What it will take for the stocks to shift gears. And a problem with oil. Extending oil cuts through the end of the year. From new york, im alix steel with guy johnson. Welcome to Bloomberg Markets. It has been a pleasure. You look great. It is nice to see you back. We missed you. Guy i am back from greece where it is raining and very hot now in london. I feel like i am doing something right. Alix you made it through the strikes. Guy i made it. I think the story with strikes around the auto sector and with the airline sector, i think they are synonymous. These are industries that have pushed back really hard on their staff over a number of years and they are now paying the price. We have data coming in. We have got the ecb coming up next week. 2. 1 out of the states. Durable goods 5. 2 . That is right in line with expectations. Extransport coming up at 0. 4 . The durable goods numbers are in line. The factory numbers look good as well. I do not think the market will react much. The oil story is a different matter. This will start creeping into the inflation data and a lot of people have been talking about the fact inflation is going to come down. With Higher Oil Prices and higher for longer prices, that may be called into question. Alix you wrapped in strikes in Different Industries and are you looking at wage pressures being filtered through . That is higher for longer expectation environment as well. I have got to say for the administration in the u. S. , there is nothing they can do. Guy they have a massive problem. Alix they have nothing to combat this. Guy you could maybe take oil out of the spr but that feels it is a busted flush. There is not much and not as much there to do on that front. I think it is going to be interesting, but it is going to be something that around the world people Pay Attention to. I filled up the car the other day, sticker shock. They are high. That takes us to our question of the day which you alluded to. What is happening with the auto sector . I think it is an interesting story post labor day. We need to talk about the strike story and what is happening with the energy story and what that means. European autos are having a tough time. The auto show taking place in munich. The german chancellor, the pirate as they are calling him now, so they should not be afraid but they cannot get into gear. Craig, i am going to start with you. The european carmakers are facing a challenge from china. The u. S. Automakers have got a more immediate threat they need to deal with, the strike issue. Post labor day, how big a threat is that actually . Craig with gm, ford, and still stalantis they have been able to produce like they did prior to the pandemic. It took about long to work through the semiconductor shortage. They have maybe been able to build up inventory. We have started to hear some overshooting and maybe that will come in handy if we have a walkout. Guy do you think we are going to have a strike . Craig the way the rhetoric is coming out of the United Auto Workers union, it sounds like an avid ability. Alix talk about the downside to the equities. I appreciate they have been raking in the profits but still, the have to make this big shift to evs profitably. In facing down a double digit wage increase as well. That is why the Biden Administration extended funding to those automakers that can aid them in the ev transition. These labor talks are about fears from those workers that are worried about their jobs coming into that transition. They are asking for higher wages to come in and that feeds into the wider story. If you compare this and this is an excellent analysis by my colleagues automakers in the u. S. Have underperformed discretionary stocks because there is so much in the fray. They have higher production costs relative to the chinese that are taking up a much larger portion of the industry. There has been a lot of concern. They are projected to increase their dominance of that industry and have lower costs in china by 25 . Guy the thing i do not understand is why would you want to own a u. S. Auto stock . You could own tesla. Tesla is out there to make market share. Tesla is cutting prices, coming out with new brands, it does not have the legacy issue. Why would you want to own a u. S. Auto company when you could own tesla . Nour why would you not . There is a lot of diversification involved. Automakers in the u. S. Currently, they are legacy companies, but they have also performed relatively well. If you look at analysis through the port function, you will see that ford and, for instance, General Motors really underperformed relative to total returns to the total index. Potentially, there is some appeal if they were to whether those strikes in the shortterm. There is some appeal in terms of valuations. There is a lot of optimism baked into the u. S. Stock market. This is another issue. It is almost shifting gears. Larger voices in the market are pointing to a softer landing in the u. S. That is going to point to better manufacturing and where do you go . You go to the automakers that you know. Alix you know what hurts manufacturing costs . Higher oil prices. This is interconnected today. You have potentially higher wages, then Higher Oil Prices, and that ends up feeding into inflation. It also points to the messiness of the transition the whole world is going to be under as we go green. Guy absolutely. Alix that is more expensive. Guy but you wonder whether that messiness, whether that inflationary impulse, is aided and abetted by the inflation reduction act. You look at what the uaw is saying. They are in the driver seat, excuse the pun. Biden said, you need to build these in the united states. Great. We will make sure our staff benefit. Is that the issue . Joe biden has set a trap for himself. Craig you have a situation where a lot of the battery plants going in the u. S. As a result of the ira are going down in the south. The uaw has had a heck of a time organizing plants they have not already represented. What can they bring to the table to convince what are joint venture companies, gm, ford, joint ventures with Foreign Companies who have little interest in seeing their labor costss go up. What can they do to bring these companies to the table and convince them unionization is a good idea when we know the hyundais, toyotas, teslas of the world are not going to be organized anytime soon. Alix this leads to the question is the market underestimating higher yields . Nour absolutely. I think that is a big part of it. We have been talking about how inflation is about to research. We are seeing different aspects narrate itself in different facets. You talked about oil. That is led by saudi arabia and russia extending cut. Saudi arabia until the end of the year was going to extend by one month. These rising yields potentially. 2 the fed point two the fed keeping tightening efforts for much longer than the market anticipates. Money markets are expecting the fed to cut within the next year and that is not translating into the different aspects of the economy. You are seeing a lot of concerns and that is translating to some complacency, particularly in the u. S. Stock market. Alix such a fun way to set the conversation. Craig trudell and nour al ali, thank you. Why is the auto sector running on empty . We lead that into the yield conversation with subadra rajappa. And we will hear what julie sue said. We remain hopeful the parties will resolve their issues. Strike is part of that and everybody would love to see a path forward where the union and the employers do the right thing. This is a moment in which Union Members are seeing historic profits coming out of the pandemic. I think the parties have to remain talking. Explore endless design possibilities. Find your personal style. Endless hardie® siding colors. Textures and styles. Its possible. With james hardie™. Its easy to get lost in investment research. Introducing j. P. Morgan personal advisors. Hey david. Connect with an advisor to create your personalized plan. Lets find the right investments for your goals okay, great. J. P. Morgan wealth management. This situation is really scary for a number of reasons. First, you have a very activist new uaw leader who has said inflammatory things that is beyond the pale in terms of any auto company. Alix that was dave ratner, chair and ceo talking to david westin, on the uaw strike. He led the bailout of the u. S. Auto industry during the crisis in 20082009. That brings us to the question of the day why is the auto sector running on empty . Joining us is subadra rajappa. You are a rates person and not a car analyst but all of these stories intersect. You have a potential recessionary fear if you have a full strike. 42 increase in wages. That is a wage inflationary scenario and Higher Oil Prices. How do you wrap that into thinking about the bond market . Subadra it is difficult. This is a moving target. We have had several strikes, ups, and others. We have had issues with the trucking companies. It is really hard to gauge what is going to be over the long run. Wages have been high and sticky. We have not really seen a precipitous rise in wages. But broadly speaking a combination of both Higher Oil Prices as well as pressure on the labor market, very tight labor force, is going to put pressure on inflation. That is where we are trying to gauge how much of an impact this is going to have on the market. Guy good morning. It is guy. Savings coming down sharply in the u. S. Spending has held up as that money has been spent. What kind of wage story are we going to have to see to keep the consumer on track do you think . Subadra wages are running between 4 and 4. 5 . We have not really seen an uptick. It is clear that labor has a lot more bargaining power. They have been able to win a lot of the concessions in these negotiations. But if you look at the broader spectrum, you are seeing the economy different parts of the economy perform differently. The consumer is coming under pressure. Student loan moratoriums will end at the end of this month. Summer splurge, is it going to last . Saving rates are lower and the consumer is coming under pressure going into the fall. Alix with all of that in mind how do you know what is fair value in the bond market . What should the 10year retrading at and how should you invest . Subadra we are calibrating our expectation for where the 10 yield is going to end. Fair value is between 4 and 4. 25 . Given how strong the economy has been and how resilient consumers have been in the face of higher Interest Rates, and the fed is also committed to keeping this on hold for longer at these higher levels, i think that is going to keep Interest Rates at a higher range than we anticipated coming into this year. Guy lets talk about what is happening at the front end. If the feds done and there is evidence to suggest that may be the case if the fed is done, is the twoyear great value right now . Do you switch into the twoyear or do you go for more duration . Subadra the twoyear is still a smart value. The fed could hike another 25 basis points. Maybe the november meeting but that basically tells you that twoyear yields are close to peak levels. We are looking at either the curve steepening out one way or the other. At least over the nearterm it looks to me like value is going to be in the twoyear. There is a potential that the 10year part could rise further. But over the longer run, if we expect recession in 2024, yields across the curve are going to be quite attractive as well as diversification given that risky assets will come under pressure. Alix you said fair value for the 10year at 4 , 4. 25 . We are at 4. 25 right now. Do need to buy the 10year and sit tight . Subadra perhaps. It is a question of timing. You look at the first half of the year, you probably did well during the Regional Banking Crisis when 10year got down to 330. We are back near the higher end of the range. Could we push higher . Perhaps. Yields will probably had lower and this might be one of the better buying opportunities. Guy always good to catch up. Really appreciate the insight. Thank you very much. Subadra rajappa, head of u. S. Rates strategy. Manchester united stock is being pummeled. Stocks under real pressure. What are we going to talk about . Chips. They are making breakthroughs in china. It looks like they are managing to sidestep u. S. Sanctions. We will talk about that, next. Worth watching. This is bloomberg. When you automate sales tax with avalara, you dont have to worry about things like changing tax rates, exemption certificates or filing returns. AvalarAhhh Ahhh Ahhh ahhh alix it is 21 past 7 00 on the west coast. We have the top tech stories. Silicon valley starts, i think it looks nice, morning. Ed ludlow joins us now. Lets get to huawei. They built an advanced seven meter processor for the new smartphone. This is a slap in the face to the u. S. We dont need you. We can do this on our own. Ed this is the best, powerful, made in china smartphone chip. It is in the huawei mate 60 pro which was released stealthily last week. What bloomberg did is we went to a Research Firm called tech insights. We said here is a handset of the 60 pro. Tear it down and see what you find. Lots of emphasis on the processor. What we know is that it was made on a seven nanometer node. That is two generations removed from the cutting edge, which is three nanometers, but there had been speculation last week when this handset hit the market that it was five nanometer. That was a surprise because the market and industry for semis says, to the best of our knowledge, china has not got to five nanometer. This confirms it is seven nanometers. It is made by semi manufacturing international, chinas biggest chipmaker, but they are still not where we are in the u. S. But the question is, is any of this caught by sanctions . Guy what is the answer to that question and is the gap of what is being produced between the u. S. And China Growing or shrinking . Ed the answer is we dont know because we asked the u. S. Commerce department and they have not responded. But one thing about Semiconductor International core is they are bound by the u. S. Technology curbs. Is the gap between the u. S. And china shrugging . Not on this basis. Jeffries has a note out looking at what we have said, looking at this 60 pro. The handset sold out within hours. What that tells is that they had small inventory. Not just two generations behind in chipmaking but they are not able to produce it at volume. Alix can return to nvidia . Ed please. Alix the founder had an interesting chat with bloomberg and talked about how nvidia could wind up being too big to fail but too big to succeed. It put a textbook story of big market delusion. What do you make of this . Ed he is known as the bubble hunter. That is how he made his name at Research Affiliates llc. His point is really simple. The runup in the stock at its current valuation is us pricing in all of the capex. The runup is extreme. This has all of the hallmarks, based on his experience, of a bubble and no one is seeing it yet. Guy Goldman Sachs differs. Ed differs. They have a note out saying ai valuations are high but they are not extreme, quote. His logic is this. Because the runup is not outside the bounds of what they consider to be extreme, the drawing is that we are really early in this hyper scaling. Committing capex to develop highlight which models and we will continue to see that expansion which will push up valuations even higher from where they are currently. Alix all right. Guy ok. I think i got it. It might be a bubble, it might not be a bubble. Alix time will tell. Guy it is one of those things, like recessions. You can only tell retrospectively. Ed if there is one, it will be my first bubble and i am looking forward to it. Guy they are certainly having lived through a few they are entertaining. The runup to 2000, i remember being in a bar in the Berkeley Hotel and this analyst ranting about how the world was being changed and the stuff was going to the moon. The valuations were crazy but could be justified. Alix that is where you got the gray hair. Guy but i do not get to go to the bar this time which is disappointing. Alix excellent. Guy you can have that experience. You should go to a really nice bar and it will be populated with those people. Thank you very much indeed. Ed i will. Guy Manchester United stock being pummeled right now. I think there was something in the mail saying the gl azers may not want to sell. The move is substantial. Alix does not want to talk about sports. This is mna. Alix but it is valuation. Guy back to the auto sector in just a moment. Is i bloomberg. Own online store. I sold that. And you can manage it all in one place. I built this. And it was easy, with a partner that puts you first. Godaddy. Nice footwork. Man, youre lucky, watching live sports never used to be this easy. Now you can stream all your games like its nothing. Yes [ cheers ] yeah woho running up and down that field looks tough. Its a pitch. Get way more into what youre into jennifer the reason why golo customers have such long term success when you stream on the xfinity 10g network. 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Alix we are about one hour into the u. S. Trading session finally back. Simone shares in the red to start in the united states. We are expecting a pretty negative september if the past 30 years of history is any indicatio