Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along
Speaker 1: with Jonathan Farrell and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
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Speaker 2: On the conversation with Lori Cavassin, a head of US
Speaker 2: Secretary Strategy at RBC Capital Markets, lor the headline in
Speaker 2: your most recent piece gif for a pause, Giff for
Speaker 2: a pause. What does that mean, Laurie.
Speaker 3: So look, I don't want anyone to come away from
Speaker 3: this thinking that Lori Caalvasin is turning super bearish. But
Speaker 3: we don't like where we are, you know, sort of
Speaker 3: in the intermediate term, and we're seeing a couple of
Speaker 3: things we went you know, every few months, right, we
Speaker 3: make sure we publish an update on our targets, our
Speaker 3: price target for the SMP. A couple of my cross
Speaker 3: asset models are deteriorating. They were improving back in so,
Speaker 3: in other words, the appeal of stocks relative to bonds
Speaker 3: is worstening.
Speaker 4: And also our sentiment model is really bothering us.
Speaker 3: It's really back at one standard deviation above its long
Speaker 3: term average. If you look at that fullishness on the
Speaker 3: AAII survey, typically you see you know, kind of mid
Speaker 3: to low single digit gains in the SMP over the
Speaker 3: next twelve months when that happens, and this just feels to.
Speaker 4: Me like a market.
Speaker 3: While I think everything has been deserved in terms of
Speaker 3: what we've done so far, it just feels like this
Speaker 3: market needs to stop, pause, have a little moment of digestion,
Speaker 3: and catch its fross.
Speaker 2: Okay.
Speaker 1: I like the analysis, and the idea is you got
Speaker 1: to pull back to get things, you know, like get
Speaker 1: the fear click in and you know, you know, we've
Speaker 1: all done this and studied it. Can you just stay
Speaker 1: flat out or through the bear market?
Speaker 3: I never really subscribed to that thesis to begin with. Tom,
Speaker 3: You know, I never liked this whole concept of we're
Speaker 3: in a bear market, therefore we have to do X.
Speaker 3: We're having a bear market rally, it's faults, don't believe it.
Speaker 3: I just was never in that camp. I think we
Speaker 3: priced in a recession last October, and we've basically been
Speaker 3: having a plain old fashioned recovery trade, and now we're
Speaker 3: seeing some of the things that we're really telling us
Speaker 3: to hold your nose and buy. At the beginning of
Speaker 3: the year, I go back to that sentiment model is
Speaker 3: telling us we need to calm down.
Speaker 4: For a little while.
Speaker 1: Ben Ladler over to Etro writes up on the Lord
Speaker 1: Calvacina World this morning. He talks about value, talks about
Speaker 1: what's out there away from seven Chosen stocks as well
Speaker 1: color or shape the value of mid caps right now.
Speaker 4: So it's interesting.
Speaker 5: Tom.
Speaker 3: We do a lot of work on small caps, but
Speaker 3: we've also been getting increasing questions on midcaps. In our
Speaker 3: big chart deck we published this morning, we actually added
Speaker 3: a midcaps section for the first time in quite some time,
Speaker 3: and it's a pretty similar story to small caps. They
Speaker 3: tend to.
Speaker 4: Benefit when you're in recovery mode.
Speaker 3: They started to do that a little bit, but not
Speaker 3: as much as we would have expected. The valuation story
Speaker 3: is pretty reasonable if you look at the multiples versus history,
Speaker 3: the midcaps look very cheap versus the megacaps right now,
Speaker 3: and if we get a recovery in twenty twenty four,
Speaker 3: there should be more upside there, so we do feel like,
Speaker 3: similar to how we feel in small caps, we feel
Speaker 3: like that MidCap part of the market where large cap
Speaker 3: managers actually can gravitate down to, we feel like that's
Speaker 3: right for a catch up trade as well.
Speaker 5: Laurie, We're going to be speaking with Michael Soon of
Speaker 5: Morgan Stanley later in this morning, which I'm really looking
Speaker 5: forward to.
Speaker 4: He has a no doubt.
Speaker 5: Talking about the fiscal backdrop and how much of a
Speaker 5: variable that is with respect to stock performance. How does
Speaker 5: that factor into what you're expecting going into an election
Speaker 5: year which tends to be tumultuous.
Speaker 3: So, you know, when we were going through this targeting,
Speaker 3: you know, kind of refresh last weekly, so we looked
Speaker 3: at one of our political tests, which is just a
Speaker 3: simple election cycle test, and one of the things we
Speaker 3: noticed is that the current year that we're intends to
Speaker 3: be one of the strongest for the markets, so it's
Speaker 3: been you know, kind of one of the more positive signals.
Speaker 3: And next year, the election year itself, for a presidential year,
Speaker 3: tends to be one of the weaker years in the
Speaker 3: election cycle. And I just juxtapose that with what I've
Speaker 3: been hearing from investors. They keep asking me, well, when
Speaker 3: are people going to start paying attention to the election.
Speaker 3: There are a lot of questions that are starting to
Speaker 3: come up, And my response to the investors I'm speaking
Speaker 3: with is, I think it's starting now because you're all
Speaker 3: asking me about it, and it seems to me that
Speaker 3: this is emerging as just a very very big source
Speaker 3: of uncertainty as to what is going to happen with
Speaker 3: the election next year, both in terms of the presidential
Speaker 3: race and Congress.
Speaker 5: So then, what is the election cycle playbook? What is
Speaker 5: how you played this particular type of uncertainty versus the
Speaker 5: uncertainty of where we are in the inflation cycle and
Speaker 5: the federal reserve.
Speaker 3: Well, I think there's a lot of, you know, questions
Speaker 3: that are starting to emerge about the outcome. One of
Speaker 3: the things I'm hearing from investors are, you know, they're
Speaker 3: trying to probe whether or not.
Speaker 4: They're alternatives to Biden.
Speaker 3: I'm hearing a lot of questions about that from international
Speaker 3: investors in particular. You know, I think there's a lot
Speaker 3: of head scratching over what's going going on on the
Speaker 3: Republican spide especially with DeSantis.
Speaker 4: There was some excitement there early on.
Speaker 3: Now that seems to have faded a bit, but I
Speaker 3: think this is just really an air pocket of uncertainty
Speaker 3: that's starting to emerge. We're not even really having detailed
Speaker 3: conversation with clients yet about what either side would want
Speaker 3: to do policy measures. It's really you know, I think
Speaker 3: just frankly, this over of not knowing what the outcome
Speaker 3: is going to be that could push investors to the
Speaker 3: sidelines for a little bit, and I think that's going
Speaker 3: to weigh heavily once we get to the fourth quarter,
Speaker 3: when everyone starts putting their outlook discussions out right, they're
Speaker 3: going to be talking about bed cuts in the back
Speaker 3: half of the year, but they're also going to be
Speaker 3: talking about the election, so we kind of see those
Speaker 3: things starting to come into the conversation.
Speaker 1: We have more outlooks to come.
Speaker 2: Oh joy, Well, some of those outlooks are being revised
Speaker 2: pretty quickly. The recession calls on Wall Street dropping like
Speaker 2: f ck Mike Gapan in the last week, Mike Feroli,
Speaker 2: JP Morgan gone into the weekend dropping his recession call too.
Speaker 1: Can you see Calvacina on the deck with a fam
Speaker 1: working on her outlook? Gin and Tonic on the table
Speaker 1: next door.
Speaker 2: In the summer, the summer, the mid year, the mid year,
Speaker 2: the summer, the summer time, summer, the summer time outlook, Laurie,
Speaker 2: can I finish on a single name? Forgive me? What
Speaker 2: does it say about the market when the biggest waiting
Speaker 2: on the S and P five hundred has had three
Speaker 2: quarters of declining sales, trades at thirty times earnings and
Speaker 2: is up forty percent yeah today? What can you take
Speaker 2: away from that? What's the signal you take from that.
Speaker 4: One of the.
Speaker 3: Reasons why I think people have been gravitating towards these
Speaker 3: megacap growth stocks is that we are in recovery mode
Speaker 3: and the shape of that recovery doesn't look so fantastic.
Speaker 3: I think the price we're going to pay for a short, shallower,
Speaker 3: skipped recession is subpar economic growth for a few years.
Speaker 3: If you look at consensus forecast is tracked by Bloomberg,
Speaker 3: basically for next year and twenty twenty five, GDP is
Speaker 3: expected to be in kind of that zero to two
Speaker 3: percent range. Well, guess what growth stocks typically do well
Speaker 3: when economic growth is scarce. And I think that's one
Speaker 3: of the reasons why people have been just plowing so
Speaker 3: much money into these big megacap names because despite some
Speaker 3: of the near term challenges, they have faith that the
Speaker 3: longer term growth opportunities are still there.
Speaker 2: Lurie, thank you. Lori Cavasena of MBC on somebody Tech
Speaker 2: stories so far this year.
Speaker 1: Our Conversation of the Day now on the equity markets
Speaker 1: of stock Market with Michael Wilson, Mike Wilson's CIO and
Speaker 1: chief US Equity strategy at Morgan Stanley. Mike, you go
Speaker 1: over and you study Ellen Zettner's notes and you look
Speaker 1: at fiscal tightening. Describe fiscal tightening, Describe what it means
Speaker 1: for the standard im ploors five hundred.
Speaker 6: Yeah, good morning guys. Yeah, look, I think you know,
Speaker 6: I don't think we've hit a wall completely here, but
Speaker 6: I think it's fair to say that the physical impulse
Speaker 6: that we've experienced over the last twelve months caught a
Speaker 6: lot of people off guard, including ourselves, and it has
Speaker 6: really kept the economy going in a way that most
Speaker 6: people were not projecting, and that has led people to
Speaker 6: believe that this can continue. Now, there's been a confluence
Speaker 6: of events for why interest rates have risen. I wouldn't
Speaker 6: blame it all on the downgrade last week. In fact,
Speaker 6: probably none of it is. I think the bigger issue
Speaker 6: is just simple supply and demand. We have an enormous
Speaker 6: amount of supply. The fund all is spending at a
Speaker 6: time when perhaps some of the natural buyers are not
Speaker 6: there anymore. For example, the banking system pretty full fun treasuries,
Speaker 6: and of course the Bank of Japan's changed last week,
Speaker 6: So you know, I think the interest rate move. Look,
Speaker 6: first of all, stocks are already expensive on their own
Speaker 6: cost of capital going up now think about it this way.
Speaker 6: The the the recovery we've had since COVID has been
Speaker 6: funded by the government for the most part, okay, and
Speaker 6: now their cost to capital is going up, So that
Speaker 6: has to have some sort of a you know, some
Speaker 6: sort of a knock on effect evaluation. If we were
Speaker 6: trading at a lower valuation here, I wouldn't be so
Speaker 6: concerned about the growth outlook. But you know, given our growth,
Speaker 6: our growth outlook, which is more customistic than most, that's
Speaker 6: where the that's where we have a real issue. And look,
Speaker 6: you can still make money picking stocks. It's just a
Speaker 6: harder game, and I think that's what most clients are
Speaker 6: having trouble with.
Speaker 1: That's where I wanted to go, Michael, So, I think
Speaker 1: this is so important. If we get a fiscal tightening
Speaker 1: and whatever your matrix is of equity dynamics folded into economics,
Speaker 1: if you will, does it lead to a more aggregate
Speaker 1: summed index or is it where sectors and selected stocks,
Speaker 1: including the glorious eight tech stocks, they're partitioned out, they
Speaker 1: do great while everybody else struggles.
Speaker 6: Well, that's been the bet that has worked so far
Speaker 6: this year. But now even those stocks seem to be tiring.
Speaker 6: I mean this, you know, this earning season has been
Speaker 6: to sell the news so to speak, if you want
Speaker 6: to call it that, even though even with companies that
Speaker 6: put up good numbers, it's been kind of a faded
Speaker 6: because the market anticipated, you know, kind of this stronger
Speaker 6: economic bounce this year and perhaps earning is not being
Speaker 6: as bad as people were thinking, and then we kind
Speaker 6: of muddle through. So now the question I think for
Speaker 6: the you know, for this rally to continue, it has
Speaker 6: to happen internally, right, We have to have breath improve.
Speaker 6: We need to see a rotation into some of these
Speaker 6: lagging areas. We've started to see that. We're not convinced
Speaker 6: yet that the breath. That way we measure breadth is
Speaker 6: not convincing to us yet, but we're open minded to it.
Speaker 6: But that's that would be the next stage of the
Speaker 6: bull market. If you want to be bullish, you have
Speaker 6: to be buying laggers here. You can't just keep chasing,
Speaker 6: you know, the magnificent seven and forget about everything else.
Speaker 6: That's not a healthy outcome.
Speaker 5: What about what Kareron Dawson was talking about, especially at
Speaker 5: a time of rising yields in part due to the
Speaker 5: fiscal backdrop, the supply and demand that you're talking about,
Speaker 5: It turns out that stocks become not a teen of
Speaker 5: trade but a little bit. There isn't another alternative that's
Speaker 5: much better. Revenues are going up in an inflationary environment. Yes,
Speaker 5: multiples look high. Well what are you going to do
Speaker 5: go into bonds that are losing value at this point?
Speaker 5: I mean, how much do you buy that type of argument?
Speaker 6: Well, we don't buy it because our view is that
Speaker 6: inflation's coming down much more rapidly from you know, at
Speaker 6: the company level than it is and the government statistics.
Speaker 6: And this is where I think it can get really
Speaker 6: interesting in this or tricky in the second half of
Speaker 6: the year. Which is we have government statistics reporting inflation
Speaker 6: still at three or four percent, So the FED is
Speaker 6: going to continue to hold or maybe even raise more. Yet,
Speaker 6: what companies are actually seeing in their businesses least that are,
Speaker 6: you know, deterioration, Like we have negative price now in
Speaker 6: many of the good sectors. Right the PPI finished goods
Speaker 6: is in negative tearatory export pricing, import pricing. So it's
Speaker 6: the opposite of twenty twenty one. Think of it this way.
Speaker 6: In the back and half of twenty twenty one, companies
Speaker 6: were getting fifteen to twenty percent price if the FED
Speaker 6: was on hold, because they were saying, well, we're not
Speaker 6: sure yet this is going to be permanent. Of course
Speaker 6: they relate to the party, and companies got to overearn
Speaker 6: at a very low interest rate. Now you have the
Speaker 6: exact opposite. Interest rates are being held very very high
Speaker 6: at a time when company earnings for the majority, not all,
Speaker 6: but the majority of companies is deteriorating. I means sales
Speaker 6: growth is not increasing, especially going down, and we have
Speaker 6: zero percent sales growth in the second quarter. And if
Speaker 6: we're right on this pricing dynamic, then that's going to
Speaker 6: be something that catches folks off guard. That's why we're
Speaker 6: not going into small caps and the lower quality parts
Speaker 6: in the market. If you're going to go to the laggers,
Speaker 6: make sure you go to the laggers that have good balance
Speaker 6: sheets and good margin structures. Okay, so it's still a
Speaker 6: quality play, just you know, just different quality names.
Speaker 5: If inflation is going to come down and come down rapidly,
Speaker 5: then why wouldn't that really favor a FED rate cut
Speaker 5: that could turbo charge some of the trade into big.
Speaker 6: Well, because I think I mean the FED no, I mean,
Speaker 6: they know they made a mistake, and they've said it right.
Speaker 6: They know they were a little bit laid on the
Speaker 6: transitory call. Okay, fine there. I mean, why would they
Speaker 6: cut rates if we have full employment? I mean, there's
Speaker 6: no reason to do that. Unemployment is three and a
Speaker 6: half percent, you have inflation still north of three percent,
Speaker 6: so now anywhere near their goal?
Speaker 2: Just hold.
Speaker 6: I mean, I'm not making the case they need a
Speaker 6: raise race here. I don't think they need to do that,
Speaker 6: but I think they're going to want to see the
Speaker 6: whites of the eyes to make sure that things are down.
Speaker 6: I'm not I don't work at the BED. I don't
Speaker 6: know what they're going to do. But my prudence would
Speaker 6: say that's what they should do. They should they should
Speaker 6: pause and see what happens and not try to anticipate
Speaker 6: too much here because that's gonna be in trouble.
Speaker 2: Last time, Mike, can we just finish with your framework
Speaker 2: post pandemic framework? We'll remember it well, it was hot
Speaker 2: and short. The cycle would be hot, but ultimately it
Speaker 2: would be shorter than what we'd seen previously. Now, Mike,
Speaker 2: it certainly was hot, and you've got the equity market
Speaker 2: call coming out of the pandemic dead on. But Mike,
Speaker 2: does anything lead you to question the short part? Because
Speaker 2: I think that's where the conversation is quickly shifting, as
Speaker 2: you know, over the last couple of weeks.
Speaker 6: Yeah, I mean this is going to sound ironic, Okay, So,
Speaker 6: as you remember back in January, I was concerned that
Speaker 6: everybody was too bearish, including ourselves, and that proved to
Speaker 6: be the right. You know, I should have gone with
Speaker 6: my instinct. And now though, I think the fact that
Speaker 6: everybody is saying that the recession risk is eliminated for
Speaker 6: the most part, including the FED itself. Right, they had
Speaker 6: called for recession back in March. They just staffed it,
Speaker 6: and they backed off that too. I don't know if
Speaker 6: we need a full blown recession, but I'm pretty convinced
Speaker 6: that growth is still flowing like we're in a down
Speaker 6: cycle now. Whether that leads to a full blown labor
Speaker 6: cycle or not remains to be seen. I think most
Speaker 6: people have pushed out the recession called the twenty four
Speaker 6: Ilean day set. It's eliminated, so it may be a
Speaker 6: four year cycle as opposed to a three year cycle.
Speaker 6: That's very plausible. I still really, I really like our boombust,
Speaker 6: you know, short cycle thesis based on the forties, because
Speaker 6: I've seen the data really supporting that. John and part
Speaker 6: of our note over the weekend, and you can appreciate
Speaker 6: this because you've followed it the whole time, is that
Speaker 6: we you know, we got you know, we kind of
Speaker 6: missed this fiscal impulse, right. That was a big miss
Speaker 6: on our part. We thought the fiscal impulse would come
Speaker 6: at the time that they really needed it. And think
Speaker 6: about this way they're doing. They're doing eight percent budget
Speaker 6: deficits spending when you have three and a half percent unemployment.
Speaker 6: I mean that's really unprecedented. So what's going to happen
Speaker 6: if we do get a slowdown next year, And I
Speaker 6: just think that I just think this boom bust thesis
Speaker 6: is so correct, and maybe the market's looking through it
Speaker 6: to the to the other side. Look, that's that's a
Speaker 6: risky proposition given where valuations are. It was a great
Speaker 6: idea to buy stocks last fall. We traded it. We
Speaker 6: didn't stick with it long enough, Okay, But I think
Speaker 6: at this stage you need to be very selective, very
Speaker 6: selective for some sort of retlacement, at least back to
Speaker 6: the tuner day moving average.
Speaker 2: Mike Wander for to get your thoughts. An update on
Speaker 2: the team at Morgan Stanley and Equity Research. Mike Wilson
Speaker 2: there of Morgan Stanley.
Speaker 1: Apple had a solid two standard deviation, moved to a
Speaker 1: lower weaker price, unlike some of the success stories that
Speaker 1: were out there last week. But with that, you know,
Speaker 1: it's not like it's a technical breakdown. I thought Sarah
Speaker 1: Hunt when we spoke to her, was on fire. I
Speaker 1: thought she was just great.
Speaker 2: Dan I was of Wetbush still bullish, Tom still bullish
Speaker 2: on the start. Despite a week Earning's report raising their
Speaker 2: price target from two twenty to two thirty. iPhones and
Speaker 2: services will accelerate in the June quarter with the softness
Speaker 2: OL Mac and iPad driven when excluding FX and focusing
Speaker 2: on the hearts and lungs, iPhones and services. This was
Speaker 2: a strong performance and guidance in our view, and we
Speaker 2: would be strong buyers on any weakness with Tom. I
Speaker 2: can tell you in the last week we've had some
Speaker 2: of that. We've had some weakness.
Speaker 1: Doing some important research. Now joining us from hirsh gibu
Speaker 1: Leedspillion twenty five ten seventeen PS Amsterdam, where Apple says
Speaker 1: vil javent and vat vor Joe. The best scus East
Speaker 1: is Daniel ives he is in Amsterdam and joins us
Speaker 1: by phone this morning. Dan, I does Apple sell in
Speaker 1: Amsterdam like it sells in New York, like it sells
Speaker 1: in Chicago, like it sells in La They do?
Speaker 7: I mean, I can tell you by what I've seen
Speaker 7: here and what Apple has always had, the presence, not
Speaker 7: just an Ansen, but across Europe. And I think if
Speaker 7: you look at the quarter, like Pharaoh was talking, I
Speaker 7: focus on iPhones, services, China, grouse margin. That was all
Speaker 7: better than expected, Mac and iPad. We have viewers noise
Speaker 7: Dan in Europe.
Speaker 1: They want to go after Google. They want to go
Speaker 1: after Microsoft. Indeed the evil Apple as well. Let's say
Speaker 1: that they are in a sense anti technology. That's the
Speaker 1: political elites. Are the people of Amsterdam, the people of Berlin,
Speaker 1: et cetera. Oslo Are they anti Apple, anti Google, anti technology?
Speaker 7: They're not an anti Apple. They're actually pro Apple, and
Speaker 7: I think investors are pro Apple. I think when it
Speaker 7: comes to the EU and when we see from a
Speaker 7: regulatory that's a whole nother situation. But I think it
Speaker 7: just comes down to find for big tech companies like Apple,
Speaker 7: Google at this point, that's like drinking a cup of coffee,
Speaker 7: and I think the investors are going to continue vida
Speaker 7: as background or is even though the heat gets hotter.
Speaker 2: In the kitchen, Let's talk about the hot and lungs
Speaker 2: of it. Dan. I think over the weekend someone at
Speaker 2: Parents said something like iPhone zero zero growth. Now, Dan,
Speaker 2: we've had three quarters of that. The stock's training at
Speaker 2: a multiple thirty thirty times earnings, and is that forty
Speaker 2: percent year today? What's the argument still that this is
Speaker 2: a growth stock?
Speaker 7: Well, first, you have four hundred bibs of that back sidewind,
Speaker 7: So the zero per se when I view it from
Speaker 7: a concurrency perspective where they're growing, and then you look
Speaker 7: at now what goes into the iPhone fifteen, which i've
Speaker 7: used basic Mini supercycle. You have twenty five percent of
Speaker 7: the install based that's not upgrade four plus years. So
Speaker 7: even though they've gone through what what i'll call conservative growth,
Speaker 7: that's going to now start to be high single digit,
Speaker 7: potentially double digit. And then at the same time services
Speaker 7: that is the key to the rereading. Now you're starting
Speaker 7: to see double digit services growth, and I think that's
Speaker 7: the perfect storm positive that I see going twenty twenty four.
Speaker 2: Part of your bullish theasis for a long time has
Speaker 2: been this base that haven't upgraded their phone down. At
Speaker 2: some point, does that base get big enough that actually
Speaker 2: that's no longer a bullish thesis, that they've just been
Speaker 2: sitting there and they're not upgrading year after year after
Speaker 2: year after year. Do you start to chraine your mind
Speaker 2: about why they're not upgrading.
Speaker 7: Yeah, it's a great question. I think the other thing
Speaker 7: is they're they're adding iPhone. I mean, they've added over
Speaker 7: one hundred and fifty million iPhone user. It's just a
Speaker 7: view of the last eighteen months. So I think what's
Speaker 7: starting to happen Now that's one point two million, which
Speaker 7: to one point was blow a billion before COVID. So
Speaker 7: I think what's starting to happen is they're gaining more
Speaker 7: and more share in China. They've gained three hundred bits
Speaker 7: of market share in China in the last two years,
Speaker 7: despite the geopolitical and I think it just comes down
Speaker 7: to you'll see the bears come out on Apple, especially
Speaker 7: over the last week, but I believe this is just
Speaker 7: a pause selling Apple into this iPhone fifteen cycle. In
Speaker 7: my opinion's leaving the super Bowl at half time.
Speaker 5: I love I love iPhone zero. I've got to say, John,
Speaker 5: I'm still thinking about that. Are you going to get
Speaker 5: an iPhone fifteen? No, I'm going to get an iPhone
Speaker 5: zero zero growth. That's sort of what a Barrs was
Speaker 5: going after them for. There is a question, though, Dan,
Speaker 5: of what you do with the multiples, with the valuation
Speaker 5: of a stock at a time where some people are
Speaker 5: speculating that there is a lot of growth in the
Speaker 5: smartphone industry and nothing really wrong against Apple just in general,
Speaker 5: there has been this real slowdown. At what point can
Speaker 5: you continue to be bullish on Apple shares if you
Speaker 5: continue to see longer term rates creep higher, if you
Speaker 5: continue to see the valuation proposition challenged on a more
Speaker 5: macro front.
Speaker 7: Sure and an excellent point. I'd also say it's some
Speaker 7: key and I've talked about a lot the grows margin store,
Speaker 7: I mean the highest gross margins ever, because what we
Speaker 7: see on the M two chip and the innovation, the
Speaker 7: margin there, and that's going to continue to go higher.
Speaker 7: That's just hire from a margin perspective, and I believe
Speaker 7: services is the key. Services, in my opinion, is worth
Speaker 7: one point three to one point four trillion alone. And
Speaker 7: even though we have this from a tech multiple headwind perspective,
Speaker 7: I think it starts to abate, and I think service
Speaker 7: is ultimately key to how this thing re retire. Along
Speaker 7: with an I and fifteen cycle that i'd be it's
Speaker 7: going to be massive.
Speaker 5: This really speaks in this question around what the content
Speaker 5: will be that really feeds some of their services. This
Speaker 5: idea that Lyle no Messi was name checked on the
Speaker 5: call as one of the reasons why they've seen a
Speaker 5: real increase in subscribers. So what are they going to
Speaker 5: use with that cash pile to acquire more content? Are
Speaker 5: they going to buy you know, I don't know a
Speaker 5: Loton football team.
Speaker 7: Well, I mean I think and I think you've seen
Speaker 7: it a bit in terms of some of the things
Speaker 7: that they've talked about. They're going to continue expand Apple TV.
Speaker 7: I think from a streaming perspective, they're going to go
Speaker 7: after more right job Snake pac twelve story that we
Speaker 7: solved with the last week. But I think the big
Speaker 7: thing is going to be AI. I mean, I think
Speaker 7: ultimate They're going to further build out this AI what
Speaker 7: I believe is going to be an AI app store,
Speaker 7: and that is going to be the next wave of
Speaker 7: growth as they further monetized and unparalleled install based in Kupertino.
Speaker 2: MESSI making the mlslate like chance play you see that
Speaker 2: we can't honestly thinks I saw someone tweet something like
Speaker 2: it's like easy mode. It's like cheap mode for Messy
Speaker 2: in the MLS, just different standard. Dan, Thank you, sir, Dan.
Speaker 2: I've a webber's still constructive optimistic on this name. Head
Speaker 2: of the launch.
Speaker 1: Tom Lisa on the American economy, I think it's real
Speaker 1: simple as to say, the biggest part of the algebraic
Speaker 1: function is a consumer and our guest is definitive on
Speaker 1: consumer dynamics.
Speaker 5: Which is really the key mystery point that people are
Speaker 5: trying to hook into. So there is no one better
Speaker 5: to speak to the Michelle Meyer, who has grown up
Speaker 5: under Ethan Harris at Bank of America during the whole
Speaker 5: mortgage situation. Currently chief Economist for North America at the
Speaker 5: MasterCard Economics Institute. Michelle always wonderful to see you. I
Speaker 5: want to start there are people overestimating or under estimating
Speaker 5: the strength of the consumer.
Speaker 8: Well, I think that was the story for the past
Speaker 8: year and a half has been this underestimation of the
Speaker 8: US consumer. The consumer has been able to spend, the
Speaker 8: consumer's been willing to spend. The consumer's been eager to
Speaker 8: engage in the economy and come back after this pandemic.
Speaker 8: And you think about why, it's actually pretty simple. There's
Speaker 8: been a lot of purchasing power. Whether it's the strength
Speaker 8: of the labor market that's continued we saw that in
Speaker 8: Friday's jobs report, or it's been the health of the
Speaker 8: balance sheet, which was really improved in the pandemic period
Speaker 8: as households paid down their debt, and even now in
Speaker 8: a higher rate environment, debt service ratios are still fairly
Speaker 8: reasonable and kind of back to where we were prior
Speaker 8: to the pandemic.
Speaker 5: That said, that said, you have seen a decrease in
Speaker 5: income relative to spending. In other words, people are spending
Speaker 5: more than they're bringing in at this point, and a
Speaker 5: lot of it has to do with credit cards. They're
Speaker 5: increasing the amount of revolving debt, credit card debt that
Speaker 5: they have outstanding. How long can that continue?
Speaker 8: Well, the way I think about it is, throughout last year,
Speaker 8: when we had high inflationary environment, it was certainly the
Speaker 8: case that consumers were augmenting their income with other sources,
Speaker 8: whether that's drawing down savings or taking on more debt,
Speaker 8: and that was to help support the inflationary environment. But
Speaker 8: now inflation is a lot more subdued. So if you
Speaker 8: look at real wages or real purchasing power, it has
Speaker 8: certainly turned positive where consumers now have a lot of
Speaker 8: support simply from the lab of marketing. They don't necessarily
Speaker 8: need that same buffer that they needed when they were
Speaker 8: facing such high inflation.
Speaker 1: No doubt. It just puts out on is it Twitter?
Speaker 1: We call it something different.
Speaker 5: Now X the platform formally known as Twitter.
Speaker 1: The platform formally known as Twitter, and he does what
Speaker 1: I like to do, which is take three months data,
Speaker 1: ninety days of data and annualize it. And the real
Speaker 1: GDP statistic, the American consumer statistic looking three months back,
Speaker 1: is extraordinary. It's a five point three percent number. That's
Speaker 1: just absolutely stunning as well. Does your consumer data and
Speaker 1: MasterCard validate a resiliency to that ginormous five point three
Speaker 1: percent trend?
Speaker 8: Yeah, you guys are throwing out all my old colleagues,
Speaker 8: Ethan Neil. It's a party here.
Speaker 1: We'll get to that. Tell me about real g got
Speaker 1: some persistency?
Speaker 8: Yeah, I think it does. I mean, if you look
Speaker 8: at the first half of the year and you think
Speaker 8: about GDP growth and consumer spending, even measures of business investment,
Speaker 8: it's been above expectations, which is partly I think because
Speaker 8: expectations were set too low, but also showed a consumer
Speaker 8: that does have this persistence. Look, the consumer shifting, the
Speaker 8: economy is shifting. We're entering a different stage in this
Speaker 8: business cycle. It is a stage where there's more of
Speaker 8: a moderation, there's more of a normalization. There's still a
Speaker 8: debate of what trend growth is or potential growth is
Speaker 8: coming out of the pandemic, but it's not an economy
Speaker 8: that is moving towards, you know, a proper deceleration, which
Speaker 8: was the fear of a lot of people earlier in
Speaker 8: the year.
Speaker 5: So given that, do you stand on the side of
Speaker 5: soft landing or do you side is on the side?
Speaker 5: Do you stand on the side where we're underestimating how
Speaker 5: much strength there is and how much potential for inflation
Speaker 5: to keep going at really elevated levels.
Speaker 8: So we've been in this soft landing camp and I
Speaker 8: still hold to that view. And I think when you
Speaker 8: think about soft there's going to be bumps, and for
Speaker 8: certain sectors it could look bumpier than others. Right when
Speaker 8: you think about the manufacturing sector that's struggling a bit
Speaker 8: more when you think about housing, which was in a
Speaker 8: big adjustment throughout this year and this year, is actually reaccelerating,
Speaker 8: which is somewhat problematic for the Federal Reserve. But yeah,
Speaker 8: it does seem like this is an economy that's readjusting,
Speaker 8: and it's doing so in a way that has been
Speaker 8: a lot less problematic than I think people feared.
Speaker 5: We were talking earlier with Mike Wilson and Morgan Stanley
Speaker 5: and talking about the fiscal impulse, and that has been
Speaker 5: one of the drivers of the strength that we've seen,
Speaker 5: the resilience, this belief in a soft landing that we
Speaker 5: have currently in the market. How much do you lean
Speaker 5: into that that what we're seeing, this strength of the consumer,
Speaker 5: the strength of the economy has been driven entirely by
Speaker 5: fiscal spending that has been delayed and has really come
Speaker 5: into effect after the pandemic was over.
Speaker 8: Well, look, there was an extraordinary amount of fiscal and
Speaker 8: monetary stimulus that boosted the economy. So when I think
Speaker 8: about the stages, you had a pandemic that created an
Speaker 8: abrupt shutdown of the economy, a reopening stage that was hot.
Speaker 8: The economy was red hot because you had this pent
Speaker 8: up demand, fiscal stimulus, monetary policy. And now we're in
Speaker 8: a stage where the economy is creating more of a
Speaker 8: normalization of rebalancing, an adjustment, pick your phrase. But whichever
Speaker 8: way you cut it, I think there is still some
Speaker 8: support from the stimulus that we had enjoyed, and that
Speaker 8: could be from the consumer with a household balance sheet
Speaker 8: that's been improved, or could even be part of the
Speaker 8: manufacturing sector. When you think about the infrastructure spending that's
Speaker 8: going through the economy now, which is quite important.
Speaker 1: Without giving away the crown jewels. You at master Card
Speaker 1: have incredible consumer data. Is there resistance to twenty nine
Speaker 1: or thirty percent credit card interest rates? Do people go no,
Speaker 1: I don't want to do that.
Speaker 8: Well, you know, we're every we're kind of the economy
Speaker 8: in general. Is figuring out what that level of interest
Speaker 8: rates is. That is a challenge, right. So when you
Speaker 8: think about the FED bringing interest rates close to six
Speaker 8: percent on the policy rate beginning of this cycle, there
Speaker 8: was a view that was impossible. You can't have a
Speaker 8: six percent policy rate and the economy will break under
Speaker 8: that environment, and it hasn't because you also have to
Speaker 8: think about in terms of real rates, not just that
Speaker 8: nominal rate. So that, I think is what the FED
Speaker 8: is trying to engineer and figure out, is what is
Speaker 8: the level of interest rates that's the appropriate level that
Speaker 8: doesn't cause the economy to roll over, but does cause
Speaker 8: the economy to slow down, because that moderation is important.
Speaker 8: It's part of getting over.
Speaker 1: Very quickly here. And you mentioned Neil Dutt earlier and
Speaker 1: all that you did at Bank of America with doctor Harris.
Speaker 1: Ethan Harris is retiring, and I would suggest what Ethan
Speaker 1: Harris gave you, which is a sense of look at
Speaker 1: history and the answer is where we are now is
Speaker 1: where we were. I'll let you decide to where are
Speaker 1: we early two thousands? Is this a nineties analog that
Speaker 1: we're in right now?
Speaker 8: I mean so yes, Ethan time series, that's his thing.
Speaker 8: That's been huge. I still't bring that back. In terms
Speaker 8: of the comparison. You know, it'd be great if it
Speaker 8: was a nineties comparison, because that was a cycle that
Speaker 8: enjoyed productivity gains. It was a cycle that had a
Speaker 8: lot longer duration than anticipated. If I was able to
Speaker 8: hike rates and then gradually normalize or reduce interest rates
Speaker 8: without creating a huge business cycle. So there's a lot
Speaker 8: of parallels to that. But it's hard to just take
Speaker 8: this business cycle and fit it into a box or
Speaker 8: say this is exactly like this past cycle because it
Speaker 8: was a pandemic with extraordinary stimulus. So so much has changed.
Speaker 8: Think about the structure labor market, how much that has
Speaker 8: changed with a more hybrid workforce. Think about how much
Speaker 8: we've embrace technology. There's a lot that is different about this.
Speaker 1: It'd be great to get you, Neil Dudd and Ethan
Speaker 1: Harris on the desk at the same time, although folks
Speaker 1: that are not in speaking terms. Oh no, no, we'resa
Speaker 1: Meyer with us with MasterCard Economics Institute. Right now. We
Speaker 1: are going to jem up a story here on Goldman Sachs. Yes,
Speaker 1: it's about Jeff Curry leaving head of Commodity as a
Speaker 1: former professor at Chicago Microeconomics. But it's far, far more
Speaker 1: on that. And I want to go to a story
Speaker 1: from six days ago Golden Sachs family office partner a
Speaker 1: Poku to leave, because maybe that's a bigger story. Sheanat
Speaker 1: a rogen for all of Global Wall Street, is expert
Speaker 1: on this, and he joins us and reports this morning.
Speaker 1: I'm sorry, there's some going on here. Don't give me here. Well,
Speaker 1: we don't know. It's just speculation, blowny. They're walking out
Speaker 1: the door, aren't they.
Speaker 9: So let's start with some numbers. This Jeff Curry would
Speaker 9: perhaps be the sixth partner to leave in the last
Speaker 9: couple of weeks in late July early August. That's not
Speaker 9: the usual time when you see a lot of partners leave.
Speaker 9: To me, it still feels like Jeff Curry's departure might
Speaker 9: be slightly different from some of the other recent departures
Speaker 9: we've seen, the likes of Lisa Poku, the likes of
Speaker 9: Julie Salisbury. These were some of the people who were
Speaker 9: on the up and up. For them to leave was
Speaker 9: a surprising bit. We have to remember. And over the years,
Speaker 9: this is what Goldman has told us to maintain their
Speaker 9: pool of four hundred or so partners. Every couple of years,
Speaker 9: some thirty five some seventy partners leave. More recently, a
Speaker 9: new spokesman has said that's about eighty partners every two years,
Speaker 9: so there's clearly been some inflation in that figure. But
Speaker 9: the fact of the matter is there's always a bunch of,
Speaker 9: to put it politely, undesirables in the Goldman partner ranks.
Speaker 9: They don't get fired, but they've certainly shown the door.
Speaker 9: They walk out, they're tired, they leave. But what has
Speaker 9: been surprising in the last year, in the last eighteen months,
Speaker 9: in fact in the last couple of years, is the
Speaker 9: type of partners leaving. People who were picked for better roles,
Speaker 9: people who were picked for much greater things that Goldman
Speaker 9: deciding to walk out the door because of some of
Speaker 9: the issues that parmacy and.
Speaker 1: So dark, and she is going to be reporting on
Speaker 1: this for Global Wall Street through all of today and
Speaker 1: then tomorrow. What's the why? What is the set of whys?
Speaker 1: If you will, this is going on that's not going
Speaker 1: on in Morgan Stanley right.
Speaker 9: We certainly haven't seen anything of this space at any
Speaker 9: other firm. It's fair to say that there is a
Speaker 9: bit of tumult in the higher ranks of Goldman. There's
Speaker 9: no denying that. AE are the rank and file big
Speaker 9: fans of the CEO David Solomon. Even David Solomon probably
Speaker 9: tell you that's not true. The reasons for that are
Speaker 9: perhaps debatable. You have come off a great high of
Speaker 9: twenty twenty one only to see profits and earnings just
Speaker 9: completely get decimated in twenty two fall further in twenty three.
Speaker 9: That could be a factor. There are others who would
Speaker 9: say there are strategic missteps, and there are others who
Speaker 9: say that this CEO just does not inspire faith.
Speaker 5: Is there a certain area of the company where a
Speaker 5: lot of the departures are focused, a certain type of
Speaker 5: asset class, a certain type of practice.
Speaker 9: I think we should acknowledge it front on that we
Speaker 9: don't have full visibility into all the partner departures. What
Speaker 9: we do see is some of the prominent names who leave.
Speaker 9: That is why people inside the firm, people outside the
Speaker 9: firm talk to us about those departures, because these are
Speaker 9: names that are recognizable. It's hard to draw statistics from that.
Speaker 9: We don't know that their banking and trading business has
Speaker 9: been doing quite well. That has always been the crown
Speaker 9: jewel of gold and Sex that has done really well.
Speaker 9: Unfortunately for David Solman, he can't take a lot of
Speaker 9: credit for that because that was already doing really well.
Speaker 9: The kind of areas he tried to drive the firm
Speaker 9: into consumer banking turned out to be a major flop,
Speaker 9: and that unfortunately sits on his head.
Speaker 4: If you take a.
Speaker 5: Step back, it seems as though there are a number
Speaker 5: of sort of big seismic changes in the banking industry.
Speaker 5: There's Credit SUITEE that has gone away, ubs acquiring not
Speaker 5: gone away yet, But you know what I'm saying, you
Speaker 5: have a real kind of shifting in the baton with
Speaker 5: respect to Gommetzas and Morgan Stanley, or at least people
Speaker 5: are thinking about that. Where does Goldman Sachs fit into
Speaker 5: this especially at a time very much a talent war.
Speaker 9: I'm so glad you mentioned that because Goldman kremnolology aside,
Speaker 9: forget the palace industrigue at Goldman sach the changes, the
Speaker 9: structural changes we've seen in the global banking industry. You know,
Speaker 9: what has happened with the big European banks has meant
Speaker 9: that if you are a large US bank, if you've
Speaker 9: been doing well, and you have a strong presence in
Speaker 9: what you're doing, you will gain market share. The competitive
Speaker 9: mote around the likes of JP Morgan Stanley and Goldman
Speaker 9: Sachs continues to grow, continues to become deeper. So they
Speaker 9: have benefited from that.
Speaker 5: Given that, where has Goldman Sachs not benefited to the
Speaker 5: extent where people are seeing an opportunity to leave, perhaps
Speaker 5: to go somewhere else that is benefiting, or perhaps to
Speaker 5: go off on their own.
Speaker 9: Well, twenty years ago, if the bank was performing as
Speaker 9: well as it is performing right now, would have made
Speaker 9: a lot more money. That's not the case anymore. And
Speaker 9: the opportunities on the buyside that kind of money Goldman's
Speaker 9: acts just cannot throw at its top executives, and loyalty
Speaker 9: is just not such a binding factor.
Speaker 1: And I'm not going to mince words here. Private equity
Speaker 1: is taking over the strena to Roger and act doctor
Speaker 1: Curry is worth his weight in gold to some private
Speaker 1: equity shop. Right.
Speaker 9: Well, you've seen a prominent move like that. Remember towson' slocke,
Speaker 9: who's now at Apollo. He moved from the cell side
Speaker 9: to the buyside. We don't know what Jeff Curry is doing.
Speaker 9: It would appear that he is taking some time out,
Speaker 9: spending some time a family. He has two young kids,
Speaker 9: so he could potentially be taking some time. He's just
Speaker 9: fifty six, so it's hard to say that he's retiring old.
Speaker 1: He's ancient. You nailed it this morning. You said that
Speaker 1: Jeff Curry was tired of waiting, tired of waiting for you.
Speaker 9: That was you talman, that you you.
Speaker 4: King.
Speaker 1: He financed Ray Davies's latest move.
Speaker 9: So at least with Jeff Curry, you know about his
Speaker 9: part time job, which is a little bit of commodities research.
Speaker 9: But he's perhaps more famous for, at least we'd like
Speaker 9: to think, for helping produce a movie, a documentary on
Speaker 9: this journalist trying to reunite the King some forty years
Speaker 9: after those guys broke up.
Speaker 5: I love that, and I've got to say that I
Speaker 5: love that you try to put the song into Shree's mouth,
Speaker 5: basically saying you came here singing.
Speaker 1: Will you look forward the.
Speaker 5: People you talk to and you do have a lot
Speaker 5: of sources. Are there more to come?
Speaker 1: Yes?
Speaker 9: Unfortunately, it doesn't look like this is something that's going
Speaker 9: to stop again. The people exiting Goldman Sachs is the
Speaker 9: number of people. You want to keep a track on that,
Speaker 9: but there isn't anything in that quantity that suggests a problem.
Speaker 9: What we want to see is the type of people
Speaker 9: leaving the building set very quickly.
Speaker 1: Here it's August, but it doesn't feel like August to me.
Speaker 1: On New York Wall Street. It feels like late October,
Speaker 1: bonus season, February they're doing fiscal planning for next year.
Speaker 1: Mckinn like larger sixty thousand Bologne. It's out the window.
Speaker 1: This seems to be a unique August. How unique is
Speaker 1: this August for the players in Manhattan?
Speaker 9: It's very important. You've had five very slow months, six
Speaker 9: very slow months, seven very slow months to start there. Sorry,
Speaker 9: I was just trying to figure out where July falls
Speaker 9: in the calendar, but you've had seven slow months to
Speaker 9: start the year. The question is now when we're seeing
Speaker 9: a little bit of a pickup, we head into the
Speaker 9: late summer lull. You're hoping for a pickup after Labor Day,
Speaker 9: but then that giant US government shutdown threats start coming
Speaker 9: into the fray again start of October, and then you're
Speaker 9: close to the end of the year. So is there
Speaker 9: enough time to rebound?
Speaker 1: Ten seconds David from the Hampton's emails and goes, when's
Speaker 1: she published it this morning? What are you publishing this morning?
Speaker 9: Nothing else for now?
Speaker 4: Tom the day.
Speaker 1: Yeah, David, there you go, She'll be publishing later today.
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