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- [00:00]
Intuit Representative
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IBM Representative
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- [01:25]
Bloomberg Business Week Daily Host
Bloomberg Audio Studios Podcasts Radio News this is Bloomberg Business Week Daily reporting from the magazine that helps global leaders stay ahead with insight on the people, companies and trends shaping today's complex economy. Plus global business, finance and tech news as it happens. The Bloomberg Business Week Daily podcast with Carol Massar and Tim Stanweck on Bloomberg radio.
- [01:55]
Tim
Vice President J.D. vance is heading to Pakistan to lead the US side of negotiations on a peace deal with Iran. With the Strait of Hormuz still largely blocked, here's the Vice President speaking to reporters at Joint Base Andrews before heading on the trip.
- [02:10]
Vice President J.D. Vance
We're looking forward to the negotiation. I think it's going to be positive. We'll of course see. As the President United States said, if the Iranians are willing to negotiate in good faith, we're certainly willing to extend the open hand. If they're going to try to play us, then they're going to find that the negotiating team is not that receptive.
- [02:26]
Tim
That's the vice president just at Joint Base Andrews before heading on that trip. For an update on where we stand heading into this crucial weekend of talks, we bring in Jeff Mason. He's Bloomberg White House and Washington correspondent. Jeff, what exactly is the White House trying to get out of this weekend's talks?
- [02:44]
Jeff Mason
Well, they're trying to lay the groundwork for and and eventually achieve a longer term peace deal. In a nutshell, right now, of course, there's a two week cease fire, which the President announced earlier this week. And what he would like is to have something longer term. So by sending Vice President Vance, he's sending the second highest official in his government to try and hammer that out. There are a bunch of hurdles, not least of which the fact that Iran is now saying that they would like to have their assets unfrozen and to have a cease fire in Lebanon before even going to the talks. So that is certainly hanging over this even as Vice President Vance is in the air. But if they proceed, then the overall goal is to get something that's longer term and to try to do so in the next two weeks.
- [03:31]
Tim
What would a successful weekend meeting look like? Like, what precise objectives would we be reading about on Monday morning, where you would deem it a success?
- [03:42]
Jeff Mason
You know, I think probably a success would be if they don't fail, if they don't say we're done and we're not going to continue and the ceasefire is over. I mean, that's a pretty low bar. And yet, given the fact that there's a question mark now as to whether they'll even proceed after Iran's latest demands, I think that that's probably, that would probably be seen as a success. No doubt others would like to see more. But let's be clear. You can't get all of the points that both sides want hammered out in a weekend. But if they get started, if they establish a decent working relationship, that alone will be progress. From the talks that were going on right before the war started, which were led by Steve Woodkoff and Jared Kushner.
- [04:26]
Tim
You know, it's this, this, this fragile truce was announced earlier this week, you know, more than two days ago at this point. And, and then late yesterday, the President warned Iran against charging tolls. He said there are reports that Iran is charging fees to tankers going through the Hormuz Strait. They better not be in. If they are, they better stop now. He also told the New York Post on Friday that US Warships are being reloaded with, quote, the best ammunition to launch fresh attacks if the talks faltered. How is this, I don't know if this is the art of the deal, if this is part of the negotiation strategy, but it doesn't seem like things are totally moving in the right direction.
- [05:06]
Jeff Mason
Well, and the fact that the Strait of Hormuz is not entirely open yet either is not in line with what the President said he wanted to in order to agree to a cease fire. Yeah, he's leaving plenty of options out there. For himself, and that's one reason why he's leaving forces in the region. Again, this is a temporary truce. This is a temporary cease fire. If they don't come up with a deal, then the President has said the shooting will start again. And that threat, of course, is hanging over these talks.
- [05:37]
Tim
I wanted to go there next, just talk about how seriously is the threat of escalation, how serious is the escalation if the talks do fail?
- [05:46]
Jeff Mason
I mean, I think it's certainly serious. The President has said so, and the President has gone back and forth in terms of what he's really wanted, whether he wanted to escalate, whether he wanted things to end. The fact again that these talks are actually happening and that he agreed on a cease fire on Tuesday before following through on his threat to bomb the Iranian civilization and get rid of bridges and civilian infrastructure and using very, very harsh rhetoric in that pledge was seen as a huge sign of progress. But that doesn't take away all of the hurdles that remain, and it doesn't make a weekend negotiation any easier.
- [06:27]
Tim
Jeff, if we sort of boil this down to the reason we think that the US Went to war and the US And Israel went to war with Iran in the first place, it was about nuclear weapons and the ability for Iran to actually get a. Get a nuclear weapon. How does that factor into what we've heard from Iran with what they want to be able to do, versus the US Demand for that enrichment to stop? Where's the daylight there?
- [06:55]
Jeff Mason
Well, that certainly is one of the bigger objectives. I would add, though, Tim, that the objectives weren't entirely spelled out at the beginning of this war, but you're certainly right to pinpoint that one. And that is something that the President has said for a long time, that he doesn't want Iran to have the ability to build and have a nuclear weapon. So to your questions about the specifics, how do they figure that out? Iran still has uranium and it's in the ground. And the President has suggested that the United States and Iran could work together to dig that up. I don't know if that's something that Iran would agree to. It is interesting to compare where we are now with where the world was with the JCPOA agreement, the Iranian nuclear deal that was forged during the Obama administration, which President Trump was very critical of and eventually took the United States out of, that included international monitoring of Iran's nuclear program and of that uranium. So perhaps monitoring would be back on the table. Not sure if that's something Iran would agree to or not. All of these, again, are questions and are points that they'll have to hammer out at the, at the talks.
- [08:07]
Tim
Jeff, you've been following this for a while. We were talking with a prior guest about how like, global trade has been kind of, it's changed indefinitely. And I am curious how your view has kind of evolved as the conflict has evolved. Does it seem like we're closer to the end, a resolution than maybe we were a few weeks ago, or is the momentum heading in the other direction?
- [08:33]
Jeff Mason
Oh, we're certainly closer. I mean, the fact that they've got a cease fire is, is closer. But that doesn't mean that the ceasefire is going to last. That is, that is an unanswerable question at this point. It just depends entirely on how these talks go and what other developments happen in the meantime. The Lebanon peace has been hanging over the ceasefire and hanging over these talks ever since President Trump announced it. So that is something that we'll have to, we'll have to see if they hammer that out and to see to what extent Israel plays ball, plays ball on that as well. But you know, broadly, and I think you saw this in the market reaction after the ceasefire was announced, people see this as progress, but there have been times throughout this war where people have seen progress or have had the impression that the President was leading towards an off ramp, only for him to pull back and go in the other way and use escalatory language. So all of that are things that people should consider when they're trying to decipher where things are going next.
- [09:35]
Tim
A little after lunchtime, Jeff, the President sang in a post on his social media network. The Iranians don't seem to realize they have no cards other than a short term extortion of the world by using international water rays. The only reason they are alive today is to negotiate. And he signed that. President Donald J. Trump. It does seem like that is a pretty big card. The Strait of Hormuz, just 45 seconds here, like that is the card.
- [09:57]
Jeff Mason
I couldn't say it any better, Tim. That's the card and they're playing it and they know that they have that card. And the President can say that he wants them to open it and he can say that he wants to have control over it or he wants to have joint control over it, but the geography is such a, that that is their area of the world and they know that and they have seen the impact that having control over it has had over the last five to six weeks. And that's something they're going to hold on to until or unless they are given something in exchange.
- [10:29]
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- [10:30]
Tim
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- [10:36]
Intuit Representative
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- [10:59]
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- [11:59]
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- [12:57]
Bloomberg Business Week Daily Host
Mypolicyadvocate.com youm're listening to the Bloomberg Business Week Daily podcast. Catch us Live weekday afternoons from 2 to 5 Eastern listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.
- [13:14]
Tim
For more on energy, we're joined by home Ioon Tai McKinsey, global energy and materials practice senior partner and leader. He works with major energy companies, chemicals companies, utilities, natural resources firms and more. He joins us here in the Bloomberg Businessweek studio. Homie and good to have you on the program. Does that sound realistic in the straight get back to, I don't want to say normal because it's hard to imagine anything looks normal, but sort of what it was doing pre war in terms of the number of ships that were going through it in two months.
- [13:42]
Homie Tai
Look, Tim, I think the world has changed with this crisis. Just like Russia, Ukraine and Covid before it, I think ships can flow back in. We've got about 1200, 1300 ships that need to go back. But the long term structural effects of energy supplies I think has reconfigured.
- [13:57]
Tim
What kind of changes do you see in the next few weeks? You talk about long term, but what about in the imminent, what are you watching for when it comes to global trade?
- [14:06]
Homie Tai
Well, so certainly looking at where insurance premiums are going to go, looking at just the number of ships, looking at commodity prices, the dissonance between what we see, spot oil prices and physical contracts, 145 to $100. Right. That if we can see that dissipate, that means it's working, the confidence is working.
- [14:26]
Tim
I want to, I want to go back to this idea of you saying that the world has changed. Does the world, has the world changed in terms of the, the sort of the floor for the price of, of crude and West Texas Intermediate?
- [14:40]
Homie Tai
No, the, the way I think about it, the world has changed. If you are a country in Asia, where then let's face it, Asia's Asia has been more impacted than Europe.
- [14:49]
Tim
Oh yeah. I mean they're talking about fuel shortages. Only certain people driving on certain days, people only going to work on certain days. It's huge effect on the economy in some countries.
- [14:58]
Homie Tai
Exactly. So Sri Lanka is going to go back. Their Wednesdays are off. They're going to go back. Right. That's the, but if you're, if you're, if you're Korea or Japan and you've got these long term contracts coming out of the Middle East, I think you're going to want to rethink how that supply comes in. So it's much less of a Texas issue, it's much more of an Asia issue, how things get restructured.
- [15:16]
Tim
But from a pricing Perspective, you have West Texas Intermediate and Brent crude at almost the same price. So even though you know you can, and a politician can talk about the US being energy independent until the cows come home, but when their constituents go and fill up the tank and it's 430 a gallon, it doesn't really mean much.
- [15:35]
Homie Tai
Yeah, I mean you saw this morning, CPI came out, we're at about average 4, 415 a gallon. So we're going to see these types of primary effects come through. We're going to see secondary effects for the US consumer through fertilizer costs, chemicals, other things, heavy intensive transport, energy intensive transport. So I think that will continue to fall through over the next few months. It's not just going to get stopped because there's a ceasefire.
- [16:01]
Tim
Talk about that a little bit more the effects on to the US consumers, particularly when a lot of our energy sources maybe are still coming domestically. Why should American consumers be concerned about rising food, rising retail prices because of the geopolitical tensions right now?
- [16:19]
Homie Tai
Well, just, just remember oil and gas are very different things as you know. So oil is, is pegged globally and that's why you're talking about the price differences, you're talking about why both indices go up. Gas is different, gas is more domestic. So we're going to see $4 gas type of thing. Whereas in Asia it's going to be like 19, $20 gas. Right, that's, that's going to be so industries that are really gas intensive. So if you think about power generation in the US we're not going to see as much disruption there. Oil intensive industries on the transport side, I think we're going to see more disruption. So that's where it sort of bifurcates for the US but overall all of these things are kind of sticky. Prices go up globally for oil, it sort of filters through. Right. It takes time to come down.
- [17:00]
Tim
Do you, do you think, and you work, look again, you work with energy companies, chemicals companies, utilities, natural resources firms and more. The, the, the shift in Washington over the last 18 months has, has made it so that renewable energy is no longer a priority for the United States. Does a shock like this make the companies that you work with, like the utilities for example, think differently about, about renewables. I mean nuclear is a topic, but that's years away. If you want a gas turbine for a power plant, you got to get in line and wait years. At this point are they thinking about renewables? Even without the support of Washington, there's
- [17:36]
Homie Tai
still I think a lot of momentum on Renewable side. You do just in the US because if you think about state policies, over 26 states have renewables policies and they have targets for 2030 to 2035. And that's driving at a state level renewables development.
- [17:50]
Tim
So it's still happening.
- [17:51]
Homie Tai
It's still happening. Gas is certainly happening. Right? Gas. And we always said, as McKinsey, when we looked at the market, even years ago, we said gas is going to be a big, has a big part to play because you can't just substitute all of that with renewables. So we're going to see both develop. Now in Asia, it's quite interesting. Korea and Japan have relicensed their coal plants. So there's a ramp up of coal that is happening and renewables. So Asia is doing this bifurcated policy of renewables and, and coal. And that's not going to switch back even if we get a resolution in the next few weeks.
- [18:23]
Tim
We're speaking with humy and Tai McKinsey, global energy and Materials Practice senior partner and leader Homie and I want to
- [18:29]
continue the talk on global trade. But I am curious as well. You work with these energy companies, CEOs, how are they getting information about the conflict in Iran right now? What is actually going on at the Strait of Hormuz? I'm curious if C Suite executives have some other way of kind of like understanding what's happening.
- [18:51]
Like, you know, supposedly Citrini sent the undercover analyst.
- [18:54]
I was thinking.
- [18:55]
I knew you were going to say that. I knew that's what you were thinking.
- [18:58]
It was, you know, it was a conversation.
- [18:59]
But, but to Emily's point, are they getting the same information that we're getting?
- [19:04]
Homie Tai
I think yes. I mean generally what I. So 50% of the clients we work with, CEOs, I talked to management teams over the last few weeks of last few weeks, probably until the last two weeks, probably thought this is going to come and pass. Okay. The other 50% are worried about this in two ways. One, one group is saying, look, let's actually really think about our scenario planning in a very different way. We need real time information. So they're going to do a lot of different sources. The other 25% basically are saying, look, our hedging and contracting strategies have changed because we're relying on that. So it is a really 50, 50 split. I think it'll be very interesting over the next week as we see what happens with the ceasefire as to how many actually companies really get in the mix. But the data, the information that you're asking me about, I swear it's like from all sorts of different angles. I don't think there's any particular angle that any company has an edge on.
- [19:57]
Tim
So let's talk a little bit about the second order effects of this. And so energy gets so much of the attention. But we got to talk chemicals, nitrogen, fertilizer, urea. I mean these things that I think really go into the background of the way that we get our food and what we pay for our food.
- [20:16]
Homie Tai
Right.
- [20:17]
Tim
Do we start to see those prices or when do we start to see those prices go up as a result of the straight closure?
- [20:23]
Homie Tai
I think the lag. So just to your point, 10% of fertilizer or fertilizer costs are 10% of food inputs for the U.S. it's about 15% in Europe. As those, those pieces go up, we will see and those contracts are going up, we are going to see prices translate. I think it takes a few months. This is where it's the stickiness. And remember, you've got six weeks of that supply sitting there in Hormuz. So whatever we have on land and whatever the Asian countries have on land for, for the first commodities, petrochem, etc. You're going to run out of that. Right. So now we're going to see the pricing effects start playing in.
- [20:59]
Tim
Wait, when you say we have six
- [21:00]
Homie Tai
weeks sitting there, six weeks of tankers sitting in Hormuz with nitrogen with urea and other commodities.
- [21:07]
Tim
But the problem is the tankers that would typically take the place of the tankers that are full and leaving those ports, we're not getting through either. So even when those tankers are able to get out, you have this bottleneck.
- [21:20]
Homie Tai
Absolutely. And that's where, so when we, when you talk about the urea prices, nitrogen prices that affect fertilizer, that's in the next few months we're going to see some, some level of repricing for that.
- [21:30]
Tim
Okay, so you talk about in your notes this six week countdown to an inflection point. That's what you're referring to. But that would mean that this is coming what, next week, two weeks from now?
- [21:40]
Homie Tai
We're at six weeks now. So our concern was when you look at, and this is more when you think about supplies in Asia, Korea, Japan, you know, how much LNG is in reserve, etc. It's about six weeks worth of supply. So the six week mark, which is where we are right now, basically you're going to see repricing at spot for a bunch of contracts for manufacturing companies in Korea, etcetera So that was our concern for the six weeks. Now if the straight opens and these ships go out, they're going to take four to six weeks to deliver. So this is a 12 week protracted set of issues. We're talking about what happens if the
- [22:16]
Tim
strait opens but with a toll.
- [22:19]
Homie Tai
Look, the, if there is an actual toll and goes through, it's going to affect the delivery costs downstream. So that should translate, if that was true, that would translate into pricing and not to mention the uncertainty that comes with.
- [22:32]
Tim
Well, speaking of that uncertainty, I think one challenge will be if these insurance companies want to insure ships, at least in the beginning. And if there is, you know, God forbid, some sort of issue that happens, what that means for insurance companies. That's a big part of the equation that I don't think gets enough attention.
- [22:48]
Homie Tai
I agree. It's insurance. Look, it's port costs. It's a bunch of things.
- [22:53]
Tim
Because you're not going to take a ship through there if it's not insured.
- [22:56]
Homie Tai
Right?
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Tim
So it just sits there then.
- [22:58]
Homie Tai
Well, there's got to be different ways to think about how you get contracting done, right? I mean, so for those that if you're paying for the insurance premium, it's going to either and you're getting a supply, it's going to come through in cost. If you're recontracting, it's also going to come through cost in a different way. So you've got to look at the differential between the insurance premium and how you're recontracting.
- [23:19]
Tim
Are you seeing the US Energy companies drilling now or has that paused given everything that's going on now?
- [23:28]
Homie Tai
So investment in general, I think what I see from my clients and work that we're doing, people are very hesitant to invest. And it's not just on the oil and gas side, it's, it's across. You know, we have Asian clients who are thinking about building manufacturing facilities that are now hesitating. So we're starting to see that's the third order effect I would say is what's happening on the manufacturing.
- [23:50]
Tim
So even $100 oil prices doesn't get companies, you know, excited to drill baby drill in West Texas?
- [23:59]
Homie Tai
I think there's so much uncertainty. This is where the scenario planning comes in. The question is, well, is it going to go back down to 75, 60 and below six months later if there's resolution right now, or are there other factors that keep unknown? And that's a scenario work that is really important for companies to be thinking through.
- [24:16]
Tim
Do you think the price just 20 seconds. Are the prices that are reflected across the curve right now accurate?
- [24:21]
Homie Tai
I think the prices are could change, right? They're accurate. For the dissonance between physical and financial markets accurate. And that is our point. That's my point is that this thing doesn't fix the physical. If we get a cease fire, we don't fix the physical issues.
- [24:36]
Bloomberg Business Week Daily Host
You're listening to the Bloomberg Businessweek Daily podcast. Catch us live now, weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.
- [24:50]
Tim
It is one of the most read stories on the Bloomberg terminal. Everybody is following Bloomberg's reporting on this exclusive. Treasury Secretary Scott Bessant and Federal Reserve Chair Jerome Powell summoning Wall street leaders to an urgent meeting on concerns that the latest AI model for Anthropic will usher in an era of greater cyber risk. Todd Gillespie has the scoop. He's Bloomberg News banking reporter. He joins us here in the Bloomberg businessweek studio. So these almost every CEO of every big bank went the only person missing in your according to your story was Jamie Dimon of JPMorgan Chase and he couldn't make it for for for some reason. But why were five of the six big bank CEOs summoned by Fed Chair Jay Powell and Treasury Secretary Scott Besson?
- [25:34]
Todd Gillespie
Well, we know, Tim, that you know, in the past few days, in the past few weeks, even concerns have been raised about the severity and the strength of this new model by Anthropic, this tool called Mythos, which basically Anthropic have said can essentially at a user's will detect extreme vulnerabilities in things like web browsers, in security systems and basically presents a whole new level of cyber risk for countries, for companies, for huge institutions. And Anthropic have admitted that they know the severity of this. They have acknowledged and are taking it very, very seriously. They've had a limited rollout for testing purposes among a select group of companies. We know JP Morgan is one of those that's public. There are about 40 other companies as well who are on the list. Not all of them are public who are getting early access to this and testing it out. Their information security teams have access to this. But essentially what this shows and bear in mind some of the top executives were already in D.C. for lobbying meetings on Monday. But this was a meeting that was sort of tacked onto that. It was a very unusual and that you had Scott Bessen and Jay Powell. Remember the Federal Reserve has taken pains in the past few years to establish its independence from the political side of government right now. But together you have the central bank chair and the Treasury Secretary having a joint meeting showing how important this is across the department, across the US Government, for financial stability and for the security of the US Economy.
- [27:05]
Tim
What is your understanding of what. What was really at the heart of the concern that both Bessant and Powell had? Was it just general, like, we need to be careful because there's now a more powerful cyber, I guess, criminal out there? Not criminal, I don't want to say criminal, but, you know, a cyber tool that we're vulnerable to, or were there more specifics of like this could actually happen, Here's a specific risk that maybe was flagged.
- [27:30]
Todd Gillespie
Yeah, we're certainly, we're continuing to look into this, that's for sure. But one thing to bear in mind, right, is the context, the wider context here that you have around these AI tools. You have Iran, you have China, you have Russia, all creating their own cyber tools, their own AI capabilities. At the same time, here is something that's been developed on US soil. There have already been partial leaks by some of these, by anthropic itself, as we know, that are creating questions around the security of. Of the capability. So basically, what the government is essentially saying to these banks is, hey, you guys are the most systemically important institutions in some ways that we have in this country. You of anyone need to be the most defended in case of potential risks, not just by this own tool that you will be getting access to. JP Morgan has access to it. We know that other companies are getting access to it soon as well. And that is that. That to them is sort of the core of this. Like, can you test this? Can you make sure? Can you help us evaluate its own risk and the risk that we might face from elsewhere as well?
- [28:37]
Tim
And can they?
- [28:39]
Todd Gillespie
Well, that's. I think that's a delicate question right now. You know, obviously these banks have been keeping this meeting extremely confidential. I mean, this was. This was a result of a few days of reporting.
- [28:49]
Tim
Yeah. In your piece mentions, none of them even come commented to you.
- [28:52]
Todd Gillespie
Yeah, none of the banks commented to us on this. I think it was very, very tightly held. And I think it seems to be more of a directive from the top down to the CEOs directly, a direct appeal to say, hey, you need to be taking this super seriously internally.
- [29:07]
Tim
So what can you tell us about the way that banks do keep our money safe in an environment where they could be at risk from these new tools?
- [29:15]
Todd Gillespie
Yeah, I mean, that's a great question. We know banks aren't perfect by any means. In fact, some of them have the worst tech right of instit. You know, I've come on this show before to talk about, you know, fat fingers at Citigroup, for instance, you know, a lot of banks with crunchy technology, let's say, to be generous, you know, we all know, you know, even from a retail perspective, many people listening to this show will know that their own bank is far from perfect when it comes to technology. So the urgency of this is really not lost on these companies. They are reflective on this. The Federal Reserve, you know, has a huge role in particular in its supervisory role, looking internally at banks. They are the ones that have staff, often inside the bank's offices, who are looking at their capabilities, looking at their systems, looking at their defenses here. And they've obviously been evaluating that and evaluating the new tools and the new capabilities that are both available to these companies, but also to people who might want to hack these companies and have decided that, look, the equation and the balance that stands right now is serious enough that this needs to have like, you know, a top down, extremely detailed and serious approach to what's going on here.
- [30:24]
Tim
Is there a potential that that approach would ever turn into maybe new rules and regulation for banks?
- [30:31]
Todd Gillespie
I think that's quite possible. I think there are, you know, there's, there's, there's, there's chatter around that, you know, across sectors about how different companies might respond, questions of best practice. You know, as we all know across Wall street right now, a lot of banks have public partnerships with certain companies, are trying out lots of different tools internally, whether that's for their engineers, their junior analysts, all this kind of thing. They are already playing around in the sandbox as it is. But I think it's only inevitable that at some point there will be some formalization of what's required.
- [31:04]
Tim
Todd? I think what's particularly chilling in a scenario like this is just because one American company has this technology now doesn't necessarily mean that other companies won't get it soon and that it won't easily fall into the wrong hands at some point soon. I think people are pretty shocked about how quickly this tech moves, but no question, everything's moving the direction where it just gets better, better and more impressive and more impressive. What happens then? It seems like this is, you know, it's always going to be a race between sort of the bad actors and the ones who are trying to keep this stuff safe.
- [31:34]
Todd Gillespie
Yeah, I mean, it's not Yeah, I mean, you're right, Tim. And it's not just Anthropic's own tools, but who could replicate that, right? You know, a lot of this, a lot of AI source code is open source. China and Russia, Iran are also developing open source tools, at least China is for sure. And this stuff is readily available. So it's not just a case of whether anthropic. It's not just a question of whether Anthropic itself is secure, but it's who can replicate what Anthropic has. And what can the US Economy learn from what Anthropic has in order to defend itself against what other companies might have and other states might have?
- [32:14]
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- [32:15]
Tim
More from Bloomberg Businessweek Daily Coming up after this.
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- [35:32]
Bloomberg Business Week Daily Host
You're listening to the Bloomberg Business Week daily podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.
- [35:46]
Tim
We're joined by Jed Ellerbrook, Argent Capital Management Portfolio Manager. He joins us today from Kansas City. The firm has about $4 billion in a. Um. Let's just start with the equity market, jed S&P 500 finishing the week about 3.5% higher. It's the second week in a row of a gain, a sizable gain we could call it. What in your view is really driving the equity market price action right now, especially when most of March was pretty difficult for anyone long the equity market.
- [36:17]
Jed Ellerbrook
Yeah. Yeah. Good afternoon guys. I think AI exposure, AI data center, CapEx, the concerns about Anthropic and their incredible new product release pace and the impact that might have on existing software companies and other businesses. I think that's probably the biggest story of the week. And I think it started off, I believe Monday after the close when Google and Anthropic and Broadcom made that announcement about Anthropic buying three And a half gigawatts worth of TPU chips made by Broadcom. And then it continued through the week with the two core weave new customer announcements. Anthropic was one, meta was the other. And it's been an explosive week for those data center CapEx companies. As we see another signal or many, many signals really, that demand for compute is exceptionally high. It's well above demand is well above supply. And that gap has been widening lately.
- [37:20]
Tim
Do you think the, you know, I talked to somebody yesterday who's, who's such a bear when it comes to AI and the technology and he's just, he's been very outspoken about it and he thinks the market is just getting this completely wrong. Is the market getting it right?
- [37:36]
Jed Ellerbrook
Demand for compute is exceptionally high and it's growing exceptionally fast. All of the signals, yeah, but, but
- [37:41]
Tim
like the demand is high right now. But to, but his argument is like, to what end? Like he doesn't think we're going to actually see the payoff.
- [37:52]
Jed Ellerbrook
I disagree with that, with that view that. Yeah, I mean there are many people that, that do have that view that that argument goes something to, something to the effect of yeah, it's great, there's all this demand for AI compute today, but that's basically just coding and software development people. And once we satiate that market,
- [38:11]
Homie Tai
the
- [38:12]
Jed Ellerbrook
really high demands there will not spread to the rest of knowledge work, the rest of white collar work. I think that will prove false. I see evidence to the contrary in my daily life. I see it in the Morgan Stanley CIO survey, a huge survey of corporate America that was published two days ago. And I see contrary evidence from everything that the cloud computing giants who are serving that AI demand for most of enterprises in America, the demand signals they're seeing from their customer bases. But that's the debate, that's the great debate that markets are having today. The adoption, the speed of adoption in AI tools is unprecedented and markets are struggling to price that on a day to day to week basis.
- [38:59]
Tim
So when you look ahead to the coming earnings season, you write in your notes here, the big question is will the CapEx, CapEx estimates actually rise during this season? Are there particular names that you're watching, watching for to actually show that kind of CapEx run through? Or is it still, you know, on these, on these bigger AI builders, a wait and see environment?
- [39:25]
Jed Ellerbrook
Yeah, the ones I'll be watching most closely are Google Meta, Microsoft and Amazon. Google Meta and Microsoft, or excuse me, Google Meta and Amazon gave us very detailed CapEx guidance for 2026, three months ago. I don't expect those companies will change that guidance so soon. Microsoft, meanwhile, their fiscal year end is on a different calendar. Their fiscal year ends in June versus the other three ending in December. So they will be giving us more detailed guidance, either this earnings report or the next, perhaps both. We've seen capex guidance get revised up quarter after quarter after quarter for all four of those companies to such an extent that their free cash flow, which is basically just cash flow from operations minus that capex spending equals free cash flow. We've seen CAPEX rising so fast that free cash flow estimates for those four giant CapEx spenders has been declining for the last four quarters in a row. Investors don't like free cash flow going down. Those stocks have suffered, I think, as a result. And yes, they're pointing to really strong revenue growth. They're pointing to really high customer engagement, big contract signings going out a couple years. But those free cash flow estimates going down has been a major sticking point for investors. And I think this quarter we are going to see those free cash flow estimates estimates stop being revised down and start inflecting and being revised up. And the reason why is because I think those CapEx estimates are going to be stable compared to last quarter and I think we're going to see upward estimate revisions. One maybe specific data point. So Amazon's aws, their biggest profit generator, revenue growth has been accelerating. It was 23% last quarter. It was in the teens the couple quarters before that. So a positive trend. We're going to see that trend accelerate and I think we're going to see a number in the high 20s percent this quarter and then up into the 30s the next several quarters going forward. That revenue growth for AWS is accelerating because of all the AI data center CapEx.
- [41:29]
Tim
Well, before we let you go, the data centers, the capex that the hyperscalers announced, that gets a lot of attention. What doesn't get as much attention are the sort of the tried and true companies, the waste management companies that you're bullish on. You know, sort of like low tech versus high tech. But we've talked to some of these CEOs who are using a lot of tech when it comes to processing waste. Why are you seeing an opportunity in these stocks right now?
- [41:53]
Jed Ellerbrook
Yeah, yeah, we. So first of all, you want to have a diversified portfolio. You want to have some exposure to those, those big AI winners. You also want to have some exposure to companies whose businesses are not as economically sensitive, they're not as dependent on technology. Advancement. And I think the waste companies are in that group. They're pretty steady eddy 10% type growth compounders. They get to that 10% growth. First of all, by raising prices consistently, they're able to raise prices 4 to 6% a year. We don't know it. As customers and businesses, we don't worry about it so much. It's a monthly bill, but they have good pricing power. And then second of all, they take their profits and they make acquisitions of smaller competitors. Yes, that adds a knowledge percent. Yeah, yeah, yeah. That adds another couple percent growth. And they tend to be decent dividend payers too. So we think those waste companies offer 10% earnings growth irrespective of the strength or weakness of the economy.
- [42:53]
Bloomberg Business Week Daily Host
This is the Bloomberg businessweek Daily podcast, available on Apple, Spotify and anywhere else you get. Your podcasts listen live weekday afternoons from 2 to 5pm Eastern on Bloomberg.com, the iHeartRadio app TuneIn, and the Bloomberg Business App. You can also watch us live Every weekday on YouTube and always on the Bloomberg Terminal.
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