Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa A. Bromoids,
Speaker 1: along with Tom Keen and Jonathan Ferrell. Join us each
Speaker 1: day for insight from the best in economics, geopolitics, finance
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Speaker 2: From a beautiful Newport Beach, California, I'm Jonathan Ferrow, PIMCO,
Speaker 2: publishing its secular outlook, The Aftershock Economy, writes, quote, we
Speaker 2: see a window to step in as a senior lender
Speaker 2: in areas once occupied by regional banks, such as consumer lending,
Speaker 2: mortgage credit, and various forms of asset based finance. I'm
Speaker 2: very pleased to say that we can have that conversation
Speaker 2: now with the man himself, the boss, Pimco CEO, Manny
Speaker 2: Roman Money.
Speaker 3: Good morning to you, Thanks for having.
Speaker 4: Us morning Tolism. Nice to see you.
Speaker 2: That quote feels like your kind of language. We're going
Speaker 2: to step in. My first thought when I read that was,
Speaker 2: why don't you just buy a bank? There's many banks
Speaker 2: sale right now. Why don't you just buy a bank?
Speaker 5: What I think there are going to be many assets
Speaker 5: to buy, and maybe the best way I have to
Speaker 5: describe it is banks are going to be tight for capital.
Speaker 5: And when the type for capital, they have two ways
Speaker 5: of solving the problem. They can either raise more capital
Speaker 5: or they can sell assets. And the most likely scenario
Speaker 5: is there will be assets to sell in area where
Speaker 5: we have a big footprint mortgagers commercial with the state bonds,
Speaker 5: municipal bonds. Dan said that earlier today that he was
Speaker 5: very keen on mortgagers. They'll be mortgagers to sell and
Speaker 5: will be there to step in and.
Speaker 4: Try to buy them.
Speaker 2: Are you looking at buying a franchise to do that
Speaker 2: or is that just something that happens.
Speaker 4: Is something that we've built over the past twenty years.
Speaker 5: And you know, there's good news and bad news when
Speaker 5: you have a tougher economic cycle. I think the better
Speaker 5: news is that the expected him goes up and they
Speaker 5: are significant block of assets to sell.
Speaker 4: You know, it could be for example, equipment loans.
Speaker 5: You know, one of the bank who was very big
Speaker 5: in equipment loans is out of business all of a sudden.
Speaker 4: There's going to be a lot for us to do.
Speaker 2: I hear this from other people too. I hear apollot
Speaker 2: side banks are going to step back. We're going to
Speaker 2: step back in. How competitive is this going to be?
Speaker 2: Can you give me some size and make the pie
Speaker 2: it's going to be.
Speaker 5: It is going to be competitive because the seller has
Speaker 5: a fiduciary duty and there will be enough for some
Speaker 5: of us to do a lot and put money to
Speaker 5: work and be patient and wait for the right opportunity
Speaker 5: to do so. And I think I think the cycle
Speaker 5: is usually long, and so there's no rush to put
Speaker 5: money to work. There is a very discipline and systematic
Speaker 5: way to look at your opportunity, and some will look
Speaker 5: better than the other. It may very well be that
Speaker 5: the single best asset turns out to be real estate
Speaker 5: where we have a big foot print, or it may
Speaker 5: very well be that it turns out to be commercial
Speaker 5: real estate. And you know mortgagers in this whole segment and.
Speaker 2: Commercial redista is something you've brought up, and I've heard
Speaker 2: it from Dan. I spoke to Mark about it just
Speaker 2: moments ago. Should I be worried about commercial real estate?
Speaker 2: Can you talk me, just take me into the halls
Speaker 2: of this place this building. Have you all sat around
Speaker 2: a table, gone through every single portfolio and thought about
Speaker 2: what you don't want exposure to right now related to
Speaker 2: this one particular sector.
Speaker 5: Well, I think we have, and I think we've seen
Speaker 5: the playbook before, and it is everything else being.
Speaker 4: Equal a slow cycle.
Speaker 5: So the banks will look at the portfolio and slowly
Speaker 5: but surely mark their books. I think you have a
Speaker 5: microstructure of the commercial real estate market, which is quite
Speaker 5: different depending on the city, depending on the places. Some
Speaker 5: places are clearly tested, some of them are doing just fine.
Speaker 5: I mean you can look at Austin, for example. You're
Speaker 5: hard praised to find an empty office in Austin. And
Speaker 5: the overall trend is going to be that people somehow
Speaker 5: come back to work one way or the other. But
Speaker 5: there's a transition period where for sure there will be
Speaker 5: distress seller and people who have the wrong financing.
Speaker 4: And I think the financing part.
Speaker 5: Is really really important because it's one of the segments
Speaker 5: where we're very involved and people have borrows shot term
Speaker 5: in the past with very low rates. All of a
Speaker 5: sudden the financing is expiring, spreads are higher, and of
Speaker 5: course rates a much higher, and so then we need
Speaker 5: to address the situation either by selling or by refunding
Speaker 5: at more attractive terms for.
Speaker 2: Us, Clearly, this business is going to change compared to
Speaker 2: what it was several decades ago. We've had a multi
Speaker 2: decade bond ballmarket. Most people assume that's now over based
Speaker 2: on the last twelve months. Can you tell me how
Speaker 2: this business will be different with that in mind? What
Speaker 2: you need to position for now versus what this firm
Speaker 2: was positioned for in the previous several decades.
Speaker 5: What a very big change, and Dan mentioned this before
Speaker 5: is generative AI and how technology can change our business
Speaker 5: and thing for example, about the real estate market. We
Speaker 5: can hire one hundred people to go from city to
Speaker 5: city and kind of look at every single lease or
Speaker 5: every single property. Or we can use technology to give
Speaker 5: us a better grasp of where the alpha is and
Speaker 5: where we think the opportunity is. When we think about
Speaker 5: communication with client, we can invest significantly in generative AI
Speaker 5: and actually give a better risk report, better customized report
Speaker 5: to clients and so on and so forth. And I
Speaker 5: think it's incredibly exciting. I see the work that we
Speaker 5: do with open AI and Microsoft as important as.
Speaker 4: The birth of the Internet. I mean, is it is
Speaker 4: that it is.
Speaker 5: You think it's that powerful, It is that powerful, and
Speaker 5: it will change your job also change your job too potentially.
Speaker 4: Yeah, no, no, of course, of course. I mean I
Speaker 4: mean in a good way.
Speaker 5: I think it will make us row up more productive
Speaker 5: and I think that's a really, really good thing.
Speaker 3: Is that a challenge to your secular outlook?
Speaker 5: I think secular on a super secular basis, everything else
Speaker 5: is being equal.
Speaker 4: I think it means rates.
Speaker 5: Are lower, but it also I think you should say
Speaker 5: that with a humongous amount of humble pie in a
Speaker 5: sense that the dispersion of events is going to be
Speaker 5: very big, and we don't know what we don't know,
Speaker 5: and it's easy for me to make prediction about what
Speaker 5: will happen ten years from that that.
Speaker 4: I'd be very wrong.
Speaker 2: Let's measure success AUM over the last ten years, and
Speaker 2: let's go back a decade. PIMCO was at about two
Speaker 2: trillion dollars AM, not too far away from the likes
Speaker 2: of Black Rock Black Rocks. AUM since then has more
Speaker 2: than doubled. The AM here is steady, steady, with some volatility,
Speaker 2: tons of volatility along the way, but it's basically unchanged
Speaker 2: in the last decade.
Speaker 3: What do you think that reflects?
Speaker 5: It reflects the decision we made is that we try
Speaker 5: to be very focused and do one thing and do
Speaker 5: it very well. And I think we went through a
Speaker 5: period of time where maybe fixed income wasn't as attractive.
Speaker 4: As it is right now.
Speaker 5: And we have the view that if we perform, if
Speaker 5: we significantly beat the passive benchmark, if we do better
Speaker 5: than appears, they will come. And we don't measure our
Speaker 5: success by the amount of assets where we have. We
Speaker 5: measure our success bet the returns we give to our
Speaker 5: investors in what is a very competitive market, and so
Speaker 5: and so and so. The real scene of asset manager
Speaker 5: is to try to be bigger for the sake of
Speaker 5: being bigger.
Speaker 4: Because of economy of scale. We don't it's not a goal.
Speaker 4: Just to be clear, it's not a goal.
Speaker 3: It's not a goal.
Speaker 4: We're here to.
Speaker 5: Perform with the money we've been trusted and if we
Speaker 5: do a good job, we'll be fine.
Speaker 2: Well, let's talk about that good job. There have been
Speaker 2: a couple of difficulties. I want to talk about one
Speaker 2: specific name, which is Columbia properly trust.
Speaker 3: What do I need to know about that? What happened.
Speaker 3: Can you just give me a better idea of what
Speaker 3: happened there?
Speaker 5: Well, I think I think for obvious reasons, we don't
Speaker 5: specifically come on names. But of course we have a
Speaker 5: big portfolio of assets across the globe, and when you
Speaker 5: have a recession, some are going to be doing less well,
Speaker 5: and we're gonna work on trying to bet to get
Speaker 5: the best possible dot com. And the reality of fund
Speaker 5: management is you have, at any point in time things
Speaker 5: doing great and things doing less great, and we focus
Speaker 5: on the one doing let's great, and making sure we
Speaker 5: have the best possible dot com.
Speaker 2: So is that just a reflection of being so big
Speaker 2: there across everything or was that a canary in the
Speaker 2: coal mine on a certain issue at a certain time.
Speaker 5: No, I think it's a reflection of us having a
Speaker 5: diverse port for you. And I think you heard one
Speaker 5: of my competitor at Milkin's saying that very yeah well,
Speaker 5: saying that when you have a big realestate port for you,
Speaker 5: at any point in time, not everything is going to
Speaker 5: do great. And I think we're willing to do that
Speaker 5: as long as the net result for our investors is.
Speaker 4: Going to be the right one. Some thing that's what matters.
Speaker 2: One last issue that we need to discuss as well.
Speaker 2: And understand that perhaps you can't offer a great degree
Speaker 2: of clarity in detail because of litigation issues, But you
Speaker 2: know what name is going to come up in conversation now,
Speaker 2: credit sweets.
Speaker 3: Now.
Speaker 2: I just wonder from your perspective the future of the
Speaker 2: at one market continued convertibles.
Speaker 3: After the events of the last couple of months.
Speaker 2: As a firm, and if you don't want to talk
Speaker 2: directly about that institution, we don't have to. But as
Speaker 2: a firm, have you rethought about that particular class of securities.
Speaker 5: Well, the banks, especially in Europe have a big need
Speaker 5: to issue eighty one as a way to raise enough
Speaker 5: equity to pass the stress test, and so there needs
Speaker 5: to be clear rule of engagement from both the banks
Speaker 5: and the regulator. And you've seen in the recent months
Speaker 5: the Bank of England and the ECB being incredibly vocal
Speaker 5: about what they think the rules of the game are
Speaker 5: and what a well functioning market has to offer to
Speaker 5: make it attractive for investors to participate. And if the
Speaker 5: rules of the game are attractive and the price is right,
Speaker 5: you'll see plenty of people coming into this market and
Speaker 5: Pinco will be one of them. And if the rules
Speaker 5: of the games are biased or unclear or at the
Speaker 5: expense of investors, then maybe we'll decide to step.
Speaker 4: Out of it.
Speaker 3: Do you think that bars an unclear?
Speaker 5: Now depends on the jurisdiction. We have welcomed the comments
Speaker 5: made by the ECB.
Speaker 4: And the Bank of England.
Speaker 2: Manley, it's good to see. It's good to see you
Speaker 2: the hostingers. I appreciate it. Thank you very much. We
Speaker 2: got to do this again next year as well. Money
Speaker 2: Rum and the pin cut.
Speaker 1: Julian Emmanuel, chief equity Derivatives and quant strategists at Evercore
Speaker 1: ISA for the ISI for the hour. And this comes
Speaker 1: in the time when we are seeing this twenty percent
Speaker 1: potential gain on the S and P since the lows
Speaker 1: that we saw in October. Is this rally real?
Speaker 6: We think it is. Actually, we don't want to put
Speaker 6: the label bull market on it, okay, because frankly, our
Speaker 6: base case is that sometime in the next twelve to
Speaker 6: eighteen months you're going to have a recession, which means
Speaker 6: you're going to have a sizeable pullback. But this is
Speaker 6: a cyclical rally where we think the hallmark of the
Speaker 6: last week or so is a broadening of participation.
Speaker 1: What is it about the labels? You don't want to
Speaker 1: call it a bull market. You don't want to call
Speaker 1: it a pause, You want to whole call it a
Speaker 1: skip Like why does it matter?
Speaker 6: Well, it matters a lot. If you go back to
Speaker 6: the two tech bubble burst bear market, you had several
Speaker 6: rallies of forty and fifty percent in the NASDAC before
Speaker 6: you made the final bottom. It is one of those
Speaker 6: things where rather than labeling, you have to think about
Speaker 6: how you want to think about the long term as
Speaker 6: either an individual investor or an active manager. And frankly,
Speaker 6: this is one of these times where those considerations are
Speaker 6: a bit different.
Speaker 1: Is this a fun time?
Speaker 6: It's a tough time, but look at the end, we're
Speaker 6: happier when equities go up.
Speaker 1: I think we're seeing also a lot of potential risks
Speaker 1: of a bigger picture scale, whether it's what we saw
Speaker 1: over in Ukraine with that dam bursting and what it's
Speaker 1: doing some of these concerns about and escalating war there,
Speaker 1: or if it's ratcheting up of tensions in China between
Speaker 1: the US and China. How much are you looking at
Speaker 1: potential tail risks or do you think that that's what's
Speaker 1: damp in some of the valuations at this point that
Speaker 1: sort of set up for what you're talking about.
Speaker 6: It's definitely damp in the valuations. And this, again, the
Speaker 6: period we believe we're entering, is one of those times
Speaker 6: where despite those risks, we do think we're going to
Speaker 6: see a little bit of multiple expansion, which is a
Speaker 6: bit counterintuitive but frankly what it does. And again going
Speaker 6: back to our options expertise, the VIX with a fourteen
Speaker 6: handle is absolutely fabulous in terms of protecting either downside
Speaker 6: risk or for some who are underperforming and may get
Speaker 6: pulled into a chase upside risks.
Speaker 1: We're kind of bearing the lead here. On Sunday. You
Speaker 1: made a pretty big move. You upgraded, you increased your
Speaker 1: expectation for the S and PAY to forty four to
Speaker 1: fifty and potentially you might see that as soon as July.
Speaker 6: Explain that's the hallmark of a momentum market, and I
Speaker 6: think look, clearly, the NASDAC has been in a momentum
Speaker 6: market essentially since the end of March, and for us
Speaker 6: the last week or so is encouraging because the S
Speaker 6: and P broadly has joined with that in its clear
Speaker 6: move above the forty two hundred level, which had been
Speaker 6: basically six or seven months versus of resistance. We're actually
Speaker 6: starting to see a little bit of broadening into the
Speaker 6: small caps, which is very encouraging. But frankly, again, this
Speaker 6: is an environment where the momentum takes on a life
Speaker 6: of its own, and that's also a function of the
Speaker 6: fact that if you look at it, sentiment, whether you're
Speaker 6: measuring it in terms of the stock market or the
Speaker 6: economy or again thinking about risk, is incredibly, incredibly poor.
Speaker 6: And yet at the same time we're seeing data that
Speaker 6: says there's a chance that this recession gets pushed out,
Speaker 6: it keeps getting pushed out, in may end up getting
Speaker 6: pushed out to twenty four.
Speaker 1: And right now we're seeing basically a range bound market
Speaker 1: ahead of yet another day of quiet period for the
Speaker 1: Federal Reserve. But anything but when it comes to some
Speaker 1: of the international fluctuations, you see about a tenth of
Speaker 1: a percent decline on the S and P forty two
Speaker 1: seventy five, still on the forty three hundred watch we
Speaker 1: didn't quite get there. Ongoing weakness over in the euro
Speaker 1: but it's basically bit around one oh six eight for
Speaker 1: quite a while, with a bit of a stronger dollar
Speaker 1: and tenyure yields lowered just to touch after those ISM
Speaker 1: services data that came out yesterday, kind of disappointing, even
Speaker 1: though still an expansion crewed a little bit off earlier lows.
Speaker 1: I want to note I said John's on the beach.
Speaker 1: He's actually in Newport Beach. He's hosting the open from
Speaker 1: pimco's headquarters, which is the reason why he ditched me
Speaker 1: along with Tom. He'll be speaking with CEO Emmanuel Roman,
Speaker 1: CIO Dan Ivison, and former FED Vice chair Rich Claredo,
Speaker 1: who's their head economic out they're at PIMCO. That's all
Speaker 1: coming up today starting at nine am Eastern today, annual
Speaker 1: shareholder meetings will happen for Zillow, Urban Outfitters, Palanteer, and
Speaker 1: Freeport macbere And I say this because we actually saw
Speaker 1: some really interesting guidance out of Taiwan Semiconductor Manufacturing Company,
Speaker 1: basically downwardly revising some of their expectations. You're seeing shares
Speaker 1: off today, so it's sort of interesting to see some
Speaker 1: of the commentary coming out of these meetings at a
Speaker 1: time of such fluctuation and today I know that you
Speaker 1: love talking politics, Julian, so I really wanted to get
Speaker 1: you on this. Former New Jersey Governor Chris Christy is
Speaker 1: expected to jump into the race to become Republican candidate
Speaker 1: for president. He has been called in one New York
Speaker 1: Times article the Trump's layer, people saying he has no
Speaker 1: chance to win, but his complete objective is to act
Speaker 1: as an attack dog on the stage in debates with
Speaker 1: the former President Trump. A pretty crowded field in the
Speaker 1: Republican race, potentially twelve candidates by July.
Speaker 6: Well, you do wonder if Governor Christy is going to
Speaker 6: announce with a pair of everlast boxing gloves on his hands.
Speaker 1: Essentially, yes, QUI.
Speaker 6: Question about it. Look, this is healthy at least I
Speaker 6: think you can call it healthy. Let's see what happens.
Speaker 6: My question is and hopefully we'll have someone help us
Speaker 6: answer it is. You know who among the field aside
Speaker 6: from Trump and DeSantis, could potentially rise to sort of
Speaker 6: create a three way race. That's the big question.
Speaker 1: And a lot of people are looking down to Virginia
Speaker 1: potentially for that, And we will get into that later.
Speaker 1: I do want to get to what we heard over
Speaker 1: in China, a recommendation that state owned banks start to
Speaker 1: reduce their deposit rates to encourage lending and to increase
Speaker 1: their margins. Joining us now is Bloomberg's Tom mackenzie, who
Speaker 1: covered China for more than a decade. He's in London, Tom,
Speaker 1: what do you make of this and also what do
Speaker 1: you make of the fact that it's not a mandate,
Speaker 1: it's a recommendation.
Speaker 7: Yeah, there's a final line between a mandate and a
Speaker 7: recommendation when it comes to official policies out of aging
Speaker 7: when they lean on those state banks. Of course, the
Speaker 7: build u when we were talking about last week, Lisa, around
Speaker 7: the measures being put in place, at least the proposals
Speaker 7: being discussed, according to Bloomberg reporting to kind of shore
Speaker 7: up the real estate market. Now you have more piecemeal
Speaker 7: efforts to try and put a floor under the growth
Speaker 7: that has come through from China, less strong, of course
Speaker 7: than many had expected. So leaning on the banks to
Speaker 7: reduce those deposit rates, it means that the banks can
Speaker 7: then look to lower the loan rates and provide more liquidity.
Speaker 7: We did see loans new un loans that credit impulse
Speaker 7: came through in the first quarter, but then it dropped
Speaker 7: on April, and clearly there was concern about the fact
Speaker 7: that there wasn't that traction going forward in terms of
Speaker 7: liquidity and that demand for loans. Households, businesses, they're shoring
Speaker 7: up their balance sheets, households are paying down their mortgages.
Speaker 7: The question really is is there the demand even if
Speaker 7: it becomes easier to take out a loan and to
Speaker 7: access to that liquidity, is that they're really the demand
Speaker 7: to kind of tap into that and then support the economy.
Speaker 1: On one hand, this is kind of stimulus light and
Speaker 1: that's positive potentially for growth. On the other hand, this
Speaker 1: indicates that perhaps the Chinese Communist Party sees a bigger
Speaker 1: problem than they're letting on, which is it.
Speaker 7: Well, it's interesting. I was speaking to How Hong, who
Speaker 7: was formerly a BOCOM, a really respected strategist there, and
Speaker 7: he said, look, this seems to me like a government
Speaker 7: that's running out of ideas. Bloomberg economics are they now
Speaker 7: view the chances of a benchmark rate cut. So for
Speaker 7: the one year and the five year medium term lending facilities,
Speaker 7: they expect those to be reduced, possibly as early as
Speaker 7: the middle of June. But there's a debate about that
Speaker 7: Jones Lang Lacel. Economists there say they actually think this
Speaker 7: action to lean on the banks to reduce deposit rates
Speaker 7: and therefore give them the scope to reduce loan rates,
Speaker 7: that that probably pushes back a benchmark rate cut for
Speaker 7: the PBOC. By the way, for the context, they've cut
Speaker 7: just fifty basis points, just half of percent since the
Speaker 7: start of the pandemic in twenty twenty, so they do
Speaker 7: have that dry powder. But again they have this massive
Speaker 7: debt pile, and there's that concern of course in terms
Speaker 7: of just adding to that if they go with a
Speaker 7: broad benchmark cut. But it's certainly something that now the
Speaker 7: buloving big economics seem things it's possibly likely.
Speaker 1: Mid Jude Tommy Kenzie, thank you so much of Bloomberg.
Speaker 1: Joining us from London, Julian Emmanuel, have evercore as Isi
Speaker 1: here with me for the hour. What do you make
Speaker 1: of what's going on in China and the fact that
Speaker 1: the growth is sort of running out of steam to
Speaker 1: such a degree. Do you feel like a lot of
Speaker 1: that story has been priced in and is really on
Speaker 1: the wayne.
Speaker 6: So we actually think that you're it's the bumpy path
Speaker 6: to a more sustainable number it's not six percent or
Speaker 6: north of six percent, but it may settle in towards
Speaker 6: five percent. The issue here is a couple of things.
Speaker 6: First off, the way that China wants and will likely
Speaker 6: grow is unlike the last twenty years, we are making
Speaker 6: the transition to a domestic consumer led economy. And the
Speaker 6: issue is is that you know, you've had a second
Speaker 6: COVID wave over the last five or six weeks, and
Speaker 6: it's hard to say, I think right now just how
Speaker 6: much of a dampening effect that has. But you know,
Speaker 6: in hearing the suggestion that banks reduce their rates, I'm
Speaker 6: reminded of that phrase moral suasion that I suspect you'll
Speaker 6: get a degree greater of moral suasion if things don't
Speaker 6: pick up. And obviously the government is very, very in
Speaker 6: tune with the pulse.
Speaker 1: The beatings will continue until morale improves a bit of that.
Speaker 1: I mean, there is this question though, going forward, about
Speaker 1: how much of a tailwind or a headwind China will be.
Speaker 1: And as you talk about upgrading your forecast for US equities,
Speaker 1: do you see US as sort of being I don't
Speaker 1: want to say a haven, but a new sort of
Speaker 1: spot of focus. After everyone was looking international for the
Speaker 1: first half of the year.
Speaker 6: Well, again, it is a mixed bag because if you
Speaker 6: look at some of the consumer focus names selling into China,
Speaker 6: they have sold off in the last month, even as
Speaker 6: the rest of the market has stabilized, and obviously parts
Speaker 6: of it have rallied quite strongly, and that tells you
Speaker 6: that it is an open question. The one thing that
Speaker 6: does seem clear is that this whole idea that China
Speaker 6: is going to be this very discreete reason for inflation
Speaker 6: to take another leg higher that we don't subscribe.
Speaker 1: To every morning. In your morning meetings, what do they
Speaker 1: seem like? Do people kind of sit around They're like, well,
Speaker 1: it's the same kind of waiting game. We're not sure,
Speaker 1: but today we see more games. I mean, is it
Speaker 1: sort of a momentum kind of discussion. Well, it is.
Speaker 6: But and again when you think about it, ed Heiman
Speaker 6: has been absolutely on the forefront of the view that
Speaker 6: inflation is going to come in faster than people expect.
Speaker 6: Now the last month or two it's been a little
Speaker 6: bit choppier, and we look ahead to next week, we
Speaker 6: think that's likely to be assigned.
Speaker 1: We certainly saw that from the ECB and their consumer
Speaker 1: inflation release that they put out today. Julian Emmanuel, chief
Speaker 1: Equity Derivatives and quant strategists at Evercore ISA, our next guest,
Speaker 1: has been talking about in earnings recession. He's also been
Speaker 1: talking about how you could see a soft landing and
Speaker 1: yet you could also see companies really have to ratch
Speaker 1: back what their profits are going to be. As Ander
Speaker 1: Sheet's chief cross asset strategistic Morgan Stanley, wonderful to have
Speaker 1: you on. Let's just start first in your thoughts and
Speaker 1: what Neil was talking about earlier.
Speaker 8: Well, look, I do think that we should acknowledge this
Speaker 8: is an unusual time in markets. And again I think
Speaker 8: in that opening clip showed you know, we have some
Speaker 8: of the highest core inflation since the eighties.
Speaker 4: We have the.
Speaker 8: Most inverted yield curve in the US in forty years,
Speaker 8: in Germany in thirty years. We have won of the
Speaker 8: lowest unemployment rates we've seen in the US since the
Speaker 8: nineteen sixties. So we're dealing investors are dealing with some
Speaker 8: unusual data.
Speaker 4: You know.
Speaker 8: Our view is that that the economy is going to
Speaker 8: slow in the US and Europe in the second half
Speaker 8: of the year, that the full effect of tightening has
Speaker 8: not yet been felt by the economy, but that tightening
Speaker 8: will continue to play out, and that even if you
Speaker 8: don't get a recession, the effect of slowing growth effect,
Speaker 8: especially the effect of slowing nominal GDP, is going to
Speaker 8: be bad for operating leverage, is going to put some
Speaker 8: pressure on earnings and mean that current expectations for earnings
Speaker 8: growth we think are still high for this year, which
Speaker 8: creates some near term downside. Now I think as you
Speaker 8: look further out, the picture looks a little bit better,
Speaker 8: but near term, I think the market still has to
Speaker 8: get through a number of key challenges.
Speaker 1: Andrew, you just put out a report talking about S
Speaker 1: and P earnings declining about sixteen percent through the end
Speaker 1: of this year. What have been some of the responses
Speaker 1: that you've gotten. How have you explained why you see
Speaker 1: that even though people have in revising upwards some of
Speaker 1: those earnings expectations.
Speaker 8: Yeah, so I think investors are skeptical of that sort
Speaker 8: of earnings move, which is understandable. It's a below consensus estimate,
Speaker 8: so the consensus is understandably higher. But also I think
Speaker 8: you have investors who say, look, you've had economic data
Speaker 8: that's held up. Okay, So far, you've had very good
Speaker 8: performance from some of the largest companies in the market,
Speaker 8: and so that isative of investors being more optimistic that
Speaker 8: earnings can be stronger going forward. And so I guess
Speaker 8: what we'd say to that is a couple of things. First,
Speaker 8: you know, we do run kind of forward earnings indicators,
Speaker 8: forward earnings estimates, and those estimates, those models have been
Speaker 8: pretty good at predicting the events so far, and those
Speaker 8: models are saying that there's going to be more downside
Speaker 8: to consensus than what the consensus expects. I'd think if
Speaker 8: you look at some of those larger cap names that
Speaker 8: about performing, their actual earnings growth has not been particularly strong.
Speaker 8: And even if for the market, overall earnings growth is
Speaker 8: rapidly approaching kind of flat year every year. So this
Speaker 8: is a market that, even is still a pretty strong
Speaker 8: nominal GDP environment, is struggling to grow overall earnings. And
Speaker 8: we think that will get more difficult as you move ahead,
Speaker 8: as the market confronts the laged defect of rate hikes
Speaker 8: and the legged defect of some further tightening in bank
Speaker 8: credit conditions.
Speaker 9: So Andrew High, this is Neil, can you explain exactly
Speaker 9: how the long and variable lags work. I mean, because
Speaker 9: you know, you've been hearing this argument now for you know,
Speaker 9: really since since last year, and you know, I would
Speaker 9: expect to see significant slowing in credit areas of the
Speaker 9: credit sensitive areas of the economy. But that's not what
Speaker 9: we're seeing. I mean, you know, housing autos, I mean,
Speaker 9: they look like they've been doing a little bit better.
Speaker 9: So can you explain you know, how that how that
Speaker 9: will actually work when it's been you know, several quarters
Speaker 9: now that they've been hiking and and some of these
Speaker 9: credit sensitive areas are actually picking up.
Speaker 8: Yeah, So look, I think that's the challenge. The challenge
Speaker 8: with long and variable legs is that they're long and
Speaker 8: they're variable, and so if we think about our estimates
Speaker 8: for that, we think that rate hikes you feel the
Speaker 8: full effect maybe with a twelve month leg, which means
Speaker 8: that if we had, you know, rate hikes starting at
Speaker 8: the beginning of last year, you are only now starting
Speaker 8: to feel the full effect of those rate hikes in
Speaker 8: the US and Europe. So we've not yet felt the
Speaker 8: full effect. The full effect is still to come. Moreover,
Speaker 8: if we think about the real policy rate, right, the
Speaker 8: interest rate relative to inflation that is still going through
Speaker 8: some of its larger largest increases over the next several
Speaker 8: months as inflation finally falls, and we think the FED
Speaker 8: and the ECB keyp rates high. So I think the
Speaker 8: first element is we haven't yet seen enough time to
Speaker 8: see the full effect of those rate hikes play through
Speaker 8: the economy, and we have actually haven't seen the full
Speaker 8: effect of rates relative to inflation. Now, I think as
Speaker 8: it relates to the more credit sensitive sectors of the economy, again,
Speaker 8: I think that's pretty fascinating because again, as we've talked
Speaker 8: about at the opening, the equity market overall is very strong.
Speaker 8: The most credit sensitive parts of the market, say the
Speaker 8: Russell two thousand small caps, more cyclical stocks, have really struggled.
Speaker 8: Commercial real estate credit sensitive has really struggled. So I
Speaker 8: think we are starting to see some of the act
Speaker 8: of that tighter policy play out. It hasn't played out
Speaker 8: at the overall market cap level, but I think it's
Speaker 8: playing out below the surface, and I think we still
Speaker 8: have some of that to come, which is a reason
Speaker 8: why we think growth decelerates further into the second half
Speaker 8: of the year.
Speaker 1: Andrew just quickly, how does this idea of a deceleration
Speaker 1: in earnings growth pair with a soft landing.
Speaker 8: So I think they're actually quite compatible.
Speaker 4: You know.
Speaker 8: Again, if we think about the types of forecasts that
Speaker 8: we're seeing, we saw a market and earnings really outperform
Speaker 8: the economy over the last eighteen months. And I think
Speaker 8: one way of thinking about our estimates is that in
Speaker 8: the US, earnings in the market underperform the economy somewhat
Speaker 8: as you go forward, and especially because I think we
Speaker 8: think earnings are much more geared and much more linked
Speaker 8: to nominal GDP growth, which is decelerating sharply, maybe more
Speaker 8: so than real growth. Another part of this that's important
Speaker 8: is the labor market. You know, I think if you
Speaker 8: have a soft landing, I think you're inherently talking about
Speaker 8: fewer job losses than you'd have in a recession. Well,
Speaker 8: fewer job losses is great for workers, but it might
Speaker 8: be more of a challenge for margins if the top
Speaker 8: line is slowing and costs aren't being pulled back in.
Speaker 4: The same way.
Speaker 1: After sheets of Morgan Stanley, thank you so much. One
Speaker 1: person who's gotten it right considerably and every single time
Speaker 1: was Dan Ives, who is senior equity out analyst over
Speaker 1: at Wedbush, who has come out with one positive prognostication
Speaker 1: after another. How much do the Bears hate you?
Speaker 7: Oh?
Speaker 10: I mean, it's kind of been a Bear hate party,
Speaker 10: and I like and ultimately, look, I appreciate it, and obviously, look,
Speaker 10: some of the smartest people I know are Bears. I
Speaker 10: just think it's something here where the shorts the Bears,
Speaker 10: they came out of their caves last year, you know,
Speaker 10: and obviously feeling really good going into the air. And
Speaker 10: my view is just it was going to be a
Speaker 10: lot better than fear in terms of overall tech spending.
Speaker 10: But it was our v and we've talked about it
Speaker 10: that it's the most transformational trend we've seen in tech
Speaker 10: since the late nineties, and I think you just can't
Speaker 10: fight that, and that's why I think names like Microsoft
Speaker 10: and n Video, Apple and others continue to go higher.
Speaker 1: I have to say that some of my best friends
Speaker 1: are Bears. Was always sort of the prelude too, is
Speaker 1: something negative that's pretty significant. I'm curious, though, after the
Speaker 1: announcement yesterday, you're still doubling down on some of the
Speaker 1: artificial intelligence embarkments of Apple, saying that this is where
Speaker 1: they're going next. A lot of other people didn't necessarily
Speaker 1: take that away from the conference. What gives you confidence
Speaker 1: that that's kind of the next phase of their explosion
Speaker 1: and valuation and gross And I think.
Speaker 10: That's typical, right, I mean for Apple for many years,
Speaker 10: I mean for the last decade. There's many people I
Speaker 10: know they've sort of fought it because they'll go to
Speaker 10: a conference, they'll just see a leaf. They don't see
Speaker 10: the forest through the trees. And I think essentially what Cooper,
Speaker 10: Tino and Cook are building here, it's another ecosystem within
Speaker 10: the app store. And it all because, at least right now,
Speaker 10: there's a battle, a game of thrones for developers between
Speaker 10: Google Microsoft in terms of what we're seeing in terms
Speaker 10: of this eight hundred billion dollar AI revolution. Apple understands
Speaker 10: that that's why they have the gold install base and
Speaker 10: they have the developers. This is the first step on
Speaker 10: a broader strategy really to build another mood for developers
Speaker 10: and consumers.
Speaker 6: So Dan obviously the Big five, Big seven, However, many
Speaker 6: stocks you want to target who have really capitalized on
Speaker 6: this last number of months of AI momentum, Who among
Speaker 6: sort of the second tier of maybe those companies that
Speaker 6: haven't yet fully realized the potential do you see as
Speaker 6: being most attractive first? And then the second question is
Speaker 6: what industries and specific do you think are likely to
Speaker 6: benefit over the next year or two.
Speaker 10: Yeah, a great question because I think right now, okay,
Speaker 10: the first derivative the New York City cab Grevens, Microsoft, Navidia.
Speaker 10: But so now it's like who the second third derivatives.
Speaker 10: I think ultimately salesforce is going to be a big
Speaker 10: derivative that no one's talking about. I think you have
Speaker 10: names like pal and Teer, which is another on the
Speaker 10: on the AI front, and I think what you're really
Speaker 10: starting to see right now from a cybersecurity perspective, it's
Speaker 10: really as more and more moves to the cloud, more
Speaker 10: moves to AI, you're gonna have huge benefits there names
Speaker 10: like pow Out, though Ford Net and others. That's why
Speaker 10: I believe this is not just today, it's five seven,
Speaker 10: ten stocks when we look out over the next one, two,
Speaker 10: three years. I think this is really what I've views
Speaker 10: like a nineteen ninety five moment and iPhone moment relative
Speaker 10: to where we see it over the coming years. Obviously
Speaker 10: macro aware in terms of what we're seeing in that
Speaker 10: but I can tell you if from talking to developers enterprises,
Speaker 10: what we see in spending, I continue to U as
Speaker 10: a green light for overall tech stocks.
Speaker 1: So this is a faith based kind of bet though
Speaker 1: at a certain point, right, this is faith that AI
Speaker 1: is going to be a transformational moment more than say
Speaker 1: the adoption of thirty five hundred dollars, you know, augmented
Speaker 1: reality sets that people are maybe not going to buy
Speaker 1: their children for the holidays. I'm just saying personally, but
Speaker 1: I'm just wondering from your perspective. You know, it's not
Speaker 1: about one product. It's about sort of engaging in a
Speaker 1: whole new way of doing business and getting out front
Speaker 1: so that different companies can use your technology, software, whatever
Speaker 1: you have in a way that transforms the way they
Speaker 1: do business. Correct.
Speaker 10: Yeah, I think it was faith based till the guidance
Speaker 10: heard around the world the Nvidia, the four billion dollar raise.
Speaker 10: That's where basically all the bears went into hibernation mood
Speaker 10: for the winner. And that really is what really changed
Speaker 10: everything for tech because that that was the numbers. And
Speaker 10: now in redmen, we're going to see it. Google, We're
Speaker 10: going to see these next few quarters, and that's why.
Speaker 10: I can tell you a lot of investors they're not
Speaker 10: looking at the next one to two quarters, they're looking
Speaker 10: out of the next one two years. And that's why
Speaker 10: this really created the opportunity in terms of, you know,
Speaker 10: a market where I think many is still yelling fire
Speaker 10: in a crowd theater.
Speaker 6: What do you say to the clients who are worried
Speaker 6: about valuations.
Speaker 10: So it's the same clients that I've talked over the
Speaker 10: last twenty two years where I'll sit down there, like
Speaker 10: on transformational tech names, on the Amazons, the Googles, the
Speaker 10: test was if you look out over the next year
Speaker 10: on transformational tech companies, you'll miss every transformational tech stock
Speaker 10: the last twenty years and in the next twenty years.
Speaker 10: It's doing different than coming out of two thousand draft
Speaker 10: six round out of Michigan, Brady that first camp being like,
Speaker 10: I just don't know if it's going to work. So
Speaker 10: I think that's sort of my view in terms of
Speaker 10: how you have to look at these transformational tech names.
Speaker 1: So from your perspective, Julian, are you sort of buying
Speaker 1: into this? Do you feel like you kind of have
Speaker 1: to be overweight tech? Even after the rally.
Speaker 6: So we've taken a little bit of a different tech right.
Speaker 6: So so for us we realize is that the momentum aspect,
Speaker 6: whether it's nineteen ninety five, and frankly, if you think
Speaker 6: about it, if Dan's right that this is nineteen ninety
Speaker 6: five and not ninety eight or ninety nine, we have
Speaker 6: a lot further to run. Or if it's later in
Speaker 6: the cycle, we like the kinds of names that have
Speaker 6: actually shown both price momentum, earnings momentum. And for us,
Speaker 6: very importantly in a momentum driven market, is still defensive positioning, okay,
Speaker 6: and by that whether it's a bid to puts or
Speaker 6: high short interest. And actually you get a number of
Speaker 6: sort of the second and third tier technology names that
Speaker 6: Dan mentioned, as well as actually other industrial names that
Speaker 6: may or may not end up using AI more directly
Speaker 6: in the immediate term.
Speaker 1: When you talk about positioning, that is what a lot
Speaker 1: of people talk about. The overweights right now, for the
Speaker 1: big tech names have gotten fairly extreme. Suddenly everyone's piling
Speaker 1: in because as much as the bears might be more
Speaker 1: vocal and the ones reaching out to you to say
Speaker 1: no way, and with all sorts of hate mail with
Speaker 1: lots of expletives, most people are saying, all right, we
Speaker 1: buy it, We're in. How much is that going to
Speaker 1: potentially challenge the ability for these shares to really rally
Speaker 1: even if people buy into the story.
Speaker 10: Look, but I still think institutionally speaking, many have been
Speaker 10: sitting on the sidelines with their six reasons to be negative,
Speaker 10: and now they're like, maybe they could focus on the weather.
Speaker 10: Hurricane season is a reasonably negative and I'm just trying
Speaker 10: to think about like other reasons negative. But so I
Speaker 10: think what's really starting to happen now is you looking
Speaker 10: at the derivatives. You get apple from some of the
Speaker 10: parts perspective. I know this doc that continues to go
Speaker 10: much higher you look at now the macro is not
Speaker 10: rosy and rainbows.
Speaker 1: We know that.
Speaker 10: But I think what's starting to happen here when you
Speaker 10: look out the next four to six quarters. If you
Speaker 10: pick look, there's gonna be fakes, there's gonna be names
Speaker 10: that basically like ultimately feake it and then ultimately that's.
Speaker 4: The froft that will come off.
Speaker 10: But if you pick the winners, you pick what I've
Speaker 10: used the fundamental names to really own in cloud, CyberSecure
Speaker 10: and AI, and that's how you win here.
Speaker 1: Ten seconds, When has Apple become a four trillion dollar company?
Speaker 10: Look, I think I believe right now you carash On
Speaker 10: it is three and a half trillion. I think by
Speaker 10: twenty twenty five we're looking at a four trillion dollar
Speaker 10: or sooner.
Speaker 1: Dan, I have of Wedbush. Subscribe to the Bloomberg Surveillance
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Speaker 1: I'm Lisa Abramowitz, and this is Bloomberg