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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day

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Speaker 1: for insight from the best and economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. Subrider Chappa

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Speaker 1: joins us right now. My head is spinning here on

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Speaker 1: equities and even more so on bonds as well. Sot

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Speaker 1: of the fact is a lot of yields are moving

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Speaker 1: up here. I'm looking at the ten year real yield

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Speaker 1: in the US and is sobering. What are the ramifications

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Speaker 1: to you in SoC gen If we see the ten

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Speaker 1: year real yield breakout to new highs.

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Speaker 2: Well, I think that the impact is going to be

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Speaker 2: felt not just in the bond market, but broadly speaking

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Speaker 2: in all risky assets. Right, we're starting to recalibrate to

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Speaker 2: a much stronger economy, but a lot of the data

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Speaker 2: that we're looking at, like the first quarter GDP, the

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Speaker 2: second take or third take is backward looking, right, So

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Speaker 2: we have to be looking at forward looking indicators, and

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Speaker 2: if we are if the FED word raised rates by

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Speaker 2: fifty basis points or more, then I think that you're

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Speaker 2: going to see that feed through even more sharply into

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Speaker 2: the broader economy.

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Speaker 3: So the forward looking data has the potential.

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Speaker 2: To be meaningfully weaker if the FED, you know, continues

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Speaker 2: to hike rates. I mean, our call is that the

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Speaker 2: FED would probably stay in and around you know, the.

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Speaker 3: Current levels for the remainder of the years.

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Speaker 2: It's not out of the question that they raise rates

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Speaker 2: by maybe twenty five basis points or even fifty basis

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Speaker 2: points by the end of the year. But you know,

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Speaker 2: that's only going to really bring the recession you know forward,

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Speaker 2: if you will, we have a recession pencident for the

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Speaker 2: first half of twenty twenty four. That still seems like

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Speaker 2: the timeline that we're looking at. But broadly speaking, I

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Speaker 2: think a lot of the data that we're placing our

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Speaker 2: optimism on is backward looking, not forward looking.

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Speaker 1: Well, it's so important here the dynamics Katie Greifeld mentioned earlier,

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Speaker 1: the belly of the curve. Let's come in tight, not

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Speaker 1: five to seven years, but in that interesting two year

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Speaker 1: to five year space. What is your belief that we'll

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Speaker 1: see there. Do the high yields of a two year

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Speaker 1: one year space come out to high yields of a

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Speaker 1: four year five year space, or do we get relief.

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Speaker 2: I think that a lot of the repricing in the

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Speaker 2: FED funds market is going to be very much a

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Speaker 2: front end phenomena. That's part of the reason why we

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Speaker 2: don't really think that the tenure meaningfully rises about four percent.

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Speaker 2: I think we get close to four percent. It's going

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Speaker 2: to be a buying opportunity for bond investors that missed

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Speaker 2: their first opportunity earlier on this year to go long bonds.

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Speaker 2: But again, you know, the rise in yields, at least

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Speaker 2: in my view, is going to be much more of

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Speaker 2: a front end phenomena and not a long end phenomena.

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Speaker 2: And you're looking at the yield curve, you know, the

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Speaker 2: two stents part of the eeld curve is back near

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Speaker 2: negative hundred basis points or below. Again, that might be

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Speaker 2: our opportunity to think about reinitiating steepeners in the bond market,

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Speaker 2: because eventually, the more the Fed hikes, the more the

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Speaker 2: slowdown is going to be, and the Fed's going to

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Speaker 2: have to perhaps adjust policy during twenty twenty four.

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Speaker 4: So Poer, I am so excited to talk to you

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Speaker 4: about that two tens curve over one hundred basis points inverted,

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Speaker 4: and you say that you expect the yield curve to

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Speaker 4: gradually steep in, and that language masks a huge call

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Speaker 4: because if you expect the ten year yield to sort

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Speaker 4: of drop and then stay there, what does the front

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Speaker 4: end look like? How much do two year yields have

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Speaker 4: to plummet and how much does the FED have to

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Speaker 4: cut to get there?

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Speaker 3: So that's really a tricky question.

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Speaker 2: I think it's it's fair to say that the FED

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Speaker 2: could keep policy stable after getting to a certain level,

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Speaker 2: but beyond that, I think that the FED is very

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Speaker 2: committed to keeping policy higher for longer, and this time

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Speaker 2: around with inflation not just a US phenomena but a

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Speaker 2: global phenomena. I think that global center banks are going

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Speaker 2: to keep policy restrictive well into the first half of

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Speaker 2: next year. So in that sort of context, it makes

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Speaker 2: sense that the front end remains sticky and you don't

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Speaker 2: really see that dramatic repricing lower in the two year

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Speaker 2: part of the yel curve. That's why we're calling for

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Speaker 2: a very gradual resteepening of the yelk curve. Typically when

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Speaker 2: the FED pauses, you know, six months after that, you

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Speaker 2: tend to see the two stents part of the curve

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Speaker 2: steeping out meaningfully. This time around, that process is going

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Speaker 2: to be somewhat gradual. Also for the tenure.

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Speaker 3: We only have.

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Speaker 2: The tens getting to say three and a quarter by

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Speaker 2: the end of the of the year. That's not a

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Speaker 2: meaningful decline from where you are at the lows of

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Speaker 2: this year in tents. Again, the decline in yields is

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Speaker 2: going to be much more gradual across the curve in

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Speaker 2: this cycle as opposed to the past cycles.

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Speaker 4: So what gets us back to positive territory on the

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Speaker 4: twos tense curve if you have the two year kind

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Speaker 4: of anchored, I mean, what has to happen then at

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Speaker 4: the back half.

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Speaker 2: So we will I think eventually get to positive territory,

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Speaker 2: but it's going to be perhaps.

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Speaker 3: In twenty twenty four and not in twenty twenty three.

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Speaker 2: We have the two stands part of the curve you know,

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Speaker 2: steepening out, but you know, getting to only anywhere between

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Speaker 2: the negative fifteen negative twenty five basis points.

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Speaker 3: You know, by the end of the year. So the

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Speaker 3: steepening is going to be, you know, much more gradual.

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Speaker 2: But broadly speaking, you look at the broader economy, you

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Speaker 2: are going to start seeing the market respond to higher

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Speaker 2: interest rates. We did see some improvement in the housing

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Speaker 2: market in the in the last couple of months. If

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Speaker 2: you start seeing two start, you know ten, you're starting

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Speaker 2: to get towards four percent again, and mortgage it's start

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Speaker 2: to rise. You're going to see that impacting the housing

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Speaker 2: market and the broader interstate censor sectors of the economy.

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Speaker 3: Are going to respond to higher interstrates.

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Speaker 1: Sobrata, thank you for the brief. Really look forward to

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Speaker 1: talking to you in the twenty twenty three here on

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Speaker 1: the dynamics of fixed income. Sobrada Rajappa with a sack gen.

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Speaker 1: We decided to go to the only man in America

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Speaker 1: from sea to shining Sea that has not lost the

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Speaker 1: family arapods. Tom Forty joins us right now of Da Davison.

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Speaker 1: And what's important with this conversation, folks, is Forty's expert

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Speaker 1: on the chips, the wiring and all that. But he's

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Speaker 1: not a fanboy your neutral on Apple discuss all right.

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Speaker 5: I'm neutral.

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Speaker 6: I think that a lot of the good news is

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Speaker 6: already priced.

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Speaker 5: Into the stock.

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Speaker 6: So when you think about the Marshall three trillion, it's

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Speaker 6: mainly been in the back of the iPhone. The iPhone

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Speaker 6: continues to perform very well. But when you think of

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Speaker 6: the next trillion, and you think of vision pro and

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Speaker 6: augmented reality and virtual reality.

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Speaker 5: There are a lot of structural challenges.

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Speaker 6: Even for Apple started with price thirty four to ninety nine,

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Speaker 6: is not going to result in a mass produced, mass marketed,

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Speaker 6: mass adopted I am and Tom, I wish I could

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Speaker 6: tell you that I haven't washed many AirPods in my

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Speaker 6: washer dryer, well, many AirPods in the fourteen household.

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Speaker 1: Yeah, Cook and Lucas are working on that right now. Tom.

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Speaker 1: Everybody owns it. But I continue to read from pros

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Speaker 1: like you that Apple is institutionally under owned. On June

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Speaker 1: thirty is long only buyside out there going oh damn it,

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Speaker 1: I gotta buy it.

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Speaker 6: All right, So to that point, I think that's a

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Speaker 6: fair yes, And outside of Warren Buffett, where it's his

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Speaker 6: number one position, yes, it's probably under owned. From an

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Speaker 6: inters social standpoint, if you look at the basis points

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Speaker 6: holdings versus the index. They're likely a lot of equal

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Speaker 6: weights or some underweights out there and that's going to

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Speaker 6: negative affect their performance for the June quarter.

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Speaker 4: And Tom, I want to talk about the next trillion dollars.

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Speaker 4: I mean, you have a neutral rating on the stock.

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Speaker 4: It seems like you would say take a breather here.

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Speaker 4: But what's going to propel the next trillion is that

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Speaker 4: the Vision Pro.

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Speaker 6: Yes, and I would have told you that it was

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Speaker 6: the Vision Pro and at some point the Apple car,

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Speaker 6: But now I have concerns that if they make a car,

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Speaker 6: they're going to price it at two hundred thousand. So

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Speaker 6: I think that you know, the good news is that

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Speaker 6: the iPhone keeps on chugging on and that's still the

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Speaker 6: most important product right now, generates the largest percentage of

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Speaker 6: sales and profits, and it's still well positioned.

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Speaker 5: But I think to go.

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Speaker 6: From three to four, three to five, three to six,

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Speaker 6: we're going to have to see some sort of contribution

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Speaker 6: from the Vision Pro, potentially a car, new products, and

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Speaker 6: I think that's going to be challenging.

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Speaker 4: Can we talk about the price tag on the Vision

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Speaker 4: Pro because when they announced that there was a clip

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Speaker 4: that made its way through social media of people gasping

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Speaker 4: at that price town tag three four hundred ninety nine

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Speaker 4: dollars for that augmented reality headset.

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Speaker 7: Is that price going to have to come down?

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Speaker 5: So the answer is yes.

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Speaker 6: The question is did Apple tip off their strategy by

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Speaker 6: naming it the Vision pro So are they going to

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Speaker 6: have a lower price point ARVR headsite called Division not,

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Speaker 6: unlike they do with their laptops?

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Speaker 5: And I think that's a possibility. But I do think even.

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Speaker 6: For Apple to generate mass adoption, they're going to have

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Speaker 6: to have a lower priced offering. The good news is

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Speaker 6: for Meta Platforms they're three thousand dollars less.

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Speaker 5: So I do think to the.

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Speaker 6: Extent that Apple gets people excited about ARVR, that could

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Speaker 6: lean people to purchase the products from Meta Platforms, which

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Speaker 6: has one at four ninety nine.

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Speaker 4: And Tom, I know, oh you're neutral, but I want

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Speaker 4: to bring you the ball case. Of course, again that

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Speaker 4: city call getting a lot of attention, initiating coverage with

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Speaker 4: the buyer and talking about this underestimation of Apple's ability

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Speaker 4: to really protect and grow its margins. How are you

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Speaker 4: thinking about Apple's abilities when it comes to its margins.

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Speaker 5: So the story for.

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Speaker 6: Apple under tim Cook has been the rollout of higher

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Speaker 6: margin services, which has resulted.

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Speaker 5: In a higher multiple for the stock. Now, what the.

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Speaker 6: Analyst isn't pointing out is that on a short term basis,

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Speaker 6: we've seen pressure in the services revenue.

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Speaker 5: We've seen pressure in the advertising revenue.

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Speaker 6: So yes, I found sales have held up amazingly well

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Speaker 6: in a global, challenging macroeconomic environment, but the higher margin,

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Speaker 6: higher multiple causing services revenue has been under pressure. So

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Speaker 6: I think that's a little optimistic over the next twelve months.

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Speaker 1: O good time. I want to fold this into the

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Speaker 1: share buyback and the beliefs that they're going to show

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Speaker 1: up every day and buy four hundred and twenty two shares.

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Speaker 1: In an odd log from Fidelity dot com, Tom fourteen,

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Speaker 1: i got free cash flow out at one hundred and

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Speaker 1: eleven billion, basically a double pre COVID. I've got the

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Speaker 1: margin discussion that uber bulls like Ives and Mailekovert City

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Speaker 1: Group are talking about, and critically, Tom, I've got Apple

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Speaker 1: with four point one percent of capital is debt. Can't

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Speaker 1: these guys just keep going out and doing bond deals

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Speaker 1: and buying back share after share after share.

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Speaker 6: They certainly are cash register and generate tremendous free cash flow.

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Speaker 6: And yes, his Warren Buffets not buying the stock, Apples

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Speaker 6: certainly buying the stock.

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Speaker 5: And we'll see about.

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Speaker 6: Those institutional investors, Tom to see if they want to

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Speaker 6: ramp their portfolio to at least equal weight.

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Speaker 1: Are they deminimus? I mean, are they going to come

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Speaker 1: back and buy back so much shares? Is Tom? Is

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Speaker 1: Tim Cook going to privatize AAPL?

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Speaker 6: Maybe not privatize, but it does remind me of another

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Speaker 6: Warren Buffet investment being there where there was an extended

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Speaker 6: period of time where Dairy Queen had no new unit

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Speaker 6: growth but essentially bought back having to stop. So I

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Speaker 6: do think there's a potential that, given the free cash

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Speaker 6: flow Apple generates and that it is a cash right,

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Speaker 6: sure they're going to retire a lot more shares privatize.

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Speaker 1: I don't think so, and their folks. In the history

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Speaker 1: of Bloomberg Surveillance is the first time we've taken the

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Speaker 1: mother of all blue chip stocks and compared it to

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Speaker 1: Dairy Queen. Tom forty, thank you so much. With da Davidson, hugely,

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Speaker 1: hugely valuable. He's one of the greatest thinkers on Wall Street.

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Speaker 1: I mean this seriously. He's chief economist ubs Global Wealth Management,

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Speaker 1: far More, a student of the Pacific experiment of China

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Speaker 1: and America. Farmer as student of Brexit. Farmer's student of

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Speaker 1: continental Europe as well. We welcome Paul Donovan. It's been

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Speaker 1: way way to a love Paul. I love, love, love

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Speaker 1: your comments on CenTra. Everybody's out there pounding the inflation bendwagon.

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Speaker 1: You're with Ed Hyman, You're with David Rosenberg. Disinflation is

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Speaker 1: in place. Discuss well, we're seeing this inflation.

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Speaker 8: The three waves of inflation that we've had, the demand

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Speaker 8: shock after the pandemic, the supply shock of the war,

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Speaker 8: and then the profit led inflation. Wave one and Wave

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Speaker 8: two have gone. We've had six months of outright deflation

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Speaker 8: in endurable goods prices in the United States. Transitory inflation

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Speaker 8: was transitory energy prices fading completely from the picture. And

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Speaker 8: now what we're starting to see is this squeeze on

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Speaker 8: margins coming through. Now every country's got weird technical stuff

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Speaker 8: going on with its inflation numbers, which creates a little

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Speaker 8: bit of noise, a little bit of distortion. But just

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Speaker 8: draw up any inflation chart around the world and you

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Speaker 8: are seeing the numbers come out down. That's I think

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Speaker 8: the disinflation narrative is going to start to become a

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Speaker 8: bit more established.

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Speaker 4: I want to talk about profit lead inflation and how

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Speaker 4: that differs or is the same as what we're seeing

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Speaker 4: when it comes to margins. What's going to be the

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Speaker 4: biggest impulse in that disinflation that you're talking about. Is

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Speaker 4: it the margins decreasing or how does that actually translate through?

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Speaker 8: So profit led inflation, it's a bit of a weird terms.

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Speaker 8: It's really a relative price shift. To be very clear,

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Speaker 8: profit led inflation does not take place across the entire economy.

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Speaker 8: It takes place at the end of the supply chain.

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Speaker 8: It's with retailers with very strong corporate brands, so food brands,

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Speaker 8: clothing brands, people who are very very close to the consumer.

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Speaker 8: And what happens is you have stabilist demand and companies

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Speaker 8: find a good excuse to pass on a margin increase.

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Speaker 8: So if we look in the United States tail profit

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Speaker 8: margins as a share of retail GDP pre pandemic, those

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Speaker 8: are averaging about fourteen percent one four percent of GDP

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Speaker 8: now twenty one percent. So you've seen that margin expansion

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Speaker 8: coming through margin small companies. It's not just big business.

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Speaker 8: Small business does this as well. But what's now happening

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Speaker 8: is customers are saying, you know what, I don't believe

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Speaker 8: that story. I don't think that profit increase is necessarily

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Speaker 8: something I should be paying. I don't believe why prices

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Speaker 8: are going up. You're seeing more discernment amongst consumers. You're

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Speaker 8: seeing politicians start to get involved, and with that, with

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Speaker 8: the threat of brand damage, companies are starting to perhaps

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Speaker 8: be a bit more cautious on their margin expansion, and

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Speaker 8: with that that final stage of inflation is starting to

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Speaker 8: turn into this inflation refource.

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Speaker 1: Zima, what is your I mean, you're doing more of

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Speaker 1: a broader economic chit chat. I get there. But let's

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Speaker 1: play asset allocation. Now, what are you and UBS Global

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Speaker 1: Wealth Management say, after the bang upon market we've seen,

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Speaker 1: how do you recalibrate on an allocation basis in equities

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Speaker 1: into the second half of this year.

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Speaker 8: Well so, for the time being, equities for Arthur a

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Speaker 8: moderate underweight, because there is still this optimism about earnings

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Speaker 8: which perhaps needs to be looked at a little bit

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Speaker 8: around the world. There are some challenges. Remember, of course,

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Speaker 8: the equity market is more skewed towards the good sector

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Speaker 8: than the service sector. The economy is very very service

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Speaker 8: sector space focused. The equity market's a little bit more

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Speaker 8: good spacing, and there we're seeing more of the moderation

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Speaker 8: of demands, more of the disinflation pressure coming through. So

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Speaker 8: the macroeconomics are not creating a sort of a vibrant

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Speaker 8: equity market. I'm not saying it's a disaster. I'm just

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Speaker 8: saying it's something where I think equities are more likely

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Speaker 8: to underperform. And as central banks are confronted by an

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Speaker 8: inflation rate that continues to come down, then the expectations

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Speaker 8: about rates are going to assist as well. They can't

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Speaker 8: keep hiking inexorably. Even Powell has got to learn to

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Speaker 8: stop tiking policy at some point, and with that the

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Speaker 8: bond market gets a little bit more support.

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Speaker 1: Can we withstand higher yields? I mean, I get the

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Speaker 1: idea of your case and others very respectful ed heyman,

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Speaker 1: evercore Isi. I mean the basic idea here, Paul is

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Speaker 1: if we delay a disinflation, if we get some form

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Speaker 1: of higher rate regime, there's a belief out there we

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Speaker 1: all fall apart, says who.

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Speaker 8: Well, I'm a little bit skeptical about the idea that

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Speaker 8: we all fall apart. I have to say, I think

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Speaker 8: economies generally have become less interest rate sensitive, over time

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Speaker 8: monetary policy and to a lesser extent quantitative policy. They

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Speaker 8: become blunter tools in the range of options that a

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Speaker 8: central bank has got. So absolutely I think that there

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Speaker 8: is less likely to be a complete collapse. And what

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Speaker 8: we're going to remember is that when we look at economies,

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Speaker 8: it's the middle income consumer that's really the engine of

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Speaker 8: any advanced economy, and middle income consumers are actually doing okay,

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Speaker 8: they're more resilient. Now I'm not saying they're not slowing down.

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Speaker 8: They are slowing down, but with low unemployment, with rising

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Speaker 8: female participation in the workforce, very important point that, with

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Speaker 8: the fact that middle income consumers have a lower inflation

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Speaker 8: rate than headline consumer price inflation suggests on both sides

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Speaker 8: of the Atlantic, all of that combined is giving the

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Speaker 8: middle income consumer that little bit more firepower when it

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Speaker 8: comes to spending. Not enough to reverse a slowdown at

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Speaker 8: this stage, but enough to make sure that the slowdown

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Speaker 8: is not, in my view, going to be too severe.

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Speaker 4: Well, Paul, maybe the economy has become less interest rate sensitive,

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Speaker 4: as you say, And if that's the case, does that

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Speaker 4: mean the FED ultimately has to go higher on the

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Speaker 4: terminal than cycles previous? I mean, if the upper bound

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Speaker 4: right now is at five and a quarter percent, do

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Speaker 4: we need to go above six to really pull down

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Speaker 4: the final areas of the economy that are still pretty

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Speaker 4: hot at this point.

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Speaker 8: I think that's a very very difficult question because I

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Speaker 8: think you need to sort of pause and reflect on

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Speaker 8: what is changing and what isn't changing in the economy.

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Speaker 8: I mean, this is why the sort of relentless chance

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Speaker 8: of hike hike hikes that comes out of the fanatics

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Speaker 8: that the said is really quite troubling. You know, stop

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Speaker 8: and think for a moment, guys, because I think what

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Speaker 8: you've got to assess is, Okay, well, look the transport sector,

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Speaker 8: LEO travel and so on. That's not necessarily changing. There

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Speaker 8: is this fanatical desire to go on vacation all the time. Well, actually,

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Speaker 8: then perhaps you've got a totally different world emerging post

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Speaker 8: pandemic in that sector. But then look at the deflation

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Speaker 8: that's coming through endurable goods, So we've got something different

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Speaker 8: going on there. So I think you've got to balance

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Speaker 8: this out and consider what relative prices are doing as

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Speaker 8: well as the aggregate. How much of this is the

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Speaker 8: fiction of owner's equivalent rent, which we know is going

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Speaker 8: to be coming down in the future. Again an important factor.

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Speaker 8: I think that the central banks also need to broaden

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Speaker 8: their thought. I mean, they've got conversative policy as an

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Speaker 8: additional weapon. They've also got regulatory policy, and of course

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Speaker 8: that's going to become a topic in the United States

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Speaker 8: if you start to Tyson bank regulation in the wake

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Speaker 8: of the implosion of Silicon Valley Bank, that is going

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Speaker 8: to be something which is going to have a cooling

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Speaker 8: aspect on the economy as well.

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Speaker 1: Paul Donovan, thank you so much. With UBS Global Wealth Management.

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Speaker 1: Part of the collective memory that John and I have

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Speaker 1: about bulls and bears is people that are out switch

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Speaker 1: their mind and get it right. One of those is

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Speaker 1: Max Kuttner, chie's anti asset strategist at HFCC. We joined

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Speaker 1: him in London ages ago and he said, you know what, up,

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Speaker 1: we get a brief today from the gentleman who got

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Speaker 1: this really right. Max, give us a redo here. How

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Speaker 1: have you recalibrated for Q three of twenty twenty three. Yeah,

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Speaker 1: good morning, Tom.

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Speaker 9: Not an awful lot really, because from a fundamental perspective,

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Speaker 9: I don't think an awful lot really has changed yet.

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Speaker 9: When we look actually at the US economy, I think,

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Speaker 9: particularly against initial expectations, the US economy is just doing fine.

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Speaker 9: The consumers doing fine, the services sector is fine. Look

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Speaker 9: at all the concerns we had around the housing sector,

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Speaker 9: around commercial real estate. The reality is I think you

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Speaker 9: guys at Bloomberg are running one of those surprise and

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Speaker 9: disease about the US housing and in real estate activity,

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Speaker 9: and that's on a twenty year high, right, So the

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Speaker 9: US economy is really doing fine. So quite frankly, I

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Speaker 9: don't think those recession calls that we're still having for

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Speaker 9: Q three and Q four and in particular for you,

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Speaker 9: for the US economy, that these recession calls are really

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Speaker 9: really going to come to fruition. I really do think

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Speaker 9: that those recession calls will continue to be misplaced, and

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Speaker 9: if anything, the risk is that things are continuing to

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Speaker 9: be much much better than expected and that we will

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Speaker 9: have another sort of short end rate repricing.

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Speaker 1: Mex Curtner fold in here the linkage of economics to

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Speaker 1: the markets, which I'm going to take through nominal GDP.

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Speaker 1: If we have a persistent inflation or dare I say,

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Speaker 1: even a breakout higher in rates on a broad global basis,

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Speaker 1: and if we get some form of real GDP like

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Speaker 1: the surprise of America, does that provide persistency to corporate

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Speaker 1: revenues forward? Yeah? I think it does.

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Speaker 9: When we look at earnings, actually at earnings growth over

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Speaker 9: the last thirty forty years, you overlay that with things

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Speaker 9: like headline inflation, you know, that usually does provide some

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Speaker 9: tailwent because as you said, right, this is the discussion

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Speaker 9: that we should be focused on much much more rather

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Speaker 9: than looking at you know, credit crunches and commercial real

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Speaker 9: estate and death seiling and you know, in effect really

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Speaker 9: some sort of when's the recession finally going to hit?

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Speaker 9: Instead of that, we should be talking much more about, well,

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Speaker 9: do we really care right now about real GDP growth?

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Speaker 9: Or as an investor, like you were saying, right, the

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Speaker 9: connection to markets is real versus nominal and in effect,

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Speaker 9: really we should be caring much much more about nominal

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Speaker 9: growth nominal earnings and they're growing just fine. And think

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Speaker 9: about Q two, the Q two reporting season that's going

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Speaker 9: to start in a couple of weeks. Consensus expectations again

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Speaker 9: are only for flat growth Q two over Q on

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Speaker 9: they are you know, they've been massively downgraded for cyclical sectors,

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Speaker 9: the sectors like consumer, discretionary, energy, and materials. Even tech, right,

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Speaker 9: even the tech earnings expectations have been downgraded by more

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Speaker 9: than ten percent in the last five months. So I

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Speaker 9: do struggle to see a big, big decline or a

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Speaker 9: big big downside surprise in earnings, particularly now in the

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Speaker 9: in the Q two reporting season.

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Speaker 4: We let's talk about the next half of the year

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Speaker 4: that we're sailing into. I want to talk a little

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Speaker 4: bit about the expectations for the relative asset classes. Of course,

436
00:23:55,880 --> 00:23:58,000
Speaker 4: there was a lot of doom and gloom about the

437
00:23:58,040 --> 00:24:00,560
Speaker 4: corporate earnings picture, and this was really supposed to be

438
00:24:00,640 --> 00:24:03,000
Speaker 4: the year of the bond, the year of fixed income.

439
00:24:03,000 --> 00:24:06,280
Speaker 4: It looks like it just turned into another year for equity,

440
00:24:06,400 --> 00:24:10,879
Speaker 4: specifically another year for big tech. Is that the dynamic

441
00:24:10,920 --> 00:24:12,679
Speaker 4: heading into the second half is that how we're going

442
00:24:12,760 --> 00:24:13,920
Speaker 4: to end twenty twenty three.

443
00:24:15,720 --> 00:24:17,199
Speaker 9: I think, well, I'm going to give you the classic

444
00:24:17,200 --> 00:24:20,280
Speaker 9: strategist answer yes and no, and it depends I think

445
00:24:20,320 --> 00:24:22,320
Speaker 9: what it's going to be is I think at the

446
00:24:22,359 --> 00:24:25,080
Speaker 9: beginning of Q three, I think, Katie, you're correct, it's

447
00:24:25,119 --> 00:24:27,520
Speaker 9: going to be more of the same, right, more sort

448
00:24:27,520 --> 00:24:30,720
Speaker 9: of growthy, you know, the kind of goldilocks environment where

449
00:24:30,720 --> 00:24:34,000
Speaker 9: we're in right now, because growth is fine, inflation, headline

450
00:24:34,000 --> 00:24:37,359
Speaker 9: inflation is still going down, so that's sort of really

451
00:24:37,400 --> 00:24:40,960
Speaker 9: really goldilocks y. The problem I think will come in

452
00:24:41,080 --> 00:24:45,520
Speaker 9: late summer towards Q four when we realize, look, inflation

453
00:24:45,600 --> 00:24:48,879
Speaker 9: could and particularly headline inflation in the US could start

454
00:24:48,920 --> 00:24:51,760
Speaker 9: to pick up again because some of those energy based

455
00:24:51,760 --> 00:24:55,199
Speaker 9: effects will fade, right, they will converge to zero. So

456
00:24:55,200 --> 00:24:57,120
Speaker 9: we're going to have a bit of a mechanical posh

457
00:24:57,200 --> 00:25:00,600
Speaker 9: higher for headline inflation again. And that and of course

458
00:25:00,880 --> 00:25:03,960
Speaker 9: the economy doing much much better, and that in my mind,

459
00:25:04,040 --> 00:25:07,680
Speaker 9: really will then favor value of a growth So that

460
00:25:07,760 --> 00:25:10,680
Speaker 9: will then really make a switch from those big tech

461
00:25:10,800 --> 00:25:15,280
Speaker 9: names into the more value and short duration names towards

462
00:25:15,320 --> 00:25:17,359
Speaker 9: the end of the summer and into the poll.

463
00:25:17,760 --> 00:25:20,800
Speaker 4: How do valuations factor into that call for this rally

464
00:25:21,000 --> 00:25:24,120
Speaker 4: to broaden out outside of just you know, megacap tech,

465
00:25:24,160 --> 00:25:25,919
Speaker 4: which has absolutely been dominating.

466
00:25:27,400 --> 00:25:31,200
Speaker 9: The short answer is not at all, nothing, Right, Valuations

467
00:25:31,240 --> 00:25:34,080
Speaker 9: don't matter, right, They really really don't matter to me

468
00:25:34,280 --> 00:25:35,639
Speaker 9: at all. In the short term.

469
00:25:35,760 --> 00:25:36,800
Speaker 3: If we're talking about.

470
00:25:36,600 --> 00:25:38,600
Speaker 9: The next seven to ten years, they are the thing

471
00:25:38,640 --> 00:25:40,680
Speaker 9: that should matter the most. If we're talking about the

472
00:25:40,720 --> 00:25:43,439
Speaker 9: next three to six months, they are quite frankly a

473
00:25:43,560 --> 00:25:45,960
Speaker 9: random number. If you look at you know, the explanatory

474
00:25:45,960 --> 00:25:50,480
Speaker 9: power of both outright and absolute valuations of equities and

475
00:25:50,520 --> 00:25:54,199
Speaker 9: also relative valuations things like equity risk premium, and the

476
00:25:54,240 --> 00:25:56,960
Speaker 9: explanatory power with sort of six to twelve month performance,

477
00:25:57,280 --> 00:26:00,399
Speaker 9: it is somewhat between two to three percent, So they

478
00:26:00,440 --> 00:26:03,520
Speaker 9: don't really matter, right. So to me, the valuation side

479
00:26:03,520 --> 00:26:04,920
Speaker 9: of things, they don't really matter.

480
00:26:04,960 --> 00:26:05,359
Speaker 3: It's more the.

481
00:26:05,440 --> 00:26:10,280
Speaker 9: Inflation and the rates trajectory, right, and particularly inflation, the

482
00:26:10,359 --> 00:26:14,040
Speaker 9: sticky inflation part that matters for the next six months.

483
00:26:14,040 --> 00:26:17,359
Speaker 1: The left tail outlier right now, and we covered this

484
00:26:17,480 --> 00:26:20,640
Speaker 1: yesterday Max Kutner with an important essay by William Dudley,

485
00:26:20,640 --> 00:26:23,600
Speaker 1: the former president of the New York fedoh modeled out

486
00:26:23,640 --> 00:26:27,040
Speaker 1: of four and a half percent US tenure. But the

487
00:26:27,119 --> 00:26:31,200
Speaker 1: thing that no one's predicting is a higher interest rate

488
00:26:31,280 --> 00:26:35,000
Speaker 1: regime that goes against Steve Major, that goes against David

489
00:26:35,000 --> 00:26:38,800
Speaker 1: Blom and a lot of the HSBC research heritage. Are

490
00:26:38,840 --> 00:26:42,840
Speaker 1: you guys prepared for the possibility of higher interest rates?

491
00:26:44,560 --> 00:26:46,280
Speaker 9: Not quite yet, because I think we're still in this

492
00:26:46,359 --> 00:26:49,119
Speaker 9: goldilocks environment right where you know, yields are sort of

493
00:26:49,160 --> 00:26:52,960
Speaker 9: peeped from last year. I think it is really a

494
00:26:53,040 --> 00:26:55,160
Speaker 9: risk for the second half. It's not a base case.

495
00:26:55,160 --> 00:26:57,280
Speaker 9: It is a risk, though not on the long end,

496
00:26:57,400 --> 00:27:00,720
Speaker 9: more on the front end, because let's remember that, you know,

497
00:27:00,800 --> 00:27:03,919
Speaker 9: futures are still pricing around one hundred and fifty basis

498
00:27:03,920 --> 00:27:06,520
Speaker 9: points of rate cuts between the end of this year

499
00:27:06,640 --> 00:27:09,119
Speaker 9: and the end of next year, so it is really

500
00:27:09,160 --> 00:27:12,480
Speaker 9: one of those risks. I think that if the majority

501
00:27:12,520 --> 00:27:14,400
Speaker 9: of those rate cuts will be sort of pushed into

502
00:27:14,440 --> 00:27:17,320
Speaker 9: twenty twenty five, not saying that there won't be any

503
00:27:17,400 --> 00:27:19,800
Speaker 9: rate cuts at all next year, but if the market

504
00:27:19,840 --> 00:27:24,000
Speaker 9: temporarily shifts its expectations, you know, from twenty twenty four

505
00:27:24,160 --> 00:27:28,680
Speaker 9: into twenty twenty five, that has massive, massive implications from

506
00:27:28,720 --> 00:27:31,600
Speaker 9: an asset of location perspective, because what we just talked

507
00:27:31,600 --> 00:27:34,560
Speaker 9: about in that environment, if that risk does, if that

508
00:27:34,680 --> 00:27:38,520
Speaker 9: tail risk, that left hand side risk really does pan out,

509
00:27:38,880 --> 00:27:42,359
Speaker 9: you really absolutely don't want to be in growth names.

510
00:27:42,440 --> 00:27:45,200
Speaker 9: You want to be shifting into the value names, perhaps

511
00:27:45,280 --> 00:27:49,080
Speaker 9: even into the cyclical value names, rather than re having

512
00:27:49,160 --> 00:27:51,520
Speaker 9: the long duration and tech assets.

513
00:27:51,880 --> 00:27:54,320
Speaker 1: Max Cutner, thank you so much for the June thirty brief.

514
00:27:54,440 --> 00:28:08,960
Speaker 1: Mister Cuttner is with HSBC. But what's far more important

515
00:28:09,160 --> 00:28:14,000
Speaker 1: is there some serious ramifications to this airline mess up.

516
00:28:14,200 --> 00:28:18,280
Speaker 1: We address this now. The Points Guy, let's just be blunt.

517
00:28:18,320 --> 00:28:21,720
Speaker 1: He changed the way all of his travel absolutely revolutionary,

518
00:28:22,240 --> 00:28:25,480
Speaker 1: so much so that Clint Anderson was an iconic guy

519
00:28:26,040 --> 00:28:28,600
Speaker 1: and all sorts of TV metrics doing the charade that

520
00:28:28,640 --> 00:28:31,600
Speaker 1: we do every day. Clint Anderson said, no, I want

521
00:28:31,600 --> 00:28:33,720
Speaker 1: to get frequent fires on Alaska Era. I'm going to

522
00:28:33,800 --> 00:28:36,560
Speaker 1: join with Brian. How did you get to the Points Guy?

523
00:28:36,640 --> 00:28:38,680
Speaker 1: How did they drag someone as the famous as you

524
00:28:38,840 --> 00:28:42,960
Speaker 1: and MSNBC over to a real job with the Points Guy.

525
00:28:43,040 --> 00:28:44,920
Speaker 10: Well, you know, the Points Guy is obsessed with points

526
00:28:44,920 --> 00:28:48,160
Speaker 10: and miles. That's always been ours sort of DNA, but

527
00:28:48,400 --> 00:28:51,400
Speaker 10: over the years we've expanded into a full media brand,

528
00:28:51,440 --> 00:28:53,080
Speaker 10: and so they wanted somebody who had a little bit

529
00:28:53,120 --> 00:28:54,880
Speaker 10: of media experience to come in. So that's sort of

530
00:28:54,920 --> 00:28:56,720
Speaker 10: where I came in. And it was right before COVID,

531
00:28:57,120 --> 00:28:58,960
Speaker 10: and so it was the perfect timing because I was

532
00:28:59,000 --> 00:29:00,440
Speaker 10: able to help drive this news.

533
00:29:00,960 --> 00:29:03,960
Speaker 1: Was this expected? I'm going to suggest that the thebaccle

534
00:29:04,040 --> 00:29:07,680
Speaker 1: of fourth of July weekend in America is new and original.

535
00:29:07,720 --> 00:29:08,560
Speaker 1: Do I have that right?

536
00:29:08,760 --> 00:29:12,920
Speaker 10: So Unfortunately, since COVID, we've seen this holiday after holiday.

537
00:29:12,920 --> 00:29:15,520
Speaker 10: We got through Memorial Day, but remember Christmas time was

538
00:29:15,560 --> 00:29:18,720
Speaker 10: a mess. We had a real mess last summer. At

539
00:29:18,720 --> 00:29:21,800
Speaker 10: the time, we were blaming airline staffing, so there wasn't

540
00:29:21,880 --> 00:29:24,840
Speaker 10: enough pilots and flight attendants. Now it seems like they've

541
00:29:24,840 --> 00:29:26,520
Speaker 10: been able to higher up. But now it's the air

542
00:29:26,520 --> 00:29:29,920
Speaker 10: traffic controller issue that's really helping to drive this. You know,

543
00:29:30,000 --> 00:29:33,200
Speaker 10: thunderstorms are a normal part of summer. We should be

544
00:29:33,240 --> 00:29:36,640
Speaker 10: planning for that. Unfortunately, the airlines are scheduled really tight

545
00:29:36,720 --> 00:29:39,760
Speaker 10: right now, as if there's no such thing as thunderstorm.

546
00:29:39,840 --> 00:29:43,040
Speaker 10: So there's blame to go around. But the air traffic

547
00:29:43,080 --> 00:29:45,400
Speaker 10: controller shortage is a real issue.

548
00:29:45,000 --> 00:29:47,760
Speaker 4: A real issue. And talk about the demand picture too.

549
00:29:47,840 --> 00:29:50,680
Speaker 4: Obviously a lot of people want to fly right now,

550
00:29:50,680 --> 00:29:53,400
Speaker 4: which is maybe why that shortage with the air traffic

551
00:29:53,400 --> 00:29:54,960
Speaker 4: controllers is really being felt.

552
00:29:55,160 --> 00:29:57,280
Speaker 10: Yeah, you know what's really interesting. Business travel has not

553
00:29:57,440 --> 00:29:59,840
Speaker 10: fully recovered yet, But it's been more than made up

554
00:29:59,840 --> 00:30:03,760
Speaker 10: for by leisure travel. So the demand is insane. And

555
00:30:03,800 --> 00:30:06,520
Speaker 10: remember during COVID, the airline's cut back on the number

556
00:30:06,720 --> 00:30:08,920
Speaker 10: of flights, in the number of seats that are for sale,

557
00:30:09,320 --> 00:30:11,880
Speaker 10: and people decided during COVID, I'm going to travel. I

558
00:30:11,880 --> 00:30:14,120
Speaker 10: don't care what happens. And that's what we're seeing. We're

559
00:30:14,120 --> 00:30:16,760
Speaker 10: seeing that pent up demand and people who decided that's

560
00:30:16,760 --> 00:30:18,720
Speaker 10: going to be a way of life for themselves.

561
00:30:18,520 --> 00:30:19,120
Speaker 7: Well your life.

562
00:30:19,400 --> 00:30:22,960
Speaker 4: It's interesting though that business travel hasn't really caught up,

563
00:30:23,000 --> 00:30:25,160
Speaker 4: and I do want to talk about the summer travel season,

564
00:30:25,200 --> 00:30:28,160
Speaker 4: but with business travel, I mean, is that coming back

565
00:30:28,240 --> 00:30:30,920
Speaker 4: or when can we officially declare we're not going back

566
00:30:30,960 --> 00:30:32,000
Speaker 4: to twenty nineteen.

567
00:30:32,120 --> 00:30:34,360
Speaker 10: So it really depends on who you ask. We're sort

568
00:30:34,400 --> 00:30:37,520
Speaker 10: of eighty percent level of business travel. I don't think

569
00:30:37,560 --> 00:30:41,080
Speaker 10: it returns fully ever. I think people have learned how

570
00:30:41,080 --> 00:30:45,320
Speaker 10: to do zoom meetings. Companies have realized it's really expensive

571
00:30:45,360 --> 00:30:47,920
Speaker 10: to send employees around and they don't necessarily need to

572
00:30:48,000 --> 00:30:48,640
Speaker 10: in all cases.

573
00:30:48,680 --> 00:30:50,880
Speaker 1: So I think that's what you're seeing on a planning basis.

574
00:30:51,000 --> 00:30:53,640
Speaker 1: And the points guy is a concept. I mean, you

575
00:30:53,680 --> 00:30:56,840
Speaker 1: guys reinvented how we travel the whole keep track at

576
00:30:56,840 --> 00:30:59,360
Speaker 1: your miles racket and the charge cards and all that.

577
00:31:00,040 --> 00:31:02,160
Speaker 1: But what if I'm fascinating here. It's the same old,

578
00:31:02,200 --> 00:31:05,360
Speaker 1: same mold. We have limited airports, limited gates. We have

579
00:31:05,400 --> 00:31:08,880
Speaker 1: a major argument between gates at JFK and Newark. Just

580
00:31:09,480 --> 00:31:13,120
Speaker 1: is one discussion point. I'll even pull a LaGuardia on it.

581
00:31:13,720 --> 00:31:16,080
Speaker 1: And then we got air traffic controllers. Now I look

582
00:31:16,080 --> 00:31:18,360
Speaker 1: out on the web and they're making one hundred and

583
00:31:18,360 --> 00:31:21,000
Speaker 1: thirty one hundred and fifty thousand dollars a year. So

584
00:31:21,080 --> 00:31:23,360
Speaker 1: I'm up in the air and there's a guy with

585
00:31:23,480 --> 00:31:26,720
Speaker 1: seven lights on a radar screen, and I look at

586
00:31:26,760 --> 00:31:29,240
Speaker 1: the pilots that were complaining, and they make sixty grand

587
00:31:29,240 --> 00:31:32,520
Speaker 1: a year, which is like a bar worse than a bartender.

588
00:31:33,000 --> 00:31:36,360
Speaker 1: I don't get the salary structure we're complaining about. Shouldn't

589
00:31:36,400 --> 00:31:40,240
Speaker 1: we just pay the air traffic controllers more? Shouldn't we

590
00:31:40,440 --> 00:31:44,520
Speaker 1: just pay the pilots more to solve this labor conundrum.

591
00:31:44,560 --> 00:31:45,840
Speaker 7: I think that would help solve it.

592
00:31:45,880 --> 00:31:48,000
Speaker 10: But that's going to cut into the airline's bottom line,

593
00:31:48,120 --> 00:31:51,120
Speaker 10: and they don't necessarily want to do that. Air traffic controllers.

594
00:31:51,200 --> 00:31:54,000
Speaker 10: That's a good middle class, solid job that you could

595
00:31:54,280 --> 00:31:56,880
Speaker 10: end up doing very well. I'm not sure why it's

596
00:31:56,880 --> 00:32:00,640
Speaker 10: not an attractive option for young people. I think they're

597
00:32:00,680 --> 00:32:03,440
Speaker 10: trying to do some recruiting at colleges and places like that,

598
00:32:03,600 --> 00:32:05,040
Speaker 10: but it's tough to get people in.

599
00:32:05,720 --> 00:32:08,600
Speaker 1: Okay, but I don't buy this. If Kirby was here

600
00:32:08,680 --> 00:32:11,040
Speaker 1: or Bastian was here, yeah, i'd say, look, you guys

601
00:32:11,040 --> 00:32:12,800
Speaker 1: are fancy. I get it, you want to make your

602
00:32:12,800 --> 00:32:16,800
Speaker 1: profits and all that. The fact is on this Friday

603
00:32:17,480 --> 00:32:19,880
Speaker 1: or I think at Bramo, she's probably down in Atlanta

604
00:32:19,960 --> 00:32:23,240
Speaker 1: right now at Heartsfeld's sleeping on a floor somewhere. Why

605
00:32:23,280 --> 00:32:26,200
Speaker 1: are we acting like a third world country where we've

606
00:32:26,200 --> 00:32:29,880
Speaker 1: got families with kids sleeping on the floor in the

607
00:32:29,920 --> 00:32:33,480
Speaker 1: new terminal A at Nork. That's a good policy for

608
00:32:33,560 --> 00:32:34,280
Speaker 1: these airlines.

609
00:32:34,320 --> 00:32:36,960
Speaker 10: Totally unacceptable, and that's why, as consumer advocates are the

610
00:32:36,960 --> 00:32:40,440
Speaker 10: points guy. My own personal opinion is that we should

611
00:32:40,480 --> 00:32:42,840
Speaker 10: have some kind of passenger bill of rights. Now, there

612
00:32:42,920 --> 00:32:45,520
Speaker 10: is a passenger Bill of Rights being proposed by Senators

613
00:32:45,560 --> 00:32:49,080
Speaker 10: Markey and Blumenthal. Even though even if that was passed,

614
00:32:49,080 --> 00:32:52,440
Speaker 10: though which is unlikely, the problem is it doesn't cover

615
00:32:52,520 --> 00:32:54,760
Speaker 10: for weather, so the airlines always have wiggle room when

616
00:32:54,760 --> 00:32:56,560
Speaker 10: it comes to weather. They can say, oh, well, that

617
00:32:56,640 --> 00:32:59,560
Speaker 10: chain reaction started because of a storm on Tuesday, so

618
00:32:59,560 --> 00:33:03,080
Speaker 10: we don't have to compensate passengers. I think maybe something

619
00:33:03,120 --> 00:33:04,440
Speaker 10: stronger needs to be in place.

620
00:33:04,760 --> 00:33:07,840
Speaker 7: Is there any blueprint for that? Though? Maybe it doesn't

621
00:33:07,840 --> 00:33:08,680
Speaker 7: exist in the US.

622
00:33:08,720 --> 00:33:11,280
Speaker 4: But when you look overseas, I mean, how is that

623
00:33:11,320 --> 00:33:12,000
Speaker 4: handled there?

624
00:33:12,120 --> 00:33:14,320
Speaker 10: I would love to see something pass in the US

625
00:33:14,320 --> 00:33:16,040
Speaker 10: like EU two sixty one compensation.

626
00:33:16,120 --> 00:33:17,480
Speaker 1: What those So?

627
00:33:17,560 --> 00:33:21,760
Speaker 10: Basically, if a flight is delayed extreme amounts from three

628
00:33:21,840 --> 00:33:24,920
Speaker 10: to six hours, or it's canceled, the airlines have to

629
00:33:24,960 --> 00:33:29,360
Speaker 10: compensate passengers in almost all cases. I personally benefited from

630
00:33:29,400 --> 00:33:31,960
Speaker 10: this with an American Airlines flight from Europe. But here's

631
00:33:32,000 --> 00:33:34,680
Speaker 10: the issue. There is an exception for whether in those

632
00:33:34,720 --> 00:33:35,600
Speaker 10: cases as well.

633
00:33:36,040 --> 00:33:38,080
Speaker 4: Even still, I mean, a lot of people would make

634
00:33:38,120 --> 00:33:40,239
Speaker 4: a lot of money when you think about just the

635
00:33:40,280 --> 00:33:43,640
Speaker 4: cancelations that we've seen. Let's talk about this summer though,

636
00:33:43,680 --> 00:33:46,040
Speaker 4: because even with the conditions that we're talking about, I mean,

637
00:33:46,040 --> 00:33:49,600
Speaker 4: the demand is off the charts, especially internationally. I mean

638
00:33:49,600 --> 00:33:53,040
Speaker 4: you've heard several airlines talk up what they expect to

639
00:33:53,040 --> 00:33:57,440
Speaker 4: see in terms of overseas travel. Is that actually going

640
00:33:57,480 --> 00:33:58,480
Speaker 4: to materialize?

641
00:33:58,600 --> 00:33:59,240
Speaker 1: Absolutely.

642
00:33:59,600 --> 00:34:02,600
Speaker 10: You see two thousand dollars flights from New York to Rome,

643
00:34:02,880 --> 00:34:04,920
Speaker 10: you know something's up. And I think part of the

644
00:34:04,960 --> 00:34:08,200
Speaker 10: issue is they've reduced the number and frequency of flights,

645
00:34:08,520 --> 00:34:12,399
Speaker 10: and so what's happening is those seats are very much

646
00:34:12,400 --> 00:34:14,840
Speaker 10: in demand in prices are spiking. But there is deals

647
00:34:14,880 --> 00:34:17,200
Speaker 10: out there. I promise you every day we publish a

648
00:34:17,200 --> 00:34:19,239
Speaker 10: deal at the Point Skuy and there are deals to

649
00:34:19,280 --> 00:34:20,239
Speaker 10: bed click.

650
00:34:20,239 --> 00:34:23,080
Speaker 1: Come on, you're a grizzle media proble. What's Katie doing here?

651
00:34:25,360 --> 00:34:29,760
Speaker 1: Showing it? Subscribe to the Bloomberg Surveillance podcast on Apple,

652
00:34:29,960 --> 00:34:34,160
Speaker 1: Spotify and anywhere else you get your podcasts. Listen live

653
00:34:34,320 --> 00:34:38,680
Speaker 1: every weekday starting at seven am Eastern on Bloomberg dot Com,

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Speaker 1: the iHeartRadio app tune In, and the Bloomberg Business app.

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Speaker 1: You can watch us live on Bloomberg Television and always

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Speaker 1: on the Bloomberg Terminal. Thanks for listening. I'm Tom Keane,

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Speaker 1: and this is Bloomberg