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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: with stocks extending gains after posting fresh record highs. Max
Speaker 2: Katner of HSBC writing, what matters more than geopolitics is
Speaker 2: what's driving the global earnings outlook. The big question is
Speaker 2: whether US exceptionalism will make a proper comeback. Max joins us.
Speaker 3: Now for more.
Speaker 2: Max, you've been Max overweight for quite a while. We
Speaker 2: were talking about it at the top of the program.
Speaker 4: Here.
Speaker 2: Do you see this as comfort with the risk in
Speaker 2: the Middle East or renewed confidence the US tech trade.
Speaker 5: I think it's probably more the latter. In fact, I
Speaker 5: think I would argue does really does the iron more
Speaker 5: really matter that much to the global earnings out look,
Speaker 5: particularly to the earnings outlook of the SMP. Bear in mind,
Speaker 5: when you look at the SMP, you look at you
Speaker 5: with large caps. It's not like consumer cyclicals are thirty
Speaker 5: forty percent.
Speaker 3: Absolutely not right. Actually, you look at consumer discretionary strip.
Speaker 5: Out Amazon and Tesla, you're talking about sort of four
Speaker 5: and a half percent of the SMP. And even there,
Speaker 5: when you linked within those, you look at the proper
Speaker 5: consumer ciclicals, you're talking something like two to three percent
Speaker 5: of the SMP. So even if let's say the lower
Speaker 5: end of the k of the slightly weaker households in
Speaker 5: terms of household health and financial health, if they are
Speaker 5: hurt the least, does it really matter for SMP earnings?
Speaker 5: I would argue no, because you look at tech, you
Speaker 5: look at the tech sector, you look at the AI sectors.
Speaker 3: Actually, when you.
Speaker 5: Look takeing AAI together, that nowaday for almost fifty percent
Speaker 5: of market cap. So to me, I don't think what
Speaker 5: we've seen in the last eleven training sessions is the
Speaker 5: irrational reaction. I think actually what was irrational was the
Speaker 5: really sort of the twenty percent de rating and compression
Speaker 5: that we've seen in S ANDP multiples at the beginning
Speaker 5: of the war.
Speaker 2: Max two points you made SMP earnings S ANDP multiples.
Speaker 2: It's the same true of the international backdrop, the global
Speaker 2: earning story, the European equity story.
Speaker 5: I think on the European earning story is probably slightly
Speaker 5: more nuanced. When you look at stuff like chemicals, stuff
Speaker 5: like authors, they are going to be probably more effected.
Speaker 5: So I think where we're in right now, we're probably
Speaker 5: in the sort of global relief rally, not just because
Speaker 5: of US runt, but also because of things like interest
Speaker 5: rate volatility that has basically more than doubles right during March.
Speaker 5: That's now really really come down quite a lot, and
Speaker 5: that helps pretty much everything. Now, when interest rate wall
Speaker 5: comes down, what helps that? The most that helps really
Speaker 5: gets from March. So what do you want to do
Speaker 5: right now is basically lip the performance picture of March.
Speaker 3: So my advice to investor is very simple.
Speaker 5: You just download a performance picture across sectors, across region,
Speaker 5: across asset classes in March, and you.
Speaker 3: Just flip it right.
Speaker 5: You buy the stuff that didn't work in March. You
Speaker 5: sell the stuff that did work and protected you. I
Speaker 5: think in a second stage, the second trade, probably in
Speaker 5: a couple of weeks or a couple of months, that
Speaker 5: is probably then more going towards Okay, what's actually changed
Speaker 5: from the fundamental backdrop a little bit like with Russia
Speaker 5: Ukraine were on a redative basis, then we're probably talking
Speaker 5: about right.
Speaker 3: The AI outlook, the takeout look.
Speaker 5: Is still strong, so probably then it's worth rotating from
Speaker 5: Europe to.
Speaker 3: The US, but not right now. Right now you're still.
Speaker 5: Playing that reshaped recovery trade.
Speaker 1: And how much max is this really predicated on the
Speaker 1: idea that big tech suddenly is once again a have
Speaker 1: in trade after kind of being kicked around for a
Speaker 1: couple of months. Are we seeing anything fundamentally different now?
Speaker 1: Given the pressure from higher commodity prices, that will press
Speaker 1: certain consumers in some regions more than another's.
Speaker 5: Yeah, look, I think I'm not disputing that it will
Speaker 5: hurt certain consumers. But at the end of the day,
Speaker 5: our job as analysts, our job as portfolio managers is
Speaker 5: to look at the aggregate number. We've got to look
Speaker 5: at the aggrid PC or retail sales number. What's that
Speaker 5: driven by? That's not driven by the lowest twenty percent. Right,
Speaker 5: this is a very cynical thing to say. The lower
Speaker 5: end of the K that's been struggling already since COVID,
Speaker 5: that's been struggling even more with you know, stuff like
Speaker 5: food prices going up even more than more and headline
Speaker 5: CPI they've been really struggling even more.
Speaker 3: They're now going to struggle even more.
Speaker 5: Now from our perspective, Does that matter for the PC
Speaker 5: or for their headline retail sales numbers. No, they are
Speaker 5: not the main contributors to that. So therefore that's why
Speaker 5: I'm saying, you know what, actually on the headline numbers,
Speaker 5: there's probably not going to be that awful much of change.
Speaker 5: And on the tech side of things, I think one
Speaker 5: thing has fundamentally changed to the last two quarters, pretty
Speaker 5: much since November, since the Q three reporting season, we've
Speaker 5: kind of given up on the AI earnings outlook. Right,
Speaker 5: that was the first times where markets have actually not
Speaker 5: rewarded but actually punished higher AI capis. The result of
Speaker 5: that was black prices of AI, of hate for hyperscalers,
Speaker 5: but earnings going through the roof still and now relative
Speaker 5: tech valuations if you look at S and P tech
Speaker 5: versus X tech or Max seven valuations, you're close to
Speaker 5: ten year lows, so that tech premium is almost entirely vanished.
Speaker 5: That really puts TAG and us on a bit of
Speaker 5: a longer term perspective on a really really I would
Speaker 5: argue even cheap foundation there.
Speaker 1: Max, I feel like you should change your name from
Speaker 1: Max Ketner to Max Polish because you've had Max Polish
Speaker 1: for quite a while with one huge caveat, which is
Speaker 1: what the yield backdrop ends up looking like. That could
Speaker 1: be the fly in the ointment if you see that
Speaker 1: danger level, particularly with the ten year yield. There's a
Speaker 1: lot of uncertainty around the FED. The polymarket trading betting
Speaker 1: odds now have the chances of a FED cher J.
Speaker 1: Powell leaving the board by May thirtieth at only thirty
Speaker 1: one percent. I mean, how much do you see this
Speaker 1: as a real risk versus just some sort of theoretical
Speaker 1: risk out there given the fact that a lot of
Speaker 1: inflationary metrics have been relatively under control.
Speaker 5: Yeah, just to be clear, so we've not been sort
Speaker 5: of Max bullish on equities for a year and we
Speaker 5: don't see any risks at all. It was just more
Speaker 5: in mid March that we thought, right, probably there's been
Speaker 5: enough happening now and you know, we're probably pretty close
Speaker 5: to particularly systematic positioning very clean, which is still the.
Speaker 3: Case, and that has driven on us to that max
Speaker 3: bullish stance. Am I still going to be that in
Speaker 3: three to six months time?
Speaker 5: I think that's very questionable because what you've been asking,
Speaker 5: I think that is not a theoretical risk. That is
Speaker 5: a real risk because at the end of the day, look,
Speaker 5: US earnings out look is really strong. At the end
Speaker 5: of the day, actually Q one reporting seating ahead of that,
Speaker 5: we've now seen the highest negative to positive pre announcement ratio.
Speaker 3: From US corporates.
Speaker 5: US Corpress are telling us ahead of the Q one
Speaker 5: reporting seeling things are not only fine, they're even better
Speaker 5: than they themselves have expected by the most in five years.
Speaker 3: And that really I.
Speaker 5: Think that is something that brings perhaps the danger back
Speaker 5: that things are not going sort of goldilocks, not too hot,
Speaker 5: not to gold. But then in a couple of months,
Speaker 5: with so sicky inflation and with perhaps the unemployment rate
Speaker 5: going down even further because of that very low brake
Speaker 5: even payroll and a really really solid and accelerating earnings backdrop,
Speaker 5: that suddenly things are just too good.
Speaker 3: So I wouldn't put it on Kevin Walsh.
Speaker 5: I would simply put it on the data perhaps in
Speaker 5: a couple of months just looking too hot and therefore
Speaker 5: the terminal rate maybe having to move more towards four percent,
Speaker 5: and that of course would put pressure across all the
Speaker 5: asset classes with the dollar the only say havement again, well.
Speaker 6: Max in that situation, could us exceptionalism make a proper comeback?
Speaker 6: You say that's your third stage in your note.
Speaker 3: I think that is then the case.
Speaker 5: Yeah, I absolutely think that's the case, because right now,
Speaker 5: what is the use acceptionalism, right it is inflation is
Speaker 5: sort of sticky, and actually growth is kind of fine
Speaker 5: and accelerating as particularly the superior profitability.
Speaker 3: Right against the rest of the world.
Speaker 5: Now, when you nick something, I priced the book ratios
Speaker 5: of the US against the rest of the world, and
Speaker 5: you compare that to the return on equity on a
Speaker 5: relative basis between the US and the rest of the world,
Speaker 5: what you will see is that the compression, that relative
Speaker 5: compression was way more significantly more than is justified what's
Speaker 5: been happening on the relative profitability side. So I do
Speaker 5: think people have really really overreacted to some sort of
Speaker 5: AI funding concerns since Q four last year. And I
Speaker 5: think that is then when we realizing, you know what,
Speaker 5: maybe the US is as stupid as that sounds, is
Speaker 5: even too cheap given that superior profitability outlook at some stage,
Speaker 5: I think, given that sticky inflation backdrop, given that the
Speaker 5: pop down growth side also is more than fine, I
Speaker 5: think in a couple of months we're talking probably about
Speaker 5: a bit more of a challenging rate outlook.
Speaker 7: There.
Speaker 3: Stay with us.
Speaker 2: Marvel and Birk surveillance coming up after this, General Karon
Speaker 2: Gibson of Academy Securities, you think I'm joking. Maybe I'm
Speaker 2: not writing each day that the golf remains closed to
Speaker 2: business increases risk to the global economy around benefits from
Speaker 2: a closed golf.
Speaker 3: We do not.
Speaker 2: General Gibson joins us now for more. General Gibson, good morning,
Speaker 2: Good morning, and welcome to the studio here in Washington.
Speaker 2: It's good to see you. Let's talk about the risks
Speaker 2: on the ground right now, the state of the ceasefire
Speaker 2: and the state of the blockade.
Speaker 3: What's your assessment of things.
Speaker 4: So the ceasefire is holding, which is a good sign,
Speaker 4: establishing the ceasefire was a positive step by stepping off
Speaker 4: that escalatory kinetic ladder that we had been on, and
Speaker 4: an extension of a ceasefire I think is a sign
Speaker 4: that perhaps there's some productive dialogue going on in the
Speaker 4: back channel. If it were increasingly frustrated, we would probably
Speaker 4: see a bold an additional bold action by the United
Speaker 4: States in terms of the blockade.
Speaker 3: I think that's a very.
Speaker 4: Bold move and attempt to decline or decrease some of
Speaker 4: Iran's leverage and to deny them revenue, whether that's from
Speaker 4: the toll that they exact on passage of vessels or
Speaker 4: from their own exports, and ideally that will bring them
Speaker 4: to the table to make additional concessions. I have no
Speaker 4: doubt about the US Navy's ability to execute this mission
Speaker 4: with the same kind of competence, professionalism, and precision of
Speaker 4: all the missions they've performed throughout this campaign. But it
Speaker 4: does not solve the transit problem of vessels that remain
Speaker 4: stuck in the golf well.
Speaker 6: In the past, we've seen the Fifth Fleet escort tankers
Speaker 6: through the straight or from most can we see.
Speaker 4: That that is certainly possible. It's another feasible option. It's
Speaker 4: resource intensive, and so now there is another carrier as
Speaker 4: I understand, steaming towards the Golf. Both the blockade and
Speaker 4: escorts are resource intensive. It's not just the ships that
Speaker 4: are escorting them, destroyers of fighter cap for combat air patrol, intelligence,
Speaker 4: surveillance and reconnaissance, mind sweepers. And even if we are
Speaker 4: scorting vessels, particularly if we're the only nation that's doing it,
Speaker 4: we can't escort the same number of vessels that previously
Speaker 4: we're flowing through the Golf prior to this conflict, so.
Speaker 6: The volume will be low. But if the US fIF
Speaker 6: Fleet were to do this, when could they actually start
Speaker 6: doing it?
Speaker 4: I think if they want to impose both the blockade
Speaker 4: and escorts, we probably want to wait for the arrival
Speaker 4: of the other, the additional carrier strike group that as
Speaker 4: I understand, is on its way there. I think it's
Speaker 4: important to note, though, that Iron's ability to choke off
Speaker 4: the Golf is very broad. It's really based on a
Speaker 4: perception of risk. It doesn't take a lot of resources
Speaker 4: on their part. It's not hard to drop a mine
Speaker 4: or two, or even to say we've dropped minds over here,
Speaker 4: and then someone has to verify it. Demonstrate the feasibility
Speaker 4: of sailing through there, and the decision to flow through
Speaker 4: the golf as you know, well, it's not a military
Speaker 4: or a political decision, it's an economic decision on commercial risk.
Speaker 1: Unless there is a transformation in terms of the way
Speaker 1: that trips transit through the strait of ourmous, will things
Speaker 1: ever be the same again because of this perceived risk
Speaker 1: that is now in the forefront of every shipping company's minds.
Speaker 4: I think perceived risk is exactly what it boils down to,
Speaker 4: and so there's a much that must happen to lower
Speaker 4: that perception. The ceasefire is an important step because right
Speaker 4: now we don't see anyone you know, taking any hits
Speaker 4: from drones and missiles.
Speaker 3: Et cetera.
Speaker 4: Also, progress on the diplematic front would be an important
Speaker 4: confidence builder. But this period of risk, or this perception
Speaker 4: of risk extends beyond shipping. You know, we've seen strikes
Speaker 4: against airfields, against you know, to buy There's much that
Speaker 4: will need to be done to lower that temperature across
Speaker 4: the region, and I know that our golf partners are
Speaker 4: very interested in seeing this result so that they can
Speaker 4: resume a normal commercial and iron Man.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this.
Speaker 2: Bob mcmalley of Rapid and Energy Group expecting a prolonged
Speaker 2: hormost disruption, writing, if the strait does not reopen by
Speaker 2: three q we estimate the oil price rally, we'll likely
Speaker 2: need to be counted by extensive demand destruction in the
Speaker 2: form of severe hits to GDP growth. Bob joined us
Speaker 2: now for more, but welcome to the show. I wonder
Speaker 2: if you share that enthusiasm and confidence of the Treasury
Speaker 2: Secretary for lower gas prices in the months ahead.
Speaker 3: Well, good to be with you.
Speaker 7: You know, our base case is that we will avoid
Speaker 7: that worst case recession caps the oil price fake.
Speaker 3: That's how it's been done in the past.
Speaker 7: We're cautiously optimistic we will get to a better outcome.
Speaker 7: Not right away, but we will have either a cease
Speaker 7: fire in the coming weeks that allows a full resumption
Speaker 7: of hormos flows, or or the US military will get
Speaker 7: on with the job of degrading around's ability to interrupt
Speaker 7: shipping in the coming weeks. That may take a little longer,
Speaker 7: but I'm cautiously optimistic we maybe see the end of
Speaker 7: the oil price rally, hopefully before it has to come
Speaker 7: to recession. However, gas prices that's another story. We have
Speaker 7: to see how things turn out this summer. I hope
Speaker 7: maybe by the end of the summer and have a
Speaker 7: three handle, but that would be that would be optimistic.
Speaker 6: Bob, what is the reporting that Iron could consider rallying
Speaker 6: ships to safely go through the.
Speaker 3: Gulf of Oman. How would that affect flows?
Speaker 6: How many more vessels could we see actually then start
Speaker 6: to move?
Speaker 7: Well? In the old days before this, the way out
Speaker 7: we go through Omani waters and the way in through
Speaker 7: Iranian waters, they kind of split the highways if you will,
Speaker 7: the t SS's and I think, you know, if it's
Speaker 7: just Omani waters open, it's not clear we can get back.
Speaker 3: To a full and safe restart of flows.
Speaker 7: Possibly. But I think what Iran is really signaling here,
Speaker 7: and it's more important, is that it realizes, and this
Speaker 7: is very important and very hopeful in the long term,
Speaker 7: it realizes no one's going to let them be the
Speaker 7: toal keeper of Hormuz.
Speaker 3: In the long term. They did move and play the
Speaker 3: oil card.
Speaker 7: I don't think the US expected that, and because they
Speaker 7: have this leverage, they have stronger ability to extract concessions
Speaker 7: from the United States on nuclear and other things, and
Speaker 7: they probably WI will. However, they realize that Golf Cooperation
Speaker 7: Council countries Israel, the United States, there's no way we're
Speaker 7: going to allow them to choke this thing forever. So
Speaker 7: I think it's kind of an admission that, yeah, we
Speaker 7: know at some point flows are going to resume. Whether
Speaker 7: it's through totally Omani waters, we could do that if
Speaker 7: we had to, or back to the old ways, partially
Speaker 7: Irani and partially Omani, but it's going to come back
Speaker 7: to freedom of navigation eventually.
Speaker 6: The President yesterday was talking a lot about his conversations
Speaker 6: with on his upcoming trip to China. Right now, I
Speaker 6: know China is taking him much less crude from the
Speaker 6: Middle East, about half of what's going on in terms
Speaker 6: of they used to import from Saudi Arabia. How are
Speaker 6: they dealing with the problem right now, because I know
Speaker 6: you have a new note right now actually talking about
Speaker 6: how China is going to weather this storm.
Speaker 7: So China stocked up well, I mean, they're not enjoying it,
Speaker 7: but they're doing better than their many other Asian neighbors.
Speaker 7: They had one point two billion in crude inventories they've
Speaker 7: been hoarding like mad other commodities as well. They're going
Speaker 7: to begin to draw those down. They're dropping runs again.
Speaker 7: They're in a better position than many of their neighbors
Speaker 7: with regard to this famine of oil that is now
Speaker 7: certainly in Asia.
Speaker 3: So with regard to the loss of the one.
Speaker 7: Point six or so they were getting from Iran, I
Speaker 7: think we expect more stock draws, more run cuts. No fun,
Speaker 7: but it's not a disaster. But I just step back
Speaker 7: and say this, I think this whole Iran and China
Speaker 7: link is overstated. China has much more going on with
Speaker 7: the other side of the Golf and the Golf Cooperation
Speaker 7: Council countries in terms of economic and financial linkages, and
Speaker 7: the relationship with the United States is very important. It's
Speaker 7: got big agenda items on trade, chips and other things,
Speaker 7: Taiwan and so, you know, I wouldn't overstate how tight
Speaker 7: that linkage and that relationship with Iran really is. With China,
Speaker 7: and they're dealing with it, you know pretty well. I
Speaker 7: don't think they're going to militarily challenge our blockade. I
Speaker 7: think they understand this is not about China, It's about Iran.
Speaker 7: And so I'm optimistic that the China aspect of this
Speaker 7: can be managed pretty well.
Speaker 1: Bob, what are you looking forward to understand? Whether the
Speaker 1: blockade of the blockade could get removed, and the first
Speaker 1: blockade get removed, and the second one could get removed,
Speaker 1: we could actually get free flow in some form or
Speaker 1: another in the near term.
Speaker 7: Well, I don't think the blockade is going to be removed,
Speaker 7: the US blockade on Iran. Indeed, it looks like it's
Speaker 7: being expanded this morning to allow checks for ships that
Speaker 7: may have contraband or weapons and nuclear weapons and so forth.
Speaker 3: So if it's expanding, so.
Speaker 7: I think, Look, there's going to be a big deal
Speaker 7: at some point, and there'll be resolution on nuclear on missiles,
Speaker 7: on proxies, on giving her on some of its money back,
Speaker 7: et cetera. And that'll include the straight of horror moves,
Speaker 7: and we'll be lifting a blockade. We don't think we're
Speaker 7: there yet. Unfortunately, we think this has to get worse
Speaker 7: before it gets better. But at the end of the day,
Speaker 7: I think there's going to be a settlement of all
Speaker 7: the issues and we'll see a lifting of blockades being
Speaker 7: imposed by both sides, and we have to hope that
Speaker 7: by then we will not have seen extensive destruction to
Speaker 7: physical infrastructure, which would prolong the recovery in flows beyond
Speaker 7: the three to four months we're already looking at.
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