00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg Surveillance Podcast. Catch us live weekdays at seven am Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube. 00:00:27 Speaker 2: In the studio, we are thrilled to have Michael Purvis with us. Are you not up north in northern New England? Because this is like peak fly season right, not yet. We'll give it a couple of weeks, give it a couple of weeks, let it dry out and all that, and then where you go? So I went to the we ice cream. Paul Sweeney taught me how the Vicks First of all, Paul yesterday sixteen point twenty seven. Did we observe window dressing yesterday? 00:00:51 Speaker 3: Maybe? 00:00:54 Speaker 2: Michael Purvis, what do you think in terms of the apody catching up? 00:00:58 Speaker 4: Yeah, Well, it's been a pretty remarkable year. Obviously, earnings growth has been exceptional. And what's even more distinctive about that exception exception earning s growth is that it came on the back not of an earning strough, but of a very strong twenty twenty five earnings there and you know, a lot of strategists are upgrading their price targets. But just to throw out a couple of quick numbers, here, forward earnings estimates per Bloomberg Consensus, the S and P five hundred are up nearly twenty percent year to day. Now, some of that might be some you know, sort of unusual things with how some of the big tech companies account for some of their investments. Even if we take a conservative approach, let's just call it twelve percent. Now, let's say that second half of the year we're up the same amount another ten percent. You take today's multiple on that twenty two times, and you're at nine thousand at the end of the year. Right, So you know there's a lot of like, oh my god, someone's upgrading to eight thousand. Well, it's not inconceivable to see nine thousand this year. And I don't know if anyone's it's sort of hard to wrap your arms around that, but it's it's actually, ah, it's a real scenario. 00:02:02 Speaker 3: Here is inflation a risk to some of those earnings forecast because it seems like even oil is coming down. I've got wta good oil at sixty eight bucks here today, which is good, But a lot of folks are concerned about some more underlying core sticky inflation. 00:02:14 Speaker 4: Yeah, there's there's no question that I think inflation has been you know, with or without oil. There's there's a strong argument to be made, and I've certainly been making it that inflation is sort of going to a higher, longer place here. But I think it's important to point out that if you look at a long term history, that inflation doesn't necessarily reduce earnings, and in some cases it actually you know, inflate startings. We go into Starbucks, we buy our coffee with nominal not real dollars, right. 00:02:42 Speaker 2: So I didn't know that. 00:02:45 Speaker 4: So no, but it's I think, Paul, you're raising a really good question and point here. If you look at earnings estimates across sectors. You know, since you know the around war broke out, staples and consumer discretionary the two most obvious you know sectors to be hurt by this. 00:03:05 Speaker 2: And even then. 00:03:07 Speaker 4: They're earnings, you know, their forward earnings are stole up, are higher today than they were back at the beginning of the year. 00:03:14 Speaker 2: I was gonna do this is the stark Paul, let me do it right now. One year trailing, we I go up twenty Well you're going to move the screen. Paul taught me how to do this, and I'm going down in flames. The answer is the Dow up eighteen percent. Yea, the Russell two thousand. We're gonna talk to Jill here in a moment from Bank of America up thirty eight percent. Yeah, it's I mean, how many people know that? I think a lot of people. 00:03:38 Speaker 3: That don't know that. I mean, so, how do you think about volatility in this market? 00:03:42 Speaker 5: Michael? 00:03:43 Speaker 3: I mean, are people buying risk here? They're buying protection? What are they doing here? 00:03:47 Speaker 2: Yeah? 00:03:47 Speaker 4: Well, very recently you've seen you know, the vics come in. You've seen the volatility risk premium shrink to levels that are don't make you particularly comfortable. So I do think there's sort of an argument that, yes, okay, the VIX is sort of, you know, towards the lower point of its longer term range. The put call skew metrics like that are not particularly elevated. There's some levels of complacency here. I think the problem that I've always struggled through over the last couple of years here is that in a strong tech led bull market, tech broadly defined. 00:04:25 Speaker 5: Shall we say? 00:04:26 Speaker 4: The correlations will go very very very low and often stay very very low. So so do you want to hedge within the book like you're you know, with a SECONDTF or more perhaps a single stock, or do you want to buy vix calls or S and P puts. It's it's buying, you know, just just buying S and P puts as an insurance policy is very It's been very tricky, and I think that's going to stay the case. 00:04:52 Speaker 2: When does the president doing better in compensation than the normal you know, g G hyphen you know, two hundred and eighty five thousand year or whatever. I guess he's doing better than good. We're doing better than good because of a set of stimuli. Kevin Hassett. Right now, the National Economic Council Director, Doctor Hassett's over with Maria talking about four percent growth, five percent, six percent. Dare I say, Banana Republic seven percent nominal GDP? Is that healthy? Well? 00:05:26 Speaker 4: Look in terms of yeah, I don't know about the four percent real if that's what he was saying there. But I think right now our our complexion of nominal GDPs a little bit more skewed towards inflation than growth, but it's not particularly you know, people throughout the term stagflation. 00:05:44 Speaker 2: It's manageable. 00:05:45 Speaker 4: Yeah, if you look at what the term stagflation was coined in the late nineteen seventies in reference to nominal GDP of ten percent, that was twelve percent inflation and minus two percent growth. That's what real stagflation was. So just look at corporate earnings we're talking about. They have been able to grow through all sorts of inflation, all sorts of inflation over the last few years. The margins have been able to manage through this inflation over the last few years, and of course the top line has benefited from inflation. So so look, you know, if we're if we end up being you know, two percent real three percent inflation over the next couple of years, I think that's going to set the stage for you know, a pretty solid broadly speaking, economic conduction. 00:06:28 Speaker 2: So the VIC seventeen would you acquire new shares today? I saw like John Templeton. 00:06:34 Speaker 4: Yeah, you know what shares are you talking about? Because you know S and P five hundred. You know, if you want to sort of you know, just keep adding every every month type of thing, as you know, in a retail type of long term savings context. 00:06:47 Speaker 2: Sure, I think I think you know. 00:06:49 Speaker 4: The real story is is how are you, you know, gauging gauging the rotations? Do you believe that semiconductor rally is going to continue a pace or not? That's really where that I think the story is. 00:07:01 Speaker 2: I got one final question, Squam Lake, is the real estate stupid up there? Now? 00:07:05 Speaker 4: If you're on the lake, it is. Yeah, if you're on the Linke, it's like stupid price. Yeah yeah, Hanry. 00:07:10 Speaker 2: Fond, it couldn't slip in right now for a cottage. Yeah. 00:07:14 Speaker 4: Well, you know, Boston radiates a lot of its success North the median sales price. 00:07:19 Speaker 2: Squam Lake sits around five point nine millions for Henry Vonda's cottage. And I'm Goulden, Michael Purvis, thank you so much. Stay with us. More from Bloomberg Surveillance coming up after this. 00:07:39 Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube. 00:07:52 Speaker 2: This is hugely, hugely anticipated. Paul chastises me turns to me, it's just a stupid we're not doing enough on small caps. Ji'll carry Hall owns the high ground. Why do you bring in? Right? 00:08:04 Speaker 3: Absolutely, Jill carry Hall us equity strategist and head of the small cap strategy at Bank of America. Small caps are having a good year this year. The yeah, thank you, Wow finally X kind of d SMP. What's going on out there? 00:08:18 Speaker 6: Well, it's been a long time where they've been underperforming, I mean really for over a decade. And you know, right now you have some some cyclical positives because they'd been in an earnings recession, finally started to come out of that, and you've had the manufacturing recovery in the US finally take hold the ism. Manufacturing indicators the single most correlated macro indicator with the Russell two thousand. Yeah, when we've looked at like, you know, thirty or fifty different macro indicators, so manufacturing actually matters a lot for that index. And then you had you know, oil prices higher. The Rustle two thousand actually has more exposure to industries that benefit from higher oil than the consumer industries that get hurt by it. And then you know performance was actually a bit more concentrated than usual, So when you look at a lot of the top performers, it was actually some of the thematic AI infrastructure stocks that were some of the biggest contributors. So even though the index is up so much this year, I think there are parts of the index that could still play catch up. You know, healthcare has been underperforming, but M and A activity, yes, and healthcare and biotech had not looked particularly attractive in our work in small caps, but finally are starting to The rep is there's. 00:09:29 Speaker 2: No profit or less profit. How does profit play across successful and less successful Russell two thousand. 00:09:37 Speaker 6: Yeah, the index is, you know, about a third of the companies are nonprofitable, so that is historically elevated. We we obviously just went through two earnings or sessions COVID and then the recent one that started in you know, twenty twenty two, twenty twenty three, and you also had an IPO boom in twenty twenty one that caused a lot of nonprofitable stocks to get added. So the amount of stock that don't have earnings is elevated. It's starting to come down, and even for an area like biotech, Biotech is actually the highest quality it's been in about twelve years. You're starting to see more companies turn profitable, get more mature. But we did see this sort of, you know, unprecedented period of low quality outperformance within the small cap index over the past year or so, where you know, usually if you're a small cap investor, you own you want to own higher quality stocks because the profitable stocks of higher quality ones do tend to do better over the long term. But that's not what we saw over the last year or so. So that that kind of three standard deviation event and how much low quality stocks outperformed, I think now kind of paves the way that we could go back to a more normal environment or higher quality stocks work within small caps in the second half. 00:10:50 Speaker 3: I learned early in my career smid means small MidCap. That's a cool term now for you, Jill. In the first half, you preferred small versus MidCap. Now in the second alf you're saying MidCap versus small. Why. 00:11:04 Speaker 6: Yeah, I think even though we do still think that both small and midcaps could outperform mega caps in the second half, you're still expected to see a big profits pick up in small and mid caps to kind of similar levels that should outpace large cap profits in the second half were we saw much better performance for small caps in the first half. So I think, just performance wise, there's more catchup potential now for mid caps on a similar level of profits. And we're seeing FED hikes start to get priced into the market. Are economists at be of A now expect the FED will hike three times this year at the end of the Toward the end of the year, Russell two thousand has a lot more leverage, a lot more refinancing risks, given the debt exposures more towards short term and floating rate debts. So I think given those increased risks from higher rates, we'd tilt more toward the mid caps than the small caps for the second half, just given those rea do. 00:11:57 Speaker 2: Their executives, particularly in mid cap striving every day, they've got their hurdles or equity kickers and all that. Do they do M and A like big caps? I mean, are they essentially equivalent or is it a whole different world? 00:12:10 Speaker 6: I mean, right now, you know a lot of the deal activity is you know, small caps are the targets, and you know a lot of the larger companies are the acquirers, so you have a lot of you know, large large pharma buying smaller biotech. That's been a key area of activity. So you know, while you may see some ADMD that a lot of the activity is you know, large buying small and that's where the relatively cheaper valuations are as well. You know, megacaps are the most expensive area. Small caps are kind of the least stretched, although now small and midter trading it similar value. 00:12:47 Speaker 2: You have one of the coolest double majors going here, Lafayette. Were you in economics and said I'm going to take a double major in English, or you in English saying I'm going to take a double major in economics. 00:12:57 Speaker 7: I was. 00:12:58 Speaker 6: I was econ in mad and then I decided to drop the math and pick up a I always liked writing, so I decided if I was taking some writing courses, might as well make it a second major. 00:13:10 Speaker 2: So you got to cut your shrouding equations and differential equations. 00:13:15 Speaker 6: Yeah, I got to CALC three and then I just said I think I've had enough. 00:13:18 Speaker 2: That's great, don't be a strangers. You carry hall, Thank you, thank you so much. And I do want to mention the Bank of America call on what mister Warrish is going to do is really an outlier call up the rating increases of three. We heard that yesterday from a jeep of the hobby of a Bank of America as well. Stay with us. More from Bloomberg Surveillance coming up after this. 00:13:49 Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from seven to ten am Eastern Listen on Applecarplay and Android Otto with the Bloomberg Business app, or watch us live on YouTube. 00:14:02 Speaker 2: Lindsay Pigs will with us right now. Chief economist Steph Will choose my Economist of the Year a couple of years ago and around that is an optimism Lindsey once again. One year trailing, six months trailing, the equity markets price better than good. How do you respond and what do you see? It's steafull of the gloom that's out there. 00:14:25 Speaker 7: Well, I don't know if it's necessarily gloom, but I think there's a lot of reason to be concerned when you're talking about potentially tackling dangerously elevated inflation at this point. Now, we did see a stronger than expected pace of growth at the start of the year. We are seeing slightly better than expected conditions in the labor market. We have started to see some momentum in inflation cool but there's still a lot of concern and a lot of conditions that the FED needs to be aware of and adjust policy appropriately to keep inflation in check. 00:14:58 Speaker 2: I mean, just a single line here, Paul yep Pigs of Stiefel Lauren Henderson wrote this, Lindsey didn't write this Gross private investment revised up to seven point ninety percent. Nice. 00:15:09 Speaker 3: I mean inside investment. 00:15:11 Speaker 2: There's a spirit out it. 00:15:12 Speaker 3: There there is, there is, and Lindsey, I mean, we heard from the FED Chairman Walsh for the first time a couple of weeks ago. What did you take away from that as you think about central bank policy going forward. 00:15:26 Speaker 7: Well, one of the things that I took away was he took a much more neutral stance. There was a much more neutral tone than I think the market had originally been pricing in. In terms of that shift from a previous inflation hawk to now aligning himself with the administration calling for a regime change and a markedly lower level of policy. I think it over the medium to longer term, I think the wars certainly will try to steer the monetary policy SHD towards lower interest rates, but in the near term he seems to be acknowledging the reaction of elevated inflation, so perhaps at worse, what he does is downplay the potential for in conversation around great hikes, even if the Committee seems to be moving in that direction. 00:16:14 Speaker 2: Kevin Wersh and Bloomberg's surveillance at nine o'clock hour with the tag team, Governor Bailey, Madame Leguard, Sarah eisenholding court there in CenTra. This is like the Jackson Hole of Europe. It's in near Lisbon as well. Anna Wong just publishes on this moments ago. I'm reading it re Lily as we go, Anna Wong and Andrew Sacher this morning, Lindsey, what do you want to hear from Kevin Worsh. Is he a hawk or as he has dove? As doctor Wong puts it. 00:16:40 Speaker 7: Well, again, I think longer term he's going to reveal his very dubvish colors. But I think at this point it is important, given the reality of such heightened level of inflation, that he maintains a more neutral tone as Otherwise this could risk on anchoring inflation expectations if there's a sense that the new leadership would tolerate extremely elevated inflation in order to get us down to a lower interest rate environment. So it's going to be very important for him to strike a neutral tone. That being said, I do think that he's already in the market of revising or at least looking at many of the things that the FED does, everything from balance sheet management, to the Fed's use the data, to of course communication. That was a big change for the market, dropping that statement down to about one hundred and thirty words when the market is used to a statement four or five times that length. In order to give us more color around what the FED is viewing the economy as and what the Committee is expecting from policy going forward. 00:17:48 Speaker 3: Linda, we're going to get some more labor data tomorrow, nonfarm payrolls. What are you expecting. How do you think the FED is thinking about the labor market. 00:17:56 Speaker 7: Well, I do expect payrolls to increase a lesser one hundred and twenty hundred and twenty five thousand, So it's still a very positive, very solid number, but slower than what we saw in may the unemployment rate likely to remain steady around that four point three percent rate as it has been now for the past four consecutive months, and average hourly earnings really remaining around that three and a half percent annual mark. 00:18:23 Speaker 2: So I think. 00:18:23 Speaker 7: Overall, when we look at these more solid conditions in terms of GDP, is still solid pace of hiring. I think for the FED, absolutely elevated inflation is unfavorable to say the least, but these relatively sturdy numbers I think can serve to quickly derail any sort of hawkish sentiment at the FED if it starts to bring back the conversation of a temporary or transitory impact from the energy price shock as a result of the conflict overseas. 00:18:57 Speaker 2: It's a Tito's in tang transitory every time. 00:19:00 Speaker 3: Very little sit there. Linday, how about the other side of the fence mandate that the labor market here? Just in general, how do you think about AI and the labor market going forward? Is it a net positive negative? Too soon to tell. 00:19:15 Speaker 2: We just don't know. 00:19:16 Speaker 7: But what we what we do know is that when we look at it from a top line perspective, there's no doubt that AI is driving higher productivity efficiency. That's the gain, that's the benefit for businesses. But when we talk about potentially displacing millions upon millions of jobs. In fact, taking a middle of the road analysis, there's an expectation of displacing about nine million jobs this year alone. We cannot underappreciate then the longer term disruptive factors that this will have in the labor market, both for current and future labor market participants. 00:19:50 Speaker 2: But the fact is, lindsay, did I think a lot of people got wrong? This resilient economy and just simply where the levels of the market is. Even if somebody underperformed SPX, it's like wow, double digit as well, the economic framework that you see into next year. First time I've asked the second half in the next year, Lindsay, it's a tone of optimism, right, We're still hugging along, right it is. 00:20:20 Speaker 7: And remember there's a lot of unknowns, a lot of uncertainty when we talk about this technological revolution, because we've had these in the past, and typically when we see these types of technological change, it's labor augmenting, not labor replacing, meaning yes, some jobs are lost, but others are created. As we free up capital, become more efficient, and we're expanding the economy this time around, though, there is a big question mark of will it be different, because if we find ourselves not replacing these labor components but permanently displacing the human component in that production equation, that can have a more lasting negative impact on the labor market. But again, the forecast span across the gambit, we really don't know at this point how this is going to play out. 00:21:08 Speaker 2: Lindsey, thank you so much. Landa Viexo was stayful here with a nice briefing, particularly on Chairman Warsaw. Stay with us. More from Bloomberg Surveillance coming up after this. 00:21:24 Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from seven to ten am Eastern. Listen on Applecarplay and Android Otto with the Bloomberg Business app, or watch us live on YouTube. 00:21:37 Speaker 2: He is in studio. He is Jay Pulowski, Founder Principal TVW Advisory Definitive at Morgan Stanley, putting together allocation, emerging market strategy and such. So like ten days ago, I'm sitting with a major heavyweight from a major firm and they whispered to me, Tom, I regret so much how cautious I was, and I just got this great bullmarket wrong. You have said you have to participate. What do you say on this fourth of July to the crew that have missed this bullmarket? 00:22:13 Speaker 5: The good news is we're early and we can, I think globally in particular, go considerably higher. And I think the real opportunity is that we have a global growth convergence taking place as a result of what we're calling a spending supercycle, as Europe, Asia and the America's spend on AI, climate and defense. And what that's doing, Tom, is it's meaning that earnings growth is converging. So you have the same kind of earnings growth we're enjoying here in the US, in the emerging markets in Japan coming in Europe as well. But what isn't converging is valuation. And that's the opportunity, right. So, if you have a global growth long cycle, as we think we are in the early stages running through probably the end of the decade twenty thirty and beyond, if you have earnings convergence where that supports this bull market. We're not expensive people who keep talking about a bubble and expensive just have it completely wrong. It's an earnings growth driven market, it's not a multiple expansion bubble market. That you have an opportunity for a convergence in valuation, and that is going to be coupled with, in our view, a devaluation of the dollar relative to other currencies. And therefore you've got a twin engine opportunity and non US equities for a valuation convergence. Right now, for example, EM trades at eleven times earnings, the SMP trades at twenty one times earnings, the same earnings growth forecast for both this year and next. Why should there be such a huge valuation divergence. It shouldn't exist, and I don't think it will exist as we go forward the next couple of years. So to me, the medium and long term investment opportunity we're presented with in investing outside the US as global equity leadership shifts from the US to the rest of the world, led by emerging markets through evaluation convergence in a currency convergence is very very compelling. 00:24:25 Speaker 3: How does one play that well? 00:24:27 Speaker 5: You can play it by owning emerging markets. You can play it by owning non USDM, whether you want to look at Japan or Europe, you can own it in looking at commodities, right, we're very bullish commodities. You can own it by owning em debt for example, both local currency and dollar. I mean, basically to us, the way we're thinking about the world is that the kind of the wide part of the funnel, the investment funnel, the acid allocation decision run we do global macro investing at TPW. The wide mouth of the funnel is pretty straightforward. Acid allocation wise, overweight equities, overweight commodities, deeply underweight bonds because we're in a spending supercycle, which means governments and private's going to have to spend, which means long duration debt in the G ten is not attractive. Right, We're going to have continued pressure on interest rates, and so you don't own fixed income. The question is you allocate it to equities and commodities, and within that commodity bucket. For example, we're like more than double weighted, so we own the energy space, we own the miners. We're big fans of copper, we're big fans of the conversion into clean energy. And then you have the thematics. We think there's a huge opportunity in thematics. 00:25:41 Speaker 2: Two things going here. I got the President of the United States and the beast out by the new Air Force one. We'll bring you in those images here on YouTube in a moment we say good morning across America. Is well sit on Mag seven? Is the Mag seven story over? 00:25:56 Speaker 5: Yeah? That's I mean, it's such. I mean, you own semis, You own the picks and shovels. Tom, This is really basic stuff, right, You own the semis? Right, you want you get wealthy, not by being the gold miner. You get wealthy by being the guy selling the gold mine of the picks and shovels. Picts and shovels. Todakay is semiconductors. 00:26:14 Speaker 2: Okay. The Jablowski I know is when Duke was like two and eleven. Okay, he's on the first Sadly Clemson Clemson October eighteenth, nineteen eighty You go on to Death's Valley and Clemson is like, anna kill you you? How did you? That was like one of the greatest upsets in the Austria college football How did that happen? 00:26:36 Speaker 5: I mean, this is why I came in, right because I knew that Tom would give me this kind of love, and it's so rare for people to like even remember back that far that it's a good thing Tom, you and I, you know, go back to those days. Yeah, that was the one singular moment of success that we had to do football when I was there. Sadly happy to say that nowadays du football is in a much much better place and I've had a little bit to do with that. 00:27:00 Speaker 1: Jay, Thank you so much for This is the Bloomberg Surveillance podcast, available on Apples, Spotify, and anywhere else you get your podcasts. Listen live each weekday, seven to ten am Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.