Middle East Tensions Rise as Markets Ready for Rates and Nvidia

Published Aug 26, 2024, 2:20 PM

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Bloomberg Surveillance hosted by Tom Keene and Paul SweeneyAugust 26th 2024
Featuring:

  • Lindsey Piegza, Chief Economist at Stifel, talks about the potential for inflation to resurface as Fed Chair Jay Powell sends a dovish message on interest rates
  • Ethan Bronner, Israel Bureau Chief for Bloomberg News, discusses Israel and Hezbollah strikes over the weekend and risks of a wider regional conflict
  • Pierre Ferragu, Head: Global Technology Infrastructure at New Street Research, joins for a preview of Nvidia earnings
  • Bloomberg's John Tucker with Newspaper Headlines


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This is the Bloomberg Surveillance Podcast. I'm Tom Keene along with Paul Sweeney. Join us each day for insight from the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube to see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always I'm Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.

Lindsay Pigs are with us.

That chief economists at Stiefel is well, the world changed on Friday. It was something, Lindsay, to sit on the lawn at Jackson Hole and realize this was a speech. Was this the Powell speech of his career?

Well, it certainly did signal that Chair Powell is on the same page with the market. That quote, the time has come to adjust policy, although he did say that the direction of travel is still uncertain, and he left the door open in terms of the timing and the pace of rate cuts, suggesting that the Fed is still data dependent, but he wanted to make sure that investors and market participants were very clear that the FED is on board the time has come for rate cuts lindsay.

The last paragraph I thought was allegiic. I was looking for him to try to define FED independence.

Quote.

We will be open to criticism and new ideas while preserving the strength of our framework. The limits of our knowledge so clearly evident during the pandemic, demand humility like we get from Lindsay pigs at Stiefel, and a questioning spirit focused on learning lessons from the past, etc.

Etc.

I thought, you will burner imitation, lindsay, what are the lessons from the past the chairman Powell learned well.

I think this was a big may koopa in the sense that, look, they were holding on to crisis level accommodation well beyond what was appropriate. They continued to wear the transitory T shirt for much longer than was necessary, and they realized now that that was a policy mistake, that that was an error coming into this cycle, and they allowed in many ways price pressures to become more ingrained than they otherwise would have had they taken their foot off of the gas sooner and So I think that's a recognition of the FED contributing to the inflationary problems that we continue to see today, and their willingness to say we're going to do our best to try to not make a second policy error on the back end.

So, lindsay, from your perspective, is the FED now pivoting to easing from a position of strength ied economies, okay?

Or a position a weakness?

Did you?

And maybe they're too late here question.

Money question No.

I think right now, the economy is still in very solid conditions, and Chairman Powell all but said so within the details of that speech, suggesting that price stability has yet been achieved. He's increasingly confident, but prices are still high, and at the same time, the labor market, while beginning to show signs of cooling, is still overall solid. So I think, right now, when we look at the consumer, when we look at the momentum in the underlying economy picking up from Q one to Q two, not to mention again, against the backdrop of still elevated inflation, the FED still has a good amount of leeway to continue to move at a very slow tempered pace, keep us in a relatively firm period a restrictive period of policy. Remember, even after the FED cuts rates for the first time, the FED is in no rush back to neutral, let alone below neutral. So even after they initiate that first round reduction, it's likely that the FED disappoints the markets expectations for a quick reversal to neutral and then back to an accommodative stance. That's kind of the economy is still on.

I'm sorry, Yeah, that's kind of where I wanted to go, lindsay, because it's been a while since we've all been in a rate cutting cycle.

How should we expect this to go?

Should it be twenty five basis points every meeting, every other meeting, front load fifty?

How do you think they're going to proceed?

Well, I think fifty is off the table, and in fact, I never thought fifty was on the table. I think even during the July press conference, chair Pole pushed pretty aggressively against the notion of fifty basis points, saying that's not even something we're considering at this point. So I do think twenty five basis points in terms of each move is the baseline. The timing, however, I think, is going to be again extended beyond the market's expectation. The market is looking for every meeting. I think the FED goes at most once a quarter. Again, there's no rush for the FED to remove policy affirming. At this point, the FED is simply responding to an economy that's normalizing, not an economy that's weakening.

And full disclosure, folks, Jackson Hole has changed. It's now a bunch of academics. She's great. It's a wonderful group of people. But I liked it when people like Lindsay Pigs were there, Jan Hatzias and others.

I like Diane Swamp was there, Paul as well, doctor Piggs.

I heard this Steifel argument from Adam Posen and also a guy named Philip Lane with a modest job for Laguard at.

The ECB, and that they said, okay.

Disinflation in order. But that was the Lindsay Piggs A bible is the butt coming down? How do we monitor inflation to discover that we're not disinflating like the soft landing crew?

Hope?

Well, I think it's going to remain a data dependent focus. Paul identified this inflationary issue as a global phenomenon. He talked about a rapid rise in the demand for good supply, supply chain strained, tight labor markets, a sharp hike in commodity priceis what's interesting about that list is a number of those factors are outside of the Fed's purview. And so if we did see international tensions geo political issues lead to a reversal in some of the improvement that we've seen, that could quickly undermine a good portion of this disinflation without the FED having any control over that reversal. And so again, I think this is a very complicated pathway for inflation. Yes, we've seen a lot of improvement, but the FED must remain vigilant in maintaining focus on that disinflationary trend because it's still very bumpy and uneven.

Lindsey, thank you so much. Lindsey's Stifel this morning. Here on the Paul speech, it's ramifications for our honor to go to Israel, and Ethan Branner, our Israel bureau chief, barely describes his knowledge, his effort, his reporting over decades in the greater levant. Ethan, let me just get to us one oh one, what is the distinction between Hesbolah and Hamas?

Oh? Well, good morning, Tom. I mean there was an enormous distinction. Hisbela is a Shiite Lebanese group on the northern border and the southern part of Lebanon, and it's the controlling force in Lebanon politically and militarily right now. And Hamas is a Sunni Palestinian group based essentially in Gaza south of Israel.

Is Israel from a military standpoint, do they approach this like a war like military like divisions in platoons or is it a different approach to the border with Hesbolah?

So I would say that they It's been a difficult transition for the Israeli military. It faced states Syria, Lebanon, Egypt and so forth in the past, and in facing these militias, I think it's finding it more difficult to know how to handle it. I mean, it has an enormous technological advantage, obviously, but it turns out a lot of the low tech stuff that and Hamas have done using drones that you can buy at the Best Buy and building tunnels, have really caused quite a lot of problems for the country. So I think that it's a mix. I mean, the truth is that Hamas force and the Hisbela. Also militia force are set up in divisions and in brigades, but there it's really a much more of an asymmetrical warfare problem for the country.

So, Ethan, how challenging is it for the Israeli defense forces to have what now appears to be a two front active war.

He Oh, it's very challenging, Pauland it's more than two fronts, right. You have Hispala the north, you have a Master the south, you have the Huties further to the south, and you have militias in Iraq and Syria. All of these things, of course are funded and sponsored by Iran way to its east, and so it's got a it likes to think of it, or it not so much likes to but it tends to think of it as a seven front war because there's also concerned about the West Bank and some Israeli Arabs who may not be thrilled about the place. So it's it's a very very complex situation for the country.

Was it surprising, Ethan that the Israelis chose to bomb Elebanon, I guess preemptively to thwart potential attack.

I mean, you know, these things are surprising to you. And me because we're not sitting in those intelligence rooms. But what they said that they had very precise intelligence that you know, we've known for several weeks that since the late July killing of a militia leader in Beirut, that Isbela was going to respond, and at the beginning of this last week there was a clear sense that it was coming.

Up this week and there was a lot of.

Chatter about it, and then it became clear that Israel had very precise intelligence that there were all of these launchers were headed toward mostly northern Israel, but they included a plan to hit le Loot, which is where the intelligence community sits, just outside of Tel Aviv, and they decided that they couldn't allow that to happen.

Ethan, you're such a pro on this.

When I look at Israeli media, all the different Israeli posts and all the rest of it, my head spins. I can't keep track of who represents who, who's on the team, et cetera.

Does mister Netanyahu.

Have the support of elites in Tel Aviv and Jerusalem? Does he have the support of the newspapers.

No, he does not. In many ways, D'tagna.

It's best to think of Nitanahu the way you might think of Donald Trump. Okay, that is to say, with a fair amount of popular support and utter rejection by the cultural, economic, and military elites of the country.

But you know, the people account for a lot.

And he has also done pretty well in terms of his numbers and his polling in the last four or five months. He's back up. He's not totally up, but he is a steady with whoever might compete against him. And it wouldn't shock me if he were to call an election in a few months and win.

That's right where I wanted to go.

I mean, now he calls an election, and do you look at him, you know, within a democracy of parliamentary structure, do you look at mister Netanyahoo is basically with an extended term, an extended view, and extended vision.

Yes, I think it's very likely. I mean, look, I don't know if he'll win, but he has a decent shot at it. It's a similar question about Donald Trump right now, right, it's close, but he could and he certainly has climbed back up. Because the longer with the further way you are from October seventh, the less people blame him and remember it as a failure of his part or his government, and the more his militant strength grows, and people really aren't, you know, especially after October seventh, Israelis don't have a sense of how to handle the situation except by being tough. I mean, there's plenty to say about that question, but that is the growing sentiment here.

Ethan. You're based in Tel Aviv.

I'm cossaying to understand what it's like in Tel Aviv these days. I mean, if I were to walk the streets of Tel Aviv on a Saturday evening, what would I find in the restaurants, the cafes, just on the street.

You'd find it very hard to get a table ball. I can tell you that it is very, very crowded. It is still fairly wealthy place, lots and lots of young people. I happen to live in the southern part, in the kind of cool area. I'm not so cool, but they've let me in and it is really really crowded. So you wouldn't you could? You know, as far as you know, you'd be in Barcelona that kind of a criminal. There's no sense of menas on the streets of Tel Aviv right now.

Ethan, Thank you, Ethan Bronner. Day after day there's leadership in the Levant. Israeli Barret, chief of Bloomberg News, acclaimed for his work over the last number of decades.

There are things back before digital that you would carry around to be cool, very important.

You'd carry around what was called the Maroon Book from DLJ. Donison, Lufkin Jen read it was her beautiful fixed income essay. They had some young Turk named John writing. They would write for it. I think bear Stearns had something. But the mother of all status symbols was to carry.

Around the Black Books. Yes of Sanford Bernstein.

There were any number of iconic names there good morning Brad hints. But one of them was a guy named Peer Faragu. Not that familiar, I think to Americans, but Peer Farragu was an absolute required read on global technology. We're thrilled he could join us right now on in video. But i'm tech in general. Is in Vidia pier alone or can we take signals from Nvidia across your larger technology.

Space, Adam, That's a great, great question. Well, Nvidia is definitely not alone. A lot of people supply in Vidia, and even more people depend on Nvidia for what they're doing. But Nvidia has this particularity of being almost last to speak in earning season, so we know a lot of what's going on in the upstream of Nvidia, in the downstream of FA Vida before the report, So you don't have that much read across coming from them, and it's it's just because they speak last. So what we've heard so far is that the clients or Nvidia are increasing their capex very significantly. It's good for Nvidia, and then the supply chain of Nvida is accelerating the pace at which they make more capacity available for Nvidia, which means that we are still based on all what we see in a world in which there are people want buy more GPUs than the number of GPUs that can be actually manufactured.

Pierre, do we know yet, when we look across the tech stack and we see the capital spending numbers which are just extraordinary, how much of that is incremental for AI versus maybe shifting it from other parts of the capex budget, Whether it's it or something else.

It's a great question.

Well, it's usually the one of the most tricky, trickiest questions you can ask, and you have a technology transition. But here the answer is actually relatively easy. Spending on AI chips might you know, reach like one hundred and fifty billions in twenty twenty five next year. And compared to that, the market for CPUs, you know, like which is really like the leading ship of the what I would call like the traditional infrastructure, you know, the legacy infrastructure is only in the twenties. It's like, it's less than thirty billions. So the market for AI infrastructure is so large that you can't talk about a shift or anything else. So that's one first way to look at it. And the second way to look at it is we haven't seen more than a slightly sluggish, slightly sluggish market outside of AI. And when you ask Microsoft, Google and others, why are you not spending so much on CPUs and others and traditional servers all they never tell you what it's because we're done with these technologies. They're telling you it's just that we don't have time. We're so focused on the eye that we don't have time. We'll have to catch up at some point a.

Periodic conversation with you.

We've got to look at your brilliant call and Apple with a neutral. There are forty one buys, seventeen neutrals holds and Apple right now, what would it take for Apple to do to get pure fair good, to go long Apple, to go buy Apple.

Well, you would need to create you know, in some ways, way more controversy than what you have on the stock today. You know, Apple is a very easy story. It's a very very high quality franchise, but is the highest quality consumer franchise.

In the world.

They're still on top of their game, and they're very good at defending their position, mostly as you know, a provider of the actual hardware like the handset, and also building out from the one billion user base, you know, steadily growing and very stable recurring revenue stream for services, and you know we're going through multiple revolutions like streaming content and then the voice voice interaction. Now we're going into artificial integence. And Apple is doing a very good job at adapting to all these things. But the only power of Apple is very very mature. So you know, the controversy is it going to grow five percent or seven percent next year?

And so it's very difficult.

You have a strong conviction on the stock as long as you don't have more more of a controversy. So you know, the simpleeancer would be for people to start worry about something for Apple would not worry about, and then probably I would become a buyer.

Peer, Is there a reasonable I guess there's a call out there that maybe Apple has missed at least temporarily the AI evolution.

Is that a fair statement?

Well, from a technological standpoint, I would say, you know, Apple Intelligence. The way the way Apple is articulating AI for their devices, I think is very sound and very good, and it's it's the right way to do it. But our view here is that Apple has to host AI and let AI mature and let AI you know, winning news cases emerge and and so it's it's going to be very nondestructive to UH to Apple. The business model of Apple is not going to change as we go through through AI, even if Apple is probably going to a major player in the adoption of AI very quickly.

Here, Peer, you've got a humongous call and Microsoft was made some time ago. Do you reiterate a five seventy target and Microsoft?

Is that accurate? Yeah?

I think Microsoft is in a very good in a very good place investors that have been worried about Microsoft spending so much money on Kapex. So the freaka shlow is coming down and terms you know my history with TSMC, but I know a lot and you knows my history with Tesla. I like a lot good businesses that are spending a lot of money on infrastructure on PPS because if you make if you have a good business, you make a good return on an asset. And when you invest a lot, that means good returns are coming through. And so that's really the way I'm looking at Microsoft today. I'm thinking the busiest case of a for them is very straightforward. It's like it's very to say AI as an adult. So they are getting to make money out of all the investments are doing today. This is very very bootish.

Never enough time, peer fergu thank you so much on Nvidia, an Apple, on Microsoft, you deal. You look at the front pages the John Tucker our mister Tucker.

All right, let's take a deeper dive. Bloomberg Quick Take has a deeper dive in the story that we've reporting all morning long. As we learned of the arrasta the CEO in Europe, comes the question of how did the messaging app Telegram become a focus of extremist activity online. The service was started back in twenty thirteen and it is actually one of the most downloaded apps worldwide. It also polices content with what you could call a pretty light touch. It's used by hundreds of millions of people across the world as a straightforward, everyday communication tool. Users can also post stories, create discussion groups, or establish what are known as channels, and a channel can end up drawing millions of subscribers. And a Telegram was used to foment and coordinate those anti immigrant riots in the UK last month, well earlier this month, I should say law enforcement agencies. They do actually have more leverage to persuade Facebook and Meta to help them identify users engaged in illegal activities, as it's a publicly listed company and it's headquartered in the US. This has proven to be largely powerless when it comes to Telegram, which is based in Dubai.

It's gonna it was fermenting overnight with a huge Russian response, and the French seem pretty entrenchous on it.

It's just this is the way it is. What else is it next?

All right?

This from the New York Times Apple rethinking its movie strategy. When Apple won a bidding war in twenty twenty one for the rights to make the action comedy Wolfs with George Clooney and Brad Pitt, it did so in partant because it promised the stars they put the movie into a large number of theaters. But this month, just six weeks before the film was set to show up in thousands of theaters across the country, Apple announced a significant change in plans. Wolves will now be shown on a limited number of movie screens for one week before becoming available on the company streaming service.

Let's stop here, this is really important, Paul. I looked at a pie chart this week in a market share Who's kidna? Who these people? This is a fantasy of Variety Magazine's done a great treach one. This is a fantasy of micro's share. The fact is paramount Apple. All the rest have micro Share.

It's delusional.

Yeah, I mean it's interesting.

I mean and in this particular story, Tom, I mean, you get two heavyweights, George Kleen, Brad Pitt, You make a deal with these people. I can't imagine what that meeting was like to say, oh, guys, we're going.

Back not too happy, and they should follow my advice. Brad read the fine print exactly.

I mean it was Apple can do obviously whatever Apple wants. But boy, if you're George pleading Brad Pitt, I mean, you have to be right.

You want that.

You you came up in the world where you had the broad theatrical release, you know, in.

Honor of the courage of what they did in World War Two. We watched the World War.

Two Flyers thing on Apple. Spielberg did it with Tom Hanks.

It was great, but it's it's it's dead. It's dead garbage, you know, It's it's like it got next to nobody watched it.

I mean, I just I've never seen an industry where nobody cares if anybody's watching.

And uh, there's another movie out on one of these streaming services that it would if it back in the day, would have been out in the theaters, huge promotion, huge budget, hundreds of millions of dollars spent on every talk show. It comes out with just a but I guess if I'm not dam they wrote me my ten million dollar check.

I spent through, you know, three months on a thing. I guess that's it's.

The new reality.

Yes, just do you have one more, sir?

Well, let's take this one. I love this one from the Financial Times. Ikea is taking on eBay. Ikea starting a peer to peer marketplace for consumers to sell secondhand furniture to each other. This is Ikea pre Owned, will be tested in Madrid and Oslo until the end of the year, with the aim of rolling out the buying and selling platform globally. The new marketplace part of a transformation of Ikea.

This is the couch pizza.

The couch with the Swedish people stains. He gets some other fool to buy it from you.

So all right, But who's ever put together an Ikea piece of furniture.

I have not done that, but I know that's Oh.

I have so many Allen ranches left over from that total.

I have a collection of al retch I have a full disclosure, folks, I've never been in an iq.

No, sir, no, no surprise us.

John Tucker, thank you for the news there.

This is a Bloomberg Surveillance podcast bringing you the best in economics, finance, investment, and international relations. You can also watch the show live on YouTube. Visit the Bloomberg Podcast channel on YouTube. To see the show weekday mornings from seven to ten am Eastern from our global headquarters in New York City. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg

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