บทถอดความฉบับเต็มของ US Inflation Ebbs for First Time in Six Months in Relief for Fed

signs there, and our upcoming guest, perhaps we'll have some things to say about. 00:02:39 Speaker 5: That, bringing him in maybe other thing? Can I do that? 00:02:44 Speaker 2: Joining us now? 00:02:45 Speaker 4: Joining us now is two fall Bloomberg Economics economists with us here in the Bloomberg Interactive Broker Studio ASTU. 00:02:52 Speaker 5: Do you want to talk about housing inflation? 00:02:53 Speaker 6: Sure, so we did see that. 00:02:54 Speaker 7: We did see rent step down a little bit too, that zero point three five percent month on month. Oh, are the owner's equivalent of RIND is still a bit stubborn, staying above zero point four percent on the month, Carol. If we're looking at some of the other items under the hood. I think that it's the lack of change that we actually see on the month that's the most interesting. Excluding autos, core goods prices are still rising. That's pretty atypical. 00:03:16 Speaker 2: Good shop and you feel it, You. 00:03:18 Speaker 7: Definitely feel it. And if you look at autos, you might have been surprised to see auto prices declining on a seasonally adjusted basis one point four percent. That's because of about two thirds of that decline is really the seasonal adjustment factor. It's not what you're seeing when you walk on the lot to buy a car. And then if you're looking at the prices of some discretionary services categories, things like recreational services, prices are still increasing, still increasing too fast. 00:03:40 Speaker 4: For the fed and also the non recreational services. I think the ones that you really can't avoid, like car insurance huge that's still rising at like the fastest annual rates since the seventies. 00:03:50 Speaker 2: That's not just that if you have a teenager in the house that it's expensive. 00:03:53 Speaker 4: It's expensive, right, Yeah, for the rest of us too, So car insurance a big one, medical care big one. I mean, these are things that you just can't avoid. But yeah, the recreation ones for sure, if you want to go out. 00:04:03 Speaker 8: And have some fun. 00:04:04 Speaker 3: The two of you are painting a picture for us that doesn't necessarily go in line with what we're seeing in the equity and the bond market today. And I'm wondering, Stuart, if you absolutely think that at least the equity market is overreacting. 00:04:15 Speaker 7: Perhaps a little bit. Perhaps it's the markets are looking at retail sales number that were pretty dismal. Just across the board, retail sales surprise to the downside, So that would warrant some expectation for perhaps a second FED rate cut this year. There was just one full cut price before this morning. Now we're seeing two full cut priced But yeah, across the board, retail sales are pretty dismal. If we were just to exclude gasoline prices, we would have had a negative headline print headline just held flat on a nominal basis. On a real basis, we're seeing declining retail sales. 00:04:49 Speaker 2: That's a bummer. We've talked about how important consumers are to the economy. 00:04:52 Speaker 7: Correct, Yeah, absolutely, And if we're kicking off Q two data, we are getting our first print, our first hint at what consumers spending is going to be for the second quarter. It's going to be a material slow down in real terms from the two and a half percent annual basis that we've printed in Q one. 00:05:06 Speaker 2: All Right, So got to bring an Ira Jersey because we are now talking about the markets and we want to get to the bond market and the rates curve. Ira Jersey, Chief US Interest Rates Strategies at Bloomberg Intelligence at BI headquarters out there in Princeton, New Jersey. I mean, I'm looking at a ten year at four thirty four, a two year note at four seventy three. I mean, we've seen a dramatic move down here. Ira, walk us through it and what it says to you and the significance of the moves. 00:05:31 Speaker 8: Yeah. 00:05:31 Speaker 9: So I think that the market had to reprice the idea that the Fed might not be cutting as aggressively as they thought earlier in the year, and the market, you know, the bond market tends to overshoot a little bit, right. You get a lot of positions positioning where cleeople are long they get out of those positions, there's not a lot of liquidity. Then people are fearing that you know, hey, maybe the FED might even hike this year, so they wind up maybe even getting. 00:05:53 Speaker 1: A little short. 00:05:53 Speaker 9: So I think we're trying to find an equilibrium here. Four to thirty five was a pretty important technical level. If we close the below that, then that could set us up for a little bit more of a little bit more of a rally here in the long end of the yield curve. But you know, I think probably low four, you know, call it four twenty five to four fifty might ultimately be a range that we stay in until we get more convincing data one way or the other that either the Fed's going to be on hold for the entire year and into twenty twenty five, or maybe they actually factually will cut And if we start to price that higher probability of those more cuts in, then obviously the market will rally a little bit more. 00:06:31 Speaker 3: Well, it's interesting, Eric, because we're seeing quite a reaction, as Carol has talked about, as you've just talked about it, and I'm wondering if this to you says that wait a second, the worst in terms of where we think that rates are going to go is actually behind us this year? Is that what the bond market's telling us. 00:06:47 Speaker 6: Well, I think there's two pieces too. 00:06:48 Speaker 9: I think one is that there were people who are fearful that the data would that the inflation data in particular would come out a little bit hotter than expected, so they came in short and shorts had built over a while, so I think part of this suggests positioning and like I said, a relief rally. And the retail sales numbers, as Stewart and you guys just mentioned, were

not particularly good, although you know, if there's some oddities sometimes and when you have a good print like we had in March April can be a little bit weaker. So if you look at longer term averages that those that haven't changed a whole heck of a lot. But the market, I think was relieved that you didn't have stronger data, and because of that, there were people who are comfortable just getting long at four point four four and a half percent, depending on where in the curve you're talking about, and just holding that and thinking, okay, look, my risk reward seems to be decent. 00:07:36 Speaker 10: Now. 00:07:36 Speaker 9: Being short is hard now, too, right, Because if you're short the market, your carry, so the amount that you have to pay to be short continues to go up a little bit and because of that, it's just hard to stay short. 00:07:49 Speaker 8: For a long period of time. 00:07:50 Speaker 9: So one reason why you know, people just get out of these things is is because tail risks are going away. 00:07:56 Speaker 8: Right. 00:07:57 Speaker 2: Interesting though, if I look at retail sales, I mean, we did see revisions for the prior month, for the month of March. But you do make a good point, Ira, and let me bring in you guys, Molly and Stewart, in terms of we did have a strong month the month before, and so we saw it's a very different story this month. Is there something you know to what IRA's saying that when you have a strong month, you see some weakness the following month. 00:08:20 Speaker 7: There typically is some of a there's a little bit of a gift back. IRA's right there. The thing that I like to think about under the hood, though, especially when we're looking at retail sales, all the figures are nominal. So even in the pockets of strength that we did see in this report, something like clothing, which which spending on clothing rose about one and a half percent, prices were also rising in clothing right about one point two percent on the month. So IRA's right, when you do look at trends, it's not as bad as a single month may make. It seem there's a little bit of give back this month, but under the hood, it's just not a very good report. And when we are kicking off the second quarter, I think it's important to mark the change that the change in momentum, or at least the waning momenta. 00:09:00 Speaker 2: Well, it does feel right it just like you look at the numbers. The contrast Molley is pretty pretty strong. 00:09:05 Speaker 5: Yeah, I mean that point on clothing that just made us a good one. 00:09:08 Speaker 4: Like the whole point of like when we're saying that these sales are nominal versus inflation adjusted, is that you can't tell that a percent increase in a category like apparel is due to higher prices or due to actual more spending activity. 00:09:21 Speaker 5: So that's what makes this difficult to interpret. 00:09:23 Speaker 4: But when there is a period like this where clothing prices did rise in the month, of course makes you think that, like maybe it is more price driven than spending driven. So that's the thing about retail sales that it's difficult to parse through this report and make like strong conclusions about what's actually happening. But we do know that household debt reached a record high in the first quarter of this year. We do know that consumer credit has generally been weakening, that delinquencies are still pretty low but are rising, so maybe says a little bit more discretion among consumers in that sense. 00:09:55 Speaker 3: I was gonna say, Carol, you and I were having a chat a little earlier as we were preparing for the program about CPI versus PCE and the idea that Okay, come on, guys, I thought this cares. 00:10:05 Speaker 5: I thought, I don't care, car. 00:10:07 Speaker 3: No, he cares CPI I thought. I thought PCE was the preferred method of the preferred measure of inflation for the FED. 00:10:14 Speaker 5: It is, but it doesn't come out for another two weeks. 00:10:17 Speaker 6: It doesn't. 00:10:17 Speaker 3: But we put so much stock in this until until that comes. 00:10:20 Speaker 4: Out because it is the single biggest market moving event of the month, and I think that's I mean, that's going to probably remain that way for some time. 00:10:27 Speaker 5: I mean, remember this, before you. 00:10:29 Speaker 4: Know, inflation really got to where it was. In twenty twenty two, the biggest market moving event of the month was the job's report, and that is very much shifted to the CPI. 00:10:38 Speaker 2: Well, it makes me think about IRA. Come on back in here, and we always talk about you about the kind of focal points for the market and certainly for treasury traders and watching what goes on with rates. I mean, you've got what a job's market, a job's report in a couple of weeks or so. I'm thinking about the next FED meeting June twelfth, not so far off, about a month a little bit less than a month away, and I believe we get do we get a CPI print also on that. 00:10:59 Speaker 5: FED days get updated projections. 00:11:01 Speaker 2: And updated So so as you watch the rates curve, is it just pretty quiet until we just kind of trade around those key metrics again? 00:11:10 Speaker 9: Oh no, I think that we'll have more volatility at just about every data print that comes up, particularly the inflation one. So actually for the rates market, Uh, the the payrolls report is still the granddaddy of all economic data where. 00:11:22 Speaker 8: You see rates move. 00:11:23 Speaker 9: Today's move wasn't because of CPI, right, Like it's pretty clear because the miss on CPI was minute, So it was actually something else that moved the market today. But CPI is obviously really important. So will the GDP report in a couple of weeks, and so will you know the revision to that as well? As obviously the April UH, the April income and spending and therefore the inflation report. All of those things are going to matter the

the trends, and if there is a shift in trend, you'll wind up seeing that in things like the personal the personal spending report, because that's a broader report than the retail sales report. Right, and you know Stewart can talk more about this, but but from a long term trend perspective, like the market tends to focus on these very high frequency data, but when you look at the longer term trends and look for turns, you have to take the whole, you know, the entire story, and the build a whole mosaic around all of the incoming information that that's coming in and see if things. 00:12:15 Speaker 8: Are going to shift. 00:12:15 Speaker 9: And the bond market tends to do that exceptionally quickly and a lot of times incorrectly. 00:12:20 Speaker 11: Right. 00:12:20 Speaker 9: It focuses on one thing that ultimately turns out to. 00:12:23 Speaker 8: Be a false indicator. 00:12:24 Speaker 9: And we used to move a lot on ISM reports, and ISM has been wrong basically for the last six months. So the market's now ignoring a lot of the survey data and using the hard data like the retail sales like CPI, like the growth GDP report. Those are the things that the market's focused on now, not ism, not consumer confidence, and none of that stuff. 00:12:44 Speaker 3: Hey start come on in. I would certainly name checked you there, and I want to know what goes into building your mosaic when you're thinking about the data that we're getting in the coming winks. 00:12:53 Speaker 7: So just broadly, if we just look at a broad spot of data and we look at some of the surprises that we've seen, prices have been surprised to the upside, excluding what we saw in headline CPI today again out of the hood, though still a lot of persistent inflation going on. Indicators of growth is a bit more mixed, But generally speaking, it's just too strong of an economic environment to encourage retailers to encourage folks to start cutting prices to get the deflation the disinflation that we would need for the FED to then get to its point that it would be comfortable pivoting with policy rates. And if that's the case, again, one downside surprise in the headline CPI is not going to do it. The headline. So to IRA's point, a lot of these high frequency data will matter for markets, but and it will matter for even getting the timing of the first FED rate cut, right. Is it possible that we get something in July. Maybe, But in terms of determining the economic landscape and the trajectory over the next year, it's not going to matter much of its July or September, or even if they just get one off in December, which I think, frankly is an increasingly likely case. 00:14:00 Speaker 2: Real quickly. Ira twenty second. So in terms of a ten year I mean, do we will take five percent off the table at this point or five and a quarter? I mean, it's just amazing the swings that we've seen this year. 00:14:11 Speaker 9: Yeah, I think that we've seen the cycle high in terms of the ten year yield. That doesn't mean we can't go back to four seventy four seventy five if we, you know, do price out like like Stuart just said, another cut this year or maybe another cut next year, but the market's still going to think they're going to cut at some point. 00:14:26 Speaker 8: So therefore, you know, rates don't have to go out much higher. 00:14:29 Speaker 2: Not not if just when we're still data dependent. Molly really quick all day, all. 00:14:34 Speaker 5: Day, and I just want to say one thing. 00:14:36 Speaker 4: I just wanted to point out downside surprise on the headline CPI. Everything else came in as expected, so so IRA's point of this being a relief rally, the things were just in line and not worse. 00:14:47 Speaker 2: Molly Smith, Stuart, Paul, Ira, Jersey. That's our Bloomberg team, the amazing trifectop. 00:14:54 Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five BM Eastern. Listen on Apple car Play and and Broud Auto with a Bloomberg Business app, or watch us live on YouTube. 00:15:08 Speaker 2: Jack Morgan out the list of alt investments to keep an eye on the firm, high highlighting private equity, private credit, real estate, infrastructure, also secondaries. Sounds like certainly a lot of the topics that we talked about at Milk and that's for sure. 00:15:22 Speaker 6: Yeah. 00:15:22 Speaker 3: Well, our next guest is the head of Alt Investment over at Mercer Alternatives. Joining us is Raylan Lambert, Global Alternatives Leader at Mercer Alternatives. It's the all investment arm of the consulting firm Mercer. It's got one hundred and sixty billion dollars in assets under management overall and twenty five billion dollars when it comes to the alternatives space. She joins us from Rancho Cordova, California. Realan good to have you on the program this afternoon. So I'm curious about what you're seeing in terms of demand right now, because, as Carol mentioned, I mean last week at Milk and pretty much all about alternatives and AI. I guess we could throw in there at this. 00:15:58 Speaker 2: Point out of private credit. 00:15:59 Speaker 3: But what are you seeing in terms of demand right now and in terms of what what investors want to see as an overall portion of their portfolio dedicated to alternatives. 00:16:08 Speaker 10: Well, sure, thank you. You know, given that we have the tools in our toolkit to help clients implement their total portfolios. As you indicated, alternatives is certainly a growing component of that. When you think about where portfolios are today versus the sixty forty allocation just a few years ago. The reality is, I think investors are realizing if you're not investing in private markets, you are missing a huge component of the investable universe. And so you mentioned private credit that has continued to be a high growth area for US, particularly amongst our European investors and others that are looking for you know, current

income and yield Infrastructure group and long standing investors in infrastructure, and so certainly as the energy transition continues, energy security, those themes certainly carry through. And of course private equity is certainly a hallmark of what clients seek our help from both an advice and implementation standpoint, and so that is an area that we continue to focus and certainly happy to touch on. 00:17:18 Speaker 8: AI. 00:17:19 Speaker 2: Yeah, well, and I do want to touch on it, But first I want to ask you Raylan, private equity different from private credit, different from real estate, different from infrastructure, right, So I do. I'm curious. You know, we're the fundamentals and the environment's best idea, if you will, in the alt space, alt investing space. 00:17:37 Speaker 10: Well, we really, I mean, one of the things we really try to do is connect the dots for investors. Rather than digging deep into say a specific strategy, we look at thematically. What is the possibility of inflation going to have on portfolios? Clients want to know how should they position that relative to concerns around geopolitics, aguilation, and certainly market volatility. Interestingly enough, you know the concern there's been some concern from some investors about private equity and a higher inflation environment. We've recently put out you know, we every year we try to prognosticate if we can, on what's going to be happening. And one of the things we found with respect to inflation and private equity is, in fact, there's not really a correlation between a high inflationary environment and the returns that investors can attain in private markets. 00:18:30 Speaker 2: In fact, if you look in the. 00:18:31 Speaker 10: Early two thousands, interest rates were pretty at pair parody with where they are today, and that happened to be quite a strong returning environment. 00:18:41 Speaker 2: And so it's really you. 00:18:43 Speaker 10: Know, approaching those themes and how they might impact allocation. 00:18:47 Speaker 2: Well maybe not rate you know, or interest rates in terms of private equity. I think one of the big discussions we certainly have had here at Bloomberg is just, you know, private equity investors who've invested in these PE funds are looking for exits, right to get some of their returns back. And it's not been a great market, as I don't need to tell you IPO M and A. Yes, we've seen some big deals, but it's been way down, certainly from the five trillion we saw a few years ago, kind of the peak of M and A. So it's like, you know, what's going on in terms of the exit space, what are you seeing on that front? And then private equity kind of compete competing to put that money to work, and I do think about how that drives up valuation. So what kind of insight can you give us on those fronts? 00:19:30 Speaker 10: Yeah, sure, you know, you hit the nail on the head. I mean, certainly, distributions are lower, and you mentioned, yeah, twenty twenty three was a very low activity in terms of M and A. But you you know, one of the things that's great about this ASSI class is it's very innovative, and so we're seeing a lot of deal flow in other areas, right, We're seeing it in terms of secondaries, a lot of GP led deals. You know, they're looking to hold on to those crown jewel ass sets continue to add value, so those opportunities offer exit. There's also opportunities to enter into sort of a mid life, so some opportunity to provide some liquidity by way of having new investors add value. So even though distributions are down, we are seeing interesting ways for liquidity to occur. That also includes certainly the whole growth of liquidity solutions for both LPs and GPS, whether that's an outright sale or some sort of lending facility to facilitate liquidity. 00:20:36 Speaker 3: Hey, Rylan, I'm curious about the fee structure when it comes to alternatives in a portfolio over at Mercer. How does the feed structure compare to equities and fixed income when it comes to a person's portfolio. 00:20:49 Speaker 10: Yeah, I mean generally these are you know, long term hold investments, right, and so it takes a lot to source those deals, to add the value and ultimately to exit them. 00:21:00 Speaker 2: But we have seen over the years. 00:21:03 Speaker 10: Fees have been coming down, and certainly when you've got the scale that somebody like Mercer does, there's a lot of opportunity as we have partners around the world, the GPS that we invest with on behalf of our clients to find ways to you know, bring those fees down but in a way that continues the alignment between GPS and LPs. So I'd say that fees have come down quite measurably, at least from the two and twenty back in the nineties that was but you know, certainly higher than the more traditional, more liquid asset class. 00:21:38 Speaker 3: What would they be like, I don't know, twice as high as you'd find in the equities portfolio or three times as high. You just give us some numbers here. 00:21:48 Speaker 8: I you know, it. 00:21:49 Speaker 10: Really depends on the portfolio and the assets, and I'd say I'd probably want to punt that one to one of our CIOs. This is probably more well positioned to do the comparison. But we look at it from total portfolio context, and oftentimes that the investor is interested in ultimately the net return that they're generating, you know, the absolute fee becomes less of a primary concern. 00:22:13 Speaker 2: I do want to dig a little bit deeper too into real estate. What specifically are you guys looking at? Obviously interest rate sensitivity there, there's also lots of questions still about the office space. I was looking at some numbers in terms of rates and logistics and kind of industrial routs. They are down on the year, So I'm curious where you are finding opportunities and the kind of returns you can't anticipate on that front, maybe this year or looking out over the next couple of

years. 00:22:41 Speaker 10: Sure well. Actually, amongst our North American client base, real estate was a very strong area of investment, and given where we've seen sort of the markets headed. We think that a lot of sort of the price you know, the price discovery has kind of happened, that there's probably a trial now that pricing has kind of reached equilibrium, and a lot of investors that might have been turning more towards the opportunistic credit, certainly around the pandemic post pandemic or excuse me, opportunistic real estate are looking more now, maybe at good values in core and core plus real estate and certainly commercial real estate. It's a part of our portfolio, but not a very large part by any means. And so there's other areas. When you look at the growth of digitization, When you look at the amount of streaming that you and I and many around the globe are doing, you're seeing other kinds of assets. Data centers, you're seeing even film studios. You're seeing other kinds of real estate opportunities that present themselves and are certainly prevalent in our portfolios. 00:23:48 Speaker 3: Okay, really, and speaking of digitization, we promised we'd talk about AI. It was a huge theme for Carol last week out at the Milk and Institute of Global conference. What are the opportunities when it comes to AI in your world? Is it data centers? Is it energy? Is it utilities? 00:24:02 Speaker 8: What are they? 00:24:05 Speaker 2: It's all of that and more. 00:24:08 Speaker 10: You know, when you think about you've mentioned the distributions are coming down. If you were to sell an asset today at the same value, but a year later, you're already going to get three hundred basis points less in terms of your overall investment rate of return. 00:24:23 Speaker 2: What does that mean? 00:24:24 Speaker 10: That means a laser focus on ebada, That means pricing power on the top line. But AI what we're seeing is, in fact, we've reached out to the managers in our portfolio and said, how are you expressing AI and what you do on a day to day basis? Over ninety percent ninety percent said that they are either currently have integrated AI into their sourcing, research and portfolio implementation activities or are have, you know, discrete plans. 00:24:53 Speaker 2: To do so. 00:24:54 Speaker 10: So I think when the equation really shifts to an ebada, how are you going to create greaterfficiencies? How are you going to look at cost rationalization? That plays a huge part across all industries. But we're also seeing managers think about new product development or even augmenting capabilities or product lines that good companies already have. So I'd say it's quite pervasive across sectors, across different kinds of investments, and it's certainly an exciting time. 00:25:26 Speaker 2: All right, Gon to leave it there, Hey listen, Rayland, so nice to get some time with you. Really appreciate it. Raeland Lambert, he's global alternatives leader at Mercer Alternatives, joining us on this Wednesday. 00:25:37 Speaker 1: You're listening to the Bloomberg Business Week Podcast. Listen live each weekday starting at two pm Eastern ont 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 Play. Bloomberg eleven thirty AI has. 00:25:56 Speaker 2: Once again ignited a technology ramp up and capex spend across every industry, fueling a major investment play. As we were reminded once again by longtime market watcher and equity ble Edyard Denny, appearing this morning on Bloomberg Surveillance. 00:26:10 Speaker 1: Everything's technology. So my pet theory here is that when you look at the stock market, you have to think of every stock as a technology company. They're either making it or using it. If they're not using it, they're going to lose it, all right. 00:26:21 Speaker 2: That was Edyard Denny earlier. Basically, everybody's a technology company. You're either using it or you're making it for others to use, all right. The great AI utilization and investment race it is on. And yet Silicon Valley, the heart of innovation and the startup community, is searching for its piece of the action. And that's what the remarks of this week's new issue of Bloomberg Business Week is all about. Written by Bloomberg's Bradstone and Rachel Metz. 00:26:43 Speaker 3: That new issue out tomorrow. It's already online at Bloomberg dot com slash of BusinessWeek. It's great to be talking once again with the editor of Bloomberg BusinessWeek, Bradstone. He's author two of many books, including two on Amazon, the latest being Amazon Unbound Jeff Bezos in the Invention of a Global Empire. Brad usually on the West Coast, out in California, Ucky for us though here in our New York headquarters. So Brad, a busy week on the AI front. We got to catch up with you at the Bloomberg Tech Conference on Thursday, and a question that I asked you there was you know, you've been studying technology for years, you've been participant in it for years as an observer, as a writer, as a journalist, And I wondered about corollaries between what we see with AI versus what we saw with the nineties, with the rise of the Internet, what we saw at the two thousands and social media, and how this time is different, and you kind of dive into that a little bit when it comes to the remark section. 00:27:29 Speaker 6: Thanks Tim. 00:27:29 Speaker 12: I mean that juxtaposition is almost what led me to this essay because I felt like with the Internet and the nineties, sure we didn't know, you know, if it would if the line would be linear or not, but you could predict with a fair amount of certainty that this thing was going to be impactful. 00:27:47 Speaker 6: Same with social networking. 00:27:48 Speaker 12: We didn't know how long it would take, but that most of the people in the world would be networked together in some way. I feel like the

questions in AI are much more fundamental. I think that, you know, we're a community in tech and Silicon Valley that likes to have answers, and don't I think that, you know, I wanted to acknowledge a certain amount of what I'm calling AI ambiguity exists, for example, the extraordinary increase in the capabilities of services like chat GBT, which have been exponentially getting better. 00:28:20 Speaker 6: Will that continue or will it flatline? 00:28:22 Speaker 12: Open AI give a demonstration of a new multimodal chap bot earlier this week, and people thought it was a marginal improvement. I think the consensus was less than impressed. Google at Google Io announced a number of new things, the biggest one being a redesign of the search page to feature more AI content. 00:28:40 Speaker 6: So will it keep getting better? 00:28:42 Speaker 12: Will the big tech companies completely dominate and own the AI opportunity? 00:28:46 Speaker 6: Or is their room for startups? 00:28:49 Speaker 12: So many questions, not a lot of answers. That's why I called it the Age of AI ambiguity. 00:28:54 Speaker 2: Well, and meantime, I feel like every conversation we have on the in the investment space BRAAD is all about, Okay, this is how you make money in AI. Having said that, I do wonder is it ultimately going to be the big players Because the cost of either data centers or the computations like getting these things, it's expensive. So I do wonder ultimately is it going to be led by the deep pockets of a Microsoft or an alphabet and others. 00:29:18 Speaker 12: Yeah, that's a great another great uncertainty. At the tech conference that you mentioned, the co founder and CEO of Anthropic, Dario Amode said it could cost one hundred billion dollars to train like a future model. I mean, look, it's going to require ever more amounts of computing power and resources to train these models and get them to be exponentially better. 00:29:43 Speaker 6: So who can afford that? 00:29:44 Speaker 12: At the same time, Mark Zuckerberg and Meta spent one hundred million dollars training Lama three, acquiring the processors from Nvidia, very specialized and hard to get processors, and then they have open sourced it. 00:29:57 Speaker 6: So is it They're. 00:29:58 Speaker 12: Harder and harder to do and the economics are being eradicated, and so what does you know? Profit making for the fundational models look like it's another of these great ambiguities. 00:30:09 Speaker 3: In the piece, you and Rachel talk about a small company that's called at Moo and the ideas they are able to forecast weather using data better than traditional forecasting. Can you take us through sort of the story here as to why it's sort of exemplary of the challenges that startups face competing not just against the big folks, but against the proxies of the big folks. 00:30:29 Speaker 12: I mean, it's interesting because weather forecasting, after like calculating ballistic missile trajectories, was

the first application of the EMIAC supercomputer. Wow, and so weather forecasting has always been the province of powerful computers. The promise of at MO, this you know, two dozen persons startup in San Francisco, is to apply AI so systems that not only can crunch the numbers taken the censored data, but learn from their mistakes. You know, just look at all the mentions of these complex mathematical atmospheric equations. And what was interesting is as I was talking to this company and I was getting sort of interested in what they're doing, Google published a paper in an academic journal announcing its own weather model. 00:31:15 Speaker 6: And so it's a. 00:31:16 Speaker 12: Perfect encapsulation, ya right, Like, well does this impact this company at all? I mean, they put on a brave face and say it's a paper, it's not a product. In Nvidia is also talked about weather technology. Nobody other than at MO is selling it. They've got some good customers, like the US Air Force, but we don't know. And so I guess the case for startups in their backers, is it's like classic Silicon Valley if you specialize in it, if it's what you do, if you are emphasizing reliability, particularly when it's mission critical to the US Air Force or the government of the Philippines or whoever else. There are other customers, are you know, can you get that level of service from a Google or an Nvidia. 00:32:00 Speaker 6: They've got other fish to fry. But this is what ATMO does. 00:32:03 Speaker 12: So that's the argument that startups are making where there might be a lane here, even though the resources, the demands for talent and PhDs do seem to favor the big tech companies. 00:32:13 Speaker 2: All right, so what does the venture capital world say? You guys had been oed Coslow also at the Bloomberg Tech Summit. But I'm just curious, So what are they saying, because I feel like we've talked to you know, seed investors, some venture capitalists and they're like, AI the opportunities. But I'm just curious what they are seeing. Are there deals to fund or are they seeing a. 00:32:28 Speaker 6: Slow I mean, they're making an extraordinary bet. 00:32:30 Speaker 12: So we quote the New Stanford AI Index, venture capitalists funded eighteen hundred and twelve new AI companies last year a forty percent increase from twenty twenty two. And so they're placing the bet. You know, like all a venture capital, they're trying a lot of things, not all will work. 00:32:48 Speaker 6: I talk in the story. 00:32:50 Speaker 2: Great HR too, that's I guess showing some of the I guess investments that have been made or the foundation. 00:32:55 Speaker 12: Yeah, these are the models, and this actually shows how the largest models are then of the big tech companies. But you know, I've got this parable in the story of dimes and steamrollers, which is, you know, you can go pick up dimes in front of a slow moving steamroller. 00:33:10 Speaker 6: That's the tech platform. 00:33:12 Speaker

12: It might be dangerous, but if you're nimble and if you know when to get out of the way, you know it might it might end up working out. And I think that's the strategy here that you know, these companies, these the big tech platforms, are going to try a lot of things, but their attentionions a little diffuse, and there's still a lot of opportunity for companies that are nimble and that's specialized. 00:33:33 Speaker 3: Hey, Brad, thirty seconds give us a big takeaway that you left Thursday with. I mean, you put on this incredible text on it out in San Francisco, some huge guests out there. What's what's something that you learned and took away from the way that AI is sort of going to impact us moving forward. 00:33:48 Speaker 12: I mean, I think the first thing my first takeaway is that San Francisco. 00:33:52 Speaker 6: Is back baby. 00:33:53 Speaker 11: Yeah. 00:33:54 Speaker 6: It felt like that. 00:33:55 Speaker 12: Yeah, just the community and the speakers and the energy in the room from the beginning when Amoday siblings came and talked about anthropic Adam Newman, if we work to the end, Devin Spiegel of Snap and you know, sometimes these conferences can feel a little bit like air coming from the balloon, and it just felt, you. 00:34:14 Speaker 6: Know, a lot of energy all day. 00:34:16 Speaker 12: I think, you know, part of what inspired me to write the story is if I'm talking, if we're thinking, if we're talking about AI takeaways that there's still some questions and answers, you know, and that's why we called it the Age of AI Ambiguity. 00:34:29 Speaker 2: We are early on Broadstone. Thank you so much. 00:34:31 Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from two to five pm Eastern Listen on Apple car Play and then brought Auto with a Bloomberg business app or wants us live on YouTube. 00:34:47 Speaker 3: Hey, here's something that may surprise you. It certainly surprised me when I read the most recent story by our next guest. The US never really quit force labor. So yes, we have the thirteenth Amendment in the Constitution. It was ratified back in eighteen sixty five in the aftermath for the Civil War. It prohibited slavery and involuntary servitude. But Carol, there's a caveat in there quote accept as a punishment for a crime. And that's where a recent big take brings us the notion that corporate America never really stopped relying on forced labor, specifically forced labor done by inmates, who, it turns out, do billions of dollars of work for companies and governments each year. Josh Iidelson is Bloomberg News labor reporter. He joins us from our San Francisco bureau. Josh's story is going to be featured in the forthcoming issue of BusinessWeek magazine. You can read it now on the Bloomberg terminal and at Bloomberg dot com. Slash a BusinessWeek Josh. Before we get to the lawsuit that's sort of at the center of your story here, just give us an overview for people like myself who weren't actually familiar with the idea that in many states there are prisoners who do work for companies that many Americans use each and every day. What are some of those companies and who are these prisoners. 00:35:57 Speaker 8: That's right. 00:35:58 Speaker 13: Inmates do every thing from producing Russell Stover chocolates to upholstering high school auditorium furniture, to data entry to making swimming trunks. Prisoners are working in fast food restaurants, in manufacturing, fighting fires, digging mass graves during the COVID pandemic, and as you said, this is billions of dollars a year of work for governments and companies. Some do work producing goods that are sold elsewhere, some are working in the workplaces of private companies, and some are doing work for the prison system that is incarcerating them. 00:36:45 Speaker 3: So talk a little bit about the compensation here, because the companies are paying for this work in many cases, but the folks who are actually doing the work aren't necessarily the ones who are receiving the compensation. 00:37:00 Speaker 8: That's right. 00:37:00 Speaker 13: Even when a company, a private company, provides a wage for the work of someone who's incarcerated, the state can take a substantial cut of that, and in Alabama, as we report, two fifths goes to the apartment, the Department of Corrections, ostensibly to defray the costs of that person's incarceration. That's on top of other fees that are deducted. And so in Alabama you have a number of inmates bringing a lawsuit saying in some cases that their work either is unpaid or makes them only a few dollars an hour. 00:37:40 Speaker 6: There are so. 00:37:40 Speaker 2: Many aspects of this story to get into. About the injustices, to say the least one of the big ones though, and it's kind of in the sub headline if you will, have the story about many being kept in prison because the business is just too good. Get into that, and how all of this has ultimately led to a lawsuit. 00:38:05 Speaker 13: So this human trafficking and racketeering lawsuit alleges that the Alabama state officials, including the governor and the attorney general and the head of Corrections, have conspired to keep black people incarcerated as cheap labor, and that companies have colluded to profit off of that cheap labor of inmates. The defendants in the lawsuit have mostly motioned to have it dismissed. They have made various legal arguments and in some cases suggested that the inmates are treated well or that people who are incarcerated deserve to be made to do this work. 00:38:46 Speaker 2: What are some of the stories that you found out about in reporting out this story of some of the inmates and what they had to deal with or what their stories were. 00:38:56 Speaker 13: One plaintiff in the lawsuit, Lakira Walker, that she was sick in bed with the flu, and rather than being concerned about her health, a supervisor in the prison told her to get up

and make us our forty percent, referencing the state's cut from her labor working in a thirty some degree assembly line situation handling frozen food, turning her fingers deep red. Another plaintiff, Arthur Potomy, says that when he told a fast food franchise co owner that he was no longer going to do free work as a second job for the same family for their catering business, he was fired from the franchise and as a result, received a disciplinary infraction that was held against him at a parole hearing. 00:39:49 Speaker 2: One thing I was one, oh sorry forgive me no please go. 00:39:53 Speaker 13: Another plaintiff, Alomurio English, says that he had to clean filthy shower with human bodily fluids and was not usually provided gloves, and when he raised the need for safety equipment, was told he needed to learn to be submissive or they would make him be submissive. 00:40:18 Speaker 2: You guys, are you know? You note in your story? And I want to kind of tie two things together. Earlier this year, as you report out, Josh and Associated Press investigation found prison labor in the supply chains of dozens of prominent companies, including Cargill, Coca Cola, Kroger, Target, and Walmart. These are obviously very known, well known companies, certainly to the Bloomberg audience. So I'm curious about one. Obviously the companies know or do they know about the use of prison labor. And then I want to ask you about the federal Prison Industries program the US governments. I mean, what do they know about what's going on with these workers that are in prisons and working for companies and about the conditions that are alleged. 00:41:02 Speaker 13: Many companies did not provide comment for this story, but several companies have said that they are working to address any instances of forced labor in their supply chains. In some cases, companies say that it's their suppliers who are the issue and not them the name brand themselves. The federal Prison Industry's program has a brochure we note in the story where they advertise prison labor as an alternative to what they call unstable labor and say you still get the made in the USA marketing advantage from getting your dorm furniture or swim trunks or data entry from this prison labor. We also note in the story that there have been allegations of safety issues. There an Inspector General report that was critical of how that agency handled safety, though the Inspector General later said that by the time the report came out, things were operating safety safely with limited exceptions. 00:42:12 Speaker 3: Hey, Josh, there's a racial element here that's really important in your story when it comes to the granting of parole and how folks who are incarcerated can get out and to what extent they do get out. Talk to us about what you found in your reporting here. 00:42:26 Speaker 13: So the lawsuit uses public records to conclude that there is a two to one disparity, with white people being twice as likely when considered to receive parole as black people in prison. They argue, there are a series of decisions that the governor made that both made overall parole rates plummet in the Alabama system and also created room for a significant racial disparity to emerge, and that is part of the grounds on which the Plane TIFFs are seeking an injunction to reverse changes to the parole system. 00:43:06 Speaker 2: Well, and just got about thirty seconds here to wrap up, Josh, I mean, I don't know what is next or what are you watching in terms of what happens to this story, these inmates and these legal actions. 00:43:19 Speaker 13: We'll be watching what happens with this case. It is in a fairly conservative federal appeals court. We have now a much more further right US Supreme Court than we used to in this country. So there are some challenges ahead for this lawsuit, but we'll be watching what happens with it in our case that experts say makes a compelling case. And more broadly, there are efforts, for example, on the ballot to end the exception allowing forced labor or slavery in prisons in several state constitutions, and those will continue to shape conversation. More broadly, well. 00:43:58 Speaker 2: It's an incredible story reality, to be quite honest, and so we highly recommend folks check it. 00:44:04 Speaker 8: Check it out. 00:44:05 Speaker 2: It's going to be the new issue of Bloomberg Business Week. It's online and of course already on the Bloomberg Josh Idols and labor reporter at Bloomberg News, joining us from our San Francisco bureau. Josh, thank you, m broommak. 00:44:18 Speaker 8: A journal. 00:44:19 Speaker 2: How about you let me drive? 00:44:21 Speaker 4: No no, no no please, jug honey please, how do the riding gravels? 00:44:26 Speaker 1: Let's mate, I want to try it. 00:44:30 Speaker 3: It's a good question time. 00:44:35 Speaker 1: This is the Drive to the Clothes dot com Think well by young it Don on Bloomberg Radio. 00:44:41 Speaker 2: All right, everybody just got about eighteen minutes left in today's trading session. Of course, Charlie breaking down the trade here, fifty three oh four on the S and P five hundred. So you've got stocks at all time highs. You've seen bond yields back off a bit after an inflation slow down we got earlier this morning. Also some weaker retail sales numbers, reinforcing those bets that fed. Maybe we'll cut interest rates this early September. So let's get to it because our next guest says valuations for several asset classes now look more appealing and that economic conditions are also turning more favorable. So we want to dig a little bit into that as well. 00:45:14 Speaker 6: Back with us. 00:45:15 Speaker 3: As Luca Pelini, chief market strategist at pick Day Asset Management, here in our Bloomberg Interactive Broker's studio, I think it's been a couple of years. 00:45:22 Speaker 8: Since a couple of Yes, it's great to be here. 00:45:23 Speaker 3: It's good to see you. 00:45:24 Speaker

2: Welcome back London home base. 00:45:26 Speaker 6: Right, yeah, so all all is well? 00:45:30 Speaker 11: Yeah, all is good, All is good. Somebody is coming, not yet, but. 00:45:34 Speaker 6: There, we're getting there. 00:45:35 Speaker 3: Hey, I wanted to talk a little bit about what asset classes you find more appealing, because, as Carol set up for us, we're at an S and P five hundred and NaSTA composit right now that are at records. So if you're sitting there with a pile of cash ready to deploy it, things are looking a little rich. 00:45:51 Speaker 11: Well, you know, I think what is interesting in the accounting situation is that a lot of valuation indicators that we do tend to be pretty much in line with story coll average or trend. There are some outliers, maybe US equities, maybe Japanese bonds, but overall most US a classic trade more or less where they should be. So I think the value is difficult to see great value, and if you see value, probably is a value trap. Think about Chinese equities. We see value now, for example in bonds because you. 00:46:19 Speaker 8: Have a peak in US growth. 00:46:22 Speaker 11: Inflation Yeah, sticky, but probably trending down. The FED is cutting rights, so we see value bones. And if you look at equities, to be honest, the value is more in Europe and Japan. 00:46:32 Speaker 8: You know sk coal markets. 00:46:34 Speaker 11: You see some improvement in the economy as well, especially in Europe, and these are markets that I'll perform in the US, believe it or not this year. So I think we should probably give some credit to Europe in the short term. In the long term, the US is see the. 00:46:46 Speaker 8: Place to be. 00:46:47 Speaker 2: Look, guys, I think so many people are talking about Japan right finally you know a change in certainly their outlook. If you certainly for market potential, how do you play it? Do you buy a basket? What do you do in terms of the equity exposure, specifically for Japan. 00:47:01 Speaker 8: Well, let me say that. 00:47:02 Speaker 11: First all, we also expect the end to recover. So if you are let's say a foreign investors, you probably get the bus also from the currency side. Otherwise, look, we tend to focus more on the domestic domestic companies in Japan. Japan is really a stock pickers market. It's not you cannot just buy yeah, but we focus more on domestic secrets because we think that the end we get stronger. I think the demand, domestic demand will improve. So we really believe that Japan has stand the corner. And I think when you look evaluations then we look rich, but rich compared to the past ten years when Japan was not in the same position as it is now. 00:47:41 Speaker 6: He said. 00:47:41 Speaker 3: In the long term, the US is still the place to be. 00:47:44 Speaker 8: I think so. 00:47:45 Speaker 11: I think so for a very simple reason. If you look at the main trend that we are going to see over the next few the next few years, the artificial

intelligence is one, but this is the US where US is leading. You have companies that are generating a huge amount of profit. Profit margins are very solid. The risk for the US I think it's going to be moved from the dollar. I have to say, and if you look over the medium term though, we think the value I said is in Europe and Japan. 00:48:11 Speaker 8: There will be some catch up to do. 00:48:13 Speaker 11: But in the long term it's difficult to be very ebolished in Europe, but it's very limped the growth, no political leadership is very difficult. So the US in a way is the safest place to be. 00:48:23 Speaker 14: So wait, so you're not exposure to Europe or you want to in the short term, yes, because I think look, if you look at the past six months or the next six months, you have probably a rape card they CIB. 00:48:33 Speaker 11: That counts before the fair correct, good evaluation. There is good momentum in Europe. Impression is fully more than in the US, and there is also momentum. 00:48:39 Speaker 3: So I see well to Carol's point, how do you know if you you know in terms of your thesis, when to move out of Europe and Japan into the US. If Europe and Japan are the place to be in the short term, but the long term the US is. 00:48:55 Speaker 11: I think if you start to see the US or sort of the globally call me to week significantly, I think you have to play safe and go back to the into the US. At that point you probably can even consider China because Chines is a completely different business side. 00:49:11 Speaker 2: I want to consider China and. 00:49:13 Speaker 11: Not now, not now, But if I expect, if we expect the global economy to go into a recession or into a long phase of tagnician, you probably want to look at Martiveware. The cycle is different Chinese and a completely different cycle. Inflation is negative. 00:49:27 Speaker 2: Well, it's a cycle that's often ruled by the Chinese government in terms of what they do in terms of policy, So like how comfortable do you feel about that? 00:49:34 Speaker 11: Or this will be only a tactical call. We don't think that China in the medium to long term offer the same value that maybe could have offered two decades ago. Now is a very different environment, so that's why we stick with the US. But tactically we think there is value set in Europe. 00:49:48 Speaker 2: But how much exposure, Like if you say tactically, when you talk about Europe or China for that matter, tactically, how small of an exposure. 00:49:56 Speaker 8: Are you China? We don't have any exposure right now. 00:49:58 Speaker 11: What I was saying that if you expect a significant desseration global growth is something we may consider purely tactically in the Europe. In Europe really depends on which funds we are talking about. I think, you know, for a European investor, Evan, let's say a quite significant portion in European stocks, I think you think it makes sense if you have fifty percent in equities, probably twenty percent in Europe makes a lot of sense. 00:50:20 Speaker 3: On the US side, I'm wondering if November's election and the outcome there changes your thesis at all. 00:50:27 Speaker 8: Not yet. 00:50:28 Speaker 11: First of all, a lot of things can change between now and November. I don't think there would be a massive change in the direction of the country if there is a change, So I honestly think that it's too early to think about it. I personally think though, that if Trump wins the presidency, I think what is probably negative for bondes? Why for equities? I think it's much more difficult to assess. It's much more a relative game. I think it's going to be bad for bonds. But otherwise we think it's too early to play the election the election game here. 00:50:58 Speaker 2: Look, I just get about a minute. Are so left here? I mean, what's interesting about this market global market cycle right now? I mean here we are, what now four years out of the pandemic, a lot of money that was thrown at investors and individuals globally as the economy shut down. But we're still kind of finding our way forward. But it's different. We've got a couple of wars. We've got geopolitics that constantly kind of creeps its way into almost every story and every I feel like investing conversation. So I don't know what's interesting about the cycle. And forgive me now, you're only forty second. 00:51:31 Speaker 8: What is interesting? 00:51:32 Speaker 11: We don't know, tam high and we have an incredible number of shocks, you know, call in inflation, interest rates, wars. But everything feels pretty good, and maybe it is good. And I think the surprising I think the surprising element is, for example, we have seen no recession when everybody was expecting one, and I think we have seen the economy and credibras into very much higher interest rates. 00:51:54 Speaker 8: Why. 00:51:55 Speaker 11: I think because we had a fantastic increasing wealth over the past two decades. People feel out here and some people taking an average on average, that means that I think they're much less vulnerable to our as an inflation or interest rate. And I think we have we have to look into this indicators. So I think wealth is wealth creation. The past two decades has been massive, and there is still a lot of money around, and I think that's obviously reflecting this fantastic performance of markets. 00:52:22 Speaker 2: Well, could have you here in studio, Safe travels Home, Thank you, Look at Paolini his chief market strategies A Picta Asset Management. 00:52:30 Speaker 1: This is the Bloomberg Business Week podcast, available on Apple, Spotify, and anywhere else you get your podcast. Listen live weekday afternoons from two to five pm Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business App. You can also want us live every weekday on YouTube and always on the Bloomberg terminal