and until that narrows,
it's hard to question why capital is going in this
domain because I mean it should.
Speaker 8 (26:00):
Well, thank you for mentioning the earning season, because that's
exactly what we want to be asking you about.
Speaker 4 (26:05):
Obviously.
Speaker 8 (26:05):
Yeah, Kapex was such a big theme last season, especially
for Nvideo, but really just in general, right the magnificence
having companies and anyone involved in the space. I think
that's still the big question for investors is is what
companies are spending on AI Does that justify the returns
that they're getting now and in the future. What would
you say to those investors kind of weighing that balance
(26:30):
as we head into the next season's earnings.
Speaker 9 (26:33):
I mean, look at the ear to date performance of
mag seven. The stocks that have outperformed are the ones
that have spent their capex that have increased their spending
on AI, not the ones that have been conservative. Your
Apple and Amazon haven't.
Speaker 4 (26:48):
Outperformed, right, and Vidya the best performer.
Speaker 9 (26:51):
I mean, Nvidia is not the one who is putting
capex dollars. But look at you know, Google, they I think,
so that's where I do think the market is still
rewarding companies that are spending on AI. And if you
have been conservative and just focused on margins, you're multiple
(27:12):
has shrunk. And that's the sort of mood we are in.
So my feeling is you will see this earning season
also reward companies that show higher AI revenue growth, even
if they have large businesses. If that AI component is accelerating,
you will see multiples expanding, and that's where there is
(27:33):
scope to be positively surprised.
Speaker 4 (27:36):
Our valuation is too high though.
Speaker 9 (27:39):
I mean you could argue that, you know, in certain
pockets for maybe the index as a whole, but when
you look at individual companies, I go back to mag seven.
These are wonderful businesses that are investing in AI, which
everyone deems, you know, will have high usage. The question
is how will they monetize and if they can answer
(28:02):
that question in terms of, you know, how it monetizes
over time, not in the next twelve to twenty four months,
but over time, I think investors will be happy.
Speaker 8 (28:11):
Now, of course, part of the jitters around this weather
AI is in a bubble and all that is really
this idea of concentration risk, right, And the fact that
more and more gains and the S Top five hundred
and the US equity market in general are being driven
by such a small number of companies. Is that something
that investors really need to be worrying so much about when,
(28:33):
as you say, at the moment, demand for these companies
products and services is still far outstripping the supply.
Speaker 6 (28:40):
Yeah.
Speaker 9 (28:41):
So I mean again the pigs and shovels trade has
carried on. Now we are in that phase where the
LLM frontier models are you know, clear which ones are
those and which ones have the lead. And now it's about,
you know, how the other software companies adapt in terms
of using these models as a distribution and making sure
(29:01):
they can thrive in the world where llms are also
part of the tech stack. So we'll start to see
that pan out over time. Not every company will be
as dominant as they used to be But then the
businesses that end up using LLM as an intelligence layer
and continue to show positive surprises, I think you will
(29:22):
see a rerating in their multiple Well.
Speaker 8 (29:25):
Thank you so much, Mandeep, as always for providing us
with your excellent insights into this space. Now, for more
insights from Mandeep and the Bloomberg Intelligence team, make sure
to check out their Tech Disruptors podcast that features conversations
with thought leaders and management teams on disruptive trends in
the tech world, covering everything from AI, to EVS, to
(29:45):
VR and beyond. Find it at Apple, Spotify, or wherever
you get your podcasts.
Speaker 6 (29:52):
Stay with us more from Bloomberg Business Week Daily coming
up after.
Speaker 1 (29:55):
This listening to the Bloomberg Business Week Daily podcast. Catch
us live weekday afternoons from two to five East. During
this listen on Applecarplay and Android Otto with the Bloomberg
Business app, or watch us live on YouTube.
Speaker 4 (30:13):
We need to move over into the land of banks.
I mean, earning season is just around the corner. You blink,
and here we are again. Let's talk about banks, Christine,
I think that would be such an interesting discussion here
for our viewers. We're joined, of course, by Herman Chan.
He's a senior analyst for US regional banks at Bloomberg Intelligence,
and he is here with us happily in the Interactive
(30:33):
Brokers studio.
Speaker 5 (30:34):
Bridge down.
Speaker 4 (30:35):
This deal that's going on right We've got Third, This
is an eleven eleven billion dollar deal, sparking hopes for
a bank merger wave. Is there a wave?
Speaker 5 (30:45):
There's a bit of a crust right now.
Speaker 10 (30:47):
I would say that this deal with Fifth Third and
Commergan comes on the heels of a few other large
regional bank deals. P and C's buying First Bank, which
is mostly in Colorado and Arizona, and then Huntington's also
buying a smaller competitor to Camericas in Texas as well
in Veritech. So you're seeing some percolating activity. A lot
(31:09):
of that is really driven by deregulation efforts under the
Trump administration. That's encouraging more banking M and A. And
also the secondary factor is bank stock prices have improved,
so they've got the currency to do deals.
Speaker 6 (31:21):
I talk to us.
Speaker 8 (31:22):
About this wave right of just mergers in particularly in
the regional banking sector. It wasn't too long ago that
you know, we were having issues in this particular space
talking about a couple of years ago. Now fast forward
to this sort of environment where there are a lot
of active deals. Do you think that this kind of
(31:43):
helps mitigate some of the concerns that we got from
that regional banking crisis from a few years right.
Speaker 10 (31:49):
So, one of the key lessons from the SBB failures
that also toppled First Republic and Signature was that deposits
are the lifeblood of banks and you really need to
protect those deposits during events of uncertainty because the positive
flight is real. That's really what took down SBB, and
(32:10):
this deal with Comerica and Fifth Third is a direct
reflection of that. Well, come America really didn't have the
same deposit flight as SVB, they did have some, and
it really showed the need to have a more diversified
deposit base, i e. More retail deposits that fall under
the FDIC insurance so there's no reason to take your
(32:32):
money out of the bank.
Speaker 5 (32:34):
And that's really one.
Speaker 10 (32:35):
Of Fifth Third's key expertises is their consumer banking in
branch banking expertise, and that's that's driving some of that
merger activity that we're seeing today.
Speaker 4 (32:47):
So taking a look at your report that you recently wrote,
you see that Camerica's management missteps and structural weaknesses in
its funding profile have hindered the top line trajectory and profitability.
Here are these risks that Fifth Third can afford to
be a exposed to.
Speaker 5 (33:01):
Yeah, that's that's a good question.
Speaker 10 (33:03):
What's what's great is that, through the magic of bank
merger accounting, when when these deals happen, you get to
reset on day one. So so the issues that affected
co America are are effectively less of an issue for
for Fifth Third, And so they start off with the
clean slates and they can manage their rate sensitivity and
(33:26):
asset management liability without some of the legacy issues that
that co America had, both on the funding side as
I mentioned earlier, but also on the swap side, where
where they added some ill time swaps that really hindered
them when rates were staying high.
Speaker 8 (33:42):
Yeah, and what do you make of the equity reaction
or I guess like the investor reaction to this. Is
this a deal that you know, as you mentioned, you
know there's some synergies here or some benefits, particularly for
coo America, But what are we kind of gleaning from
the immediate reaction industry to this.
Speaker 10 (33:58):
Yeah, I think that the immediate reaction is is there
going to be more ahead? I think the analyst community
and the investor community understood the reason why COO America
was sold, and particularly why they chose fifty third as
a partner, so it makes sense that that would happen. Really,
(34:19):
is there going to be more consolidation ahead? There are
a number of regional banks around the same size as
the Third and PNC and Huntington banks, like Regions and
M and T and Citizens, and that's going to be
a big topic on the three Q earning skalls over
the next couple of weeks.
Speaker 4 (34:38):
Is there more room for consolidation? I mean personally when
I think, I feel like we have so many regional
banks here in the US, and you can inlighten me
as to how that compares globally, But we have so
many regional banks here. Is there more room for mergers
some consolidation trinking here?
Speaker 10 (34:52):
There is? There's about forty five hundred banks in the
United States, and so is.
Speaker 5 (34:58):
There really a need for that many?
Speaker 10 (35:00):
I would say no, And so there's going to inevitably.
Speaker 5 (35:06):
Be con consolidation. These smaller banks.
Speaker 10 (35:10):
They not only have to compete with these regionals that
I'm talking about, but also the largest banks in the
United States like Chase and b of A that are
expanding organically and opening up branches in areas like Alabama
and Mississippi and Pittsburgh and Washington.
Speaker 2 (35:24):
D C.
Speaker 10 (35:24):
And And the fintech challenge is real. You've seen FinTechs
come in and really take share banks. FinTechs like Chime
and so far are really gaining a lot of new
customers and to the to the detriment of banks big
and small, So it's harder to compete. And then you
(35:47):
have the technology and compliance issues that all banks have
to deal with because of the regulations that they have
to adhere to. So it makes for a really tough
operating environment. And so that's something that that is pushing
a lot of banks.
Speaker 8 (35:59):
To Yeah, well, we're of course kicking off earnings season
and next week with the biggest Wall Street banks reporting.
What are you in particular looking out for when that starts.
Speaker 10 (36:10):
Yes, so the largest Wall Street banks kickoff next week.
I think a lot of it will be what's happening
in capital markets driving trading activity, fixed con ecruity trading
activity IPOs have been really picking up over the past
several months, so that's something that bodes well for the
capital markets activity. And also on the lending side, commercial
(36:34):
lending has been pretty strong, particularly lending to non bank
financial institutions, and so it seems like there's some positives.
And also the interest rate high cut that happened in
September should help on the deposit funding side as well.
Speaker 4 (36:50):
And I mean, you mentioned the rate cut that we
just had. What about this October? I mean, are you
if there is one right leading this October? Does that
change your thinking at all?
Speaker 10 (36:59):
Yeah, So it's interesting banks typically will be able to
reduce their funding costs that they cut their deposit rates
for their depositors, so that's an immediate benefits. On the
other hand, there there's still some uh some juice left
with a lot of the fixed rate assets that the
(37:20):
banks added onto their balance sheet when rates for zero,
So those are actually repricing still higher today and so
there there's some really positive sort of dynamics going on
for for banks netter just income, so that'll continue to flow.
Speaker 5 (37:33):
Through over the next several quarters.
Speaker 8 (37:36):
Yeah. Well, I mean, yeah, given that what we've seen
from the Federal Reserve though in their potential for the
rate US this year. I mean, just generally, is the
rate conversation still relevant for banks or has that been
overtaken by just the deal BLENANDSA that we've seen over
the last quarter.
Speaker 5 (37:55):
Yeah, that's that's a good question.
Speaker 10 (37:58):
Rain banks are are naturally reflecting the rate environment and
how their positioned for rate changes. A lot of the
banks have really hedged their exposure, so there's less of
variability going forward for a lot of the banks that
I cover, so that that's helpful. They've already taken some
(38:19):
of the hits on their negatives incombine by adding these
swaps and insurance on their on their balance sheets.
Speaker 5 (38:25):
And then I think the real, the real.
Speaker 10 (38:30):
Positive aspect of my coverage right now is just there's
more M and A activity that really gets the juices
flowing from analyst investors. And it's really good to see
after the Biden administration, because it seemed like the prior
administration really did not have a positive view on bank
m and A and it's been a real one eighty
(38:50):
from from the current administration and that's why you're seeing
more activity today.
Speaker 4 (38:54):
I'm looking at the BKX index. Actually quickly KBW regional
Banks down one point two at the closing bell, Christine, Wow.
Speaker 8 (39:02):
Yeah, Well, I mean a lot to look out for
them when it comes to M and A deals. But
thank you so much once again to Herman Chand, who
is our senior analyst for e US regional Banks from
Bloomberg Intelligence.
Speaker 1 (39:13):
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