1 00:00:02,520 --> 00:00:07,280 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:07,760 --> 00:00:09,280 Speaker 2: Mike, Good morning, sir, Morning John. 3 00:00:09,320 --> 00:00:10,680 Speaker 3: I want to pick up on I think a coal 4 00:00:10,800 --> 00:00:13,399 Speaker 3: view of yours for twenty twenty five coming into twenty 5 00:00:13,400 --> 00:00:16,799 Speaker 3: twenty six, recessions behind us. I think that's somewhat unique 6 00:00:16,920 --> 00:00:18,720 Speaker 3: to you and a team at Morgan Stanley just built 7 00:00:18,720 --> 00:00:19,400 Speaker 3: that out for us. 8 00:00:19,720 --> 00:00:21,360 Speaker 4: Yeah, I mean, you know, we try to work six 9 00:00:21,360 --> 00:00:23,000 Speaker 4: months in the future. I think in a year ago. 10 00:00:23,079 --> 00:00:25,040 Speaker 4: I think remember we had this conversation after the election. 11 00:00:25,120 --> 00:00:27,600 Speaker 4: You were saying, make you sound more optimistic than I've 12 00:00:27,600 --> 00:00:29,000 Speaker 4: heard you in a while, and it was kind of 13 00:00:29,000 --> 00:00:29,360 Speaker 4: we were. 14 00:00:29,240 --> 00:00:30,440 Speaker 2: Thinking six months in advance. 15 00:00:30,480 --> 00:00:32,559 Speaker 4: We thought the first half would be tough as they 16 00:00:32,600 --> 00:00:35,280 Speaker 4: transitioned from the kind of growth negative policies. 17 00:00:34,840 --> 00:00:36,199 Speaker 2: To these growth positive policies. 18 00:00:36,240 --> 00:00:38,960 Speaker 4: All this capex you're talking about is right in line 19 00:00:39,000 --> 00:00:41,000 Speaker 4: with the big beautiful bill. I mean, they're trying to 20 00:00:41,000 --> 00:00:45,040 Speaker 4: basically reduce consumption increase investment. Okay, it's a totally different economy. 21 00:00:45,200 --> 00:00:48,400 Speaker 4: And what that is, it's a higher velocity economy. For 22 00:00:48,560 --> 00:00:50,479 Speaker 4: all the companies that haven't been doing well for the 23 00:00:50,560 --> 00:00:52,400 Speaker 4: last I would say three years, we've been sort of 24 00:00:52,400 --> 00:00:53,080 Speaker 4: in a recession. 25 00:00:53,600 --> 00:00:54,440 Speaker 2: I would argue strong. 26 00:00:54,520 --> 00:00:56,240 Speaker 4: We've done the work on this, and you know, we've 27 00:00:56,320 --> 00:00:59,360 Speaker 4: done analysis with respect to the rolling recession that has 28 00:00:59,400 --> 00:01:01,440 Speaker 4: been in place or I would say three years, most 29 00:01:01,440 --> 00:01:03,880 Speaker 4: of the privatey, economy kind of suffering, government kind of 30 00:01:03,920 --> 00:01:06,400 Speaker 4: carrying the water, and then we basically saw all of 31 00:01:06,440 --> 00:01:09,400 Speaker 4: that come to fruition at the end in April. April 32 00:01:09,440 --> 00:01:12,320 Speaker 4: capitulation day as I call it, was basically the government 33 00:01:12,360 --> 00:01:15,240 Speaker 4: recession that was the final piece of the rolling recession. 34 00:01:15,520 --> 00:01:17,600 Speaker 4: And if you actually look at the Challenger job cuts 35 00:01:17,760 --> 00:01:19,520 Speaker 4: and you look at the revision data now on the 36 00:01:19,560 --> 00:01:22,480 Speaker 4: on the NFL, on the payroll data, it clearly looks 37 00:01:22,480 --> 00:01:24,880 Speaker 4: to me like a rate of change low okay in 38 00:01:24,920 --> 00:01:27,720 Speaker 4: payrolls and a rate of change high in Challenger job 39 00:01:27,760 --> 00:01:30,160 Speaker 4: cuts came in April. So the markets figured all this out, 40 00:01:30,160 --> 00:01:31,800 Speaker 4: and that's why revision breath has gone straight up. 41 00:01:31,880 --> 00:01:34,479 Speaker 3: So rolling recovery, where are we that strges? 42 00:01:34,600 --> 00:01:37,480 Speaker 4: So we deemed at the rolling recovery in April, and 43 00:01:37,520 --> 00:01:39,800 Speaker 4: we're now seeing that, like these areas of the marketer, 44 00:01:40,120 --> 00:01:42,000 Speaker 4: not everything's going to recover it once, because it's a 45 00:01:42,080 --> 00:01:45,040 Speaker 4: it's an unorthodox recession. It's not like everything flushed at 46 00:01:45,080 --> 00:01:47,240 Speaker 4: once and everything recovers at once, So it is going 47 00:01:47,280 --> 00:01:49,200 Speaker 4: to be staged, and we've seen it in the market. 48 00:01:49,280 --> 00:01:52,280 Speaker 4: We're still narrow quite frankly, AI campbex Is still is 49 00:01:52,560 --> 00:01:55,160 Speaker 4: kind of one of early recoveries here, semiconductors being an 50 00:01:55,160 --> 00:01:57,600 Speaker 4: early cycle group. But we're not seeing the other quote 51 00:01:57,680 --> 00:02:01,040 Speaker 4: unquote early cycle groups recover the way they typically do 52 00:02:01,200 --> 00:02:04,240 Speaker 4: in a new economic cycle. Why because the FED is 53 00:02:04,240 --> 00:02:06,120 Speaker 4: behind a curve. The FED is way behind a curve 54 00:02:06,160 --> 00:02:08,760 Speaker 4: on rates. They need rates much lower if you really 55 00:02:08,800 --> 00:02:11,480 Speaker 4: want to get the private economy moving, rates are too high. 56 00:02:11,560 --> 00:02:13,640 Speaker 1: Much lower? How much lower do you think that really 57 00:02:13,680 --> 00:02:15,119 Speaker 1: is required to get that broadening out? 58 00:02:15,160 --> 00:02:17,280 Speaker 2: Well, let's just start with the two year treasury yield. 59 00:02:17,360 --> 00:02:20,120 Speaker 4: Okay, So my barometer is always the FED is behind 60 00:02:20,160 --> 00:02:24,280 Speaker 4: the curve. If FED funds is above two year treasury yields, 61 00:02:24,360 --> 00:02:26,680 Speaker 4: and in order to stimulate the private economy, I would 62 00:02:26,680 --> 00:02:28,000 Speaker 4: say they need to be well below that. 63 00:02:28,240 --> 00:02:29,080 Speaker 2: So that's fifty. 64 00:02:28,800 --> 00:02:31,000 Speaker 4: Basis points just to get the neutral and maybe another 65 00:02:31,000 --> 00:02:33,799 Speaker 4: one hundred plus to get to something that's more stimulative 66 00:02:33,800 --> 00:02:35,760 Speaker 4: for the average company and the average consumer. 67 00:02:35,919 --> 00:02:39,280 Speaker 1: Are you right now betting on that broadening out and 68 00:02:39,320 --> 00:02:43,760 Speaker 1: expecting maybe AI to underperform going forward as they invest 69 00:02:43,880 --> 00:02:47,560 Speaker 1: more in some of these debt sales and the infrastructure 70 00:02:47,639 --> 00:02:50,440 Speaker 1: side and the rest of the economy plays catch up. 71 00:02:50,520 --> 00:02:53,160 Speaker 4: Absolutely, think about the trickle down effect of this capital spending. 72 00:02:53,240 --> 00:02:55,480 Speaker 4: I mean, it's not just going to be semi conunter companies. 73 00:02:55,480 --> 00:02:58,040 Speaker 4: There's a lot of infrastructure, there's a lot of job creation, 74 00:02:58,080 --> 00:03:00,320 Speaker 4: there's a lot of velocity in a real economy, and 75 00:03:00,360 --> 00:03:03,360 Speaker 4: the lending channels starts getting going, perhaps for small medium 76 00:03:03,400 --> 00:03:06,480 Speaker 4: businesses that job creation. Deregulation is another part of that story. 77 00:03:06,680 --> 00:03:08,079 Speaker 2: Okay, so absolutely that's. 78 00:03:07,960 --> 00:03:11,160 Speaker 4: What should happen if things play out the way they could. 79 00:03:11,320 --> 00:03:12,480 Speaker 2: Now there's risk to that. 80 00:03:12,720 --> 00:03:15,160 Speaker 4: Let's say that FED continues to say, hey, we still 81 00:03:15,160 --> 00:03:18,520 Speaker 4: think there's inflation risk, we don't like the inflationary three percent, 82 00:03:18,560 --> 00:03:21,680 Speaker 4: we're not going to raise our targets there, and then 83 00:03:21,680 --> 00:03:22,760 Speaker 4: we just kind of drag their feet. 84 00:03:22,800 --> 00:03:23,639 Speaker 2: It's going to stay narrow. 85 00:03:23,720 --> 00:03:25,600 Speaker 4: Then it's going to stay up the quality curve, and 86 00:03:25,639 --> 00:03:27,440 Speaker 4: that's where we are right now. He says that people 87 00:03:27,480 --> 00:03:30,799 Speaker 4: basically are trying to choose between those two outcomes, and 88 00:03:30,800 --> 00:03:33,240 Speaker 4: I would say right now, most institutional community is still 89 00:03:33,360 --> 00:03:36,120 Speaker 4: huddled into the high quality stocks. They haven't really made 90 00:03:36,160 --> 00:03:39,360 Speaker 4: the transition yet. Well, we have in some of our guidance. 91 00:03:39,400 --> 00:03:39,560 Speaker 2: Yeah. 92 00:03:39,560 --> 00:03:42,240 Speaker 4: Absolutely, In order for that transition to work, the FED 93 00:03:42,320 --> 00:03:43,000 Speaker 4: has to cut though. 94 00:03:43,200 --> 00:03:44,440 Speaker 2: That's what it's contingent on. 95 00:03:44,960 --> 00:03:46,920 Speaker 4: It's one of the main things now. Drag is a 96 00:03:46,920 --> 00:03:49,040 Speaker 4: big part of that. Okay, the capital spending is a 97 00:03:49,080 --> 00:03:52,160 Speaker 4: part of that. Those can happen without the FED cutting significantly, 98 00:03:52,360 --> 00:03:54,440 Speaker 4: but it would really, it would really solidify it for me. 99 00:03:54,480 --> 00:03:55,600 Speaker 4: And if you go back and look at all these 100 00:03:55,640 --> 00:04:00,680 Speaker 4: different economic cycles, small caps and lower quality stocks typically 101 00:04:00,760 --> 00:04:03,800 Speaker 4: don't outperform until the FED gets below two year treasury heels. 102 00:04:03,800 --> 00:04:05,920 Speaker 4: We've we've documented this, so by the way, it doesn't 103 00:04:05,920 --> 00:04:08,240 Speaker 4: mean these stocks can't work in absolute terms. It just 104 00:04:08,280 --> 00:04:11,360 Speaker 4: means that relative outperformers you typically get in that early 105 00:04:11,400 --> 00:04:14,640 Speaker 4: cycle rotation needs FED funds to be much lower. 106 00:04:14,840 --> 00:04:16,480 Speaker 1: If you look at the FED next year, are you 107 00:04:16,600 --> 00:04:19,880 Speaker 1: just expecting a federal reserve that's markedly different than it 108 00:04:19,960 --> 00:04:21,120 Speaker 1: was today than it is today? 109 00:04:21,360 --> 00:04:23,160 Speaker 4: Well, I think they're just I think they're being patient here, 110 00:04:23,680 --> 00:04:25,800 Speaker 4: They're doing their job. I'm not wanting to sit here 111 00:04:25,800 --> 00:04:27,240 Speaker 4: and criticize the Fed left and right. 112 00:04:27,240 --> 00:04:29,480 Speaker 2: What I see is just a very. 113 00:04:29,240 --> 00:04:32,920 Speaker 4: Weird economic cycle, and I think we've kind of we've 114 00:04:32,920 --> 00:04:34,640 Speaker 4: solved the puzzle a little bit on this, and that's 115 00:04:34,680 --> 00:04:37,240 Speaker 4: why I feel fairly confident that our narrative we laid 116 00:04:37,279 --> 00:04:38,280 Speaker 4: out this year is played out. 117 00:04:38,320 --> 00:04:38,520 Speaker 2: Now. 118 00:04:38,520 --> 00:04:41,120 Speaker 4: I'm getting evidence in the marketplace, and I feel more 119 00:04:41,120 --> 00:04:43,400 Speaker 4: confident in that narrative. And that's sort of the difference. 120 00:04:43,400 --> 00:04:45,279 Speaker 4: I just think they're not there yet, you know, they're 121 00:04:45,320 --> 00:04:47,240 Speaker 4: not where I am in my head. I could be wrong, 122 00:04:47,279 --> 00:04:48,880 Speaker 4: but I'm pretty confident about that outcome. 123 00:04:48,960 --> 00:04:50,040 Speaker 3: Can we finish on big tench? 124 00:04:50,160 --> 00:04:50,440 Speaker 2: Sure? 125 00:04:50,520 --> 00:04:53,680 Speaker 3: These companies are changing. We're used to companies that weren't 126 00:04:53,680 --> 00:04:56,520 Speaker 3: investing tons ultimately, that were giving it back to shareholders. 127 00:04:56,680 --> 00:04:58,520 Speaker 3: Now we've seen a subtle twist I think from the 128 00:04:58,640 --> 00:05:01,320 Speaker 3: likes of say Meta, who was spending tons and tons 129 00:05:01,400 --> 00:05:03,440 Speaker 3: and tons and then coming to the debt market to 130 00:05:03,480 --> 00:05:06,039 Speaker 3: fund it. That's not what we're used to with these 131 00:05:06,120 --> 00:05:09,279 Speaker 3: names typically the asset like capital return heavy. Are you 132 00:05:09,320 --> 00:05:11,320 Speaker 3: not seeing the same change? And how should we treat 133 00:05:11,320 --> 00:05:13,599 Speaker 3: those companies differently of at all? Because of that? 134 00:05:13,920 --> 00:05:15,800 Speaker 2: So let's talk about the risks for the bullmarket. 135 00:05:15,880 --> 00:05:18,320 Speaker 4: We think a bull market started in April new economic 136 00:05:18,360 --> 00:05:19,080 Speaker 4: earning cycle. 137 00:05:19,360 --> 00:05:20,360 Speaker 2: Okay, there are two risks. 138 00:05:20,360 --> 00:05:23,360 Speaker 4: One is it the FED drags their feed liquidity funding 139 00:05:23,360 --> 00:05:25,640 Speaker 4: market stresses kind of pop up. The second one is 140 00:05:25,680 --> 00:05:27,520 Speaker 4: what you just talked about, is that the market starts 141 00:05:27,520 --> 00:05:30,240 Speaker 4: to push back on the fact that free cash flow 142 00:05:30,320 --> 00:05:32,880 Speaker 4: growth is actually decelerating for some of these businesses and 143 00:05:32,920 --> 00:05:35,919 Speaker 4: the asset light story is being called into question. 144 00:05:36,000 --> 00:05:37,679 Speaker 2: We haven't seen it yeto the last week. 145 00:05:37,600 --> 00:05:40,880 Speaker 4: Was the first sign we saw pretty diversion performance between 146 00:05:40,880 --> 00:05:43,719 Speaker 4: some of these and that's a risk because if all 147 00:05:43,760 --> 00:05:46,640 Speaker 4: of a sudden the market starts to become a governing factor 148 00:05:46,680 --> 00:05:49,520 Speaker 4: on those stocks. I can guarantee you that the management 149 00:05:49,520 --> 00:05:51,039 Speaker 4: teams are going to say, well, maybe we aren't going 150 00:05:51,080 --> 00:05:52,720 Speaker 4: to spend quite as much, just like we saw in 151 00:05:52,720 --> 00:05:54,280 Speaker 4: the fall of twenty twenty four as we talked about 152 00:05:54,279 --> 00:05:56,960 Speaker 4: the deceleration and campex, and also we saw that with 153 00:05:58,160 --> 00:06:00,960 Speaker 4: other times when these companies spend much money the market 154 00:06:01,080 --> 00:06:03,680 Speaker 4: is a governing factor. The management change their view how 155 00:06:03,960 --> 00:06:05,919 Speaker 4: how they're guiding on the campex. Right now, they're getting 156 00:06:05,920 --> 00:06:08,080 Speaker 4: rewarded for more campex the market. 157 00:06:08,360 --> 00:06:10,080 Speaker 3: Is it welcome news that they're leaning on the debt 158 00:06:10,120 --> 00:06:12,680 Speaker 3: market a little bit more, just as a sequity market 159 00:06:12,720 --> 00:06:13,800 Speaker 3: starts to push back. 160 00:06:13,720 --> 00:06:15,040 Speaker 2: Well, I think that. I mean, I think it's a 161 00:06:15,120 --> 00:06:15,839 Speaker 2: natural evolution. 162 00:06:16,080 --> 00:06:18,600 Speaker 4: And and and just to be clear, in all these buildouts, 163 00:06:18,600 --> 00:06:22,760 Speaker 4: whether it's railroads, electricity, uh, the internet itself, Okay, we 164 00:06:22,839 --> 00:06:24,920 Speaker 4: got to get renown to the debt part. Okay, So 165 00:06:25,080 --> 00:06:27,320 Speaker 4: now they just raised a ton of capital, Well, they're 166 00:06:27,320 --> 00:06:29,159 Speaker 4: not going to sit They're going to spend it. So 167 00:06:29,440 --> 00:06:31,520 Speaker 4: like that's another reason to be excited on one hand, 168 00:06:31,560 --> 00:06:33,360 Speaker 4: because we know that money is going to get spent, 169 00:06:33,480 --> 00:06:35,800 Speaker 4: not going to sit there and collect dust. So so 170 00:06:36,080 --> 00:06:38,520 Speaker 4: you know, typically it could last a year, two three, 171 00:06:38,560 --> 00:06:40,680 Speaker 4: I don't know, I mean, but it's hard for me 172 00:06:40,720 --> 00:06:42,520 Speaker 4: to believe that the spending cycles. 173 00:06:42,120 --> 00:06:44,440 Speaker 2: Over when they just raised gobs and gobs of dollars. 174 00:06:44,520 --> 00:06:47,280 Speaker 3: Do you think it japanizes comportive term programs as these 175 00:06:47,320 --> 00:06:48,600 Speaker 3: companies take on more leverage. 176 00:06:48,640 --> 00:06:50,520 Speaker 4: Yeah, it's competing for the for the free cash flow. 177 00:06:50,560 --> 00:06:52,280 Speaker 4: So whether it's camp and by the way, Capex now 178 00:06:52,320 --> 00:06:54,640 Speaker 4: is a percentage of free cash flow is pretty high 179 00:06:54,680 --> 00:06:56,880 Speaker 4: for these businesses. But once again, I want to go back, 180 00:06:56,920 --> 00:06:58,280 Speaker 4: this is this is by design. 181 00:06:58,360 --> 00:06:59,080 Speaker 2: Okay. 182 00:06:58,880 --> 00:07:03,240 Speaker 4: The tax bill is basically incenting these companies to do it. Now, 183 00:07:03,320 --> 00:07:07,599 Speaker 4: I mean, the government administration is really encouraging businesses of 184 00:07:07,640 --> 00:07:09,840 Speaker 4: all types to start investing for the first time in 185 00:07:09,880 --> 00:07:13,520 Speaker 4: fifteen years. We've underinvested in so many things, not just 186 00:07:13,640 --> 00:07:17,840 Speaker 4: you know, AI, but like infrastructure and factories and you know, 187 00:07:17,920 --> 00:07:20,720 Speaker 4: automating production and robotics and things like that. I mean, 188 00:07:20,720 --> 00:07:24,400 Speaker 4: this bill is designed to get that engine of growth moving. 189 00:07:24,160 --> 00:07:26,640 Speaker 3: And it's happening. It's just putting all these pieces together. 190 00:07:27,280 --> 00:07:29,240 Speaker 3: This was a core theme, I think, a core pillar 191 00:07:29,280 --> 00:07:32,000 Speaker 3: for being long US equities for a long long time. 192 00:07:32,440 --> 00:07:34,840 Speaker 3: And now it's changed. Is it still good? I think 193 00:07:34,840 --> 00:07:36,080 Speaker 3: that's what I'm trying to get out here. Is this 194 00:07:36,120 --> 00:07:37,680 Speaker 3: still an argument to buying US ecrities. 195 00:07:37,760 --> 00:07:40,280 Speaker 4: I think that the valuation, you know, is telling you 196 00:07:40,320 --> 00:07:41,920 Speaker 4: that the growth is going to be better than we think. 197 00:07:41,960 --> 00:07:43,280 Speaker 4: My view is that earning SC is going to be 198 00:07:43,280 --> 00:07:44,720 Speaker 4: better next year than people expect. 199 00:07:44,760 --> 00:07:45,000 Speaker 2: Now. 200 00:07:45,840 --> 00:07:47,480 Speaker 4: On the other side of that, I do think we're 201 00:07:47,480 --> 00:07:49,520 Speaker 4: in a different environment where we have these hotter but 202 00:07:49,600 --> 00:07:52,560 Speaker 4: shorter cycles. Okay, so we're not in these ten year 203 00:07:52,640 --> 00:07:55,560 Speaker 4: economic expansions anymore, and so it's two years on, one 204 00:07:55,600 --> 00:07:57,240 Speaker 4: year off, two years on, one year off. That's what 205 00:07:57,240 --> 00:07:59,720 Speaker 4: we've had since COVID right twenty twenty twenty twenty one good, 206 00:08:00,080 --> 00:08:02,240 Speaker 4: twenty two bad, twenty three, twenty four good, twenty four 207 00:08:02,280 --> 00:08:02,800 Speaker 4: to twenty. 208 00:08:02,560 --> 00:08:03,880 Speaker 2: Five, and that's so good. Now we're into a new 209 00:08:03,880 --> 00:08:04,520 Speaker 2: two year cycle. 210 00:08:04,520 --> 00:08:07,080 Speaker 4: So you just have to understand that because inflation is 211 00:08:07,120 --> 00:08:09,280 Speaker 4: right under the surface, and now you have a higher 212 00:08:09,360 --> 00:08:12,280 Speaker 4: velocity economy that means you're going to have to trade 213 00:08:12,320 --> 00:08:13,960 Speaker 4: it a little bit more. For right now, I think 214 00:08:14,000 --> 00:08:15,600 Speaker 4: it's you know, we're in a pretty good position.