WEBVTT - Bloomberg Surveillance TV: April 12, 2024 0:00:02.440 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio news. 0:00:11.640 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.680 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.720 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.920 from our global headquarters in New York City. We are 0:00:24.920 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.280 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:35.840 Terminal and the Bloomberg Business app. 0:00:36.320 --> 0:00:39.840 Kenleyon, director of Equity Research at CFA, joins us. Now, Ken, 0:00:39.880 --> 0:00:41.880 what's your big takeaway from the earnings reports we've gotten 0:00:41.920 --> 0:00:44.160 so far? Hi, You know, I. 0:00:44.080 --> 0:00:47.600 Think the first supporter sets the base for growth for 0:00:47.680 --> 0:00:50.800 the rest of this year, and I think the narrative 0:00:50.960 --> 0:00:55.440 is to be conservative. We certainly have a different economic 0:00:55.520 --> 0:00:59.960 backdropers for growth. We saw a very healthy loan activity 0:01:00.200 --> 0:01:02.720 that will accelerate for the rest of the year, not 0:01:02.760 --> 0:01:06.440 only consumer but really business. And to your point about 0:01:06.880 --> 0:01:09.720 are the banks going to compete with the Apollos of 0:01:09.760 --> 0:01:10.200 the world. 0:01:10.520 --> 0:01:13.199 We saw healthy fixed income underwriting. 0:01:13.480 --> 0:01:18.480 We also saw off the shelf dusting bank loan syndicates 0:01:18.480 --> 0:01:22.440 and giving very aggressive pricing, so the direct lending from 0:01:22.520 --> 0:01:26.920 the apollos and areas is really bought off. So I 0:01:26.959 --> 0:01:31.120 think the opportunity here is really net interest income is 0:01:31.160 --> 0:01:35.160 based on rate, but also on volume. Volume is business 0:01:35.240 --> 0:01:39.039 activity expanding the balance sheet. And that's why I think 0:01:39.160 --> 0:01:42.840 JP Morgan is guiding conservatively and they're going to exceed 0:01:43.040 --> 0:01:47.240 expectations if we have a very healthy US economy this year, 0:01:47.400 --> 0:01:48.280 which we believe. 0:01:49.680 --> 0:01:52.960 Good morning, Ken. I'm looking at both Wellsfanga and JP 0:01:53.120 --> 0:01:55.480 Morgan on the provision for credit losses and just before 0:01:55.480 --> 0:01:56.960 the break as we went to the breaker said one 0:01:56.960 --> 0:02:00.440 point eight to eight billion at JP Morgan, lesson billion 0:02:00.480 --> 0:02:04.360 over at Wells Fargo. Still both of these materially lower 0:02:04.360 --> 0:02:08.000 than the market had expected, and that talks to the 0:02:08.120 --> 0:02:10.119 uniqueness and the strength of the US economy. 0:02:11.520 --> 0:02:14.680 It does, and the narratives different than January where there 0:02:14.720 --> 0:02:19.400 was more concern of recession and also areas that where 0:02:19.400 --> 0:02:22.919 we could see higher credit risks. So as to my point, 0:02:23.120 --> 0:02:26.239 as you see the volumes of a healthy US economy, 0:02:26.720 --> 0:02:30.160 you will see some increases in loan provisions, but it's 0:02:30.200 --> 0:02:32.399 going to be proportional I will stay. 0:02:32.360 --> 0:02:34.120 In the normalized area. 0:02:34.520 --> 0:02:37.120 So I don't think credit risk is a problem, but 0:02:37.800 --> 0:02:40.360 both bank managements and analysts, you know, we'd like to 0:02:40.400 --> 0:02:41.600 look at it and talk. 0:02:41.360 --> 0:02:42.520 About it well. 0:02:42.520 --> 0:02:47.680 Obviously dividend and buybacks are part of the narrative with banks. 0:02:47.680 --> 0:02:50.080 We'll hear a little bit more, hopefully later on today 0:02:50.160 --> 0:02:53.760 from Jamie Diamond on that front. As you look at 0:02:53.800 --> 0:02:57.440 the banks, we've had this pivot to breadth in financials generally, 0:02:57.800 --> 0:03:00.560 But where the lead, where's the leadership in the end story? 0:03:00.600 --> 0:03:01.040 Kem for you. 0:03:02.040 --> 0:03:02.919 It's a great question. 0:03:02.960 --> 0:03:06.639 And now we're speaking about investors in terms of when 0:03:06.639 --> 0:03:09.560 we look at the financial sector, sixty five percent or 0:03:09.560 --> 0:03:12.720 twelve stocks, six of the largest banks are in there. 0:03:13.000 --> 0:03:15.200 And also return of capital comes up. 0:03:15.120 --> 0:03:19.760 With the mid year the June banks stress tests, and 0:03:20.320 --> 0:03:22.720 you know, we think the banks are very well capitalized. 0:03:22.919 --> 0:03:27.880 They're also building building up their capital because we don't 0:03:27.880 --> 0:03:28.840 know what's going to happen. 0:03:29.040 --> 0:03:30.400 What's called Basel. 0:03:30.080 --> 0:03:33.440 Three end game, which is getting a lot of pushback 0:03:33.480 --> 0:03:38.080 from Congress that it's too onerous and has negative impact. 0:03:37.720 --> 0:03:38.840 For the US economy. 0:03:39.240 --> 0:03:41.840 So I think what we have here and cf A 0:03:42.120 --> 0:03:44.960 went to an overweight on the financial sector and the 0:03:45.040 --> 0:03:47.760 large banks are part of that story. Is because we're 0:03:47.800 --> 0:03:51.760 going to see very healthy return of capital and probably. 0:03:51.360 --> 0:03:53.600 We're going to get a glimpse of that at the 0:03:53.680 --> 0:03:54.480 end of June. 0:03:54.720 --> 0:03:56.720 Ken You know, sometimes people take a look at bank 0:03:56.760 --> 0:03:58.600 earnings and they say it kicks off the rest of 0:03:58.640 --> 0:04:00.840 earning season. Mix it gives it to of what the 0:04:00.880 --> 0:04:04.640 economic outlook looks like. I'm not clear on whether there 0:04:04.720 --> 0:04:07.800 is a clear read on the economy going forward in 0:04:07.840 --> 0:04:08.520 these earnings. 0:04:08.520 --> 0:04:09.360 Did you get one? 0:04:10.440 --> 0:04:13.600 I think there is because we did see credit service 0:04:13.640 --> 0:04:17.160 income still very healthy year over year and sequential, so 0:04:17.240 --> 0:04:20.440 the consumer is healthy and spending. We'll take a closer 0:04:20.480 --> 0:04:25.960 look at volumes or transaction activity. We did see in 0:04:26.000 --> 0:04:30.560 the commercial loan activity midteam growth year over year for 0:04:30.680 --> 0:04:35.159 JP Morgan. That suggests that we're seeing CEOs more confident 0:04:35.440 --> 0:04:39.320 for capital raising, whether it be through loan activity or 0:04:39.360 --> 0:04:42.039 going to the capital markets, which we think in the 0:04:42.080 --> 0:04:45.200 second half of this year there is a tsunami of 0:04:45.440 --> 0:04:48.760 capital that has to exit the private equity firms, which 0:04:48.800 --> 0:04:50.839 is going to benefit IPOs or m and A. 0:04:51.240 --> 0:04:54.600 Meanwhile, you're looking at in terms of net interest compression 0:04:54.800 --> 0:04:57.280 that is compelling to me and Menace was talking about 0:04:57.279 --> 0:04:59.320 this earlier, this idea they've got to pay more for 0:04:59.400 --> 0:05:03.159 deposits and that deposits are leaving. This really raises a 0:05:03.320 --> 0:05:05.640 question is is basically you're going to get a more 0:05:05.640 --> 0:05:08.960 direct read through of that five percent benchmark rate if 0:05:08.960 --> 0:05:11.440 you just get into a savings account. And this might 0:05:11.480 --> 0:05:14.400 be somewhat personal, but you know, there's this question of 0:05:14.680 --> 0:05:16.159 are they going to have to pay up akin to 0:05:16.160 --> 0:05:18.599 what the regional banks and having had to do for 0:05:18.640 --> 0:05:19.680 a longer period of time. 0:05:20.320 --> 0:05:23.160 Totally different businesses. It's an easy narrative. 0:05:23.240 --> 0:05:25.839 So I mean, if you're a city or JP Morgan, 0:05:26.240 --> 0:05:30.440 you have treasury services to studio institution, and then of 0:05:30.440 --> 0:05:31.040 course you have. 0:05:31.080 --> 0:05:32.640 Small business and individuals. 0:05:32.720 --> 0:05:37.480 So their relationships are far greater than giving five percent 0:05:37.600 --> 0:05:40.839 versus you know of a small bank versus four point 0:05:40.960 --> 0:05:45.760 six percent on a CD. Their relationships are dynamic. And 0:05:45.800 --> 0:05:49.440 when you look across where deposits are for these large banks, 0:05:49.800 --> 0:05:52.640 and there is a high percentage to my description that 0:05:52.680 --> 0:05:54.040 are non interest bearing. 0:05:54.160 --> 0:05:55.520 That it's a little bit different. 0:05:55.800 --> 0:05:59.839 So Moini hand, the CEO of Bank in America, always 0:05:59.880 --> 0:06:02.479 has that's a great explanation for this is we have 0:06:02.600 --> 0:06:06.640 diversified businesses and in terms of our deposit base, and 0:06:06.760 --> 0:06:09.680 so also based on the underpinnings of other things that 0:06:09.720 --> 0:06:11.360 we do in those relationships. 0:06:11.960 --> 0:06:16.520 Well, JP Morgan certainly has that breadth. Give me your 0:06:16.640 --> 0:06:17.599 view on this. 0:06:17.760 --> 0:06:19.120 I reflect back to the start. 0:06:18.960 --> 0:06:23.800 Of the year, HSBC Wholesale sacked twenty seven percent of 0:06:23.800 --> 0:06:27.320 the commercial real estate exposure. They were nervous, The world 0:06:27.480 --> 0:06:29.640 was nervous. We're less nervous now. 0:06:30.200 --> 0:06:31.880 It takes my mind back. 0:06:31.800 --> 0:06:36.120 To just before the GFC, who was left holding the 0:06:36.240 --> 0:06:41.440 baby when it came to know cds's who is holding 0:06:41.480 --> 0:06:44.520 the baby in terms of C or E exposure that 0:06:44.560 --> 0:06:47.440 we should be concerned about, or is that a media 0:06:47.520 --> 0:06:50.640 obsession and not an analyst obsession with C or E. 0:06:51.520 --> 0:06:54.000 We look very closely at that. And I also cover 0:06:54.120 --> 0:06:56.960 part of real estate and there isn't a black spawn 0:06:57.000 --> 0:06:58.719 event here for the large expects. 0:06:59.520 --> 0:07:01.920 But when you go down and look at the total 0:07:01.960 --> 0:07:05.039 portfolio of commercial real estate, it's mostly in multifamily. 0:07:06.080 --> 0:07:07.880 And then when we go down. 0:07:07.680 --> 0:07:12.960 To office for JP Morgan, it's investment grade borrowers, it's Class. 0:07:12.640 --> 0:07:14.160 A tower buildings. 0:07:14.480 --> 0:07:19.520 It might be idiosyncratic, but to Gerard's point, Gerard cassidy earlier. 0:07:19.800 --> 0:07:23.320 You know, it's under five percent, three percent of the 0:07:23.360 --> 0:07:26.960 total loans. When you get down to the regional banks 0:07:26.960 --> 0:07:29.040 are smaller, it becomes more problematic. 0:07:29.440 --> 0:07:32.480 But because these are not massive consumer. 0:07:32.080 --> 0:07:36.240 Loans, they'll just kind of extend these loans for two 0:07:36.400 --> 0:07:37.600 or three years. 0:07:37.400 --> 0:07:39.600 And work out any problem real estate. 0:07:39.800 --> 0:07:42.960 But for the largest banks, we all watch it very 0:07:42.960 --> 0:07:47.240 closely and we look at all the metrics and think 0:07:47.320 --> 0:07:50.040 that this will be more idiosyncratic, not systemic. 0:07:50.320 --> 0:07:51.440 Ken Lee and a CFI. 0:07:51.520 --> 0:07:52.600 You were going to be back. 0:07:52.440 --> 0:07:55.360 With us in eight am following the City group earnings. 0:07:55.360 --> 0:07:57.600 Thank you so much for being with us today, right, 0:08:07.000 --> 0:08:09.720 friend Max Neil Datta joins us now with an answer 0:08:09.720 --> 0:08:12.440 to that question, is this a pivot point this week 0:08:12.600 --> 0:08:15.920 or is this something that just is more noise, more 0:08:15.960 --> 0:08:18.680 bumpiness to the same road to easing policy. 0:08:20.560 --> 0:08:21.600 Well, I think the latter. 0:08:21.720 --> 0:08:24.120 I think it's a bumpiness on the path to still 0:08:24.880 --> 0:08:27.120 a couple of cuts this year. You know, you kind 0:08:27.160 --> 0:08:28.800 of had to take the data as it comes to you, 0:08:29.400 --> 0:08:32.800 and certainly what we learned in the last week definitely 0:08:32.800 --> 0:08:34.960 throws a bit of cold water on the idea that 0:08:35.000 --> 0:08:38.200 residual seasonality was a big driver for why you know, 0:08:38.240 --> 0:08:40.400 we sort of missed the boat on inflation the first 0:08:40.440 --> 0:08:43.120 couple of months of the year because March was still 0:08:43.160 --> 0:08:46.760 somewhat firmer. You know, the PPI data certainly took some 0:08:46.840 --> 0:08:48.760 of the edge off in terms of what it means 0:08:48.760 --> 0:08:50.520 for PC. But at the end of the day, you're 0:08:50.520 --> 0:08:55.280 talking about core inflation PC inflation likely to be running 0:08:55.280 --> 0:08:57.880 above three percent over the first three months of the year. 0:08:58.760 --> 0:09:02.120 So the way I'm thinking about it is, you know, 0:09:02.240 --> 0:09:05.720 July at the earliest we had, we had three months 0:09:05.720 --> 0:09:09.600 of poor inflation data, and you're gonna need at least 0:09:09.600 --> 0:09:12.439 that many months to undo the damage. 0:09:12.800 --> 0:09:14.240 So lots of things have. 0:09:14.160 --> 0:09:17.360 To go right, But I think July at the earliest 0:09:17.440 --> 0:09:20.400 is probably the way I would think about it. If 0:09:20.440 --> 0:09:23.120 you get another bad inflation number, you just push it out. 0:09:23.200 --> 0:09:27.319 I mean, Lisa, I do think it's worth reminding people that, 0:09:28.280 --> 0:09:29.640 you know, the late I mean, you have to kind 0:09:29.679 --> 0:09:32.319 of go back to first principles in these sort of situations, right, 0:09:32.360 --> 0:09:34.840 I Mean, we know the labor markets are cooling, we 0:09:34.920 --> 0:09:37.640 know that inflation expectations haven't really moved if you look 0:09:37.679 --> 0:09:41.079 at surveys of consumers and households, so at some level 0:09:41.120 --> 0:09:44.320 that would that suggests to me that consumers are somewhat 0:09:44.320 --> 0:09:48.600 resistant now to taking on higher prices, and so if 0:09:48.600 --> 0:09:51.600 this continues, I'd be frankly more worried about corporate profit 0:09:51.679 --> 0:09:52.680 margins than anything else. 0:09:52.760 --> 0:09:55.200 Well, now, let's really raise us a question about whether 0:09:55.640 --> 0:09:57.920 this sort of challenge is a bullish thesis and equity 0:09:57.960 --> 0:10:00.440 is more significantly than people are realizing. If you do 0:10:00.520 --> 0:10:03.199 see slowing under the surface, if you do see people 0:10:03.200 --> 0:10:06.200 pushing back on prices, the inability for companies to pass 0:10:06.240 --> 0:10:09.240 along things like oil prices and other commodities that are 0:10:09.320 --> 0:10:12.120 coming up, how much does that really make you less 0:10:12.120 --> 0:10:14.400 optimistic about what we get in the equity market. 0:10:15.200 --> 0:10:17.480 Well, I mean, right now, the markets are kind of 0:10:17.520 --> 0:10:20.400 trading right. At any given point in time, I think 0:10:20.440 --> 0:10:22.959 you could basically say, you know, the economy is you know, 0:10:23.080 --> 0:10:25.400 one of four things. Right, we could talk about soft 0:10:25.480 --> 0:10:28.040 landing sort of you know, solid growth, benign inflation. We 0:10:28.080 --> 0:10:32.360 could talk about inflationary boom, or you could talk staflation 0:10:32.600 --> 0:10:36.320 or a recession right deflationary bust. And right now I 0:10:36.320 --> 0:10:40.280 think the markets are kind of thinking inflationary boom like dynamics. 0:10:40.320 --> 0:10:45.160 I mean, that's an environment where you know, stocks can work, 0:10:45.480 --> 0:10:50.040 bonds can. But you know, if you kind of move 0:10:50.160 --> 0:10:55.080 towards the situation where inflation stays sticky, that begins to 0:10:55.080 --> 0:10:59.280 erode household incomes, it keeps the FED off on the sidelines, 0:11:00.400 --> 0:11:03.000 then you're talking about a situation where equity markets will 0:11:03.040 --> 0:11:05.360 come under more pressure. You know, I don't think we're 0:11:05.360 --> 0:11:07.600 there yet, but you know, certainly if we can, because 0:11:07.600 --> 0:11:10.640 I think inflation will cool. But if it doesn't, then 0:11:10.840 --> 0:11:12.400 you have to be cognizant of that risk. 0:11:13.360 --> 0:11:15.200 And that's maybe where the bond markets and New Good morning. 0:11:15.200 --> 0:11:16.880 The bond markets have been trying to price. They did 0:11:16.880 --> 0:11:19.760 thirty odd basis points in the space of two weeks. 0:11:19.800 --> 0:11:22.280 We've got a little bit back this morning. We've had 0:11:22.280 --> 0:11:25.040 a couple of auctions this week which it took more 0:11:25.520 --> 0:11:27.680 to encourage people to buy the tens and buy the 0:11:27.760 --> 0:11:30.160 thirties than it has for a long time. 0:11:30.440 --> 0:11:30.600 Now. 0:11:30.640 --> 0:11:33.360 That's because of market dislocation. But I'm looking at my 0:11:33.400 --> 0:11:35.520 inbox from Torsion Slock and he says, we are seeing 0:11:35.520 --> 0:11:40.080 the first science of US financial stress appear. Trailing treasury auctions, 0:11:40.200 --> 0:11:44.960 rating agencies issuing opinions about deteriorating fiscal situation and term 0:11:45.240 --> 0:11:49.240 premium trending higher. What do you make of that? The 0:11:49.280 --> 0:11:51.920 dislocation of the auctions this week, ad you syncraphic or 0:11:51.960 --> 0:11:52.840 something more malevolent? 0:11:54.880 --> 0:11:55.679 I mean, I think. 0:11:55.520 --> 0:11:59.120 It's I mean, I think financial conditions have tightened. If 0:11:59.120 --> 0:12:02.240 you look across a different indicators, right the dollars going up, 0:12:02.280 --> 0:12:05.120 corporate credit spreads of Titan. You know, I wouldn't say 0:12:05.120 --> 0:12:09.320 that it's a significant dislocation yet. I mean, I still 0:12:09.360 --> 0:12:13.160 think that, you know, financial market conditions, you know, have 0:12:13.320 --> 0:12:16.480 largely repriced because inflation has been higher, so you know 0:12:16.520 --> 0:12:19.280 that's going so in other words, inflation's higher, it's going 0:12:19.320 --> 0:12:22.400 to take a little bit weaker growth to get inflation 0:12:22.520 --> 0:12:24.199 back to where the Fed wants it. And so you're 0:12:24.200 --> 0:12:27.240 seeing financial conditions titan. I don't think it's anything beyond that. 0:12:27.320 --> 0:12:28.679 Just yet, Neil. 0:12:28.760 --> 0:12:31.240 We have some more news. We've been reporting all week 0:12:31.280 --> 0:12:35.040 that this attack potentially from Iran on Israel was going 0:12:35.080 --> 0:12:37.120 to be imminent, and we have reporting that it's going 0:12:37.160 --> 0:12:38.600 to be within the next forty eight hours. We've see 0:12:38.640 --> 0:12:40.720 a few signals from that, whether or not it's the 0:12:40.840 --> 0:12:44.719 US directing embassy personnel in Israel where they should and 0:12:44.760 --> 0:12:49.080 should not go friends telling putting certain countries on no 0:12:49.280 --> 0:12:50.160 travel lists. 0:12:50.600 --> 0:12:53.760 Last time we spoke, you pretty much shrugged off geopolitics 0:12:53.800 --> 0:12:57.120 at this point. How can you not say that this 0:12:57.320 --> 0:12:59.800 is not concerning at all to what is going on 0:13:00.120 --> 0:13:02.120 when you look at the global marketplace. 0:13:02.679 --> 0:13:04.600 Well, you don't shrug it off. You just I mean, 0:13:04.920 --> 0:13:07.000 you take it as it comes to you, right, I mean, 0:13:07.040 --> 0:13:10.080 in my experience, like changing a fundamental forecast based on 0:13:10.080 --> 0:13:13.560 what's going on geopolitically is usually you know, by the 0:13:13.600 --> 0:13:15.920 time you start doing that, usually the crisis is over. 0:13:16.080 --> 0:13:17.719 That's that's in my experience. 0:13:17.960 --> 0:13:20.000 Now, what I will say to me, the most interesting 0:13:20.040 --> 0:13:22.400 thing is just the relationship between what's going on in 0:13:22.400 --> 0:13:23.119 the energy. 0:13:22.880 --> 0:13:24.880 Markets and the dollar. 0:13:24.960 --> 0:13:28.640 You know, historically everyone's thought, you know, dollar down, oil up. 0:13:29.280 --> 0:13:33.600 But given the US position as a major commodity exporter, 0:13:33.960 --> 0:13:37.760 and you know, we run a net surplus in petroleum, 0:13:38.520 --> 0:13:42.120 you're seeing you know, stronger oil prices boost the terms 0:13:42.120 --> 0:13:45.600 of trade of the US and that strengthens the dollar. Right, 0:13:45.640 --> 0:13:48.480 So the causality is actually from oil to the exchange 0:13:48.520 --> 0:13:52.199 rate in the US. I think it matters more frankly 0:13:52.280 --> 0:13:57.520 for emerging markets or you know, sort of oil importers globally, 0:13:57.600 --> 0:14:00.959 because not only are they dealing with higher oil prices, 0:14:00.960 --> 0:14:04.160 they're also now dealing with weaker currencies, and that's going 0:14:04.160 --> 0:14:07.240 to limit the ability of those central banks to cut 0:14:07.280 --> 0:14:09.800 interest rates, which has been a reason for some of 0:14:09.800 --> 0:14:12.439 the enthusiasm and. 0:14:11.600 --> 0:14:12.760 Global risk appetite. 0:14:12.840 --> 0:14:16.720 Right, So, I think it introduces a little bit more 0:14:17.000 --> 0:14:19.760 tighter financial conditions, particularly in the rest of the world, 0:14:19.800 --> 0:14:21.920 I think more so than the US. 0:14:22.040 --> 0:14:23.640 Yeah, before we let you go, it sounds like you're 0:14:23.760 --> 0:14:25.840 a little less bullish than you have been of late. 0:14:25.960 --> 0:14:26.640 Is that true? 0:14:27.520 --> 0:14:29.200 Well, yeah, the data hasn't gone my way. How do 0:14:29.240 --> 0:14:31.520 you expect me to set you know, I mean, you know, 0:14:31.560 --> 0:14:34.400 you have to be honest with yourself, right, So, but 0:14:34.840 --> 0:14:39.640 I will just say, I mean, I do think we're Ultimately, 0:14:39.720 --> 0:14:42.800 when the dust settles on twenty twenty four, we will 0:14:42.800 --> 0:14:45.760 still be talking about a situation where the US economy 0:14:45.840 --> 0:14:49.400 is growing and the FED will be cutting That is, 0:14:49.520 --> 0:14:51.200 you know, I think, still the fundamental story. 0:14:51.480 --> 0:14:53.840 And honestly, Neil data hasn't gone to anyone's way because 0:14:53.840 --> 0:14:56.160 no one's been able to gain this out. Remax, Neil Data. 0:14:55.920 --> 0:14:57.400 Thank you so much for being with US. 0:15:06.920 --> 0:15:09.600 Bank of America stel Caerry Hall, writing quote, we think 0:15:09.640 --> 0:15:13.120 the uncertainty overhang may challenge relative performance of the Russell 0:15:13.160 --> 0:15:16.160 two thousand for now. Given higher for longer rate risks, 0:15:16.200 --> 0:15:19.200 small is likely to lag large until later this year 0:15:19.240 --> 0:15:22.440 if and when we get more confidence in cuts. Jill 0:15:22.480 --> 0:15:24.560 carry Hall joining us now and Jill, this has been 0:15:24.560 --> 0:15:27.040 always a fascinating discussion. If we're getting this sort of 0:15:27.080 --> 0:15:29.800 cyclical boom, why are we not seeing it as small caps? 0:15:30.000 --> 0:15:32.080 You're saying it's completely hinged on rate cuts and if 0:15:32.080 --> 0:15:33.600 we don't get them, we're not going to get that 0:15:33.640 --> 0:15:34.400 rebound this year. 0:15:35.920 --> 0:15:37.800 Yeah, and thanks for having me. I mean, we talked 0:15:37.800 --> 0:15:39.920 to a lot of investors and I think there has 0:15:40.000 --> 0:15:42.800 been this year more optimism on small caps. We've seen 0:15:42.800 --> 0:15:45.480 that in the inflows that we track. But I think 0:15:45.520 --> 0:15:48.520 in all of the conversations that we have, investors have 0:15:48.640 --> 0:15:50.680 sort of been looking to the FED as the next 0:15:50.720 --> 0:15:54.040 catalyst for why the Russell two thousand could could move 0:15:54.120 --> 0:15:57.880 higher from here. You know, corporates in general, especially when 0:15:57.880 --> 0:15:59.600 you look at the S and P five hundred, they've. 0:15:59.400 --> 0:16:01.360 Locked in dated low rate debt. 0:16:01.440 --> 0:16:04.800 But for smaller companies within the rustle, about forty percent 0:16:04.800 --> 0:16:07.120 of their debt is either short term or floating rates. 0:16:07.280 --> 0:16:09.640 So you know, we estimate this could be a pretty 0:16:09.680 --> 0:16:12.640 significant hit to earnings over the next five years of 0:16:12.800 --> 0:16:17.160 rates sort to stay high relative to you know, if 0:16:17.160 --> 0:16:20.280 we see cuts, then this becomes a less detrimental headwind. 0:16:20.680 --> 0:16:23.640 Jill, forgive me for sort of the hypothetical here, but 0:16:24.000 --> 0:16:26.240 what does it take to get some sort of fuel 0:16:26.320 --> 0:16:28.640 to this particular sector. Is it just one rate cut, 0:16:28.880 --> 0:16:31.000 is it just taking the prospect for even higher rates 0:16:31.000 --> 0:16:32.800 off the table, or do we need to sort of 0:16:32.840 --> 0:16:35.840 see the beginning of a protracted rate cutting cycle that 0:16:35.880 --> 0:16:40.040 could bring some of these expenses interest expenses back into 0:16:40.080 --> 0:16:40.880 something similar to. 0:16:40.840 --> 0:16:44.200 The past, right, I mean, I think you know what 0:16:44.480 --> 0:16:46.880 one cut isn't necessarily just going to solve the problem. 0:16:46.960 --> 0:16:49.640 I think, you know, given how elevated rates are are, 0:16:49.960 --> 0:16:52.760 our economists are now expecting that we'll see a cut 0:16:52.800 --> 0:16:55.920 in December. They had pushed that back from June, and 0:16:56.240 --> 0:16:58.800 four cuts next year. So I think if we get 0:16:58.800 --> 0:17:02.240 greater confidence that we're on a path to lower interest 0:17:02.320 --> 0:17:04.960 rates so that when these companies do have a lot 0:17:04.960 --> 0:17:07.760 of debt coming due over you know, twenty twenty five, 0:17:07.800 --> 0:17:11.720 twenty twenty six, and beyond that, that refinancing won't be 0:17:11.760 --> 0:17:13.840 as big of an impact to earnings as it could 0:17:13.840 --> 0:17:16.520 be now a great state. At these levels, I think 0:17:16.560 --> 0:17:20.359 a lot of the macro positives for small caps still stand, 0:17:20.880 --> 0:17:24.040 the profits recovery. But you know, another risk there is 0:17:24.080 --> 0:17:27.320 that the profits recovery this year is very back end loaded. 0:17:27.359 --> 0:17:29.520 Earnings are still going to be negative year over year 0:17:29.600 --> 0:17:33.400 this earning season. The consensus is looking for small cap 0:17:33.440 --> 0:17:36.240 earnings to recover to about thirty percent year every year 0:17:36.280 --> 0:17:38.080 by the time we get to the fourth quarter. So 0:17:38.359 --> 0:17:40.040 we'll be paying a lot of attention to guidance this 0:17:40.119 --> 0:17:44.240 earning season. So that could you know, potentially if things 0:17:44.280 --> 0:17:46.000 do come through, set us up for a better year 0:17:46.080 --> 0:17:48.760 end rally for small caps if we have confirmation that 0:17:48.880 --> 0:17:50.960 the back end loaded earnings recovery is coming through, and 0:17:51.000 --> 0:17:53.879 if we have confirmation that okay, inflation is cooling and 0:17:53.920 --> 0:17:56.680 the FED is going to cut, which as mentioned is 0:17:56.720 --> 0:17:58.760 our economists forecast now for December. 0:17:59.080 --> 0:18:01.720 Still good morning. Looking at the breath trade and the 0:18:01.800 --> 0:18:03.840 Russell Twoth size and energies at the top there are 0:18:03.920 --> 0:18:06.600 up over ten percent, and tech and when you look 0:18:06.600 --> 0:18:09.000 at the commodity complex, we're talking about oil around this 0:18:09.160 --> 0:18:12.440 desk this morning. Geopolitics is samory the warnings that are there. 0:18:12.480 --> 0:18:14.639 We're looking at oil, we're looking at copper, We're looking 0:18:14.680 --> 0:18:18.440 at a some kind of a new cycle within the 0:18:18.480 --> 0:18:20.840 breadth narrative, within the Russell twoth size and how do 0:18:20.840 --> 0:18:22.760 you play commodity strength and will it endure? 0:18:24.280 --> 0:18:24.440 Well? 0:18:24.480 --> 0:18:27.359 I think you know, the good news around the commodity 0:18:27.480 --> 0:18:31.000 oriented sectors like energy and materials and industrials is that 0:18:31.359 --> 0:18:34.720 they are some of the sectors that have lower refinancing 0:18:34.840 --> 0:18:38.960 risk relative to sectors like real estate that can see 0:18:38.960 --> 0:18:42.359 a much bigger earning set. So I think within small caps, 0:18:42.359 --> 0:18:45.320 if you're an investor right now, you want to be selective, 0:18:45.320 --> 0:18:48.240 and some of these commodity oriented sectors are one way 0:18:48.280 --> 0:18:51.160 to do that because they will benefit from from higher 0:18:51.160 --> 0:18:55.400 commodity prices, you know, manufacturing GDP improving, but they're less 0:18:55.400 --> 0:18:59.199 sensitive to refinancing risks. So that's one area that we 0:18:59.240 --> 0:19:02.360 see as relatively better positioned within SMID and we'd stick 0:19:02.400 --> 0:19:04.960 with higher quality stocks and stocks that don't have a 0:19:04.960 --> 0:19:07.280 lot of leverage or short term or floating ratedit. 0:19:07.480 --> 0:19:08.959 And then I pivoted one Ida and I look at 0:19:08.960 --> 0:19:11.000 the lags in the Russell two thousand and it is 0:19:11.040 --> 0:19:13.479 in the financials. We're getting information through and from JPM, 0:19:13.520 --> 0:19:15.600 from Wells Fargo, from City and it is about the 0:19:15.680 --> 0:19:20.719 net interest income and that story incrementally under a bit 0:19:20.760 --> 0:19:24.879 of pressure. But is that more pressure to come in 0:19:24.960 --> 0:19:27.240 financials in the regional banks. 0:19:29.119 --> 0:19:32.600 So within within banks we'd favor large over smid banks 0:19:32.600 --> 0:19:37.880 for now. Obviously the regionals have been challenged. And you know, overall, 0:19:38.240 --> 0:19:42.080 this is a sector within the rustle that's sensitive to 0:19:41.800 --> 0:19:45.320 to credit conditions and to you know, the FED. So 0:19:45.720 --> 0:19:48.320 you know that's an area that even though it's ranked 0:19:48.359 --> 0:19:52.439 relatively well in our plot work, we're relatively cautious or 0:19:52.560 --> 0:19:55.200 more selective within Right now, we'll see what all of 0:19:55.240 --> 0:19:57.800 the banks continue to say this earning season, watching guidance 0:19:57.840 --> 0:20:02.920 pretty closely. US corporates over all had guided relatively weekly 0:20:03.240 --> 0:20:06.719 in the last three months. Guidance usually is weaker at 0:20:06.720 --> 0:20:08.119 the start of the year, so we'll see if we 0:20:08.160 --> 0:20:11.879 see any improvement there. But in addition to financials, real 0:20:12.000 --> 0:20:14.480 estate it is another one that you know, we're more 0:20:14.520 --> 0:20:17.159