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Speaker 1: A gentleman from Michigan we're thrilled to have with us

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Speaker 1: this morning for this entire half our Michael Wilson. He

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Speaker 1: is at Morgan Stanley, coach, Effequity Strategies CIO, and among

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Speaker 1: other things, author and driving force behind really smart thirty

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Speaker 1: six page research pieces on what matters at the moment.

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Speaker 1: Mike Wilson, Good morning you people have done a tour

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Speaker 1: to force on AI.

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Speaker 2: And on what's to come.

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Speaker 1: Does Mike Wilson believe in the stock market and believe

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Speaker 1: in AI?

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Speaker 2: Well, good morning, Tom, Yeah, thanks for having me. We

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Speaker 2: do believe in AI.

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Speaker 3: We've then probably more front footed on this theme as

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Speaker 3: a firm over the last year, year and a half.

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Speaker 3: And the way I would characterize it is is that

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Speaker 3: this is the next big probably the next big productivity driver,

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Speaker 3: but it's not going to happen immediately, and we're seeing

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Speaker 3: that manifest itself in the stock market right so so far,

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Speaker 3: what's really worked from AI has been what we call

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Speaker 3: the enablers, the companies that are allowing this.

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Speaker 2: New platform to be developed and built out.

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Speaker 3: And we've seen obviously some of the stocks go somewhat

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Speaker 3: stratospheric and the real opportunity though, is going to be

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Speaker 3: when this technology diffuses across the economy, and that would

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Speaker 3: be the adopters, and that's very very early days.

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Speaker 2: Now.

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Speaker 3: There's been some winners in that already, but boy, it's

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Speaker 3: it's kind of hard to find them so far. The

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Speaker 3: other theme that we've been really espousing for the last

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Speaker 3: year and a half when we were early on this

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Speaker 3: is this idea of operational efficiency. In fact, many companies

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Speaker 3: adopted that phrase for their own taking because that's what

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Speaker 3: they needed to do over the last year. As you know,

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Speaker 3: it's been a very unbalanced economy where you have a

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Speaker 3: very heavy handed government influence which is kind of keeping

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Speaker 3: the aggregate statistics strong, and then you have companies that

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Speaker 3: have unique growth opportunities. But then the sort of average

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Speaker 3: company is really struggling still with cost inflation, you labor tightness,

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Speaker 3: cost of capital, et cetera. And so efficiency is one

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Speaker 3: way to get around that, right, keeping your cost down.

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Speaker 1: And having it mar and I'll dovetail it to Allen

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Speaker 1: Zenner's new productivity. And we're hearing a lot about that

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Speaker 1: on the show. Micha Wilson, I'm not going to mince words.

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Speaker 1: You've been to Pinata for people that are like I

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Speaker 1: want to participate in the market, but I just don't

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Speaker 1: get the exuberance out there. What's the Wilson meter look

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Speaker 1: like right now? On market exuberance? It don't narrow it

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Speaker 1: down to the silliness of Nvidia, but how effervescent, how exuberant?

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Speaker 1: Is a market I want to be in, but I'm

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Speaker 1: scared stiff?

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Speaker 3: Yeah, I mean, look, there's there's been some some big

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Speaker 3: winners and some big loss It's been a stock picking

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Speaker 3: environment quite frankly really for the last year, year and

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Speaker 3: a half. And look, we had that major low that

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Speaker 3: was made in October twenty two one that we identified

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Speaker 3: as a good opportunity, the.

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Speaker 2: One ast fall we felt was close but didn't quite

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Speaker 2: get there. But of course we had a huge rally.

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Speaker 3: And what's happened Tom and I think this is a

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Speaker 3: differentiating feature of our view versus others is we view

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Speaker 3: the last four to five month rally as being driven

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Speaker 3: more by very loose financial conditions, extreme liquidity, which is

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Speaker 3: finding its way into the right parts of the market,

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Speaker 3: and that and the parts of the market that are

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Speaker 3: working are what we call high quality growth stocks, and

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Speaker 3: some of those you've mentioned and some of those are.

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Speaker 3: But it's also it's not just tech stocks, some of

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Speaker 3: the industrial space which are benefiting from some of those

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Speaker 3: heavy handed government programs, for example, some of the consumer

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Speaker 3: spaces having a bounce back at consumer services. And then

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Speaker 3: of course these companies that are being efficient, and that's

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Speaker 3: really what's been working. And it's been so in other words,

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Speaker 3: the market's been very good at identifying the winners.

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Speaker 2: It's also been very good at identifying the loser.

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Speaker 4: Well, Mike, I mean you mentioned efficiency, and you mentioned

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Speaker 4: operational efficiency, and for me, I need you to drill

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Speaker 4: down a little bit more. You know what you know,

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Speaker 4: what indicators you looking for? It we strictly talking operating

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Speaker 4: margins here. I mean, how do you evaluate you know,

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Speaker 4: those sectors you're referring to, like which sectors are prime

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Speaker 4: to perform well, given you know that focus on high

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Speaker 4: quality growth, on operational efficiency, on the narrowing of that

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Speaker 4: big divide between the haves and have nots.

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Speaker 3: Yeah, it's not really it's not really by sector, damn,

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Speaker 3: it's more by company. It's really company specific and we

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Speaker 3: and we've talked about that, meaning within sectors, there are

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Speaker 3: companies that are being more efficient than they're say, they're competitors,

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Speaker 3: and we're seeing it, so that once again it is

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Speaker 3: as you say, the haves and have nots. So I

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Speaker 3: don't think I don't think it's a sector call. It's

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Speaker 3: a company call. It's a very stock specific call. So

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Speaker 3: that's that's actually a really good environment for active managers

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Speaker 3: who can take advantage of that.

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Speaker 2: So we're seeing we're seeing it across multiple industries. It's

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Speaker 2: not just one or two.

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Speaker 4: So the MIC is the key identifying those companies that

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Speaker 4: are going to improve their operational efficiency or selecting those

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Speaker 4: companies that have an advantage over their peers.

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Speaker 3: It's both and and one of those advantages is just

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Speaker 3: sheer size, having scale, having the ability to kind of

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Speaker 3: manage your cost structure, being efficient with your labor and hiring,

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Speaker 3: and that's a pure scale argument. Then of course, there

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Speaker 3: are companies who are using various technologies, not just AI

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Speaker 3: to make their existing businesses more efficient.

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Speaker 2: There are some you know, what we've discovered is within AI.

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Speaker 3: Irightly, the companies that are actually being the most efficient

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Speaker 3: are tech companies. They're the ones who are actually able

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Speaker 3: to reduce labor and headcamp, particularly encoding. That's one area

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Speaker 3: where it's been extremely efficient, back office, et cetera. So

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Speaker 3: in many ways, AI is helping to keep the labor

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Speaker 3: market a little bit soft.

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Speaker 4: Well, let's talk about your note from yesterday. Multiple expansion

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Speaker 4: kind of accounting for most of the move we've seen

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Speaker 4: here inequities. But then you excite your colleague Andrew Sheets,

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Speaker 4: and this is where what I love. I want to

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Speaker 4: talk about M and A volumes. I want to talk

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Speaker 4: about thirty five billion of IG issueans expected this week

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Speaker 4: after three weeks straight of fifty billion. Talk to us

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Speaker 4: about which sectors are witnessing M and A activity and why.

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Speaker 2: Yeah, I mean, the conditions are there for M and A.

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Speaker 3: I would say the headwinds are that the cost of

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Speaker 3: capital is still pretty high. We haven't seen any rate

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Speaker 3: cuts yet. And then even though we're seeing issue ements

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Speaker 3: at the IG level, that's that's pretty robust. A lot

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Speaker 3: of that's for refinancing and also for you know, for

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Speaker 3: existing deals that are in the market. The other constraint,

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Speaker 3: of course, is that we just had a big increase

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Speaker 3: in valuations.

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Speaker 2: I would say, you know.

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Speaker 3: Last fall was getting closer to a point where the

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Speaker 3: buyers and sellers we're getting to a point where maybe

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Speaker 3: the price was right, and now, of course those prices

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Speaker 3: have elevated again, and we have stars in the eyes

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Speaker 3: of some of the sellers. So I think this is

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Speaker 3: going to be once again the story for twenty twenty

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Speaker 3: five twenty six, as we kind of settled into whatever

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Speaker 3: the you know, the new the new administration, where the

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Speaker 3: existing administration stays in power. I think those are also

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Speaker 3: wildcards for M and A. So the conditions are there.

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Speaker 3: We're not seeing a ton of activity right now. We're

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Speaker 3: hopeful that will pick up later this year and into

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Speaker 3: twenty twenty five.

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Speaker 4: So I just want to recap here. Valuations are relatively rich,

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Speaker 4: interest rates are relatively high, and yet volumes and activity

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Speaker 4: you're picking up. Go figure, I wonder what's going on

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Speaker 4: in the corporates week. But let's go back to a

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Speaker 4: little bit of what you mentioned before with operational efficiency.

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Speaker 4: So in this environment, you know, in an environment where yeah, okay,

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Speaker 4: you know, cost the capital is relatively high and valuations

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Speaker 4: are rich, what should companies be doing to improve their

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Speaker 4: operating and their profit margins here?

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Speaker 3: Well, obviously, if you have some top line, that solves

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Speaker 3: a lot of problems. So I think a lot of

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Speaker 3: you know, companies are trying to figure out what the

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Speaker 3: next product cycle is. You know, how can they be

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Speaker 3: different than their than their competitors and drive top line growth.

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Speaker 2: I mean, that solves all of your That solves many

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Speaker 2: of your problems. Look, I think what corporate.

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Speaker 3: America is very good at, it has been very good

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Speaker 3: effort for decades is cost cutting. Okay, we're world class

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Speaker 3: in cost cutting. And I think they've done that. I

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Speaker 3: mean most companies have cut costs. They have kind of

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Speaker 3: whittled things down to the bone. And what's interesting is

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Speaker 3: in the last six months, if you go back to

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Speaker 3: the fall of last year, right so October, and this

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Speaker 3: is something that doesn't get discussed. At the end of October,

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Speaker 3: it looked like we were sort of careening towards the wall, right,

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Speaker 3: I mean, the stocks were basically making new lows. Companies

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Speaker 3: were starting to talk about maybe a layoff cycle they

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Speaker 3: were going to have to do that. And then of

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Speaker 3: course came in this big short squeeze at the back

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Speaker 3: end of the treasury market.

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Speaker 2: And then the Fed aquiesced and said, hey, we may

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Speaker 2: be cutting race next year.

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Speaker 3: And that provided the hope that raids are going to

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Speaker 3: come down and so we bought time and what we're

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Speaker 3: seeing now is this big hockey.

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Speaker 2: Stick and expectations for the second half of this year.

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Speaker 3: Okay, there's a big If you talk to most companies

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Speaker 3: and listen to most companies, what they're saying, Yeah, first

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Speaker 3: quarter still things are kind of squishy maybe the first half,

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Speaker 3: but the second half things are going to really pick up.

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Speaker 3: And that may happen, but I'll say right now, if

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Speaker 3: it doesn't happen, then we're going to see more cost

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Speaker 3: cunning in the summer. And that's probably why, you know,

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Speaker 3: the risk of a hard landing is still not being exterminated.

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Speaker 3: You still have a thirty percent chance that there's going

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Speaker 3: to be a laugh cycle if business doesn't pick up

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Speaker 3: in the second.

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Speaker 2: Half of the year.

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Speaker 1: What I want to talk about now, folks, Damon helped

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Speaker 1: me out here, Mike Wilson, the Vogue Now and Margan Stanley.

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Speaker 1: I assume it's not doing this is the two x

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Speaker 1: Mike Wilson fun, the three X Mike Wilson fun, the

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Speaker 1: four x Mike Wilson fun. Mike Wilson on the benefit

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Speaker 1: but the tragedy of leverage. We're at that giddy season.

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Speaker 1: How does this work out. Mike Wilson, how does it

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Speaker 1: play out?

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Speaker 3: Well, I mean you're talking about the benefit of leverage

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Speaker 3: and investing or in the econ.

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Speaker 1: I would say in investing right now, we're seeing we're

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Speaker 1: inundated here at Bloomberg, surveillans every day with a two x,

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Speaker 1: this ETF the three x, even four x. All my

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Speaker 1: radars up.

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Speaker 2: Mike Wilson, Well, that's just.

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Speaker 3: The greed versus fear dynamic. I mean, I think you know,

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Speaker 3: obviously last fall we hit a lot of fear priced in,

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Speaker 3: and now we have a lot of greed priced in,

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Speaker 3: so we are seeing speculative of activity pick up in

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Speaker 3: a meaningful way. I would say the daily expiration options

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Speaker 3: market is probably your single best example of that. We

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Speaker 3: have a lot of people sort of you know in

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Speaker 3: the stock market is like prop bets almost like draft

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Speaker 3: gings and things like that. That that to me is

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Speaker 3: you know, signs that exuberances is pretty high.

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Speaker 2: Now that doesn't have to end in tiers.

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Speaker 3: Okay, leverage isn't always bad, but you know, we have

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Speaker 3: a situation where people are reaching for risk because you know,

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Speaker 3: there's full mil yeah, and you know that's that's where

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Speaker 3: the pendulum is right now, Tom and and that's why

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Speaker 3: we're probably.

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Speaker 2: A little bit more in some of our peers.

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Speaker 3: You know, I think a lot of folks all they've

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Speaker 3: done is raise their price targets based on higher multiples,

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Speaker 3: and we're not willing to do that because we don't

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Speaker 3: see the condition.

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Speaker 2: We don't see the justification for higher multiples.

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Speaker 3: Given that we have basically no earnings growth across the

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Speaker 3: broader economy, a situation is still kind of a difficult

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Speaker 3: operating environment, and so we're going to be very selective.

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Speaker 3: And that's why we think it's you know, you've got

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Speaker 3: to be you got to be a stock picker here.

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Speaker 2: You can't just buy the index.

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Speaker 4: Well, I mean, Michael, you're hitting right on the point here.

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Speaker 4: I mean, look, volatility has come off a bit here,

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Speaker 4: but it just doesn't feel that way, right, And I

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Speaker 4: think that goes down to the type of investor you are.

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Speaker 4: You know, I wonder if you could talk to our

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Speaker 4: audience a little bit about you know, those traders who

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Speaker 4: are in the market who look at volatility on a

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Speaker 4: day over day basis, right delta hedgers for example, Guys

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Speaker 4: who have to deal with real volatility, and those who

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Speaker 4: are more longer term. Let's call it carry investors. I'm

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Speaker 4: a fixed income guy, by the way. So they're looking

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Speaker 4: at volatility on a month over month basis, and from

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Speaker 4: that metric, vall looks, yes, relatively low. Right, So talk

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Speaker 4: to us a little bit about those divergent investments. I

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Speaker 4: guess theses, those those those those investors who have to

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Speaker 4: look at you know, option markets, involve and leverage and

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Speaker 4: assess it for what it is. It means different things

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Speaker 4: to different people.

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Speaker 3: Well, I think I characterize it maybe a little bit

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Speaker 3: differently and just say that index level ball is very low,

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Speaker 3: but single stock ball is still quite high.

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Speaker 1: Right.

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Speaker 3: We have a high dispersion within the equity market, right,

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Speaker 3: single stocks volatility, sector volatility, even rbs.

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Speaker 2: But then that the index level has been very compressed.

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Speaker 2: One of the factors.

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Speaker 3: One of the reasons for that is that there are

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Speaker 3: a lot of new products out there that are fall

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Speaker 3: selling strategies. Okay, And now, over time I would agree

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Speaker 3: that selling ball is always better than buying ball, Okay,

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Speaker 3: Like that's just a better strategy, and you know, these

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Speaker 3: products are kind of keying off of that. So there's

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Speaker 3: there's been a tremendous amount of downward pressure around volatility

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Speaker 3: because of these ball selling strategies, and I.

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Speaker 2: Think you know that's a bit of an illusion.

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Speaker 3: Okay, there is plenty, there's plenty of opportunity within the

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Speaker 3: market from a volatility standpoint, but once again, it's at

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Speaker 3: the single stock level, not the index level.

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Speaker 1: Mike Wilson generously view to be with us for and

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Speaker 1: a half hour, you will be out on single best

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Speaker 1: idea our new podcasts here.

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Speaker 2: We'll do that.

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Speaker 1: You'll see that later this afternoon in the digital mix

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Speaker 1: and processing here at Bloomberg Podcast. Mike Wilson is with

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Speaker 1: Morgan Stanley