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Speaker 1: Joining us now from Brussels is US Commerce Secretary Howard
Speaker 1: Lucknick Secretarynk, Thank you so much for being with us.
Speaker 1: I want to start on your discussions with the European Union.
Speaker 1: We were hearing some noise that it doesn't necessarily include
Speaker 1: reducing steel and aluminum terroiffts from fifty percent to fifteen percent?
Speaker 1: Is that off the table for now?
Speaker 3: We're talking about everything is on the table when you
Speaker 3: have such a great partner as the European Union. They
Speaker 3: have four hundred and fifty million people and a twenty
Speaker 3: trillion dollar economy, so the opportunity is great. They would
Speaker 3: like to have steel and aluminum as part of this package.
Speaker 3: And we think it is very very important that they
Speaker 3: understand our digital companies and they reconsider their digital regulations
Speaker 3: to be more inviting to our big companies. They tend
Speaker 3: to tax our big companies and attack our big companies,
Speaker 3: and they're not getting the investment that we're getting. Right,
Speaker 3: You're seeing trillions of dollars of our tech companies investing
Speaker 3: in building data centers in America and they're not getting
Speaker 3: them here.
Speaker 4: So we're talking to them about.
Speaker 3: Take your foot off the regulatory statement, build those data
Speaker 3: centers in America, and in exchange for that, we'll come
Speaker 3: up with a cool steal and aluminum deal that we'll
Speaker 3: all be together.
Speaker 4: So it's all trading. These are trade deals.
Speaker 3: You're talking about opportunities together. Let's bring it all on
Speaker 3: the table. Let's see what we can accomplish.
Speaker 1: Secretary Lutnik, what's the threshold in terms of reducing certain
Speaker 1: regulations in Europe on US tech companies that's required in
Speaker 1: order to create some sort of framework for this deal.
Speaker 4: Well, what the.
Speaker 3: European Union does is they say, well, our digital rules
Speaker 3: they only touch companies above a certain threshold. Of course,
Speaker 3: the only companies above those threshold are all American companies.
Speaker 4: So come on, that can't be the rule. Let's take
Speaker 4: it off.
Speaker 3: Let's settle the outstanding cases against Google and against Microsoft
Speaker 3: and against Amazon.
Speaker 4: Let's put them behind us.
Speaker 3: Let's come up with a reasonable framework where these companies
Speaker 3: can grow and build, and then those companies will agree
Speaker 3: to invest hundreds of billions of dollars of data centers here.
Speaker 3: So the idea is, if they take their foot off
Speaker 3: this regulatory framework and make it more inviting for our companies,
Speaker 3: they can get the benefit of hundreds of billions, possibly
Speaker 3: a trillion dollars of investment a year.
Speaker 4: So the idea is, I'm trying.
Speaker 3: To convince them that winning the way Donald Trump is
Speaker 3: winning in America is the way to go. Look at America,
Speaker 3: look at these growth rates.
Speaker 4: Come on to realize our investment in AI.
Speaker 3: Cape's last quarter exceeded consumer spending in America. We had
Speaker 3: three point eight percent GDP growth. We're going to grow
Speaker 3: over four percent and next year we could grow over
Speaker 3: five percent. You got to embrace what's coming. The AI
Speaker 3: world is coming. Come on, embrace it. That's what we're
Speaker 3: here doing, trying to bring and make our deal with Europe,
Speaker 3: which has a great deal done by Donald Trump.
Speaker 4: Let's make that deal better.
Speaker 5: Secretary Letnik just on that point and point take in
Speaker 5: on what you see as the benefit to embracing that
Speaker 5: tech with the EU over and over again has insisted
Speaker 5: said that it's digital laws are not up for discussion.
Speaker 5: Are you seeing any sort of relenting from them as
Speaker 5: you've been pushing it. Does it seem like they would
Speaker 5: agree to you on this point.
Speaker 3: Well, you know, I see a lot of ministers member.
Speaker 3: There's twenty seven countries, so some are more open minded
Speaker 3: than others. But you know, it's a process which is
Speaker 3: talking to them and telling them that if they want
Speaker 3: to get that kind of investment here, they've got to
Speaker 3: change the model.
Speaker 4: So there's the carrot and the stick.
Speaker 3: You know, if you keep taxing these companies, they're not
Speaker 3: going to give you the investment. So that's my job
Speaker 3: to sort of talk about it and help those American
Speaker 3: companies find their way clear to invest here and to
Speaker 3: grow here. And another example for them, I show them
Speaker 3: that you know, they're ruling out clean diesel for batteries,
Speaker 3: and I try to remind them you don't make batteries
Speaker 3: in Europe. Come on, guys, don't make rules that harm
Speaker 3: your self because you don't make batteries. That's not a
Speaker 3: good idea. Stick with clean diesel, stick with combustion engines.
Speaker 3: Come on, be clever about yourselves and just common sense.
Speaker 3: This is the common sense Trump administration here in Europe,
Speaker 3: trying to remind them that they have an amazing economy
Speaker 3: that can grow and build.
Speaker 4: Will help them grow and build with great trade with America.
Speaker 3: But you can't be silly and sort of embrace just
Speaker 3: batteries which you don't make in Europe. So these are
Speaker 3: the kind of conversations I have. They're pretty fun if
Speaker 3: you ask me, because I get to point to the
Speaker 3: growth in America and say, come on, follow our lead
Speaker 3: and we will have a bigger, better, stronger trade deal.
Speaker 3: We'll add to it, will add excitement to it.
Speaker 4: But you've got to come along with us. Secretary interests
Speaker 4: the model, the growth.
Speaker 5: We've been seeing because the AI has been contributing a
Speaker 5: lot to this American economy.
Speaker 4: And as a lot of it has been.
Speaker 5: Said about the two speed nature of it. On one hand,
Speaker 5: AI is doing well, and on the other hand, you
Speaker 5: have consumers that are still feeling high prices. You saw
Speaker 5: that play out through the most recent elections. There's been
Speaker 5: a renewed concentration from this Trump administration to try to
Speaker 5: reduce tariffs, especially on things like food, give food, food goods.
Speaker 5: Are you and the rest of this administration as you
Speaker 5: negotiate terror specifically looking at that, trying to find terras
Speaker 5: to bring down to lower the cost of everyday household
Speaker 5: items for American consumers.
Speaker 4: Exactly.
Speaker 3: The Trump administration is exactly about affordability. We are going
Speaker 3: through every line item to try to make sure we
Speaker 3: can drive affordability across the American consumer landscape. Two things though,
Speaker 3: American earnings are growing, right, the average earnings of America,
Speaker 3: their income is growing. So as that grows and we
Speaker 3: drive prices down, and you're going to feel that Golden
Speaker 3: age coming. So it's the combination of earnings growing and
Speaker 3: we are raisor focused on bringing down prices. That's one
Speaker 3: of the things we're doing here today, working together to
Speaker 3: try to bring down prices on average daily products.
Speaker 4: We are working on it. The Trump administration is on it.
Speaker 4: We have a clear direction from the President.
Speaker 3: We are going to lower prices and like things more affordable,
Speaker 3: build We're also going to raise income, raising income as.
Speaker 1: Well, just to build up what Dan's talking about. Though,
Speaker 1: there is a feeling that there is a limit to
Speaker 1: how much tariffs can go up or how much the
Speaker 1: Trump administration may have to reduce tariffs going forward in
Speaker 1: order to address some concerns about cost of living. Has
Speaker 1: it affected your negotiations at all?
Speaker 4: No, I think it's pretty easy.
Speaker 3: The world understands that there's given take in these trade deals,
Speaker 3: and the benefits are clear that the Trump administration has
Speaker 3: created the greatest set of trade deals. You know, the
Speaker 3: President's talk about a two thousand dollars tariff given. Then
Speaker 3: coming back to the American people, you got the one
Speaker 3: big beautiful bill which is going to cut and there's
Speaker 3: going to be significant income growth from people next year
Speaker 3: as that bill comes into play. And we are going
Speaker 3: to focus on the affordability. You saw coffee and cocoa
Speaker 3: and bananas and all those kind of things. Those prices
Speaker 3: came down. You're going to see prices continuously come down,
Speaker 3: energy prices down. You're going to see affordability across the board.
Speaker 4: Here.
Speaker 3: Trump administration is going to win in affordability and income,
Speaker 3: two sides of the coin we're going to win.
Speaker 1: Secretary Latnik, there's been a huge focus and you've been
Speaker 1: talking about how US tech has definitely been the fashion
Speaker 1: of the economic growth over the past couple of years.
Speaker 1: As the Trump administration decided whether or not to allow
Speaker 1: Nvidia to sell the H two hundred chips into China,
Speaker 1: that's been a discussion and something that increasingly people are
Speaker 1: speculating about.
Speaker 3: Well, I've seen that speculation. That kind of decision sits
Speaker 3: right on the desk of Donald Trump. Right He's got
Speaker 3: Jensen from Nvidio who really wants to sell those chips,
Speaker 3: and he's got a good reasons for it.
Speaker 4: There's an enormous number of other.
Speaker 3: People who think that that's something that should be deeply considered.
Speaker 3: And the benefit that we have is we have Donald
Speaker 3: Trump in the Oval office. He is going to weigh
Speaker 3: those decisions. He understands President she the best. He will
Speaker 3: decide whether we go forward with that or not. That's
Speaker 3: on his desk with lots of different advisors. The President
Speaker 3: loves to hear lots of different voices to make those
Speaker 3: kind of decisions, and he'll decide whether we sell those
Speaker 3: chips or not, and then we will go execute it.
Speaker 4: However, he decides to go forward.
Speaker 1: There's a bigger question here, Secretary Lutnik, about what national
Speaker 1: security is. Is it more of a national security risk
Speaker 1: to give China some of these high powered chips or
Speaker 1: is it more of a national security risk to not
Speaker 1: have US tech in China?
Speaker 6: Has your view on that changed?
Speaker 3: Well, that's the question exactly as well, put and in
Speaker 3: front of the president, which is, do you want to
Speaker 3: sell China some chips and keep them using our tech
Speaker 3: and our tech stack, or do you say to them, look,
Speaker 3: we're not going to sell you our best chips. We're
Speaker 3: just going to hold off on that and we're going
Speaker 3: to compete in the AI race ourselves. So that is
Speaker 3: the question. It's in front of the president. He's going
Speaker 3: to decide. It's a really really interesting question. He's got
Speaker 3: all the information, he's got lots and lots of experts
Speaker 3: talking to him, and he's going to decide which way
Speaker 3: he wants to go forward.
Speaker 6: Secretary Lutnick.
Speaker 5: Meanwhile, use of IEPA for terroiffts in front of the
Speaker 5: Supreme Court. The feedback has been skepticism so far from
Speaker 5: many of the justices, conservative ones included. As this plays out,
Speaker 5: can you walk us through how you prioritize the different
Speaker 5: alternatives should the administration's use of terrorist via IEPA get
Speaker 5: struck down.
Speaker 3: So I was in the Supreme Court. I sat through
Speaker 3: the whole argument. The justices were tough on on the
Speaker 3: beginning on the Department of Justices, you know, our person,
Speaker 3: but then they were much tougher on the other side,
Speaker 3: much much tougher. So I left that day feeling very
Speaker 3: confident that we and the President was going to prevail
Speaker 3: on these IEPA tariffs. So I think you're hearing it
Speaker 3: from me. I think I was there in the courtroom.
Speaker 3: I heard it all the way through. I didn't sort
Speaker 3: of write my story halfway through. I said all the
Speaker 3: way through to the end. The President's going to win
Speaker 3: that case, because that makes sense for.
Speaker 4: Him to win.
Speaker 3: But I want to remind you the president has lots
Speaker 3: of other authorities. He has two thirty twos, he has
Speaker 3: three ozh ones, he has three thirty eights, he has
Speaker 3: a whole variety one twelve, one twenty two. He's got
Speaker 3: all sorts of other powers. And tariffs are going to
Speaker 3: be part of this administration going forward, But I don't
Speaker 3: think they're going to be necessary because the President's going
Speaker 3: to win the IEPA case in front of the Supreme Court.
Speaker 6: Secretary Lutnik.
Speaker 1: Theoretically, if the US did lose that court in front
Speaker 1: of the Supreme Court, in terms of AEPA as justification,
Speaker 1: how quickly could you roll out that package of additional measures,
Speaker 1: whether it's Section three or one or section two thirty two.
Speaker 3: I think many of them could come very very quickly.
Speaker 3: I really I don't think most of the big deals.
Speaker 3: I don't think are in jeopardy. I think the people
Speaker 3: who did those deals, they don't want their.
Speaker 4: Tariffs to go up.
Speaker 3: They want their auto tariffs that's durable. That was in
Speaker 3: a nine to zero at the Supreme Court. You have
Speaker 3: auto tariffs, you have semiconductors, you have pharmaceuticals, you have
Speaker 3: steal and aluminum, you have lumber. All of those are
Speaker 3: durable tariffs. They're not going anywhere. I think our big
Speaker 3: trade deals are here to stay the way they are now.
Speaker 4: Right and the others.
Speaker 3: I think we're going to win the case, but I
Speaker 3: think it would be relatively straightforward for the President to
Speaker 3: replace it with other means. But it's not going to
Speaker 3: be necessary because the President has used AEPA correctly, and
Speaker 3: he's going to win.
Speaker 4: Case.
Speaker 1: Secretary Lutnik, we know you've got a really busy morning,
Speaker 1: but before we let you go, has the Supreme Core
Speaker 1: Case influenced any of your discussions at all with trade
Speaker 1: partners in terms of what the potential limits are to
Speaker 1: your ability to negotiate or potentially keep some of the
Speaker 1: ongoing negotiations that have been already struck.
Speaker 3: So that's exactly the point I'm here in Europe. It
Speaker 3: hasn't come up at all. The fact is we've made
Speaker 3: a great deal with Europe. They think it's important to them,
Speaker 3: it's important to us. Includes semiconductors, it includes pharmaceuticals, it
Speaker 3: includes autos. These are things that are important to the
Speaker 3: European Union, and they're important. The whole trade deal is
Speaker 3: important to America. I think this deal stands. I think
Speaker 3: the question that we are negotiating is how to make
Speaker 3: the deal bigger, how to make it stronger, how to
Speaker 3: make it more inclusive, how to bring in these digital
Speaker 3: markets act and try to improve that for digital America.
Speaker 3: How to maybe do steal and aluminum and how to
Speaker 3: include that, how to do things bigger and better together
Speaker 3: between our two great economies. I think they're going to
Speaker 3: do it standards, make sure they take US autos here,
Speaker 3: and make sure we are working together to extend both
Speaker 3: the European Union standards and American standards throughout the world.
Speaker 3: I don't feel that the AIPA case is here at all.
Speaker 3: I think the opportunities for us to grow and do
Speaker 3: business together.
Speaker 4: People want to.
Speaker 3: Have their trade deals with America, and I think these deals.
Speaker 2: Are durable, stay with us. Mulblindex Savanna's coming up off to.
Speaker 1: This bil dot a runmap writing odds for December should
Speaker 1: be sub fifty. That Daily is saying December is an
Speaker 1: open question means it's probably caput. No December, it means
Speaker 1: no January.
Speaker 6: Neil joins us now he is grumpy.
Speaker 1: He wants the rate cuts, he doesn't see them. Why
Speaker 1: do you put this off so much given the fact
Speaker 1: that New York Fed President John Williams seemed to really
Speaker 1: open the door to a rate cut next week and
Speaker 1: next month, and we do have that closeness between him
Speaker 1: and Fed shir J.
Speaker 6: Powell.
Speaker 7: Well, you're doing me not a solid there. I mean
Speaker 7: I wrote that before Williams came out.
Speaker 1: I mean it's again Meal data is positive for December
Speaker 1: rate because of John Williams.
Speaker 7: I mean, I don't look, I think the sort of
Speaker 7: I think the bigger problem is that we're even debating
Speaker 7: whether it is or isn't really right. I mean, if
Speaker 7: they don't go in December, maybe they wait for the data.
Speaker 7: We know that the employment and the inflation numbers come
Speaker 7: out actually after the FED meeting, So perhaps they come
Speaker 7: up with some consensus where they pause, they want to
Speaker 7: see the data, then they go in January. I mean
Speaker 7: that's possible too, But to me, the bigger issue is
Speaker 7: what's really there to debate and why are we having
Speaker 7: this debate. I mean, unemployment has been climbing. It's actually
Speaker 7: been rising for three consecutive months. It wasn't We were
Speaker 7: very close to going to four and a half percent.
Speaker 7: Everything that's come out since September. In October, we saw
Speaker 7: that war notices, the worker adjustment retraining notices rose, we
Speaker 7: saw layoff announcements rise. So what makes anyone think that
Speaker 7: unemployment is going to stabilize here?
Speaker 6: You know?
Speaker 7: My sense is that it's much easier to tell a
Speaker 7: story for why unemployment is going up then why inflation
Speaker 7: is going to reaccelerate, and so the fact that we're
Speaker 7: having this big debate about whether or not we can
Speaker 7: go twenty five in December or January, to me is
Speaker 7: a bit ridiculous.
Speaker 6: I mean, it almost feels like I.
Speaker 7: Don't want to be fatalistic, but it does feel like
Speaker 7: the train has already kind of left the station. I mean,
Speaker 7: even if they are able to cobble together at consensus, Lisa,
Speaker 7: the likelihood is is that that's probably going to be it.
Speaker 7: They're not going to signal a path of ease and
Speaker 7: going forward.
Speaker 6: So the train has.
Speaker 1: Left the station implies that you see a greater chance
Speaker 1: of recession.
Speaker 6: Is that correct? I do so for next year?
Speaker 1: You see actually a greater chance of re session next year,
Speaker 1: which is completely counter we're hearing from every company and
Speaker 1: every Wall Street.
Speaker 6: Strategist, which is often how it happens. But that's what
Speaker 6: you say, Yeah, I do.
Speaker 7: I mean I think if you go like sort of
Speaker 7: industry by industry, like, what area do you think is
Speaker 7: going to look better going forward?
Speaker 4: I mean.
Speaker 7: With respect to employment? Right, I mean, so you know
Speaker 7: I've talked about residential construction. Home builders are sitting on
Speaker 7: more on soold inventory. So which way do we think
Speaker 7: residential construction jobs will go? The freight sector is in recession.
Speaker 7: It's in recession going into the holidays. As capacity comes
Speaker 7: out of the freight industry, which way do we think
Speaker 7: trucking and rail and trans employment is going to go?
Speaker 7: What about restaurants? I mean, if you pull up a
Speaker 7: chart of restaurants, I mean their margins are being squeezed,
Speaker 7: they're telling us that they're holding the line on price.
Speaker 7: If their margins are being squeezed, which way do we
Speaker 7: think employment is going to go for them? Look at
Speaker 7: lumber prices, oil prices. You know, if you're a sawmill,
Speaker 7: can you actually make a profit with lumber prices where
Speaker 7: they are?
Speaker 6: Probably not?
Speaker 7: So if you're in the woods product employment, which way
Speaker 7: do we think that's going? How about people working on
Speaker 7: oil rigs? Also probably down? So you know, there's a
Speaker 7: lot of this sort of myopic fixation on initial jobless claims,
Speaker 7: and you know initial claims have to go up.
Speaker 6: We haven't seen initial claims.
Speaker 7: Well, initial claims aren't really a leading indicator, right, They're
Speaker 7: just an indicator that comes out every week. What we
Speaker 7: know about how businesses behave is they shut hiring off
Speaker 7: first they've done that, and then they lay people off
Speaker 7: as a last resort. And so if you have to
Speaker 7: ask me which is the direction of layoffs over the
Speaker 7: next six to twelve months, my argument would be as
Speaker 7: probably higher.
Speaker 5: This is an economy though that defied a lot of
Speaker 5: the worst expectations for a downturn after COVID, and a
Speaker 5: lot of it was attributed to the government giving out
Speaker 5: more stimulus. If we don't get cuts from the Fed.
Speaker 5: But what we do get is Washington, DC handing out
Speaker 5: two thousand dollars tare freebate checks. You get tax rebates
Speaker 5: too from the one big beautiful bill. Could that be
Speaker 5: enough to save a recession from this economy?
Speaker 7: Well, I mean, I've never in my career been able
Speaker 7: to figure out a way to make tax refunds useful
Speaker 7: in terms of predicting what happens with consumption, because it
Speaker 7: doesn't actually change permanent income. That's what ultimately drives consumer spend.
Speaker 7: So to me, it's probable that people save the refunds
Speaker 7: that they get because they're worried about job loss. Right,
Speaker 7: So to me, it's that income constraint that matters. That's
Speaker 7: more binding than whatever people get with the refunds. You know,
Speaker 7: I don't really have an opinion on two thousand dollars rebates.
Speaker 7: Treasury Secretary Bessett has said that they probably need Congress
Speaker 7: for that, So you know, the President can say what
Speaker 7: he wants, but ultimately, you know, to me, this is
Speaker 7: really about monetary policy being too tight, and that's kind
Speaker 7: of setting in motion a slowing in the economy.
Speaker 5: So then there's a question about the five speakers voting
Speaker 5: speakers we've heard from that don't want cuts. What do
Speaker 5: they see that you don't reas appoint It's one of
Speaker 5: the possibilities Corporate America is really strong. Another possibility, and
Speaker 5: this was raised a few weeks ago by Evercore, was
Speaker 5: that it is FOMC members digging their heels in ahead
Speaker 5: of what they see as a Trump appointed chair who
Speaker 5: will want cuts, and then setting the groundwork now for
Speaker 5: fighting back against that. Do you think there is some
Speaker 5: politics to play behind what these officials are saying.
Speaker 7: I mean, it's possible, but I also take them out
Speaker 7: their word. I mean, their basic argument seems to be
Speaker 7: that inflation has been high for a while and that
Speaker 7: as a result that, you know, expectations can become unanchored.
Speaker 7: I really see very little evidence for that. I mean,
Speaker 7: if you look at business inflation expectations just from the
Speaker 7: Atlanta Fed released last week, I mean, it's basically where
Speaker 7: it was last year, even before all the tariff started going.
Speaker 7: So if the price setters in the economy don't see
Speaker 7: higher inflation expectations, it's really challenging to see where it
Speaker 7: comes from.
Speaker 8: You.
Speaker 1: I'm old enough to remember when I was feeling bearish
Speaker 1: and you are yelling at me, like things are going
Speaker 1: so well, what are you talking about? And now I'm saying,
Speaker 1: you know, companies are doing really well, and you're saying
Speaker 1: it's not going to work. The train has left the
Speaker 1: station without rate cuts. When was the last time you
Speaker 1: were so negative on the state of the economy.
Speaker 6: I mean, I'm a pretty young guy, so it's been
Speaker 6: a while.
Speaker 7: I mean, you know, probably when I started my career,
Speaker 7: I worked for someone who was very bear so maybe
Speaker 7: that was the last time, and six maybe, But yeah,
Speaker 7: I mean, look, you can't say I'm a perma anything, right,
Speaker 7: So yeah, I mean I think that there's reason, there's
Speaker 7: more reasons to be cautious than bullish right now.
Speaker 6: That's sort of the way I'm looking at.
Speaker 1: It going forward, who do you expect the next feed
Speaker 1: chair to be? Evidently we were supposed to get a
Speaker 1: pick now than it was going to be next month
Speaker 1: now evidently January. Is there an indication to you based
Speaker 1: on the timeline that keeps getting moved depending on the moment.
Speaker 7: I think the longer the process goes on, the more
Speaker 7: likely it is is that Secretary Besson becomes the fet chair.
Speaker 7: That's my view. I mean, I just think that what
Speaker 7: do we know. I mean, we know that President Trump
Speaker 7: wants secretary. Could you imagine being one of these other people?
Speaker 7: Like Kevin has it like it's so obvious that you're
Speaker 7: number two, because time every chance he gets to talk
Speaker 7: about the fetcher, he's like, well, I wish this guy over.
Speaker 6: Here would do and he's playing to Scott Besson and
Speaker 6: neber One doesn't want it right and he keeps saying no,
Speaker 6: I don't know.
Speaker 7: I mean to me, it's almost like a bet on
Speaker 7: do you think that Trump President Trump gets to make
Speaker 7: his personnel decisions or not? And if you do, then
Speaker 7: you have to assume that Secretary Besson is the one
Speaker 7: that takes the seat. The longer the process goes on,
Speaker 7: I think the more likely it is he's the.
Speaker 4: One in that seat.
Speaker 2: Stay with us, Molblemberg, Savannah's coming up.
Speaker 4: Off to this.
Speaker 1: The team at Morgan Stanley releasing their outlook for twenty
Speaker 1: twenty six, writing, we raise our S and P five
Speaker 1: hundred price target to seventy eight hundred, driven by strong
Speaker 1: earnings growth. We believe that we're in the midst of
Speaker 1: a new bull market and earnings cycle, especially for many
Speaker 1: of the lagging areas. Mich Wilson of Morgan Stanley joins, Now,
Speaker 1: wonderful to see you, Mike, Thanks Lisa. So let's start
Speaker 1: on the optimism. We have an optimistic for quite a while,
Speaker 1: talking about the rotation into the adopters, not just the
Speaker 1: AI tech behemoths. Why are you getting even more optimistic
Speaker 1: as the year goes on.
Speaker 9: We say, it's just a changing It's an evolving narrative
Speaker 9: we've had, which is that we think that the policy
Speaker 9: still misunderstood right, that they essentially came in this year
Speaker 9: to the growth negative stuff first, and now we're looking
Speaker 9: at the growth positive stuff. I'm not worried about the economy.
Speaker 9: What I am a little bit worried about is that
Speaker 9: the FED is kind of dragging its feet. So I
Speaker 9: would agree with Neil's comment, like the FED needs to cut,
Speaker 9: but not to save the economy, but to see the
Speaker 9: full rotation into these lagging parts of the market, the
Speaker 9: interest rates sensitive parts of the market, which is really
Speaker 9: our story for twenty twenty eight or.
Speaker 8: Twenty twenty six.
Speaker 9: We think that seventy eight hundred is dependent on the
Speaker 9: earning cycle broadening out.
Speaker 6: So there's a lot to unpack there.
Speaker 1: I want to start with you agreeing with Neil, because
Speaker 1: Neil had a pretty negative assessment of the overall economy,
Speaker 1: saying he suspects the trains already left the station with
Speaker 1: respect to the pain from the FED keeping rates where
Speaker 1: they are for as long as they have, and that
Speaker 1: we could be looking at a recession. You seem to
Speaker 1: disagree on that. So where's the nuance here. What's the
Speaker 1: difference between preventing recession and really allowing the rotation into
Speaker 1: some of these other names.
Speaker 9: Yeah, I mean, I think our view has been differentiated
Speaker 9: that we think we have had a recession. We went
Speaker 9: through a rolling recession in the private economy. So I
Speaker 9: would agree with Neils that the economy is weak, but
Speaker 9: it's rebalancing now. Towards the private economy. I mean, many
Speaker 9: parts of the economy have been suffering, housing, all the
Speaker 9: interest rates, that durable goods, you know, consumer goods which
Speaker 9: have been under pressure, commodity sectors, transportation, There's been no
Speaker 9: volume going through the economy, no velocity in the real economy,
Speaker 9: and the way that the administration is changing the policy.
Speaker 9: In addition to the FED now cutting, hopefully next year
Speaker 9: you'll see the private economy now doing much better, the
Speaker 9: government no longer crowding out these areas that have been
Speaker 9: under pressure. But we do need to get that trend
Speaker 9: that if the FED needs to do more, the FED
Speaker 9: needs to cut race and they need to probably provide
Speaker 9: some balance sheet.
Speaker 4: I say.
Speaker 5: One of the things that Neil talked about was his
Speaker 5: fear that even if they cut in December, they're not
Speaker 5: going to lay out a path for continuous cuts, and
Speaker 5: Fed Governor Waller seemingly enforcing that speaking on Fox moments ago,
Speaker 5: saying you might see more of a meeting by meeting
Speaker 5: approach once you get to January. If you do get
Speaker 5: that posturing from the FED that maybe they cut in December,
Speaker 5: but it's a meeting by meeting approach, They're not necessarily
Speaker 5: going to cut in every single one. Is that enough
Speaker 5: to allow.
Speaker 4: For that rotation?
Speaker 5: Or do you need a clear passive cuts to get it?
Speaker 9: No, we need a ladder. And I think we're going
Speaker 9: to get there one of two ways. Either the data,
Speaker 9: you know, the labor data is going to basically support
Speaker 9: our view or my view that we had a rate
Speaker 9: of change trough and the labor markets in April, okay,
Speaker 9: and so that data they will allow the FED to
Speaker 9: cut more or signal they're going to cut more. The
Speaker 9: second one is that we get more financial stress.
Speaker 8: Okay, that's what's been going on.
Speaker 9: We think the market We wrote about this back in
Speaker 9: September early October, we thought the market was going to
Speaker 9: have a ten to fifteen percent correction because the liquidity
Speaker 9: wasn't there, that the balance you was tightening, And we
Speaker 9: think there's evidence that that correction is well advanced. Okay,
Speaker 9: all the momentum stocks, you know, Crypto obviously is the
Speaker 9: topic of the day, down thirty percent for bitcoin. I mean,
Speaker 9: these things are telling you that the market is worried
Speaker 9: about this liquidity. So as usual, the markets will dictate
Speaker 9: the fed's timing. So if the market really once and Look,
Speaker 9: markets are like children, right, they have a little temper
Speaker 9: tantrum and then and.
Speaker 8: Then the Federal respond to that.
Speaker 9: So is this like a Many twenty eighteen in that regard, right,
Speaker 9: that you kind of go into end of the year
Speaker 9: and then there's stress in some of these financial metrics
Speaker 9: that the Fed cares about, and then they provide more
Speaker 9: balance sheet So we think there's sort of this title
Speaker 9: war going back and forth, but ultimately it results in
Speaker 9: a more dubbish policy path.
Speaker 5: On the point of Crypto, a lot was made, I mean,
Speaker 5: even from Bill Ackman basically saying things that he thought
Speaker 5: weren't correlated all of a sudden were that Fanny and
Speaker 5: Freddy were selling off because the people who were buying
Speaker 5: Crypto were the same people in those names did last
Speaker 5: week in the week before's episode. Given how much crypto falls,
Speaker 5: show some vulnerability within the market structure, within who owns
Speaker 5: these stocks, and how fragile and weak some of those hands.
Speaker 8: Are, I don't think it's showing anything new. I think
Speaker 8: this has been their whole time, right, I.
Speaker 9: Mean, I don't people waking up to the idea that
Speaker 9: liquidity is important for the market. I mean, obviously I
Speaker 9: don't know what they're doing. I mean that's kind of crazy.
Speaker 9: Of course, liquidity matters. I mean liquidity is, and especially
Speaker 9: the last ten years or so, I think that the
Speaker 9: hard part about liquidity is it's sort of this sort
Speaker 9: of nebul this thing.
Speaker 8: It's hard to measure.
Speaker 9: And I've spent a lot, like the last two or
Speaker 9: three years trying to develop a better skill set around that,
Speaker 9: and I think we've got a better handle, but I
Speaker 9: would I would say it still is one of these
Speaker 9: things that's sort of the invisible hand. And so what
Speaker 9: you have to do is you have to look at
Speaker 9: the market to tell you when liquidity is tight or not.
Speaker 1: So you kept mentioning the balance sheet. Are you saying
Speaker 1: QUE is going to start again?
Speaker 9: Well, they may not call it Q, but yeah, the
Speaker 9: balance sheet needs to expand, not only to support financial markets,
Speaker 9: but to support the better growth that I think is
Speaker 9: coming next year. Right, So if CAPEX really picks up
Speaker 9: for the first time in ten years. OK, let's be honest,
Speaker 9: we haven't seen much capital spending, but the big beautiful
Speaker 9: bill is in scenting that that's a usage of capital
Speaker 9: that needs to be supplied by somebody.
Speaker 8: So the balance sheet needs to grow.
Speaker 9: Just to help the economy and the markets, and so
Speaker 9: we can call it QE, call it not QE, but
Speaker 9: generally they need to expand that.
Speaker 1: How much is a seventy eight hundred target predicated on
Speaker 1: the idea of the FED cutting rates and using its
Speaker 1: balance sheet to help support liquidity.
Speaker 8: It's very important.
Speaker 9: I mean, I would say, if we don't get at
Speaker 9: least one of those items surprising the market's meaning more
Speaker 9: than three cuts, or we get more balance sheet expansion,
Speaker 9: call a queue, call it something else, okay, yo, curve control.
Speaker 8: Whatever you want to call it.
Speaker 4: Okay.
Speaker 9: If we don't get some combination of that, then we're
Speaker 9: not going to reach our target.
Speaker 8: So I'm assuming that we get.
Speaker 9: There either through the labor data or through some financial stress.
Speaker 1: So it has been so far that the AI trade
Speaker 1: has maintained any kind of equity valuation, despite the fact
Speaker 1: that people are getting increasingly worried about an economy that
Speaker 1: you think already.
Speaker 6: Has gone through recession.
Speaker 1: I just wonder do you think that ship sailed in
Speaker 1: terms of AI leadership propic things up. Do you think
Speaker 1: that if we don't get the real economy reaccelerating, you
Speaker 1: cannot get the multiples that we currently have.
Speaker 6: Been seeing on the big tech names.
Speaker 9: Yeah, I think it's one of the same. I mean, obviously,
Speaker 9: the investment in AI is on the premise that it
Speaker 9: will lead to higher productivity, adoption and all that works.
Speaker 9: I mean, that's the way technology investment works. So you're
Speaker 9: not going to these stocks are not.
Speaker 8: Going to work.
Speaker 9: Leaders aren't going to work if the foundation itself isn't
Speaker 9: being supported by the technology investment. We assume that is
Speaker 9: going to happen in twenty twenty six. That is part
Speaker 9: of our thesis, Okay, but it's not without risk. So
Speaker 9: our job is to lay out our narrative, which we
Speaker 9: have conviction in, but then to highlight these risks in
Speaker 9: the short term or in the medium term that could
Speaker 9: throw that They could throw that narrative off.
Speaker 8: And he R.
Speaker 5: Denny also joined us earlier just saying that some of
Speaker 5: the air is being taken out of the AI bubble,
Speaker 5: and to him that meant that the melt tup that
Speaker 5: we've been seeing is going to be harder to come by.
Speaker 5: Has something changed, at least with that blind willingness to
Speaker 5: continue to buy AI related stocks regardless of how much
Speaker 5: they're spending and what the return on that spend.
Speaker 9: Is well, I mean, this is a natural evolution of
Speaker 9: any capital spending cycle. There's always going to be a
Speaker 9: challenge on the return you're going to get. And this
Speaker 9: is you know, we've seen this multiple times.
Speaker 8: We saw it a year ago.
Speaker 9: We've talked about this, you know multiple times. In July
Speaker 9: of twenty twenty four, that was the peak and sort
Speaker 9: of an AI CAMPACKX deceleration. So this is an EBB
Speaker 9: and flow. What I like to look at is the
Speaker 9: AI spenders, how are those stocks reacting? Is the market
Speaker 9: enforcing discipline on the AI spenders, which then trickles down
Speaker 9: into the campacks beneficiaries. But we think this is going
Speaker 9: to happen. The money's been raised now, so we don't
Speaker 9: think the debt markers are now involved, and so that
Speaker 9: money is not going to sit on these balancees.
Speaker 8: It's going to be spent.
Speaker 9: The question is what's the payoff look like and what's
Speaker 9: the timing of that payoff. We think we'll see some
Speaker 9: of that in twenty twenty six, twenty twenty seven, and
Speaker 9: so now it's just this transition. You're kind of trading
Speaker 9: back and forth. So I want to make it clear
Speaker 9: we think there's a broadening out. That doesn't mean that
Speaker 9: all the AI stuff gets killed and everything else does
Speaker 9: really really well. It can work in harmony. In fact,
Speaker 9: it needs to work in harmony to some degree.
Speaker 5: If you do get a scenario though where let's say
Speaker 5: I don't know, Meta that seems to be one of
Speaker 5: the poster children for not getting that return doesn't get
Speaker 5: it as much, and they need to pull back on
Speaker 5: their spending, but everybody else is still spending. Do you
Speaker 5: only need one pillar to fall to really hurt this
Speaker 5: trade or can just any sort of spending happening within
Speaker 5: this trade, regardless of who the winner is, continue to
Speaker 5: lift all the boats.
Speaker 9: Well, look, I mean, look what's been going on, right,
Speaker 9: So we've seen a massive bifurcation or dispersion and the
Speaker 9: performance of not only the hyperscalers but names within that.
Speaker 9: To me, that's healthy. That's like, not everybody's going to
Speaker 9: win like that. There's all trophies here. I mean, you
Speaker 9: have to actually win the game. But all of these
Speaker 9: companies are competing for the trophy. So in that competition,
Speaker 9: I think we continue to see this velocity of spend,
Speaker 9: and then we're going to see the most exciting part
Speaker 9: about this AI spend to me is we don't even
Speaker 9: know yet. Okay, these new businesses that are going to
Speaker 9: be created, these new industries that are going to be created,
Speaker 9: the efficiencies we're going to get in areas like healthcare
Speaker 9: or education or manufacturing, that's on the come. That's wheally,
Speaker 9: real wealth creation is going to be coming from.
Speaker 1: So next year or maybe the end of this year,
Speaker 1: when we find out who the next FED chair is
Speaker 1: going to be, how much will that matter to you
Speaker 1: in terms of whether your goal case will get realized?
Speaker 6: I mean, who will necessarily be.
Speaker 1: Good for that and who might be a little more
Speaker 1: problematic for that.
Speaker 8: You probably not.
Speaker 9: Don't like my answer, but it doesn't matter to me
Speaker 9: because ultimately, the market's going to tell the.
Speaker 8: FED what to do.
Speaker 9: I mean, that's my general That's always been my view.
Speaker 9: People hate it, but like I'm a markets person, Okay,
Speaker 9: the market's dominant. The markets tell investors what to do, right,
Speaker 9: So the markets will you kind of force their hands.
Speaker 9: And if the markets believe they need more liquidity, they
Speaker 9: will force the faces hand. If the market believes it
Speaker 9: needs more ray cuts, it will force the hand. Because
Speaker 9: we become so financialized at this point right. The FED
Speaker 9: now is basically obligated to make sure that we have
Speaker 9: financial stability to some degree, and they're also they have
Speaker 9: an obligation to help Treasury fund the government.
Speaker 8: So I don't believe the FED is independent.
Speaker 9: I believe they're trying to work in the best interests
Speaker 9: of Americans. Okay, I'm not saying they're dictated by the
Speaker 9: White House, but they are not independent of the markets.
Speaker 9: They're not independent of the funding requirements of the US government. Okay,
Speaker 9: So the Treasury and the FED will work together to
Speaker 9: do the best they can to solve those issues.
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