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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business App. Daryl Kronk of Wells

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Speaker 2: Fargo saying this, as the odds of a Trump presidency increase,

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Speaker 2: so do the chances of Republicans keeping the House and

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Speaker 2: winning the Senate sectors that are likely to be received

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Speaker 2: as winners under a Trump White House, Republican Congress, Our Defense,

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Speaker 2: financial services, reads, and traditional energy. Daryl joins us for

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Speaker 2: more Darrek and morning, It's got a Sailing Jack. Let's

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Speaker 2: start with the energy piece of this perception versus reality.

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Speaker 2: When the former president comes in, it's a Droe baby

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Speaker 2: trou Should I be buying Genijio running away from it?

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Speaker 1: Well, it's interesting It's a great point because during the

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Speaker 1: past Trump presidency, energy was one of the worst performing sectors,

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Speaker 1: right from a gets standpoint. Ironically, during the Biden administration,

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Speaker 1: if you market as of the date of Joe Biden's

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Speaker 1: election four years ago, energy has been one of the

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Speaker 1: best performing sectors. So there is a little bit of

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Speaker 1: a contrarian element there. In fact, it's rivaled tech. Most

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Speaker 1: people don't believe this, but you can go back and

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Speaker 1: run the numbers that everybody believes Tech has been consumed

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Speaker 1: all the oxygen in the room, and the reality is

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Speaker 1: energy has done extraordinarily well in the last four years

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Speaker 1: since the last election. All that said, I actually do

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Speaker 1: believe that we're probably in a secular bowl for energy.

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Speaker 1: It's our single biggest and best idea of high conviction

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Speaker 1: on the board. And it's not a conviction that we think,

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Speaker 1: you know, fades in the next three six nine months.

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Speaker 1: We think it's a multi year. You know, the world

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Speaker 1: just has too much demand coming out of AI cybersecurity,

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Speaker 1: defense spending. Right. I can go down a list of

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Speaker 1: inputs coming in to the demand side of energy, and

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Speaker 1: we just don't have enough supply. That's just the hard reality.

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Speaker 2: We should also say it's odd reality of American politics

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Speaker 2: that you can come out and say drill, baby, drill.

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Speaker 2: And there are very few progressive Democrats that are willing

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Speaker 2: to come out and correct in because the reality for

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Speaker 2: them is that actually we've got record output near thirteen

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Speaker 2: million pounds a Day's a odd situation, isn't it. They

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Speaker 2: almost don't want to talk about it, that we've actually

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Speaker 2: got record output in America when it comes to crude, right.

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Speaker 3: And it is a sector that also has done very

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Speaker 3: well under President Biden, which also gets to this idea

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Speaker 3: of how much do you really want to trade the

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Speaker 3: politics when they both have had the.

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Speaker 2: Same that result, we've been traded the politics the small

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Speaker 2: caps as well. You've got rates, you've got earnings, and

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Speaker 2: then you've got Donald Trump out of those three right now.

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Speaker 2: And I know this is difficult to do, but just

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Speaker 2: based on your conversations, what you see in the price

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Speaker 2: the rally that we've had over the last week in

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Speaker 2: small caps, is it about one versus the other or

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Speaker 2: three combined?

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Speaker 3: What is it?

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Speaker 1: So we've had a lot of conversations that Strategy Committee

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Speaker 1: about this, right, because it's to rip your face off

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Speaker 1: rally over the last seven to eight trading days, and

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Speaker 1: it started with the weak inflation. Then everybody believed the

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Speaker 1: Fed was, you know, a go in September, No if

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Speaker 1: sands butts and so here comes to the rate cutting cycle.

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Speaker 1: And then of course the events over the weekend of

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Speaker 1: the attempted assassination put a bid in a Trump presidency

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Speaker 1: in a red wave basically, So it's those three combined.

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Speaker 1: I would tell you this, John, we're thinking about is

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Speaker 1: it a reaction or is it a rotation? Because they're

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Speaker 1: two different things. Right, reaction is a short term reaction

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Speaker 1: in the last seven eight trading days, right that blows

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Speaker 1: through some of the technical resistance levels and everything else.

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Speaker 1: Or is it a true rotation where capital is believing

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Speaker 1: that small caps can durably outperform over the next you know, six, nine,

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Speaker 1: twelve months. We think it's the former. We think it's

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Speaker 1: a reaction. At this point. If you look at small caps,

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Speaker 1: still forty percent are non earners, as everybody knows. What's

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Speaker 1: interesting is if you look at the equity risk premium, right,

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Speaker 1: which is just a function of am I getting paid

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Speaker 1: to take the risk, It's at an all time low

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Speaker 1: on smalls, all time low, right, not like a cycle

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Speaker 1: low or anything else. It's an all time low today,

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Speaker 1: so you're not getting paid to take the risk. The

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Speaker 1: leverage is still high as we know in small caps,

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Speaker 1: so as they have to service that debt, right, that's

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Speaker 1: hard on their earnings, and the earnings both today and

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Speaker 1: going forward are still expected to decelerate relative to large right,

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Speaker 1: so the fundamental story is not there now. What can

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Speaker 1: change that? What will change that is if the Fed

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Speaker 1: cuts rates faster and more than people expect. Because small

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Speaker 1: caps are highly indexed to floating rate debt. Almost forty

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Speaker 1: forty five percent of their debt is floating rates. So

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Speaker 1: if you bring the short side of the curve down quickly,

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Speaker 1: that's a big tailwind right to small caps along with

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Speaker 1: their highly leveraged so obviously the rates come down, it

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Speaker 1: helps them in their business model, margins, earnings and the

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Speaker 1: like today bottom line, we still think it's a reaction

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Speaker 1: and not a full rotation.

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Speaker 3: What about the rest of this market because it's not

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Speaker 3: just small caps that did better. It was basically everything

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Speaker 3: but big big tit tech just kind of state flat

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Speaker 3: is not more enduring that you have a market that

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Speaker 3: has maybe gone over at skis with how concentrated it

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Speaker 3: is and willing to look elsewhere.

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Speaker 1: I think it's a great point, Danny. So you know,

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Speaker 1: we are at a little bit of tenuous levels this morning, right,

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Speaker 1: the S and P sitting right on top of its

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Speaker 1: twenty day support level, but Big Tech more importantly, right

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Speaker 1: mag seven top ten names sitting on top of its

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Speaker 1: fifty day If it pierces its fifty day support level, right,

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Speaker 1: I think some of that selling accelerates to the downside.

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Speaker 1: We all know breath has been far too narrow right,

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Speaker 1: and that leadership needs to expand. So I would argue

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Speaker 1: and postulate that if you can get leadership to expand

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Speaker 1: right into financials, into industrials, right into other areas of

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Speaker 1: the market, that's actually a healthy thing for markets. We

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Speaker 1: know we've had too little leadership that's been too concentrated

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Speaker 1: than on a market cap basis has driven that. So

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Speaker 1: it's a healthy thing if we can do that. But

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Speaker 1: the question is if Because just a week ago before

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Speaker 1: we started this rally, the index was set all time

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Speaker 1: highs and the number of participants above their two hundred

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Speaker 1: day moving average, we're at all time lows in the SMP.

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Speaker 2: Right. So here's the thing, I worry about that people

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Speaker 2: are pan against a cyclicals just as a cycle is

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Speaker 2: starting to turn the wrong way. Isn't that what you

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Speaker 2: worry about too?

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Speaker 1: It is? I mean, if I was asked this question

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Speaker 1: of the to day, you know what would make you

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Speaker 1: buy small caps?

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Speaker 3: Right?

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Speaker 1: Which is a prime beta cyclical? It would be one

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Speaker 1: of two things.

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Speaker 3: Right.

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Speaker 1: Either it has to be price compelling, which to me

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Speaker 1: the Russell two thousand probably needs to be at eighteen

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Speaker 1: fifty nineteen hundred before you're price compelling. Or I have

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Speaker 1: to believe I'm early cycle and not late cycle, and

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Speaker 1: all the data tells me that I'm still late cycle. Right,

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Speaker 1: If you can convince me I'm early cycle, I'm a

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Speaker 1: buyer or small capsule?

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Speaker 2: Because I've been asking this question for months, if not

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Speaker 2: years now, do you really want to buy the recovery

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Speaker 2: to the recession we haven't had?

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Speaker 1: That's right? Unless there's compelling evidence there right that we're

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Speaker 1: truly that. I guess you can make the case. Here's

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Speaker 1: the contrring case. You make the case we soft land

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Speaker 1: so you never have the recession. You trough out a

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Speaker 1: little bit, and then you reaccelerate hard to the other

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Speaker 1: side of which then small caps make sense. I'm a

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Speaker 1: little worried that people are jumping on small caps because

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Speaker 1: remember small caps did well as we close sixteen and

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Speaker 1: early into twenty seventeen on the first Trump presidency. Right,

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Speaker 1: so they're replaying the same tape, right, if you will,

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Speaker 1: you know Bear Steepener, small caps outperform, you know defense

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Speaker 1: financials rates. Yeah, the whole thing is the same playbook.

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Speaker 1: If that same playbook doesn't play out in policy, right,

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Speaker 1: and what let's say Trump two dot zho comes to fruition.

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Speaker 1: If that's how the November election goes, then you've got

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Speaker 1: some risk in those trades and they become then the

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Speaker 1: reaction and not a durable rotation.

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Speaker 3: Well, as we start out this conversation, Darryl, a huge

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Speaker 3: part of it is what down ballot races look like,

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Speaker 3: what the House and what the Senate look like. Does

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Speaker 3: just the fact of Biden being more likely to drop

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Speaker 3: out with this pressure make that up in play and

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Speaker 3: maybe question some of this rotation.

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Speaker 1: Yes, and no. I So our thought all the way

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Speaker 1: along is the Senate. Clearly the math is difficult for

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Speaker 1: the Democrats to hold the Senate, right, and everybody knows that.

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Speaker 1: So it's likely to go GOP. We've often thought the

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Speaker 1: House goes the way of executive branch, right, so whoever

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Speaker 1: wins the presidency carries the House on their coat tails.

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Speaker 1: Right now, you have to think that the the the

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Speaker 1: strength has been towards the President Trump and and weakness

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Speaker 1: towards uh Biden at least in the intensity of voters

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Speaker 1: and what they wanna see. The Democratic Party seems to

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Speaker 1: be united around one thing, which is trying to move

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Speaker 1: to a different candidate at this point, what if and

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Speaker 1: when they do that? The question then becomes can they

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Speaker 1: unify from there or does that fracture the party?

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Speaker 2: Oh, it's been a massive distraction the focus. I have

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Speaker 2: a Whamingley winning in November and not campenting for the

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Speaker 2: next four and a half years.

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Speaker 1: That's right.

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Speaker 2: And policy, let's talk about policy. Let's talk about policy

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Speaker 2: a little bit more now it's going to see it. Thanks,

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Speaker 2: thank you, sir, Katrina Dampley Franklin Templeton with this to say.

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Speaker 2: The biggest issue for investors is the concentration we have

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Speaker 2: seen in the market that is driving returns higher but

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Speaker 2: with significantly lower breadth. Katrina joins us now for more, Katrina,

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Speaker 2: we've been trying to address that over the last couple

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Speaker 2: of weeks. Do you think this move that we've seen

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Speaker 2: is sustainable.

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Speaker 4: I think we hope that is sustainable in terms of

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Speaker 4: the rally that we've seen in the small caps. And

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Speaker 4: why do we think that? Well, as I said, you know,

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Speaker 4: the concentration of the market and the amount of market

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Speaker 4: cap that's represented either by the Magnificent seven as we

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Speaker 4: call them, or tech generally is in historically very very

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Speaker 4: high levels, and we're hoping that some of that can

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Speaker 4: put performance can spread into the smaller cap area.

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Speaker 1: One of the.

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Speaker 4: Reasons that we're actually optimistic is our view on investment

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Speaker 4: and investment spending, and we think that that will disproportionately

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Speaker 4: benefit the small cap companies over those larger cap names.

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Speaker 2: What do you think of earning so far? And maybe

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Speaker 2: you can't name specific names, so I can do that

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Speaker 2: for us, the likes of Delta United, PEPSI. It doesn't

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Speaker 2: sound great on the consumer front, and when I think

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Speaker 2: about small caps and I think about regional banks, it

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Speaker 2: feels like we're piling into cyclicals at a time that

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Speaker 2: some companies are telling us things aren't that great.

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Speaker 1: What would you say to that, Katrina this morning.

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Speaker 4: Okay, you are absolutely right that we have seen a

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Speaker 4: lot of pressure coming from the consumer. But that pressure

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Speaker 4: and that concern.

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Speaker 5: Is not new.

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Speaker 4: We have seen it for many quarters ahead of time,

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Speaker 4: and so companies, when you are seeing these trends early,

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Speaker 4: can prepare. So we've seen something like a McDonald's talk about,

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Speaker 4: you know, bringing down the cost of its offering and

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Speaker 4: adjusting to this new reality. And that is positive because

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Speaker 4: as long as companies are able to adapt, what we

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Speaker 4: see as a negative headline can actually be an opportunity

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Speaker 4: for a company to continue develop and move their business forwards. So, yes,

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Speaker 4: we are watching the consumer. The second part of that

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Speaker 4: is some of the pressure that we're seeing is at

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Speaker 4: the lower end of the consumer. So if you rule,

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Speaker 4: the bottom forty percent of income earners actually represent less

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Speaker 4: than twenty percent of spending. So we need to really

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Speaker 4: understand this kind of broad range of spending across our

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Speaker 4: economy and who is really driving the numbers.

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Speaker 3: I mean, there are pockets, but there are pockets of weakness, Katrina.

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Speaker 3: And if you just look at the fun flow, people

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Speaker 3: have just been buying outright small cap ets. Big of

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Speaker 3: America's latest note says it was the second biggest inflow

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Speaker 3: on record over the past week. Do you think there's

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Speaker 3: an issue with people just diving into the sector as

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Speaker 3: a whole. Do they need to be more picky?

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Speaker 4: I like picky investors. They're my favorite type of investors,

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Speaker 4: because a picky investor is really saying there are benefits

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Speaker 4: to being active and to really understand what you're buying.

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Speaker 4: Particularly in the small caps, you're kind of buying a

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Speaker 4: basket of everything, and what we're saying is, actually, you

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Speaker 4: do need to sort through that basket of stocks and

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Speaker 4: identify those companies that are treating a good valuation. And

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Speaker 4: that's something I always talk about. Your evaluation is one

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Speaker 4: of the key drivers of stock performance. But also you

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Speaker 4: want to look and make sure that they've got strong financials,

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Speaker 4: that they're not pressured, or that they're prepared for the

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Speaker 4: interest rate rises that are in the past but are

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Speaker 4: now really starting to come for our financials. So I

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Speaker 4: think in the small cap plan, it really does pay

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Speaker 4: to be an active investor, because otherwise you're just kind

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Speaker 4: of buying what I would call a hodgepodge, but just

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Speaker 4: a diverse and a highly varied range of investments.

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Speaker 3: But someone to argue Katrina that as long as it

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Speaker 3: seems like Trump has good odds to be president, and

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Speaker 3: that the FED is going to be cutting rates, that

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Speaker 3: there are things that are under love that should be

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Speaker 3: going up anyway. Are those two pillars of an argument

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Speaker 3: to say maybe you can just buy it regardless that

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Speaker 3: they're just so in love that it makes some sense.

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Speaker 4: But that idea that just because it was unloved and

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Speaker 4: suddenly some macro factors are going to change and that's

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Speaker 4: going to make everybody love a stock, I think that

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Speaker 4: that's really not understanding the reality of what drivestock performance.

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Speaker 4: Because just because people didn't like a company before, if

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Speaker 4: you didn't like a buggy whip manufacturer when we had

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Speaker 4: that transition to cars, it doesn't matter if we had

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Speaker 4: one hundred or one thousand more cars on the road.

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Speaker 4: We still don't need those buggy whips. So you really

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Speaker 4: need to understand the business. You can't just say that

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Speaker 4: because it was I loved yesterday, I've got this positive

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Speaker 4: mac or a backdrop that things are going to get better,

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Speaker 4: because I just think that that is not the reality,

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Speaker 4: particularly in small caps.

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Speaker 2: Katrina Well said, it's going to hear from your Katrina,

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Speaker 2: don't be there of Franklin Templeton. I think we all

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Speaker 2: need to talk about the process as well as Ama

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Speaker 2: from the RNC and Marie. Thank you. Let's turn to

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Speaker 2: Rob Casey now a signal Global Advisors.

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Speaker 4: Rob.

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Speaker 2: Great to catch up with you, sir. Thank you for

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Speaker 2: being with us before we talk about the process. And

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Speaker 2: I'd love your thoughts on the process because you guys

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Speaker 2: specialize in this kind of stuff. I want to talk

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Speaker 2: about how close we actually are now because it feels

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Speaker 2: like you and a team have changed your base case

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Speaker 2: about whether President Biden stays in this race. Where are

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Speaker 2: we now?

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Speaker 5: Yeah, John, we have and thanks for having me on.

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Speaker 5: You know, as of yesterday, I think that the tide

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Speaker 5: really has turned. Anne Marie totally agree with her. This

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Speaker 5: weekend is the most important of Joe Biden's political career.

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Speaker 5: The issue for Biden for Democrats is we've essentially had

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Speaker 5: three weekends.

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Speaker 1: In a row, or three weekends.

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Speaker 5: Out of the last four that are the most important

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Speaker 5: of Joe Biden's career, after the debate, after the NATO summit,

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Speaker 5: and now this weekend coming up.

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Speaker 1: We just don't think that that path is sustainable.

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Speaker 5: We can't have every weekend the question of whether or

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Speaker 5: not Joe Biden is going to drop out. Joe Biden

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Speaker 5: can't have it. Senate Democrats, House Democrats, who are running

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Speaker 5: very tight races. Nobody can have it. So we don't

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Speaker 5: think it's sustainable. Clearly congressional leadership is thinking the same thing.

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Speaker 5: Wefer from Chuck Schumer. We've heard from Leader Jeffreyes, We've

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Speaker 5: heard from Nancy Pelosi, all of whom you know. It

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Speaker 5: seems that they're going more public with further pressure on

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Speaker 5: Biden to step aside.

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Speaker 2: So let's go to the weekend. Let's assue this happens

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Speaker 2: just for the sake of the following conversation. Let's see

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Speaker 2: he sits there at the weekend and delivers an address

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Speaker 2: to the nation and talks about stepping aside.

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Speaker 4: One done.

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Speaker 2: What does the process look like going into Walkers rob

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Speaker 2: What do market participants in our audience need to think about?

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Speaker 5: Yeah? Absolutely, well, I think the first moment after that,

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Speaker 5: there's going to be a scramble within the Democratic Party. Obviously,

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Speaker 5: everybody's sort of preparing for this behind the scenes. Now

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Speaker 5: nobody's able to explicitly prepare for it until it happens.

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Speaker 5: We with very high conviction believe that Vice President Kamala

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Speaker 5: Harris will be Democrats' plan b Now, it may not

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Speaker 5: be that she is immediately coronated or Biden immediately says,

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Speaker 5: you know, I'm moving on and handing it to Kamala.

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Speaker 5: There's a chance that we have sort of a mini

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Speaker 5: contested convention in August, but I think very likely and

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Speaker 5: almost immediately it will become clear that the Democrats are

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Speaker 5: rallying around and coalescing around Vice President.

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Speaker 1: Harris, which they need to.

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Speaker 5: I mean, they can't have a contested convention after Republicans had,

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Speaker 5: you know, one of the most successful conventions in recent history,

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Speaker 5: entirely united around and behind Donald Trump.

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Speaker 3: Rob It's a catch twenty two though, because if you

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Speaker 3: do have Democrats who are united against United under one candidate,

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Speaker 3: presumably Kamala Harris, as you were talking about, then it

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Speaker 3: gets back to this criticism that they face before that

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Speaker 3: they're running an undemocratic like type process to have their

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Speaker 3: candidate up on stage. How do they get around those

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Speaker 3: sorts of claims if they do unite under her.

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Speaker 5: Yeah, I think it's a fair criticism, and you know,

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Speaker 5: I think if we see a kind of backroom deal situation,

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Speaker 5: there will certainly be more criticism. I think the way

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Speaker 5: for Democrats to get around that is potentially say, Okay,

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Speaker 5: we're going to have an open convention. Anyone who wants

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Speaker 5: to throw their hat in the ring is more than

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Speaker 5: welcome to. But you know, a little bit more privately,

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Speaker 5: coming from Biden, Schumer, Jeffreys, Pelosi, that really the whole

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Speaker 5: leadership gang a lot of pressure for people to stay

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Speaker 5: on the sidelines and let Kamala around her race. We've

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Speaker 5: already seen Newsom, governor of California, say that he would

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Speaker 5: not throw us hat into the ring. That's a surprise

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Speaker 5: given he's essentially been campaigning for president over the past.

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Speaker 1: Two or three years.

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Speaker 5: We've heard similar from Governor Gretchen Wimmerre and others who

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Speaker 5: it seems like they are not incredibly willing to challenge

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Speaker 5: Harris in this hypothetical.

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Speaker 3: I mean, I can't help but wonder Rob if part

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Speaker 3: of that is just they know they're going to walk

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Speaker 3: into a very difficult campaign and it might bruise them

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Speaker 3: for their chances in four years from now.

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Speaker 1: Yeah, I think that's fair.

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Speaker 5: I mean, one of the most important aspects that we

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Speaker 5: have to remember is the Biden Harris campaign has raised

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Speaker 5: hundreds of millions of dollars. They have about one hundred

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Speaker 5: million dollars on hand as we speak today, and Harris

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Speaker 5: would be able to use that money almost immediately. She

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Speaker 5: wouldn't be able to use it immediately, but essentially it

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Speaker 5: would be hers should Biden set beside, because her name

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Speaker 5: is on the ticket. Newsom's name is not on the ticket,

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Speaker 5: Whitmer's name is not on the ticket. All of these

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Speaker 5: potential candidates would be phenomenal candidates either in twenty twenty

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Speaker 5: four or twenty twenty eight, but they just don't have

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Speaker 5: the infrastructure, They don't have the funding available to them

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Speaker 5: right now to immediately challenge Harris and then to immediately

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Speaker 5: challenge Trump.

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Speaker 2: What are you thinking of in terms of a VP

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Speaker 2: if it is Kamala.

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Speaker 5: Rubb, Yeah, governor and yoursheer from Kentucky, Governor Roy Cooper

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Speaker 5: from North Carolina, potentially Governor Jos Shapiro from Pennsylvania. Of course,

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Speaker 5: you know, it doesn't think a genius to know that

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Speaker 5: the unifying factors among those three and others.

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Speaker 1: Moderate white male.

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Speaker 5: That is probably a necessity for Vice President Harris, who

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Speaker 5: you know herself is not incredibly progressive on policy, but

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Speaker 5: whose profile certainly groundbreaking, ceiling shattering, and thus perceived to

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Speaker 5: be progressive by many Americans.

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Speaker 2: I have a feeling Rub, we might be talking again

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Speaker 2: this weekend, so I'm looking forward to that. If we

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Speaker 2: have to, Rub, Thank you, sir Rob Casey there of

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Speaker 2: Signal Global Advisors. This is the Bloomberg Sevenants podcast, bringing

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Speaker 2: you the best in markets, economics, an Giet politics. You

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Speaker 2: podcast on Apple, Spotify, or anywhere else you listen, and

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Speaker 2: as always on the Bloomberg Terminal and the Bloomberg Business

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Speaker 2: out

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Speaker 4: Mm hmm