WEBVTT - Morgan Stanley’s Mike Wilson Talks Rolling Recovery

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

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<v Speaker 2>Here's the latest this morning. Trade talks between the US

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<v Speaker 2>and China stretching into a second day as President Trump's

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<v Speaker 2>Friday deadline approaches. The COMMAS Secretary Howard Latinik thing a

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<v Speaker 2>ninety day truce extension, which China is likely. Mike Wilson

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<v Speaker 2>of Malkan Stanley is bullish, writing We're bullish into twenty

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<v Speaker 2>six through the near term setup is not without risks.

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<v Speaker 2>These include tariff related inflation. Mike joins us now for more. Mike,

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<v Speaker 2>good morning, Good to see you. You list a lot

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<v Speaker 2>of reasons to be constructive here, just go through those

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<v Speaker 2>leasons for us this morning.

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<v Speaker 3>Yeah.

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<v Speaker 1>I mean the reasons really haven't changed.

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<v Speaker 4>We've been very constructive since May when we did our

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<v Speaker 4>midyear update. And I think the main thing to take

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<v Speaker 4>away from our outlook that's maybe different than others. I

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<v Speaker 4>think we came into the year feeling the first half

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<v Speaker 4>would be tricky, second half would be better, and that

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<v Speaker 4>was all function of the sequencing of the policy.

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<v Speaker 1>Right.

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<v Speaker 4>So the policy sequencing was what we said is a

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<v Speaker 4>kitchen sink the first quarter. It took to the growth

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<v Speaker 4>negative stuff first and then.

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<v Speaker 1>Flipped very quickly in April.

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<v Speaker 4>So the main reason we're bullish, okay, is that the

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<v Speaker 4>earnings revision breath and we show this every week in

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<v Speaker 4>our note and it goes up every week, has exploded

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<v Speaker 4>higher off of what was a deep cyclical low that

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<v Speaker 4>basically priced in a recession for the most part, So

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<v Speaker 4>that revision breath is guiding us to the performance that

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<v Speaker 4>we've seen.

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<v Speaker 1>This is just to put it in context.

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<v Speaker 4>Okay, this increase or V shaped recovery and arrange re

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<v Speaker 4>vision breath is as significant as we've seen since COVID,

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<v Speaker 4>the COVID recovery, and that was the last time that

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<v Speaker 4>we were this far out of consensus being bullish, and

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<v Speaker 4>it was right because of it.

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<v Speaker 1>It's the data. We're data dependent, So that's the main reason.

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<v Speaker 4>So this is not just me saying, oh, momentum stocks

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<v Speaker 4>and price momentum, etc.

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<v Speaker 1>That's part of it too. So what's driving that earninge

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<v Speaker 1>revision breath? Well, first, it's a.

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<v Speaker 4>Reflexivity just on people getting too bearish on the growth

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<v Speaker 4>negative stuff.

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<v Speaker 1>And let's not forget the AI camp X cycle, which.

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<v Speaker 4>We came into your feeling negative about, also bottomed in April.

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<v Speaker 1>Okay, So those are two big drivers.

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<v Speaker 4>The second one is a weaker dollar dollars, a big

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<v Speaker 4>tail wind for multinational companies, okay. And the third one

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<v Speaker 4>now is we're starting to see operating leverage in more

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<v Speaker 4>companies across the S and P five hundred. And this

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<v Speaker 4>is a very unique view that we've had. So, you know,

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<v Speaker 4>the rolling recession call that we've kind of been talking about, well,

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<v Speaker 4>now it looks to us like we're having a rolling recovery, okay,

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<v Speaker 4>And that will be further spurred by the FED cutting

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<v Speaker 4>rates at some point in the next year. And we

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<v Speaker 4>don't know exactly when they're going to start, but I

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<v Speaker 4>think it's fair to say that they're not going to

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<v Speaker 4>be raising rates. So this three year what I would

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<v Speaker 4>call soft recession that we've been living through, now we're

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<v Speaker 4>sort of coming through that and we're getting more visibility

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<v Speaker 4>and that that's why we're more constructive on the next year. Now,

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<v Speaker 4>in the next three months, I do think that some

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<v Speaker 4>of the things that people have been worried about could

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<v Speaker 4>start to play through earnings.

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<v Speaker 1>For example, we.

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<v Speaker 4>Can see cost of goods sold increase because of the tariff.

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<v Speaker 4>You know, the inventory now is flowing through, the cost

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<v Speaker 4>of goods sold.

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<v Speaker 1>We could see the back.

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<v Speaker 4>End of the treasury markets start to back up again

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<v Speaker 4>because of the supply that we know is coming. And

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<v Speaker 4>then of course we still have to deal with just

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<v Speaker 4>this sort of concern around inflation and how does that

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<v Speaker 4>play through, how.

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<v Speaker 1>Does the Fed respond to that? So there are risks there.

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<v Speaker 4>We're not saying there's no risks. And remember the market

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<v Speaker 4>trade six months in advance. So that's what's happened. The

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<v Speaker 4>market has figured this out, it's gotten ahead of it,

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<v Speaker 4>and we've priced a lot of good news.

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<v Speaker 3>How much is this entirely tech driven versus a broad

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<v Speaker 3>based kind of revisions increase and recovery. Given some of

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<v Speaker 3>the mixed guidance that we're getting this morning from a

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<v Speaker 3>number of companies, particularly those that are consumer facing.

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<v Speaker 1>That's right.

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<v Speaker 4>Well, it still remains mixed because we're still in this

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<v Speaker 4>rolling recovery, right, So it's not everything at once. Tech

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<v Speaker 4>and the MAG seven are leading, but we're seeing also

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<v Speaker 4>other groups, industrials, financials, Okay Software, which has been in

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<v Speaker 4>a software session for the last couple of years, we're

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<v Speaker 4>seeing we are seeing a.

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<v Speaker 1>Broadening out for the Max seven. So it's not.

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<v Speaker 4>Where we need to be to see say, oh, we're

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<v Speaker 4>going to move into small cap stocks, We're going to

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<v Speaker 4>move into the low quality parts of the market. We're

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<v Speaker 4>still staying up that curve, however, it's starting to progress.

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<v Speaker 4>Just like the rolling recession saw degradation that was not

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<v Speaker 4>all at once, but kind of more piecemeal.

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<v Speaker 3>So during the rolling recession, we saw gains of about

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<v Speaker 3>twenty percent on the S and P five hundred first

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<v Speaker 3>couple of consecutive years.

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<v Speaker 2>Could you see.

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<v Speaker 3>Gains twenty percent or more during rolling recovery? Does it

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<v Speaker 3>matter if you're in a rolling reception or really recovery

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<v Speaker 3>in terms of the returns.

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<v Speaker 4>What I would hope is that we would see areas

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<v Speaker 4>that have been lagging start to participate more. And that's

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<v Speaker 4>that's sort of our view on twenty six right, and

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<v Speaker 4>that's sort of starting to happen now. Industrials has been

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<v Speaker 4>the best performing sector here today. It's been our top

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<v Speaker 4>pick for the right reasons, for the reasons that we've

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<v Speaker 4>been citing, which is earnings there starting to look better.

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<v Speaker 4>Let's not forget the tax bill, which I didn't even

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<v Speaker 4>mentioned earlier.

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<v Speaker 1>This is a massive, okay.

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<v Speaker 4>Tailwind for cash earnings for US companies. I mean to

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<v Speaker 4>the tune of five to ten percent increase.

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<v Speaker 1>So that's real money going into the pockets of companies.

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<v Speaker 4>They're now allocating capital, not the government, and I think

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<v Speaker 4>everybody would agree that's probably a better outcome.

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<v Speaker 2>Do you think US exceptionalism is back? Is everyone else

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<v Speaker 2>signing up to that?

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<v Speaker 1>Well, what I.

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<v Speaker 4>Would say is that maybe US exceptionalism has been missing. Okay,

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<v Speaker 4>So now, I mean, no one wants to admit this,

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<v Speaker 4>but the direction we're going in now, it looks like

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<v Speaker 4>we are going.

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<v Speaker 1>To see better participation.

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<v Speaker 4>Across the economy. We've been waiting for this. We've been

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<v Speaker 4>waiting for this for two or three years. You know,

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<v Speaker 4>We've bend kind of back and forth, sometimes bullets, sometimes

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<v Speaker 4>bears trying to pick stocks. And this is the first

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<v Speaker 4>time I can say that I can now see the

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<v Speaker 4>path of this transition. We're actually starting to rotate into

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<v Speaker 4>more of an early cycle recovery.

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<v Speaker 2>Let me give you some more space to do this,

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<v Speaker 2>because it's important the strategy of the White House and

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<v Speaker 2>the rebalancing that you envision a year out, two years out,

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<v Speaker 2>three years out. What is it you see?

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<v Speaker 4>Well, the rebalancing is both global and domestic. So the

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<v Speaker 4>global rebalancing is obvious. Are trying to reduce our current

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<v Speaker 4>account deficit, you know, get the trade negotiations are along

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<v Speaker 4>those lines.

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<v Speaker 1>And I think that's rising.

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<v Speaker 4>That's a good strategy, getting more manufacturing, potentially in house

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<v Speaker 4>or domestically. In the domestic rebalancing, it's really instead of

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<v Speaker 4>just having the one percent right, it's you know, Main

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<v Speaker 4>Street over Wall Street. I mean, people say, well, that

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<v Speaker 4>doesn't sound like that's working right now. But the idea

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<v Speaker 4>here is you get lending through the regional banking sector,

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<v Speaker 4>you get lending smaller banks, lending to small businesses, to individuals,

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<v Speaker 4>get rates down at the back end.

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<v Speaker 1>Okay, that is that.

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<v Speaker 4>Will liberate actually the domestic the sort of the middle

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<v Speaker 4>part of the economy.

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<v Speaker 3>Where do you then place this idea that tariffs are

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<v Speaker 3>pretty regressive, this idea that lower income individuals bear the

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<v Speaker 3>brunt of it. BECs is essentially a sales tax on them.

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<v Speaker 3>And you're already seeing companies really grapple with what that

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<v Speaker 3>means for demand, particularly in the travel and leisure space.

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<v Speaker 3>How do you square that with a sort of broad

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<v Speaker 3>based dynamism that you're talking about.

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<v Speaker 4>So I think it's very simple in the sense that

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<v Speaker 4>you have to think, Okay, what do you have to

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<v Speaker 4>think about? What are the terrors trying to achieve? My

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<v Speaker 4>view has always been that this is going to end

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<v Speaker 4>up being an import tax. Now I would have said,

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<v Speaker 4>you know, two weeks ago, this is a ten percent

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<v Speaker 4>it's going to end up a ten percent import tax

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<v Speaker 4>that's going to be shared between exporter, importer, and consumer,

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<v Speaker 4>and the market will determine, okay, who can absorb those terrors.

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<v Speaker 4>Exporter will decide, hey, we got a discount because we're

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<v Speaker 4>going to lose volume. Importer will say we can't pass

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<v Speaker 4>it on. We're going to eat some of that, and

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<v Speaker 4>the companies that have pricing power will pass it through. Okay, Now,

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<v Speaker 4>we believe that the consumer areas have less pricing power,

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<v Speaker 4>so I would argue that the pricing power is going

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<v Speaker 4>to be more, probably in the industrial space, probably more

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<v Speaker 4>in the you know, sort of the value added supply chain.

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<v Speaker 4>So then what do they do on the other side, Oh,

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<v Speaker 4>they do a tax cut for the companies. So it's

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<v Speaker 4>it's just basically saying we're going to tax this chain here,

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<v Speaker 4>which is going to be a shared tax, but then

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<v Speaker 4>we're going to actually give that away to corporations who

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<v Speaker 4>could then reinvest and actually get.

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<v Speaker 1>The economy moving.

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<v Speaker 4>It's I mean, it is a capitalist type of approach. Now,

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<v Speaker 4>I don't know if it's going to work perfectly, but

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<v Speaker 4>I like the direction of it from a from an

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<v Speaker 4>investors standpoint.

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<v Speaker 1>I love this. Okay.

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<v Speaker 4>Now, I'm not here to make judgments about who gets

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<v Speaker 4>herot the most or whatever, and I don't really know,

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<v Speaker 4>but I can see the path and why we're more constructive,

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<v Speaker 4>why we've been more constructive on the twelve month you.

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<v Speaker 4>I think remember last year you said, you know, Mike,

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<v Speaker 4>this first time i've heard you sound a little more

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<v Speaker 4>constructive because I had that vision.

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<v Speaker 2>Is overwhelming this morning, Mike, I've got to get to

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<v Speaker 2>a brank We all need to PreK my Wolston and

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<v Speaker 2>walk and standing. Mike, appreciate it. Thank you, sir. It's

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<v Speaker 2>going to see you