WEBVTT - Morgan Stanley's Mike Wilson Talks Tariff Impact in Q3

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Wealgan Stanley's Mike Wilson rising impoor cost exposure for S

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<v Speaker 2>and P five hundred industries. It's more limited thus far,

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<v Speaker 2>given the combination of the countries in scope and the

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<v Speaker 2>exemption seemingly still in place. Mike John is SNAW Football Mike,

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<v Speaker 2>Good morning, morning John. Have we actually been tested? That's

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<v Speaker 2>the question I've got for you, based on the note

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<v Speaker 2>you put out over the weekend.

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<v Speaker 1>Yeah.

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<v Speaker 3>I think we keep getting tested back and forth, And

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<v Speaker 3>I think Amrie did a brilliant job of kind of

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<v Speaker 3>describing yesterday as just another example the president controlling the

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<v Speaker 3>narrative back and forth, you know, maybe the timelines now,

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<v Speaker 3>I mean he lets things go even shorter than he

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<v Speaker 3>comes back in reverses, And I totally agree. I think

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<v Speaker 3>it's about trial balloons. It's no different than FED policy makers.

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<v Speaker 3>It's no different than other policy makers coming in and

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<v Speaker 3>they trial ballooned to see how it will impact the market.

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<v Speaker 3>So have we been tested? Yeah, We've been tested severely.

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<v Speaker 3>In the first three or four months of the year,

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<v Speaker 3>we had a bear market stockture down thirty five to

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<v Speaker 3>forty percent over the prior year. So, I mean, we

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<v Speaker 3>had a bear market, and so now are looking for

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<v Speaker 3>the I go, well, you missed the bear market.

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<v Speaker 1>We had it.

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<v Speaker 3>You know, we bottomed in April, and all the indicators

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<v Speaker 3>we look at from a ready to change standpoint, if

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<v Speaker 3>inflected sharply. That's what we wrote about our mid year update,

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<v Speaker 3>and it's even surprised us to the upside. I mean,

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<v Speaker 3>the arn answer vision breadth is explosive, and so you

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<v Speaker 3>just can't deny that. You can't deny the fact that

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<v Speaker 3>companies are good at mitigating terrors. For example, import prices

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<v Speaker 3>really aren't up that much. So the question is who's

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<v Speaker 3>eating these terrors? That's the big question. I hear now

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<v Speaker 3>from clients like, well, we're collecting all these terrors, but

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<v Speaker 3>where where are they? Some of them are on the

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<v Speaker 3>balance shese of companies that hasn't flowed through the cost

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<v Speaker 3>of goods sold yet, some of them are from exporters.

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<v Speaker 3>They've discounted their pricing. They're eating the terrors, and then

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<v Speaker 3>some it's going to get passed on to the consumer.

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<v Speaker 3>That's to be determined still, And so as we've been saying,

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<v Speaker 3>the third quarter is probably the quarter of risk where

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<v Speaker 3>you'll see some of this flow through to the cost

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<v Speaker 3>of goods sold. I don't think this is, you know,

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<v Speaker 3>a massive correction. It's a five seven percent correction for

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<v Speaker 3>some companies that could be bigger. But this is the

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<v Speaker 3>quarter of risk for where the terrorists will start to

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<v Speaker 3>hit and then but the markets are you thinking about?

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<v Speaker 3>This is a temporary impact and twenty six now Ernie'

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<v Speaker 3>grows standpoint is looking better.

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<v Speaker 2>Is that a correction you'd be looking to buy?

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<v Speaker 1>Then?

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<v Speaker 3>Absolutely, we're looking to I mean, I'm hoping we get

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<v Speaker 3>a pullback to some degree. I think a lot of

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<v Speaker 3>clients are looking for a pullback of some kind. They've

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<v Speaker 3>been surprised we haven't gotten one. But this is what

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<v Speaker 3>the beginning of a new bowl market looks like.

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<v Speaker 1>Right.

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<v Speaker 3>It's just explosive. It doesn't let people in, right. The

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<v Speaker 3>rate of change is accelerating beyond what you expected. So

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<v Speaker 3>it's just I think the pullbacks will be short and shallow.

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<v Speaker 3>Maybe there'll be another surprise, another test of some kind

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<v Speaker 3>that will cause something more severe. But I really can't

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<v Speaker 3>see more than a five or ten percent correction given

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<v Speaker 3>what I see now in the landscape.

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<v Speaker 4>When you think of tariffs, though, I think you're talking

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<v Speaker 4>about the visa the country tariffs, right, the reciprocal what

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<v Speaker 4>about the sectoral tariffs? Does that make it more complicated?

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<v Speaker 1>Absolutely?

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<v Speaker 3>I mean, and that's one of the reason why I

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<v Speaker 3>think a lot of investors have thrown up their hands

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<v Speaker 3>and the market is kind of looking past this.

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<v Speaker 1>Because there's so many carbauts.

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<v Speaker 3>I mean, even the USMCA, right, the exclusions, and that's

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<v Speaker 3>what we've word about this weekend. So a lot of

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<v Speaker 3>the tariffs on China go you know, they go through

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<v Speaker 3>backdoor through Mexico. Well, a lot of that's been excluded,

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<v Speaker 3>so the twenty five percent tariff doesn't even end up

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<v Speaker 3>hitting that.

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<v Speaker 1>And then we have the two two exclusions.

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<v Speaker 3>We just saw that now you know, you can sell

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<v Speaker 3>semiconnectors into China again. So like there's these carve outs

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<v Speaker 3>and it's very confusing. My base case view and has

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<v Speaker 3>been this all year, is ultimately I think that what

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<v Speaker 3>they're going for is a ten percent import tax, basically

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<v Speaker 3>a consumption tax, and that's where we're going to land

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<v Speaker 3>rit large. Now we're not quite there right now if

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<v Speaker 3>you do the math, it's like sixteen seventeen percent. But ultimately,

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<v Speaker 3>if we get to a ten percent import tax. Companies

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<v Speaker 3>can deal with that. You raise three to four hundred

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<v Speaker 3>million dollars in revenue per year. I mean, it's not

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<v Speaker 3>a bad it's not a bad strategy.

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<v Speaker 4>Does the One Big Beautiful Bill tax cuts offset that

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<v Speaker 4>import tax?

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<v Speaker 3>Well, that's exactly the strategy, which is that you're instead

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<v Speaker 3>of taxing companies and private companies and individuals, you're sharing

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<v Speaker 3>the tax now through exporters, importers, and consumers and then

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<v Speaker 3>let the market figure that out, like figure out where the.

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<v Speaker 1>Tax can get allocated.

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<v Speaker 3>So what we're moving from is an economy where capital

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<v Speaker 3>has been allocated by government to an economy where capital

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<v Speaker 3>is being allocated by private corporation. That's the beauty of

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<v Speaker 3>the Big Beautiful Bill is that you're basically shifting the

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<v Speaker 3>economy mix from a publicly driven economy to a privately

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<v Speaker 3>driven economy.

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<v Speaker 1>SOMEBOE we talked about six eight months ago.

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<v Speaker 4>But is there a fiscal impulse given the fact that

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<v Speaker 4>really the crux of the One Big Beautiful Bill is

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<v Speaker 4>an extension of current policy.

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<v Speaker 3>That's right, So there's no incremental fiscal in the traditional

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<v Speaker 3>way you think about it. However, there's a massive positive

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<v Speaker 3>impact to cash earnings for corporations and an incentive structure

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<v Speaker 3>to start investing something that companies have not been doing

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<v Speaker 3>for the last three or four years is investing in capex.

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<v Speaker 3>The bill basically encourages them to spend money in capital

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<v Speaker 3>goods in R and D, something that we need to

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<v Speaker 3>do to grow down the road.

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<v Speaker 2>Let's build on some of this. She talked about the

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<v Speaker 2>broad based earnings revisions. Is that more than just AI,

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<v Speaker 2>more than just big tech? Where are you seeing that?

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<v Speaker 3>So it's been led by the mag seven so to speak,

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<v Speaker 3>But no, it's actually fairly brought now. It is a

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<v Speaker 3>larger company driven sort of revision factor. So the small

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<v Speaker 3>the small companies still aren't seeing it yet. That's what

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<v Speaker 3>we've been underweight. We've remained underweight with the smaller BIS say,

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<v Speaker 3>is now that could change if the FED starts cutting rates.

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<v Speaker 3>That's something we're thinking about for twenty twenty six. But

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<v Speaker 3>it is a fairly broad expansion. It's financials, it's industrials,

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<v Speaker 3>it's some of the software stack which was kind of

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<v Speaker 3>left behind over the last year year and a half.

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<v Speaker 1>So it is it is broadening out.

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<v Speaker 3>And this is I think a function of Look, there's

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<v Speaker 3>been there is pent up demand in the economy, there

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<v Speaker 3>is pent up capex in the economy, and somebody's incentives. Now,

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<v Speaker 3>some of these tax changes, I think do give clarity

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<v Speaker 3>to companies now saying Okay, we can move forward with

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<v Speaker 3>our business. The legislative agenda is done. Now we now

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<v Speaker 3>we can look forward for at least three years, maybe

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<v Speaker 3>not beyond that, but at least for the next three years,

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<v Speaker 3>and we got to get out with our life.

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<v Speaker 2>What are the kind of companies you like at the moment.

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<v Speaker 3>Industrials and financials really are the two areas we've been

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<v Speaker 3>really focused on. And software because I think a lot

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<v Speaker 3>of folks are too bearish on software.

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<v Speaker 1>I understand why. I mean AI, you know, coding and

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<v Speaker 1>all that.

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<v Speaker 3>But at the end of the day, this is the

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<v Speaker 3>part of the tech cycle where you've done the compute

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<v Speaker 3>and now the application layer has to get built so

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<v Speaker 3>that you know, dummies like me on tech can actually

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<v Speaker 3>use this technology and become more productive.

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<v Speaker 2>One of them will can POSSI the Hudson down the

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<v Speaker 2>Hudson in downtown New York, and I look across the

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<v Speaker 2>river to back office city compliance. All of those workers

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<v Speaker 2>that are working for these major financial institutions and forgive

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<v Speaker 2>me because many of them are watching right now and

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<v Speaker 2>this might be a rather brutal conversation. How close are

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<v Speaker 2>we to seeing some big cuts to the amount of

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<v Speaker 2>people to work at these institutions?

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<v Speaker 3>Well, I mean, compliance is definitely one area that will

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<v Speaker 3>be hit not only from AI but also from just

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<v Speaker 3>a change in regulatory environment. Potentially, we don't really know.

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<v Speaker 3>We're not seeing it yet. Okay, I would say that

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<v Speaker 3>the AI concern about employment I think is real. We're

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<v Speaker 3>seeing it. Here's here's the lead indicator. So the largest

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<v Speaker 3>companies who are very fascial with data Okay, you're Nvidios,

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<v Speaker 3>your metas, etc. Are showing the ability to use this data. Microsoft, right,

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<v Speaker 3>They're laying off people more and more because they're able

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<v Speaker 3>to use this data.

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<v Speaker 1>So the question is can.

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<v Speaker 3>That translate into the average company in the economy to

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<v Speaker 3>be determined, But you know, I think that, like I

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<v Speaker 3>don't want to make a statement here, that's not great

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<v Speaker 3>for employees necessarily, but man, if you think about what

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<v Speaker 3>it does for S and P earnings, well, this is

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<v Speaker 3>it might.

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<v Speaker 1>Really really positive.

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<v Speaker 3>That's why the multiple keeps expanding because that's what it's

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<v Speaker 3>looking forward.

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<v Speaker 2>To the conversation for further down the road, and this

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<v Speaker 2>is the next several years, you can have this really

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<v Speaker 2>strange dynamic where the labor market data stinks, but the

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<v Speaker 2>yearnings coming out of these companies might be really powerful.

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<v Speaker 2>I just wonder how far you can push that, How

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<v Speaker 2>far can we push that.

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<v Speaker 3>Well, we're going to find out, I think, because I

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<v Speaker 3>think companies or US companies are really good at cutting costs,

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<v Speaker 3>whether it's employees or you know, other types of expenses,

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<v Speaker 3>and so I mean that's what they're that's what they're

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<v Speaker 3>going to do because we're still in kind of a

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<v Speaker 3>slow growth top line environment, so companies have to become

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<v Speaker 3>more efficient. Plus they have to offset some of these

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<v Speaker 3>other things like terrafs and things like that.

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<v Speaker 1>So but companies will figure that out.

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<v Speaker 3>That's why the market continues to go for the high

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<v Speaker 3>quality businesses. One other thing that we haven't talked about

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<v Speaker 3>yet is last week's Supreme Court ruling I think was

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<v Speaker 3>really fascinating with respect to the government's ability to do

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<v Speaker 3>these reductions in force you know from the DOGE.

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<v Speaker 1>And this this this could be.

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<v Speaker 3>Also quite interesting development where this is like the return

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<v Speaker 3>of DOGE. Because I would say most people are disappointed

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<v Speaker 3>that those wasn't allowed to kind of complete the deal.

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<v Speaker 1>They were kind of blocked. They weren't able to kind

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<v Speaker 1>of reduce government headcount.

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<v Speaker 3>And maybe this ruling by the Supreme Court allows those

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<v Speaker 3>to kind of return and we could see headcount reduction

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<v Speaker 3>in government, which is another type of a slowdown in labor,

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<v Speaker 3>which won't affect the market. Right, That's not great for

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<v Speaker 3>government employees necessarily, but that will liberate Okay, you know

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<v Speaker 3>kind of the private economy.

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<v Speaker 1>Once again, two parts.

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<v Speaker 4>Of these conversations. When you talk about the fact that

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<v Speaker 4>more capital being allocated to the private sector, not the

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<v Speaker 4>US government. But if you have companies laying off people

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<v Speaker 4>because of AI, who has to step in to help

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<v Speaker 4>what potentially could be high unemployment rates.

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<v Speaker 2>It's going to be the US government.

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<v Speaker 3>Yeah, well, I would hope that, you know, instead of

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<v Speaker 3>laying people off, you just make them more productive. I

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<v Speaker 3>mean ultimately, so everyone says yeah, but I mean that

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<v Speaker 3>at the end of the day, if you look at

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<v Speaker 3>the private economy for the last three years, this is

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<v Speaker 3>something that doesn't get a lot of airtime. The private

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<v Speaker 3>labor force has not really ground the most part. Okay,

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<v Speaker 3>it's been a government heavy healthcare, heavy education like state

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<v Speaker 3>and local jobs, and so the private economy has been

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<v Speaker 3>operating with fewer employees already.

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<v Speaker 1>This is not a new deal.

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<v Speaker 3>I mean, companies once again are really good at being

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<v Speaker 3>more efficient. So you know, my hope would be that

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<v Speaker 3>we could just grow with fewer people. By the way,

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<v Speaker 3>we have less immigrants now right because of the shutdown

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<v Speaker 3>the border, so we kind of need this.

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<v Speaker 1>We need to fill that.

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<v Speaker 3>Gap of making the people who are in America more

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<v Speaker 3>productive and so we can grow the economy.

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<v Speaker 2>Mike Wilson smile is always good to see you. Thank you, sir,