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Speaker 2: Two years ago, he used my economist to the yere.
Speaker 2: He had an optimism about the American economy. Admitst recession
Speaker 2: at gloom. Neil Doutta takes a continued victory lap. He's
Speaker 2: with Renaissance at Macro this morning, stop by the FED show.
Speaker 2: He was so wound up about the FED meeting was
Speaker 2: he he called my people and said, I demand to
Speaker 2: come on. Okay, joining us now because he demanded to
Speaker 2: come on, Neil dota. Neil, let's go back to the
Speaker 2: last FED meeting. Why did you go mental? Why did
Speaker 2: you say I gotta come on?
Speaker 3: The FED decides, Well, thanks for having me on, Tom,
Speaker 3: Happy New Year. Well, I would just say that it
Speaker 3: was a complete one eighty from the meeting right before
Speaker 3: that when they said they wouldn't prejudge policy outcomes right
Speaker 3: after the election, and what do they do in December?
Speaker 3: They prejudged policy outcomes before anything even happened, basically taking
Speaker 3: out insurance some potential tariffs before you know, Trump even
Speaker 3: takes the oath of office.
Speaker 2: I thought that was quite revealed.
Speaker 3: So, you know, this idea that the fedily responding to
Speaker 3: the data and adjusting their forecasts, I don't really think
Speaker 3: that washes if you look at how much the data
Speaker 3: surprised on the upside with respect to March. I mean,
Speaker 3: it would make more sense to push off raid cuts
Speaker 3: at that meeting, but in December, you know, rasing two
Speaker 3: cuts given the forecast revisions I thought was a little
Speaker 3: bit much. So this was really about a balance of
Speaker 3: risks story that they explicitly said that wouldn't do.
Speaker 2: The higher yields and the attendance strong dollar. Does that
Speaker 2: force or cause a slowdown?
Speaker 3: I think so. I mean, when you look at the
Speaker 3: nature of why interest rates had been going up, it
Speaker 3: has very little to do with a rerating of nominal
Speaker 3: growth expectations. I mean, if you look at the data,
Speaker 3: you know, the your own Bloomberg Surprise Index has been
Speaker 3: weakening in recent weeks, so the economic data has been slowing.
Speaker 3: You know, if you look at inflation expectations, both of
Speaker 3: surveys of consumers and businesses, they've been falling. So you know,
Speaker 3: my sense is that this has something to do that's
Speaker 3: not related to the data. I think it has to
Speaker 3: do with term premiums. Maybe that's a function of QT.
Speaker 3: Maybe that's a function of what's going on globally. You're
Speaker 3: seeing rates go up in Japan for example. You know,
Speaker 3: maybe there's a you know, risk around deficits and so
Speaker 3: you know there's going to be more treasury issues relative
Speaker 3: to the demand for treasuries. I mean, these are all
Speaker 3: things that push up the term premium, but it doesn't
Speaker 3: really have to do with growth expectations. And that the
Speaker 3: term premium is going up, that's a tightening of financial conditions, right,
Speaker 3: I mean, the declining term premium was a big driver
Speaker 3: of you know, sort of risk appetite, you know, stronger
Speaker 3: equity private you know in recent decades, frankly, and you know,
Speaker 3: to the extent that's going away, that's going to be
Speaker 3: a headwind for stocks.
Speaker 4: Neil, Neil, I'm at an equity guy. All I know
Speaker 4: about the bond market is bond prices go up, yields
Speaker 4: go down.
Speaker 2: That's mailed that.
Speaker 4: But I got my fetter reserved cutting interest rates. Why
Speaker 4: are my yields in this bond market thing going up?
Speaker 4: I thought the yield should be going down.
Speaker 2: Yeah, I mean it's a good question.
Speaker 3: I think. You know, obviously some rates are coming down.
Speaker 3: Some private sector borrowing rates have been coming down alongside
Speaker 3: the FEEDI using so for example, helock rates have been
Speaker 3: coming down, Auto loan rates have been coming down. You know,
Speaker 3: prime rates obviously have been coming down because those are
Speaker 3: very much keyed off what the FED is doing. But
Speaker 3: you know, things like more rates, those have been high elevated,
Speaker 3: and yeah, and as I mentioned, I mean that's you know,
Speaker 3: to some extent, it's it's out of the fed's control.
Speaker 3: I mean, I think one reason why they're going up
Speaker 3: is because, you know, at some level, the economy has
Speaker 3: been doing a little bit better, at least initially after
Speaker 3: the September meeting, somewhat better than expected. But I don't
Speaker 3: think that goes far enough to explain why interest rates
Speaker 3: have backed up. So I think that's part of the reason,
Speaker 3: but it's not really the bulk of the reason.
Speaker 4: What's the FED focusing on here, Neil, do you think
Speaker 4: is it? Is it the absolute inflation number? Is it
Speaker 4: the labor market? What is the FED focusing on these days?
Speaker 2: Do you think? Well?
Speaker 3: I mean, I think to the extent that the September
Speaker 3: meeting was a focus on the labor market, I think
Speaker 3: December one kind of put inflation back in the driver's seat.
Speaker 3: I mean, they're clearly all you have to do is
Speaker 3: go through the document that they release with, you know,
Speaker 3: with the Summary of economic projections, and go to the
Speaker 3: balance of risks. Right, you have a overwhelming majority of
Speaker 3: participants on the f MC seeing that the balance of
Speaker 3: risk to core inflation are skewed to the upside. It
Speaker 3: completely flipped from where they were in September. So I
Speaker 3: think the real life of inflation data has taken on
Speaker 3: a lot more importance than it did, you know, maybe
Speaker 3: three months ago.
Speaker 2: And Neil done it with the Renaissance Macro. He'll be
Speaker 2: with us for the entire half hour. I do want
Speaker 2: to point out that he works with Jeffrey Degraph, who
Speaker 2: had a better than good two thousand and four. We're
Speaker 2: hoping to get mister mister de Graph is very tough
Speaker 2: to me, you know, it sounds like it we can
Speaker 2: get done anytime we want. Jeff to Graph is just
Speaker 2: like absolutely impossible to get what do you learn from
Speaker 2: Jeff to graph right now, Neil dout it when you
Speaker 2: tie in is world class equity coverage into your call
Speaker 2: of a slowing economy, how do you synthesize those two?
Speaker 3: Well, I mean I would say that the market has
Speaker 3: been is over sold, you know, so that's you know,
Speaker 3: reasonably good setup going in uh, you know, into the
Speaker 3: new year, so you're sort of probably due for a bounce.
Speaker 3: But I do think interest rates up at these levels
Speaker 3: concern him, and so you know, that's something to keep
Speaker 3: in and keep in mind, you know. For my own part,
Speaker 3: I mean I would say that, you know, really, to me,
Speaker 3: the big the big story, frankly, is the performance of housing, right.
Speaker 3: I mean, this is why you know, you made Economist
Speaker 3: of the Year back in twenty twenty three.
Speaker 2: I didn't get that. I didn't I didn't get that back.
Speaker 3: I didn't get it for twenty twenty four time, unfortunately.
Speaker 3: But you know, I would just say that one of
Speaker 3: the reasons why I made that, made the calls I
Speaker 3: made in twenty for twenty you know, twenty twenty three,
Speaker 3: is because at the end, you know, two years ago,
Speaker 3: at the end of twenty twenty two, you know, the
Speaker 3: FED was dialing back kind of the hikes, and housing
Speaker 3: stocks were outperforming. So that's kind of a you know,
Speaker 3: an interesting Now you have the FED cutting and housing
Speaker 3: stocks are underperforming, so you know, I think that the
Speaker 3: underperformance of home building is I think an important kind
Speaker 3: of Yeah, Neil, I.
Speaker 2: Got a fiery response out on YouTube and the housing market.
Speaker 2: What is your insight of where the housing market goes
Speaker 2: for twenty twenty five.
Speaker 3: Well, I think it's not going to look particularly good
Speaker 3: as we go into the spring selling season because mortgage
Speaker 3: rates are running plose to seven percent. I mean, with
Speaker 3: the labor markets cooling, the math doesn't work for a
Speaker 3: lot of people. And I think that's the primary issue
Speaker 3: right now with respect to housing.
Speaker 2: I mean, if you look at.
Speaker 3: Home building, new builders, new housing, if you look at
Speaker 3: single family homes for sale that have been completed, that
Speaker 3: number is up over fifty percent against last year. So
Speaker 3: there's slack building in the new housing market. I think
Speaker 3: Paul mentioned sort of the increasing inventory situation in parts
Speaker 3: of the South and.
Speaker 2: The West.
Speaker 3: I mean, remember that's like the meat of the market,
Speaker 3: right so if inventories are going up in those places,
Speaker 3: that means that construction is going to be coming down. Yeah,
Speaker 3: that's where most construction happens.
Speaker 2: Frankly, you know this is important. Eruption.
Speaker 3: Employment is at risk.
Speaker 2: Now I want to go to Neldata and Paul Sweeney
Speaker 2: Lisa jump in on this. This is important. Isn't where
Speaker 2: we live in aberration? Paul Sweeney like, where we live
Speaker 2: isn't normal?
Speaker 4: No, because I think the density we have here in
Speaker 4: the metro New York area is so crazy. That and
Speaker 4: Lisa's looking for a new are you looking for.
Speaker 2: Six thousand square Now that's the backyard.
Speaker 5: But it's like getting out bid by these offers. That
Speaker 5: is crazy. Like a house goes on the market for
Speaker 5: six hundred thousand in New Jersey and.
Speaker 2: It sells for seven forty. It's me and it's like,
Speaker 2: how do you get it?
Speaker 4: But that's not the rest of the world here, So hey, Neil,
Speaker 4: so let's stop back. You know, we got the labor market,
Speaker 4: the real estate market. How's the consumer doing out there?
Speaker 4: How do you think about the consumer here in twenty
Speaker 4: twenty five.
Speaker 3: I mean, I think it's going to be tough to
Speaker 3: sustain the kind of consumption pace we saw last year, right,
Speaker 3: I mean, if the labor markets are slowing and wage
Speaker 3: growth is cooling, which I think is clearly happening because
Speaker 3: you know, things like hiring rates are down, puts rates
Speaker 3: are down. You know, there's not really much need for
Speaker 3: firms to be paying up and bidding up the wages
Speaker 3: of their workers. So with the slack in the labor market,
Speaker 3: that's you know, slowly building. I mean, you know, the
Speaker 3: labor market's not collapsing, but it's hard to be bullish
Speaker 3: on the consumer given that environment. And I also think
Speaker 3: there's probably a bit of an asymmetry, right, I mean,
Speaker 3: you know, the thing that's been supporting I think consumption
Speaker 3: has been you know, rising wealth, you know, sort of
Speaker 3: equity prices going up, home price is going up. And
Speaker 3: to the extent that that doesn't continue, I mean, we've
Speaker 3: seen some slowing in stocks. I mean there's probably an
Speaker 3: asymmetry there right where modest slowing gets you maybe an
Speaker 3: outsized slow down in right.
Speaker 4: So that shape and K shaped Tokany, here's.
Speaker 2: The second time you've mentioned I like it. It makes.
Speaker 4: Exactly the K shaped to Kanya. It kind of makes
Speaker 4: sense to me. So what should the FED do given that? Here?
Speaker 4: I mean again, I guess if you look at the
Speaker 4: warp function w I RP go on the Bloomberg Terminal
Speaker 4: suggests maybe a couple of rate cuts this year. Should
Speaker 4: the Fed do more?
Speaker 2: Do you think?
Speaker 3: I mean, I think they will do more because I
Speaker 3: think the data is going to slow and inflation. I mean,
Speaker 3: to me, the most notable thing that's happened, frankly is
Speaker 3: the slowing in rental in rental inflation, housing rental inflation.
Speaker 3: That's been really the main shortfall relative to the Fed's
Speaker 3: longer run inflation objectives, and now that appears to be
Speaker 3: working right, I mean in the favor of disinflation. So
Speaker 3: I think that's important. Obviously we're all watching what's going
Speaker 3: on with the dollar, but that's going to weigh on
Speaker 3: the prices for imported goods, I think so. No, I
Speaker 3: think the Fed's going to be ending up. If I
Speaker 3: had to pick, I'd say that they're going to cut
Speaker 3: more than twice. So I think that the front the
Speaker 3: Yeld Curve is a pretty good place to park your
Speaker 3: money at the moment.
Speaker 2: Neil da I wanted to go there in a dollar
Speaker 2: kitschooks joining us in about two hours, folks with socchin
Speaker 2: and you're just brilliant, but let's let's do let's talk
Speaker 2: to foreign exchange trader Neil Dutta here as well. Are
Speaker 2: the dollar movements Neil Dotta nonlinear or linear like d
Speaker 2: x y one O seven, one o eight, one oh nine,
Speaker 2: or is there a Neil Doutta tip point where things
Speaker 2: begin to unravel?
Speaker 3: I mean, I think there's probably something to the idea
Speaker 3: that you know, at a certain point, like more things
Speaker 3: start breaking. But you know, let's I mean, when you
Speaker 3: have like one percent currency moves, that's a big deal, right,
Speaker 3: I mean, so I think the dollar is concerning across
Speaker 3: multiple dimensions. I mean, Number one, obviously, it weighs on
Speaker 3: US exporters, particularly manufacturing.
Speaker 2: That's number one.
Speaker 3: Number two, going back to the equity market discussion, it
Speaker 3: weighs on earnings, right, particularly for tech companies that are
Speaker 3: global in nature, and because that's been a big driver
Speaker 3: of US stock prices. I think the fact that the
Speaker 3: dollar has been strengthening is going to weigh on earnings
Speaker 3: and by extension way on stocks. And I think it
Speaker 3: matters for the rest of the world, obviously, particularly emerging markets,
Speaker 3: because they have lots of dollar denominated debts, so the
Speaker 3: cost of financing that goes up, and then you have
Speaker 3: to start worrying about balance of payment problems in em
Speaker 3: which obviously of their slowing that creates a negative feedback loop,
Speaker 3: pushing the dollar up even more. So you know, I think,
Speaker 3: you know, because of safe haven consideration. So yeah, I
Speaker 3: think it's concerning. But again, that's not really a world
Speaker 3: where the Fed can just kind of sit back in
Speaker 3: its chair and say, oh, we're gonna cut twice this year, right,
Speaker 3: So to me, the dollar represents an unambiguous tightening of
Speaker 3: financial market connections.
Speaker 2: Neil Donna, thank you so much. Here's you valuable generous time.
Speaker 2: Here on a Friday morning to start the year.
Speaker 1: Of you're listening to the Bloomberg Surveillance Podcast. Catch us
Speaker 1: live weekday afternoons from seven to ten am Eastern Listen
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Speaker 2: A bond person comes in, Paul, you nailed early. What
Speaker 2: did you say?
Speaker 6: Price up up, yields down, nail down.
Speaker 2: Okay, there we go, We're not going to do that.
Speaker 2: Joining us now. Pria isra with a Friday get the
Speaker 2: year started discussion, and everybody's sitting in their kitchen this
Speaker 2: weekend discussing how much they've lost betting on football and
Speaker 2: also their portfolio. You and I are going to talk
Speaker 2: Jensen trainer sharp right now. Adults in the business say
Speaker 2: how much did I make? But how much risk did
Speaker 2: I make making what I made? And William Sharp out
Speaker 2: at Stanford identified this explain to mere mortals worldwide what
Speaker 2: the sharp rate is and why it matters.
Speaker 6: I love that you're talking about sharp ratio.
Speaker 2: It's great you and I can bring up bar conversation
Speaker 2: on two people here.
Speaker 6: I love it.
Speaker 2: They're sitting at their their table this weekend and they're like,
Speaker 2: why are we not making money? Sharp ratio?
Speaker 3: Go.
Speaker 7: So there's a lot of well I should start with
Speaker 7: happy new Year, thank you for having me.
Speaker 2: I have children.
Speaker 7: Continue. The focus typically is on the return. It's what
Speaker 7: return am I getting? You're getting that return taking risks
Speaker 7: and you know, but you know you're talking about have
Speaker 7: we not made money?
Speaker 6: Enough money?
Speaker 7: I think bond people who thought the Fed starting to
Speaker 7: cut trades, and that was where we were a year ago.
Speaker 7: The Fed's going to cut trades. They typically cut two
Speaker 7: hundred three hundred basis points. You're gonna make a lot
Speaker 7: of money in bonds. I don't think, well that that's
Speaker 7: where they lost money. They put money in stocks. They
Speaker 7: did well. We're in a soft landing. Pretty much every
Speaker 7: risk asset did well. Credit did great. Now you take
Speaker 7: stock and look at the uncertainty. You have the FED
Speaker 7: with an army of PhDs saying we.
Speaker 6: Have a lot of uncertainty.
Speaker 7: We don't know how to manage the cyclical and the structure.
Speaker 7: So we're pausing. And so that's where that shop comes in.
Speaker 7: Let's look at the risk and return. So let's look
Speaker 7: at the return relative to the risk, which is what
Speaker 7: you will you do to sharp ratio. That's where I
Speaker 7: think fixed income. You're getting six seven percent in high
Speaker 7: quality fixed income with not a lot of risk because
Speaker 7: I don't think exactly, and so that your denominator, if
Speaker 7: it's lower, suddenly fixed income makes a lot of sense.
Speaker 2: And I'm one more than one question, folks, and Sweeney's
Speaker 2: going to bring us back to normal. You have a
Speaker 2: superior sharp ratio and the JP Morgan core bond versus
Speaker 2: your peers and versus the index. That's a one year
Speaker 2: sharp ratio. There's a three year look back, there's a
Speaker 2: five year lookback. I'm wedded to the three year sharp ratio.
Speaker 2: Folks of whatever four oh one k plan you've got,
Speaker 2: which duration is the most value to prea miser?
Speaker 7: So I would say I think I do wonder Bob Michael,
Speaker 7: I would say that we look at five year, ten
Speaker 7: year consistency is such a big part of it's our DNA.
Speaker 7: So just making sure that we can consistently outperform it.
Speaker 6: You know, how do you do this?
Speaker 7: You diversify a lot so that the risks are not
Speaker 7: You're not, you know, wedded to one particular risk, and
Speaker 7: you do your research. In a high cost of capital world,
Speaker 7: dispersion is going to be high, meaning some sectors will
Speaker 7: do well and others will not. And I wish I
Speaker 7: could say we know exactly which sectors are going to
Speaker 7: do well. If you diversify well and you do that research,
Speaker 7: that's where you get that superior shock.
Speaker 2: You'll sharp ninety years old out of stay. Is that right? Yeah? Okay, good,
Speaker 2: bring us back to some sense of normal.
Speaker 4: Twenty twenty four fixed income investors got paid to take
Speaker 4: some risk, high yield leverage loans by far the best performers.
Speaker 4: Is that going to spill over into twenty twenty five
Speaker 4: do you.
Speaker 7: Think I think so, and yes, why let's look at fundamentals.
Speaker 7: Fundamentals of the corporate sector is still very wrong.
Speaker 6: It was strong a year ago. It's still strong.
Speaker 7: You're looking at strong balance sheets, strong business models, earnings
Speaker 7: are decent. We're also looking at what a company is
Speaker 7: doing with their debt. Are they re levering up? That
Speaker 7: would make me a little nervous. Mostly they're not. I
Speaker 7: will say, since you talk about high yield and leverage,
Speaker 7: I mean high yield default rates including the restructuring, has
Speaker 7: been one and a half percent. It's low leverage loans
Speaker 7: a little higher. So I think you have to be
Speaker 7: careful what you buy. We like high quality, high yel
Speaker 7: we like parts of leverage loans. I think fundamentals are strong.
Speaker 7: Then let's look at technicals. Technical is extremely strong. People
Speaker 7: are looking at the returns they had in equities and
Speaker 7: they're saying, maybe we should rebalance.
Speaker 6: You look at fixed income. If you're getting or in.
Speaker 7: High yeld, you're getting seven eight percent with lower volatility.
Speaker 7: That's why we're seeing continued inflows into bond funds. So
Speaker 7: I would say technical fundamental very positive for fixed income.
Speaker 7: I think you have another good year as long as
Speaker 7: that soft landing is maintained.
Speaker 4: Are there some industries sectors that are attractive to that
Speaker 4: screen well for you guys in terms of maybe taking
Speaker 4: some credit risk.
Speaker 6: So I would say financials is an area that we like.
Speaker 7: Utilities is another one in investment grade within high yield
Speaker 7: as parts of media and telecom that have been beaten
Speaker 7: up and they've actually started to perform well. And that's
Speaker 7: where but I would say rather than sectors even look
Speaker 7: at companies, you have to drill down into balance sheets
Speaker 7: to make sure you know what you own, particularly as
Speaker 7: you sort of go down that risk spectrum.
Speaker 4: New issuance. We've seen a ton of new issuance in
Speaker 4: the bond market. I mean, did they call you up
Speaker 4: when Morgan standing a Goldman Sachs. They've got new issues,
Speaker 4: so they called JP Morgan Asset Management to buy new issues.
Speaker 4: Are you guys known as Hey, we'll buy pretty much
Speaker 4: anything you got for sale? How do you guys do that?
Speaker 6: Not everything that's for sale.
Speaker 7: We absolutely look at the new issue market, sometimes as
Speaker 7: a new issue premium. As there was we started to
Speaker 7: see the new issue market sort of begin yesterday. We
Speaker 7: would love to buy something with a premium because you're
Speaker 7: getting paid to buy that new bond, which is actually
Speaker 7: going to be more liquid, and you can get out
Speaker 7: of some of your older bonds. We're getting in flows,
Speaker 7: so we're invested.
Speaker 6: I mean, I think.
Speaker 7: January tends to be seasonally a higher issuance month, so
Speaker 7: we expect more issuance. What I'm looking at is net issuance.
Speaker 7: So five years ago, when COVID hit or four five
Speaker 7: years ago, you have this big burst of issuance, And
Speaker 7: what we're seeing now is that issuance is being refinanced.
Speaker 7: If net issuance was picking up a lot, that means
Speaker 7: a corporate sector is getting levered up.
Speaker 6: I might hesitate to buy.
Speaker 7: This is still net issuance we think will be actually
Speaker 7: lower this year compared to last year. Gross issuance will
Speaker 7: be high, but people have two Companies have to refinance,
Speaker 7: Investors have to refinance.
Speaker 2: So Tim Cook watches a new episode of Silo tonight
Speaker 2: on Apple TV, goes mental over the dystopian destruction of
Speaker 2: the world, and he goes out and issues thirty billion
Speaker 2: dollars of bonds. Do you want to buy Meg seven paper?
Speaker 7: I like the fundamentals of the Mac seven what I
Speaker 7: don't love other spreads. I mean they're you're not getting
Speaker 7: paid tight, You're not getting paid. I would rather, Okay,
Speaker 7: you can take the same risk if you take it
Speaker 7: in securitized PHM.
Speaker 6: That requires you. Does that mean so securitized.
Speaker 2: John Tucker's new iPhone?
Speaker 7: Is that?
Speaker 2: What that is?
Speaker 7: That would be a tranched up structured security with more
Speaker 7: consumer risk. I mean there are some corporates in housing,
Speaker 7: single family rental. They take all these loans, they put
Speaker 7: it in a structure and tranch it.
Speaker 2: But Apple's not doing is securitize, right?
Speaker 7: I have to so I would say I'd like to
Speaker 7: take that creditorisk, But where am I getting paid more
Speaker 7: than the seventy eighty basis points you're getting paid? So
Speaker 7: it's more about what return am I getting versus the
Speaker 7: risk I'm taking. And that's why I would say securitize
Speaker 7: will screen better than something like max seven though, I
Speaker 7: you know the fundamentals are strong.
Speaker 4: Are you getting cash inflows into your bond funds these days?
Speaker 4: What are what are your clients doing with allocation?
Speaker 2: Are they putting money into the bond funds?
Speaker 6: We are getting inflows.
Speaker 7: I think the industry is getting I'd like to say,
Speaker 7: you know, are we getting more market share? I don't
Speaker 7: know where the industries get more in flows. We're absolutely
Speaker 7: getting inflows. I think people are looking at all in
Speaker 7: yields and looking at their portfolios and saying, well, maybe
Speaker 7: we should put some in fixed income. The other thing
Speaker 7: they're looking at is cash is giving you four percent
Speaker 7: and a bond fund is giving you five six percent.
Speaker 6: Okay, I'm picking up yield, and so I'm moving up there.
Speaker 2: I got twenty five seconds because you've got to move heat,
Speaker 2: because Bar's got to sit down. It's in his contract
Speaker 2: for two thousand and twenty five. Are you picking up
Speaker 2: carpet yet for the new skyscraper? Are they of the
Speaker 2: designers in saying, Pria, do you want it in maroon? Yep.
Speaker 7: We are very excited about that building. We can see
Speaker 7: it go up in front of us and been inside.
Speaker 7: We haven't, but it does look like it's getting there.
Speaker 7: In seventy eight months, we're totally it'll be done.
Speaker 6: I hope.
Speaker 2: You know. It's like Silo. You look out the windows
Speaker 2: of the cafeteria at Park Avenue and you're not sure
Speaker 2: what you're looking at out there. Now we're doing a remote.
Speaker 4: I'm telling you, Jamie Diamond, right now, when that thing opens,
Speaker 4: we're doing a remote for.
Speaker 2: Pretty Did you see the view she has? Now? Yeah,
Speaker 2: she's important. She's looking at a brick wall like medicine.
Speaker 6: Exactly right now, I'm just looking at the screens. But yes,
Speaker 6: it's a beautiful reading the Bloomberg screens.
Speaker 2: Right well, thank you, you can come back, pre amisser,
Speaker 2: thank you so much. With JP Morgan, a really important
Speaker 2: discussion here earlier on the sharp ratio. If you don't
Speaker 2: know what that is, look it up, study it. But
Speaker 2: I just can't say enough about the financial media return return,
Speaker 2: return return, you know what it's about, the risks along
Speaker 2: the way, matters a little bit. That was a clinic
Speaker 2: with Priam misery of JP Morgan.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
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Speaker 2: Journeys Down Mike Wilson with Morgan Stanley with succeptionally intelligent
Speaker 2: views on the market. He has not been a raging bull.
Speaker 2: He's been someone who has participated but done it with
Speaker 2: a bit of angst and caution as well. There's the
Speaker 2: Mike Wilson word. Mike Wilson nimble. If I'm nimble after
Speaker 2: five days down in a row or whatever it is,
Speaker 2: how nimble am I into Monday? What do I do
Speaker 2: now to reposition with confidence? Well?
Speaker 8: Good morning, Tom, Look I think and happy New Year.
Speaker 8: I you know, I think what you said earlier is
Speaker 8: listening to your chatting about do I get in now?
Speaker 8: Do I what do I do? And that's really not
Speaker 8: ever the right strategy. The right strategy is to have
Speaker 8: something committed at all times and be balanced in your
Speaker 8: portfolio so that you can ride out, you know, turbulent.
Speaker 2: Times when they arrive.
Speaker 8: And look, we've had a little bit of a bad
Speaker 8: stretch here since the beginning of December, which doesn't really
Speaker 8: surprise me given the run that we had, you know,
Speaker 8: post election is just a lot of euphor you So
Speaker 8: we're having a bit of correction here. I do think
Speaker 8: the first half of twenty twenty five will probably be
Speaker 8: a bit more challenging, and then the second half sets
Speaker 8: up pretty well, assuming that you know, a forecast around
Speaker 8: the economy and earnings come through. Everybody knows the market's expensive.
Speaker 8: Everybody knows that. You know, we've had and sentiments crazy
Speaker 8: right now, and that's just part of the game. I mean,
Speaker 8: you have to, you know, you have to deal with that,
Speaker 8: and that's why you have diversification in your portfolio.
Speaker 2: You look at factors. I think of Lizae Saunders over
Speaker 2: Schwaub as well. Which is the factor now with the
Speaker 2: closest Mike Wilson's study.
Speaker 8: Well, we look at all of them obviously, and I
Speaker 8: would say it's been the you know, the factor that's
Speaker 8: been most in favor has been quality and momentum. And
Speaker 8: then recently both of those came off a bit because
Speaker 8: that's where people were positioned. Okay, that doesn't mean that
Speaker 8: those aren't still the places to be. It just means
Speaker 8: that we're having a bit of a pullback in here.
Speaker 8: And like I think, I think going into twenty twenty five,
Speaker 8: there are some areas that got probably a little bit overdone,
Speaker 8: some of the you know, some of the growth areas
Speaker 8: that that factor in particular, probably people are paying up
Speaker 8: for that too much. I think some of the size factors.
Speaker 8: You know, people are rotated probably a little bit too
Speaker 8: much into the small cap area and they're giving some
Speaker 8: of that back now too. So that's just one sort
Speaker 8: of arrow in our in our quiver. And uh, you know,
Speaker 8: but but it's definitely something we watch closely.
Speaker 4: Hey, Mike, I'm reading your your more most recent note
Speaker 4: about the breath of the market. It gets gets me
Speaker 4: to thinking, here, I got the s and P five
Speaker 4: twenty four is up like twenty three twenty four percent,
Speaker 4: Yet the equal weighted SMP up only like you know,
Speaker 4: ten or eleven percent. A what does that tell you?
Speaker 4: I mean, is and how concerning is that for you?
Speaker 8: Well, I mean it's not really. Remember, breath is a symptom, okay,
Speaker 8: of what's going on, not the cause. And so the
Speaker 8: weaker breath tells us that, you know, certain things are
Speaker 8: going and we think we've this is something we think
Speaker 8: we've gotten very right over the last several years, which
Speaker 8: is that it's a very government heavy, you know, economy. Right,
Speaker 8: So if you actually look at the private economy, the
Speaker 8: private economy has been sort of languishing, whether it's manufacturing
Speaker 8: or housing. Some of the consumer goods areas I mean,
Speaker 8: they're actually inter recession. They've been inter recession for two years.
Speaker 8: And the government, heavy handed former government, whether it be
Speaker 8: fiscal or monetary policy, has kind of kept things buoyed
Speaker 8: and the market has figured that out. And of course
Speaker 8: you have things like AI, you know, maybe weight loss drugs,
Speaker 8: you know, certain themes that are very specific to certain areas,
Speaker 8: and those areas have carried the day. Okay, So I
Speaker 8: think the weak breath is symptomatic of this very unbalanced
Speaker 8: economy that we're dealing with.
Speaker 2: Now.
Speaker 8: One thing to point out, however, is the second half
Speaker 8: really since September the breath improved tremendously, And actually the
Speaker 8: breath in twenty twenty four is still way better than
Speaker 8: it was in twenty twenty three. So it's not all bad,
Speaker 8: but it is a like I said, it's a symptom
Speaker 8: of what I think is a very unbalanced kind of
Speaker 8: recovery that is ongoing.
Speaker 4: So so you think about twenty twenty five, Mike, I
Speaker 4: think a lot of folks are saying this, Really, if
Speaker 4: there's gonna be any performance in twenty twenty five, it
Speaker 4: really has to be driven by earnings growth, because maybe
Speaker 4: the Fed's going to cut a couple of times, but
Speaker 4: I'm not sure how much more than that. Are you
Speaker 4: concerned that the earnings leg of this story is maybe
Speaker 4: a little ahead of itself.
Speaker 8: Well, I mean, look the markets are they get ahead
Speaker 8: of that, right, So the markets, you know, multiples, you know,
Speaker 8: rallied because it anticipated in earnings recovery. Of course, this
Speaker 8: summer we had some turbulence and then the fall things
Speaker 8: picked up again. We think most of the of the
Speaker 8: rally in the second half was driven by sort of
Speaker 8: liquidity factors, and you know, the sentiment picking up around
Speaker 8: the election, just hitting that behind us, you know, the
Speaker 8: definitive outcome, et cetera. And so now we're a little
Speaker 8: bit ahead of ourselves. So multiples probably have to consolidate
Speaker 8: a bit. They for the key for this year is
Speaker 8: are we going to get a broadening out in the
Speaker 8: earnings participation? Okay, So earnings have been pretty lousy for
Speaker 8: most companies over the last two years for the reasons
Speaker 8: I mentioned earlier. Okay, interest rates are too high for
Speaker 8: most businesses. Government is crowding out a lot of smaller
Speaker 8: businesses and even larger businesses. To some extent, the global
Speaker 8: economy is still kind of stuck in the mud. So
Speaker 8: a lot of multinationals are not doing well. So the
Speaker 8: key for next year is can we see a broadening
Speaker 8: out of that earning recovery. We think we can, and
Speaker 8: that's our job. Our job is to figure out where's
Speaker 8: that earning is going to pick up. Financials is one
Speaker 8: area where we've gotten more constructive recently because of the
Speaker 8: earning story, specifically.
Speaker 2: Mike Wilson with US with Morgan Stanley. If I need
Speaker 2: breadth to go higher, Mike Wilson is healthcare is so
Speaker 2: dominant that if healthcare doesn't perform, I don't see an
Speaker 2: intelligent gain in the market.
Speaker 8: No, I don't think so, Tom. I mean, healthcare has
Speaker 8: been languishing for a while. It's been you know, there's
Speaker 8: been some big home run winners and as I mentioned earlier,
Speaker 8: some of the weight loss drug winners, et cetera. But
Speaker 8: healthcare has been languishing for the better part of a
Speaker 8: year and a half in a relative basis, and the
Speaker 8: market's been fine. So I don't think it's necessary condition
Speaker 8: it would be helpful. We'd like to see it happen.
Speaker 8: I think for healthcare specifically, you know, with the appointment
Speaker 8: of Bobby Kennedy. Well, let's see how that goes. I mean,
Speaker 8: I think that the sector is probably gonna remain under
Speaker 8: pressure until that confirmation. Hearing interesting, and then I think
Speaker 8: from there we might we might get a bit of
Speaker 8: a bounce.
Speaker 2: Yeah, Mike Wilson, tell me about the necessary condition for
Speaker 2: breath to work. What is the single item that you're
Speaker 2: studying with your team to say we have good breadth.
Speaker 8: It's what you said earlier, Tom, we need we need
Speaker 8: better breath of earnings revisions. I mean, this has been
Speaker 8: a theme of ours for the last two years.
Speaker 2: You know.
Speaker 8: One of the reasons why we weren't maybe as enthusiastic
Speaker 8: as others in terms of the rally we've had is
Speaker 8: because we thought it would be narrow. In fact, our
Speaker 8: forecast suggested that that the earnings recovery itself was driven
Speaker 8: by heavy cost cutting in the mag seven and then
Speaker 8: of course they had AI, which helped a handful of companies.
Speaker 8: You had, you had a few of the themes that
Speaker 8: were driving you know, growth, You had government support for infrastructure,
Speaker 8: spend things along those lines, and so it was very narrow.
Speaker 8: So in order for the market breath, the price breath
Speaker 8: to get better you need earnings breath to get better.
Speaker 8: I don't think it's that complicated. And that's what we
Speaker 8: think should happen in twenty twenty five, assuming once again
Speaker 8: that you know, we don't get some policy changes that
Speaker 8: are maybe negative for the market in the near term.
Speaker 8: And that's really our concern the short term is that
Speaker 8: we think some of the policy changes are probably going
Speaker 8: to be more negative in the beginning and then more
Speaker 8: positive in the second half.
Speaker 4: Hey, Mike, as we all know, the S and P
Speaker 4: five hundred over each of the last two years has
Speaker 4: grown north of twenty percent.
Speaker 2: I'm not sure.
Speaker 4: Earnings have grown to that extent, are we? What's the
Speaker 4: valuation call right here? As you think about the market here.
Speaker 8: Mike, it's expensive. I mean, that's not a great insight.
Speaker 8: I mean, this is probably the single biggest miss by
Speaker 8: I think everybody in the last twelve months. I don't
Speaker 8: recall anyone saying they thought we would trade to twenty
Speaker 8: three times earnings. But of course everybody rode the wave,
Speaker 8: including us, and you're happy to take it. And so
Speaker 8: now you're sitting here twenty two twenty three times earnings
Speaker 8: and you're like, oh, you know, well, now we need
Speaker 8: to see the earnings actually surprised to the upside. And
Speaker 8: you're exactly correct on the fact that earnings have not
Speaker 8: been the main driver of the returns. The main driver
Speaker 8: of the returns has been equity evaluations, right. And there's
Speaker 8: been some specific names that have done a great job
Speaker 8: in earnings and those are unique, but overall this has
Speaker 8: been probably one of the biggest multiple expansions we've ever
Speaker 8: seen coming out of a reception.
Speaker 2: And so what does it do with cash? For Mike Wilson,
Speaker 2: for Lisa Shallatt and Morgan Stanley Wealth Management? Is cash
Speaker 2: your friend right now?
Speaker 8: Well, I think you know, short duration fixed income in
Speaker 8: general has been our friend for the last several years.
Speaker 8: Being underweight you know duration, whether that's two years or
Speaker 8: one year or cash, they're all doing the same thing
Speaker 8: for your portfolio time but giving you a nice four
Speaker 8: to five percent return with very little risk. And so
Speaker 8: that's a great place to have some of your money
Speaker 8: once again, not all of your money. You know, we're
Speaker 8: probably five to seven percent in that cash rate region,
Speaker 8: which is two years and end, and that's fine. That's
Speaker 8: a good place to be when you're getting compensated. I mean,
Speaker 8: just recall two years ago you're getting zero on that cash.
Speaker 8: Now that's a bad deal, But today you're getting actually
Speaker 8: a pretty positive return. And there's a place in every
Speaker 8: portfolio for something like that. Just ask Warren Buffett.
Speaker 4: Hey, Mike, it seems like the market's discounting two FED
Speaker 4: rate cuts this year.
Speaker 2: Is the market okay with that or do.
Speaker 4: They need to think the market needs to see a
Speaker 4: little bit more or do you think the market is
Speaker 4: fairly discounting to rate cuts.
Speaker 8: Well, first of all, let me just make an opening
Speaker 8: statement about that. I mean, if there's one thing that
Speaker 8: the markets have been more wrong about than FED cuts
Speaker 8: over the last four years, I like to know what
Speaker 8: it is, so you know, I mean, this has been
Speaker 8: probably the single biggest whip saw, both on the upside
Speaker 8: and the downside, that the markets have gotten wrong. So
Speaker 8: I think looking at the bond market right now, what
Speaker 8: they're pricing in is a waste of time because they
Speaker 8: don't know. The FED doesn't even know what I would say. However,
Speaker 8: one of the reasons why the breath is deteriorated, I
Speaker 8: talked about that as a symptom the cause of the
Speaker 8: breath deterioration. One of them is the fact that rates
Speaker 8: have gone up at the back end almost one hundred
Speaker 8: basis points since the FED has cut a hundred basis points.
Speaker 8: Think about that. That means the term premium has really
Speaker 8: gone up sharply, and that's been something we've been focused on.
Speaker 8: When the term premium kind of gets up into this range,
Speaker 8: you actually now are at risk of having an equity
Speaker 8: valuation correction. So we think that's probably the main reason
Speaker 8: why the breath has deteriorated here recently, more so than earnings.
Speaker 8: And I think, you know, two cuts, sure, why not?
Speaker 8: Could we get zero cuts next this year? Possibly could
Speaker 8: we get four or five cuts. Maybe it just depends
Speaker 8: on how things play out, but I think right now
Speaker 8: two cuts is kind of the best guess, and the
Speaker 8: bomb market is probably a little bit suspicious about that
Speaker 8: based on how the back end straining.
Speaker 2: Mike Wilson, thank you so much, Chief you. S equity
Speaker 2: strategist Morgan Stanley enters to be with us.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
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Speaker 2: Yes, into twenty twenty five. We're extending the Lisa Mantel
Speaker 2: hour into a longer day part as they say in
Speaker 2: the business, Lisa, what do you have today?
Speaker 5: So younger drinkers. This is apparently according to Financial Times,
Speaker 5: they are sipping less French wine. Yes, they're opting for
Speaker 5: different beverages, rose beer, spirits, cutting out alcohol altogether. So
Speaker 5: I'd like to go to Paris correspondent Tom Keene and
Speaker 5: find out were they sipping less French wine in Perry.
Speaker 2: Yeah, I think they are. It's in the zeitgeist over there.
Speaker 2: They're very concerned about it. And what's fascinating is selected
Speaker 2: res staurant owners talking about how people are just flat
Speaker 2: out drinking less. Yes, and you know, I did a
Speaker 2: shout out on Twitter. John Ferrell absolutely nailed the impact
Speaker 2: of this so zebic thing overall. Yeah, plus three days
Speaker 2: got six percent. People are eating six percent less food
Speaker 2: and it curbs your alcohol.
Speaker 5: Yeah, and drinking alcohol that a lot of sugar, So
Speaker 5: are trying to stay away from I mean, you know,
Speaker 5: especially wine, especially red wine. Pro tip and that's yes.
Speaker 2: You have a martini maybe two, and these are smaller martinis.
Speaker 2: These are fifty mad men martinis. And then to cut
Speaker 2: back on alcohol, the third martini, you have a reverse martini,
Speaker 2: which is a little bit of gin but with vermouth.
Speaker 2: That's how you that's a measured consumption declined.
Speaker 6: Very interesting.
Speaker 2: Interesting, But the red is a big no.
Speaker 5: But and it's it's causing a lot of people to change.
Speaker 5: Like a lot of the producers. They have to focus
Speaker 5: on higher quality wines, right because the younger generations like
Speaker 5: certified organic wines, and then they're offering reds like whites,
Speaker 5: low alcohol wines, but also making the low alcohol wine.
Speaker 5: It's more expensive, so now the producer are having over
Speaker 5: more money to make these low alcohol wines.
Speaker 4: We're drinking barber Escos now, that's what we're in. We're
Speaker 4: drinking the barber Sco than Nebiola.
Speaker 2: Grape coming at it.
Speaker 4: Listen to you got turned on to that a couple
Speaker 4: of years ago, and that's what we're drinking.
Speaker 2: I was one Morgan David, That's where I was.
Speaker 5: Next America apparently getting better at getting things done. Workers
Speaker 5: and companies are getting more productive. Okay, this is Labor
Speaker 5: Department data. Productivity rows two percent in the third quarter
Speaker 5: compared to a year earlier. But the Wall Street Journal
Speaker 5: says the reason why a lot of business owners using
Speaker 5: AI to help write things like marketing plans, email social
Speaker 5: media posts the influx of immigration. They say immigrants often
Speaker 5: take those manual intensive jobs, so that allows other workers
Speaker 5: to move up to these highly skilled roles. But also,
Speaker 5: you know the QR codes that makes things you know
Speaker 5: better because you have papermint instead of paper menus at restaurants.
Speaker 5: I'm sure you've seen that.
Speaker 2: And if you do, hate it.
Speaker 3: Hate with.
Speaker 2: Why are you doing the Sparta is actually listening this morning.
Speaker 2: Well it works like two days a week exactly. Sparta's
Speaker 2: listening and you're talking productivity, Yes.
Speaker 5: Faster productivity. You know, productivity grows the faster the economy
Speaker 5: can grow.
Speaker 2: So Tucker's got to get with it. Yes, the John
Speaker 2: Tucker next.
Speaker 5: And the head of YouTube I know you're gonna like
Speaker 5: this one is saying that artificial intelligence and online influencers
Speaker 5: are going to help supercharge their growth in the coming years.
Speaker 5: So this is Neil Mohan. He's telling the Financial Times
Speaker 5: they're wrapping up AI spending. So they have two experimental
Speaker 5: features from deep Mind that's like their AI unit it's
Speaker 5: called dream screen and dream Track, and they generate videos
Speaker 5: and music from text, so that's one thing they can do.
Speaker 5: They also auto dub, which means that they train to
Speaker 5: English language videos into eight other languages. And they're saying
Speaker 5: it's going to help with online creators because that's their
Speaker 5: big draw. Hundreds of millions of gen Z fans are
Speaker 5: from these online creators, so that's really helping, you know,
Speaker 5: to get their their your descriptions.
Speaker 2: That's a productivity that's PROTEI.
Speaker 5: That is Oh and since yesterday we were talking about
Speaker 5: Apple TV Plus, please this story stood out to me.
Speaker 5: Apple's actually offering a free all access pass to Apple
Speaker 5: TV Plus this weekend today through Sunday, so you can
Speaker 5: test it out, try it out, see if you like it.
Speaker 5: And any device that supports Apple TV you have to
Speaker 5: want to, you know, sign in with your Apple I
Speaker 5: D so all those restrictions, but you can try it
Speaker 5: out for free if you want, and they got to
Speaker 5: get those subscribers.
Speaker 2: What do you think of this? I mean, where are
Speaker 2: we in the streaming streaming?
Speaker 4: I mean it's obviously Netflix hugely profitable, Disney finally now profitable,
Speaker 4: and some of the other players are going becoming profitable,
Speaker 4: so again more and more contents going there, Tom And
Speaker 4: the biggest issue.
Speaker 2: Is live sports.
Speaker 4: More and more live sports you're finding on the streaming
Speaker 4: services here, including the football.
Speaker 2: Games coming up state Notre Dames on ESPN.
Speaker 4: Yeah, we're getting some The wild card games for the
Speaker 4: NFL were on Amazon Prime. So if you don't have
Speaker 4: Amazon Prime, you need to talk to somebody in your
Speaker 4: extended family and figure out if somebody's got a membership there,
Speaker 4: because that's where you're going to find the NFL wild
Speaker 4: card games. Figure, let's go on streaming.
Speaker 2: I'm hooked on Silo and there's some disagreement in the household.
Speaker 2: Some people think it's slow and doesn't move fast enough.
Speaker 6: I have to agree with that.
Speaker 5: I might agree with that person in your household. My
Speaker 5: husband loves it, loves it, loves it.
Speaker 2: Yeah, and I'm finding it just magisterial land. Apple TV
Speaker 2: is they call it dad TV, and I could see
Speaker 2: why is that? Okay, it's that Netflix dad TV? I
Speaker 2: don't know.
Speaker 4: Well there, I mean, the talent's getting paid. They're making
Speaker 4: all these things for Apple TV and Paramount and all
Speaker 4: the streaming stuff and the A list talents they're getting paid,
Speaker 4: so like, I'll table stuff out on.
Speaker 2: YouTube, lid chat, ask Lisa Costco.
Speaker 5: Road trip to sleep No Costco road trip. My paycheck
Speaker 5: went there last week and I have done.
Speaker 2: Thank you so much for the newspapers.
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