AI-Driven Growth Fuels Optimistic Economic Outlook Amidst Derivative Complexities - Episode Hero Image

AI-Driven Growth Fuels Optimistic Economic Outlook Amidst Derivative Complexities

Bloomberg Surveillance · · Listen to Original Episode →
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TL;DR

  • Federated Hermes projects an 8600 S&P 500 target for two years out, driven by earnings growth fueled by AI-induced productivity gains and stimulus, anticipating 3% GDP growth.
  • Active fixed income ETFs can capture 100% of the US public bond market, exploring twice as many opportunities compared to passive ETFs which cover only about 50%.
  • Okta secures AI agents' identities, providing a single control layer and trust standard to prevent business risks and transform them into opportunities, regardless of agent scale.
  • Adobe Acrobat Studio's AI-powered PDF spaces enable rapid insight extraction from large documents and real-time tone tailoring for market reports, enhancing efficiency.
  • Individual stocks exhibit rising implied volatility even as they increase in price, reflecting their nature as options where greater upward potential also increases the probability of further gains.
  • The Chase Ink Business Premier card offers 2.5% cashback on purchases over $5,000 and unlimited 2% on others, enabling business owners to reinvest cash back into their operations.

Deep Dive

Stephen Auth of Federated Hermes presents an optimistic two-year outlook for the American economy, projecting the S&P 500 to reach 8600, driven by earnings growth fueled by the AI revolution and productivity gains. This contrasts with a more cautious consensus, positioning Auth’s view as a potentially upside surprise due to anticipated stimulus. Dean Curnutt of Macro Risk Advisors offers insights into derivatives, noting that while the S&P 500 typically moves inversely to the VIX, individual stocks, even large-cap ones, can exhibit rising implied volatility as they increase in price. This phenomenon is attributed to the leveraged nature of options, where rising stock prices increase the potential for even greater future gains, thereby elevating perceived volatility.

Auth's projection of 3% GDP growth next year, exceeding the consensus of 2%, is underpinned by the belief that stocks follow nominal GDP growth, which he sees as strong. The AI revolution is identified as a key driver of future earnings, promising significant productivity enhancements across the economy. This optimistic stance suggests that current market valuations may not fully price in the transformative potential of AI and the subsequent boost to corporate profitability. The implication is that investors who embrace this forward-looking perspective may capture substantial gains as these productivity improvements materialize.

Curnutt's analysis of stock and VIX dynamics highlights a critical nuance in market behavior. The traditional negative correlation between the S&P 500 and the VIX--where stocks rise and volatility falls--does not always extend to individual equities. For single stocks, an upward price movement can coincide with an increase in implied volatility. This occurs because as a stock appreciates, the potential for further, amplified gains increases, which in turn raises the market's expectation of future price swings. This dynamic underscores the role of options as a leveraged instrument, where their value can move disproportionately to the underlying stock. Curnutt's observation suggests that understanding these derivative market interplays is crucial for accurate risk assessment and strategic positioning, particularly for investors seeking to hedge or leverage their portfolios.

The core takeaway is that while macro-economic indicators suggest a robust growth trajectory driven by technological advancements like AI, the intricacies of derivative markets introduce complex volatility dynamics at the individual stock level. Investors must therefore balance broad economic optimism with a nuanced understanding of how market participants price future uncertainty.

Action Items

  • Audit AI agent security: Implement Okta for identity control across 3-5 AI agent types to mitigate business risk.
  • Analyze stock-VIX correlation: For 5-10 single stocks, measure implied volatility when the stock rises to understand derivative dynamics.
  • Evaluate earnings growth drivers: Track nominal GDP growth and AI revolution impact on earnings for a two-year economic outlook.
  • Draft runbook template: Define 5 required sections (setup, common failures, rollback, monitoring) to prevent knowledge silos for key financial models.

Related Episodes

Key Quotes

"We've got, uh, two-year target of 8600. Uh, we've got 7800 for next year. And really driven by earnings growth at this stage. We've got earnings at, uh, yeah, 390 out three years. And, you know, stocks eat nominal GDP growth. Nominal GDP growth looks really good to us."

Stephen Auth of Federated Hermes provides a two-year target for the market, emphasizing that earnings growth is the primary driver. Auth believes that stocks tend to follow nominal GDP growth, which he sees as strong.

"But for single stocks, and it's not just meme stocks like GameStop, it could be Google, it could be Broadcom. The stocks are rising, and the market is assigning a higher implied volatility. Why? It's a great question and it, and it really to me reflects a unique, um, component, which is the stocks are our options. In other words, when the stock rises, the potential that it rises much more actually goes up as well."

Dean Curnutt of Macro Risk Advisors explains a counterintuitive market dynamic where individual stocks can rise while their implied volatility also increases. Curnutt attributes this to the nature of stocks themselves acting like options, where an upward price movement increases the potential for even greater future gains.

"But this alpha dog laser gaze won't keep your supply chain moving across borders. The real power move? Having a smart platform that keeps up with the changing trade landscape. That's why smart businesses partner with FedEx and use the power of digital intelligence to navigate around supply chain issues before they happen."

This quote from FedEx highlights the limitations of traditional "power moves" in business. The speaker argues that effective supply chain management in today's environment requires a smart platform and digital intelligence, rather than outdated tactics.

"But without identity, you can't trust they'll serve your business instead of jeopardizing it. Fortunately, Okta helps you get identity right by securing your AI agents' identities, giving you a single layer of control, a single standard of trust."

Okta's statement addresses the critical need for identity management in the context of AI agents. The company asserts that without proper identity verification, AI agents pose a risk, and Okta provides a solution for securing these identities to establish trust and control.

"Need AI to turn 100 pages of market research into five insights with a click? Do that with Acrobat. Need templates for a sales proposal that'll close that deal? Do that with Acrobat. Need an AI specialist to tailor the tone of your market report to sound real smart in real time? Do that with the all-new Adobe Acrobat Studio."

This quote from Adobe Acrobat Studio showcases the capabilities of its new AI-powered features. The speaker emphasizes how Acrobat Studio can perform complex tasks like summarizing research, generating proposals, and refining document tone using AI.

Resources

External Resources

Books

  • "Single Best Idea" by Tom Keene - Mentioned as the title of a podcast segment featuring conversations with guests.

Articles & Papers

  • "The Single Best Idea" (Bloomberg Surveillance Radio) - Mentioned as the title of a segment featuring conversations with guests.

People

  • Stephen Auth - Mentioned as a guest from Federated Hermes discussing the American economy and providing a two-year target.
  • Dean Curnutt - Mentioned as a guest from Macro Risk Advisors discussing derivatives, options, futures, and their linkage to the S&P 500 and VIX.
  • Steven Kim - Mentioned as a guest from Evercore ISI who discussed the American housing market.
  • Sam Ro - Mentioned as someone who does a great job looking at outlooks.
  • Ryan Reynolds - Mentioned in relation to a Mint Mobile promotion.
  • Eva Longoria - Mentioned as performing a review for Amazon Five Star Theater.

Organizations & Institutions

  • JP Morgan Asset Management - Mentioned for its active fixed income ETFs and their ability to capture the US public bond market.
  • JP Morgan Chase & Co. - Mentioned as the parent company of JP Morgan Asset Management.
  • JP Morgan Distribution Services, Inc. - Mentioned as the issuer of communications for JP Morgan Asset Management.
  • Okta - Mentioned for securing AI agents' identities to ensure trust and control.
  • Chase Ink Business Premier - Mentioned as a pay-in-full business credit card from Chase for Business.
  • Chase for Business - Mentioned as a suite of credit cards designed for business owners.
  • JP Morgan Chase Bank, N.A. - Mentioned as the issuer of Chase credit cards.
  • Adobe Acrobat Studio - Mentioned for its AI-powered PDF features, including generating insights and tailoring tone.
  • Bloomberg Audio Studios - Mentioned as the producer of podcasts, radio, and news.
  • Federated Hermes - Mentioned as the company Stephen Auth is associated with.
  • Macro Risk Advisors - Mentioned as the company Dean Curnutt is associated with.
  • Evercore ISI - Mentioned as the company Steven Kim is associated with.
  • GameStop - Mentioned as an example of a meme stock.
  • Amazon - Mentioned for its Five Star Theater and holiday shopping.
  • FedEx - Mentioned as a partner for supply chain management and digital intelligence.
  • Mint Mobile - Mentioned for offering a half-off promotion on unlimited wireless plans.

Websites & Online Resources

  • jpmorgan.com/getactive - Mentioned as a website to learn more about JP Morgan Asset Management's active fixed income ETFs.
  • omnystudio.com/listener - Mentioned for privacy information.
  • adobe.com/do that with Acrobat - Mentioned as a website to learn more about Adobe Acrobat Studio.
  • chase.com/businesscard - Mentioned to learn more about the Chase Ink Business Premier card.
  • mintmobile.com/switch - Mentioned as a website to try Mint Mobile.
  • mintmobile.com - Mentioned for terms and conditions related to Mint Mobile offers.

Podcasts & Audio

  • Bloomberg Surveillance - Mentioned as the podcast name.
  • Bloomberg Surveillance Radio - Mentioned as the source of "The Single Best Idea" segment.
  • Single Best Idea - Mentioned as a podcast segment.

Other Resources

  • Passive fixed income ETFs - Mentioned in relation to capturing a portion of the US public bond market.
  • Active fixed income ETFs - Mentioned as a way to capture more of the US public bond market.
  • AI agents - Discussed in the context of identity and security.
  • Identity - Discussed as a crucial element for trusting AI agents.
  • AI - Mentioned in relation to driving earnings and productivity.
  • Nominal GDP growth - Mentioned as a driver for stocks.
  • Productivity - Mentioned as a factor driven by the AI revolution.
  • GDP - Mentioned in relation to projected growth for the next year.
  • Stimulus - Mentioned as a factor that could lead to upside surprises in GDP.
  • Derivatives - Discussed in relation to their dynamics and leveraged nature.
  • Options - Discussed in relation to their leveraged nature and dynamics.
  • Futures - Discussed in relation to their leveraged nature.
  • Greek letters - Mentioned in the context of options and futures.
  • S&P 500 - Mentioned in relation to its linkage with the VIX.
  • VIX - Mentioned in relation to its correlation with the S&P 500 and single stocks.
  • Implied volatility - Discussed in the context of single stocks rising while the market assigns higher implied volatility.
  • Meme stocks - Mentioned as an example category of stocks.
  • Leveraged nature - Discussed in relation to options and futures.
  • Underlying stock - Mentioned in relation to the leverage of an option.
  • Hedging your bets - Discussed as an alternative to a pure play in options.
  • Performance mesh boxer briefs - Mentioned as a product reviewed on Amazon Five Star Theater.
  • Supply chain - Discussed in relation to moving goods across borders and navigating issues.
  • Digital intelligence - Mentioned as a tool used by smart businesses with FedEx.
  • Unlimited wireless - Mentioned in relation to a promotion by Mint Mobile.

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