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Speaker 1: Jason Thomas of Carlisle writing the job displacement, productivity gains,
Speaker 1: and agentic economy expected to up end our world have
Speaker 1: yet to materialize. The current AI related capex already accounts
Speaker 1: for more than one third of the second quarter twenty
Speaker 1: twenty five US economic growth. Jason joins us Now, Jason,
Speaker 1: always wonderful to speak with you. Thank you for being
Speaker 1: with us, And to me, this is the big question
Speaker 1: that so many people have estimated for twenty twenty five.
Speaker 1: How much are we actually seeing that AI tailwind come
Speaker 1: into practical effect versus still remain a promise?
Speaker 3: Well, I think it's again it's It's interesting because when
Speaker 3: you think of AI, when you discuss AI, it's almost
Speaker 3: exclusively about the future and what it means, and then
Speaker 3: I think distracts from the present. Just how important all
Speaker 3: this spending is stacks, servers, GPUs, physical construction, and of
Speaker 3: course electricity related energy needs related applications. And this year
Speaker 3: have four companies now that are intending to spend over
Speaker 3: three hundred billion dollars. This year about six are spending
Speaker 3: over four hundred billion. This is went from something that
Speaker 3: is market significant, stock market significant, to something that is
Speaker 3: now GDP significant and also I think underappreciated. It's also
Speaker 3: increasingly significant for bond markets because you know, if we
Speaker 3: look at decade ago, these large companies, they were largely
Speaker 3: virtual companies. Prior to the pandemic, this class of businesses
Speaker 3: only about twenty percent of their book value was property,
Speaker 3: plant and equipment. Most of it was really just cash
Speaker 3: security holdings. Now property plant equipment ACCUNTS for over seventy
Speaker 3: percent of their book value. There's an industrial feel to
Speaker 3: some of these businesses as they ramp up their capital
Speaker 3: spending and that huge surpluses that they used to generate
Speaker 3: the providing liquidity to the rest of the economy is
Speaker 3: now being rolled in capital spending Ai.
Speaker 1: So Jason, just to sort of bleed through into the market.
Speaker 1: What you're saying the industrial revolution that so many people
Speaker 1: say is taking place, are you saying that is a
Speaker 1: physical world sucking capital out of financial markets, in particularly
Speaker 1: the bond market, leading to higher yields.
Speaker 4: Exactly.
Speaker 3: Again, what's so interesting, I think is that these companies
Speaker 3: have really exercised an option to change strategy. In the past,
Speaker 3: it was typical to generate one hundred billion dollars of
Speaker 3: cash from operations, reinvest maybe twelve to fifteen billion, and
Speaker 3: then that free cash flow would of course lead to
Speaker 3: a massive war chest on the balance sheet, or it
Speaker 3: would fund huge share repurchase programs or special dividends. Today
Speaker 3: that revenue is being diverted to capex, and so this
Speaker 3: raises really interesting questions such as the cash generation potential.
Speaker 3: We saw in Alphabet's earnings a big divergence between net
Speaker 3: income and free cash flow. It also raises industrial error
Speaker 3: questions about capacityilization, and also what is the economic rate
Speaker 3: at which this new capital depreciates? You know, is there
Speaker 3: functional obsolescence where you're investing at the frontier of new technology,
Speaker 3: how quickly does it arrive? So these are again very
Speaker 3: interesting questions. But from the bond market perspective, when you
Speaker 3: look at the cumulative cash flow surplus of the corporate
Speaker 3: sector this cycle, it's down seventy five percent from where
Speaker 3: it was a decade ago. So the last cycle, there's
Speaker 3: a question, very large deficits. Why was it so easy
Speaker 3: for the FED to fund itself? Well, of course QE
Speaker 3: is a simple answer, but I think behind that you
Speaker 3: also had again this enormous corporate savings glut. Some of
Speaker 3: that was cyclical, the scars from the GFC, but a
Speaker 3: lot of it was that most of the growth in
Speaker 3: earnings and revenues were attributed to again these virtual businesses,
Speaker 3: businesses that could grow revenue without incremental hiring, incremental investment,
Speaker 3: and they've changed strategy.
Speaker 5: So Jason, it's some serious tailwinds and changes we're talking about,
Speaker 5: But as you underscored, it's only a handful of companies,
Speaker 5: it's only for maybe six companies hyper scalers that are
Speaker 5: leading this charge. Is there a concentration risk in this
Speaker 5: that these trends are being driven by a small cohort
Speaker 5: that for now are being rewarded by markets for spending.
Speaker 5: What happens if that changes. Yes, of course there's concentration risks.
Speaker 5: There's concentration risk in the stock market, there's concentration risk
Speaker 5: in the economy again, as capital spending and GDP become
Speaker 5: more dependent on these continued outlays.
Speaker 4: And I think that that.
Speaker 3: People talk about the mag seven of course, and it's
Speaker 3: the share I think, you know, fifteen percent of global
Speaker 3: stock market capitalization, almost a third of the S and
Speaker 3: P five hundred market capitalization. But I think that what's
Speaker 3: more concerning to me, at least, is that these are
Speaker 3: not a diversified set of businesses operating in you know,
Speaker 3: completely different sectors with completely different strategies. They're all basically
Speaker 3: pursuing the same end goal at the moment. There's some variation,
Speaker 3: of course, but in general, it's a concentrated bet on
Speaker 3: the same AI future, and you know, everyone has to
Speaker 3: hope that ultimately it pays off, because again it's not
Speaker 3: just of significance for the stock market or investors in
Speaker 3: these companies, but again it has very significant spillovers on
Speaker 3: the rest of the economy today as well.
Speaker 1: Well.
Speaker 5: Some of those spillovers Jason, which has been widely talked about,
Speaker 5: is what it does to this labor market, and there
Speaker 5: it's unclear what's really showing up. You see it in
Speaker 5: some of the Earnings Service now, the management platform tool,
Speaker 5: the CEO they're saying yesterday, we're slowing down the hiring
Speaker 5: and jobs that are quite frankly soul crushing, which I
Speaker 5: think is maybe a nice way to describe replacing people's
Speaker 5: jobs with Ai Jason. Is it showing up anywhere?
Speaker 3: I think that most of the change in the labor
Speaker 3: market that we observed in twenty twenty five was related
Speaker 3: to tariffs, just just the shock, the uncertainty, and I
Speaker 3: think what was so interesting about that was CEOs really
Speaker 3: not panicking after April second. I think there was this
Speaker 3: intention to project a sense of normalcy, to look at
Speaker 3: competitors and see if there are any missteps, if they
Speaker 3: could take market share, And part of that had been, yes,
Speaker 3: perhaps slowing the pace of hiring. But it was just
Speaker 3: interesting when we look through our portfolio that they're really
Speaker 3: not much for reduction in open but unfilled positions. There
Speaker 3: really wasn't the pullback that I think many people expected.
Speaker 3: So so the labor market is held up reasonably well,
Speaker 3: and of course on the other side of that, you
Speaker 3: have inflation that continues. You know, if you look at
Speaker 3: core PCE over the last twelve months, still probably two
Speaker 3: and a half two point six percent, So you know,
Speaker 3: it is this interesting moment where I think that inflation's
Speaker 3: a bit stickier. I mean, of course, some people look
Speaker 3: at the last eight to ten weeks and tell me
Speaker 3: inflation is only up by one percent annualized rate. But
Speaker 3: you know, of course there's not that many prices in
Speaker 3: our economy that reset that regularly, you know, whether they're
Speaker 3: fixed or contractual term or you know, just other frictions.
Speaker 3: So you know, it's a twelve month inflation benchmark and
Speaker 3: this it's still elevated. So you know, next week, I
Speaker 3: think is a time when when the FED is very
Speaker 3: reasonably going to take rate study.
Speaker 1: Jason, you're making an argument for why stocks can outperform
Speaker 1: and bonds cannot, the idea that the promise of the
Speaker 1: future and all of this investment and the profitability is
Speaker 1: much more attractive than credit markets. That people say, or
Speaker 1: I would say, government bond markets credit markets might be
Speaker 1: slightly different.
Speaker 4: Is that accurate?
Speaker 1: Is that kind of the way you think of the
Speaker 1: world right now.
Speaker 3: There is of course the convex upside of earnings, of
Speaker 3: the potential of AI, and that is what equity markets
Speaker 3: are ultimately betting on. Whether that materializes or not is
Speaker 3: a separate question, but there is that upside there, and
Speaker 3: I think also just the potential for inflation. When you
Speaker 3: have businesses that can increase prices proportional to the overall
Speaker 3: increase in the price level, that also provides an inflation
Speaker 3: hedge when you're investing in businesses, you know, the fixed
Speaker 3: income markets. That's a different story right now. If you
Speaker 3: look at the size of the US fiscal deficit, it's
Speaker 3: consuming about forty percent of the savings of the private sector,
Speaker 3: that is, the savings of the household sector plus the
Speaker 3: free cash flow of the corporate sector. This is up
Speaker 3: about fifty percent from where it was in the past
Speaker 3: cycle two thousand and nine to twenty nineteen. So this
Speaker 3: is just enormous funding needs, and I think that people
Speaker 3: have to be concerned about the potential to be inflated away. Eventually,
Speaker 3: the Treasury may try to turn out more of its
Speaker 3: dead issuance. And what is the market clearing price when
Speaker 3: the share of federal funding actually moves in the direction
Speaker 3: of ten year notes thirty year bonds. So I think
Speaker 3: certainly a lot of questions there, and I think the
Speaker 3: other big concern bonds historically have hedged equity market risk.
Speaker 3: That was the experience really since two thousand. What we've
Speaker 3: seen since the FED started hiking rates in two thousand
Speaker 3: and two is that stock and bond returns have been
Speaker 3: positively correlated. Those treasury holdings that you thought were protecting
Speaker 3: you that would rise predictably when stocks sell off, are
Speaker 3: actually selling off at the same time. And we saw that,
Speaker 3: of course in April, which many people attribute to the
Speaker 3: decision to suspend the initial Liberation Day tariff schedule.
Speaker 1: Jason Thomas of Carlisle, thank you so much. Francisco Blanche
Speaker 1: of Bank of America. Writing this, we project Brent and
Speaker 1: WTI to average sixty seven and sixty four dollars a barill,
Speaker 1: respectively in twenty twenty five. Francisco joins US now, and
Speaker 1: I guess that you could ask why our price is
Speaker 1: not lower considering all of the supply that we see
Speaker 1: coming out of the Middle East and this push for
Speaker 1: drill baby drill in the United States.
Speaker 4: Thanks for having Melissa once again.
Speaker 6: Yeah, you know it's funny, right, So you know, weaker
Speaker 6: little are we're getting slightly littlewer oil, potentially lower rates
Speaker 6: the whole point.
Speaker 4: Right.
Speaker 6: That's so it's all going according to pine. I do
Speaker 6: think one of the issues that has been supporting oil
Speaker 6: has been the seasonal strength of the summer months. But
Speaker 6: as we go into the second half of the year,
Speaker 6: we are going to likely see lower prices, and that's
Speaker 6: because inventories are most likely to build outside the China.
Speaker 6: I remember in the second quarter we had a surplus,
Speaker 6: but ninety percent of those barrels were stored in Chinese
Speaker 6: strategic reserves. And can you blame them after all the
Speaker 6: volativity we've seen in the Middle.
Speaker 4: East, Russia, Ukraine.
Speaker 6: So the Chinese are acutely aware of the geopolitics and
Speaker 6: the fact that they're the biggest oil important in the world,
Speaker 6: so twelve million barrels a day, so they have a
Speaker 6: huge exposure. Whether it's the Strait of.
Speaker 4: Hormones or Malacca.
Speaker 6: They're still really heavily on oil despite all the electric
Speaker 6: vehicles that they keep pushing into their market. So I
Speaker 6: think that's that's been part of the story. My sense,
Speaker 6: they'll they'll keep building inventories, but they're almost they almost
Speaker 6: have forty percent of all oil stocks globally at.
Speaker 4: This point, crude oil stocks, that is right.
Speaker 6: So I do think second half of the year, the
Speaker 6: surple is going to be close to two hundred million barrels,
Speaker 6: and eventually we're going to spill out from Chinese inventories
Speaker 6: into the Atlantic Basin, into into the US and Europe,
Speaker 6: and that's what's going to allow prices to come off.
Speaker 6: How much are we going to come off will depend
Speaker 6: on how much Open Plus keeps pushing barrels out, because
Speaker 6: we've seen the recount in the US is already coming down.
Speaker 4: It's down fifteen percent.
Speaker 6: So my sensus that we'll see lower prices, but not
Speaker 6: necessarily prices crashing given.
Speaker 1: The geopolitics and given this supply demand dynamics that we're
Speaker 1: just talking about. How divorced is the price of oil
Speaker 1: from an economic cycle that seems to hinge on a
Speaker 1: new industrial revolution that ten years ago would have included
Speaker 1: a huge use of oil.
Speaker 6: Yeah, this is a very very good point. And when
Speaker 6: you think about the energy demand we're seeing today, it's
Speaker 6: in some places in the US it's astronomical. I mean
Speaker 6: Texan powery Man is up five point five percent year
Speaker 6: and year. I mean, you can barely find an emerging
Speaker 6: market that's going at that's pace, right, And it's just
Speaker 6: this is like insane. So I think if you if
Speaker 6: you look at the next the next few months, the
Speaker 6: majority of the demand and probably next two three years,
Speaker 6: the majority of nine for energy is going to be
Speaker 6: still renewals. Also natural gas, which is what makes us
Speaker 6: relatively constructive on Henry Hub and even into the summer
Speaker 6: on TTF European gas. But for oil, it's not going
Speaker 6: to touch it immediately. It's gonna take a little longer.
Speaker 6: I'm not even sure, you know. Oil is the transportation
Speaker 6: fuel for the most parts, so it's kind of left
Speaker 6: by the wayside in this in this AI revolution for
Speaker 6: more energy at this stage.
Speaker 4: Maybe later on it may not, but for now it.
Speaker 5: Is talk about that later on point what could it
Speaker 5: eventually look like?
Speaker 6: Well, I mean, I think if you look five years out,
Speaker 6: the demand growth threies we're saying for energy, they're going
Speaker 6: to be pretty hard to meet.
Speaker 4: And remember how we've evolved.
Speaker 6: Two years ago, the big tech companies were looking for
Speaker 6: clean sources of power. They're like, oh, we just want
Speaker 6: to use super clean power, and then you know, renewals
Speaker 6: and this net and then they said, well maybe renewals
Speaker 6: and nuclear and now it's like renewals nuclear gas, like, oh,
Speaker 6: just give me any power you can find, because we
Speaker 6: really need a lot of power we need. So there's
Speaker 6: talks about building ten fifteen gigs of power in Pennsylvania.
Speaker 6: There's you know, you have the easterner Boarder is going
Speaker 6: to need a lot of power. Texas already growing beyond belief,
Speaker 6: and even older parts of the US where you have
Speaker 6: this data center's Pacific Northwest, you're gonna have a lot
Speaker 6: of world So and then eventually Europe as well, and
Speaker 6: the US has a capacity problem. The US needs to
Speaker 6: build those power plants Europe because it's destroyed the energy
Speaker 6: consumption in the last couple of years a result of
Speaker 6: Russia Ukraine. Actually it does have the capacity. So there's
Speaker 6: going to be an interesting balancing act in the next
Speaker 6: two three years for power too, which is on.
Speaker 5: That point we finally have a ban on Russian imports
Speaker 5: coming into effect for Europe, and Totel Energy is one
Speaker 5: of the biggest energy players in Europe, was saying, look,
Speaker 5: we have a tightening diesel market because of this how
Speaker 5: played out is this is there going to be more
Speaker 5: stress and tension in the market and tightening of supplies
Speaker 5: as the band really starts to come into force.
Speaker 6: There could be, certainly, and you also have to ask yourself, Okay,
Speaker 6: so there's this ban on that secondary resell issues. Of course,
Speaker 6: Europe doesn't want to buy diesel that has come from
Speaker 6: originally Russian crude oil, which as we know, is going
Speaker 6: mostly into India but also into China. Right So Europe's
Speaker 6: been buying oil from refiners that actually do purchase Russian
Speaker 6: crude and that's been one of the issues. But Europe
Speaker 6: still purchases fifteen percent of its gas directly from Russia,
Speaker 6: right so, and that's that goes from Belgium and France
Speaker 6: and Spain and Italy and does it make its way
Speaker 6: into Germany too. So Europe is trying to really cut
Speaker 6: its dependency on Russia. But it's a tough thing to
Speaker 6: do because again, only three years ago or a half
Speaker 6: years ago, fifty percent of European energy, oil, gas and
Speaker 6: coal came from Russia. So they're trying to do it
Speaker 6: progressively and in the process is not being helping European industry.
Speaker 6: But that's kind of I guess part of the price
Speaker 6: that Europe is ready to pay.
Speaker 4: Francisco.
Speaker 1: Before I let you go, I'd love a comment on
Speaker 1: oil and gold. Excuse me, the solid gold, the solid
Speaker 1: oil that we've seen in terms of just how people
Speaker 1: are treating it. We've seen prices double since twenty twenty
Speaker 1: two to more than three thousand dollars in allens, and
Speaker 1: I just wonder how much higher you see it going
Speaker 1: as you hear an increasing amount of people point this
Speaker 1: out as the haven asset as the real questions around
Speaker 1: via currency.
Speaker 4: Right, So we have to be clear.
Speaker 6: Just like we are bearish on oil and we're constructive
Speaker 6: on gas because of the power story we are, we
Speaker 6: are bullish on gold as well. We think gold is
Speaker 6: eventually going to get around four thousand or the next
Speaker 6: Prounce over the next twelve months. Having said that gold
Speaker 6: needs more investor demand. The story has been mainly a
Speaker 6: central bank story, and of course you know there was
Speaker 6: a nice tour estera of the FED building that we
Speaker 6: saw that, right, So the pressure is on for the
Speaker 6: Fed to cut rates, and obviously people are going to
Speaker 6: question independence and one of the beneficiaries of that questioning
Speaker 6: is going to be the goal market, right, So to
Speaker 6: what extent this you know, this pressure builds on the
Speaker 6: FED political pressure. I think that's what will ultimately trigger
Speaker 6: a higher price for gold. But remember jewelry demands for
Speaker 6: gold is down twenty percent year on year. So so
Speaker 6: the real beneficiaries a year to date of the gold
Speaker 6: upside pressure have been the other metals, the other precious
Speaker 6: metals like silver and platinum and palladium. So so gold
Speaker 6: this is doing well. It's still picking up a mentune,
Speaker 6: but it's already a twenty plus trillion dollar market. Right,
Speaker 6: there's twenty plus trillion dollars worth of gold out there.
Speaker 6: I remember, US treasure isn't handled public twenty trillion or so,
Speaker 6: right in the US public. Now you have the foreigners,
Speaker 6: which on another nine nine trillion. But Goal's gotten very big,
Speaker 6: and to get another leg up you need lower rates
Speaker 6: when this happens, and pretty much those lower rates come
Speaker 6: on the back of political pressure, I think will get
Speaker 6: another another light wind.
Speaker 1: All I can say is we saw a tour of
Speaker 1: the FED. I would have loved to see a tour
Speaker 1: of Fort Knox.
Speaker 2: That's all I can say.
Speaker 5: That's where they should meet next time and Trump at four.
Speaker 1: I would like to see that tour Francisco lunch. Thank you, Gregor,
Speaker 1: thank you so much.
Speaker 4: I'm great to see you as always.
Speaker 1: Great dayco of Ey writing this economic activity is decelerating
Speaker 1: even as inflationary pressures are re emerging. This tension is
Speaker 1: likely to persist through the summer. Greg joins us now
Speaker 1: and Greg, we just had a lineup of people all
Speaker 1: saying that the economy is going strong. People are just
Speaker 1: deciding which fast casual restaurant to go to, and there
Speaker 1: definitely does not seem to be the same kind of
Speaker 1: inflationary pressure that many people thought would be the case.
Speaker 1: Why are you maintaining this idea of a stagflationary push
Speaker 1: that just hasn't shown up in the data yet.
Speaker 7: Well, I think it hasn't shown up in the superficial data.
Speaker 4: But if you lift the hood, you're.
Speaker 7: Going to see the signs of this diflationary move. If
Speaker 7: you look at the recent developments in terms of inflation,
Speaker 7: we estimate that about a third to a fourth of
Speaker 7: the push in inflation in the month of June was
Speaker 7: actually coming from tariff induced price pressure. So it's there
Speaker 7: it's slowly starting to emerge. And I've written in the
Speaker 7: past about the fact that it's not that we're not
Speaker 7: seeing the tariff pressures, it's that they're taking some time
Speaker 7: to filter through because businesses have been managing inventories, because
Speaker 7: they've been using bonded warehouses and foreign trade zones, because
Speaker 7: the effective teriff frate is not quite yet at the
Speaker 7: average teriff frate, and there is a gap between those two.
Speaker 7: All these measures are delaying the inflation pass through. But
Speaker 7: make no mistake, it is materializing, and it will affect
Speaker 7: us with more and more pressure over the course of
Speaker 7: the summer, which will feed into how consumers spend.
Speaker 4: And we're seeing these signs.
Speaker 7: Of pressures on the consumer already. If you look at
Speaker 7: retail sales, the categories that were most affected by the
Speaker 7: tariffs are the ones that are suffering the most.
Speaker 5: So what happens then if we feel the real effects
Speaker 5: later this year and early next year, at the same
Speaker 5: time we're starting to get fed cuts and you're starting
Speaker 5: to see the one big beautiful bill some the stimulus
Speaker 5: through from that, well, I.
Speaker 7: Think it's important to distinguish all of the different details
Speaker 7: that are affecting the economy. There are a lot of
Speaker 7: cross currents which make for this very confusing economic picture,
Speaker 7: but the reality is that the economy is decelerating. If
Speaker 7: you look at the labor market momentum, it is actually decelerating,
Speaker 7: Slower job growth, more concentration of job growth in a
Speaker 7: few sectors. We are seeing continuing claims for unemployment that
Speaker 7: are rising, even though after the hump we saw initial
Speaker 7: claims come back down. We're seeing the hiring rate at
Speaker 7: a ten year low. All of these factors are factors.
Speaker 4: That drive income growth.
Speaker 7: The key pillar to consumer spending activity, and that is
Speaker 7: way to the downside. So that's going to be a
Speaker 7: constraint for consumer spending as we navigate through the second
Speaker 7: half of the year at the same time as inflation
Speaker 7: pressures are ramping up. And about that biscal bill that
Speaker 7: is not going to provide a lot of stimulus in
Speaker 7: terms of the US economy. The major thing the One
Speaker 7: Big Beautiful does is prevent the expiry of a number
Speaker 7: of tax provisions from the Tax Cuts and Jobs Act.
Speaker 7: That prevents a drag on the economy of one percent,
Speaker 7: but the actual net boost to the economy we calculate
Speaker 7: will be around zero point two zero point three percentage
Speaker 7: points of GDP, not a big benefit for the cost
Speaker 7: of that pill.
Speaker 5: Well, the other factor to put into this too is
Speaker 5: also what we might see in terms of a supply
Speaker 5: shock to a supply shock in the labor market, going
Speaker 5: from something like four million people coming into the USA year,
Speaker 5: a lot of them working age men, going to something
Speaker 5: like just a few hundred thousand per year. Have we
Speaker 5: started to see the effects and what will the effects
Speaker 5: be going forward.
Speaker 7: I think that's a much underdiscussed topic, the immigration topic,
Speaker 7: because we are in an environment where increasingly.
Speaker 4: Economic activity is driven by supply side factors.
Speaker 7: Whereas before COVID it was all about demand side factors,
Speaker 7: now it's increasingly about supply side factors.
Speaker 4: It's the supply of labor, it's the.
Speaker 7: Supply of capital, it's a supply of energy, it's trade
Speaker 7: in logistics. And when it comes to immigration, you're absolutely right.
Speaker 7: It's been a key driver of economic activity. If we
Speaker 7: start to see less immigration, that is going to do
Speaker 7: a couple of things. One will weigh directly on spending
Speaker 7: because people there are fewer people that are spending less
Speaker 7: in part because they're fearful. And two, it drives lower supply,
Speaker 7: lower labor supply, which weighs on employment growth, which weighs
Speaker 7: on your economy's.
Speaker 4: Potential to grow.
Speaker 7: Combined, all of these representative drag of about zero point
Speaker 7: three zero point four percentage points over the next year.
Speaker 7: That's more than the one big beautiful bill that we
Speaker 7: were just discussing.
Speaker 1: It's one reason why people are looking at this miss
Speaker 1: on capital goods orders that include non defense aircraft as
Speaker 1: being particularly notable. Stay close Greg for one second, Mike McKee,
Speaker 1: you've got some more details on what exactly was behind that.
Speaker 8: It is sometimes fairly easy to figure out durable goods orders.
Speaker 8: When you have these big swings, it's usually Boeing. They
Speaker 8: reported a decline of fifty one point eight percent in
Speaker 8: new orders for the month of June Boeing and some
Speaker 8: of the smaller little private plane makers, and that compares
Speaker 8: with a two hundred and thirty one percent arise in
Speaker 8: the month before in May.
Speaker 4: So you can see why we get these big swings.
Speaker 8: Unless you're Danny Berger, you're not buying a new Boeing
Speaker 8: jet every month. We also saw a decline in manufacturing
Speaker 8: orders of twelve point eight percent. That's something that FED
Speaker 8: will keep an eye on along with computers and communications equipment.
Speaker 8: They both were down on the month, and this may
Speaker 8: signal that business is sitting on its hands. One last note,
Speaker 8: capal good shipments were up four tenths after a five
Speaker 8: tenths rise the month before, and that was double what
Speaker 8: was anticipated. So maybe we have a little more strength
Speaker 8: in the second quarter the rebound from all those imports, etc.
Speaker 4: That we saw in the first quarter.
Speaker 8: Those numbers will feed into better than expected perhaps second
Speaker 8: quarter GDP, which we get on Wednesday when the FED
Speaker 8: is making its decision.
Speaker 1: Thank you so much, Michael McKee and Danny Berger is
Speaker 1: here to tell us all about your selection of Boeing
Speaker 1: Jetsike you have put on yeah radar.
Speaker 5: Apparently every month I'm buying a new Boeing jet. You
Speaker 5: all are welcome to join. I guess I don't know
Speaker 5: where we're going with an entire jet, but.
Speaker 1: Yeah, but you know, what Michael was talking about is
Speaker 1: actually really important. And this idea that we've heard about
Speaker 1: so much this morning, which is that it used to
Speaker 1: be just investment in assets and liquidity heavy kinds of
Speaker 1: corporate investment. Now we're talking about real physical investment in
Speaker 1: this whole industrial revolution. At what point do you see
Speaker 1: that really offering a boost to both productivity as well
Speaker 1: as growth that hasn't been accounted for in so many
Speaker 1: of the more pessimistic outlooks for the US economy.
Speaker 7: Well, I've been an optimistic on the productivity front, despite
Speaker 7: the fact that I'm quite reserved in terms of the
Speaker 7: short term cyclical outlook. I've been very optimistic about the
Speaker 7: exceptionalism that we were seeing going into twenty twenty five
Speaker 7: because it was driven by strong productivity growth that was
Speaker 7: coming from the bottom up. It wasn't yet the AI
Speaker 7: lift that we're all talking about. It was actually businesses
Speaker 7: being more efficient with a talent on hand that costs
Speaker 7: more in today's environment, ensuring longer tenure. Better trained employees
Speaker 7: are better able to contribute to economic activity. And it
Speaker 7: was this focus on investing in the infrastructure that will
Speaker 7: support AI that is often undercounted. And then on top
Speaker 7: of that, you have a desire to push more industrial
Speaker 7: policy and focus on driving more manufacturing investment.
Speaker 4: It won't bring back the jobs, but it will bring.
Speaker 7: Back more economic activity and more potential supply that is
Speaker 7: right now undercounted, but it is still one of the
Speaker 7: key pillars of economic activity driving that stronger productivity momentum.
Speaker 5: Does that mean, for all the fears of growth slowing
Speaker 5: and inflation picking up, that it's not quite stagflation because
Speaker 5: you have some of these forces, it would moderate the
Speaker 5: worst case scenario.
Speaker 7: Well, I think economic activity is a flow notion, right,
Speaker 7: and so we are still benefiting from a very robust economy.
Speaker 7: As I was saying, up until the start of twenty
Speaker 7: twenty five, we had an economy that had been growing
Speaker 7: at a three percent pace with disinflation. Inflation was moving lower,
Speaker 7: so we had the best of both worlds. We had
Speaker 7: essentially strong productivity growth supporting a very strong economy and
Speaker 7: disinflationary currents. We're gradually moving to the opposite of that,
Speaker 7: a stagflationary environment where economic activity is lowing and inflation
Speaker 7: is accelerating, and that becomes a headache for policy makers
Speaker 7: around the world, but including the FED, which has to
Speaker 7: balance these divergence pressures in terms of the employment mandate
Speaker 7: and the inflation mandate.
Speaker 5: Considering the pressure from the White House. Inevitably, especially next
Speaker 5: year when we have a FED chair appointed by President Trump,
Speaker 5: does this just turn into a FED that puts more
Speaker 5: weight on the growth side of the mandate even if
Speaker 5: inflation is still picking up.
Speaker 7: No, I think the Fed will have to pay attention
Speaker 7: to both sides of the mandate.
Speaker 4: That is what it's supposed to do.
Speaker 7: But it has to determine whether the pressures from tariffs
Speaker 7: are one off pressures, which is the argument that Governor
Speaker 7: Waller has been making. It's the argument that I've been
Speaker 7: making for a while now that essentially this tariff induced
Speaker 7: inflation is going to be a temporary one, that we
Speaker 7: are still seeing significant this inflationary currens, in particular from
Speaker 7: the shelter side of the economy, that inflation expectations are
Speaker 7: still well anchored, and that we're not necessarily going to
Speaker 7: see and round effects because the labor market is softening
Speaker 7: and you're not going to see the types of pressure
Speaker 7: that we saw during COVID. With wage inflation accelerating, in
Speaker 7: my opinion, that opens the window for the Fed to
Speaker 7: neutralize monetary policy from a slightly restrictive stance to a
Speaker 7: more neutral stance with some easing over the course of
Speaker 7: the next few months.
Speaker 1: Greg Daco of EU, I thank you so much. Vishall
Speaker 1: Conduja of Morgan Stanley writing this, given the tariff revenue collections,
Speaker 1: we believe that the next two inflation prints will be
Speaker 1: reflective of the tariff contribution. We shall joins us now
Speaker 1: and I am curious about whether this is going to
Speaker 1: be a one time price shock or whether this is
Speaker 1: going to have longer legs, and how much we've really
Speaker 1: gotten clarity versus just people's expectation that this will be
Speaker 1: just a one time adjustment.
Speaker 9: Budding Liza, Definitely, in principle it should be a one
Speaker 9: time adjustment. Again tariffs. There are only three spots that
Speaker 9: we can see the effects. Either the exporters seated up,
Speaker 9: either companies through their profit margins. We heard a couple
Speaker 9: of those in the earnings more on the order side
Speaker 9: and the OEM side showing up with one time charges there,
Speaker 9: or it trickles through PPI and CPI.
Speaker 4: Here in economic data.
Speaker 9: We saw a little bit of all of that, less
Speaker 9: of exporters, more of profit margins, and CPI show us
Speaker 9: a little bit. I think as you track the revenue
Speaker 9: from the tariffs, and as average rates start to go
Speaker 9: through the economy, I think the next two prints are
Speaker 9: going to get a little steamy and a little bit
Speaker 9: more contribution from there, but we still think it's going
Speaker 9: to be a one time bump rather than a lingering
Speaker 9: effect that we had seen in the prior years.
Speaker 5: On to your point, Vishal, the tariff revenue has been real.
Speaker 5: We have seen a bump in what the US is
Speaker 5: taking in. What does that tell you about how sticky
Speaker 5: these tariffs are for the foreseeable future? That this isn't
Speaker 5: a story of the next four years, but this is
Speaker 5: a tariff story that will continue on beyond present trumps.
Speaker 9: I think if you just remove all the politics, mid terms,
Speaker 9: four year term etc. Out Of the pitture and just
Speaker 9: mathematically extend the clock out. Yes, this is going to
Speaker 9: be a consumption tax which is going to be five
Speaker 9: times more. But then companies are resilient, resilient and adjust.
Speaker 9: I think they will take some profit margin hits slightly
Speaker 9: more profit margin.
Speaker 4: Sectors with high profit.
Speaker 9: Margins will take a little bit more less on the
Speaker 9: consumer side, and then consumptions, consumption will adjust or consumers
Speaker 9: will adjust as well. I know we are still squinting
Speaker 9: to see the weakness in consumption and consumer and labor market,
Speaker 9: but still there is that sort of underlying weakness that
Speaker 9: is showing up, and we do think that consumption patterns
Speaker 9: will adjust nominal GDP should adjust down for that matter
Speaker 9: as well.
Speaker 5: What will it take to finally see that show, Vishal,
Speaker 5: because it has been sometimes since we've seen any of
Speaker 5: that weakness, despite the constant calls for it.
Speaker 9: Yeah, No, I think it will take time, and that's
Speaker 9: where it makes the FEDS job difficult from our perspective.
Speaker 9: I think why it is difficult to see this and
Speaker 9: why it's taking time because balance sheets, both consumer and
Speaker 9: corporate balance sheets coming into this twenty twenty five uncertain
Speaker 9: environment from both physical and monetary policy, have been extremely strong.
Speaker 9: I think you're sitting on a consumer who is a homeowner,
Speaker 9: is sitting on three percent thirty or fixed rate. Even
Speaker 9: the best hedge funds in the world don't get that
Speaker 9: type of type of leverage and their equities up twenty
Speaker 9: five percent at least on their houses, and you're running
Speaker 9: a four decade low unemployment rate. So that balance sheet
Speaker 9: of that consumer extremely strong to take on some of
Speaker 9: the uncertainties that you're seeing, and that's why I think
Speaker 9: it's taking time for it to see through the economy.
Speaker 1: Vijuel, you said something in your notes that I thought
Speaker 1: was fascinating when you bleed this into the market. You
Speaker 1: said US assets and US dollar are two separate trades,
Speaker 1: and this is something increasing numbers of investors are coming
Speaker 1: around to. Is that something that you expect to be
Speaker 1: persistent Bullish US assets bearish US dollar.
Speaker 9: I think that's how our portfolios are adjusted today as well.
Speaker 9: Over the last like seven months, we've adjusted and steered
Speaker 9: our portfolios in that direction. We're still trying to eke
Speaker 9: out that positive fundamentals from consumer and corporate balance sheets here.
Speaker 9: Not saying that there are not some of the idiosynthetic, eediosyncratic,
Speaker 9: strong fundamental balance sheets in Europe and other parts of
Speaker 9: the emerging market world as well, but I think that
Speaker 9: dollar weakness, I think is coming primarily from that, you know,
Speaker 9: the urge from the administration. We've heard it time and
Speaker 9: again from speakers and another FED speak, but more from
Speaker 9: DC on that part. And then where the exceptionalism story
Speaker 9: is landing us. It is much weaker dollar from here
Speaker 9: rather than what we had seen probably the last decade.
Speaker 9: And I have so strong fundamentals from consumer and corporate
Speaker 9: balance sheets, weak fundamentals from the government balance sheets, and deficits,
Speaker 9: which flows into your currency. And that's how portfolio of
Speaker 9: position at the moment.
Speaker 1: Just about twenty seconds fee show. You said much weaker dollar,
Speaker 1: how much further does it have to depreciate?
Speaker 9: I think in the next probably two years. We think
Speaker 9: that probably around that ten to fifteen percent in a
Speaker 9: basket of currencies. We are not picking one currency to
Speaker 9: go against in a basket of DM and EM currencies.
Speaker 9: That's how we've reflected in our portfolios. We do think
Speaker 9: that there is a double digit depreciation along the way. Again,
Speaker 9: the point being that it is not about US treasury.
Speaker 9: Foreign buyers of US treasury as a percentage of GDP
Speaker 9: has actually not changed. It is the foreign buyers of
Speaker 9: US equities that are up probably ten to fifteen percent
Speaker 9: since the financial crisis that needs to adjust.
Speaker 4: That's where some of the hedging.
Speaker 9: Will come through. And that's why we think that that
Speaker 9: ten to fifteen percent is how we are thinking about it.
Speaker 1: Visha Konduja of Morgan Stanley, thank you so much for
Speaker 1: being with us. Have a wonderful, wonderful weekend.
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Speaker 1: Mm hmm