Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
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Speaker 1: joins us right now. My head is spinning here on
Speaker 1: equities and even more so on bonds as well. Sot
Speaker 1: of the fact is a lot of yields are moving
Speaker 1: up here. I'm looking at the ten year real yield
Speaker 1: in the US and is sobering. What are the ramifications
Speaker 1: to you in SoC gen If we see the ten
Speaker 1: year real yield breakout to new highs.
Speaker 2: Well, I think that the impact is going to be
Speaker 2: felt not just in the bond market, but broadly speaking
Speaker 2: in all risky assets. Right, we're starting to recalibrate to
Speaker 2: a much stronger economy, but a lot of the data
Speaker 2: that we're looking at, like the first quarter GDP, the
Speaker 2: second take or third take is backward looking, right, So
Speaker 2: we have to be looking at forward looking indicators, and
Speaker 2: if we are if the FED word raised rates by
Speaker 2: fifty basis points or more, then I think that you're
Speaker 2: going to see that feed through even more sharply into
Speaker 2: the broader economy.
Speaker 3: So the forward looking data has the potential.
Speaker 2: To be meaningfully weaker if the FED, you know, continues
Speaker 2: to hike rates. I mean, our call is that the
Speaker 2: FED would probably stay in and around you know, the.
Speaker 3: Current levels for the remainder of the years.
Speaker 2: It's not out of the question that they raise rates
Speaker 2: by maybe twenty five basis points or even fifty basis
Speaker 2: points by the end of the year. But you know,
Speaker 2: that's only going to really bring the recession you know forward,
Speaker 2: if you will, we have a recession pencident for the
Speaker 2: first half of twenty twenty four. That still seems like
Speaker 2: the timeline that we're looking at. But broadly speaking, I
Speaker 2: think a lot of the data that we're placing our
Speaker 2: optimism on is backward looking, not forward looking.
Speaker 1: Well, it's so important here the dynamics Katie Greifeld mentioned earlier,
Speaker 1: the belly of the curve. Let's come in tight, not
Speaker 1: five to seven years, but in that interesting two year
Speaker 1: to five year space. What is your belief that we'll
Speaker 1: see there. Do the high yields of a two year
Speaker 1: one year space come out to high yields of a
Speaker 1: four year five year space, or do we get relief.
Speaker 2: I think that a lot of the repricing in the
Speaker 2: FED funds market is going to be very much a
Speaker 2: front end phenomena. That's part of the reason why we
Speaker 2: don't really think that the tenure meaningfully rises about four percent.
Speaker 2: I think we get close to four percent. It's going
Speaker 2: to be a buying opportunity for bond investors that missed
Speaker 2: their first opportunity earlier on this year to go long bonds.
Speaker 2: But again, you know, the rise in yields, at least
Speaker 2: in my view, is going to be much more of
Speaker 2: a front end phenomena and not a long end phenomena.
Speaker 2: And you're looking at the yield curve, you know, the
Speaker 2: two stents part of the eeld curve is back near
Speaker 2: negative hundred basis points or below. Again, that might be
Speaker 2: our opportunity to think about reinitiating steepeners in the bond market,
Speaker 2: because eventually, the more the Fed hikes, the more the
Speaker 2: slowdown is going to be, and the Fed's going to
Speaker 2: have to perhaps adjust policy during twenty twenty four.
Speaker 4: So Poer, I am so excited to talk to you
Speaker 4: about that two tens curve over one hundred basis points inverted,
Speaker 4: and you say that you expect the yield curve to
Speaker 4: gradually steep in, and that language masks a huge call
Speaker 4: because if you expect the ten year yield to sort
Speaker 4: of drop and then stay there, what does the front
Speaker 4: end look like? How much do two year yields have
Speaker 4: to plummet and how much does the FED have to
Speaker 4: cut to get there?
Speaker 3: So that's really a tricky question.
Speaker 2: I think it's it's fair to say that the FED
Speaker 2: could keep policy stable after getting to a certain level,
Speaker 2: but beyond that, I think that the FED is very
Speaker 2: committed to keeping policy higher for longer, and this time
Speaker 2: around with inflation not just a US phenomena but a
Speaker 2: global phenomena. I think that global center banks are going
Speaker 2: to keep policy restrictive well into the first half of
Speaker 2: next year. So in that sort of context, it makes
Speaker 2: sense that the front end remains sticky and you don't
Speaker 2: really see that dramatic repricing lower in the two year
Speaker 2: part of the yel curve. That's why we're calling for
Speaker 2: a very gradual resteepening of the yelk curve. Typically when
Speaker 2: the FED pauses, you know, six months after that, you
Speaker 2: tend to see the two stents part of the curve
Speaker 2: steeping out meaningfully. This time around, that process is going
Speaker 2: to be somewhat gradual. Also for the tenure.
Speaker 3: We only have.
Speaker 2: The tens getting to say three and a quarter by
Speaker 2: the end of the of the year. That's not a
Speaker 2: meaningful decline from where you are at the lows of
Speaker 2: this year in tents. Again, the decline in yields is
Speaker 2: going to be much more gradual across the curve in
Speaker 2: this cycle as opposed to the past cycles.
Speaker 4: So what gets us back to positive territory on the
Speaker 4: twos tense curve if you have the two year kind
Speaker 4: of anchored, I mean, what has to happen then at
Speaker 4: the back half.
Speaker 2: So we will I think eventually get to positive territory,
Speaker 2: but it's going to be perhaps.
Speaker 3: In twenty twenty four and not in twenty twenty three.
Speaker 2: We have the two stands part of the curve you know,
Speaker 2: steepening out, but you know, getting to only anywhere between
Speaker 2: the negative fifteen negative twenty five basis points.
Speaker 3: You know, by the end of the year. So the
Speaker 3: steepening is going to be, you know, much more gradual.
Speaker 2: But broadly speaking, you look at the broader economy, you
Speaker 2: are going to start seeing the market respond to higher
Speaker 2: interest rates. We did see some improvement in the housing
Speaker 2: market in the in the last couple of months. If
Speaker 2: you start seeing two start, you know ten, you're starting
Speaker 2: to get towards four percent again, and mortgage it's start
Speaker 2: to rise. You're going to see that impacting the housing
Speaker 2: market and the broader interstate censor sectors of the economy.
Speaker 3: Are going to respond to higher interstrates.
Speaker 1: Sobrata, thank you for the brief. Really look forward to
Speaker 1: talking to you in the twenty twenty three here on
Speaker 1: the dynamics of fixed income. Sobrada Rajappa with a sack gen.
Speaker 1: We decided to go to the only man in America
Speaker 1: from sea to shining Sea that has not lost the
Speaker 1: family arapods. Tom Forty joins us right now of Da Davison.
Speaker 1: And what's important with this conversation, folks, is Forty's expert
Speaker 1: on the chips, the wiring and all that. But he's
Speaker 1: not a fanboy your neutral on Apple discuss all right.
Speaker 5: I'm neutral.
Speaker 6: I think that a lot of the good news is
Speaker 6: already priced.
Speaker 5: Into the stock.
Speaker 6: So when you think about the Marshall three trillion, it's
Speaker 6: mainly been in the back of the iPhone. The iPhone
Speaker 6: continues to perform very well. But when you think of
Speaker 6: the next trillion, and you think of vision pro and
Speaker 6: augmented reality and virtual reality.
Speaker 5: There are a lot of structural challenges.
Speaker 6: Even for Apple started with price thirty four to ninety nine,
Speaker 6: is not going to result in a mass produced, mass marketed,
Speaker 6: mass adopted I am and Tom, I wish I could
Speaker 6: tell you that I haven't washed many AirPods in my
Speaker 6: washer dryer, well, many AirPods in the fourteen household.
Speaker 1: Yeah, Cook and Lucas are working on that right now. Tom.
Speaker 1: Everybody owns it. But I continue to read from pros
Speaker 1: like you that Apple is institutionally under owned. On June
Speaker 1: thirty is long only buyside out there going oh damn it,
Speaker 1: I gotta buy it.
Speaker 6: All right, So to that point, I think that's a
Speaker 6: fair yes, And outside of Warren Buffett, where it's his
Speaker 6: number one position, yes, it's probably under owned. From an
Speaker 6: inters social standpoint, if you look at the basis points
Speaker 6: holdings versus the index. They're likely a lot of equal
Speaker 6: weights or some underweights out there and that's going to
Speaker 6: negative affect their performance for the June quarter.
Speaker 4: And Tom, I want to talk about the next trillion dollars.
Speaker 4: I mean, you have a neutral rating on the stock.
Speaker 4: It seems like you would say take a breather here.
Speaker 4: But what's going to propel the next trillion is that
Speaker 4: the Vision Pro.
Speaker 6: Yes, and I would have told you that it was
Speaker 6: the Vision Pro and at some point the Apple car,
Speaker 6: But now I have concerns that if they make a car,
Speaker 6: they're going to price it at two hundred thousand. So
Speaker 6: I think that you know, the good news is that
Speaker 6: the iPhone keeps on chugging on and that's still the
Speaker 6: most important product right now, generates the largest percentage of
Speaker 6: sales and profits, and it's still well positioned.
Speaker 5: But I think to go.
Speaker 6: From three to four, three to five, three to six,
Speaker 6: we're going to have to see some sort of contribution
Speaker 6: from the Vision Pro, potentially a car, new products, and
Speaker 6: I think that's going to be challenging.
Speaker 4: Can we talk about the price tag on the Vision
Speaker 4: Pro because when they announced that there was a clip
Speaker 4: that made its way through social media of people gasping
Speaker 4: at that price town tag three four hundred ninety nine
Speaker 4: dollars for that augmented reality headset.
Speaker 7: Is that price going to have to come down?
Speaker 5: So the answer is yes.
Speaker 6: The question is did Apple tip off their strategy by
Speaker 6: naming it the Vision pro So are they going to
Speaker 6: have a lower price point ARVR headsite called Division not,
Speaker 6: unlike they do with their laptops?
Speaker 5: And I think that's a possibility. But I do think even.
Speaker 6: For Apple to generate mass adoption, they're going to have
Speaker 6: to have a lower priced offering. The good news is
Speaker 6: for Meta Platforms they're three thousand dollars less.
Speaker 5: So I do think to the.
Speaker 6: Extent that Apple gets people excited about ARVR, that could
Speaker 6: lean people to purchase the products from Meta Platforms, which
Speaker 6: has one at four ninety nine.
Speaker 4: And Tom, I know, oh you're neutral, but I want
Speaker 4: to bring you the ball case. Of course, again that
Speaker 4: city call getting a lot of attention, initiating coverage with
Speaker 4: the buyer and talking about this underestimation of Apple's ability
Speaker 4: to really protect and grow its margins. How are you
Speaker 4: thinking about Apple's abilities when it comes to its margins.
Speaker 5: So the story for.
Speaker 6: Apple under tim Cook has been the rollout of higher
Speaker 6: margin services, which has resulted.
Speaker 5: In a higher multiple for the stock. Now, what the.
Speaker 6: Analyst isn't pointing out is that on a short term basis,
Speaker 6: we've seen pressure in the services revenue.
Speaker 5: We've seen pressure in the advertising revenue.
Speaker 6: So yes, I found sales have held up amazingly well
Speaker 6: in a global, challenging macroeconomic environment, but the higher margin,
Speaker 6: higher multiple causing services revenue has been under pressure. So
Speaker 6: I think that's a little optimistic over the next twelve months.
Speaker 1: O good time. I want to fold this into the
Speaker 1: share buyback and the beliefs that they're going to show
Speaker 1: up every day and buy four hundred and twenty two shares.
Speaker 1: In an odd log from Fidelity dot com, Tom fourteen,
Speaker 1: i got free cash flow out at one hundred and
Speaker 1: eleven billion, basically a double pre COVID. I've got the
Speaker 1: margin discussion that uber bulls like Ives and Mailekovert City
Speaker 1: Group are talking about, and critically, Tom, I've got Apple
Speaker 1: with four point one percent of capital is debt. Can't
Speaker 1: these guys just keep going out and doing bond deals
Speaker 1: and buying back share after share after share.
Speaker 6: They certainly are cash register and generate tremendous free cash flow.
Speaker 6: And yes, his Warren Buffets not buying the stock, Apples
Speaker 6: certainly buying the stock.
Speaker 5: And we'll see about.
Speaker 6: Those institutional investors, Tom to see if they want to
Speaker 6: ramp their portfolio to at least equal weight.
Speaker 1: Are they deminimus? I mean, are they going to come
Speaker 1: back and buy back so much shares? Is Tom? Is
Speaker 1: Tim Cook going to privatize AAPL?
Speaker 6: Maybe not privatize, but it does remind me of another
Speaker 6: Warren Buffet investment being there where there was an extended
Speaker 6: period of time where Dairy Queen had no new unit
Speaker 6: growth but essentially bought back having to stop. So I
Speaker 6: do think there's a potential that, given the free cash
Speaker 6: flow Apple generates and that it is a cash right,
Speaker 6: sure they're going to retire a lot more shares privatize.
Speaker 1: I don't think so, and their folks. In the history
Speaker 1: of Bloomberg Surveillance is the first time we've taken the
Speaker 1: mother of all blue chip stocks and compared it to
Speaker 1: Dairy Queen. Tom forty, thank you so much. With da Davidson, hugely,
Speaker 1: hugely valuable. He's one of the greatest thinkers on Wall Street.
Speaker 1: I mean this seriously. He's chief economist ubs Global Wealth Management,
Speaker 1: far More, a student of the Pacific experiment of China
Speaker 1: and America. Farmer as student of Brexit. Farmer's student of
Speaker 1: continental Europe as well. We welcome Paul Donovan. It's been
Speaker 1: way way to a love Paul. I love, love, love
Speaker 1: your comments on CenTra. Everybody's out there pounding the inflation bendwagon.
Speaker 1: You're with Ed Hyman, You're with David Rosenberg. Disinflation is
Speaker 1: in place. Discuss well, we're seeing this inflation.
Speaker 8: The three waves of inflation that we've had, the demand
Speaker 8: shock after the pandemic, the supply shock of the war,
Speaker 8: and then the profit led inflation. Wave one and Wave
Speaker 8: two have gone. We've had six months of outright deflation
Speaker 8: in endurable goods prices in the United States. Transitory inflation
Speaker 8: was transitory energy prices fading completely from the picture. And
Speaker 8: now what we're starting to see is this squeeze on
Speaker 8: margins coming through. Now every country's got weird technical stuff
Speaker 8: going on with its inflation numbers, which creates a little
Speaker 8: bit of noise, a little bit of distortion. But just
Speaker 8: draw up any inflation chart around the world and you
Speaker 8: are seeing the numbers come out down. That's I think
Speaker 8: the disinflation narrative is going to start to become a
Speaker 8: bit more established.
Speaker 4: I want to talk about profit lead inflation and how
Speaker 4: that differs or is the same as what we're seeing
Speaker 4: when it comes to margins. What's going to be the
Speaker 4: biggest impulse in that disinflation that you're talking about. Is
Speaker 4: it the margins decreasing or how does that actually translate through?
Speaker 8: So profit led inflation, it's a bit of a weird terms.
Speaker 8: It's really a relative price shift. To be very clear,
Speaker 8: profit led inflation does not take place across the entire economy.
Speaker 8: It takes place at the end of the supply chain.
Speaker 8: It's with retailers with very strong corporate brands, so food brands,
Speaker 8: clothing brands, people who are very very close to the consumer.
Speaker 8: And what happens is you have stabilist demand and companies
Speaker 8: find a good excuse to pass on a margin increase.
Speaker 8: So if we look in the United States tail profit
Speaker 8: margins as a share of retail GDP pre pandemic, those
Speaker 8: are averaging about fourteen percent one four percent of GDP
Speaker 8: now twenty one percent. So you've seen that margin expansion
Speaker 8: coming through margin small companies. It's not just big business.
Speaker 8: Small business does this as well. But what's now happening
Speaker 8: is customers are saying, you know what, I don't believe
Speaker 8: that story. I don't think that profit increase is necessarily
Speaker 8: something I should be paying. I don't believe why prices
Speaker 8: are going up. You're seeing more discernment amongst consumers. You're
Speaker 8: seeing politicians start to get involved, and with that, with
Speaker 8: the threat of brand damage, companies are starting to perhaps
Speaker 8: be a bit more cautious on their margin expansion, and
Speaker 8: with that that final stage of inflation is starting to
Speaker 8: turn into this inflation refource.
Speaker 1: Zima, what is your I mean, you're doing more of
Speaker 1: a broader economic chit chat. I get there. But let's
Speaker 1: play asset allocation. Now, what are you and UBS Global
Speaker 1: Wealth Management say, after the bang upon market we've seen,
Speaker 1: how do you recalibrate on an allocation basis in equities
Speaker 1: into the second half of this year.
Speaker 8: Well so, for the time being, equities for Arthur a
Speaker 8: moderate underweight, because there is still this optimism about earnings
Speaker 8: which perhaps needs to be looked at a little bit
Speaker 8: around the world. There are some challenges. Remember, of course,
Speaker 8: the equity market is more skewed towards the good sector
Speaker 8: than the service sector. The economy is very very service
Speaker 8: sector space focused. The equity market's a little bit more
Speaker 8: good spacing, and there we're seeing more of the moderation
Speaker 8: of demands, more of the disinflation pressure coming through. So
Speaker 8: the macroeconomics are not creating a sort of a vibrant
Speaker 8: equity market. I'm not saying it's a disaster. I'm just
Speaker 8: saying it's something where I think equities are more likely
Speaker 8: to underperform. And as central banks are confronted by an
Speaker 8: inflation rate that continues to come down, then the expectations
Speaker 8: about rates are going to assist as well. They can't
Speaker 8: keep hiking inexorably. Even Powell has got to learn to
Speaker 8: stop tiking policy at some point, and with that the
Speaker 8: bond market gets a little bit more support.
Speaker 1: Can we withstand higher yields? I mean, I get the
Speaker 1: idea of your case and others very respectful ed heyman,
Speaker 1: evercore Isi. I mean the basic idea here, Paul is
Speaker 1: if we delay a disinflation, if we get some form
Speaker 1: of higher rate regime, there's a belief out there we
Speaker 1: all fall apart, says who.
Speaker 8: Well, I'm a little bit skeptical about the idea that
Speaker 8: we all fall apart. I have to say, I think
Speaker 8: economies generally have become less interest rate sensitive, over time
Speaker 8: monetary policy and to a lesser extent quantitative policy. They
Speaker 8: become blunter tools in the range of options that a
Speaker 8: central bank has got. So absolutely I think that there
Speaker 8: is less likely to be a complete collapse. And what
Speaker 8: we're going to remember is that when we look at economies,
Speaker 8: it's the middle income consumer that's really the engine of
Speaker 8: any advanced economy, and middle income consumers are actually doing okay,
Speaker 8: they're more resilient. Now I'm not saying they're not slowing down.
Speaker 8: They are slowing down, but with low unemployment, with rising
Speaker 8: female participation in the workforce, very important point that, with
Speaker 8: the fact that middle income consumers have a lower inflation
Speaker 8: rate than headline consumer price inflation suggests on both sides
Speaker 8: of the Atlantic, all of that combined is giving the
Speaker 8: middle income consumer that little bit more firepower when it
Speaker 8: comes to spending. Not enough to reverse a slowdown at
Speaker 8: this stage, but enough to make sure that the slowdown
Speaker 8: is not, in my view, going to be too severe.
Speaker 4: Well, Paul, maybe the economy has become less interest rate sensitive,
Speaker 4: as you say, And if that's the case, does that
Speaker 4: mean the FED ultimately has to go higher on the
Speaker 4: terminal than cycles previous? I mean, if the upper bound
Speaker 4: right now is at five and a quarter percent, do
Speaker 4: we need to go above six to really pull down
Speaker 4: the final areas of the economy that are still pretty
Speaker 4: hot at this point.
Speaker 8: I think that's a very very difficult question because I
Speaker 8: think you need to sort of pause and reflect on
Speaker 8: what is changing and what isn't changing in the economy.
Speaker 8: I mean, this is why the sort of relentless chance
Speaker 8: of hike hike hikes that comes out of the fanatics
Speaker 8: that the said is really quite troubling. You know, stop
Speaker 8: and think for a moment, guys, because I think what
Speaker 8: you've got to assess is, Okay, well, look the transport sector,
Speaker 8: LEO travel and so on. That's not necessarily changing. There
Speaker 8: is this fanatical desire to go on vacation all the time. Well, actually,
Speaker 8: then perhaps you've got a totally different world emerging post
Speaker 8: pandemic in that sector. But then look at the deflation
Speaker 8: that's coming through endurable goods, So we've got something different
Speaker 8: going on there. So I think you've got to balance
Speaker 8: this out and consider what relative prices are doing as
Speaker 8: well as the aggregate. How much of this is the
Speaker 8: fiction of owner's equivalent rent, which we know is going
Speaker 8: to be coming down in the future. Again an important factor.
Speaker 8: I think that the central banks also need to broaden
Speaker 8: their thought. I mean, they've got conversative policy as an
Speaker 8: additional weapon. They've also got regulatory policy, and of course
Speaker 8: that's going to become a topic in the United States
Speaker 8: if you start to Tyson bank regulation in the wake
Speaker 8: of the implosion of Silicon Valley Bank, that is going
Speaker 8: to be something which is going to have a cooling
Speaker 8: aspect on the economy as well.
Speaker 1: Paul Donovan, thank you so much. With UBS Global Wealth Management.
Speaker 1: Part of the collective memory that John and I have
Speaker 1: about bulls and bears is people that are out switch
Speaker 1: their mind and get it right. One of those is
Speaker 1: Max Kuttner, chie's anti asset strategist at HFCC. We joined
Speaker 1: him in London ages ago and he said, you know what, up,
Speaker 1: we get a brief today from the gentleman who got
Speaker 1: this really right. Max, give us a redo here. How
Speaker 1: have you recalibrated for Q three of twenty twenty three. Yeah,
Speaker 1: good morning, Tom.
Speaker 9: Not an awful lot really, because from a fundamental perspective,
Speaker 9: I don't think an awful lot really has changed yet.
Speaker 9: When we look actually at the US economy, I think,
Speaker 9: particularly against initial expectations, the US economy is just doing fine.
Speaker 9: The consumers doing fine, the services sector is fine. Look
Speaker 9: at all the concerns we had around the housing sector,
Speaker 9: around commercial real estate. The reality is I think you
Speaker 9: guys at Bloomberg are running one of those surprise and
Speaker 9: disease about the US housing and in real estate activity,
Speaker 9: and that's on a twenty year high, right, So the
Speaker 9: US economy is really doing fine. So quite frankly, I
Speaker 9: don't think those recession calls that we're still having for
Speaker 9: Q three and Q four and in particular for you,
Speaker 9: for the US economy, that these recession calls are really
Speaker 9: really going to come to fruition. I really do think
Speaker 9: that those recession calls will continue to be misplaced, and
Speaker 9: if anything, the risk is that things are continuing to
Speaker 9: be much much better than expected and that we will
Speaker 9: have another sort of short end rate repricing.
Speaker 1: Mex Curtner fold in here the linkage of economics to
Speaker 1: the markets, which I'm going to take through nominal GDP.
Speaker 1: If we have a persistent inflation or dare I say,
Speaker 1: even a breakout higher in rates on a broad global basis,
Speaker 1: and if we get some form of real GDP like
Speaker 1: the surprise of America, does that provide persistency to corporate
Speaker 1: revenues forward? Yeah? I think it does.
Speaker 9: When we look at earnings, actually at earnings growth over
Speaker 9: the last thirty forty years, you overlay that with things
Speaker 9: like headline inflation, you know, that usually does provide some
Speaker 9: tailwent because as you said, right, this is the discussion
Speaker 9: that we should be focused on much much more rather
Speaker 9: than looking at you know, credit crunches and commercial real
Speaker 9: estate and death seiling and you know, in effect really
Speaker 9: some sort of when's the recession finally going to hit?
Speaker 9: Instead of that, we should be talking much more about, well,
Speaker 9: do we really care right now about real GDP growth?
Speaker 9: Or as an investor, like you were saying, right, the
Speaker 9: connection to markets is real versus nominal and in effect,
Speaker 9: really we should be caring much much more about nominal
Speaker 9: growth nominal earnings and they're growing just fine. And think
Speaker 9: about Q two, the Q two reporting season that's going
Speaker 9: to start in a couple of weeks. Consensus expectations again
Speaker 9: are only for flat growth Q two over Q on
Speaker 9: they are you know, they've been massively downgraded for cyclical sectors,
Speaker 9: the sectors like consumer, discretionary, energy, and materials. Even tech, right,
Speaker 9: even the tech earnings expectations have been downgraded by more
Speaker 9: than ten percent in the last five months. So I
Speaker 9: do struggle to see a big, big decline or a
Speaker 9: big big downside surprise in earnings, particularly now in the
Speaker 9: in the Q two reporting season.
Speaker 4: We let's talk about the next half of the year
Speaker 4: that we're sailing into. I want to talk a little
Speaker 4: bit about the expectations for the relative asset classes. Of course,
Speaker 4: there was a lot of doom and gloom about the
Speaker 4: corporate earnings picture, and this was really supposed to be
Speaker 4: the year of the bond, the year of fixed income.
Speaker 4: It looks like it just turned into another year for equity,
Speaker 4: specifically another year for big tech. Is that the dynamic
Speaker 4: heading into the second half is that how we're going
Speaker 4: to end twenty twenty three.
Speaker 9: I think, well, I'm going to give you the classic
Speaker 9: strategist answer yes and no, and it depends I think
Speaker 9: what it's going to be is I think at the
Speaker 9: beginning of Q three, I think, Katie, you're correct, it's
Speaker 9: going to be more of the same, right, more sort
Speaker 9: of growthy, you know, the kind of goldilocks environment where
Speaker 9: we're in right now, because growth is fine, inflation, headline
Speaker 9: inflation is still going down, so that's sort of really
Speaker 9: really goldilocks y. The problem I think will come in
Speaker 9: late summer towards Q four when we realize, look, inflation
Speaker 9: could and particularly headline inflation in the US could start
Speaker 9: to pick up again because some of those energy based
Speaker 9: effects will fade, right, they will converge to zero. So
Speaker 9: we're going to have a bit of a mechanical posh
Speaker 9: higher for headline inflation again. And that and of course
Speaker 9: the economy doing much much better, and that in my mind,
Speaker 9: really will then favor value of a growth So that
Speaker 9: will then really make a switch from those big tech
Speaker 9: names into the more value and short duration names towards
Speaker 9: the end of the summer and into the poll.
Speaker 4: How do valuations factor into that call for this rally
Speaker 4: to broaden out outside of just you know, megacap tech,
Speaker 4: which has absolutely been dominating.
Speaker 9: The short answer is not at all, nothing, Right, Valuations
Speaker 9: don't matter, right, They really really don't matter to me
Speaker 9: at all. In the short term.
Speaker 3: If we're talking about.
Speaker 9: The next seven to ten years, they are the thing
Speaker 9: that should matter the most. If we're talking about the
Speaker 9: next three to six months, they are quite frankly a
Speaker 9: random number. If you look at you know, the explanatory
Speaker 9: power of both outright and absolute valuations of equities and
Speaker 9: also relative valuations things like equity risk premium, and the
Speaker 9: explanatory power with sort of six to twelve month performance,
Speaker 9: it is somewhat between two to three percent, So they
Speaker 9: don't really matter, right. So to me, the valuation side
Speaker 9: of things, they don't really matter.
Speaker 3: It's more the.
Speaker 9: Inflation and the rates trajectory, right, and particularly inflation, the
Speaker 9: sticky inflation part that matters for the next six months.
Speaker 1: The left tail outlier right now, and we covered this
Speaker 1: yesterday Max Kutner with an important essay by William Dudley,
Speaker 1: the former president of the New York fedoh modeled out
Speaker 1: of four and a half percent US tenure. But the
Speaker 1: thing that no one's predicting is a higher interest rate
Speaker 1: regime that goes against Steve Major, that goes against David
Speaker 1: Blom and a lot of the HSBC research heritage. Are
Speaker 1: you guys prepared for the possibility of higher interest rates?
Speaker 9: Not quite yet, because I think we're still in this
Speaker 9: goldilocks environment right where you know, yields are sort of
Speaker 9: peeped from last year. I think it is really a
Speaker 9: risk for the second half. It's not a base case.
Speaker 9: It is a risk, though not on the long end,
Speaker 9: more on the front end, because let's remember that, you know,
Speaker 9: futures are still pricing around one hundred and fifty basis
Speaker 9: points of rate cuts between the end of this year
Speaker 9: and the end of next year, so it is really
Speaker 9: one of those risks. I think that if the majority
Speaker 9: of those rate cuts will be sort of pushed into
Speaker 9: twenty twenty five, not saying that there won't be any
Speaker 9: rate cuts at all next year, but if the market
Speaker 9: temporarily shifts its expectations, you know, from twenty twenty four
Speaker 9: into twenty twenty five, that has massive, massive implications from
Speaker 9: an asset of location perspective, because what we just talked
Speaker 9: about in that environment, if that risk does, if that
Speaker 9: tail risk, that left hand side risk really does pan out,
Speaker 9: you really absolutely don't want to be in growth names.
Speaker 9: You want to be shifting into the value names, perhaps
Speaker 9: even into the cyclical value names, rather than re having
Speaker 9: the long duration and tech assets.
Speaker 1: Max Cutner, thank you so much for the June thirty brief.
Speaker 1: Mister Cuttner is with HSBC. But what's far more important
Speaker 1: is there some serious ramifications to this airline mess up.
Speaker 1: We address this now. The Points Guy, let's just be blunt.
Speaker 1: He changed the way all of his travel absolutely revolutionary,
Speaker 1: so much so that Clint Anderson was an iconic guy
Speaker 1: and all sorts of TV metrics doing the charade that
Speaker 1: we do every day. Clint Anderson said, no, I want
Speaker 1: to get frequent fires on Alaska Era. I'm going to
Speaker 1: join with Brian. How did you get to the Points Guy?
Speaker 1: How did they drag someone as the famous as you
Speaker 1: and MSNBC over to a real job with the Points Guy.
Speaker 10: Well, you know, the Points Guy is obsessed with points
Speaker 10: and miles. That's always been ours sort of DNA, but
Speaker 10: over the years we've expanded into a full media brand,
Speaker 10: and so they wanted somebody who had a little bit
Speaker 10: of media experience to come in. So that's sort of
Speaker 10: where I came in. And it was right before COVID,
Speaker 10: and so it was the perfect timing because I was
Speaker 10: able to help drive this news.
Speaker 1: Was this expected? I'm going to suggest that the thebaccle
Speaker 1: of fourth of July weekend in America is new and original.
Speaker 1: Do I have that right?
Speaker 10: So Unfortunately, since COVID, we've seen this holiday after holiday.
Speaker 10: We got through Memorial Day, but remember Christmas time was
Speaker 10: a mess. We had a real mess last summer. At
Speaker 10: the time, we were blaming airline staffing, so there wasn't
Speaker 10: enough pilots and flight attendants. Now it seems like they've
Speaker 10: been able to higher up. But now it's the air
Speaker 10: traffic controller issue that's really helping to drive this. You know,
Speaker 10: thunderstorms are a normal part of summer. We should be
Speaker 10: planning for that. Unfortunately, the airlines are scheduled really tight
Speaker 10: right now, as if there's no such thing as thunderstorm.
Speaker 10: So there's blame to go around. But the air traffic
Speaker 10: controller shortage is a real issue.
Speaker 4: A real issue. And talk about the demand picture too.
Speaker 4: Obviously a lot of people want to fly right now,
Speaker 4: which is maybe why that shortage with the air traffic
Speaker 4: controllers is really being felt.
Speaker 10: Yeah, you know what's really interesting. Business travel has not
Speaker 10: fully recovered yet, But it's been more than made up
Speaker 10: for by leisure travel. So the demand is insane. And
Speaker 10: remember during COVID, the airline's cut back on the number
Speaker 10: of flights, in the number of seats that are for sale,
Speaker 10: and people decided during COVID, I'm going to travel. I
Speaker 10: don't care what happens. And that's what we're seeing. We're
Speaker 10: seeing that pent up demand and people who decided that's
Speaker 10: going to be a way of life for themselves.
Speaker 7: Well your life.
Speaker 4: It's interesting though that business travel hasn't really caught up,
Speaker 4: and I do want to talk about the summer travel season,
Speaker 4: but with business travel, I mean, is that coming back
Speaker 4: or when can we officially declare we're not going back
Speaker 4: to twenty nineteen.
Speaker 10: So it really depends on who you ask. We're sort
Speaker 10: of eighty percent level of business travel. I don't think
Speaker 10: it returns fully ever. I think people have learned how
Speaker 10: to do zoom meetings. Companies have realized it's really expensive
Speaker 10: to send employees around and they don't necessarily need to
Speaker 10: in all cases.
Speaker 1: So I think that's what you're seeing on a planning basis.
Speaker 1: And the points guy is a concept. I mean, you
Speaker 1: guys reinvented how we travel the whole keep track at
Speaker 1: your miles racket and the charge cards and all that.
Speaker 1: But what if I'm fascinating here. It's the same old,
Speaker 1: same mold. We have limited airports, limited gates. We have
Speaker 1: a major argument between gates at JFK and Newark. Just
Speaker 1: is one discussion point. I'll even pull a LaGuardia on it.
Speaker 1: And then we got air traffic controllers. Now I look
Speaker 1: out on the web and they're making one hundred and
Speaker 1: thirty one hundred and fifty thousand dollars a year. So
Speaker 1: I'm up in the air and there's a guy with
Speaker 1: seven lights on a radar screen, and I look at
Speaker 1: the pilots that were complaining, and they make sixty grand
Speaker 1: a year, which is like a bar worse than a bartender.
Speaker 1: I don't get the salary structure we're complaining about. Shouldn't
Speaker 1: we just pay the air traffic controllers more? Shouldn't we
Speaker 1: just pay the pilots more to solve this labor conundrum.
Speaker 7: I think that would help solve it.
Speaker 10: But that's going to cut into the airline's bottom line,
Speaker 10: and they don't necessarily want to do that. Air traffic controllers.
Speaker 10: That's a good middle class, solid job that you could
Speaker 10: end up doing very well. I'm not sure why it's
Speaker 10: not an attractive option for young people. I think they're
Speaker 10: trying to do some recruiting at colleges and places like that,
Speaker 10: but it's tough to get people in.
Speaker 1: Okay, but I don't buy this. If Kirby was here
Speaker 1: or Bastian was here, yeah, i'd say, look, you guys
Speaker 1: are fancy. I get it, you want to make your
Speaker 1: profits and all that. The fact is on this Friday
Speaker 1: or I think at Bramo, she's probably down in Atlanta
Speaker 1: right now at Heartsfeld's sleeping on a floor somewhere. Why
Speaker 1: are we acting like a third world country where we've
Speaker 1: got families with kids sleeping on the floor in the
Speaker 1: new terminal A at Nork. That's a good policy for
Speaker 1: these airlines.
Speaker 10: Totally unacceptable, and that's why, as consumer advocates are the
Speaker 10: points guy. My own personal opinion is that we should
Speaker 10: have some kind of passenger bill of rights. Now, there
Speaker 10: is a passenger Bill of Rights being proposed by Senators
Speaker 10: Markey and Blumenthal. Even though even if that was passed,
Speaker 10: though which is unlikely, the problem is it doesn't cover
Speaker 10: for weather, so the airlines always have wiggle room when
Speaker 10: it comes to weather. They can say, oh, well, that
Speaker 10: chain reaction started because of a storm on Tuesday, so
Speaker 10: we don't have to compensate passengers. I think maybe something
Speaker 10: stronger needs to be in place.
Speaker 7: Is there any blueprint for that? Though? Maybe it doesn't
Speaker 7: exist in the US.
Speaker 4: But when you look overseas, I mean, how is that
Speaker 4: handled there?
Speaker 10: I would love to see something pass in the US
Speaker 10: like EU two sixty one compensation.
Speaker 1: What those So?
Speaker 10: Basically, if a flight is delayed extreme amounts from three
Speaker 10: to six hours, or it's canceled, the airlines have to
Speaker 10: compensate passengers in almost all cases. I personally benefited from
Speaker 10: this with an American Airlines flight from Europe. But here's
Speaker 10: the issue. There is an exception for whether in those
Speaker 10: cases as well.
Speaker 4: Even still, I mean, a lot of people would make
Speaker 4: a lot of money when you think about just the
Speaker 4: cancelations that we've seen. Let's talk about this summer though,
Speaker 4: because even with the conditions that we're talking about, I mean,
Speaker 4: the demand is off the charts, especially internationally. I mean
Speaker 4: you've heard several airlines talk up what they expect to
Speaker 4: see in terms of overseas travel. Is that actually going
Speaker 4: to materialize?
Speaker 1: Absolutely.
Speaker 10: You see two thousand dollars flights from New York to Rome,
Speaker 10: you know something's up. And I think part of the
Speaker 10: issue is they've reduced the number and frequency of flights,
Speaker 10: and so what's happening is those seats are very much
Speaker 10: in demand in prices are spiking. But there is deals
Speaker 10: out there. I promise you every day we publish a
Speaker 10: deal at the Point Skuy and there are deals to
Speaker 10: bed click.
Speaker 1: Come on, you're a grizzle media proble. What's Katie doing here?
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