00:00:02
Speaker 1: Bloomberg Audio Studios. Podcasts Radio News.
00:00:11
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m.
00:00:28
Speaker 1: Eastern.
00:00:28
Speaker 2: Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App.
00:00:36
Speaker 3: Sarah Hunt of Alpine Saxon Woods writing, all eyes will be on the AI sector and how that progresses as the funding becomes dependent on both equity and credit markets.
00:00:46
Speaker 1: Sarah joins us now for more. Sarah, great to see you. Good morning. Thank you. What do you do with a week like what we just got?
00:00:51
Speaker 4: Well, you know, you had the whole lead up into this where everybody was, including ourselves, were talking about how good earnings had been and how everything was, that was carrying a lot of the, that plus the AI trade was carrying a lot of the sentiment. And now you have sort of cracks in both. And I wouldn't say that the earnings necessarily were bad, but I think that Alphabet presages an issue when your funding for AI is your base business and your base business all of a sudden is being somewhat compromised. I mean, who knows exactly what that level is, but cannibalized by AI, then how do we look at that going forward? And we're already crossing over into 2027 where those cash flows that were funding everything and you still had mild positive cash flows are flipping to negative. And I think that that's one of the reasons you've seen the multiple compression that you have.
00:01:33
Speaker 3: So it sounds like you aren't so quick to just jump in and buy a dip. So we hear two types of thought, right? On one hand, if you actually look at the multiples, they're pretty cheap and the earnings have actually been pretty good. And on the flip side, there's something going on here where they're not answering the question of how they plan to pay this all off and continue to improve profitability.
00:01:53
Speaker 1: At pace the way that they have. What's your take on this?
00:01:56
Speaker 4: Well, I think that a good chunk of that multiple compression is exactly that. It's the uncertainty of I'm spending all this cash. And in prior periods, I could explain to you if I spent a dollar, what I could think I was going to be making on that dollar and how that was going to happen. And right now it's, we're going to spend it. They're going to come and then there will be money. And there's less of an easy path. Now, there are all sorts of discussions about different kinds of compute being used for different kinds of things and how all of this is going to work. But that's a lot of money to spend right now. And people don't quite understand where that return is coming from. You layer that into the fact that inflation is problematic on the oil front, that you've got component shortages. And all of a sudden, people start to get wary and wary about spending that money. And you've got to go to debt and equity markets and raise it.
00:02:37
Speaker 3: So this diversification trade has been sort of what people are turning to increasingly today.
00:02:43
Speaker 1: Do you think that's the way to go?
00:02:45
Speaker 3: Is that the way to hedge is to just look for companies and countries that.
00:02:49
Speaker 1: Are uncorrelated in some capacity? Does that exist?
00:02:52
Speaker 4: Well, I was about to say the correlation is not, I mean, it's hard to say that it's uncorrelated because if you have a problem with the story that's been driving the market, the entire market is going to suffer regardless of the companies. that are knee-deep in it versus not knee-deep in it. I mean, we're balance sheet and cash flow people, so we always have been. So there's a big emphasis.
00:03:09
Speaker 1: On that for us.
00:03:10
Speaker 4: And there are plenty of places, the industrial sector's gotten hit pretty hard. Healthcare's got some, there's a lot of good things that are going on in a lot of these different markets. The rise in interest rates was tough on the industrials, and you've seen some of them that are mostly tied to AI have a little bit more problems. But there's still an enormous amount of build-out. I mean, look at GDP.
00:03:27
Speaker 1: Like, the economy is, is doing well.
00:03:30
Speaker 4: And yes, AI is a big part of that, but there are other parts of the economy that are doing well, that are also doing well. So it's not only that story. The problem is that that is the theme that people have anchored to. And when that theme starts to get a little bit wobbly, you see the market do.
00:03:42
Speaker 5: It as well. You liked energy for a while. Chevron Exxon reported massive results this morning.
00:03:47
Speaker 1: What's your reaction?
00:03:48
Speaker 4: Well, I mean, that's one of those areas where the growth in earnings is baked into just watch the commodity price, right?
00:03:53
Speaker 1: So you can see that.
00:03:54
Speaker 4: But the volatility that the commodity price has had for the year between ceasefires, not ceasefires, and everything else that's gone on made that a harder trade because as soon as oil ran up, it ran right back down again. And people were not comfortable holding those stocks, I think, on a longer term. You have to be a long-term person to look at energy, but you have to think that all of the things that we're doing increases power consumption. Anything that is part of that trade is ultimately going to be in more demand. Now, the question of timing and everything else and the problems that you're seeing because of what's been hit in refining between Russia and Ukraine, all of those things bake more inflation into the cake longer because the product prices are higher. That's much harder to solve than a high oil price. So there's a lot going on under the surface. I still think that energy is not a bad place to be. There's plenty of infrastructure that does well under any circumstances. But even the commodity itself, I think you've got a longer-term call on those assets than people thought you did even five years ago.
00:04:46
Speaker 5: You mentioned the geopolitical risks when it comes to energy. Next week, when it comes to the midterm elections, Lisa, me, and John have asked this question to a lot of our guests. Is it going to be a clearing event, or is it going to be the start of fresh volatility?
00:04:59
Speaker 4: Well, it's interesting because, yes, I've been here for that question, and my original thought was that it's a clearing event. I will say, though, that if it's very extreme and you get a very big blue wave, it may be a kickoff for more volatility because people will start asking what that means for some of these big trades that we're talking about, like the data center trade and everything else. The odds of building all the ones that are on the books right now weren't that high anyway because you didn't have the power. But if you're going to be slowed down from a regulatory standpoint, that's a problem as well.
00:05:25
Speaker 3: Can you give a sense of how you're adjusting portfolios in response to all of this?
00:05:30
Speaker 1: Are you holding more cash?
00:05:32
Speaker 3: Are you going more into bonds with the expectation that maybe there's going to be less of a tailwind to growth?
00:05:38
Speaker 4: So when rates moved up after the Fed hike in September, we expanded our duration a little bit. You saw rates continue to move up, but we're still very short, relatively speaking, on the short end of the curve because that long end has so much volatility here. I think that, I mean, we.
00:05:52
Speaker 1: Were already moving... We were already.
00:05:55
Speaker 4: Because like I said, we're cash flow and sort of dividend and capital return people, we were already looking for places where we didn't see as much vulnerability because you could see those cash flow swings and how that was going to affect multiples of some of the really big guys. So something like a Microsoft that got hit really, really hard earlier in the year on the software issue has come back and is doing a lot better. So we're more comfortable in places like that, where we thought that the reaction was overdone. And I think that that's where you have to look for, because it's not just stocks are down by the stocks. It's look at the individual company and see what's happening in the near term, because that's what's going to drive performance.
00:06:29
Speaker 3: Do you think that maybe it's time to look outside of the U.S.? I was just looking at a George Saravello's piece from Deutsche Bank, where he was talking about how We're now facing the AI dollar and the U.S. market is so upheld by this idea that the AI companies are the promise to growth and profitability going forward. Do you think that that is the correct hedge right now to go outside?
00:06:52
Speaker 4: Well, I think it's a little bit tricky because if you look at Asia, a lot of that trade is also tied to, it's tied to memory, it's tied to chips, it's tied to a lot of those different pieces. Look at Europe. Europe is not in great shape. So yes, you could argue that they are less tied to AI, but they're certainly tied to a sovereign market that's having problems, individual countries that are having problems, and some chaos there that does not look like it's very easy to solve. it's always good to be looking everywhere, but I still think that the U.S. has a lot of promise and a lot of companies that are doing business in other places, and there are pockets of U.S. markets that are not as tied to the AI story.
00:07:25
Speaker 1: Sarah Hunt, wonderful to see you. Have a wonderful weekend. Thank you for being with us. Sarah Hunt of Alpine Saxon Woods. Stay with us.
00:07:32
Speaker 2: More Bloomberg Surveillance coming up after this.
00:07:44
Speaker 3: Neela Richardson of ADP seeing a new dimension in the K-shaped economy, writing, many households are maintaining spending power by working more hours and overtime, not necessarily because jobs are paying substantially more per hour. Neela Richardson joins us now for more.
00:07:59
Speaker 1: Neela, thank you so much for being here.
00:08:01
Speaker 3: We just got Employment Cost Index. It came out pretty much in line. It's been sort of just chugging along. What's your concern when you look at the labor market and you see people describe it as healthy, robust, full?
00:08:14
Speaker 1: Based on what you just talked about?
00:08:15
Speaker 6: You know, the big picture numbers are those things.
00:08:18
Speaker 1: It is robust. It is healthy.
00:08:20
Speaker 6: It is solid. It's only when you look under the hood that you actually see what's really going on and how it amplifies the case shape that we're seeing. So what are we seeing? In terms of base pay, everybody's getting about the same amount of base pay. They're getting about 3% from last year. It's kind of normalized to this really boring number. But earnings and base pay are two totally different things. Earnings is how much overtime, how many hours, what the bonuses are. That's where all the action is. And for the people at the bottom of the quartile in terms of income, they are working a whole lot more than everybody else. And that is because they have to keep up with higher prices. So base pay, about the same, but double digits in terms of earnings for the bottom quarter of this income distribution, all over time, shift work, that kind of thing, driving that increase. In other words, you could see a faster pace of wage growth at the lower end of the K, but it's not because they're getting paid more in their jobs as much as the gig economy supporting their weekly paychecks. That's exactly right. And this is very different than we saw during the great resignation where many economists were really enthused by the fact that there was wage compression from the bottom to the top because the bottom half was seeing such high wage growth. That's not what's happening now. People are just working more to keep pace. and to make their dollar go further.
00:09:50
Speaker 1: So this explains why sentiment's so poor.
00:09:52
Speaker 3: People don't feel good because they're working all the time.
00:09:54
Speaker 1: That's right.
00:09:56
Speaker 3: On the flip side, it does give people spending power and the ability to keep... on going out and maintaining their lifestyle even though maybe they don't feel so good.
00:10:04
Speaker 6: And so that's a good thing, especially in the good sector where overtime is more prevalent. The question is whether it's sustainable. Can you keep doing this? Can you keep working more to outrun an inflation? And then on the flip side, for the top income earners, which are more likely to be invested in the stock market, is that wealth effect, the feeling that I can spend more because I'm making more in the markets, is that sustainable, especially with the action we're seeing today?
00:10:30
Speaker 5: When it comes to a lower cohort, and you're talking about potentially this over time, do you see them picking up also part-time jobs? Is it trying to get multiple jobs at once just to keep up with where prices are? Right.
00:10:42
Speaker 6: So it's overtime. It's more hours. It's another job. It's an active gig economy. And what we don't talk about a lot, it's the non-traditional sector. Where you don't see it in official statistics, but it's mowing the lawn, it's doing babysitting, it's house cleaning that may not show up in our aggregate numbers. All of that is on the table as people try to deal with the affordability pressures that we're seeing.
00:11:07
Speaker 1: Especially this group.
00:11:08
Speaker 5: How are they going to deal with potentially higher interest rates if the Fed continues on a hiking cycle?
00:11:15
Speaker 6: Well, we are not looking at the purchases of our economy right now. If you're looking at the bottom quartile of the income distribution, this is a population that has been blocked out of buying a home or buying a car or investing. We don't have the same housing programs that allowed... people to move to homeownership. And you can see that in the numbers. So it's really, the interest rate is going to be more meaningful for higher income households who actually have the wherewithal to make those big purchases.
00:11:46
Speaker 5: What are you expecting for December based off what we saw from the Fed this week?
00:11:51
Speaker 6: In terms of the action to move or not? Well, I think it's anyone's guess at this point. I'm going to be listening really carefully to the Fed speak that we hear next week. I hope to hear a reaction function in that Fed speak. So maybe not forward guidance, but past guidance. Why we did what we did, why we held the way we did. But the key thing coming from the jobs market is wages are not a source of inflation. And that's the bottom line. You see that in the ECI. You see that in the numbers, whether you're looking at the BLS or ADP numbers. Wages are not the thing.
00:12:30
Speaker 1: That is going to trigger inflation.
00:12:32
Speaker 3: You know, one of the hottest points of debate right now is how much the AI trade is filtering out to strengthen the broader economy. And there have been a lot of different studies showing that there haven't really been job gains, certainly. If anything, there have been job losses in certain places. Anecdotally, not necessarily according to your data. But how do you see the sort of shifting under the hood tied to AI given the fact that you have big tech companies that are cutting thousands of workers and you have other companies saying, well, how do we save money given the fact that we're spending so much on cybersecurity, let alone anything that could improve efficiency?
00:13:05
Speaker 1: Yeah, it's a real.
00:13:06
Speaker 6: Dichotomy, and I think there's going to be a lot of shuffling around right now. We partner with Stanford University on this Canaries dashboard where we're actually tracking the AI impact on employment in real time. We do that every single month. And what we're seeing is not really widespread. It's actually been very modest, but for early career in AI-exposed fields— in white-collar jobs, in IT, yes, we're seeing an impact at about 3% per year. It's meaningful impact.
00:13:35
Speaker 1: But the funny thing, Lisa, is.
00:13:37
Speaker 6: That's not where the job gains are coming. These are small sectors. IT, information sectors, about 2% of the labor market. The gains are coming from healthcare and leisure and hospitality and these in-person services. So It's almost like our labor market is not reflective of the AI investment right now. And so that means that if this is going to take hold, there has to be a huge transformation in the labor market.
00:14:03
Speaker 3: Although some of the areas that are most affected are the highest-paying jobs, so the white-collar jobs that are known to be the ones that make several hundred thousand dollars a year.
00:14:13
Speaker 1: On their average.
00:14:14
Speaker 3: How much does that affect the backdrop?
00:14:16
Speaker 6: Well, it depends on career stage, because what we're seeing in our data is that the later you are in your career, the more you make because of AI and the higher employment grows for those higher level fields. It's really the early career stages that are seeing the most impact. Later in career, more income, more employment. So we're not there yet, at least according to our data.
00:14:38
Speaker 3: Neela Richardson, always great to catch up with you. Thank you so much for being here. Neela Richardson of ADP.
00:14:44
Speaker 1: Stay with us.
00:14:45
Speaker 2: More Bloomberg surveillance coming up after this.
00:14:56
Speaker 3: Melissa Hutchinson of Nomura writing, the next beneficiaries of the AI value creation likely to be non-tech sectors with the data sets AI can optimize.
00:15:07
Speaker 1: That's where we're focused. Melissa joins us now for more. Melissa, great to see you. Great to see you too. So out of this week, fair for you.
00:15:13
Speaker 3: I mean, did you feel like you had to reshape everything or do you feel like your thesis pretty much stays intact?
00:15:18
Speaker 1: Well, what a week it's been.
00:15:20
Speaker 7: It's And it is good it's Friday, as we were talking before. It has been a crazy week. There has been a lot of headlines and a lot of ups and then downs that seem to have followed it. Yesterday, I think, was a perfect example of a microcosm of why a diversified portfolio really starts to matter in this environment. you saw obviously the NASDAQ take some really big hits from the earnings side, but you also saw some other areas really hold up.
00:15:47
Speaker 1: So areas like the equal weight, which.
00:15:49
Speaker 7: You just mentioned, small caps, and obviously bonds rallied too. So you're starting to see that diversification play out. And that's what we've been talking about a lot over the past year is making sure that you still are taking part of the potential upside from AI growth. But how do you think about using your tools around you to also diversify? And a really important tool that we actually think is underutilized right now is income. And you can look at some of the income levels in the market, areas like high-yield corporates that are actually yielding over 8% right now with a duration of just around three and a half years and historically high credit quality. That's a really interesting entry point into the market when you think about getting in at a yield at over 8%, and that income cushion it can give you.
00:16:37
Speaker 3: This is interesting to me, given that some people are saying that because of the big sell-off and specific big tech.
00:16:42
Speaker 1: Names, they're trading at a discount, it's time to get in.
00:16:46
Speaker 3: Other people are saying, you know what, you can probably get a solid 8% investing in the credit side of things without taking that equity-like risk, and they would rather take that.
00:16:55
Speaker 1: Is that where you sit, or do you think that you can do both? I think you could do both.
00:16:59
Speaker 7: So you don't, you can't, just get all out of equity, right? That would not be advised or smart when we are in the midst of a major technological disruption.
00:17:10
Speaker 1: There will be winners.
00:17:11
Speaker 7: So ensuring that you're really looking at that forward-looking opportunity on the equity side is super important.
00:17:17
Speaker 1: So don't forget about that.
00:17:18
Speaker 7: But it is the right time to take a step back and say, how do we think about diversifying the play here? And that is where the credit market can come into play. On the high-yield corporate, as I just mentioned, that does tend to have equity-like returns over the long term. So if you're thinking about, maybe I take a little bit from the equity side, but implement it in high-yield corporates, which have that equity-like return, but with a lower volatility with an entry point right now of that over 8%. That's an area that can be really interesting. Similar on high-yield muni bonds right now, where the taxable equivalent yields are actually over 9%.
00:17:54
Speaker 1: So there are just some areas in.
00:17:56
Speaker 7: The market that might look cheap that give you an opportunity to just add a little bit more comfort into your portfolio.
00:18:02
Speaker 3: How much is that predicated on the idea the Fed isn't going to hike to torpedo any kind of growth?
00:18:07
Speaker 7: So I think the market has already priced in about two hikes from the Fed right now.
00:18:13
Speaker 1: There's also a.
00:18:14
Speaker 7: Ton of dynamics going on with AI. So the Fed, obviously, we saw this week said, you know, let's sort of see what happens over the next couple of weeks and months.
00:18:24
Speaker 1: We obviously have the elections next week, too.
00:18:27
Speaker 7: And I think they're trying to say, how much of this will the market take care of for us versus what do we need to do to kind of help put a little bit of brakes on the market? But it's already priced in for two hikes. And so I think that you're already seeing that reflected in prices.
00:18:44
Speaker 5: I mean, it was interesting when it comes to the Fed chair, how he mentioned how he's watching what's going on in South Korea and the frenzy when it comes to AI.
00:18:53
Speaker 1: And then, and Jonathan and Lisa.
00:18:55
Speaker 5: Talked about this a lot following the meeting, how he almost said the market is doing the work for them. That little wobble and core weave, is that really it?
00:19:04
Speaker 7: Well, I think look at the market today, right? There's just concern about, and maybe it's warranted, maybe not, but there's just concern from investors around the world of everyone's trying to figure out how much longer can the CapEx go on for?
00:19:20
Speaker 1: Is it worth it, etc.
00:19:22
Speaker 7: Obviously, the earnings gave people a bit of concern around some specific names. And so the reaction of the market is what the Fed will watch. And if that does kind of pull back enough to help them get a little bit of comfort.
00:19:35
Speaker 5: Do you think they're almost watching the AI trade more than they are watching the inflation data? Because inflation data was super hot and they decided to stay on hold.
00:19:42
Speaker 7: Well, I think the inflation, I assume they're watching the inflation data. I would assume, given that's a huge part of their mandate. But you have to kind of look at it holistically. And there are obviously parts of the inflation data. that they can't necessarily control. When you think about Iran and oil, which has been really driving some of the inflation concerns, that's not necessarily something.
00:20:07
Speaker 1: The Fed can come in to control.
00:20:10
Speaker 7: So they have to look at the broader market, too, which is why I think AI has been on everyone's mind.
00:20:16
Speaker 3: Next week's election, is that going to be a risk-clearing event or a risk-generating event?
00:20:20
Speaker 7: I think ultimately, we'll see, but probably short-term volatility, probably short-term volatility. But almost all historical data shows that once the uncertainty is removed from the market, that it does provide upside across equities. And so I think that removing that uncertainty is what the market's probably looking for.
00:20:43
Speaker 1: Melissa Hutchinson, thank you so much for being with us.
00:20:45
Speaker 6: Thank you.
00:20:45
Speaker 1: Have a wonderful Halloween.
00:20:46
Speaker 6: You too.
00:20:47
Speaker 1: Melissa Hutchinson of Nomura.com.
00:20:50
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg Terminal and the Bloomberg Business App.
Speaker 1: Bloomberg Audio Studios. Podcasts Radio News.
00:00:11
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Hordern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m.
00:00:28
Speaker 1: Eastern.
00:00:28
Speaker 2: Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App.
00:00:36
Speaker 3: Sarah Hunt of Alpine Saxon Woods writing, all eyes will be on the AI sector and how that progresses as the funding becomes dependent on both equity and credit markets.
00:00:46
Speaker 1: Sarah joins us now for more. Sarah, great to see you. Good morning. Thank you. What do you do with a week like what we just got?
00:00:51
Speaker 4: Well, you know, you had the whole lead up into this where everybody was, including ourselves, were talking about how good earnings had been and how everything was, that was carrying a lot of the, that plus the AI trade was carrying a lot of the sentiment. And now you have sort of cracks in both. And I wouldn't say that the earnings necessarily were bad, but I think that Alphabet presages an issue when your funding for AI is your base business and your base business all of a sudden is being somewhat compromised. I mean, who knows exactly what that level is, but cannibalized by AI, then how do we look at that going forward? And we're already crossing over into 2027 where those cash flows that were funding everything and you still had mild positive cash flows are flipping to negative. And I think that that's one of the reasons you've seen the multiple compression that you have.
00:01:33
Speaker 3: So it sounds like you aren't so quick to just jump in and buy a dip. So we hear two types of thought, right? On one hand, if you actually look at the multiples, they're pretty cheap and the earnings have actually been pretty good. And on the flip side, there's something going on here where they're not answering the question of how they plan to pay this all off and continue to improve profitability.
00:01:53
Speaker 1: At pace the way that they have. What's your take on this?
00:01:56
Speaker 4: Well, I think that a good chunk of that multiple compression is exactly that. It's the uncertainty of I'm spending all this cash. And in prior periods, I could explain to you if I spent a dollar, what I could think I was going to be making on that dollar and how that was going to happen. And right now it's, we're going to spend it. They're going to come and then there will be money. And there's less of an easy path. Now, there are all sorts of discussions about different kinds of compute being used for different kinds of things and how all of this is going to work. But that's a lot of money to spend right now. And people don't quite understand where that return is coming from. You layer that into the fact that inflation is problematic on the oil front, that you've got component shortages. And all of a sudden, people start to get wary and wary about spending that money. And you've got to go to debt and equity markets and raise it.
00:02:37
Speaker 3: So this diversification trade has been sort of what people are turning to increasingly today.
00:02:43
Speaker 1: Do you think that's the way to go?
00:02:45
Speaker 3: Is that the way to hedge is to just look for companies and countries that.
00:02:49
Speaker 1: Are uncorrelated in some capacity? Does that exist?
00:02:52
Speaker 4: Well, I was about to say the correlation is not, I mean, it's hard to say that it's uncorrelated because if you have a problem with the story that's been driving the market, the entire market is going to suffer regardless of the companies. that are knee-deep in it versus not knee-deep in it. I mean, we're balance sheet and cash flow people, so we always have been. So there's a big emphasis.
00:03:09
Speaker 1: On that for us.
00:03:10
Speaker 4: And there are plenty of places, the industrial sector's gotten hit pretty hard. Healthcare's got some, there's a lot of good things that are going on in a lot of these different markets. The rise in interest rates was tough on the industrials, and you've seen some of them that are mostly tied to AI have a little bit more problems. But there's still an enormous amount of build-out. I mean, look at GDP.
00:03:27
Speaker 1: Like, the economy is, is doing well.
00:03:30
Speaker 4: And yes, AI is a big part of that, but there are other parts of the economy that are doing well, that are also doing well. So it's not only that story. The problem is that that is the theme that people have anchored to. And when that theme starts to get a little bit wobbly, you see the market do.
00:03:42
Speaker 5: It as well. You liked energy for a while. Chevron Exxon reported massive results this morning.
00:03:47
Speaker 1: What's your reaction?
00:03:48
Speaker 4: Well, I mean, that's one of those areas where the growth in earnings is baked into just watch the commodity price, right?
00:03:53
Speaker 1: So you can see that.
00:03:54
Speaker 4: But the volatility that the commodity price has had for the year between ceasefires, not ceasefires, and everything else that's gone on made that a harder trade because as soon as oil ran up, it ran right back down again. And people were not comfortable holding those stocks, I think, on a longer term. You have to be a long-term person to look at energy, but you have to think that all of the things that we're doing increases power consumption. Anything that is part of that trade is ultimately going to be in more demand. Now, the question of timing and everything else and the problems that you're seeing because of what's been hit in refining between Russia and Ukraine, all of those things bake more inflation into the cake longer because the product prices are higher. That's much harder to solve than a high oil price. So there's a lot going on under the surface. I still think that energy is not a bad place to be. There's plenty of infrastructure that does well under any circumstances. But even the commodity itself, I think you've got a longer-term call on those assets than people thought you did even five years ago.
00:04:46
Speaker 5: You mentioned the geopolitical risks when it comes to energy. Next week, when it comes to the midterm elections, Lisa, me, and John have asked this question to a lot of our guests. Is it going to be a clearing event, or is it going to be the start of fresh volatility?
00:04:59
Speaker 4: Well, it's interesting because, yes, I've been here for that question, and my original thought was that it's a clearing event. I will say, though, that if it's very extreme and you get a very big blue wave, it may be a kickoff for more volatility because people will start asking what that means for some of these big trades that we're talking about, like the data center trade and everything else. The odds of building all the ones that are on the books right now weren't that high anyway because you didn't have the power. But if you're going to be slowed down from a regulatory standpoint, that's a problem as well.
00:05:25
Speaker 3: Can you give a sense of how you're adjusting portfolios in response to all of this?
00:05:30
Speaker 1: Are you holding more cash?
00:05:32
Speaker 3: Are you going more into bonds with the expectation that maybe there's going to be less of a tailwind to growth?
00:05:38
Speaker 4: So when rates moved up after the Fed hike in September, we expanded our duration a little bit. You saw rates continue to move up, but we're still very short, relatively speaking, on the short end of the curve because that long end has so much volatility here. I think that, I mean, we.
00:05:52
Speaker 1: Were already moving... We were already.
00:05:55
Speaker 4: Because like I said, we're cash flow and sort of dividend and capital return people, we were already looking for places where we didn't see as much vulnerability because you could see those cash flow swings and how that was going to affect multiples of some of the really big guys. So something like a Microsoft that got hit really, really hard earlier in the year on the software issue has come back and is doing a lot better. So we're more comfortable in places like that, where we thought that the reaction was overdone. And I think that that's where you have to look for, because it's not just stocks are down by the stocks. It's look at the individual company and see what's happening in the near term, because that's what's going to drive performance.
00:06:29
Speaker 3: Do you think that maybe it's time to look outside of the U.S.? I was just looking at a George Saravello's piece from Deutsche Bank, where he was talking about how We're now facing the AI dollar and the U.S. market is so upheld by this idea that the AI companies are the promise to growth and profitability going forward. Do you think that that is the correct hedge right now to go outside?
00:06:52
Speaker 4: Well, I think it's a little bit tricky because if you look at Asia, a lot of that trade is also tied to, it's tied to memory, it's tied to chips, it's tied to a lot of those different pieces. Look at Europe. Europe is not in great shape. So yes, you could argue that they are less tied to AI, but they're certainly tied to a sovereign market that's having problems, individual countries that are having problems, and some chaos there that does not look like it's very easy to solve. it's always good to be looking everywhere, but I still think that the U.S. has a lot of promise and a lot of companies that are doing business in other places, and there are pockets of U.S. markets that are not as tied to the AI story.
00:07:25
Speaker 1: Sarah Hunt, wonderful to see you. Have a wonderful weekend. Thank you for being with us. Sarah Hunt of Alpine Saxon Woods. Stay with us.
00:07:32
Speaker 2: More Bloomberg Surveillance coming up after this.
00:07:44
Speaker 3: Neela Richardson of ADP seeing a new dimension in the K-shaped economy, writing, many households are maintaining spending power by working more hours and overtime, not necessarily because jobs are paying substantially more per hour. Neela Richardson joins us now for more.
00:07:59
Speaker 1: Neela, thank you so much for being here.
00:08:01
Speaker 3: We just got Employment Cost Index. It came out pretty much in line. It's been sort of just chugging along. What's your concern when you look at the labor market and you see people describe it as healthy, robust, full?
00:08:14
Speaker 1: Based on what you just talked about?
00:08:15
Speaker 6: You know, the big picture numbers are those things.
00:08:18
Speaker 1: It is robust. It is healthy.
00:08:20
Speaker 6: It is solid. It's only when you look under the hood that you actually see what's really going on and how it amplifies the case shape that we're seeing. So what are we seeing? In terms of base pay, everybody's getting about the same amount of base pay. They're getting about 3% from last year. It's kind of normalized to this really boring number. But earnings and base pay are two totally different things. Earnings is how much overtime, how many hours, what the bonuses are. That's where all the action is. And for the people at the bottom of the quartile in terms of income, they are working a whole lot more than everybody else. And that is because they have to keep up with higher prices. So base pay, about the same, but double digits in terms of earnings for the bottom quarter of this income distribution, all over time, shift work, that kind of thing, driving that increase. In other words, you could see a faster pace of wage growth at the lower end of the K, but it's not because they're getting paid more in their jobs as much as the gig economy supporting their weekly paychecks. That's exactly right. And this is very different than we saw during the great resignation where many economists were really enthused by the fact that there was wage compression from the bottom to the top because the bottom half was seeing such high wage growth. That's not what's happening now. People are just working more to keep pace. and to make their dollar go further.
00:09:50
Speaker 1: So this explains why sentiment's so poor.
00:09:52
Speaker 3: People don't feel good because they're working all the time.
00:09:54
Speaker 1: That's right.
00:09:56
Speaker 3: On the flip side, it does give people spending power and the ability to keep... on going out and maintaining their lifestyle even though maybe they don't feel so good.
00:10:04
Speaker 6: And so that's a good thing, especially in the good sector where overtime is more prevalent. The question is whether it's sustainable. Can you keep doing this? Can you keep working more to outrun an inflation? And then on the flip side, for the top income earners, which are more likely to be invested in the stock market, is that wealth effect, the feeling that I can spend more because I'm making more in the markets, is that sustainable, especially with the action we're seeing today?
00:10:30
Speaker 5: When it comes to a lower cohort, and you're talking about potentially this over time, do you see them picking up also part-time jobs? Is it trying to get multiple jobs at once just to keep up with where prices are? Right.
00:10:42
Speaker 6: So it's overtime. It's more hours. It's another job. It's an active gig economy. And what we don't talk about a lot, it's the non-traditional sector. Where you don't see it in official statistics, but it's mowing the lawn, it's doing babysitting, it's house cleaning that may not show up in our aggregate numbers. All of that is on the table as people try to deal with the affordability pressures that we're seeing.
00:11:07
Speaker 1: Especially this group.
00:11:08
Speaker 5: How are they going to deal with potentially higher interest rates if the Fed continues on a hiking cycle?
00:11:15
Speaker 6: Well, we are not looking at the purchases of our economy right now. If you're looking at the bottom quartile of the income distribution, this is a population that has been blocked out of buying a home or buying a car or investing. We don't have the same housing programs that allowed... people to move to homeownership. And you can see that in the numbers. So it's really, the interest rate is going to be more meaningful for higher income households who actually have the wherewithal to make those big purchases.
00:11:46
Speaker 5: What are you expecting for December based off what we saw from the Fed this week?
00:11:51
Speaker 6: In terms of the action to move or not? Well, I think it's anyone's guess at this point. I'm going to be listening really carefully to the Fed speak that we hear next week. I hope to hear a reaction function in that Fed speak. So maybe not forward guidance, but past guidance. Why we did what we did, why we held the way we did. But the key thing coming from the jobs market is wages are not a source of inflation. And that's the bottom line. You see that in the ECI. You see that in the numbers, whether you're looking at the BLS or ADP numbers. Wages are not the thing.
00:12:30
Speaker 1: That is going to trigger inflation.
00:12:32
Speaker 3: You know, one of the hottest points of debate right now is how much the AI trade is filtering out to strengthen the broader economy. And there have been a lot of different studies showing that there haven't really been job gains, certainly. If anything, there have been job losses in certain places. Anecdotally, not necessarily according to your data. But how do you see the sort of shifting under the hood tied to AI given the fact that you have big tech companies that are cutting thousands of workers and you have other companies saying, well, how do we save money given the fact that we're spending so much on cybersecurity, let alone anything that could improve efficiency?
00:13:05
Speaker 1: Yeah, it's a real.
00:13:06
Speaker 6: Dichotomy, and I think there's going to be a lot of shuffling around right now. We partner with Stanford University on this Canaries dashboard where we're actually tracking the AI impact on employment in real time. We do that every single month. And what we're seeing is not really widespread. It's actually been very modest, but for early career in AI-exposed fields— in white-collar jobs, in IT, yes, we're seeing an impact at about 3% per year. It's meaningful impact.
00:13:35
Speaker 1: But the funny thing, Lisa, is.
00:13:37
Speaker 6: That's not where the job gains are coming. These are small sectors. IT, information sectors, about 2% of the labor market. The gains are coming from healthcare and leisure and hospitality and these in-person services. So It's almost like our labor market is not reflective of the AI investment right now. And so that means that if this is going to take hold, there has to be a huge transformation in the labor market.
00:14:03
Speaker 3: Although some of the areas that are most affected are the highest-paying jobs, so the white-collar jobs that are known to be the ones that make several hundred thousand dollars a year.
00:14:13
Speaker 1: On their average.
00:14:14
Speaker 3: How much does that affect the backdrop?
00:14:16
Speaker 6: Well, it depends on career stage, because what we're seeing in our data is that the later you are in your career, the more you make because of AI and the higher employment grows for those higher level fields. It's really the early career stages that are seeing the most impact. Later in career, more income, more employment. So we're not there yet, at least according to our data.
00:14:38
Speaker 3: Neela Richardson, always great to catch up with you. Thank you so much for being here. Neela Richardson of ADP.
00:14:44
Speaker 1: Stay with us.
00:14:45
Speaker 2: More Bloomberg surveillance coming up after this.
00:14:56
Speaker 3: Melissa Hutchinson of Nomura writing, the next beneficiaries of the AI value creation likely to be non-tech sectors with the data sets AI can optimize.
00:15:07
Speaker 1: That's where we're focused. Melissa joins us now for more. Melissa, great to see you. Great to see you too. So out of this week, fair for you.
00:15:13
Speaker 3: I mean, did you feel like you had to reshape everything or do you feel like your thesis pretty much stays intact?
00:15:18
Speaker 1: Well, what a week it's been.
00:15:20
Speaker 7: It's And it is good it's Friday, as we were talking before. It has been a crazy week. There has been a lot of headlines and a lot of ups and then downs that seem to have followed it. Yesterday, I think, was a perfect example of a microcosm of why a diversified portfolio really starts to matter in this environment. you saw obviously the NASDAQ take some really big hits from the earnings side, but you also saw some other areas really hold up.
00:15:47
Speaker 1: So areas like the equal weight, which.
00:15:49
Speaker 7: You just mentioned, small caps, and obviously bonds rallied too. So you're starting to see that diversification play out. And that's what we've been talking about a lot over the past year is making sure that you still are taking part of the potential upside from AI growth. But how do you think about using your tools around you to also diversify? And a really important tool that we actually think is underutilized right now is income. And you can look at some of the income levels in the market, areas like high-yield corporates that are actually yielding over 8% right now with a duration of just around three and a half years and historically high credit quality. That's a really interesting entry point into the market when you think about getting in at a yield at over 8%, and that income cushion it can give you.
00:16:37
Speaker 3: This is interesting to me, given that some people are saying that because of the big sell-off and specific big tech.
00:16:42
Speaker 1: Names, they're trading at a discount, it's time to get in.
00:16:46
Speaker 3: Other people are saying, you know what, you can probably get a solid 8% investing in the credit side of things without taking that equity-like risk, and they would rather take that.
00:16:55
Speaker 1: Is that where you sit, or do you think that you can do both? I think you could do both.
00:16:59
Speaker 7: So you don't, you can't, just get all out of equity, right? That would not be advised or smart when we are in the midst of a major technological disruption.
00:17:10
Speaker 1: There will be winners.
00:17:11
Speaker 7: So ensuring that you're really looking at that forward-looking opportunity on the equity side is super important.
00:17:17
Speaker 1: So don't forget about that.
00:17:18
Speaker 7: But it is the right time to take a step back and say, how do we think about diversifying the play here? And that is where the credit market can come into play. On the high-yield corporate, as I just mentioned, that does tend to have equity-like returns over the long term. So if you're thinking about, maybe I take a little bit from the equity side, but implement it in high-yield corporates, which have that equity-like return, but with a lower volatility with an entry point right now of that over 8%. That's an area that can be really interesting. Similar on high-yield muni bonds right now, where the taxable equivalent yields are actually over 9%.
00:17:54
Speaker 1: So there are just some areas in.
00:17:56
Speaker 7: The market that might look cheap that give you an opportunity to just add a little bit more comfort into your portfolio.
00:18:02
Speaker 3: How much is that predicated on the idea the Fed isn't going to hike to torpedo any kind of growth?
00:18:07
Speaker 7: So I think the market has already priced in about two hikes from the Fed right now.
00:18:13
Speaker 1: There's also a.
00:18:14
Speaker 7: Ton of dynamics going on with AI. So the Fed, obviously, we saw this week said, you know, let's sort of see what happens over the next couple of weeks and months.
00:18:24
Speaker 1: We obviously have the elections next week, too.
00:18:27
Speaker 7: And I think they're trying to say, how much of this will the market take care of for us versus what do we need to do to kind of help put a little bit of brakes on the market? But it's already priced in for two hikes. And so I think that you're already seeing that reflected in prices.
00:18:44
Speaker 5: I mean, it was interesting when it comes to the Fed chair, how he mentioned how he's watching what's going on in South Korea and the frenzy when it comes to AI.
00:18:53
Speaker 1: And then, and Jonathan and Lisa.
00:18:55
Speaker 5: Talked about this a lot following the meeting, how he almost said the market is doing the work for them. That little wobble and core weave, is that really it?
00:19:04
Speaker 7: Well, I think look at the market today, right? There's just concern about, and maybe it's warranted, maybe not, but there's just concern from investors around the world of everyone's trying to figure out how much longer can the CapEx go on for?
00:19:20
Speaker 1: Is it worth it, etc.
00:19:22
Speaker 7: Obviously, the earnings gave people a bit of concern around some specific names. And so the reaction of the market is what the Fed will watch. And if that does kind of pull back enough to help them get a little bit of comfort.
00:19:35
Speaker 5: Do you think they're almost watching the AI trade more than they are watching the inflation data? Because inflation data was super hot and they decided to stay on hold.
00:19:42
Speaker 7: Well, I think the inflation, I assume they're watching the inflation data. I would assume, given that's a huge part of their mandate. But you have to kind of look at it holistically. And there are obviously parts of the inflation data. that they can't necessarily control. When you think about Iran and oil, which has been really driving some of the inflation concerns, that's not necessarily something.
00:20:07
Speaker 1: The Fed can come in to control.
00:20:10
Speaker 7: So they have to look at the broader market, too, which is why I think AI has been on everyone's mind.
00:20:16
Speaker 3: Next week's election, is that going to be a risk-clearing event or a risk-generating event?
00:20:20
Speaker 7: I think ultimately, we'll see, but probably short-term volatility, probably short-term volatility. But almost all historical data shows that once the uncertainty is removed from the market, that it does provide upside across equities. And so I think that removing that uncertainty is what the market's probably looking for.
00:20:43
Speaker 1: Melissa Hutchinson, thank you so much for being with us.
00:20:45
Speaker 6: Thank you.
00:20:45
Speaker 1: Have a wonderful Halloween.
00:20:46
Speaker 6: You too.
00:20:47
Speaker 1: Melissa Hutchinson of Nomura.com.
00:20:50
Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg Terminal and the Bloomberg Business App.
