00:00:00 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordernt. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. Mike Wilson and Walk and Stanley writing, falling danaergy prices, peaking, tariff inflation and contained services. Keep the Fed on hold rather than hiking this year. Lower real rates should support equities and further fuel the broadening trade. I'm pleased to say that Mike joins us around the table for the next hour. He joins us for more. Mike, good morning, Good to see you. 00:00:53 Speaker 1: Good morning. 00:00:53 Speaker 2: Let's just start with the stability we're seeing in the rates market and how important that is to set the stage for what you're anticipating in the next few months. 00:01:00 Speaker 3: Yeah, I mean, I think you were saying it earlier as listening to the show, I mean, there's somebody expecting a hike, there someone expecting a cut, and. 00:01:06 Speaker 1: We're on hold. 00:01:07 Speaker 3: And this is I think what we got to get used to is that with the new chair probably not giving as much guidance, is going to allow the market to kind of figure it out on its own and have these different different views. We're in that adjustment period now, and I think that's one of the reasons why the market's been a little choppy or even correcting in the last month or so, is we're getting used to this new regime, which is going to be higher volatility and potentially the bond market. But over time, I think what's going to end up happening is the market's going to sell down. It's going to it's actually more estimates. A wider dispersion of estimates actually least to lower volatility in the pricing over time. But we're in that adjustment period, so we think rates are lower ultimately, particularly at the back end. And by the way, we've talked about this on the show many times, new Treasury Secretary, you know, new Fed chair, this kind of new Fed Treasury accord to really anchor the back end. That's what they're focused on. You got to get the back end down or at least anchored, because you have so much debt that you have to basically finance. 00:02:02 Speaker 2: Do you think in the meantime we're confusing a reduction and guidance with an increase in hawkishness just in the meantime. 00:02:07 Speaker 1: Yeah, I think that's right. And then market is pricing that now. 00:02:10 Speaker 3: So that's the good news is that we've already had that adjustment, and that adjustment started four months ago. Right, this is why precious metals have traded really poorly. You know, the day that worsh was announced as a nominee, the gold market peaked and that that was a sign the dollar has been stronger. So once again the market has really gotten ahead of this. 00:02:28 Speaker 2: So rates of recent we've come down from around four point suo percent to four point one. There's a belief this morning at least we've removed the urgency to hide as soon as July, so we can put that story to bed. Cruise decline, massive reset crew from triple digits down to the sixties on wti's Does that open the door within the equity market and let's talk about the stock market exclusively. Does that open the door to the broadening trade again. 00:02:49 Speaker 3: Yeah, that's our call basically is that that was happening at the beginning of the year. Then we in Venezuela and then I ran by the way the market priced Iran before the invasion even happened or the attack happened, because once again it was pretty well signaled. And so that's when the broadening trade stopped. The barding trade literally stopped the day that the attacks happened, and we had the big spiking oil and then the pricing of the FED to high rates. Since I say mid May, which is when we reiterated the Barny call, we had a different view of the most We thought all prices would come down, and that has allowed now FED pricing to sort of stabilize, and that has allowed the broadening trade to regnate. 00:03:26 Speaker 2: Small caps have performed nicely, just had a massive quarter by more than twenty percent on the rustle. We've seen the broadening trade. Speak to the performance we've seen in the equal white on the S and P five hundred as well. Let's talk about a Max seven, which increasingly was called the lag seven. You've got to know out this morning talking about maybe the money going back into the hyperscalus. Just walk us through how you're thinking about what's happened in tech and that divergence between the big spending companies and the beneficiaries of all that spending, of the divergence that's really widened in the last few months. 00:03:54 Speaker 3: Yeah, I mean there's a symbiotic relationship between the spenders and the beneficiaries and typically they trade sort of been lockstep. And a couple of things we've been writing about for the last several months. Number one, capex to sales, That particular factor has been straight up since the Big beautiful Bill was passed, right that basically the government's in scenting businesses to spend. 00:04:14 Speaker 1: Money today rather than later. 00:04:16 Speaker 3: And so that capex the sales factor has been driving a lot of stocks higher. 00:04:20 Speaker 1: That looks like it's peaking now. 00:04:22 Speaker 3: And by the way, the hyperscaler stocks started to trade poorly about a month and a half ago and into this idea. But that's not sustainable. You can't have the spender stocks trading poorly and the beneficiary stocks continuing to go straight up. And now what we saw last week, you know, Meta announced perhaps they're going to sell some excess capacity, maybe turned into a provider of capacity. That is just a reason for these things to take a break. Also, peak great a change on revision breath right, the memory stocks. The revisions have been spectacular, but they can only go so high. So all that's kind of happening at the same time, and I expect the hyperscalers now to stabilize. That's what's going on the last couple weeks, and the semic counter stocks are going to are going to correct. That's a good development. That doesn't mean the Capeck cycle is over, but that ebbing and flowing between the two is a natural kind of governing factor because you can't have this divergence continue. 00:05:14 Speaker 1: It's unstable. 00:05:15 Speaker 2: Your words, take a break. That's interesting. Some people have called it a narrative shift for the overall trade and maybe a shift in spending. 00:05:21 Speaker 4: Two. 00:05:21 Speaker 2: Why is it one or not the other? 00:05:23 Speaker 1: Well, we don't know. 00:05:23 Speaker 3: For sure, but we've had three of these already, John, So since chat GPT was announced in November twenty two, we've had three of these sort of mini cycles within the broader structural capex cycle, which is that the market starts to question, oh, the return on capital isn't good enough to support this kind of capex. What happens then the stocks trade poorly, and then the CEOs of those companies come out and say, well, you know, maybe we won't spend as aggressively, and then it ebbs the other way. And so that's that's the story. That's the dance back and forth. Now there is going to be a period, there is going to be a time, we don't know when it's going to happen yet, where the capback cycle will exhaust itself and we will have you know, we've talked about this that there is going to be malinvestment here. We don't think that that spending cycle is over because they just start raising the capital and the credit market so they're going to spend the capital. Okay, So but we can have these mini cycles within in the structurable market of COUNTIL. 00:06:14 Speaker 2: I think, as you know, though, forget the spending that's not yet happened. It's the intentions that matter. And a deceleration in capex intentions from here, how do you think this market's going to internalize the prospect of that in the coming months. 00:06:26 Speaker 1: Well, it's doing it right now. 00:06:27 Speaker 3: So we talk about it as a peak rate of change or you know, trough rate of change. Second derivative growth, and that's exactly what's going on. There's two things we're focused on. Earniche re vision breath for the semi country stocks themselves are like seventy five percent. 00:06:41 Speaker 1: That's about as high as it goes. We've documented that, so that's going to roll over. 00:06:44 Speaker 3: It doesn't mean it goes negative, but the deceleration on that can cause those stocks to correct. And then of course the hyperscalers will benefit if the market perceives these companies as being somewhat capex disciplined, that they're not going to do willy nilly spending in a way where free cash. 00:06:58 Speaker 1: Flow goes to zero negative. 00:07:00 Speaker 3: And by the way, free castrow expectations for some of those companies are going towards zero. 00:07:04 Speaker 1: That's why they've underperformed. 00:07:06 Speaker 3: So it's just stands like I said back and forth, and now in the last week and a half, the hyperscale or some of the hyperscalar stocks have started to trade better. That's a good sign that we're going to have a little correction. This could last you know, four to six, eight weeks something like that, and then we'll probably have the next upcycle. 00:07:19 Speaker 1: For the semi. 00:07:20 Speaker 2: These are names that we're in bear markets. I'm talking about Meta and Microsoft. Meta had a better week last week. Chips, you keep using this word correct. When I hear that, I'm just thinking, what do you mean by that? How much is the downside? How big is the downside for somebody's chip nips? 00:07:32 Speaker 1: Well, there's are hype beta stocks. 00:07:34 Speaker 3: I mean, they can correct thirty forty percent in a bowl market, by the way, just like at the tuner day moving average. So that's probably a really good gauge. These stocks are so extended relative to those moving averages. That's how you got to think about it. Those moving averages exist for a reason, right, They always return to the moving averages. Does it happen in a violent way or does it happen kind of gradually over time. 00:07:54 Speaker 1: We'll have to wait and see. 00:07:55 Speaker 3: But yeah, thirty percent correction in these stocks is I mean well within possibility. 00:08:00 Speaker 1: In fact, some of them already have corrected. There. 00:08:01 Speaker 2: You can have a thirty percent correction of chips just bear with me here, and you can still see the index move up into the right on the S and P five hundred, even with the massive weight and they have or we didn't say, that's what a most But. 00:08:14 Speaker 3: I mean that's part of our call too, is that we think this rotation is happening in a down tape. Okay, unlike the correction we saw on the precious metal stocks in January, because there's such a small part of the index, energy stocks had a big correction after having a great run in January and February. Now the market traded off a little bit because of the war itself. But I'm so I agree with what you're saying, or your premise or your question, which is, since these stocks are such a big part of the index, it's going to be really hard for the index to make any upward progress until this rotation has sort of happened. 00:08:47 Speaker 2: This is a summer story for you. 00:08:48 Speaker 1: Oh yeah, I don't. I mean, we're not bearish on the year end. 00:08:51 Speaker 3: We're still eight thousand plus per year end. And we've had that call for quite a while based on. 00:08:56 Speaker 1: The earning story. So that earning story is very much intact. 00:08:59 Speaker 3: In fact, the fact that we're rotating now to some of these other areas almost confirms the thesis we've had all year, which is this is not just a tech story. 00:09:08 Speaker 1: That's a great story. 00:09:09 Speaker 3: But the broadening story is the story that I think people have really underestimated the rolling recession from a year ago, this operating lever story, which I think is still very underappreciated. 00:09:18 Speaker 2: Do you think the banks can start working now too well? 00:09:21 Speaker 3: They have been, I mean the money center banks and the capital markets banks really have been. 00:09:26 Speaker 2: Your Stock absolutely delven Stock's fantastic. I'm talking about the. 00:09:30 Speaker 3: Other regionals and so they've started to perform, and that's been an area we've been highlighting. Now they curve is flattening still or you know, is having trouble kind of resteepening, So I think that group could pause a bit. We took that off of our list of favorites for the for the broadening trade this week, but ultimately between now and year in, we think we do think the banks are going to do quite well because this is a strategy of the Treasury and the Fed is they want more lending going through the traditional lending sector. So while the your curve is flattening, long growth is accelerating, and that's this whole broadening out story of the economy. 00:10:03 Speaker 1: This is a strategy of the administration. 00:10:05 Speaker 3: They want a privately driven organic economic expansion, and that's what we're getting, notwithstanding that maybe the labor market isn't as robust as some people were hoping. 00:10:15 Speaker 1: But that's also then feeding the earning. 00:10:16 Speaker 3: Story, right, because you're seeing revenue growth without a crazy need to hire a bunch of people, and that's the operating liver story. 00:10:23 Speaker 2: One on one stay with US multile Imberg surveillance coming up after this, Hendrod to try and fight upon it's looking forward to the Nighttive summit, saying it's a prime opportunity to direct attention away from the war and the energy fertilizer price spike it has created. So investors should be prepared for a flurry of announcements. Henridd It joins us now for more, Hendrid Welken, what kind of announcements are you looking for? 00:10:54 Speaker 5: Well, as you mentioned with Tyler, I think the idea of a joint defense effort with Germany is exactly what the doctor ordered. You know, the President is really looking to deflect away from what is happening in the Strait and there are so many issues, not least of which is the toll that still hasn't been agreed to, and which NATO nations have a real problem with so I expect them to talk about pretty much anything other than that throughout the next two days. The other piece would obviously be Russia and Ukraine and a discussion there. 00:11:24 Speaker 6: As the United. 00:11:24 Speaker 5: States Congress provides substantial funding to not just Ukraine in their various appropriations bills, but also to the neighboring regions lat Via, Lithuania and the Baltic Region as a whole, and as you were mentioning before, trying to ensure that we keep troops in the region as well in Poland and elsewhere across NATO nations and rid of the toll. 00:11:44 Speaker 2: Let's talk about it. I get that the Europeans and others sound happy about it, but right now at fills line, that's the price of admission to get energy moving again. Is there anything they can do about it? 00:11:53 Speaker 6: Yeah, that's exactly it. 00:11:55 Speaker 5: The result of this war is that Aroan now has control of the street. You see it with the US terms of tankers happening throughout the weekend and on a daily basis, as people deal with the general uncertainty of where these eighty minds are in the region. So Iran has the ability here and is using different countries as an example of how to set up a toll, call it a climate assessment, an environmental fee, whatever you want to call it. You're normalizing relations with the IRGC. And this is in many of the NATO nations opinions I've heard from Canada, for example, directly in France directly simply untenable. They don't want to work with a state sponsor of terrorism. And I would also point out that Treasury Secretary Best has created waivers for all these sanctions, but those are only going to hold as long as the administration decides that they will. They've already reversed that several times since the start of the war, and they don't have a lot of comfort from banks or insurers or NATO nations about what the policy is going to be in the future. So this is going to take a while to unfurl, probably much longer than the August twentieth deadline. 00:12:58 Speaker 1: Hendry and HiT's Mike Wilson with respect to just how. 00:13:01 Speaker 3: The world may get around the strait itself, and the sense that what this war is highlighted is how crazy it is that we have this choke point to begin with, and how fast do you think the world itself will start to migrate towards perhaps drilling for resources elsewhere or building alternative ways to get the oil out of the region through pipelines, et cetera. How fast can that happen? And we'll let's be talked about over the weekend. 00:13:24 Speaker 6: Yeah, perfect point, Mike. 00:13:26 Speaker 5: I mean, the way to think about this is that it was so obvious that going to war with Iran would result in some sort of closure of the strait. No administration has done it before, very transparent, very understood this was. 00:13:38 Speaker 6: A potential chow point. 00:13:40 Speaker 5: We have many of them around the world, whether it's in the Red Sea, the Black Sea, the Southeast Asian areas. 00:13:47 Speaker 6: There are problems like this all around the world. 00:13:49 Speaker 5: So you're going to see now a scramble to try to create alternatives to whatever choke. 00:13:55 Speaker 6: Point there might be in the entire world. 00:13:57 Speaker 5: And what I think for investor purposes is what this means, and particularly for the Federal Reserve chairman as they consider inflation is permanently, higher insurance risk permanently, and higher cost of doing this shipping, higher tanker rates, and those are all things that we're seeing across the board. 00:14:13 Speaker 6: So whatever level. 00:14:15 Speaker 5: This settles at is almost guaranteed to be higher than it was before the President made the decision on February twenty eighth to start the bombing. 00:14:21 Speaker 3: And what about Taiwan? Is that something that people are still talking about in the mainstream. It seems like that's kind of taken a back seat. 00:14:28 Speaker 6: Yeah, absolutely, great point. 00:14:30 Speaker 5: So Taiwan has taken a back seat publicly, but in DC it's still paramount. You have a pretty substantial bipartisan focused group, not a standing committee, but a select Committee Onshine of Relations that focuses directly on Taiwan. And I would say that as you look at BIS and what they're doing with export control restrictions, they're very focused on Taiwan. Members of Congress are very focused on Taiwan. So it may not be front and center for this administration, and there's a lot of questioning of how the President's allegiances towards Taiwan differ from prior administrations, but I would say Republicans and Democrats are unified in wanting to continue to provide protections to Taiwan. 00:15:11 Speaker 6: Whatever that takes. 00:15:14 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Here's a take from no Dabta of Runmack, writing, June's employment report is a reminder that the economy remains uneven, inflation remains too high, and so the strate of hikes is not receding. Neil joint just now for more, Noil, good morning, good morning, just going to see in person, buddy, I'm not going to bury the lead. You are not impressed with Kevin Walsh FED cheap? Why? 00:15:43 Speaker 4: Uh? 00:15:44 Speaker 7: Well, I mean I think he's kind of blurring the lines between the FED having a reaction function and forward guidance. You know, getting rid of forward guidance is fine. No one needs to be spoon fed every single meeting in advance. That's not what this is about. But just to say, you know, kind of swear on the monetary policy Bible stack and say, you know, I believe in price stability. 00:16:05 Speaker 4: I mean, that's fine, But the. 00:16:06 Speaker 7: Question is how you actually achieved that any action, and in my opinion, he hasn't really done much to tell us how that will be achieved. So it's really about how they respond to data and how that kind of drives their decision making process, and we don't really know much about that, which, you know, if the market has one view of it, and the FED obviously has the whippand they know more about their own reaction function in the market. It could mean that the closer you get to these meetings, we won't know their reaction function until it's revealed, in which case it creates some volatility in the financial markets. I think it's fine so long as things are stable, as guests have been saying. But you know that may not always be the case. So he's going to have to tell us eventually, and I would say sooner rather. 00:16:50 Speaker 2: Than in the maintime. Is the ambiguity strategic? You think it is beneficial. I think for him it is right. 00:16:56 Speaker 7: I mean in the sense that I think by failing to, I mean, he's been very vocal about not wanting to submit dots, give a forecast, anything like that. But I think because the Hawks really are ascendant on the committee, the last job number didn't matter one way or the other. It's really about the inflation data that's going to break the tie, so to speak. But by not submitting a dot, he absolves himself of having to take responsibility for the Hawks on the committee, you know, And so it's kind of interesting. 00:17:28 Speaker 4: I mean, it's you know, you do see. 00:17:31 Speaker 7: Some guidance from people like President Trump. A NEC director has it talking about well, you know, in his heart of hearts, he's actually dubbished, but he has these like sort of people he has to deal with, and so, you know, I think it kind of it absolves him from having to kind of take responsibility if he's able to say, look, I didn't submit something. 00:17:51 Speaker 3: At the end of the day, though, don't we need higher inflation to grand grow out the debt problem? And so he's talking about rewriting the data sets that they're going to use to sort of justify maybe inflation is really only two point five but reality, as every American knows, it's much higher than that. 00:18:05 Speaker 1: We've been going through this song and dance for ten years. 00:18:08 Speaker 3: So what's that framework look like and what is the real target inflation rate? Do you think to actually grow out of that problem? 00:18:14 Speaker 4: I don't know, Mike. 00:18:15 Speaker 7: We'll have a task force for that. I mean to borrow from our chairman. 00:18:20 Speaker 4: No, I don't. 00:18:20 Speaker 7: Look, I don't think you can inflate your way out of this. I mean you have to grow your way out of it. I remember back after the financial crisis, people were making the same argument we had to write, you know, and what ended up happening We essentially grew our way out of it, right, We had sort of stable growth, stable inflation, and over time, you know, things kind of evened out in the bondo market. So yeah, I mean, I don't think he's leaning into the inflation piece of it to the extent he's been leading into anything in terms of dealing with it. It's the productivity boom, the AI sort of Golden Age thesis that's been the lynchpin for. 00:18:55 Speaker 4: You know, for warsh I think. 00:18:57 Speaker 3: Right, So not letting it don't kill the boom is present Trump likes to say, And so having this obscurity around what I'm actually looking at gives them the freedom to maybe not be so reactive to the data sets. 00:19:08 Speaker 7: Well sure, but at the same time, by not laying out a strategy, that's the only thing that people are I mean, the vacuum is ultimately going to be filled by something. 00:19:16 Speaker 4: And so what's I mean then you do you in an. 00:19:20 Speaker 7: Odd way by trying to get people off the data, he actually push them towards the data because they don't actually know what strategy you. 00:19:27 Speaker 2: What do you think he is in his hot defense. 00:19:31 Speaker 7: I think he's I mean, I've thought he's hawkish, and I think it's almost like a revealed preference. By not saying anything, you allow the hawks on the committee to become ascended, and so that's what he wants to say, and you haven't done and you wouldn't have done that if you didn't at some level kind of agree with them. You know, the idea that you can you know, the sort of productivity golden age if you were thinking about that, honestly, the fact that inflation is above target, to pull a green span would basically mean to allow productivity to remain whatever it is to bring inflation down to target. So you wouldn't be advocating for cuts, which is what he's doing. So but you know, generally, generally speaking, I think if you didn't la out a strategy, you allowed the hawks to fill the void. You wouldn't have done that had you not believed or kind of agree with them. 00:20:19 Speaker 4: At some level. 00:20:19 Speaker 2: Right base case for you, We've got Bank of America on the one side looking for three hikes, City on the other looking for something closer to two cuts this year. That's how white things are right now on Wall Street. That's quite a spread. What do you feel, Well. 00:20:31 Speaker 7: I think if there was going to be a FED that was dysfunctional enough to deliver a one and done, it would be this one under Kevin Warsh. So that's sort of I mean to me, it's sort of why wouldn't you think the hawks kind of come back for more? And from his mind, from his seat, I actually think it makes sense because you can show that you gave you gave a hike, you stood up to the president, You're establishing yourself your credibility with the market, and now we kind of can get past this and say, look we got the hike. I mean almost like the UCB, you kind of take some of the tail out of the inflation risk and you maintain your optionality. So there's a way for them to perhaps go once without having the market price in a lot more. 00:21:14 Speaker 3: And what about balance sheet because that's been the real sort of angle on Worsh's He is a balance sheet hawk and maybe he's less hawkish on race, which is who knows. But do you think it requires market volatility to get them to increase the R and P for example, or to start doing more liquidity injection? 00:21:30 Speaker 7: So I think that like this is one of these things where people say things to get the job, to create distinctions between themselves and the people that were there before. And the balance sheet is a good example of that. It's kind of like you know, hitting yelling over the head with how she's dealing with bill management and then coming in and then doing literally the same thing. All of these things are going to be met by committee. I do I think that's you know, that's something that people say to rationalize it, right, like, oh, he's not really hawkish, he's just hawkus on the balance sheet, so he can be dubbish on rate's. Like, it doesn't work that way because the balance is not really a tool of monetary policy. The only tool is rates. So I don't think it's to me, it's not a big big factor being holkish on rates. Though we had this conversation earlier in the hour. Has it allowed the longer end of the Yelk curve to stabilize and is that something that both the Treasury and this Fed would look at say that's beneficial, that's the kind of approach we. 00:22:22 Speaker 1: Need right now. 00:22:23 Speaker 7: Yeah, I mean, I think I mean that, like the first meeting was the most hawkish meeting that you've had in the press conference era, and we had like what like a thirteen to fifteen basis point rise into your yields, So you know, talking helped take some of the risk. 00:22:37 Speaker 4: Out of the back end. Yes, I would agree with that. 00:22:39 Speaker 2: Do you think he fooled the president? Do you think do you think he fooled the president in the interview process? 00:22:45 Speaker 7: What do you mean, oh fooled him? Oh fooled him? 00:22:49 Speaker 4: Yeah. 00:22:49 Speaker 7: I think if there's a risk, it's that the president was duped. 00:22:53 Speaker 2: Yeah, how's that going to play out? If he was stooped? 00:22:56 Speaker 4: I mean, I think there seems to be like, I don't know. 00:22:58 Speaker 7: I mean, your colleague Joe Eisenthal said, I think, you know, maybearsh hikes and Trump is oddly chill about it, and I don't know, it sounds like he's giving him a lot of grace at the moment. 00:23:12 Speaker 2: It spends how close we are to the midterms. If that happens, right. 00:23:15 Speaker 4: That's why I say get it out of the way sooner. 00:23:18 Speaker 2: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg terminal and the Bloomberg Business app.