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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and Amrie Hordernt. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify, or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app. For the broader market,

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Speaker 2: Here's the view on Wall Street this morning, Andrew Sheets

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Speaker 2: of Morgan Stanley writing, lowering interest rates into easy financial

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Speaker 2: conditions raises the odds of a more speculative boom if

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Speaker 2: growth does not weaken. Andrew joins us now for more, Andrew,

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Speaker 2: let's talk about what that means for credit. Multi decade

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Speaker 2: tights on investment grade high yield. Near the tides of

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Speaker 2: the year, Andrew, We're starting to see that speculative move

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Speaker 2: start to build.

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Speaker 3: Yeah, thanks, good morning. So look, I think you are

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Speaker 3: starting to see early signs of it. And again, the

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Speaker 3: Fed has a difficult job. The FEDS at a difficult position,

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Speaker 3: but it's certainly taking a risk by lowering interest rates

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Speaker 3: and saying it's still going to lower them further despite

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Speaker 3: inflation being above its target other measures of growth holding

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Speaker 3: up large government deficits. And I think importantly some very

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Speaker 3: easy financial conditions. As you mentioned, spreads are in your

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Speaker 3: multi decade tights, equity valuations are in your multi decade highs.

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Speaker 1: And I think.

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Speaker 3: Importantly we're starting to see M and A activity really

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Speaker 3: pick up. We're seeing IPO activity pick up, We're seeing

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Speaker 3: more signs of corporate confidence. So while those levels are

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Speaker 3: still low by historical standards, they're certainly moving towards more activity.

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Speaker 1: And that's a trend we think continues.

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Speaker 4: How does that.

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Speaker 5: Square andrew with the idea that we've gotten some negative

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Speaker 5: economic news in terms of the nonfarm payrolls report, some

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Speaker 5: of the jobless claims data, albeit somewhat.

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Speaker 4: Noisy, does bad news equals bad.

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Speaker 5: News when you start seeing two reading labor market?

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Speaker 1: Yeah?

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Speaker 3: So I think this is what's so fascinating about the

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Speaker 3: data at the moment is that you do see in

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Speaker 3: labor market data and some other kind of traditional early

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Speaker 3: cycle indicators, you really do see some weakness you everything

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Speaker 3: from the jobs market to heavy truck sales, but you

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Speaker 3: also see some other data that looks a lot better.

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Speaker 3: You know, GDP tracking measures are holding up, retail sales

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Speaker 3: have held up, and I think a really interesting one

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Speaker 3: is if you look at commercial bank loan growth in

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Speaker 3: the US, which is, you know, kind of one of

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Speaker 3: our favorite credit cycle indicators to follow.

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Speaker 1: It's accelerating higher.

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Speaker 3: And that's before we get you know, the expected deregulation

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Speaker 3: of the banking sector, which we think is coming. So

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Speaker 3: I think the FED is taking the view that look

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Speaker 3: usually the labor market is the most important cycle indicators,

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Speaker 3: the most important driver of sessions. It's part of the

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Speaker 3: Fed's mandate. That's what we're going to focus on. But

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Speaker 3: the data is generally mixed, and with changes to immigration

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Speaker 3: and other policy, there are a variety of factors that

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Speaker 3: could be distorting the labor market in unusual ways.

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Speaker 5: When you put this together, it sounds like, Andrew, there's

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Speaker 5: a greater risk of upside to the economy the idea

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Speaker 5: of a reacceleration. There is some sort of downside, the

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Speaker 5: idea that you could see a real further deterioration in

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Speaker 5: the labor market. What's the implication of how far that

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Speaker 5: can go. People have talked about bubbles, people have talked

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Speaker 5: about already tight levels and credit. People have talked about

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Speaker 5: the idea of a steepening yield curve. Where do you

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Speaker 5: see the potential mispricing of such a reacceleration.

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Speaker 1: Yeah, so I think there are a couple of factors.

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Speaker 3: So first, I think, certainly for the credit market, the

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Speaker 3: market that myself and my.

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Speaker 1: Team follow most closely.

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Speaker 3: You know, of those two tails, the weaker growth scenario

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Speaker 3: is I think the much worse tail than the more

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Speaker 3: speculative boom scenario. That boom can take some time. And

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Speaker 3: I think importantly, you know, we're still I think in

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Speaker 3: the very early innings of the type of M and

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Speaker 3: A activity that we would expect if things really pick up.

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Speaker 3: You're still below average in terms of levels of M

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Speaker 3: and A adjusted for the size of the economy or

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Speaker 3: adjusted for trends.

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Speaker 1: So there's a lot further that that can go.

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Speaker 3: And I think for as much as we rightfully focus

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Speaker 3: on higher levels of optimism, say among retail investors, corporate optimism,

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Speaker 3: corporate activity levels have not been elevated, and I think

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Speaker 3: there's more room to go there, So companies that benefit

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Speaker 3: from from M and A transactions some of those advisors.

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Speaker 3: Those are stocks that my colleagues on the equity side

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Speaker 3: are more positive on. And I also think kind of

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Speaker 3: importantly there are you know, this is a market that

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Speaker 3: is still providing a discount to things that are small

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Speaker 3: or more cyclical on the equity side in a way

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Speaker 3: that's not true on the credit side. So again, I

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Speaker 3: think this dilemma that the credit market has is that

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Speaker 3: if you believe that things could get a lot better,

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Speaker 3: there are lots of small, cyclical, more levered stocks you

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Speaker 3: can buy at large discounts, But in credit we're often

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Speaker 3: already pricing those things at twenty year thirty year lows.

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Speaker 6: So Andrew, we at a space right now with the

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Speaker 6: FED is cutting into what you view as a reacceleration

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Speaker 6: of growth.

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Speaker 3: So I think that there's a number of data that's

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Speaker 3: suggesting that's a real possibility, and again that it might

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Speaker 3: not even be a reacceleration of growth, but just if

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Speaker 3: growth holds up, you know, just of growth is kind

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Speaker 3: of stable, then the FED cutting into still above average

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Speaker 3: inflation and rising inflation, the FED cutting into these already

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Speaker 3: easy financial conditions and then I think also really importantly

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Speaker 3: the FED cutting into what looks like a really historic

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Speaker 3: boom in capex. You know, the amount of spending that

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Speaker 3: we at Morgan Stanley are expecting from the AI Data

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Speaker 3: Center revival growth is just enormous. You know, it's in

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Speaker 3: the neighborhood of three trillion dollars we think between now

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Speaker 3: and the end of twenty twenty eight. So again, these

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Speaker 3: things might not be you know, three percent GDP type

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Speaker 3: of numbers, but if the cycle can hold up for

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Speaker 3: longer and extend for long longer, there are these There

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Speaker 3: is this kind of dry tender of potential for m

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Speaker 3: and a potential for more strategic activity, potential for more

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Speaker 3: CAPEX that could kind of heat up conditions in our people.

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Speaker 7: Stay with us.

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Speaker 2: More Bloomberg surveillance coming up after this, Divisions on the

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Speaker 2: Federal Reserve, clouding the fence communication as FED share.

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Speaker 7: Jay Powell is said to speak tomorrow.

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Speaker 2: Kristna Giller of Evercore ICI writing the active debate for

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Speaker 2: policy going forward will be predominantly within the twelve who

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Speaker 2: see more cuts in twenty five, not the seven who

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Speaker 2: do not. Krishna joins us now for more Christna welcome

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Speaker 2: to the program. Let's just start with that division of

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Speaker 2: the Federal Reserve. Just how material is it and how

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Speaker 2: different is it to what we've seen in years gone by.

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Speaker 8: So I think we learned two things at the meeting

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Speaker 8: just gone First, that this is still Powell's committee. He

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Speaker 8: can still muster majority support, particularly although not disclosed among

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Speaker 8: the voting members, if you guessimate whose starts or who's

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Speaker 8: for the policy path that he prefers. And that's market

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Speaker 8: risk friendly because Powell is on the more duvish side

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Speaker 8: of the committee, the more preemptive risk management side. But

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Speaker 8: there is this large block seven Fed officials who don't

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Speaker 8: see any further cuts after the September cut this year.

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Speaker 8: So the question is what influence will that seven have

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Speaker 8: on the debate. My sense is not that much. I

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Speaker 8: think the debate will mostly be among those who see

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Speaker 8: their need likely to cut rates further, but will be

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Speaker 8: debating exactly the economic conditionality in cadence rather than that

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Speaker 8: block of hawks. But you can't completely dismiss the seven

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Speaker 8: no cutters.

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Speaker 2: Christ And when you started talking about the Federal Reserve,

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Speaker 2: point to add that this was Chairman Pal's feder Reserve

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Speaker 2: almost like it was his committee, is it too early

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Speaker 2: to begin pricing a post Pal fared.

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Speaker 8: So I think the market sensibly, in my view, is

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Speaker 8: looking at two different time horizons in a different way.

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Speaker 8: Right through the end of this year. Indeed, e've been

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Speaker 8: through really at the end of Q one, early Q

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Speaker 8: two to the very end of Pal's term. I think

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Speaker 8: Chair Pal will continue to drive the committee. I think

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Speaker 8: there is a lot of loyalty to Powell, and I

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Speaker 8: think that the divisions among the central group, while they're

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Speaker 8: there for sure and amplified by these political strains, I

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Speaker 8: don't think they're very very deep. I think most of

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Speaker 8: that core group would agree with Powell that you want

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Speaker 8: to be stepping rates back to a more neutral setting

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Speaker 8: thin and that if the labor side continues to look

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Speaker 8: quite weak, you want to do that in a timely manner.

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Speaker 8: So that's the success of September October, the Sema Cutz

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Speaker 8: versus perhaps if the data were to pick up, then

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Speaker 8: you might slow down that process. Separately, the market needs

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Speaker 8: to look forward through the end of next year and

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Speaker 8: beyond and ask what might change under new leadership. And

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Speaker 8: I think when you look at the market pricing through

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Speaker 8: the end of next year, you very clearly put some

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Speaker 8: weight on the prospect of a more dovish shift in

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Speaker 8: the FED reaction function as new leadership takes over.

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Speaker 5: Krishna, has this market adequately appreciated just how duvish this

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Speaker 5: central bank already has been. The idea that they're cutting

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Speaker 5: at the most aggressive pace going back to the nineteen

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Speaker 5: eighties when we weren't in recession. I mean, this is

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Speaker 5: really an unusual type of paradigm. Given the inflation has

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Speaker 5: remained above the two percent target for more than four

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Speaker 5: years and is expected to remain above that for the remaining.

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Speaker 4: Upcoming two years.

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Speaker 5: I mean, at what point is this market not appreciating

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Speaker 5: how hot this FED is already running the economy.

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Speaker 8: So I certainly agree with you that this is a

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Speaker 8: quite unusual set of circumstances. I think it's important to

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Speaker 8: caveat that in two ways. First, the FED is not

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Speaker 8: cutting rates to at least under Powell. It's not contemplating

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Speaker 8: cutting rates to what the FED at least would cons

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Speaker 8: a stimulative territory. What they're talking about is removing what

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Speaker 8: they estimate to be the remaining restraint in the economy.

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Speaker 8: That's the roughly seventy five basis points of restraint between

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Speaker 8: where we were on the eve of the September meeting

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Speaker 8: and a spot neutral setting that might be in the

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Speaker 8: zip code of three and a half three and three

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Speaker 8: quarters separate from where the long term neutral rate by

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Speaker 8: lie when things settle down to equilibrium, which many still

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Speaker 8: see at the FED as more like three percent. So

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Speaker 8: you're talking about removing restraints, not providing stimulus. The other

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Speaker 8: thing is, of course you're seeing, i think, under Powell's leadership,

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Speaker 8: and of course with a pressure intellectual pressure from Waller

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Speaker 8: and one few others, the FED taking a view that

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Speaker 8: maybe they should be at least to some significant degree

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Speaker 8: looking through that current elevated inflation because it's to a

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Speaker 8: large extent reflecting the pass through of Tariff's c enter prices,

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Speaker 8: and of course, from a textbook sense, at least you

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Speaker 8: want to look through that first round mechanical tax impact

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Speaker 8: if you like, it's a bit like a sales tax

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Speaker 8: in that regard, and you want to be focused on

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Speaker 8: where you think the underlying inflation dynamics are going, what

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Speaker 8: risk there is of inflation persistence, And you know, if

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Speaker 8: you look at wages minus productivity, if you look at

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Speaker 8: a lot of the services, particularly the more market based services.

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Speaker 8: You look at expectations, the news on that second round

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Speaker 8: inflation dynamic is reasonably constructive, but I certainly still take

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Speaker 8: your point that the FED is cutting onerous management grounds

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Speaker 8: into what maybe the early stages of a cyclical re acceleration.

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Speaker 8: I think the market is going to want to see

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Speaker 8: more evidence on that birming inactivity and if it's passing

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Speaker 8: on to affirming in the labor side too, before it

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Speaker 8: really starts to trade that. But if you were to

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Speaker 8: see that, then I think at a minimum, people would

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Speaker 8: start to pay more attention not just to these three cuts,

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Speaker 8: but the prospect that when the next chair picks up

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Speaker 8: the cutting baton, we might well be in danger of

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Speaker 8: overdoing it.

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Speaker 5: Let's say the FED cuts rates and long term rates

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Speaker 5: also decline. Will that help housing affordability? Will that help

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Speaker 5: with this sort of declining trend and inflation that is

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Speaker 5: hinged to the housing market, frankly, which has kind of

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Speaker 5: gotten slack.

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Speaker 8: Well, So certainly I think if longer term rates were

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Speaker 8: to come down from here in an appreciable way, then

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Speaker 8: obviously that would lower the classic thirty effects type financing costs,

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Speaker 8: and that would certainly help buyers at the margin. I'd

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Speaker 8: actually work a little bit more on price than on

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Speaker 8: quantity in a number of cases, but certainly it would

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Speaker 8: be good for housing, good for housing stocks. I think

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Speaker 8: in the absence of that, what we're likely to see

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Speaker 8: is more people moving to fund at the front end

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Speaker 8: through arms, because, of course, as the front end rates,

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Speaker 8: the FED sensitive rates do come down as an opportunity

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Speaker 8: potentially to finance the front end rather than financed through

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Speaker 8: the classic thirty year. I don't think that there is

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Speaker 8: a huge amount of scope for ten year yelds to

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Speaker 8: come down further from here. If we are indeed in

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Speaker 8: the early stages of at least cyclical stabilization and possibly

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Speaker 8: even cyclical re acceleration, and my hunches, if that's the

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Speaker 8: path we're on, then the ten year year will be

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Speaker 8: higher six or twelve months from now, not lower, and

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Speaker 8: with it, of course, than those conforming loan rates. With

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Speaker 8: respect to housing and inflation. I get the point you make,

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Speaker 8: and it's a something one about the relationship between home

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Speaker 8: construction and ultimately you know, oeer rent and those other

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Speaker 8: housing services related components on inflation. I think that's right.

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Speaker 8: I still think overall, though higher longer term interest rates

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Speaker 8: will tend to restrict the economy in aggregate across all

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Speaker 8: the sectors and put downward pressure on inflation and vice versa.

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Speaker 8: If the tenure goes down.

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Speaker 7: Stay with us.

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Speaker 2: More Bloomberg Surveillance coming up after this. Counsei Parau of

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Speaker 2: JP Morgan Asseid Management, writing the low higher low fire

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Speaker 2: labor market is keeping wage growth moderate, allowing the feder

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Speaker 2: ease policy in twenty five basis point increments over the

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Speaker 2: next two to three meeting. Calci joins us now for more.

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Speaker 2: Calci Good Mornic, Good morning. It's kind of the easy

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Speaker 2: piece of this, potentially the next two to three meetings.

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Speaker 2: Then it gets hard. What's the call for twenty six?

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Speaker 9: Yeah, I think we're in a critical juncture right now

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Speaker 9: as it relates to the direction for the US economy

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Speaker 9: beyond the next three months. So there's kind of two

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Speaker 9: ways that this could break. On one hand, you have

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Speaker 9: the labor market, which is clearly weakening.

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Speaker 10: I think it's not just supply. I do think it's

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Speaker 10: a demand.

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Speaker 9: But you have growth data that remains fairly robust and

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Speaker 9: guidance from Corporate America that suggests a lot of optimism.

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Speaker 10: So you have kind of two ways that that can resolve.

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Speaker 9: One way is that the growth data starts to catch

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Speaker 9: down to the labor market data, and the labor market

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Speaker 9: data is the signal. The other scenario is that the

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Speaker 9: labor market data is about to stabilize, the FED is

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Speaker 9: going to cut rates, easy financial conditions are already there

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Speaker 9: in the background, and in three to six months, or

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Speaker 9: you're looking at companies that actually want to restart their

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Speaker 9: hiring plans, continue their capex, and we could be looking

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Speaker 9: at a FED that doesn't need to cut rates anymore

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Speaker 9: and an economy that is operating above trend. So right

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Speaker 9: now we're subtrend. I feel pretty comfortable with where we

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Speaker 9: are now and the carry and credit we have in

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Speaker 9: our portfolios. But there's still a lot of uncertainty about

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Speaker 9: which way the economy breaks in the next six to

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Speaker 9: twelve months.

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Speaker 4: What's the market pricing? Which way does the market believe

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Speaker 4: that this economy is going to break.

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Speaker 9: I think the market is pricing that the economy is

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Speaker 9: going to break more towards continued expansion and companies that

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Speaker 9: after a period of pause, start to reinvigorate their activities

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Speaker 9: and start and that labor market weakness that we're seeing

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Speaker 9: is temporary. And the way that I see that is

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Speaker 9: I like to look at the what.

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Speaker 10: The market is priced in terms of the Fed, and.

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Speaker 9: I think the way to look at it is you

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Speaker 9: look at the median and you also look at the

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Speaker 9: most hawkish and the most dubbish. Right now, for the

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Speaker 9: next six to twelve months, the market is priced up

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Speaker 9: somewhere between the median dot and the most dubbish dot,

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Speaker 9: you know, so still reflecting the fact that the balance

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Speaker 9: of risks for the Fed is more likely that they

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Speaker 9: cut faster than they don't cut it all. But then

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Speaker 9: if you look at the longer term trajectory for the

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Speaker 9: FED funds rate, it kind of looks like we sometimes

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Speaker 9: call it the Nike swoosh, because the policy path starts

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Speaker 9: to turn up.

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Speaker 10: And if you look at what the market.

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Speaker 9: Is pricing for the long term, the market is actually

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Speaker 9: slightly above the most hawkish expectation for the FED funds

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Speaker 9: rate in the long term, and that reflects some of

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Speaker 9: that longer term optimism around growth prospects that has kept

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Speaker 9: yield structurally higher in this environment.

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Speaker 4: So what you're saying is actually really interesting.

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Speaker 5: The idea that long term rates potentially could go higher

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Speaker 5: in a reacceleration trend, where you're saying suggests maybe that's

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Speaker 5: not the case. Maybe that long end rates right now

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Speaker 5: as they are, even with yield curf flattening, are already

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Speaker 5: pricing in that reacceleration. And actually, if you get some

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Speaker 5: sort of real deceleration the labor market, you get a

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Speaker 5: bigger rally.

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Speaker 4: Is that what you're basically leveraged too.

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Speaker 9: Yeah, I mean, I think that speaks to the asymmetry

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Speaker 9: and the value in owning jury. So I would say

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Speaker 9: that the path for the market is priced for the

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Speaker 9: FED in the short term is you know, priced fairly

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Speaker 9: to the trailing data. But where we still see that

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Speaker 9: there is valuation opportunities is in those long dated forwards

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Speaker 9: where they are very elevated. They are pricing in a

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Speaker 9: lot of optimism. And then on the other hand, you know,

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Speaker 9: a lot of people have been concerned about the structural

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Speaker 9: supply demand dynamics in the treasury market. You know, are

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Speaker 9: there going to be foreign buyers coming in? So far,

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Speaker 9: we've seen that the demand for fixed income is there.

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Speaker 9: The other concern has been around the mix of treasury supply,

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Speaker 9: and you know, and that's not even just a trend

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Speaker 9: in the US. You know, the long end has had

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Speaker 9: question marks around it across most developed market government bond markets,

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Speaker 9: and what we're seeing there is signs that debt management

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Speaker 9: offices and the Treasury in the US are actually probably

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Speaker 9: going to be more active in terms of shifting the

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Speaker 9: issuans to where the band is, which we see still

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Speaker 9: in the five to ten year.

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Speaker 4: Belly of the curve.

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Speaker 7: Kelsie, can you give us some more detail on that.

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Speaker 2: What has the Treasury've been doing more recently that's enabled

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Speaker 2: this market to reject the supply fears.

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Speaker 7: What have they changed?

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Speaker 9: Well, they haven't actually changed anything. It's about market sentiment

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Speaker 9: around around those things. So one is that you've seen

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Speaker 9: very strong auctions generally.

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Speaker 10: There's been a few exceptions.

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Speaker 9: There's a pretty poor tips auction last week, but generally

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Speaker 9: the nominal auctions for the long end have gone very well.

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Speaker 9: The other thing that has shifted in terms of perception is,

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Speaker 9: you know, now we have the roadmap for fiscal we

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Speaker 9: have the one big beautiful bill. We kind of know

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Speaker 9: what we're going to be collecting in terms of tariffs

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Speaker 9: on an annualized run rate, and we can kind of

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Speaker 9: feel at least more comfortable. The depth sit trajectory isn't great,

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Speaker 9: but at least you know we know where it's headed.

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Speaker 9: And then you know, while the Treasury hasn't done anything dramatic,

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Speaker 9: they are doing buybacks on the long end, and we

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Speaker 9: do think that over time they will be able to

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Speaker 9: keep the long end supply stable. If not, maybe shrink

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Speaker 9: it as a share of issuings and you'll see the

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Speaker 9: bill issuings as a shares is going to actually be

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Speaker 9: able to rise.

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Speaker 4: A little bit.

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Speaker 2: Stay with us more Bloomberg Surveillance coming up after this.

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Speaker 2: Vina Krishner of Marcleak's writing, we've increased our year end

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Speaker 2: twenty six price target to seven K from sixty seven hundred.

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Speaker 2: We expect us TACH valuations to continue reflecting constructive investor views.

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Speaker 2: VI who joins us now for more good Monarch, it's

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Speaker 2: going to see sir, Good morning, John. So up, great

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Speaker 2: to the outlook. Let's start there. What's underpinning that view

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Speaker 2: at the moment for you in the team.

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Speaker 11: A couple of things.

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Speaker 12: First, you know, the first half has been much stronger

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Speaker 12: than what we expect it from an earning standpoint. Two,

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Speaker 12: if you dig in and see what's driving that. It's

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Speaker 12: tech in financials, which is over fifty percent weight of

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Speaker 12: the market, and the revisions for that actually are improving.

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Speaker 12: And now we're in the cusp of rate cuts, which

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Speaker 12: incrementally are of course positive for the market. Right So

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Speaker 12: I think when you put and then don't forget that

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Speaker 12: global growth, if anything, is stabilizing, and US will exit

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Speaker 12: this year economic growth by our economist estimate, it's closer

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Speaker 12: to around one point eight one point nine percent range.

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Speaker 11: Which is pretty healthy.

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Speaker 12: So I think while there's a lot of talk about

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Speaker 12: you know, valuations being extended, which I don't necessarily agree with,

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Speaker 12: but right now, if you see what is holding the market,

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Speaker 12: it's three things. One is the AI narrative is still

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Speaker 12: very much intact. Two, we are in the cusp of

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Speaker 12: you know, fat cuts to three let's see what happens.

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Speaker 12: And three we're entering a period of strong seasonality. That's

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Speaker 12: more of a technical sort of phenomenon. But that said,

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Speaker 12: we do believe that all that is priced in and

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Speaker 12: our hard time seeing how the market can keep grinding higher.

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Speaker 12: But then if you look past the serial into next year,

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Speaker 12: we do see earnings improving ten percent, and we do

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Speaker 12: see you know, the market going in the range of

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Speaker 12: seven thousand, seven eight hundred. That's an upside and base

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Speaker 12: case rate.

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Speaker 2: Let's break it down earnings and valuations. Yeah, I just

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Speaker 2: want to sit on valuations just for a moment. You said,

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Speaker 2: I disagree there extended. Yeah, so time of the source

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Speaker 2: of that disagreement.

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Speaker 11: Yeah.

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Speaker 12: So I think the tendency is to look at the

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Speaker 12: aggregate multiple, which by historical standards looks high.

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Speaker 11: One is, you know, we've done.

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Speaker 12: Work and it shows that over the last fifteen years

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Speaker 12: is a structural increase in multiple three SMP. And this

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Speaker 12: primarily function of the domination of tech, which has been

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Speaker 12: faster growing, higher quality earnings, better margins, and higher multiple.

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Speaker 11: So that's one.

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Speaker 12: But the other thing we do is you've got to

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Speaker 12: unpack the market and we take some other parts approach.

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Speaker 12: In other words, we look at Big Tech, rest of tech,

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Speaker 12: and rest of SMP. So if you look at Big

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Speaker 12: Tech's trading right.

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Speaker 11: Now at about twenty nine times, right, looks high.

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Speaker 12: Fine, it is true, but it started the year at

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Speaker 12: thirty one times.

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Speaker 11: They posted earnings about twenty eight percent.

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Speaker 12: They increase their operating marke their net margins by over

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Speaker 12: two hundred basis points. The beat numbers by eleven to

438
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Speaker 12: twelve percentage points. That's one Rest of tech is trading

439
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Speaker 12: around twenty eight times. Now that's a tad high for

440
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Speaker 12: rest of tech, but if you remove some extreme names

441
00:23:21,520 --> 00:23:24,640
Speaker 12: like you Palenteered, those sort of highly valued names, it's

442
00:23:24,680 --> 00:23:27,359
Speaker 12: more reasonable. And in fact, the software part of it

443
00:23:27,400 --> 00:23:30,159
Speaker 12: has got sold off because of a lot of concern

444
00:23:30,160 --> 00:23:32,840
Speaker 12: about AI disrupting the business model, so we in fact

445
00:23:32,880 --> 00:23:35,560
Speaker 12: think there's an opportunity there. And then last motion, the

446
00:23:35,600 --> 00:23:37,639
Speaker 12: rest of US and PP we just call broadly sixty

447
00:23:37,640 --> 00:23:40,520
Speaker 12: percent of the market. We really see it as a function.

448
00:23:40,560 --> 00:23:41,960
Speaker 12: We have a good model for that, which is a

449
00:23:42,000 --> 00:23:44,920
Speaker 12: function of where rates are, where in creation is heading

450
00:23:45,000 --> 00:23:48,200
Speaker 12: economic growth Based on that, you're training it on twenty times,

451
00:23:48,400 --> 00:23:51,919
Speaker 12: that's fair value. Remember just a few months ago the

452
00:23:51,960 --> 00:23:54,040
Speaker 12: ten year was at four and a half percent. Now

453
00:23:54,160 --> 00:23:57,159
Speaker 12: we're we're struggling to crawl, you know, to how around

454
00:23:57,160 --> 00:23:58,280
Speaker 12: the four percent range.

455
00:23:58,640 --> 00:24:00,560
Speaker 11: So I think that's reality.

456
00:24:00,680 --> 00:24:05,080
Speaker 12: So in other words, I'm not suggesting it's cheap, but

457
00:24:05,119 --> 00:24:07,040
Speaker 12: I'm saying it's not a rich market, it's a fully

458
00:24:07,119 --> 00:24:07,800
Speaker 12: value market.

459
00:24:07,880 --> 00:24:11,600
Speaker 5: How predicated is this call on further rate cuts by

460
00:24:11,600 --> 00:24:14,159
Speaker 5: the Federal Reserve on the idea that yields have peaked

461
00:24:14,320 --> 00:24:15,360
Speaker 5: and are headed downward.

462
00:24:15,760 --> 00:24:18,320
Speaker 12: It's not predicated on that, but it's supported by that

463
00:24:18,600 --> 00:24:21,320
Speaker 12: right because earnings are also improving. So we do see

464
00:24:21,359 --> 00:24:24,680
Speaker 12: earnings actually improving next year, not a lot from this year,

465
00:24:24,720 --> 00:24:30,320
Speaker 12: but call it around ten percent. But where the tenure

466
00:24:30,320 --> 00:24:33,920
Speaker 12: absolutely happens. Is that fair value talked about That definitely

467
00:24:33,960 --> 00:24:37,760
Speaker 12: gets impacted by the way the ten year is. You're

468
00:24:37,800 --> 00:24:41,760
Speaker 12: always concerned about the correlation of rates and equities, and

469
00:24:41,800 --> 00:24:44,320
Speaker 12: I think what we have found is that we get

470
00:24:44,320 --> 00:24:46,760
Speaker 12: worried when the tens breach four and a half percent

471
00:24:46,800 --> 00:24:49,359
Speaker 12: and start heading towards five percent. But it's a very

472
00:24:49,640 --> 00:24:52,879
Speaker 12: distinct negative correlation we've observed over a very long period

473
00:24:52,920 --> 00:24:55,320
Speaker 12: of time. On the flip side, and it's already low,

474
00:24:55,720 --> 00:24:59,600
Speaker 12: then you're concerned because the destabilizing impact of deflation. Right now,

475
00:24:59,640 --> 00:25:03,200
Speaker 12: we're in a sweet spot where we have some amount

476
00:25:03,240 --> 00:25:06,159
Speaker 12: of inflation which is not necessarily bad, which actually strengthens

477
00:25:06,480 --> 00:25:09,600
Speaker 12: the ability to do some pricing on the pricing power front.

478
00:25:09,960 --> 00:25:12,520
Speaker 12: We have economic growth which is moderating compared to twenty

479
00:25:12,520 --> 00:25:16,399
Speaker 12: three and twenty four, but still relatively robust. So and

480
00:25:16,480 --> 00:25:19,440
Speaker 12: you have corpid earnings where with very strong and most

481
00:25:19,480 --> 00:25:23,440
Speaker 12: importantly what has happened is the tariff effect, which you

482
00:25:23,480 --> 00:25:26,359
Speaker 12: can be estimated has proved to be a little less

483
00:25:26,359 --> 00:25:28,960
Speaker 12: worse than what we thought. It's probably got pushed out

484
00:25:29,000 --> 00:25:32,280
Speaker 12: a little bit. But companies are figuring out, and most importantly,

485
00:25:32,480 --> 00:25:35,560
Speaker 12: based on the transcript work we have done, it appears

486
00:25:35,640 --> 00:25:38,560
Speaker 12: that in their guidance they are already taking into consideration

487
00:25:39,040 --> 00:25:43,119
Speaker 12: the mitigation steps, and so the guidance is relatively safe

488
00:25:43,160 --> 00:25:43,640
Speaker 12: at this point.

489
00:25:43,760 --> 00:25:45,600
Speaker 5: This is so much optimism I can't even standard. I

490
00:25:45,640 --> 00:25:49,080
Speaker 5: will just take one issue, this idea of seasonality. Everyone

491
00:25:49,119 --> 00:25:51,760
Speaker 5: said that September was a bad season, it's always a

492
00:25:51,760 --> 00:25:53,800
Speaker 5: bad month. Well we're up more than three percent and

493
00:25:53,840 --> 00:25:55,639
Speaker 5: it's poised to be the best September going back to

494
00:25:55,680 --> 00:25:56,400
Speaker 5: twenty ten.

495
00:25:56,640 --> 00:25:58,160
Speaker 4: Has seasonality broken.

496
00:25:58,680 --> 00:26:00,440
Speaker 11: Well in the recent year as it has?

497
00:26:00,480 --> 00:26:02,359
Speaker 12: You were last year it was the same story August

498
00:26:02,359 --> 00:26:05,040
Speaker 12: and September was pretty good. Historically it's bad, but I

499
00:26:05,040 --> 00:26:07,280
Speaker 12: would argue that why just seasonality?

500
00:26:07,359 --> 00:26:07,600
Speaker 11: Now?

501
00:26:08,359 --> 00:26:12,480
Speaker 12: Everything is long term relationships were broken quite significantly post COVID.

502
00:26:13,000 --> 00:26:15,720
Speaker 12: You have a negative yield curve for a long time.

503
00:26:15,760 --> 00:26:18,720
Speaker 12: In whatted curve, did we have a recession. No, we

504
00:26:18,760 --> 00:26:22,800
Speaker 12: had pmis in the negative territory. Did we have industrial

505
00:26:22,920 --> 00:26:25,879
Speaker 12: session No? Did earnings collapse for industrials?

506
00:26:26,040 --> 00:26:26,240
Speaker 11: No?

507
00:26:26,520 --> 00:26:29,439
Speaker 12: Right, but it doesn't mean they're not us. So a

508
00:26:29,480 --> 00:26:32,760
Speaker 12: lot of relationship which we thought existed are.

509
00:26:32,680 --> 00:26:34,720
Speaker 11: Simply not true. Right.

510
00:26:35,480 --> 00:26:38,320
Speaker 12: And it doesn't mean that you shouldn't worry. It just

511
00:26:38,440 --> 00:26:42,000
Speaker 12: means that, you know, if you say this time is different,

512
00:26:42,000 --> 00:26:43,440
Speaker 12: you've got to take it in.

513
00:26:43,359 --> 00:26:46,720
Speaker 11: Blocks and see you know what next? What next?

514
00:26:47,119 --> 00:26:50,159
Speaker 12: Right now, at least for the next twelve to eighteen months,

515
00:26:50,440 --> 00:26:54,040
Speaker 12: we don't see significant catalysts for destabilizing where we are

516
00:26:54,119 --> 00:26:54,560
Speaker 12: right now.

517
00:26:54,680 --> 00:26:57,720
Speaker 6: So do you find policies like H one B, visa's

518
00:26:57,840 --> 00:27:00,800
Speaker 6: the terrors they're still being legislat it in courts when

519
00:27:00,800 --> 00:27:03,920
Speaker 6: it comes to AEPA. Do you find DC policies supportive

520
00:27:04,000 --> 00:27:05,160
Speaker 6: or they headwinds next year?

521
00:27:05,160 --> 00:27:05,280
Speaker 11: No?

522
00:27:05,400 --> 00:27:07,280
Speaker 12: I mean one of the biggest concerns this year has

523
00:27:07,320 --> 00:27:11,119
Speaker 12: been the level of policy uncertainty. But what is amazing

524
00:27:11,359 --> 00:27:14,800
Speaker 12: is that the market is learned to look past it

525
00:27:15,320 --> 00:27:17,800
Speaker 12: and to see, you know, the extent of rhetoric, how

526
00:27:17,840 --> 00:27:19,800
Speaker 12: long it lasts, goes on. I mean, you saw even

527
00:27:19,840 --> 00:27:23,080
Speaker 12: the HU and B thing, we had data shifting over

528
00:27:23,119 --> 00:27:27,439
Speaker 12: the weekend right, first the use of modraconian and then

529
00:27:27,440 --> 00:27:30,840
Speaker 12: they came back at clarified that you know it's one

530
00:27:30,880 --> 00:27:35,199
Speaker 12: time and not for renewals and things like that. So

531
00:27:35,240 --> 00:27:37,760
Speaker 12: I think policy and is certainly something we have to

532
00:27:37,840 --> 00:27:39,880
Speaker 12: learn to live with. What we have to watch out

533
00:27:39,920 --> 00:27:45,280
Speaker 12: for where it oversteps acceptable boundaries of the market, right,

534
00:27:45,320 --> 00:27:49,840
Speaker 12: And so that's where I would actually watch the rates

535
00:27:49,920 --> 00:27:53,080
Speaker 12: market more for that to see if and when the

536
00:27:53,160 --> 00:27:55,760
Speaker 12: discomfort is there. I mean to talk about deficits is

537
00:27:55,760 --> 00:27:57,119
Speaker 12: the biggest concern right now?

538
00:27:57,280 --> 00:27:59,560
Speaker 11: Right? And what is your tenure doing?

539
00:27:59,720 --> 00:28:02,720
Speaker 12: It's oh, it's not up right, so it doesn't blet

540
00:28:02,760 --> 00:28:07,440
Speaker 12: me actually come down. So I think you start looking

541
00:28:07,520 --> 00:28:10,760
Speaker 12: at those things and say that to what extent is

542
00:28:11,080 --> 00:28:14,719
Speaker 12: the magnitude policy and certaintly going to hurt the market,

543
00:28:15,080 --> 00:28:18,440
Speaker 12: and so far I think it's it's a risk where

544
00:28:18,440 --> 00:28:20,400
Speaker 12: it's not an overwhelming risk thus far.

545
00:28:20,480 --> 00:28:22,880
Speaker 2: If any What's amazing is what you said about earnings

546
00:28:22,920 --> 00:28:26,800
Speaker 2: for next year EPs revisions. It's been a huge focus

547
00:28:26,800 --> 00:28:29,640
Speaker 2: of this program for quite a while now that we've

548
00:28:29,640 --> 00:28:32,760
Speaker 2: had this step down in payrolls growth, massive step down

549
00:28:32,760 --> 00:28:34,920
Speaker 2: in payrolls growth, and maybe it's been building for a

550
00:28:34,920 --> 00:28:37,800
Speaker 2: whole lot longer than people realized, and you're still seeing

551
00:28:37,840 --> 00:28:41,440
Speaker 2: this step up in earning revisions, which makes me wonder

552
00:28:41,480 --> 00:28:44,640
Speaker 2: just how relevant this is, which is an uncomfortable conversation

553
00:28:44,720 --> 00:28:47,360
Speaker 2: for anyone following this right now sitting at home saying, well,

554
00:28:47,400 --> 00:28:49,360
Speaker 2: it's relevant to me, it's relevant to everyone.

555
00:28:49,440 --> 00:28:50,320
Speaker 7: Everyone needs a job.

556
00:28:50,640 --> 00:28:53,040
Speaker 2: But at the moment we're seeing that tension just grow

557
00:28:53,200 --> 00:28:55,960
Speaker 2: get bigger and bigger. How relevant is the payrolls number

558
00:28:56,280 --> 00:28:58,200
Speaker 2: to the broader market and to ornics?

559
00:28:58,280 --> 00:28:58,840
Speaker 11: You know, it is.

560
00:28:58,800 --> 00:29:02,520
Speaker 12: Relevant, and that's why talking about you know, this market

561
00:29:02,600 --> 00:29:03,720
Speaker 12: is highly bifurcated.

562
00:29:03,800 --> 00:29:05,320
Speaker 11: That's why I said, if you look at where.

563
00:29:05,080 --> 00:29:08,560
Speaker 12: The earning strength came from, it came from just two sectors,

564
00:29:09,160 --> 00:29:10,320
Speaker 12: Tech infinancials.

565
00:29:10,600 --> 00:29:11,920
Speaker 11: And that's where the divisions have been.

566
00:29:12,120 --> 00:29:13,480
Speaker 12: If you looked at the best of the eight to

567
00:29:13,560 --> 00:29:17,280
Speaker 12: nine sectors, ninety percent of them had negative operating leverage,

568
00:29:17,400 --> 00:29:20,960
Speaker 12: in which their cost growth was faster than the sales growth.

569
00:29:21,240 --> 00:29:24,800
Speaker 12: So to we should not allull ourselves into thinking that

570
00:29:24,920 --> 00:29:28,560
Speaker 12: everything is hunky dory across markets. It's not right, and

571
00:29:28,560 --> 00:29:30,520
Speaker 12: that's why we're paying attention. That's why you know, in

572
00:29:30,520 --> 00:29:32,959
Speaker 12: our outlook, when I'll take some other parts approach.

573
00:29:33,440 --> 00:29:35,120
Speaker 11: We are a lot more bullish on.

574
00:29:35,040 --> 00:29:37,959
Speaker 12: The tech front, and we are very positive on financials,

575
00:29:38,200 --> 00:29:40,720
Speaker 12: but compared to consensus in the street, we're a lot

576
00:29:40,800 --> 00:29:43,600
Speaker 12: more on the rest of the economy. So, you know,

577
00:29:43,640 --> 00:29:46,440
Speaker 12: how does the rest of the economy get impacted by all?

578
00:29:46,480 --> 00:29:49,560
Speaker 12: This is important And to your point about the labor

579
00:29:49,600 --> 00:29:51,800
Speaker 12: market being I mean, your tech companies are laying off

580
00:29:51,840 --> 00:29:55,600
Speaker 12: people by the thousands, but their net margins have improved

581
00:29:55,600 --> 00:29:58,960
Speaker 12: by two hundred basis points and their earnings are off

582
00:29:59,000 --> 00:30:01,920
Speaker 12: the charts racial basis. When you say things are rich,

583
00:30:02,280 --> 00:30:04,600
Speaker 12: it's kind of one and the range is one to

584
00:30:04,640 --> 00:30:05,360
Speaker 12: one point six.

585
00:30:05,920 --> 00:30:07,200
Speaker 11: So what are we talking about.

586
00:30:07,400 --> 00:30:09,400
Speaker 2: Do you think the tech sector can continue just to

587
00:30:09,440 --> 00:30:11,560
Speaker 2: try it on an island, it can just be its

588
00:30:11,560 --> 00:30:13,960
Speaker 2: own base, this big ceclar thing, this detached from the

589
00:30:13,960 --> 00:30:16,360
Speaker 2: cyclical story, or do you think when they do finally

590
00:30:16,400 --> 00:30:19,080
Speaker 2: face a cyclical test, people might be surprised by just

591
00:30:19,120 --> 00:30:20,480
Speaker 2: how resident they might not pay.

592
00:30:20,800 --> 00:30:23,400
Speaker 12: Well, they will face a ceclitical test. It's not happening

593
00:30:23,440 --> 00:30:25,440
Speaker 12: in the next eighteen months, and we do more work

594
00:30:25,520 --> 00:30:26,120
Speaker 12: lookout for that.

595
00:30:26,520 --> 00:30:29,800
Speaker 11: Bas doing some excellent work on that. But the interesting

596
00:30:29,840 --> 00:30:30,360
Speaker 11: thing is.

597
00:30:32,040 --> 00:30:36,000
Speaker 12: The text impact now is spreading across a rider cross

598
00:30:36,000 --> 00:30:39,000
Speaker 12: section of the economy. So for example, when you talk

599
00:30:39,040 --> 00:30:41,840
Speaker 12: about even big tech and all the cape spending, it

600
00:30:42,000 --> 00:30:45,360
Speaker 12: is not just the big hyperscalers right now. It's gone

601
00:30:45,400 --> 00:30:50,200
Speaker 12: into utilities, it's gone into component manufacturers, it's gone to industrials.

602
00:30:50,400 --> 00:30:52,680
Speaker 11: So it's spread. So to the extent that.

603
00:30:54,320 --> 00:30:57,560
Speaker 12: Tech is negatively impacted in terms of the scale of

604
00:30:57,560 --> 00:30:59,360
Speaker 12: the business, it will percolate.

605
00:30:59,000 --> 00:30:59,720
Speaker 11: To some extent.

606
00:31:00,360 --> 00:31:02,800
Speaker 12: So yeah, it's a mixed back, but look out, I

607
00:31:02,800 --> 00:31:05,360
Speaker 12: think probably we should come back and talk it.

608
00:31:05,400 --> 00:31:07,000
Speaker 2: Well, I look awf your research piece before you go.

609
00:31:07,120 --> 00:31:08,920
Speaker 2: We really wanted to squeze in. If you're on small cats,

610
00:31:08,960 --> 00:31:11,280
Speaker 2: we've had this massive rally. You've talked about the lack

611
00:31:11,320 --> 00:31:14,320
Speaker 2: of broadening cap for earnings revisions. Small caps have rallied

612
00:31:14,320 --> 00:31:17,800
Speaker 2: almost exclusively on a rerating of the race cycle or

613
00:31:17,840 --> 00:31:20,200
Speaker 2: the rate cuts, the repricing of that over the last

614
00:31:20,360 --> 00:31:22,480
Speaker 2: site two months, since early August when we first had

615
00:31:22,520 --> 00:31:24,160
Speaker 2: that really weight you like payrolls report.

616
00:31:24,480 --> 00:31:26,480
Speaker 7: Are you seeing anything beyond.

617
00:31:26,320 --> 00:31:28,800
Speaker 2: The ray cut story to justify the rally we've had

618
00:31:29,080 --> 00:31:31,640
Speaker 2: over the last seven consecutive weeks.

619
00:31:31,480 --> 00:31:34,000
Speaker 12: For the first time, we are, and let me paraphrase

620
00:31:34,120 --> 00:31:36,640
Speaker 12: that we've been negative and small casts for the longest

621
00:31:36,680 --> 00:31:38,880
Speaker 12: period of time, right, and it's not worked for the

622
00:31:38,960 --> 00:31:40,160
Speaker 12: last two decades.

623
00:31:40,440 --> 00:31:41,800
Speaker 11: I still am very skeptical.

624
00:31:42,160 --> 00:31:44,200
Speaker 12: I think it's more of a rental trade or a

625
00:31:44,200 --> 00:31:47,880
Speaker 12: tactical trade rather than a long term strategic trade. The

626
00:31:47,920 --> 00:31:50,440
Speaker 12: reason I say that is, yes, rate cuts have been

627
00:31:50,480 --> 00:31:52,560
Speaker 12: one of the huge booster for them, but if you

628
00:31:52,640 --> 00:31:56,720
Speaker 12: start looking at the SML, which is the more profitable

629
00:31:56,800 --> 00:32:00,160
Speaker 12: portion four hundred art companies from the Russell universe, we

630
00:32:00,160 --> 00:32:03,000
Speaker 12: were surprised to see that they actually had some modest

631
00:32:03,040 --> 00:32:06,680
Speaker 12: sales decline but managed to post pretty solid earnings top

632
00:32:06,760 --> 00:32:10,000
Speaker 12: of that, and their divisions have improved and actually their

633
00:32:10,040 --> 00:32:15,240
Speaker 12: divisions have gotten slightly better than the.

634
00:32:13,960 --> 00:32:15,880
Speaker 11: SMP outside of tech that portion.

635
00:32:16,480 --> 00:32:19,080
Speaker 12: So I think there is some fundamental strength which is

636
00:32:20,200 --> 00:32:23,360
Speaker 12: going consistent with the recent rally. I just worry you

637
00:32:23,400 --> 00:32:25,880
Speaker 12: whether how long it's going to last, especially for things

638
00:32:26,000 --> 00:32:28,400
Speaker 12: like tariffs, which have not fully shown yet. I think

639
00:32:28,400 --> 00:32:32,520
Speaker 12: it's going to percolate over the next few quarters. Business Wise,

640
00:32:33,040 --> 00:32:35,680
Speaker 12: there's less flexibility. The other thing is, you know, with

641
00:32:35,760 --> 00:32:38,320
Speaker 12: the tenure coming down and front end rates coming down,

642
00:32:38,360 --> 00:32:41,320
Speaker 12: with a lot of floating rate debt, they do benefit

643
00:32:41,400 --> 00:32:41,960
Speaker 12: in the short term.

644
00:32:42,840 --> 00:32:46,400
Speaker 2: This is the Bloomberg Survendans podcast, bringing you the best

645
00:32:46,400 --> 00:32:49,760
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646
00:32:49,800 --> 00:32:52,760
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647
00:32:52,880 --> 00:32:56,640
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648
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649
00:32:59,040 --> 00:33:01,400
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