Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Master's in
Speaker 1: Business with Barry Ridholds on Bloomberg Radio.
Speaker 2: This week on the podcast, I have an extra special guest.
Speaker 2: Mike Wilson has been with Morgan Stanley since nineteen eighty nine,
Speaker 2: rising up through the ranks of institutional sales, trading, investing,
Speaker 2: banking to eventually becoming chief investment Officer and chief US
Speaker 2: equity strategist. He has a very interesting approach to thinking
Speaker 2: about market valuations and strategies and when to deploy capital,
Speaker 2: when to go with the crowd, when to lean against
Speaker 2: the crowd, and has amassed and excellent track record in
Speaker 2: doing so. I thought this conversation was really quite fascinating,
Speaker 2: and I think you will also, especially if you're not
Speaker 2: only interested in equity, but curious as to how to
Speaker 2: combine various aspects of market functions, valuation, economic cycle, fed
Speaker 2: actions into one coherent strategy. I thought this was fascinating
Speaker 2: and I think you will also. With no further ado,
Speaker 2: my conversation with Morgan Stanley's Mike Wilson. Mike Wilson, Welcome
Speaker 2: to Bloomberg.
Speaker 1: Thanks Bary, it's great to be here.
Speaker 2: It's great to have you. I've been looking forward to this.
Speaker 2: Let's talk a little bit about your background. You get
Speaker 2: a BBA from University of Michigan, Go Blue, NBA from
Speaker 2: Kellogg at Northwestern. Was investing always the career plan.
Speaker 1: Yeah, you know, it was in some way, shape or form.
Speaker 3: I mean, you know, my mom was a financial advisor
Speaker 3: in the early eighties. She was kind of an inspiration.
Speaker 3: With a single parent family household, she was basically making
Speaker 3: ends meet, and she, you know, with that time, a
Speaker 3: woman as a broker was, you know, really an endangered species.
Speaker 3: It didn't exist at all. So she got me interested
Speaker 3: looking at stocks at a young age. And of course
Speaker 3: I got hooked early because probably to this day, my
Speaker 3: largest percentage winner of all time was the first stock
Speaker 3: I ever.
Speaker 1: Picked when I was thirteen years old.
Speaker 2: What was that stuff?
Speaker 1: So I was thirteen years.
Speaker 3: Old in nineteen eighty A boy, I can't imagine. I
Speaker 3: picked Nike, worked out pretty well and ended up paying
Speaker 3: for a good chunk of tuition. And of course, once
Speaker 3: you have a winner like that, you're kind of in.
Speaker 1: So I went to school.
Speaker 3: I didn't think I would be necessarily doing what I'm
Speaker 3: doing today, but I knew that I was going to
Speaker 3: be interested in financial markets of some kind, and I
Speaker 3: think I probably ended up in the right place. It
Speaker 3: took a long time to kind of get to the
Speaker 3: right role, but but yeah, I mean I've always had
Speaker 3: an interest in markets.
Speaker 1: For sure.
Speaker 2: Do you still have that Nike I don't.
Speaker 1: Actually I sold it. I finally sold it, all of it,
Speaker 1: I believe, in the late nineties. So I left a
Speaker 1: lot on the table. Yeah. Yeah, it was still my
Speaker 1: biggest winner.
Speaker 2: But still, right, that's a good run.
Speaker 1: Yeah, that's good.
Speaker 2: That was the fat part of the curve with them.
Speaker 2: So I can't help but notice a Northwestern in Chicago
Speaker 2: and then you come to New York City. What was
Speaker 2: that transition like from a quiet Midwestern upbringing to New
Speaker 2: York City.
Speaker 1: Yeah, I mean it really was.
Speaker 3: It kind of a you know, a turbulent sort of
Speaker 3: emotional thing for me. But I had changed school so
Speaker 3: many times through my childhood. I lived in Illinois, I
Speaker 3: lived in Texas, and went to a bunch of different schools,
Speaker 3: so so like new Adventures was not not you know.
Speaker 1: A challenge for me. But yeah, the big city was.
Speaker 1: It was a big change. That was I'm a rural guy.
Speaker 3: I kind of grew up on a you know, farmtown
Speaker 3: in Illinois and in Texas which is in Dallas, but
Speaker 3: not really a farm town, but you know, more rural
Speaker 3: definitely more Midwestern, southern even And so yeah, New York
Speaker 3: was eye opening.
Speaker 2: And New York in the nineteen nineties was like a
Speaker 2: boomtown party totally. What was that first decade like as
Speaker 2: a junior level banker at Morgan's down A lot of fun.
Speaker 1: I had a lot of fun.
Speaker 3: I mean, you know, you work long hours, but you're
Speaker 3: kind of burning the candle at both ends.
Speaker 1: You're you know, it's sort of that's.
Speaker 2: What your twenties are. Four.
Speaker 3: Yeah, work hard, play hard, and nothing bad, nothing we
Speaker 3: shouldn't be doing. And it was great the nineties still
Speaker 3: to this day. I mean it felt in America was
Speaker 3: really booming. It wasn't just New York City. I mean
Speaker 3: it was almost a coming of age for the entire country,
Speaker 3: as you know. I mean, the late nineties was sort
Speaker 3: of you could say peak USA in many ways. We
Speaker 3: can measure that in a lot of different ways, and
Speaker 3: New York was, you know, a big part of that.
Speaker 1: So it was a lot of fun. It was exciting.
Speaker 2: What were your experience is like as a junior I
Speaker 2: banker and.
Speaker 1: Not so fun.
Speaker 3: I mean, you know you're learning, but it's you know,
Speaker 3: it's an entry level job and it's not glamorous. You're
Speaker 3: punching the clock pretty heavy hours.
Speaker 1: But boy, you're.
Speaker 3: Surrounded by some really smart people and you're working on
Speaker 3: things that are are forcing you to grow intellectually. It
Speaker 3: really challenges your resolve. Do you want to be in
Speaker 3: this business?
Speaker 1: You know?
Speaker 3: Do you want to because it's constant as you know,
Speaker 3: I mean being in the in the investment business, being
Speaker 3: in the financial services business, it's it's a constant you know, evolution.
Speaker 3: You know, you have to improve your skills. You have
Speaker 3: to eve all of your skills, and if you don't,
Speaker 3: you kind of die.
Speaker 2: So I had a John Mack on the show last
Speaker 2: year and one of the things that really struck me
Speaker 2: was his respect and reverence for the culture at Morgan Stanley.
Speaker 2: Tell a little bit about your your experiences dealing with
Speaker 2: Morgan Stanley culture.
Speaker 3: Yeah, I mean for me, I mean it was perfect
Speaker 3: because I you know, I grew up very independent. You know,
Speaker 3: my mom put that on me early, and so Morgan
Speaker 3: Stanley's kind of the same way. It's your career to manage,
Speaker 3: try to permitted support internally, to make sure that you
Speaker 3: have what you need, but to generally encourage you to
Speaker 3: explore your limits. And so that to me has always
Speaker 3: been a very endearing part of the Morgan Stanley culture.
Speaker 3: It served me well, it's challenged me, it's made me
Speaker 3: kind of better. It's forced me to grow and do
Speaker 3: different jobs. That's, to me, is the biggest takeaway.
Speaker 2: And thirty five years one firm, your whole career, that's
Speaker 2: a rarity in the modern era. What's kept you there
Speaker 2: your entire career.
Speaker 3: It's just what I said, I mean, they've given me
Speaker 3: the opportunity to do a lot of different things. I
Speaker 3: don't think I could have spent thirty five years at
Speaker 3: any firm doing the same job function.
Speaker 1: It's just I need a variety.
Speaker 3: And so I would probably say that I've had six
Speaker 3: or seven careers over that thirty five year period, and that's.
Speaker 1: What's kept me interested.
Speaker 3: It's been exciting, it's been you know, it's been a
Speaker 3: thrill of a lifetime to be able to do these
Speaker 3: different types of careers.
Speaker 2: So we were chatting earlier about our holding periods getting
Speaker 2: longer as we get older. You and I both started
Speaker 2: as traders. What was that experience like again, nineteen nineties,
Speaker 2: big institutional activity at Morgan Stanley. What was your trading
Speaker 2: career like?
Speaker 3: Yeah, that came later, So I was really investment banking,
Speaker 3: and then I went into really more of a sales
Speaker 3: role in the nineties, and then I became more of
Speaker 3: a prop trader in the two thousand, sort of post
Speaker 3: the tech bubble, and I was involved in trading tech
Speaker 3: stocks proprietarily, you know, helping the desk make money before
Speaker 3: you know, before that became abolished, you know, POSTGC, right,
Speaker 3: and and that was another incredible growing experience. I mean,
Speaker 3: as you know, you know, trading forces you to really
Speaker 3: look inward. You know, you're basically competing against yourself, right,
Speaker 3: You're your own worst enemy, You're your own best friend.
Speaker 1: You know.
Speaker 3: It's a love hate thing. The P and L is everything.
Speaker 3: And you know, I discovered I didn't really like that,
Speaker 3: to be honest, I don't.
Speaker 1: I didn't. I didn't enjoy you know, being married to
Speaker 1: a screen every day. That to me is is not investing.
Speaker 1: That's trading. And I'm not a trader.
Speaker 3: I mean, I understand trading I'm more of somebody who
Speaker 3: is intermediate term. I'm a cycles person as opposed to
Speaker 3: a trading person.
Speaker 2: So the question that comes to my mind because of
Speaker 2: my experience doing something very similar is I find that
Speaker 2: trading has influenced how I look at investing. What has
Speaker 2: your experience been now that your time horizon is much longer,
Speaker 2: how did your experience as a trader in the two
Speaker 2: thousands impact how you see the world?
Speaker 1: Well, it absolutely helps.
Speaker 3: I mean, you know, because it forces you to be
Speaker 3: honest about you know, your positioning, and it forces you
Speaker 3: to revisit like why am I involved in this call
Speaker 3: or position?
Speaker 1: And does it still make sense?
Speaker 3: And that trader instinct forces you to be honest with
Speaker 3: yourself where I think if you hadn't done I hadn't
Speaker 3: done that, I probably wouldn't be, as you know, open
Speaker 3: minded to things changing. And oh yeah, I could be wrong.
Speaker 3: You know, it's funny to be a lot of people
Speaker 3: are afraid to admit the wrong. I'm happy to admit
Speaker 3: that I'm wrong, because that's how a trader closes out.
Speaker 1: A position that's exactly right.
Speaker 3: I mean, like you guys, say I'm wrong, and then okay,
Speaker 3: I've got to do something different, and I think, you know,
Speaker 3: my worst mistakes have been when I've been unable to
Speaker 3: admit that I'm wrong, and so the trading experience helped
Speaker 3: me to kind of get past that.
Speaker 2: The line I recall my head trader drumming into my
Speaker 2: head was it's okay to be wrong, it's unacceptable to
Speaker 2: stay wrong.
Speaker 1: Correct.
Speaker 2: So you hold two roles, and if someone asked me
Speaker 2: what are the two best gigs in all of Morgan Stanley,
Speaker 2: my answers would be, I don't know, either chief US
Speaker 2: Equity Strategist or Chief Investment Officer. You have both of
Speaker 2: those titles. How does that work? How do you handle
Speaker 2: both of those?
Speaker 1: Well?
Speaker 3: I mean, you know that's also evolved over time. I
Speaker 3: mean they're very different constituents. So I would say the
Speaker 3: challenge of having those roles is that our institutional clients
Speaker 3: are much shorter term, and you know, Morgan Stanley has
Speaker 3: all types of different clients. We have institutional clients, we
Speaker 3: have retail clients, we have you know, pension funds, we
Speaker 3: have endowments, and so it's sort of managing that all
Speaker 3: of those different constituents with communication. So that's the challenge.
Speaker 3: I wouldn't say I like one better than the other.
Speaker 3: But what I would say is I do find more
Speaker 3: personal satisfaction in helping the asset owner clients who really
Speaker 3: need the help. Okay, you know, let's be honest. Most
Speaker 3: of the institutional clients, you know, they're pretty sophisticated and
Speaker 3: they're looking for an edge. You know, they value our research,
Speaker 3: they say, they value other people's research, they value the conversations,
Speaker 3: but they don't necessarily need your help as much as
Speaker 3: say a retail client or somebody who is really entrusting
Speaker 3: their entire network to the firm.
Speaker 1: So it's just different, you know.
Speaker 3: And what I find challenging and satisfying is that every
Speaker 3: meeting I do, I almost got to put on a
Speaker 3: different hat. You know, I go into a meeting and
Speaker 3: I'm talking to somebody who really doesn't care at all
Speaker 3: about next week, and they didn't even care about this year.
Speaker 3: They're thinking about five, ten years down the road. It's
Speaker 3: a completely different conversation. In fact, we end up talking
Speaker 3: about their business, how they made their wealth. That's really
Speaker 3: fascinating to me, Whereas if I'm going into a typical
Speaker 3: institutional meeting, it's almost like, you know, wash Rent's repeat. Okay,
Speaker 3: here's what's going on right now, here's how we're thinking
Speaker 3: about it, which is valuable, but it's a totally different meeting.
Speaker 2: Huh. Really interesting. So I'm looking at all the various
Speaker 2: roles you've had at Morgan Stanley over the past three
Speaker 2: and a half decades, investment banker, trader, salesman, strategist, product manager,
Speaker 2: and of course chief investment officer. What's your favorite role
Speaker 2: and if you could create just one sort of amalgam
Speaker 2: of it, what would that look like.
Speaker 1: Yeah, that's an interesting question.
Speaker 3: I mean I would say, you know, I had a
Speaker 3: lot of fun working on the trading desk.
Speaker 1: I was younger.
Speaker 3: We had a group of people kind of the same age,
Speaker 3: and you're rowing the boat. It's a tight team of
Speaker 3: fifteen people or so. And that role was essentially I
Speaker 3: sort of built what we call institutional sector sales, sort
Speaker 3: of a desk analyst role. We were the first firm
Speaker 3: to do that. I was a TMT specialist and then
Speaker 3: I built out that effort over the course of I
Speaker 3: don't know, five six years for every industry, and it
Speaker 3: was a it was kind of like your team, and
Speaker 3: we built it from scratch. Now, every firm has those
Speaker 3: has that role. So we were the original. We're the
Speaker 3: og on that and it was a it was a
Speaker 3: very cohesive group of people. We were analysts, were also traders.
Speaker 3: We were dealing with clients from a sales standpoint, we
Speaker 3: were making calls, we were working with our research department,
Speaker 3: and we'd even work with capital markets, you know, to
Speaker 3: help them price or think about deals in our sector.
Speaker 3: So it was a very comprehensive role but also specialized.
Speaker 3: That to me was had the most fun. But I
Speaker 3: did it for almost ten years, you know, so I
Speaker 3: kind of hit my expiration date, you know what I mean,
Speaker 3: And so I wouln't want to be doing that now
Speaker 3: because I did it. And that's why I always think
Speaker 3: about my life, which is the next thing I do
Speaker 3: is going to be something totally different. I don't even
Speaker 3: know what it's going to be yet, but I mean,
Speaker 3: I'm not retiring. I'll be working till you know, God
Speaker 3: helped me out a little long life, and I'll be
Speaker 3: doing this for a long time.
Speaker 2: Huh. Really interesting? All right, So you cover a lot
Speaker 2: of really one of my favorite topics, the five things
Speaker 2: that are within your purview US equity markets and trends,
Speaker 2: economic indicators, how political events impact markets, corporate earnings, and
Speaker 2: then federal reserve policies. That's the big five in my book.
Speaker 2: I love that area. There's always things to talk about.
Speaker 2: We were chatting earlier and I said, I got a
Speaker 2: lot of questions and emails from clients. Those are the
Speaker 2: five areas that ninety five percent of the questions that
Speaker 2: come in cover. How did you narrow it down to
Speaker 2: these five? What do you like talking about most when
Speaker 2: you're having conversations with clients.
Speaker 3: Well, to me, it's all just about the riddle. You know,
Speaker 3: you're just trying to solve a giant puzzle. I mean,
Speaker 3: that's that's what makes markets so exciting to me. It's
Speaker 3: the marrying quite frankly, of macro and micro. So I
Speaker 3: have a deep background in micro mailing the TMT space,
Speaker 3: and then I developed this macro affinity starting in two
Speaker 3: thousand and really twenty nine to ten in that role,
Speaker 3: and so marrying the two to me is the advantage,
Speaker 3: you know. The way we kind of laid this out,
Speaker 3: and we originally took over coverage of US equity strategy,
Speaker 3: we said there's four pillars to our strategy. First, of all,
Speaker 3: we're cycle analysts, not to be confused with psychoanalyst, but
Speaker 3: it's kind of related. Understanding cycles is critical.
Speaker 2: Are we talking market cycles, economic cycles? Cycles?
Speaker 3: Every but generally starts with the economic cycle. Where are
Speaker 3: you in the economic cycle? And then they're the business
Speaker 3: cycle effectively, and then understanding that there are also market
Speaker 3: cycles and marrying those two is also a big part
Speaker 3: of our framework. So you have to have some sort
Speaker 3: of fundamental framework. Mine has always been based on rate
Speaker 3: of change analysis. So to me, when people look at data,
Speaker 3: a lot of times, I don't think they look at
Speaker 3: data the right way. Now I feel like we educated
Speaker 3: the street in many ways going back fifteen to twenty
Speaker 3: years about this rate of change analysis, going back to
Speaker 3: the early two thousands, and now people are kind of
Speaker 3: onto it. I'm not saying the only person thinking about
Speaker 3: rate to change, but it has become a much bigger feature.
Speaker 3: So the rate of change matters way more than the
Speaker 3: level in every indicator you're looking at.
Speaker 2: In other words, oh, were you accelerating or decelerating rather
Speaker 2: than specific points or exactly.
Speaker 3: And that can apply to macrodata, and it can apply
Speaker 3: to microdata, and that should tell you whether or not
Speaker 3: an asset is probably going to be appreciating or deep creciating.
Speaker 3: So that's one part of our framework. The second part
Speaker 3: of our framework is valuation fundamental work, you know, earnings analysis,
Speaker 3: predicting earnings, whereas a great valuation based on kind of
Speaker 3: where we are in the cycle. And then of course,
Speaker 3: policy is a huge impact on how that cycle can
Speaker 3: be effected.
Speaker 2: When we say policy, do we mean fed policy, do
Speaker 2: we mean fiscal policy?
Speaker 1: We mean everything?
Speaker 3: Yeah, all types of policy, but mainly fiscal and monetary.
Speaker 3: Also geopolitical events, and that's probably the least important for
Speaker 3: us because they're so hard to predict, right, But definitely
Speaker 3: fiscal and monetary policy. And I think that that's probably
Speaker 3: taken on a much bigger role in the last twenty
Speaker 3: years than it was prior to that twenty year period.
Speaker 3: That policy now has a outsized impact on markets and
Speaker 3: it did twenty years ago.
Speaker 2: Huh. Really interesting. Not too long ago you wrote this
Speaker 2: is a humbling business. That's an attitude I completely share.
Speaker 2: But I don't see a lot of people in our
Speaker 2: industry discussing that. Tell us a little bit about what
Speaker 2: makes this such a humbling business.
Speaker 3: Well, first of all, it's extremely competitive, probably the smartest,
Speaker 3: most motivated people in the world that you're competing against.
Speaker 3: And it's and you're also competing against yourself to try
Speaker 3: and figure out what's going to happen. So that's that's
Speaker 3: number one. So your probability of being correct okay is low, right,
Speaker 3: I mean, like if you're fifty to fifty or sixty
Speaker 3: forty on your ideas, you're really good.
Speaker 1: Okay.
Speaker 3: Think about overachievers, you know, when you and we recruit,
Speaker 3: you know, we talk to people young people always say
Speaker 3: you probably haven't even ever had a B on your
Speaker 3: report card. They can't imagine getting a B. Well, get
Speaker 3: ready to have a bunch of f's, you know. And
Speaker 3: that's humbling is to say, hey, you know, like this
Speaker 3: is difficult and you're going to be wrong a lot.
Speaker 3: And really the humility is important because you know, failure
Speaker 3: is all about how.
Speaker 1: You deal with it.
Speaker 3: You know, you're all going to be wrong, okay at
Speaker 3: some point, and how do you deal with that failure?
Speaker 3: Do you do you double down on your mistakes? Do
Speaker 3: you do you deny that you made a mistake? Do
Speaker 3: you learn from your mistake? And to me, that's that
Speaker 3: really encompasses why I like it so much because you're
Speaker 3: forced to grow.
Speaker 1: You're always forced to be growing as a person.
Speaker 3: As a colleague, as a client service person, and you're
Speaker 3: always you're constantly learning and relearning.
Speaker 2: So let's talk about some of that learning. I've tracked
Speaker 2: your career over the years, and I don't know, a
Speaker 2: decade or two ago, you are more inclined to make
Speaker 2: bigger boulder predictions. Now I kind of see you as
Speaker 2: doing more nuanced strategies. You emphasize relative value you're looking for,
Speaker 2: where as an edge I can share with clients versus
Speaker 2: let's see if we can, you know, get the big
Speaker 2: one right. Why has that philosophy evolved over time and
Speaker 2: how do you implement it?
Speaker 3: Yeah, I would say I would say it's changed completely.
Speaker 3: I think that there are times in the markets where
Speaker 3: you know, the big pitch is easier to go after.
Speaker 3: I still I'm a big elephant hunter. I mean, I
Speaker 3: still view myself as I tend to be more contrarian
Speaker 3: because I think that's where you make the big money.
Speaker 3: All my good calls have been going against the grain,
Speaker 3: whether it's.
Speaker 1: Bullish or bearish.
Speaker 3: I would say, you know, we get tagged with being
Speaker 3: you know, more bearish and bullish. I would say, we're
Speaker 3: just more balanced, you know. But when we make big
Speaker 3: calls in the past, they tend to be at important
Speaker 3: turning points, and of course we don't get all those
Speaker 3: right either, but I still enjoy that we Lately we
Speaker 3: have not been doing as much of that because going
Speaker 3: back to what I said a minute ago, policy has
Speaker 3: been so important in the last really since COVID that
Speaker 3: it has kind of screwed up some of our indicators
Speaker 3: in a way where.
Speaker 1: It hasn't been as easy to.
Speaker 3: Have that conviction level that you get run over by policy,
Speaker 3: both on the upside and the downside. And so what
Speaker 3: we feel like we have an edge in is calling
Speaker 3: those relative value trades, and we've had great success in
Speaker 3: that in the last twelve to eighteen months, even though
Speaker 3: perhaps maybe our market call in the last twelve months
Speaker 3: has been not as good.
Speaker 2: Well, let's give you some credit where credit is due.
Speaker 2: Earlier this year you had said, hey, we're very overdue
Speaker 2: for a ten percent correction in the market, and pretty much,
Speaker 2: you know, July and August, that's about what we've seen
Speaker 2: in twenty twenty four. Do you find it easier to
Speaker 2: conceptualize market activity when things become more volatile, How do
Speaker 2: market dis locations affect your ability to read the tea leaves?
Speaker 3: Well, I mean, market dislocation always creates sort of opportunity.
Speaker 3: You know, this year has been very it's been very
Speaker 3: calm from a volatility standpoint, and that's somewhat boring, right,
Speaker 3: So we felt like in early July that you know,
Speaker 3: that had gotten kind of extreme. There was stuff that was,
Speaker 3: you know, peering its way out, and the risk reward
Speaker 3: was not as good. Now ten percent corrections are very common,
Speaker 3: you know, They're not like, that's not really that big
Speaker 3: of a bold call. That's just saying, hey, things are extended.
Speaker 3: It worked out. Timing was actually quite good. Okay, great.
Speaker 3: What I would say is that, you know, the ability
Speaker 3: to read the tea leaves, I would view myself as
Speaker 3: very good at that. And that's not a humble statement,
Speaker 3: but I think it's an accurate statement. Like that's we've
Speaker 3: built our career being able to see around the corner,
Speaker 3: maybe a little bit earlier than some people because we
Speaker 3: look at the market so closely. The market tells you
Speaker 3: kind of what's about to happen. Once again, you can't
Speaker 3: always be accurate. But I would say a lot of
Speaker 3: our clients rely on us sometimes to help them see
Speaker 3: around the corner. And they know that we're not afraid
Speaker 3: to help them.
Speaker 1: Look around the corner.
Speaker 3: Okay, whether it's bullish or bearish, that doesn't really matter.
Speaker 3: It's more of like, what's not priced right now? What
Speaker 3: is priced right now is a soft landing, and that
Speaker 3: is the base case scenario for most people. So you
Speaker 3: have to ask yourself, Okay, well, what happens if that
Speaker 3: soft landing narrative is challenged? Doesn't mean it's a hard landing,
Speaker 3: just means it's challenged. Well, it means evaluations are probably
Speaker 3: too high, and that could set off a chain reaction.
Speaker 3: That that's why you get a correction that would kind
Speaker 3: of the rationale back in early July. Those types of
Speaker 3: calls don't come around every week, right, Those types of
Speaker 3: calls tend to happen when things are extreme levels. You
Speaker 3: see the risk reward being unbalanced, and you take a swing.
Speaker 2: Well, let's talk about a swing you took. You got
Speaker 2: twenty twenty two, very right. You said things were expensive
Speaker 2: and not prepared for a fed hiking cycle, and lo
Speaker 2: and behold, not only were stocks down twenty plus percent,
Speaker 2: bonds were down fifteen percent. It was a pretty awful year.
Speaker 2: You got the macro picture right, What led you to
Speaker 2: identify that correctly? And what made the two years that
Speaker 2: followed twenty twenty two so so challenging?
Speaker 3: Yeah, I mean, I think what set us up was
Speaker 3: we you know, we got the low right in twenty
Speaker 3: twenty for the right reasons. We can't came into the
Speaker 3: pandemic more embarrassed than most because we thought it was
Speaker 3: late cycle. Then we got the pandemic and it was
Speaker 3: to us a really fat pitch. So we were very
Speaker 3: aggressive in twenty twenty in twenty twenty one, and you know,
Speaker 3: we don't get necessarily a lot of credit, but our
Speaker 3: clients give us credit. We caught all that upside and
Speaker 3: so part of that call was just like, look, we've
Speaker 3: had this massive move. It's mainly because of policy. Okay,
Speaker 3: we've overshot, We've had we've had over consumption from the pandemic,
Speaker 3: and all the benefits that were sent out to people
Speaker 3: evaluations are now out of touch with the reality. The
Speaker 3: fens you have to raise rates. We kind of use
Speaker 3: this interesting narrative called fire and ice. Right, the inflation
Speaker 3: will lead to, you know, basically slow down because I
Speaker 3: have to raise rates, and that all narrative just really
Speaker 3: worked nicely. Having been so right in twenty twenty and
Speaker 3: twenty twenty one. On the upside, the call to kind
Speaker 3: of fade into twenty one was actually pretty easy. Where
Speaker 3: we where we didn't get right was that we didn't
Speaker 3: think they'd raise five hundred basis points.
Speaker 1: So we in some ways in eighteen months.
Speaker 3: No, I mean so like that that actually made us
Speaker 3: feel then, oh my goodness, they probably overdid it and
Speaker 3: that's going to lead to probably a hard landing in
Speaker 3: twenty twenty three.
Speaker 1: But we weren't alone in that view, by the.
Speaker 2: Way, So let's talk about this that because Man did
Speaker 2: so many macro economists and strategists, they might have gotten
Speaker 2: twenty two right, but twenty three and twenty four was perplexing,
Speaker 2: and we continued to hear recession, recession, recession throughout I'm
Speaker 2: not saying you, I'm saying the street throughout twenty three,
Speaker 2: the first half of twenty four. As of August of
Speaker 2: twenty twenty four, there are no signs of a recession. Yeah,
Speaker 2: the yield curve is still inverted, it's less inverted than
Speaker 2: it was, and the Sam rule arguably ticked off, although
Speaker 2: Claudia Sam says it may not be indicating a recession now.
Speaker 2: But how did so many of the traditional economists types
Speaker 2: get this recession wrong?
Speaker 3: Well, I mean a lot of the traditional indicators were
Speaker 3: a flashed wrong sign. I mean historically that probably would
Speaker 3: have played out. And my personal view is that we
Speaker 3: had incredible policy support last year, mostly on the fiscal side,
Speaker 3: which essentially allowed the cycle to extend itself. I mean,
Speaker 3: if you take out the government spending, you probably are
Speaker 3: in a recession in a private economy. And look, many
Speaker 3: people have highlighted this too, ourselves included. We have been
Speaker 3: in a recession in many sectors, kind of a rolling recession,
Speaker 3: a term that we sort of invented in twenty eighteen,
Speaker 3: which I regret now because now people kind of use
Speaker 3: it in a way which I think is misused. But anyways,
Speaker 3: we can leave that where it is, and I guess
Speaker 3: this is where I come out in the story, which is,
Speaker 3: I don't think that they've extinguished the risk of a
Speaker 3: hard landing, okay, because now we're going into a period
Speaker 3: where probably fiscal support is going to have to wane,
Speaker 3: and we have election obviously that could affect that too,
Speaker 3: and also a policy now from the Fed maybe late
Speaker 3: and forthcoming. We don't know the answer yet, so I
Speaker 3: think it's almost like a mere image of last year.
Speaker 3: Everybody was so certain it was going to be a recession,
Speaker 3: and of course the majority was wrong. Now everybody's so
Speaker 3: certain it's going to be a soft landing. Who's to
Speaker 3: say that they're not going to be wrong. You just
Speaker 3: don't know. So I think that's where I come out
Speaker 3: on the market. Overall, at the index level, we're not
Speaker 3: as bullish as others because we don't think the multiples
Speaker 3: reflect that there's still this risk that's probably twenty thirty
Speaker 3: percent at least, that you could end up in hard
Speaker 3: landing at some point in the next twelve months, and
Speaker 3: that's definitely in that price.
Speaker 2: So you bring something up that I'm fascinated by, and
Speaker 2: it plays right to the economists getting the recession wrong
Speaker 2: in twenty three and twenty four, and that's your focus
Speaker 2: on government, both fiscal and monetary support for the economy.
Speaker 2: When we have a year like twenty twenty, like the pandemic,
Speaker 2: when the Cares Act and there were three CARES Act,
Speaker 2: But the first Cares Act was something like ten percent
Speaker 2: of GDP. We hadn't seen anything like that since World
Speaker 2: War Two. Shouldn't that force people to kind of rethink
Speaker 2: their models when suddenly a few trillion dollars unexpectedly is
Speaker 2: going to pour into the economy. I remember Jeremy Siegel
Speaker 2: jumping up and down, professor at Wharton, saying this is
Speaker 2: going to cause inflation, and nobody paid him any attention
Speaker 2: back in twenty twenty. Shouldn't that government support that you're
Speaker 2: referring to force us to kind of rethink our models
Speaker 2: a little bit.
Speaker 3: And we did, and that's why we got twenty twenty
Speaker 3: twenty one so right, because we agreed with professional single.
Speaker 3: In April of twenty twenty, we said look out for
Speaker 3: the inflation, and people thought we were nuts.
Speaker 1: Right.
Speaker 2: The pushback was pretty fierce there, fierce.
Speaker 3: We got more pushback, by the way, being bullish in
Speaker 3: March and April of twenty twenty than being bearish in
Speaker 3: twenty two because people say we were being insensitive to like,
Speaker 3: you know, the disease, and we're not being insensitive. We're
Speaker 3: just trying to do our job. And anyways, the point
Speaker 3: is that that boom bust we compared exactly to World
Speaker 3: War Two. We wrote extensively about this. The way we
Speaker 3: adjusted it was we said, okay, these cycles now we're
Speaker 3: going to be hotter but shorter. And that's why in
Speaker 3: twenty twenty one into twenty one we said, okay, this
Speaker 3: is the peak of the cycle.
Speaker 1: Rate to change, which by the way, turned out to
Speaker 1: be really accurate. We got people out of all the
Speaker 1: high flying meme stocks and all that, like in March
Speaker 1: of twenty one, because we said, this is silly, this
Speaker 1: is all just COVID over consumption. It's going to be payback.
Speaker 1: So we did adjust all that.
Speaker 3: But once again, barrious, you can't get everything right, you know,
Speaker 3: so we feel like that narrative is still right on track.
Speaker 3: We didn't trade it particularly well. Okay, Now, what we
Speaker 3: did trade well was our defensiveness and our quality bid
Speaker 3: staying away from small caps. We got out of the memes,
Speaker 3: you know, the high flying multiple stocks. People try to
Speaker 3: keep buying those and just got carried out. And what
Speaker 3: I find interesting is, you know, if you're if you're
Speaker 3: burishing wrong, you know, you get you get carried out. Okay,
Speaker 3: and people just hate that. But The reality is is
Speaker 3: that if you're bullish and wrong, you destroy way more
Speaker 3: capital if you're telling people to buy these crazy things
Speaker 3: that have no valuation support. So it's it's just kind
Speaker 3: of ironic, and I'll just throw this out as a
Speaker 3: bit of an advertisement. But like, we run a portfolio
Speaker 3: of ten stocks, that concentrated portfolio ten stocks, ten stocks,
Speaker 3: and so the last six and a half years, that
Speaker 3: portfolio has outperformed the S and P by almost eight
Speaker 3: hundred basis points annually. Wow, annually, that's huge with very
Speaker 3: little draw downs. And we've and we've been underweight to
Speaker 3: the Max seven by like ninety percent.
Speaker 2: So no kidding, I was just immediately assumed it was
Speaker 2: it was all mag seven Max.
Speaker 1: Haven' killed you in twenty two, Right twenty two, that
Speaker 1: portfolio was actually up and it's long only.
Speaker 3: So now what I'm saying is that calling the S
Speaker 3: and P five hundred is not really that important to
Speaker 3: making money.
Speaker 2: Right.
Speaker 3: Making money is, you know, pivoting into things that maybe
Speaker 3: are loved, getting out of things that are overloved at
Speaker 3: the right time, and not overstaying your welcome. And that's
Speaker 3: where I think our research and our advice has been
Speaker 3: really quite good.
Speaker 2: So here's what I'm kind of intrigued by. You have
Speaker 2: all these different roles. You're looking at all these different
Speaker 2: aspects of the market, of the economy, of various government policies.
Speaker 2: How do you take that massive information and communicate it
Speaker 2: to both the Morgan Stanley staff, the sales team, the brokers,
Speaker 2: the asset managers, and the investing public. I know you
Speaker 2: do a weekly podcast on your perspective of the market.
Speaker 2: How do you get all of this information to your
Speaker 2: audience on a timely basis.
Speaker 3: Yeah, it's it's a challenge I would I would say,
Speaker 3: of all the things, all the skills that I've acquired
Speaker 3: over the years, probably my best skill is communication. That
Speaker 3: whether it's verbal, written media of some kind. You know,
Speaker 3: people say I have a face for radios pot two. Yeah,
Speaker 3: the podcast is better. But the point is is I'm
Speaker 3: pretty clear. There's usually there's not really any uncertainty about
Speaker 3: what I'm saying. I could be wrong, but it's very
Speaker 3: clear and people like the clarity of the messaging.
Speaker 1: So we write it out every week.
Speaker 3: There's a cadence to it, right, We've developed as cadence
Speaker 3: with our clients. Every Monday at you know, twelve am
Speaker 3: in the morning the note comes out, so people are
Speaker 3: waiting for that, or we do we do these regular
Speaker 3: touch points and that regular communication, whether it's to the
Speaker 3: institutional community, to the retail community, to our endowment community.
Speaker 1: Whatever that might be. And of course then we do
Speaker 1: a lot of marketing.
Speaker 3: We do a lot of one on one meetings, you know,
Speaker 3: group events, et cetera. So it's all those touch points,
Speaker 3: and the challenge is that we have to deliver the
Speaker 3: message depending on who the audience is. When it becomes
Speaker 3: challenging is if I'm doing a media segment and that
Speaker 3: maybe the messaging is more for the institutional community, but
Speaker 3: then the retail community picks up on it and it's
Speaker 3: really not for them, or vice versa. That's where it
Speaker 3: becomes a bit of a challenge, and that's one of
Speaker 3: the reasons why I'm now more focused on the institutional side.
Speaker 2: Do you ever find yourself when you're putting these weekly
Speaker 2: conversations together, looking at the flow and saying, you know,
Speaker 2: most of the time these data series are just trending,
Speaker 2: and it's when either there's a major reversal or a
Speaker 2: big outlier that it's interesting. But all right, it's consistent
Speaker 2: with last month's trend, in the previous month's trend, do
Speaker 2: you look at that stuff and say, we don't really
Speaker 2: need to talk about ism again, do we? Or how
Speaker 2: do you deal with that?
Speaker 3: Well, I mean it comes down to what we think
Speaker 3: is the most important thing this week. We also, you know,
Speaker 3: it's a bit of an art in terms of Okay,
Speaker 3: when do you press it? When do you lay low?
Speaker 3: When do you make a relative value call? When do
Speaker 3: you make a market call? You know, it's like, well,
Speaker 3: where's the opportunity right now? But we can kind of
Speaker 3: go anywhere. The beauty of my job is I can
Speaker 3: kind of talk about anything. I can talk about rates,
Speaker 3: I can talk about credit, I can talk about stocks.
Speaker 3: So that's that gives me a wide range of things
Speaker 3: that I can have something relevant to say every week.
Speaker 2: Huh, really really interesting. So there's a phrase of yours
Speaker 2: that you use that I'm fascinated by. It's almost a
Speaker 2: wartime phrase. You had written, the fog of uncertainty reveals
Speaker 2: new investment opportunities.
Speaker 3: Explain, Well, that's when things are mispriced the most right,
Speaker 3: when things are when things are certain, you tend to
Speaker 3: get pretty accurate pricing.
Speaker 1: And of course that's dangerous too, because.
Speaker 2: I was going to say, sometimes you get certainty in
Speaker 2: the wrong direction.
Speaker 3: Correct, But when things are really confusing, like during COVID,
Speaker 3: for example, you had incredible value opportunities that popped up
Speaker 3: because nobody knew anything, including us, but we knew the price.
Speaker 3: And that was the main reason we got bullish in
Speaker 3: March of twenty twenty was that we were waiting for
Speaker 3: equity risk premiums to blow out, and they did, and
Speaker 3: I'm like, well, doesn't really matter. Does really matter what
Speaker 3: happens if I'm buying this at a seven hundred basis
Speaker 3: point equity risk premium and yes, I'm gonna make money. Okay,
Speaker 3: I'm gonna I'm gonna make money. Maybe not next week.
Speaker 3: Now it turned out it was actually the low. But
Speaker 3: I mean, like, that's when val evaluation typically doesn't matter,
Speaker 3: But when it matters, it's all that matters. And the
Speaker 3: fog of uncertainty creates those mismatches by the way, it
Speaker 3: creates on the upside too. So for example, in early
Speaker 3: twenty twenty one, we made a pretty important call, which
Speaker 3: was that all the meme stocks are going bananas, right
Speaker 3: because the free money that was floating around like, well,
Speaker 3: these prices are this is not gonna end well, and
Speaker 3: it's sure it didn't.
Speaker 2: Right, never does it never does right? How is the
Speaker 2: fog of uncertainty today? Is that it's clearly not March
Speaker 2: twenty twenty, but there is a sense that people have
Speaker 2: no idea which direction we're gonna head.
Speaker 3: I would say that right now there there is more
Speaker 3: certainty in people's minds than in reality. Okay, and that's
Speaker 3: really where the opportunity comes up, which meaning there seems
Speaker 3: to be a lot of certainty about how things are
Speaker 3: going to play out, not economically but also from an
Speaker 3: earning standpoint. But I've heard these same arguments now for
Speaker 3: four to six months, four to six quarters, quite frankly,
Speaker 3: about this reacceleration in certain things which it keeps being deferred.
Speaker 1: Okay.
Speaker 3: There's also a lot of certainty apparently around FED policy
Speaker 3: because they guide, which I don't think there's any certainty
Speaker 3: around they don't know.
Speaker 2: I mean, the street has, let's be blunt, been dead
Speaker 2: wrong about what the FED was going to do. It
Speaker 2: feels like it's a year and a half for ready, Yeah.
Speaker 1: The Fed has been wrong. Okay, it's a hard job.
Speaker 1: I mean, you know.
Speaker 3: I remember I'll just go back to an example, but
Speaker 3: in December twenty twenty one, there was fifty basis points
Speaker 3: of FED hikes priced in to the next year, okay,
Speaker 3: And I was remember talking to clients going like, do
Speaker 3: you I think this makes sense? I mean they were
Speaker 3: runaway inflation and the FED has told you they're going
Speaker 3: to start raising rage and like, well, yeah, it could
Speaker 3: be more, but like that's what the Fed's telling us.
Speaker 3: Oh okay, well, I mean so that you know this.
Speaker 3: And this goes back to you know, two thousand and
Speaker 3: three with regulation FD, that's when everything kind of changed.
Speaker 1: Well it changed in two ways. So the FED changed with.
Speaker 3: Green span right with all this forward guidance, and then
Speaker 3: of course it's just gotten more and more and more
Speaker 3: dot plot now and it just it's just compounded. You
Speaker 3: give people a little bit of information, they want more.
Speaker 3: So the FED is now provide so much information they
Speaker 3: can't even tie their shoes without telling us first.
Speaker 2: To be fair, when you and I first started, we
Speaker 2: didn't the FED didn't even announce they were tightening. You
Speaker 2: would just see activity in the bond market exactly, and
Speaker 2: someone would say, hey, it looks like the FED raised rates. Now,
Speaker 2: not only do they tell us the raising rates, we
Speaker 2: get the transcript.
Speaker 3: From the meetings, and then they have to basically go
Speaker 3: through every line and they're like parsing each word. It's
Speaker 3: got to the point now where it's almost debilitating, okay,
Speaker 3: because the markets are almost unable to trade away from
Speaker 3: this sort of formal guidance. Now that served a purpose
Speaker 3: to a point. Now I think it's it's outgrown its
Speaker 3: usefulness in many ways.
Speaker 2: Does the FED lose something by giving up the elements
Speaker 2: of surprise, the ability to shock the markets?
Speaker 1: I think so.
Speaker 3: But more importantly, what ends up happening is the market
Speaker 3: now gravitates to you know, pricing in the same outcome. Right,
Speaker 3: No one is willing to go away from the dot
Speaker 3: plot or the like. The market rarely gets away from
Speaker 3: the guidance. And I bring that up because it's the
Speaker 3: same thing in a stock market now right with regulation
Speaker 3: FD and now we have an entire industry dedicated to
Speaker 3: company conference calls.
Speaker 1: So if you look at.
Speaker 3: The variance in estimate analyst estimates, it has absolutely narrowed
Speaker 3: dramatically over the last fifteen or twenty years. In the
Speaker 3: mid or late nineties, when heads funds became a thing,
Speaker 3: and active managers were doing their thing. The variance and
Speaker 3: estimates was all over the place because we didn't have
Speaker 3: this such formal guidance. And so the irony here is
Speaker 3: that in the effort to reduce uncertainty, you actually end
Speaker 3: up creating more volatility because invariably those estimates are going
Speaker 3: to end up being wrong at some point and everybody's
Speaker 3: in the same position.
Speaker 2: Really interesting, So you mentioned earlier your focus on cycles,
Speaker 2: not just economic cycles and business cycles, but market cycles
Speaker 2: tell a little bit about where are we in the
Speaker 2: economic cycle and where are we in the market cycle today.
Speaker 3: So we're pretty convinced that we're late cycle now. Late
Speaker 3: cycle period's gonna last for years. I mean, the late
Speaker 3: nineties is a great example of that. I mean went
Speaker 3: on forever, and so we don't know when it ends.
Speaker 3: But it's very hard to argue that we're mid cycle
Speaker 3: or early cycle because we're unemployment is I mean, you're
Speaker 3: basically at the fifty year low and it's kind of
Speaker 3: turning up. So we think we're pretty much late cycle,
Speaker 3: and that informs us where to be within the market.
Speaker 3: So that's why quality large caps have done so well.
Speaker 3: Quality growth in particular, that's what works, and this idea
Speaker 3: they're going to go back to small caps or low
Speaker 3: quality cycle, it's just it doesn't work. But people, I
Speaker 3: don't think understand or appreciate where we are, or they
Speaker 3: have a different view about where we are in the
Speaker 3: economic cycle. So one example on the on the price
Speaker 3: cycle or market cycles, I mean that tends to be
Speaker 3: around kind of Fed policy kind of bee where the
Speaker 3: interest rate cycle is well there too. It would suggest
Speaker 3: that we're lated cycle because the curves inverted, has been
Speaker 3: inverted for two years, we're now about to resteep it
Speaker 3: and go positive again. That also would argue that you
Speaker 3: want to have your risk kind of dialed back, at
Speaker 3: least from a beta standpoint. You don't want to be
Speaker 3: invested in lower quality balance sheet businesses. You know, credit
Speaker 3: tends to do much better the inequities. That has been
Speaker 3: the case on a risk adjusted basis. Bonds tend to
Speaker 3: be a better buy. That's starting to work now. So yeah,
Speaker 3: I mean there's there's all kinds of things that we
Speaker 3: look at, and then of course there's individual stock cycles
Speaker 3: which we pay.
Speaker 1: Attention to quite a bit.
Speaker 3: So we do use a lot of technical analysis One
Speaker 3: of the reasons we're kind of contrarying is I tend
Speaker 3: to fade like I fade exhaustion, exhaustion meaning things get
Speaker 3: ever bought or things get over sold. I like to
Speaker 3: I like to kind of press into those into those points.
Speaker 2: That's really kind of interesting. So you mentioned the inverted
Speaker 2: yield curve, and now that that's dis and starting to
Speaker 2: steep in, everybody tends to focus on the inversion, but
Speaker 2: that's not where recessions a car. It's after the yield
Speaker 2: curve inversion on wines and things begin to steep in.
Speaker 2: So what are your thoughts on the possibility of a
Speaker 2: recession in twenty twenty four or more likely twenty twenty five.
Speaker 3: Well, once again, like our house call is as soft
Speaker 3: landing's most likely outcome, we don't have to answer, okay,
Speaker 3: And I don't think the curve is resteeping in a
Speaker 3: way that would signal that the recession is more likely
Speaker 3: than not yet, but that can change. So we're very
Speaker 3: focused on that. And usually when the curve and resteepings
Speaker 3: from the front end, meaning the.
Speaker 1: FED is catching up.
Speaker 3: This is why I'm very focused right now in the
Speaker 3: two year yield relative to FED funds. So two year
Speaker 3: yield's got almost one hundred and eighty five basis points
Speaker 3: below FED funds, you.
Speaker 2: Would think is anticipating massive cuts, right.
Speaker 3: Like, not fifty basis points, okay, or seventy five. It's
Speaker 3: predicting one hundred and eighty five basis points of cuts
Speaker 3: over the next probably you know, twelve to eighteen months,
Speaker 3: which is a pretty aggressive FED cutting cycle. And that's
Speaker 3: all it's telling you. It's just telling you that the
Speaker 3: likelihood that the FED is behind the curve is gone
Speaker 3: up once again. Not a recession, but the risk of
Speaker 3: a hard landing has gone up.
Speaker 1: All else equal.
Speaker 2: If the market thinks we're getting almost two hundred basis
Speaker 2: points and cuts, it sounds like the bond market is
Speaker 2: anticipating a recession right now.
Speaker 3: The good news is that has narrowed. So the spread
Speaker 3: now between two years and FED funds is down to
Speaker 3: one forty five. Why because the claims numbers were better.
Speaker 3: We got some you know, ism services data was a
Speaker 3: little bit better. So this like fear that you know,
Speaker 3: got priced in really quickly is now subsided. A bit
Speaker 3: doesn't mean it's extinguished. It just means that we you know,
Speaker 3: the pendulum is swinging back again, and so we're focused
Speaker 3: on that.
Speaker 1: We're watching it closely. I would say the jury is out.
Speaker 1: We don't know.
Speaker 2: So markets in twenty twenty four had a great first
Speaker 2: half of a year. A lot of people expected to
Speaker 2: build on that ten twelve, fourteen percent gains. Depending on
Speaker 2: which markets you were looking at, you I've come out
Speaker 2: and said, I think it's a low probability that there's
Speaker 2: a whole lot more upside for the rest of the year.
Speaker 2: Tell us what you're looking at there and why do
Speaker 2: you think. Hey, the most of the gains for twenty
Speaker 2: twenty four have already been had.
Speaker 3: So all of the gains really since October of last
Speaker 3: fall has been multiple expansion in anticipation of a FED
Speaker 3: cutting cycle and a reacceleration in growth. So we went
Speaker 3: from seventeen times earnings SMP earnings in October of last
Speaker 3: fall to twenty two times earnings in June.
Speaker 1: Well, that's about as rich as you can get.
Speaker 3: So I'm pretty comfortable saying that multiples are likely to
Speaker 3: come down as the FED cuts. That's also something I
Speaker 3: think people don't appreciate. Once the FED like it's easier
Speaker 3: to travel than arrive, so as you're moving to the
Speaker 3: FED cuts. That's the best part of the cycle. We
Speaker 3: wrote about that at the end of last year when
Speaker 3: we sort of you know through in the tiel that
Speaker 3: we were going to have this you know, hard landing.
Speaker 1: We thought there'd be a rally.
Speaker 3: Okay, we didn't think we go to fifty seven hundred,
Speaker 3: but needless to say that that's what happened. But the
Speaker 3: best part of that rat has now occurred. So when
Speaker 3: the FED starts cutting, multiples usually go down and there's
Speaker 3: just not enough earnings growth offset a ten to fifteen
Speaker 3: percent multiple contraction between here and the end of the year.
Speaker 3: We have like eight percent growth built in for next
Speaker 3: year's earnings growth. So that's the math. I mean, you're
Speaker 3: just you have a net drag from the multiple contraction
Speaker 3: relative to what the earnings growth is going to be,
Speaker 3: even in the soft landing outcome. So I would argue
Speaker 3: that we prob the highs for the year and the
Speaker 3: SMP are probably in. That doesn't mean it's a cataclysm, okay,
Speaker 3: just means that the risk reward now is now particularly attractive.
Speaker 2: So you have this very nuance take that. I'm intrigued
Speaker 2: by what you're describing as somewhat cautious. However, the nuances
Speaker 2: pullbacks are opportunities for investors to put money into high
Speaker 2: quality growth companies that have strong financials and high earnings potential.
Speaker 2: That's a very nuanced position relative to the highs are
Speaker 2: in for the year, and we should expect a bumpy
Speaker 2: road from here.
Speaker 3: Well, it's a little bit of both. I mean, I
Speaker 3: would say that I think the trajectory is down. I
Speaker 3: mean nineteen times. You know, next year's numbers is you know,
Speaker 3: which is the end of the year is lower than
Speaker 3: where we're training today. It's sort of that low five
Speaker 3: thousands is supposed to fifty four hundred.
Speaker 2: But what is that five six percent? Not exactly like
Speaker 2: you said, that's.
Speaker 3: Pumpy, it's not, you know, that's the way you phrase
Speaker 3: the question. So I think it is going to be bumpy.
Speaker 3: And that's to forget that we're going into this election season.
Speaker 3: There are some other things going on around the world.
Speaker 3: There is still excess leverage in the system that I'm
Speaker 3: not sure how that's going to be resolved. Necessarily, China's
Speaker 3: not providing the impetus that people were hoping for from
Speaker 3: a growth standpoint, So we just you know, we just
Speaker 3: we need to take a little bit of a of
Speaker 3: a break, you know, and it could just be a
Speaker 3: consolidation period at the index level, which once again lends
Speaker 3: me to say, I want to be up the quality
Speaker 3: curve and I want to skew more defensive than growth,
Speaker 3: because that's typically what works when the FED cuts.
Speaker 2: Let's talk about another nuanced position that you have that
Speaker 2: I find fascinating. Everybody's been so focused on the artificial
Speaker 2: intelligence enablers and Video and all the other semiconductor chip companies,
Speaker 2: but you've made the argument that investors should begin to
Speaker 2: shift from those AI enablers to the AI adopters as
Speaker 2: the big next opportunity. Talk about that, because that's really
Speaker 2: a fascinating concept.
Speaker 3: Yeah, I mean that's sort of my technology background speaking, right.
Speaker 3: I Mean, that's how these cycles work. You buy the
Speaker 3: picks and shovels or the enablers initially, and then the
Speaker 3: real money, the real opportunity, is with the companies that
Speaker 3: can actually deploy that technology into a new business model.
Speaker 3: So if you think about the nineteen ninety as a
Speaker 3: good example, everybody will understand the enablers were the telecom companies,
Speaker 3: the Silicon companies, the telecom equipment companies.
Speaker 2: Cisco, JDSUNI, Phase, all these companies that nobody, really the
Speaker 2: average investor had no idea what their hardware was really doing.
Speaker 3: Right, But these were spectacular stocks, and that was in
Speaker 3: the build out of the Internet itself. But if you
Speaker 3: think about who actually ended up building the big stocks,
Speaker 3: the ones that really worked from the Internet, it's the
Speaker 3: mag seven, right, you know, I mean X you know
Speaker 3: one semi counter company that has gone crazy here recently,
Speaker 3: But generally, these are the businesses that took the Internet
Speaker 3: and then built incredible business models kind of for free.
Speaker 1: I mean they didn't have to.
Speaker 3: They have to spend the money to build a super highway, right,
Speaker 3: the guys who built a super highway, those stocks have
Speaker 3: been terrible.
Speaker 2: Well, Metromedia, Fiber and Global Crossing. They spent thousands of
Speaker 2: dollars a mile and then got sold for pennies on
Speaker 2: the dollar. But that's how you end up with YouTube
Speaker 2: and Facebook and correct and Netflix.
Speaker 3: So that's why it's interesting now, Barry where you know.
Speaker 3: So obviously hyperscalers have been the big winners of the
Speaker 3: last era, and there's nothing wrong with these businesses or companies. Okay,
Speaker 3: they're great, but they're now the ones spending all the
Speaker 3: money on this next generation cloud or AI whatever you want.
Speaker 1: To call it.
Speaker 3: By the way, AI, just to be clear, is really
Speaker 3: just an extension of machine learning. It's you know, I'm
Speaker 3: not sure we're going to have really artificial intelligence. I mean,
Speaker 3: that's an interesting way to get people excited. Okay, it's
Speaker 3: just another investment cycle. There will be use cases in
Speaker 3: business models that are very profitable built on the backbone
Speaker 3: of those cloud networks. Okay, great, We don't even know
Speaker 3: who those companies are yet.
Speaker 1: Okay.
Speaker 3: My guess is they're going to reside in areas where
Speaker 3: great efficiencies are needed, for example, in healthcare, which we
Speaker 3: were talking about earlier, right, like a lot of inefficiencies
Speaker 3: in healthcare. Well, you know, somebody's going to come up
Speaker 3: with a solution to kind of ring out that inefficiency. Okay,
Speaker 3: and there's massive opportunity for that using machine learning. I
Speaker 3: don't know who those companies are yet, Okay, but those
Speaker 3: are going to be really the fat pitch that's going
Speaker 3: to be where the real wealth at the ten twenty
Speaker 3: thirty baggers. Because these companies now they can't grow tenfold.
Speaker 3: They they're already too big, you know what I'm saying.
Speaker 2: It's amazing when you look in the healthcare space, they
Speaker 2: still use fax machines. I mean literally have your doctor facts,
Speaker 2: the prescription to the Why can't you do email? It's
Speaker 2: not secure? Some of this is technology, some of this
Speaker 2: is just, you know, having one focused business methodology that
Speaker 2: seems to not be rooted twenty thirty four. What is
Speaker 2: fax machine? Forty years old? It's amazing. So it's not
Speaker 2: so much AI as just a rapid adoption of better
Speaker 2: technologies and AI helps. How do we conceptualize that?
Speaker 1: It's just faster processing? Right?
Speaker 3: And then once again, it's about the solution that it's
Speaker 3: built around that.
Speaker 1: Right.
Speaker 3: The Internet was a really interesting development. But I mean
Speaker 3: nineteen ninety five, and you remember this, like I did
Speaker 3: you know, We're sitting around in the desk and all
Speaker 3: of a sudden they're like, oh, there's this thing called
Speaker 3: email that we're going to introduce.
Speaker 1: You Like, what is this? But it was such an
Speaker 1: easy apple.
Speaker 2: But don't email clients. You have to get compliance. I
Speaker 2: still prove that yet. Do you recall back in the
Speaker 2: day where you literally had to have approval to send emails.
Speaker 2: It's amazing that that adoption period was a decade plus long, but.
Speaker 1: It was fat. It was.
Speaker 3: I mean, it was pretty immediate and anybody you know,
Speaker 3: could type, could could use email, and email was I
Speaker 3: think still to this day, one of the biggest productivity
Speaker 3: enhancements I've ever seen in my lifetime. Now, the browser
Speaker 3: was the other killer app. And now the problem is,
Speaker 3: weren't any websites to go to for a while. But
Speaker 3: those two sort of apps to me were so obvious,
Speaker 3: much more obvious than.
Speaker 1: Say, chat GPT is okay, at least so far. We'll
Speaker 1: see where that goes.
Speaker 3: Right now, you know, it does homework for high school
Speaker 3: students and can help you and I write a nice
Speaker 3: poem to a loved one, or help us write a
Speaker 3: speech or something great. But like, is it really enhancing
Speaker 3: productivity in a meaningful way? Like, we can't use that
Speaker 3: yet it doesn't. We can't trust it for the numbers,
Speaker 3: we can't trust it for mission critical type analysis yet.
Speaker 2: Right, it's a research a dendum, but it still hallucinates.
Speaker 2: And so my favorite story is I had Bill Dudley
Speaker 2: the New York Fed and as a guest, and I
Speaker 2: used chat GPT just to see if I missed anything,
Speaker 2: And thanks to chat GBT, I learned that he was
Speaker 2: a linebacker for the Detroit Lions in the nineteen fifties,
Speaker 2: which kind of interesting because he was also born in
Speaker 2: the nineteen fifties. Chat gbt couldn't figure out two different
Speaker 2: William Dudley's that'll eventually get worked out. At what point
Speaker 2: and this goes right back to your AI adopters. Look,
Speaker 2: we're all Internet companies, we're all phone companies. We use
Speaker 2: all these technologies. At what point in the future do
Speaker 2: the other four hundred and ninety companies in the s
Speaker 2: and P five hundred, not the AI enablers, but the adopters,
Speaker 2: when did they start to see the productivity benefits from AI?
Speaker 2: How far off is that in the future.
Speaker 3: When the you know, Hyperscalers or somebody else hands them
Speaker 3: a solution, it's a package solution. I mean, it's no
Speaker 3: different than software in the nineties, right, sound like you
Speaker 3: and I were going to go develop Office or we're
Speaker 3: going to go develop Excel, you know, But somebody developed
Speaker 3: that for us. We deployed it in our enterprise and
Speaker 3: our employees became very productive. So we just need the
Speaker 3: development of those applications. That's the second phase. The other
Speaker 3: problem that we haven't solved yet is the electricity, you know,
Speaker 3: the power consumption, the heat you know, and also to
Speaker 3: build these things out it takes time, and so that's there.
Speaker 3: There are some there are some snaff oos in here
Speaker 3: that will you know, retard the expansion and growth of
Speaker 3: But but.
Speaker 2: All those things are solvable. It's just a matter of time,
Speaker 2: you know.
Speaker 1: But but is it money?
Speaker 2: Is it decades or is it years?
Speaker 3: Oh?
Speaker 1: No, it's years.
Speaker 3: But I don't think it's fast enough to prevent where
Speaker 3: we are in the economic cycle. Once again, going back
Speaker 3: to I think there are people making the argument that, oh,
Speaker 3: not only did the fiscal kind of bridge us another year,
Speaker 3: but now AI is going to extend the cycle another
Speaker 3: three or four years.
Speaker 1: I'm just out of that belief because that's the next cycle.
Speaker 1: That's the next cycle. That's what to get, that's what's
Speaker 1: going to be.
Speaker 3: That's what you're gonna want to get excited about when
Speaker 3: valuations come in at some point in the next twelve months,
Speaker 3: is my guess. And there's a fat pitch that people
Speaker 3: have forgotten about.
Speaker 2: All right, last of our standard questions when you look
Speaker 2: at a market where we are today, When you look
Speaker 2: at the economy where we are today, what are your
Speaker 2: favorite metrics to focus on, whether it's valuation or the
Speaker 2: economy or inflation, what are your big three that you're
Speaker 2: you're watching.
Speaker 3: So, once again it goes back to ry to change
Speaker 3: on a lot of the key metrics. I say, the
Speaker 3: key metrics I'm focused on now are things like revision factors,
Speaker 3: So earnings revision factors, that's what stocks are most highly
Speaker 3: correlated to. That's now rolling over. So the rate to
Speaker 3: change on that is in a bad slope, which means
Speaker 3: valuation has come down. It doesn't mean it has to
Speaker 3: go negative, but you know, it can go negative and
Speaker 3: then we'll have to adjust, you know, or targets further.
Speaker 3: Right now, it's in a correction phase from a From
Speaker 3: that standpoint, From an economic standpoint, it's all labor data. Okay,
Speaker 3: That's all that matters to me.
Speaker 2: Now.
Speaker 3: Everything else is kind of secondary. If the claims data
Speaker 3: and the payroll data stays okay, soft landing is the outcome.
Speaker 1: If that deteriorates further.
Speaker 3: I don't think it can deteriorate a whole lot further
Speaker 3: before the market start to get nervous.
Speaker 2: In our last five minutes, Let's jump to our favorite
Speaker 2: questions that we ask all our guests, and we'll do
Speaker 2: this in a speed round, starting with tell us what
Speaker 2: you're streaming, what's giving you entertain these days?
Speaker 1: Yeah, I'm watching sort of an eclectic group.
Speaker 3: Now, The Bear. I don't know if you've seen that show.
Speaker 3: We just finished season three, which I didn't love.
Speaker 1: The season three is.
Speaker 2: Season two is still better, but three was interesting.
Speaker 3: Yeah, it's all good. It's just great character studies, which
Speaker 3: which we enjoy. My wife and I have enjoyed that series.
Speaker 3: We just finished it. Other than that, the offer, if
Speaker 3: you've seen that, no, So the offer is about the
Speaker 3: making of the movie The Godfather.
Speaker 2: We were just talking about this over the week.
Speaker 1: Spectacular. We're not done with that yet, but it is.
Speaker 2: But I can't remember the last time I saw Godfather too.
Speaker 2: It had to be decades, yeah, ago. And someone said,
Speaker 2: watch the offer. It's based on the book that the
Speaker 2: producer exactly did. And people said, when you go back
Speaker 2: and rewatch it, everything has a different context.
Speaker 3: It's spectacular. So I would recommend that. And then I'm
Speaker 3: watching a Pete Rose documentary right now. I'm in the
Speaker 3: third of the fourth and it wasn't not what I expected.
Speaker 3: So I like to watch a lot of documentaries, and
Speaker 3: that one is pretty fascina really interesting.
Speaker 2: Tell us about your mentors who helped shape your career.
Speaker 3: Well, I mean, this is all it is going to
Speaker 3: sound the writer, you know, dishonest, but it's True's basically
Speaker 3: my mom and my wife. I mean, these are the
Speaker 3: two strongest women I've ever met in my life. They've
Speaker 3: been extremely honest with me and forced me to grow,
Speaker 3: and so those are the two most important.
Speaker 1: For sure. There's no one.
Speaker 3: Person, but many colleagues and many clients. I would say
Speaker 3: clients have shaped my views on the market's probably more
Speaker 3: than colleagues, because you know, they're actually putting skin in
Speaker 3: the game, and they've also helped me make good career
Speaker 3: decisions and judgments.
Speaker 2: It's such an interesting observation you're making because we sort
Speaker 2: of forget how clients force us to rethink certain things.
Speaker 2: Or someone asked you a question where you think the
Speaker 2: answer is obvious, but you don't want to just give
Speaker 2: them a quick answer, so you do the homework and
Speaker 2: you discover, oh, this is a lot more complicated than
Speaker 2: I originally thought. I'm glad you brought that up because
Speaker 2: it comes up so frequently, and I think we don't
Speaker 2: pay it enough atention. It's really insightful. Let's talk about books.
Speaker 2: What are some of your favorites? What are you reading
Speaker 2: right now?
Speaker 3: You know, if it was up to my wife, I'd
Speaker 3: be reading like a book a week. She's a literary giant,
Speaker 3: so she's always handing me books. And I'm kind of
Speaker 3: an eclectic reader. But I would say some of my
Speaker 3: favorite books are The Boys in the Boat.
Speaker 1: Now series.
Speaker 3: Now also, yeah, there's a movie. I didn't watch the
Speaker 3: movie because the book was just so detailed. It was fantastic.
Speaker 3: Like all the classic books, my favorite was Catcher.
Speaker 1: In the Rye.
Speaker 3: It's kind of a coming out of age story, you know,
Speaker 3: animal farm and those types of things, and then like
Speaker 3: the trashy type stuff, you know, like one of my
Speaker 3: favorites of all time still to this day is The Firm.
Speaker 3: If you remember reading the John Grisham novel became a
Speaker 3: Tom Kruise move. Yeah, but I mean, like so like
Speaker 3: you know, that's it's a gamut of it right now.
Speaker 3: I mean, I read so much for work. I don't
Speaker 3: probably read enough books, Like day to day, but I'd
Speaker 3: like to read more.
Speaker 2: Huh really interesting. Our final two questions, what sort of
Speaker 2: advice would you give to a recent college grad interest
Speaker 2: in the career in investing.
Speaker 3: Well, the advice I do give them is just, really,
Speaker 3: this is not a sexy business.
Speaker 1: Okay, this is this is a grinder business.
Speaker 3: So if you come into this business, understand, like we
Speaker 3: talked earlier, you're gonna be wrong a lot. You gotta
Speaker 3: have some humility. You're gonna be a lot of highs
Speaker 3: and lows. When things are feeling really good, take it
Speaker 3: down a notch. When things are feeling really horrible, don't
Speaker 3: you know, kill yourself. And it's just it's gonna be
Speaker 3: a roller coaster. And it takes a long time to
Speaker 3: become even close to being a domain expert in anything
Speaker 3: in this business. There's some many smart people. There's so
Speaker 3: much changing all the time. You know, you got to
Speaker 3: put ten years in before you know anything. And I
Speaker 3: think that, you know, I think that's really good advice
Speaker 3: to a young person. I wish I had had that advice,
Speaker 3: because you know, we're all ball eyed coming out of
Speaker 3: college thinking we're going to change the world, and the
Speaker 3: reality is this is a this is a long road.
Speaker 3: I mean thirty five years, I'm still learning every day.
Speaker 2: Really interesting answer. And our final question, what do you
Speaker 2: know about the world of investing today you wish you
Speaker 2: knew back in nineteen eighty nine when you were first
Speaker 2: getting started.
Speaker 3: Well, I guess part of it is what I just
Speaker 3: said that it's a you know, it's not a sprint,
Speaker 3: it's a marathon. You know, cut yourself some slack along
Speaker 3: the way. You're going to make some wrong turns, and
Speaker 3: I would say, enjoy it, you know, because it's it's
Speaker 3: it's a journey, and it's a journey not just about
Speaker 3: like the people you're working with and the people you're
Speaker 3: helping your clients. It's joarning about yourself. This is a
Speaker 3: struggle with yourself. I mean, figuring out markets is an
Speaker 3: internal battle. It's like probably the book I should have
Speaker 3: mentioned was Reminiscences of a Stock Operator I have. I've
Speaker 3: read that like five times and I still go back
Speaker 3: and refer to it sometimes.
Speaker 2: I call that the first behavioral economics book.
Speaker 3: I would agree, and it's a fictional character, but it's
Speaker 3: a real life experience of just how it goes down
Speaker 3: and understanding your faults, your own fault. Understanding your weaknesses
Speaker 3: and your strengths, you know when to press it when
Speaker 3: not depress it. And then and then you know, unfortunately
Speaker 3: and that story ends up with you know, killing himself
Speaker 3: because it just it eats a way too. So that's
Speaker 3: that's really what I wish I know thirty years ago,
Speaker 3: like it's gonna it's gonna take a pound of.
Speaker 2: Flesh, right, Really interesting, Mike, thank you for being so
Speaker 2: generous with your time. We have been speaking with Mike Wilson,
Speaker 2: chief US equity strategist and chief investment officer of Morgan Stanley.
Speaker 2: If you enjoy this conversation, check out any of the
Speaker 2: five hundred or so we've done over the past ten years.
Speaker 2: You can find those at iTunes, Spotify, YouTube, wherever you
Speaker 2: find your favorite podcast. And check out my new podcast,
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Speaker 2: I did not thank the crack team that helps us
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Speaker 1: I'm Barry Rayhelts.
Speaker 2: You've been listening to Masters in Business on Bloomberg Radio.