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Speaker 2: David Kelly is a jewel. He writes incredibly informed work.
Speaker 2: He did this for years at Putnam, now holds court
Speaker 2: at JP Morgan Roshrild. You could get our holiday week here.
Speaker 2: Started strong, strong, strong, David, You start with I love
Speaker 2: this the Red River of the North up in the
Speaker 2: Dakotas and Manitoba up to Lake Winnipeg. And you're talking
Speaker 2: about the crazy river system of our North in Canada
Speaker 2: as well. Why is it like the stock market.
Speaker 3: Well, the key at that particular river is it flows
Speaker 3: from south to north, which is actually very unusual in
Speaker 3: America for a big river. But that's actually a really
Speaker 3: big problem in the spring because what happens is when
Speaker 3: the ice tolls, it all tolls in the south. First,
Speaker 3: it all floods in. But the water can all flood
Speaker 3: into the river. It's just got nowhere to come out,
Speaker 3: and so at inun dates say, you know, Grand Forks
Speaker 3: and Winnipeg and all these poor cities just get flooded
Speaker 3: because there's no way way for the water to get out.
Speaker 3: And the reason that's relevant to the stock market is
Speaker 3: we've been looking at you know, this has been it's
Speaker 3: a tortoise of an economy sort of you know, crawling,
Speaker 3: you know, staggering to the edge of the end of
Speaker 3: the year here. But we've had a hair of a
Speaker 3: market for a third consecutive year. Why is the market
Speaker 3: so strong when the economy is And I think part
Speaker 3: of the reason is because there are institutional things within
Speaker 3: our market, things like stock buybacks, embedded capital gains, money
Speaker 3: flowing into defined contribution plans.
Speaker 2: All this is.
Speaker 3: Funneling money into the equity market and it's hard to
Speaker 3: get it out because of you know, capital gainstown. That's
Speaker 3: pushing money into giving us a really strong stock market
Speaker 3: and what's an okay economy, But it's not nothing to
Speaker 3: write home about it.
Speaker 4: So, you know, David, we had, as you mentioned, a
Speaker 4: really strong twenty twenty five in terms of S and
Speaker 4: P and NASDAC fixed income gave you high single digit
Speaker 4: returns here. Yeah, what's the setup for twenty twenty six?
Speaker 5: Well, I think the economy itself should be okay.
Speaker 3: I think it's going to be strong in the first
Speaker 3: half because of income tax refunds. I think we will
Speaker 3: see a pickup in growth in the first half the year,
Speaker 3: and then it's going to fade because we really are
Speaker 3: short of workers. For the market. We still probably need
Speaker 3: to see a shock to cause a big correction here.
Speaker 3: You know, eventually we will have some shock. Evaluations are
Speaker 3: very high. But you know, I think the base case
Speaker 3: is the market keeps on The equity market keeps on
Speaker 3: moving up, probably broadens out a bit beyond the mag
Speaker 3: seven and you know, it continues sort of broadening out
Speaker 3: to other sectors. But for investors, the real thing is,
Speaker 3: you know, how much risk are you carrying? Because these
Speaker 3: are expensive stocks at this point, and I think really
Speaker 3: the resolution for twenty twenty six is rebalance because you know,
Speaker 3: whatever happens to returns, the risk level is pretty high.
Speaker 4: Here are the earnings that we see out there. I mean,
Speaker 4: the earnings in twenty twenty five have been really really strong.
Speaker 4: Here are they strong enough as you look forward to
Speaker 4: kind of support this market?
Speaker 5: Yeah, I think they should be.
Speaker 3: I mean, it's a as I said, it's a moderately
Speaker 3: growing economy, so long as we avoid recession. One of
Speaker 3: the things that I'm seeing is a fair amount of
Speaker 3: weakness and wages. I mean, there aren't many available workers,
Speaker 3: but workers still can't get a pay increase. And meanwhile
Speaker 3: companies are installing AI. Now I don't know if that's
Speaker 3: making people more productive or not, but they say it's
Speaker 3: making them more productive, and so people are and so
Speaker 3: productivity numbers are going up because you've got fewer workers
Speaker 3: and producing more output, and that helps corporate profits too.
Speaker 3: So overall, I think the profit picture is pretty good.
Speaker 3: I think the rate pricket picture is pretty stable, and
Speaker 3: that should support the stock markets, barring some shop but
Speaker 3: of course there's always the potential for a shop.
Speaker 2: We starts throwing Monday. David Kelly with us for an
Speaker 2: extended conversation. He drives GP Morgan Asset Management with all
Speaker 2: of their strategy. David one of my great insights and
Speaker 2: folks in my last two days of the year here,
Speaker 2: I'm really going to look back here. One of the
Speaker 2: great insights this year was Nancy Wilazar, who David and
Speaker 2: I know for years with Edheimen. Nancy's up in Minnesota
Speaker 2: with Piper, Jeffrey and David. She just said, look, it's
Speaker 2: an economy where there's an odd job creation. You let
Speaker 2: on this two years ago. You're the one that said,
Speaker 2: get used to non farm payrolls under one hundred thousand.
Speaker 2: Do you adjust liked your own Powell and are you
Speaker 2: giving me a real three month moving average? Now that's
Speaker 2: a negative statistic of payroll growth.
Speaker 5: It's very close.
Speaker 3: I mean, I think we're talking about somewhere in the
Speaker 3: range of minus fifty to plus fifty is the trend rate.
Speaker 3: It might pick up a little early next year. But
Speaker 3: we're out of workers. I mean, we don't have good
Speaker 3: immigration data at all. The governments stopped producing a lot
Speaker 3: of data that we need in order to figure out
Speaker 3: exactly what's going on with the growth in the working
Speaker 3: age population. But as far as I can tell, it's shrinking.
Speaker 3: And it's very hard to grow jobs when you're shrinking
Speaker 3: the working age population. But that actually has a feedback
Speaker 3: loop in the overall economy. You know, I don't know
Speaker 3: if you remember says law from your economic theories classes,
Speaker 3: but the idea that supply creates its own demand. If
Speaker 3: you pull back in the number of workers a night,
Speaker 3: and you know, you don't open a restaurant because hey,
Speaker 3: you couldn't stop the restaurants. So those jobs don't get created.
Speaker 3: You know, the meals don't get served, the houses don't
Speaker 3: get built from the people who don't want to are
Speaker 3: around to live in them.
Speaker 5: So the lack of labor supply is slowing the economy
Speaker 5: in itself.
Speaker 2: Right, says Law Paul at Trinity College. Is they open
Speaker 2: the Guinness brewery yep, And if they manufacture the Guinness,
Speaker 2: it somehow it gets consumed. That says Law out of
Speaker 2: David Kelly's Ireland. I look, David at the job economy
Speaker 2: and I look at the worry out there, and to
Speaker 2: me it becomes a political monetary policy. Can economists nor
Speaker 2: a negative non firm payroll trend? Well, I think it probably.
Speaker 3: I think if it continued into the first six months
Speaker 3: of next year, then I think the FED would ease earlier.
Speaker 3: But I think I think we'll see a little pick up,
Speaker 3: as I said, because of income tax refunds. I think
Speaker 3: we'll see a pickup and growth, and I think that
Speaker 3: will stench the bleeding for for a while, but then
Speaker 3: you know, maybe later next year we do get rate cuts,
Speaker 3: but I want to make it clear rate cuts won't
Speaker 3: fix anything here. The problem, the problems that this economy
Speaker 3: faces have got nothing to do with interest rates or
Speaker 3: interest rates being.
Speaker 5: Too high anyway.
Speaker 3: So yes, it may force the Federal Reserve into cutting
Speaker 3: more aggressively later next year if the economy, if we
Speaker 3: don't sort of put some more artificial stimulus into the economy,
Speaker 3: which we may well do.
Speaker 4: David at JPM, we're going to ask the management, how
Speaker 4: do you guys think about alternative investments?
Speaker 5: Well, we think a lot about them.
Speaker 3: Were we were very conscious of the fact you're just
Speaker 3: talking about how good a year has been for the
Speaker 3: stock market and the bond market has given you positive
Speaker 3: returns despite a fair amount of inflation. That means that
Speaker 3: a sort of sixty to forty stock bond portfolio, it's
Speaker 3: pretty expensive and people really need to diversify and reduce risk.
Speaker 3: But one of the key ways they can do that
Speaker 3: is investing in alternatives things like infrastructure, transportation, real estate,
Speaker 3: also private equity and private credit. But you've got to
Speaker 3: know who's managing that money. But we definitely believe that
Speaker 3: all investors need to think about having some alternatives in
Speaker 3: the portfolio beyond the public markets, because the public markets
Speaker 3: do have a certain amount of risk, and by the way,
Speaker 3: there's also a lot of opportunity in private markets.
Speaker 5: The companies don't want to go public, and.
Speaker 3: So a lot of the explosion of ideas around technology
Speaker 3: and AI and biotech.
Speaker 5: And so forth, they're all occurring in the private market space.
Speaker 5: So you really want to be able to access some
Speaker 5: of that.
Speaker 3: So yeah, I think it's beyond time for people to
Speaker 3: when people can just afford to ignore alternatives, I think
Speaker 3: people really need to think about their alternative as it
Speaker 3: go into twenty twenty six.
Speaker 4: So, David, I mean I can sit here in a
Speaker 4: two year treasuring get you know, three point five percent.
Speaker 4: That's a nice coupon relative the last ten or fifteen years.
Speaker 4: Is that good enough in the fixed income space? Or
Speaker 4: should I be taking some credit risk here?
Speaker 5: I wouldn't take too much credit risk.
Speaker 4: I think.
Speaker 3: I think I'd want to have, you know, maybe a
Speaker 3: little bit more duration than that, but not much. I
Speaker 3: don't think there's much money to be made in fixed income,
Speaker 3: but I think that it does help stabilize a portfolio.
Speaker 5: So I wouldn't be underweight fixed income.
Speaker 3: I wouldn't take much credit risk because credit spreads are
Speaker 3: really tight, and if you do have a recession, then
Speaker 3: you know these credit spreads are going to blow out
Speaker 3: and you're going to get hurt. So I just don't
Speaker 3: think you're getting paid for taking risk in the bond market.
Speaker 2: The melting ice, to your analog of the dakotas enough
Speaker 2: to Winnipeg. The melting ice is the yield on money
Speaker 2: market funds. You got some compete, They can do the
Speaker 2: math over there, you know, I mean for Oley, Casman,
Speaker 2: Santo's the rest of them. Maybe Kelly, what's the math
Speaker 2: of when the dam breaks on money market funds, what's
Speaker 2: the yield or the ice melts?
Speaker 5: You know, I don't think that.
Speaker 3: What usually happens is as those rates come down, you
Speaker 3: think a whole pile of money will come out of
Speaker 3: money market funds. But what happens is people get scared
Speaker 3: more and more scared that something is seriously going wrong here.
Speaker 5: It depends, you know, if.
Speaker 3: We have recession, I would expect money to pile out
Speaker 3: of the money market funds to go into the bond market.
Speaker 3: But if it's if it's sort of a recession plus
Speaker 3: inflation threat, because we're going to get more stimulus in
Speaker 3: an economy that's supply constrained.
Speaker 5: If it's that kind of story of twenty twenty two
Speaker 5: all over.
Speaker 3: Again, I think the money will sit in money market
Speaker 3: funds even if the Fed gets strong armed in the
Speaker 3: pushing rates down, because people will be genuinely scared of
Speaker 3: long term assets.
Speaker 4: So David, in the equity markets, the US equity markets,
Speaker 4: the last two or three years, really it's kind of
Speaker 4: been an AI trade, a mag seven, all that kind
Speaker 4: of stuff.
Speaker 2: Here.
Speaker 4: Folks that have been waiting for a broadening out, They've
Speaker 4: been waiting a long time. Here is twenty twenty six
Speaker 4: a year or maybe we can get some broadening out.
Speaker 5: It could be.
Speaker 3: I mean, marketing markets can remain irrational longer than the insolvent,
Speaker 3: as somebody said many many years.
Speaker 5: Ago, so it could broaden out. I think it is.
Speaker 3: If we have a big correction or a bear market,
Speaker 3: it will broaden out because we know that that the
Speaker 3: epicenter of any bear market is going to be the
Speaker 3: area of greatest speculation before it occurred. So I think
Speaker 3: that I think that I think there's a good chance
Speaker 3: that have brought out at some stage here.
Speaker 5: But the other thing to think.
Speaker 3: About is, you know, when you look at these mammoth
Speaker 3: companies who are pouring money into their version of AI,
Speaker 3: they're all making the same bet, and they've all got
Speaker 3: these sort of quasi monopolistic profits which are funneling into
Speaker 3: an enormous amount of spending on data centers and chips
Speaker 3: to be the AI superpower. But they can't all be
Speaker 3: AI superpower. So even within the mag seven there's a
Speaker 3: there's a lot of risk there that they're all chasing
Speaker 3: after a goal, you know, a brass ring that all
Speaker 3: of them cannot achieve, and maybe none of them can
Speaker 3: achieve if you know, China gets there first.
Speaker 2: David trees to the sky. Paul asked about earnings as well.
Speaker 2: Four years double digit return. It's happened like I think
Speaker 2: three times since the Irish kicked the English out of
Speaker 2: David Kelly's Ireland. David, come on, I mean, there's a
Speaker 2: point where this breaks. What should our listeners in viewers
Speaker 2: study and observe to try to get a bit out
Speaker 2: front of when the market breaks.
Speaker 3: Well, I think I think the first thing is look
Speaker 3: at that AI trade and look at the some of
Speaker 3: the big players there. Is it going to come a
Speaker 3: point where people get skittish about some of the players
Speaker 3: in this space whether they will be the winners. Because
Speaker 3: if it looks like you're not going to be the winner,
Speaker 3: then should you be putting all.
Speaker 5: This money into it? And if you shouldn't, then you know,
Speaker 5: what's your business model looking like.
Speaker 3: So I think that's that's one area of vulnerability. And
Speaker 3: then also, FRANKU keep an eye on the politics.
Speaker 2: Of all of this.
Speaker 5: I mean, I'm very worried that.
Speaker 3: We're going to try to do tariff rebate checks, which
Speaker 3: we'll just you know, if we pour more consumer stimulus
Speaker 3: into the economy before the midterm elections when we're supply constrained,
Speaker 3: we're going to reignite inflation.
Speaker 5: And that is certainly a fear.
Speaker 3: If our political system is not capable of dealing with
Speaker 3: the moment with some sort of sobriety, we do have
Speaker 3: a problem. I think that's the other thing people should
Speaker 3: keep an eye on. But more generally, look, we don't
Speaker 3: know where the next shock is going to come from.
Speaker 3: That's why you go into next year with some sort
Speaker 3: of balance. So regardless of how you try and figure
Speaker 3: out the risks, look at your portfolio is that more
Speaker 3: risk than you should be taking. If it is, how
Speaker 3: can you in a tax efficient.
Speaker 5: Way get to more balance? And I think that's a
Speaker 5: real question for twenty twenty six.
Speaker 2: David, Thank you so much. Just a great way to
Speaker 2: start this holiday with David Kelly with This is Forever
Speaker 2: of JP. Stay with us. More from Bloomberg Surveillance coming
Speaker 2: up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
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Speaker 2: We have the perfect guest after the certitude. Whatever you
Speaker 2: think of the politics and all that, the certitude of
Speaker 2: Stephen Myron. Here, George Borri with us right now, who
Speaker 2: writes in a wonderfully measured approach to fixed income for
Speaker 2: Allspring Global Investments. He's chief investment strategist fixed income at
Speaker 2: the firm. George, I look at forget about the theory.
Speaker 2: The certitude of Stephen Myron is breathtaking. What anybody if
Speaker 2: I more In the day we lost Marty Feldstein as
Speaker 2: PhD advisor. If Professor Feldstein was sitting here, I be saying,
Speaker 2: are you kidding me, professor? Did you teach him this certitude?
Speaker 2: When you hear that certitude of opinion from a legits,
Speaker 2: how do you react.
Speaker 6: I think there were two very strong messages in what
Speaker 6: he had to say, and the first is, really, you know,
Speaker 6: the easing bias is very much in place if there's
Speaker 6: a mixed view. But as he said, you know, Chairman
Speaker 6: Powell's done a good job of wrangling the committee that
Speaker 6: the committee itself seems biased to continue down this eating
Speaker 6: easing path until until data says otherwise. And then secondly,
Speaker 6: you know, they seem committed to wanting to extend the
Speaker 6: cycle and trying to engineer not just a soft landing,
Speaker 6: but an ongoing expansion. And I thought what was really
Speaker 6: interesting is talking about that balance between supply and demand,
Speaker 6: very economic driven basic principles. But if both are expanding
Speaker 6: at the same time, that really is the ultimate cycle extension,
Speaker 6: and it sounds as if the FED is committed to
Speaker 6: doing that.
Speaker 2: I was going backing for the David gerb this we're
Speaker 2: commercial free folks at the top of the hour. Let
Speaker 2: me get one more impulse, George Bory, I look at
Speaker 2: this and I go, okay, we're going to get a
Speaker 2: Myron vector to lower interest rates. I'm not sure it
Speaker 2: benefits they have nots. Let's say it benefits they have
Speaker 2: in the financialization of America. You're living this every day. Yeah,
Speaker 2: if you get a Myron vector, it's like boom, right.
Speaker 6: I think there are three big factors that are going
Speaker 6: to drive through markets next year very much bond market focus.
Speaker 6: Number One, cash is on the move. If the FED
Speaker 6: is the FED is biased to ease, then that eight
Speaker 6: trillion dollars in money markets and in short term deposits
Speaker 6: are going to be looking for other places to go.
Speaker 6: And in a world where inflation still remains up around
Speaker 6: that three percent level, the free trade, the easy trade
Speaker 6: is over, You're going to need to move that cash
Speaker 6: into something else, and so moving out into short duration
Speaker 6: bonds seem likely. The second is the curve. The curve
Speaker 6: itself kind of came down a little bit, yields came
Speaker 6: down a little bit this year. Year sounds as if
Speaker 6: we're going to see more of a twist next year
Speaker 6: that front end coming down, the long end could actually
Speaker 6: start going up again. And so I think that that
Speaker 6: actually is a really big theme that bond investors are
Speaker 6: going to contend with. And then the last you talk
Speaker 6: about haves and have nots. If we look at the
Speaker 6: corporate side of the economy, you know, event risk defaults,
Speaker 6: m and A, the AI build out, the drawdown of
Speaker 6: cash in the system to sort of spend money on
Speaker 6: things has kind of a mixed impact on credit markets,
Speaker 6: and credit markets themselves are seeing a pretty big kind
Speaker 6: of increase in dispersion and would suggest that we're in
Speaker 6: the later stages of a credit cycle, not the end,
Speaker 6: but very much the later phase. And so these three
Speaker 6: big themes are going to be what bond investors and
Speaker 6: any investor really is.
Speaker 5: Going to have to contend with now.
Speaker 6: Navigating that's going to require some maneuverability in your portfolio
Speaker 6: if you do it well. You know, for bond investors,
Speaker 6: you know, mid to high single digit returns is sort
Speaker 6: of what you're shooting for. That's kind of the best
Speaker 6: we can hope for. But it's not going to just
Speaker 6: come to you. The beta trade, if you will happened
Speaker 6: in twenty five, next year twenty six, you're going to
Speaker 6: have to move it around a little to actually achieve
Speaker 6: those kind of returns.
Speaker 4: How about if some of that cash mews into municipal debt,
Speaker 4: particularly for those in high tex jurisdictions.
Speaker 6: Yeah, munis still look very attractive relative to other bonds.
Speaker 6: You know, yields have not moved down as much as
Speaker 6: we've seen in the taxable side of the market, and
Speaker 6: so in the world of munis, where you've got the
Speaker 6: benefit of high ratings, you've got balanced budgets at the
Speaker 6: state levels, and you still have very good income streams
Speaker 6: coming through, we think there's really good value in munis
Speaker 6: and it's a nice way to kind of add to
Speaker 6: that portfolio. The tax advantage is huge for the haves,
Speaker 6: and so we'll see good demand over the course of
Speaker 6: the year, and they're going to be very susceptible to
Speaker 6: those three basic themes of moving out of cash, twisting,
Speaker 6: curve growing, event risk.
Speaker 2: So it's not really ire act. But let's ask what's
Speaker 2: a single point ten year yield for you twelve months out.
Speaker 6: I think twelve months we're probably right around four percent
Speaker 6: fan distribution four percent, we're down a little, down a little.
Speaker 2: So what does a thirty year mortgage do if we
Speaker 2: have curve steepening. Yeah, this is a surprise here. It
Speaker 2: doesn't come in.
Speaker 6: It doesn't come down much because the thirty year could
Speaker 6: be back up above five, and so the twist is
Speaker 6: actually very much around that tenure.
Speaker 5: Part of the curve.
Speaker 6: Front end comes down about twenty five basis point, long
Speaker 6: end goes up a little. Mortgages don't come down that much.
Speaker 2: Which are a surveillance real estate course. Paul Sweeneer. That's grim.
Speaker 4: That is grim because I think if you talk to
Speaker 4: some real estate agents, they say they need to see
Speaker 4: something with a five handle to get people to maybe leave.
Speaker 2: Their homes and put stuff up for sale. I mean,
Speaker 2: Myron's got the trend right here. We got to go
Speaker 2: here like one minute. But George, if Myron, if sort
Speaker 2: of Myron happens and the FED cuts rates, what, I'm sorry,
Speaker 2: what does it do to a sixty forty portfolio. It's
Speaker 2: like it's the edge of nerve. It's like what member,
Speaker 2: when your father made the charcoal fire and you took
Speaker 2: the guests, they can squeezed, Yes, welcome. Isn't that what
Speaker 2: we're talking about?
Speaker 6: It certainly should heat things up, and that's that's that's
Speaker 6: for certain. And so you know that's why we think
Speaker 6: this kind of late cycle, you know, sort of phenomena
Speaker 6: is upon us. It's why you know, intermediate short part
Speaker 6: of the curve, and you're going to be forced out
Speaker 6: of cash. That is the accelerator. That's exactly what we're
Speaker 6: talking about for all of us.
Speaker 2: Thank you so much for your commitment to Bloomberg Surveillance.
Speaker 2: George Bourrien's just really he's all Spring investors. Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
Speaker 1: This is the Bloomberg Surveillance Podcast. Listen live each weekday
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Speaker 2: Let's move on to Michael Purvis and look at the
Speaker 2: sanity here. Michael, you and I have seen mean Paul's
Speaker 2: ever seen it like this, the stupid season in M
Speaker 2: and A. You've got really a lot of experience in this.
Speaker 2: Michael Purvis, how does the certitude of transactions and combinations,
Speaker 2: how does it end? Well?
Speaker 7: I think for the near term and near term in
Speaker 7: this context may being twenty twenty six, I think we
Speaker 7: should expect.
Speaker 8: More m and A.
Speaker 7: And one of the reasons why I say that is
Speaker 7: because on one hand, you're seeing reasonably strong equity markets
Speaker 7: and some stability and rates, and you know, you look
Speaker 7: at treasury volatility that's much lower. Rates may not be
Speaker 7: as low as some would like, but the rate volatility
Speaker 7: is lower. It's that's a platform. But I think the
Speaker 7: other sort of overarching theme here is that, you know,
Speaker 7: we have this K shaped economy, but I also think
Speaker 7: there's sort of a K shaped stock market dynamic as well.
Speaker 7: And we've talked a little bit about this in the
Speaker 7: past time. But what I mean by that is that
Speaker 7: with AI and with re orienting supply chains, globally, scale matters, right,
Speaker 7: Larger companies are able to sort of manage through these
Speaker 7: transitions better than smaller ones in many cases. There So
Speaker 7: I think you're going to keep seeing smaller medium sized
Speaker 7: companies merging to get scale so that they can survive
Speaker 7: and thrive in this new era.
Speaker 4: And we're seeing that just with the news that Tom
Speaker 4: and I were discussing just a moment ago with a
Speaker 4: Paramount and Warner Brothers Discovery, Michael talk to us about
Speaker 4: kind of the risk outlook for twenty twenty six. Again,
Speaker 4: the stocks and bonds and commodities are just ripping in
Speaker 4: twenty twenty five. How do we set up for twenty
Speaker 4: twenty six?
Speaker 7: Look, I think broadly speaking, the macro that like, we
Speaker 7: have a good sort of macro set up for risk appetite,
Speaker 7: right in terms of you know, we've got sort of
Speaker 7: warm maybe hot monetary policy. We've got some warmth and
Speaker 7: fiscal policy currently you know here on top of reasonably
Speaker 7: strong earnings growth, on top of a not perfect but
Speaker 7: decent enough economy.
Speaker 8: Uh there.
Speaker 7: But I think the the there's one big risk here
Speaker 7: for certainly just talking more about equities here.
Speaker 8: Than than than than rates.
Speaker 7: But if you look at the MAG six or the
Speaker 7: MAG seven that you know, if you look at the
Speaker 7: outperformance over the last several years that has basically matched
Speaker 7: this wonderful performance in the stock market in the US
Speaker 7: stock market here. But right now, these big companies, particularly
Speaker 7: the big cap X spenders here you know, which is
Speaker 7: you know, Meta, Amazon, Google and UH and Microsoft, those
Speaker 7: companies are going through evaluation transitioned here where like if
Speaker 7: you look at the price earnings to growth ratio, things
Speaker 7: look great, very compelling price earnings to growth ratio is
Speaker 7: at zero point eight right now.
Speaker 8: Low, very very low level.
Speaker 7: But their fee cash flow yields are at record lows
Speaker 7: right and their free cash fowields or record lows, not
Speaker 7: because earnings are bad or even Dad's going to be bad,
Speaker 7: but simply because of the capex spend. So what I'm
Speaker 7: looking for, Paul in twenty twenty six is that if
Speaker 7: there's indications that the return on invested capital from this
Speaker 7: capex spend is not there, then you're going to have
Speaker 7: a lot of narratives rewritten, and you're also going to
Speaker 7: have valuations we set lower for these key stocks there.
Speaker 7: And that to me is like micro risk is almost
Speaker 7: a macro risk because we're talking about, you know what,
Speaker 7: a trillion dollars in spend from just four companies over
Speaker 7: the next twenty four months there, So that really flows
Speaker 7: through to everything.
Speaker 2: Michael Purvis with us for a good conversation this morning
Speaker 2: to get set for twenty twenty six.
Speaker 5: We welcome all.
Speaker 2: Of you usin nation the way you listen to us
Speaker 2: Good Morning ninety nine one FM, Nathan Ager Radio in Washington,
Speaker 2: ninety two nine FM in Boston, and Bloomberg eleven three
Speaker 2: You and New York, but around the world on YouTube.
Speaker 2: Subscribe to Bloomberg Podcast. Make it a habit for next
Speaker 2: year when you can. It's a great live chat there.
Speaker 2: But most importantly people watch and people listen to YouTube.
Speaker 2: Well it's on. It's been a huge success for us
Speaker 2: this year. Paul Sweeny with Michael Purvis.
Speaker 4: Michael talk to us about kind of the earnings environment
Speaker 4: out there. We've had really really strong earnings in twenty
Speaker 4: twenty five, particular last couple of quarters. How do you
Speaker 4: think about the earnings growth for twenty twenty six? Is
Speaker 4: that enough to support this market? Paul, It's a tricky one.
Speaker 7: I think if you you know, I look at the
Speaker 7: S and P as sort of like a holding company
Speaker 7: with two divisions that at one of which maybe the
Speaker 7: big tech monsters and then the everything else at a
Speaker 7: very simplistic level, so you can look at the SPX
Speaker 7: equal Weight Index sort of a PROX for everything but
Speaker 7: the NAG seven and if you look at that earnings
Speaker 7: growth year over years sort of four percent, can it
Speaker 7: beat that? Well, it will need to a have some
Speaker 7: decent nomenal GDP to go along with that that I
Speaker 7: think I expect.
Speaker 8: I think the.
Speaker 7: Harder one is whether the margins will really be there
Speaker 7: to support support that embedded in that four percent earnings growth.
Speaker 8: That's that's not in my number.
Speaker 7: That's Bloomberg spottom Up consensus estimates our record earning, earning
Speaker 7: and operating margins, which are to a degree reflect the
Speaker 7: adoption of a successful adoption.
Speaker 8: Of AI and productivity gains within these companies there.
Speaker 7: So I think, you know, it's not a big number,
Speaker 7: they have beaten that number in the past. But it's
Speaker 7: also you know, if we run into sort of a
Speaker 7: more of a stagulationary dynamic and that starts really hitting
Speaker 7: some parts of the economy, the bottom end consumer already
Speaker 7: seeing weakness there, then I think the SPH equal weight
Speaker 7: is not very compelling. By the way, you know, we
Speaker 7: were talking about price earnings to growth ratios. If you
Speaker 7: look at the price earnings to growth ratio for the
Speaker 7: SBAT equal way or for a lot of value in
Speaker 7: cyclical industries in the US stock market, those are very
Speaker 7: high there. So they really need to perform on earnings
Speaker 7: just to justify your current valuations there.
Speaker 2: What's your appetite for the timing of the market. I mean,
Speaker 2: you've been so good about Look, you've got to be
Speaker 2: in the market to play. You've been legendary on that.
Speaker 2: But is timing efficacious now?
Speaker 7: Look, I mean technicals are always really important here. Look
Speaker 7: at my very short term trading call is I think
Speaker 7: we're going to have a nice sort of Santa drift
Speaker 7: up higher in the year end here, probably led by
Speaker 7: large tech shares. That said, if you zoom out and
Speaker 7: you look at long term technical charts, you know you're
Speaker 7: looking at US at trading at high valuations, at the
Speaker 7: very high end of a you know, sort of a
Speaker 7: fifteen year channel coming out of the Great Financial Crisis there,
Speaker 7: and typically there's some significant volatility in the following.
Speaker 8: Year that follows that.
Speaker 7: If you're at the top end of the channel there,
Speaker 7: Momentum signals are are are a little mixed right now,
Speaker 7: depending on what you're looking at. Generally, I think they're
Speaker 7: pretty constructive, but not as constructive as they are for
Speaker 7: gold and silver.
Speaker 2: Well for Global Wall Street. I think you got to
Speaker 2: interrupt and do this. This is reporting off our Tokyo
Speaker 2: desk on Japan. This is with the Finance Minister Satsuki
Speaker 2: Kadayama in conversation with Bloomberg. This is a reporting and
Speaker 2: Bloomberg reports the Finance Minister says Japan can take action
Speaker 2: is set out in US. Japan join a cord, we
Speaker 2: have a Japan has a freehand for bold action in
Speaker 2: FX market if needed. This is about this strange thing
Speaker 2: called intervention and will they intervene to drive the end stronger.
Speaker 2: Carl Weinberg, among others at High Frequency Economic Paul has
Speaker 2: an absolutely blistering noe doubt that this is not going
Speaker 2: to work up well. Intervention is not going to be
Speaker 2: efficacious for Japan.
Speaker 4: Japan ten year yields surged to highest since nineteen ninety nine,
Speaker 4: occurring to when we're reporting there, So that gets your
Speaker 4: attention there, Michael, talk to us about the fix income
Speaker 4: opportunities in twenty twenty six. Twenty twenty five was a
Speaker 4: good year. I mean high single digit returns. I mean
Speaker 4: people actually want to hang out with fixing gum people
Speaker 4: these days.
Speaker 8: What do you think about next year?
Speaker 7: Well, just to pick up on this Japanese yield question,
Speaker 7: I think it's important you know, what's going on with
Speaker 7: the end is sort of what we had in the
Speaker 7: first half of the dollar which is that you saw
Speaker 7: currencies really decouple from their respective real rate differentials, and
Speaker 7: I think that's that's important there. And I do think
Speaker 7: that the you know, we you can sort of feel
Speaker 7: it and see it a little bit in the back
Speaker 7: end of the treasury curve, that the end the movements
Speaker 7: in jgb's and Japanese yields are being exported a little
Speaker 7: bit to our treasury market here there. And if you
Speaker 7: look at the you know, sort of the spread and
Speaker 7: make differentials, you can see that same echo and the
Speaker 7: ten R ten thirty curve here there. So I feel
Speaker 7: like that's that's sort of a new factor that we
Speaker 7: need to consider here. That's not you know, sort of
Speaker 7: an unhealthy type of curve steepening here. All that said,
Speaker 7: I think what I'm predicting is sort of a pretty
Speaker 7: boring year in rates. For all the drama about the
Speaker 7: FED and inflation and all that kind of stuff, all
Speaker 7: of which are very warranted discussions and debates. I'm expecting
Speaker 7: the treasury revolve to get lower. I'm expecting you know,
Speaker 7: one to two cuts. I'm expecting a fair amount of
Speaker 7: descent within the FED, which I think actually suppresses treasure
Speaker 7: evolve and I think we should see some some curve
Speaker 7: steepening that the end, if the FED does cut more
Speaker 7: than perhaps it should, you're.
Speaker 8: Going to see that echo.
Speaker 7: Just you know, the more dubbish you get, the more
Speaker 7: term premian you get on the back end there.
Speaker 8: But I think it all sort of ends up keeping
Speaker 8: the and.
Speaker 2: You're in a range, And I got to be quick here, Michael.
Speaker 2: We got to go to breaking news that Detroit Lions lost.
Speaker 2: But you know, Michael, I'm looking at curve steepening. It's
Speaker 2: clearly nonlinear. How close are we to wear curve steepening
Speaker 2: really matters?
Speaker 7: Well, Look, I you know, in terms of these existential
Speaker 7: questions as to when you know the tenure is going
Speaker 7: to spiral out of control and hit six percent, I'm
Speaker 7: those are always tailor rists to consider. I think right now,
Speaker 7: I think it would be such a problem for every
Speaker 7: facet of the US economy and market and political headaches
Speaker 7: that I sort of think that there'll be something done
Speaker 7: in that respect. But I may not necessarily be the
Speaker 7: right way, But I do think one of the things
Speaker 7: to consider next year is if that if we start
Speaker 7: seeing an unhealthy spiraling of term premium, does the FED
Speaker 7: do something on the back end on it's with its
Speaker 7: balance sheet.
Speaker 8: Michael that's something you have to consider.
Speaker 2: And Michael, thank you so much. He goes up. He's
Speaker 2: on squam Lake even if it's like fifty bulow zero. Yeah, okay,
Speaker 2: Santa first ye Michael purpose with Tallbeck and thank you
Speaker 2: so much. Greatly appreciate it. Stay with us. More from
Speaker 2: Bloomberg Surveillance coming up after this.
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Speaker 5: Okay, did either.
Speaker 9: You go to the movies over the weekend? No? Didn't
Speaker 9: see the Avatar?
Speaker 8: No?
Speaker 9: Oh my goodness. Okay, A bunch of people did that.
Speaker 9: A lot of people did. They did, And that's the
Speaker 9: thing walked to day the Avatar Fire and Ash highest
Speaker 9: grossing film in the box office, eighty eight million tickets
Speaker 9: US and Canada. They were a little bit lower than expected,
Speaker 9: even Disney was expecting about ninety million or so. It
Speaker 9: did well internationally though, that was a big thing in China. Yeah, exactly,
Speaker 9: particularly in China, and where's the sand domestically, So if
Speaker 9: you compare the other Avatar film, so it surpassed the
Speaker 9: first Avatar film that was back in two thousand and nine.
Speaker 9: It fell behind the recent sequel, Avatar The Way of
Speaker 9: Water in twenty twenty two. But I mean this is
Speaker 9: going to keep making money. I mean, the kids are
Speaker 9: going to be off, families are off, and it's going
Speaker 9: to keep pulling in some money. I mean, Disney has
Speaker 9: been pretty good. Lelo and stitch Utopia too, they both
Speaker 9: generated more than a billion dollars at the global.
Speaker 2: Box Lie, it's four hundred year, it's a lot. One
Speaker 2: hundreds used to be like a huge deal. Yeah, what
Speaker 2: do you spend four hundred million on to make a
Speaker 2: two hour movie?
Speaker 4: CGI? Computer generated images all that kind of stuff. But
Speaker 4: I tell you again, the real big story here is
Speaker 4: China is reopening its market to Western films.
Speaker 5: And that's big.
Speaker 2: Because Topia think, well there's yeah, so.
Speaker 4: That's right because it was closed, you know, kind of
Speaker 4: after the pandemic for many many years. So that's good
Speaker 4: news for hollyween.
Speaker 2: I can see paula Netflix. You're sure he could do
Speaker 2: like a daily squak for Netflix. Yes, absolutely, what do
Speaker 2: you got next?
Speaker 9: Okay, online shopping, right, it's been hurting foot traffic in stores.
Speaker 9: So what a lot of retailers are doing, and the
Speaker 9: Wall Street Journal has this about Fao Schwartz, is that
Speaker 9: they're doing a lot of in store experiences to get
Speaker 9: the customers back. So like personal shopping tours, customized toys.
Speaker 9: They're trying to do things. I'll give you an example. Okay,
Speaker 9: so people are paying one hundred dollars for a private
Speaker 9: shopping tour, and then those families go on to spend
Speaker 9: you know, hundreds of more dollars on the toys. Then
Speaker 9: for two hundred and fifty dollars, you can get a
Speaker 9: longer tour session. You can get drinks at the VIP suite,
Speaker 9: you can get shipping arrange for your purchases, and are
Speaker 9: you ready for the top tier? Okay, three thousand, seven
Speaker 9: hundred and fifty dollars for that. You can get a
Speaker 9: tour for the family. Someone is dressed as a toy soldier.
Speaker 9: It's after the store's closed, so you have the whole
Speaker 9: thing to yourself. There's dinner, there's a magician, there's everything
Speaker 9: like that. So they're basically appealing to like the higher
Speaker 9: end you know customer that are doing this. But it's
Speaker 9: a lot of competition because I feel short store to
Speaker 9: be fifty ninth and fifth. But they closed, yopened, yes,
Speaker 9: so now they have reopened.
Speaker 2: Can I just there was a certain value to the
Speaker 2: eventness of the Sears catalog in the living room floor
Speaker 2: and you'd skip the front end with clothes for women
Speaker 2: and you'd go to the back end where there were
Speaker 2: silver tone guitars and you know, I mean it was
Speaker 2: like you know catalog, the series catalog is. It was
Speaker 2: like three inches thick, big thick thing and then you
Speaker 2: just lined it up for your parents. That was that
Speaker 2: was the event.
Speaker 9: They used to have the toys arrest one too. I know,
Speaker 9: it was the thing.
Speaker 2: And now it's three thousand bucks the in store experience experience.
Speaker 5: Oh this is a doozy. Jake Paul went down on Netflix.
Speaker 2: Yes it was.
Speaker 5: I totally watched it off Friday.
Speaker 9: It was beat by Anthony josh you know, former heavyweight champ.
Speaker 9: All right, so he's he's a little bit younger, you know,
Speaker 9: Jake Paul's twenty eight, Joshua was thirty six, but Jason
Speaker 9: was also six foot six. He hit the scale of
Speaker 9: two forty three. Jake Paul, I didn't realize he had
Speaker 9: six foot one, but he weighed about two sixteen. But
Speaker 9: it was a sixth round knocked him out. I think
Speaker 9: even broke his jaw. Jake Paul was posting about that too,
Speaker 9: but he earned nearly one hundred million dollars.
Speaker 8: From it from losing the badge.
Speaker 9: But it just goes to show you sports on Netflix,
Speaker 9: like this is another big thing because you had the
Speaker 9: Jake Paul Mike Tyson fight and now you know this one.
Speaker 2: Yep.
Speaker 9: So a lot of people tuned in. We don't have
Speaker 9: the numbers yet, but a lot of people.
Speaker 2: Nice.
Speaker 8: Okay, Netflix is just riding high.
Speaker 2: I went below fifty ninth Street. Wow, sweet New York
Speaker 2: police and greeted me. I just saw some of the
Speaker 2: Christmas chair.
Speaker 5: Yeah, the newspapers.
Speaker 2: Lisa Mantello, thank you so much.
Speaker 1: This is the Bloomberg Surveillance podcast, available on Apple, Spotify,
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