WEBVTT - Bloomberg Surveillance TV: April 23, 2024 0:00:00.120 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.640 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.680 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.720 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.920 from our global headquarters in New York City. We are 0:00:24.920 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.240 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.960 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:37.800 Terminal and the Bloomberg Business app. Morgan Stanley's Mike Wilson 0:00:37.840 --> 0:00:40.560 saying this, we believe equity markets have been trading poorly 0:00:40.600 --> 0:00:43.640 in April, primarily due to the repricing of fed cuts, 0:00:43.680 --> 0:00:45.720 with ten yere yields now well above our key four 0:00:45.880 --> 0:00:49.640 thirty five four forty target. Stock appreciation from here would 0:00:49.680 --> 0:00:52.800 largely have to be earned through earnings upside rather than 0:00:52.960 --> 0:00:56.520 multiple expansion. Mike and Polica says with us around the table, Mike, 0:00:56.560 --> 0:00:58.480 good morning to you. You're worrying how high is the 0:00:58.520 --> 0:01:00.880 bar or low for those tech fis through this week. 0:01:01.240 --> 0:01:03.480 Well, it's mixed, as you were saying, it's it's not 0:01:03.600 --> 0:01:04.840 all one trade anymore. 0:01:04.880 --> 0:01:06.480 It's sort of the Magnificent three or four. 0:01:06.560 --> 0:01:08.679 Some are falling by the wayside for fundamental reasons, some 0:01:08.760 --> 0:01:10.119 are falling by the wayside. 0:01:09.760 --> 0:01:10.679 For rate reasons. 0:01:11.080 --> 0:01:14.000 And look they've got they've got tougher comparisons now, so 0:01:14.080 --> 0:01:16.800 I think that always the case, right, It's not so 0:01:16.880 --> 0:01:19.640 much about the earnings results. It's about the reaction of 0:01:19.680 --> 0:01:22.000 the stock to the earnings results. And I think that's 0:01:22.000 --> 0:01:24.360 what I'm really fascinated to see how much goodness is 0:01:24.360 --> 0:01:26.840 already priced into even the winners, and there are some 0:01:26.840 --> 0:01:27.920 big winners in that group. 0:01:28.160 --> 0:01:29.000 I agree with you, Lisa. 0:01:29.040 --> 0:01:30.919 I think what's more interesting is what's going on away 0:01:30.920 --> 0:01:34.040 from those stocks that will that will inform us more about. 0:01:33.800 --> 0:01:35.319 What's actually happening in the economy. 0:01:35.480 --> 0:01:37.800 You know, what the expectations are around FED for example, 0:01:38.000 --> 0:01:39.920 and also some of the geopolitical risk, which I think 0:01:40.080 --> 0:01:42.240 you know that's not our number one concern, but it's 0:01:42.240 --> 0:01:44.040 also one of the reasons we're overweight energy. 0:01:44.120 --> 0:01:46.160 You said, we can learn something from the earnings themselves 0:01:46.160 --> 0:01:47.720 and how the stalk responds to them. What if we 0:01:47.800 --> 0:01:50.440 learned so far as we get deeper into any season, Well. 0:01:50.400 --> 0:01:52.320 It's about fifty to fifty, So fifty percent have been 0:01:52.440 --> 0:01:54.480 up to plus one, fifty percent have been down. 0:01:54.480 --> 0:01:55.400 That's worse than normal. 0:01:55.920 --> 0:01:57.720 This is in line with what we've been saying for 0:01:57.840 --> 0:01:59.360 quite a while now as we think now we're in 0:01:59.400 --> 0:01:59.960 a period. 0:01:59.720 --> 0:02:01.000 Of moultiple contraction. 0:02:01.520 --> 0:02:01.600 Right. 0:02:01.600 --> 0:02:03.760 If you think about the last six months, all that 0:02:03.800 --> 0:02:06.720 really happened was, you know, the Fed pivoted treasury. I 0:02:06.720 --> 0:02:08.760 would argue, sort of squeeze the bomb market. We had 0:02:08.760 --> 0:02:11.360 a duration rally into year end and that affected a 0:02:11.480 --> 0:02:14.720 huge multiple expansion. You know, it doesn't get a lot 0:02:14.720 --> 0:02:16.960 of press, but twenty twenty four estimates for the S 0:02:17.000 --> 0:02:18.880 and P five hundred have really gone up. Okay, they've 0:02:18.880 --> 0:02:20.880 been sort of flat over that six month period. It's 0:02:20.880 --> 0:02:23.920 all multiple expansion. So our call basically is that we 0:02:23.960 --> 0:02:26.239 first always thought seven cuts was silly. I think a 0:02:26.240 --> 0:02:28.680 lot of people agreed with that, and now we're down 0:02:28.720 --> 0:02:31.519 to one and a half. So why wouldn't multiples come 0:02:31.560 --> 0:02:33.359 down in that environment? And I think that's what we're 0:02:33.360 --> 0:02:36.160 facing now during earning season is you've got to really 0:02:36.200 --> 0:02:39.120 put up a serious beat and a revision. 0:02:38.680 --> 0:02:40.359 To the upside for the stock to go up. 0:02:40.760 --> 0:02:42.799 I'm very curious to see how that plays for the 0:02:42.840 --> 0:02:43.480 next two weeks. 0:02:43.520 --> 0:02:46.000 What we're seeing right now in the earnings is not 0:02:46.120 --> 0:02:49.040 a cohesive story. I mean, honestly, you're seeing some areas 0:02:49.080 --> 0:02:51.799 where it's cost cutting that's keeping margins afloat, in other 0:02:51.880 --> 0:02:54.880 areas where you see, you know, for example, demand for 0:02:54.919 --> 0:02:57.800 trucks in the US going gangbusters. Are you seeing any 0:02:57.880 --> 0:02:59.839 themes that you can kind of grab onto so far? 0:03:00.280 --> 0:03:03.320 The theme is that it's a very unbalanced economy, and 0:03:03.360 --> 0:03:04.400 that's the theme we've had. 0:03:04.320 --> 0:03:04.720 For a while. 0:03:04.760 --> 0:03:07.680 So post COVID has just been a very unpredictable environment 0:03:07.680 --> 0:03:08.320 for a lot of reasons. 0:03:08.360 --> 0:03:09.520 Some of those things we got really right. 0:03:09.560 --> 0:03:11.480 So most things we got really wrong, and I think 0:03:11.520 --> 0:03:13.520 we're trying to figure out kind of what the next 0:03:13.520 --> 0:03:15.840 stage is. Let's look at the last year as an example. 0:03:15.919 --> 0:03:18.919 So a year ago hard landing recession was the consensus 0:03:19.000 --> 0:03:21.840 view market overpriced that. Then we got a soft landing 0:03:21.840 --> 0:03:23.720 price in in two q Then we had a sort 0:03:23.720 --> 0:03:26.560 of a fiscal sustainability problem where growth got too hot 0:03:26.840 --> 0:03:28.400 and rates went up and we had a big correction. 0:03:28.480 --> 0:03:30.520 Then we went back to the soft landing and now 0:03:30.919 --> 0:03:33.720 we're in no landing. So this is our view at 0:03:33.760 --> 0:03:36.440 the beginning of the year, there's a third of a percent. 0:03:36.480 --> 0:03:38.280 There's a thirty three percent chance of all three of 0:03:38.280 --> 0:03:42.280 those happening soft landing, no landing, hard landing, and I 0:03:42.280 --> 0:03:44.120 think it's the same. So in other words, right now 0:03:44.160 --> 0:03:47.200 we're trying to price that no landing scenario, but I'm 0:03:47.200 --> 0:03:50.080 not confident that we're going to stay in that environment. 0:03:50.120 --> 0:03:51.800 And companies are a reflection of that. 0:03:51.880 --> 0:03:53.920 Right Some companies do better in that scenario, and that's 0:03:53.920 --> 0:03:56.560 why they're doing better things like energy and materials, financials. 0:03:57.080 --> 0:03:58.240 But is that sustainable. 0:03:58.240 --> 0:03:59.760 We're going to find out, you know, we said that 0:04:00.120 --> 0:04:02.520 we're going to see how much multiple expansion could continue 0:04:02.560 --> 0:04:05.600 and whether we see multiple contraction. The multiple expansion has 0:04:05.640 --> 0:04:08.120 been really concentrated in big tech. 0:04:08.320 --> 0:04:09.480 It has been really. 0:04:09.200 --> 0:04:11.280 Concentrated in some of the quality names that you like. 0:04:11.520 --> 0:04:14.200 It has not been concentrated in the Russell two thousand, 0:04:14.200 --> 0:04:16.800 which has not experienced that same kind of run. Do 0:04:16.839 --> 0:04:19.960 you start to like some of those areas because suddenly 0:04:20.040 --> 0:04:23.240 it is an economy that's okay, maybe supported by a 0:04:23.279 --> 0:04:26.560 couple rate cuts, and frankly, you haven't seen that multiple expansion. 0:04:26.960 --> 0:04:29.400 Well we did, I mean November December was one of 0:04:29.440 --> 0:04:31.799 the biggest short squeezes I've ever seen in the lower 0:04:31.839 --> 0:04:34.320 quality parts of the market. So we did absolutely see 0:04:34.600 --> 0:04:36.840 multiple expansion. Now we're giving some of that back, right, 0:04:36.880 --> 0:04:39.080 And that's our call, which is that I don't really 0:04:39.120 --> 0:04:41.520 want to go to the low quality world, Okay, and 0:04:41.520 --> 0:04:44.320 that includes small caps. Not all small cap companies are 0:04:44.360 --> 0:04:46.839 low quality, just be clear, but as a group, okay, 0:04:46.920 --> 0:04:49.599 Russell two thousand is a low quality index and that's 0:04:49.600 --> 0:04:53.040 why it's underperforming again because race are too high for them. 0:04:53.640 --> 0:04:56.159 Like our star. People talking about our star, Okay, Well. 0:04:55.960 --> 0:04:58.320 Our star is different depending on who you are and 0:04:58.360 --> 0:05:01.200 what kind of company you run. It's extremely variable, and 0:05:01.240 --> 0:05:04.640 the market's been really efficient Lisa in saying, look, rates 0:05:04.680 --> 0:05:07.840 are too high for a majority of the economy, whether 0:05:07.839 --> 0:05:10.520 it's consumers or small businesses. So we're sticking with that 0:05:10.600 --> 0:05:13.640 until rates really get cut. We think that the trade 0:05:13.680 --> 0:05:15.960 is still you got to go with self funding businesses 0:05:16.080 --> 0:05:19.279 that have idiosyncratic kind of growth opportunities are pricing power 0:05:19.360 --> 0:05:21.720 and just playing out again this year in space, A. 0:05:21.680 --> 0:05:25.520 Lot of people think about you as a bear because yesterday, 0:05:25.800 --> 0:05:27.680 for last year, I should say, you are really calling 0:05:27.720 --> 0:05:30.680 for some sort of downturn in the economy. Where are 0:05:30.720 --> 0:05:34.080 we in terms of that cycle, in terms of just 0:05:34.160 --> 0:05:36.640 how close we are to a downturn? Are you basically saying, 0:05:36.800 --> 0:05:38.719 you know what, this isn't something you can really call 0:05:38.839 --> 0:05:41.680 with any definitive conviction that you have to sort of 0:05:41.680 --> 0:05:43.880 just look at specific companies and stay away from that stuff. 0:05:44.000 --> 0:05:46.360 You know, it's me it's a humbling business. And I think, 0:05:46.400 --> 0:05:48.120 I mean seventy percent of the street I think was 0:05:48.120 --> 0:05:50.280 in the recession camp a year ago. Our economists were not, 0:05:50.320 --> 0:05:52.359 but a lot of people were in that camp and 0:05:52.400 --> 0:05:54.960 we had to reprice that out. So where we think 0:05:54.960 --> 0:05:56.919 we're still very much late cycle. I heard you all chatting. 0:05:57.000 --> 0:05:58.760 One of the questions we've had is why can't it 0:05:58.760 --> 0:06:01.400 be early cycle. Well, there's a lot of reasons why 0:06:01.400 --> 0:06:03.400 we don't think it's early cycle. Labor market's very tight, 0:06:03.560 --> 0:06:05.480 the old curve is still inverted. We don't have a 0:06:05.520 --> 0:06:07.560 lot of supply in the labor market. We have immigration 0:06:07.640 --> 0:06:09.920 maybe supporting that, but generally it's a tight labor market. 0:06:10.120 --> 0:06:12.480 You know, margins are still at record high levels. So 0:06:12.640 --> 0:06:14.040 all of the things that we would look at from 0:06:14.040 --> 0:06:16.560 an early cycle perspective are just not there. So we're 0:06:16.600 --> 0:06:19.000 still late cycle, and what does that mean. It means 0:06:19.240 --> 0:06:22.280 this can last for another two years, or it could 0:06:22.320 --> 0:06:25.479 be over tomorrow if we have another shock. So we're 0:06:25.760 --> 0:06:27.919 probably going to sider we're not going to be as 0:06:27.960 --> 0:06:29.840 aggressive trying to make that shock because we don't know 0:06:29.880 --> 0:06:31.839 what it is. We thought it was a regional banking 0:06:31.920 --> 0:06:34.200 crisis last year turned out to be not the case. 0:06:34.240 --> 0:06:36.599 The economy turned out to be stronger. I would also 0:06:36.760 --> 0:06:40.680 argue that we have an incredibly imbalanced policy mix, which 0:06:40.680 --> 0:06:43.920 has helped the economy to sustain itself. So economic data 0:06:43.920 --> 0:06:46.080 does not look like the earnings data to us. Okay, 0:06:46.320 --> 0:06:48.920 economic data is much stronger than the earnings data. 0:06:48.920 --> 0:06:50.880 Why is that? An enormous amount. 0:06:50.600 --> 0:06:53.640 Of fiscal support into the economy is keeping the economic 0:06:53.720 --> 0:06:56.520 data looking strong, which is preventing the FED from really 0:06:56.560 --> 0:07:00.160 cutting rates for an early cycle rotation. And that's we're 0:07:00.160 --> 0:07:01.479 just kind of stuck in that and we could be 0:07:01.520 --> 0:07:03.600 there for a while. I don't see that breaking. I 0:07:03.600 --> 0:07:06.279 don't see any discipline in Congress. We're spending more money 0:07:06.279 --> 0:07:08.919 this week with this bill, I mean, so that is 0:07:08.920 --> 0:07:12.360 where we are. The question is is that overpriced? And 0:07:12.440 --> 0:07:14.360 I think it is because should I pay a higher 0:07:14.440 --> 0:07:18.280 multiple for what I call low quality growth, government sort 0:07:18.280 --> 0:07:20.840 of driven growth. I would already know for some companies 0:07:20.880 --> 0:07:22.760 you can pay higre multiple because they're IDoc and credic 0:07:22.800 --> 0:07:24.520 to that. And that's what's happening. Companies that don't need 0:07:24.560 --> 0:07:28.280 government support are doing better. Companies that we're getting constrained 0:07:28.280 --> 0:07:30.080 by higher rates are underperforming. 0:07:30.280 --> 0:07:32.800 Let's talk about fiscal and the fact that it doesn't 0:07:32.840 --> 0:07:34.800 matter who wins the election, there's going to be more 0:07:34.800 --> 0:07:37.640 money coming out of Washington. It's one of your questions 0:07:37.680 --> 0:07:39.120 you ask in your note, how are you thinking about 0:07:39.120 --> 0:07:41.040 the election as a driver of markets this year? Is 0:07:41.080 --> 0:07:43.280 it too soon to start preparing for November? 0:07:43.520 --> 0:07:43.680 Yeah? 0:07:43.720 --> 0:07:45.280 I mean historic, and we put this in a note. 0:07:45.280 --> 0:07:47.800 I mean typically the volatility the market picks up two 0:07:47.800 --> 0:07:51.200 to three months before the election. My experience is that 0:07:51.440 --> 0:07:53.760 until we have the conventions and we really see the 0:07:53.800 --> 0:07:56.920 platforms at the stock level, and we don't see. 0:07:56.720 --> 0:07:57.320 A lot of action. 0:07:57.760 --> 0:08:00.520 Now, interestingly, this year, the market is rallied in the 0:08:00.560 --> 0:08:03.160 beginning of the year. Typically it doesn't do well in 0:08:03.160 --> 0:08:04.640 the first half and it does better in the second 0:08:04.680 --> 0:08:06.880 half as it becomes more clear. So is that going 0:08:06.880 --> 0:08:09.200 to reverse this year? We have a tougher second half maybe, 0:08:09.800 --> 0:08:13.200 But I agree with your first sort of position, which 0:08:13.240 --> 0:08:15.320 is I don't see a lot of difference between these 0:08:15.360 --> 0:08:18.400 two campaigns in terms of the fiscal and even the 0:08:18.440 --> 0:08:21.440 monetary mix. The one thing I would say is focus 0:08:21.520 --> 0:08:24.920 on the areas where the president can do things that 0:08:24.960 --> 0:08:27.440 are executive order okay, And the biggest one in my 0:08:27.520 --> 0:08:30.440 mind is immigration, and terrass is the second one. That's 0:08:30.440 --> 0:08:32.679 the second one. So terroris and immigration could be done 0:08:32.720 --> 0:08:36.880 without congressional voting. So that's where I think, because I'm 0:08:36.920 --> 0:08:38.719 not confident that we're going to get a sweep either way, 0:08:38.760 --> 0:08:41.440 that's probably the least likely outcome. It's probably ten percent chance. 0:08:41.559 --> 0:08:43.480 It's going to be very close. But to get one 0:08:43.520 --> 0:08:45.320 party as a sweep, I think it's going to be challenging. 0:08:45.440 --> 0:08:48.440 So the executive order lever, if you're thinking about Trump 0:08:48.520 --> 0:08:50.679 or Biden, that's where that's what the action is going 0:08:50.720 --> 0:08:50.920 to be. 0:08:50.960 --> 0:08:52.600 I just want to work that's through an extra step. 0:08:52.679 --> 0:08:54.560 You suggest that might be if we get a president Trump. 0:08:54.640 --> 0:08:58.360 Volume two to this supply site, Nevana that some people 0:08:58.400 --> 0:09:00.400 in the world of economics are embracing my be threat. 0:09:00.400 --> 0:09:01.880 Since I think that's exactly right. 0:09:02.200 --> 0:09:04.200 I would argue that there's a chance that maybe something 0:09:04.320 --> 0:09:07.160 is done prior to the election for political because this 0:09:07.240 --> 0:09:10.000 is a hot issue for the election, right, Immigration is 0:09:10.000 --> 0:09:12.720 a hot topic, and the question is do they try 0:09:12.720 --> 0:09:15.800 to curtail some of that inflow prior to the election. 0:09:15.880 --> 0:09:17.160 I have no idea, but we're going. 0:09:17.080 --> 0:09:19.439 To learn more about that, I think in the conventions 0:09:19.120 --> 0:09:20.640 in terms of how they're talking about it. 0:09:20.679 --> 0:09:22.720 So your point that mind, this could change quickly in 0:09:22.760 --> 0:09:24.199 the space of a couple of months. I'm just trying 0:09:24.240 --> 0:09:26.040 to work out how quickly that would shot upen the data, 0:09:26.160 --> 0:09:29.080 how quickly the market might respond to that change. 0:09:29.240 --> 0:09:32.400 Well, here's the real takeaway, John, I feel like there's 0:09:32.440 --> 0:09:34.439 been a lot of marking to market going on, right, 0:09:34.600 --> 0:09:37.840 So I would argue everybody's been wrong about the fundamental 0:09:37.880 --> 0:09:39.760 picture in many many ways over the last two years, 0:09:39.800 --> 0:09:43.719 including ourselves, Okay, and that marketing to market. All of 0:09:43.720 --> 0:09:45.280 a sudden, you mark yourself to market, Why are you 0:09:45.320 --> 0:09:47.880 any more confident you know what's going to happen next? Right, 0:09:47.960 --> 0:09:50.640 And that's where we have a problem with valuations is 0:09:50.679 --> 0:09:54.160 there seems to be this perceived certainty again being priced in. 0:09:54.240 --> 0:09:55.800 It's like I'm not certain at all. Maybe I'm the 0:09:55.840 --> 0:09:56.480 dummy in the room. 0:09:56.520 --> 0:09:58.200 I don't know, but I feel like there's a little 0:09:58.200 --> 0:10:00.000 bit of complacency around just knowing what's going to happen. 0:10:00.160 --> 0:10:01.200 By the way I send all bad. 0:10:01.440 --> 0:10:04.640 There could be some positive surprises, but those positive surprises 0:10:04.760 --> 0:10:07.400 may lead you to a different group of assets that 0:10:07.440 --> 0:10:09.880 you want to own. Okay, I mean I think bonds 0:10:09.880 --> 0:10:12.439 are just suspend a minute on bonds, so my goodness. 0:10:12.480 --> 0:10:14.880 I mean this is one where I literally can flip 0:10:14.880 --> 0:10:16.120 a coin and I would fit. 0:10:16.280 --> 0:10:18.240 Okay, that's it, you know, because I could. 0:10:18.040 --> 0:10:21.400 See rates higher from the standpoint of fiscal sustainability problems, 0:10:21.440 --> 0:10:24.080 we have a term premium increased like last last year. 0:10:24.640 --> 0:10:27.200 Or I could see things slow down again because rates 0:10:27.240 --> 0:10:29.600 are now higher, right, the wealthffect is kind of being 0:10:29.600 --> 0:10:31.640 priced out of the market, and maybe things slow again. 0:10:31.760 --> 0:10:33.480 Our house call is we're going back to sort of 0:10:33.520 --> 0:10:35.520 four fifteen. I think you just had a guest saying 0:10:35.520 --> 0:10:38.280 three seventy five. Yep, I mean three seventy five would 0:10:38.360 --> 0:10:40.360 argue that we're probably back into a soft landing or 0:10:40.400 --> 0:10:42.760 hard landing scenario. Four to fifteen is kind of more 0:10:42.880 --> 0:10:44.520 the things just kind of slow down a bit. 0:10:44.600 --> 0:10:45.920 Can I put you on the spot just a little bit? 0:10:45.960 --> 0:10:48.880 Is it easier to foresee than being one hundred basis 0:10:48.880 --> 0:10:51.160 points lower than being one hundred basis points higher? 0:10:51.320 --> 0:10:52.680 Or you actually ten more and split? 0:10:52.760 --> 0:10:56.280 Yeah, one hundreds big, okay? And those are the tails, right, 0:10:56.320 --> 0:10:58.720 So one hundred on the upside would be the market 0:10:58.760 --> 0:11:02.920 is really concerned about unding sustainability, almost like the UK okay, 0:11:03.280 --> 0:11:05.679 two years ago. And I think one hundred base of 0:11:05.720 --> 0:11:08.000 points lower from here is kind of a hard landing. 0:11:08.160 --> 0:11:09.160 Give me the next fifty. 0:11:09.400 --> 0:11:12.960 Yeah, so fifty, I'm I'm still leaning to higher, but 0:11:13.040 --> 0:11:16.280 our house call is lower, so you know, and I 0:11:16.280 --> 0:11:16.800 got to go with the. 0:11:16.760 --> 0:11:17.280 House call. 0:11:18.960 --> 0:11:19.120 There. 0:11:19.200 --> 0:11:21.120 But I mean, but the bond guys, I. 0:11:21.040 --> 0:11:22.560 Mean, that's their job, and so I gotta, I gotta, 0:11:22.600 --> 0:11:23.319 I gotta bet. 0:11:23.120 --> 0:11:25.480 With them, okay. And so that would be okay. 0:11:25.480 --> 0:11:27.720 So what happens in that scenario for stocks, Well, all 0:11:27.760 --> 0:11:30.560 of a sudden, our no landing scenario probably isn't the case, 0:11:30.600 --> 0:11:32.920 and we probably would downgrade energy, and we probably would 0:11:32.960 --> 0:11:34.320 go back to some of the things that were doing 0:11:34.400 --> 0:11:36.199 better last year. And so it's just I think you 0:11:36.320 --> 0:11:38.360 just got to keep a really flexible open mind that's 0:11:38.400 --> 0:11:40.079 what we try to do now with the with the 0:11:40.120 --> 0:11:42.400 stock picking. We haven't really talked much about index in 0:11:42.440 --> 0:11:43.920 the last four or five months because we're trying to 0:11:43.960 --> 0:11:46.199 focus on the relative value trades and we've got a 0:11:46.240 --> 0:11:48.400 lot of those right and hopefully, knock on wood, we 0:11:48.400 --> 0:11:49.240 can continue to do that. 0:11:49.440 --> 0:11:51.560 Stick with a Mike, you're gonna sty Clive Smike Wilson, 0:11:51.640 --> 0:11:53.120 that of mulch and Stanley. 0:12:02.720 --> 0:12:03.360 Matters with us. 0:12:03.400 --> 0:12:05.760 Now for more My congratulations because I think a lot 0:12:05.800 --> 0:12:08.680 of people have moved to your view of the world. 0:12:08.960 --> 0:12:11.320 You were talking about a mid cycle adjustment quite a 0:12:11.320 --> 0:12:13.200 while ago, and I think everyone else is caught up 0:12:13.240 --> 0:12:15.600 now this is no longer about the start of a 0:12:15.640 --> 0:12:19.000 cutting cycle and perhaps an adjustment mid cycle. Can you 0:12:19.040 --> 0:12:21.280 frame the difference and what led you towards that conclusion? 0:12:21.400 --> 0:12:24.400 Yeah, absolutely so. We have I think two historical examples 0:12:24.440 --> 0:12:25.920 of mid cycle adjustments. You had one in the mid 0:12:26.000 --> 0:12:28.520 nineteen nineties, you had one in twenty nineteen. And the 0:12:28.559 --> 0:12:30.840 logic there is the FED is cutting rates, not necessarily 0:12:30.880 --> 0:12:32.960 because we're in a recession, but maybe they're seeing some 0:12:33.000 --> 0:12:34.960 weakness in the economy that they're trying to get ahead of, 0:12:35.440 --> 0:12:37.959 or they're seeing that inflation's coming down substantially. I think 0:12:38.000 --> 0:12:40.640 this cycle was going to be all about inflation coming 0:12:40.640 --> 0:12:42.880 down and the FED being able to cut rates modestly 0:12:42.920 --> 0:12:45.360 in response to that. Certainly we're seeing that that get 0:12:45.400 --> 0:12:45.920 pushed back. 0:12:46.280 --> 0:12:47.480 But with a labor market where. 0:12:47.360 --> 0:12:49.640 It is, with growth as resilient as it is, with 0:12:49.720 --> 0:12:53.360 financial conditions as easy and accommodative as they are, there's 0:12:53.360 --> 0:12:55.120 really no reason for the FED to guide towards a 0:12:55.120 --> 0:12:57.480 full cutting cycle at this point in time pre pandemic. 0:12:57.480 --> 0:12:59.360 I can remember a phrase that Chairman Pound talked about 0:12:59.360 --> 0:13:02.800 the objective to extend the CINCO. It's not the objective now, 0:13:02.880 --> 0:13:04.760 and where are we in a so called cyco. 0:13:05.040 --> 0:13:05.240 Yeah. 0:13:05.280 --> 0:13:08.199 I think you've seen FED officials talking about risk management 0:13:08.480 --> 0:13:11.200 for a long time over the past three years. Risk 0:13:11.280 --> 0:13:14.400 management meant being hawkish raising grades in order to ensure 0:13:14.400 --> 0:13:16.760 that inflation doesn't become entrenched. I think three or four 0:13:16.800 --> 0:13:19.400 months ago we saw better balancing of those risks. 0:13:19.200 --> 0:13:20.800 As inflation was looking softer. 0:13:20.640 --> 0:13:22.720 And the FED became a little bit worried about growth. 0:13:22.760 --> 0:13:25.280 I think the past three months of stronger inflation prints 0:13:25.640 --> 0:13:28.160 have put inflation back to the forefront for the FED 0:13:28.640 --> 0:13:31.400 and extending the cycle at this point, I think does 0:13:31.520 --> 0:13:34.880 mean ensuring that inflation does not get entrenched, not cutting 0:13:34.960 --> 0:13:38.079 rates prematurely. We hear more FED officials talking about the 0:13:38.160 --> 0:13:41.440 risk that that's the bigger risk, cutting rates prematurely having 0:13:41.520 --> 0:13:42.520 to rehike later. 0:13:42.760 --> 0:13:45.679 I like Ben Bernike's idea of scenario analysis. I would 0:13:45.720 --> 0:13:47.360 like to have a sense of exactly how the FED 0:13:47.400 --> 0:13:50.679 would respond if certain things happen. Since it's been such 0:13:50.720 --> 0:13:54.640 an unpredictable cycle. How many hot inflation prints will it 0:13:54.679 --> 0:13:57.120 take before we start talking about no hikes this year 0:13:57.559 --> 0:13:59.840 and no more cuts this year? And how many we 0:14:00.080 --> 0:14:01.920 prints does it take for the FED to cut? 0:14:02.200 --> 0:14:05.240 Yeah, I think we're close to talking about no cuts. 0:14:05.480 --> 0:14:07.520 You know, our expectation is the FED only cuts once 0:14:07.600 --> 0:14:10.960 and it comes cut in December. Well, we also expect 0:14:10.960 --> 0:14:12.560 that you're going to see disinflation come back over the 0:14:12.600 --> 0:14:15.440 next several months. So even if you get disinflation, you know, 0:14:15.440 --> 0:14:17.520 three four months ahead, I think the FED is going 0:14:17.559 --> 0:14:19.000 to be a little bit more reluctant to cut rates 0:14:19.000 --> 0:14:21.600 because you know, they've seen a headfake from the inflation data. 0:14:21.680 --> 0:14:23.960 It's going to take a while to rebuild that confidence. 0:14:24.160 --> 0:14:26.360 I think if you take take a step back. You know, 0:14:26.440 --> 0:14:29.120 core PC inflation on Friday might be two seven or 0:14:29.120 --> 0:14:32.040 two eight. We have growth, which you know around two 0:14:32.040 --> 0:14:34.160 and a quarter percent. We have financial conditions that are easy. 0:14:34.160 --> 0:14:36.240 We have the labor market, you know, adding more than 0:14:36.240 --> 0:14:38.040 two hundred thousand jobs per month on average, with a 0:14:38.120 --> 0:14:40.840 historically low on employment rate. There's just not very compelling 0:14:40.880 --> 0:14:43.320 reasons to cut rates within that environment, and I think 0:14:43.320 --> 0:14:44.520 the FED is coming around to that view. 0:14:44.680 --> 0:14:48.120 How much are they basically also kind of tacitly admitting 0:14:48.560 --> 0:14:51.720 that the pivot last year really kind of worked against 0:14:51.760 --> 0:14:54.920 their goal of disinflation, that that might have actually contributed 0:14:54.960 --> 0:14:57.240 to the stickiness that we're seeing right now. Is some 0:14:57.280 --> 0:14:57.760 of the data. 0:14:58.160 --> 0:15:00.000 I think, you know, perhaps it's somewhat of a contry 0:15:00.080 --> 0:15:02.800 beating factor. I think a lot of this may be seasonal, 0:15:02.880 --> 0:15:05.280 So you do have some seasonal factors that boost. 0:15:05.000 --> 0:15:06.320 Inflation early in the year. 0:15:06.600 --> 0:15:08.480 But what that means is the disinflation we saw last 0:15:08.520 --> 0:15:11.920 year was overstated, and so overall inflation is just going to. 0:15:11.840 --> 0:15:13.160 Be more elevated than then we thought. 0:15:13.280 --> 0:15:16.120 I think financial conditions will help to boost growth as 0:15:16.160 --> 0:15:18.480 we look ahead, but I don't think that it's been 0:15:18.640 --> 0:15:20.960 a key factor for the stronger inflation prints of the 0:15:20.960 --> 0:15:21.800 first three months of the year. 0:15:21.920 --> 0:15:25.120 Mid cycle adjustment doesn't sound like we're near any kind 0:15:25.160 --> 0:15:27.960 of hard landing. And yet the different rolling cycles that 0:15:27.960 --> 0:15:29.880 we're seeing in a lot of these earnings reports and 0:15:29.920 --> 0:15:34.040 what people are talking about the two sided economy, it's 0:15:34.160 --> 0:15:36.720 very real. How do you play that out given the 0:15:36.720 --> 0:15:39.160 fact that if rates were made at this level, the 0:15:39.240 --> 0:15:43.080 lower tier, the lower half, frankly of the population is 0:15:43.080 --> 0:15:45.320 going to struggle all the much more so. And I'm 0:15:45.320 --> 0:15:47.520 talking about both companies and individuals. 0:15:47.600 --> 0:15:50.120 Yeah, I think from my perspective, that's returning to more 0:15:50.160 --> 0:15:52.560 normal conditions. You know, it is the reality of the 0:15:52.640 --> 0:15:55.320 US economy that you have delinquency rates that are more 0:15:55.320 --> 0:15:59.360 elevated for for lower income households, for for lower education households. 0:15:59.800 --> 0:16:01.680 So a lot of this is returning to a more 0:16:01.720 --> 0:16:05.440 normal pre code environment as that access savings gets drawn down. 0:16:05.720 --> 0:16:09.360 What we've seen in that environment still is robust consumer spending. 0:16:09.600 --> 0:16:11.760 We saw it with the retail sales report recently. We 0:16:11.800 --> 0:16:14.480 see GDP growth that looks quite solid. We see employment 0:16:14.480 --> 0:16:17.240 gains which are above two hundred thousand. We see households 0:16:17.240 --> 0:16:21.600 adding meaningful income growth with decelerating inflation. All that I 0:16:21.600 --> 0:16:25.600