Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Mike, Good morning, sir, Morning John.
Speaker 3: I want to pick up on I think a coal
Speaker 3: view of yours for twenty twenty five coming into twenty
Speaker 3: twenty six, recessions behind us. I think that's somewhat unique
Speaker 3: to you and a team at Morgan Stanley just built
Speaker 3: that out for us.
Speaker 4: Yeah, I mean, you know, we try to work six
Speaker 4: months in the future. I think in a year ago.
Speaker 4: I think remember we had this conversation after the election.
Speaker 4: You were saying, make you sound more optimistic than I've
Speaker 4: heard you in a while, and it was kind of
Speaker 4: we were.
Speaker 2: Thinking six months in advance.
Speaker 4: We thought the first half would be tough as they
Speaker 4: transitioned from the kind of growth negative policies.
Speaker 2: To these growth positive policies.
Speaker 4: All this capex you're talking about is right in line
Speaker 4: with the big beautiful bill. I mean, they're trying to
Speaker 4: basically reduce consumption increase investment. Okay, it's a totally different economy.
Speaker 4: And what that is, it's a higher velocity economy. For
Speaker 4: all the companies that haven't been doing well for the
Speaker 4: last I would say three years, we've been sort of
Speaker 4: in a recession.
Speaker 2: I would argue strong.
Speaker 4: We've done the work on this, and you know, we've
Speaker 4: done analysis with respect to the rolling recession that has
Speaker 4: been in place or I would say three years, most
Speaker 4: of the privatey, economy kind of suffering, government kind of
Speaker 4: carrying the water, and then we basically saw all of
Speaker 4: that come to fruition at the end in April. April
Speaker 4: capitulation day as I call it, was basically the government
Speaker 4: recession that was the final piece of the rolling recession.
Speaker 4: And if you actually look at the Challenger job cuts
Speaker 4: and you look at the revision data now on the
Speaker 4: on the NFL, on the payroll data, it clearly looks
Speaker 4: to me like a rate of change low okay in
Speaker 4: payrolls and a rate of change high in Challenger job
Speaker 4: cuts came in April. So the markets figured all this out,
Speaker 4: and that's why revision breath has gone straight up.
Speaker 3: So rolling recovery, where are we that strges?
Speaker 4: So we deemed at the rolling recovery in April, and
Speaker 4: we're now seeing that, like these areas of the marketer,
Speaker 4: not everything's going to recover it once, because it's a
Speaker 4: it's an unorthodox recession. It's not like everything flushed at
Speaker 4: once and everything recovers at once, So it is going
Speaker 4: to be staged, and we've seen it in the market.
Speaker 4: We're still narrow quite frankly, AI campbex Is still is
Speaker 4: kind of one of early recoveries here, semiconductors being an
Speaker 4: early cycle group. But we're not seeing the other quote
Speaker 4: unquote early cycle groups recover the way they typically do
Speaker 4: in a new economic cycle. Why because the FED is
Speaker 4: behind a curve. The FED is way behind a curve
Speaker 4: on rates. They need rates much lower if you really
Speaker 4: want to get the private economy moving, rates are too high.
Speaker 1: Much lower? How much lower do you think that really
Speaker 1: is required to get that broadening out?
Speaker 2: Well, let's just start with the two year treasury yield.
Speaker 4: Okay, So my barometer is always the FED is behind
Speaker 4: the curve. If FED funds is above two year treasury yields,
Speaker 4: and in order to stimulate the private economy, I would
Speaker 4: say they need to be well below that.
Speaker 2: So that's fifty.
Speaker 4: Basis points just to get the neutral and maybe another
Speaker 4: one hundred plus to get to something that's more stimulative
Speaker 4: for the average company and the average consumer.
Speaker 1: Are you right now betting on that broadening out and
Speaker 1: expecting maybe AI to underperform going forward as they invest
Speaker 1: more in some of these debt sales and the infrastructure
Speaker 1: side and the rest of the economy plays catch up.
Speaker 4: Absolutely, think about the trickle down effect of this capital spending.
Speaker 4: I mean, it's not just going to be semi conunter companies.
Speaker 4: There's a lot of infrastructure, there's a lot of job creation,
Speaker 4: there's a lot of velocity in a real economy, and
Speaker 4: the lending channels starts getting going, perhaps for small medium
Speaker 4: businesses that job creation. Deregulation is another part of that story.
Speaker 2: Okay, so absolutely that's.
Speaker 4: What should happen if things play out the way they could.
Speaker 2: Now there's risk to that.
Speaker 4: Let's say that FED continues to say, hey, we still
Speaker 4: think there's inflation risk, we don't like the inflationary three percent,
Speaker 4: we're not going to raise our targets there, and then
Speaker 4: we just kind of drag their feet.
Speaker 2: It's going to stay narrow.
Speaker 4: Then it's going to stay up the quality curve, and
Speaker 4: that's where we are right now. He says that people
Speaker 4: basically are trying to choose between those two outcomes, and
Speaker 4: I would say right now, most institutional community is still
Speaker 4: huddled into the high quality stocks. They haven't really made
Speaker 4: the transition yet. Well, we have in some of our guidance.
Speaker 2: Yeah.
Speaker 4: Absolutely, In order for that transition to work, the FED
Speaker 4: has to cut though.
Speaker 2: That's what it's contingent on.
Speaker 4: It's one of the main things now. Drag is a
Speaker 4: big part of that. Okay, the capital spending is a
Speaker 4: part of that. Those can happen without the FED cutting significantly,
Speaker 4: but it would really, it would really solidify it for me.
Speaker 4: And if you go back and look at all these
Speaker 4: different economic cycles, small caps and lower quality stocks typically
Speaker 4: don't outperform until the FED gets below two year treasury heels.
Speaker 4: We've we've documented this, so by the way, it doesn't
Speaker 4: mean these stocks can't work in absolute terms. It just
Speaker 4: means that relative outperformers you typically get in that early
Speaker 4: cycle rotation needs FED funds to be much lower.
Speaker 1: If you look at the FED next year, are you
Speaker 1: just expecting a federal reserve that's markedly different than it
Speaker 1: was today than it is today?
Speaker 4: Well, I think they're just I think they're being patient here,
Speaker 4: They're doing their job. I'm not wanting to sit here
Speaker 4: and criticize the Fed left and right.
Speaker 2: What I see is just a very.
Speaker 4: Weird economic cycle, and I think we've kind of we've
Speaker 4: solved the puzzle a little bit on this, and that's
Speaker 4: why I feel fairly confident that our narrative we laid
Speaker 4: out this year is played out.
Speaker 2: Now.
Speaker 4: I'm getting evidence in the marketplace, and I feel more
Speaker 4: confident in that narrative. And that's sort of the difference.
Speaker 4: I just think they're not there yet, you know, they're
Speaker 4: not where I am in my head. I could be wrong,
Speaker 4: but I'm pretty confident about that outcome.
Speaker 3: Can we finish on big tench?
Speaker 2: Sure?
Speaker 3: These companies are changing. We're used to companies that weren't
Speaker 3: investing tons ultimately, that were giving it back to shareholders.
Speaker 3: Now we've seen a subtle twist I think from the
Speaker 3: likes of say Meta, who was spending tons and tons
Speaker 3: and tons and then coming to the debt market to
Speaker 3: fund it. That's not what we're used to with these
Speaker 3: names typically the asset like capital return heavy. Are you
Speaker 3: not seeing the same change? And how should we treat
Speaker 3: those companies differently of at all? Because of that?
Speaker 2: So let's talk about the risks for the bullmarket.
Speaker 4: We think a bull market started in April new economic
Speaker 4: earning cycle.
Speaker 2: Okay, there are two risks.
Speaker 4: One is it the FED drags their feed liquidity funding
Speaker 4: market stresses kind of pop up. The second one is
Speaker 4: what you just talked about, is that the market starts
Speaker 4: to push back on the fact that free cash flow
Speaker 4: growth is actually decelerating for some of these businesses and
Speaker 4: the asset light story is being called into question.
Speaker 2: We haven't seen it yeto the last week.
Speaker 4: Was the first sign we saw pretty diversion performance between
Speaker 4: some of these and that's a risk because if all
Speaker 4: of a sudden the market starts to become a governing factor
Speaker 4: on those stocks. I can guarantee you that the management
Speaker 4: teams are going to say, well, maybe we aren't going
Speaker 4: to spend quite as much, just like we saw in
Speaker 4: the fall of twenty twenty four as we talked about
Speaker 4: the deceleration and campex, and also we saw that with
Speaker 4: other times when these companies spend much money the market
Speaker 4: is a governing factor. The management change their view how
Speaker 4: how they're guiding on the campex. Right now, they're getting
Speaker 4: rewarded for more campex the market.
Speaker 3: Is it welcome news that they're leaning on the debt
Speaker 3: market a little bit more, just as a sequity market
Speaker 3: starts to push back.
Speaker 2: Well, I think that. I mean, I think it's a
Speaker 2: natural evolution.
Speaker 4: And and and just to be clear, in all these buildouts,
Speaker 4: whether it's railroads, electricity, uh, the internet itself, Okay, we
Speaker 4: got to get renown to the debt part. Okay, So
Speaker 4: now they just raised a ton of capital, Well, they're
Speaker 4: not going to sit They're going to spend it. So
Speaker 4: like that's another reason to be excited on one hand,
Speaker 4: because we know that money is going to get spent,
Speaker 4: not going to sit there and collect dust. So so
Speaker 4: you know, typically it could last a year, two three,
Speaker 4: I don't know, I mean, but it's hard for me
Speaker 4: to believe that the spending cycles.
Speaker 2: Over when they just raised gobs and gobs of dollars.
Speaker 3: Do you think it japanizes comportive term programs as these
Speaker 3: companies take on more leverage.
Speaker 4: Yeah, it's competing for the for the free cash flow.
Speaker 4: So whether it's camp and by the way, Capex now
Speaker 4: is a percentage of free cash flow is pretty high
Speaker 4: for these businesses. But once again, I want to go back,
Speaker 4: this is this is by design.
Speaker 2: Okay.
Speaker 4: The tax bill is basically incenting these companies to do it. Now,
Speaker 4: I mean, the government administration is really encouraging businesses of
Speaker 4: all types to start investing for the first time in
Speaker 4: fifteen years. We've underinvested in so many things, not just
Speaker 4: you know, AI, but like infrastructure and factories and you know,
Speaker 4: automating production and robotics and things like that. I mean,
Speaker 4: this bill is designed to get that engine of growth moving.
Speaker 3: And it's happening. It's just putting all these pieces together.
Speaker 3: This was a core theme, I think, a core pillar
Speaker 3: for being long US equities for a long long time.
Speaker 3: And now it's changed. Is it still good? I think
Speaker 3: that's what I'm trying to get out here. Is this
Speaker 3: still an argument to buying US ecrities.
Speaker 4: I think that the valuation, you know, is telling you
Speaker 4: that the growth is going to be better than we think.
Speaker 4: My view is that earning SC is going to be
Speaker 4: better next year than people expect.
Speaker 2: Now.
Speaker 4: On the other side of that, I do think we're
Speaker 4: in a different environment where we have these hotter but
Speaker 4: shorter cycles. Okay, so we're not in these ten year
Speaker 4: economic expansions anymore, and so it's two years on, one
Speaker 4: year off, two years on, one year off. That's what
Speaker 4: we've had since COVID right twenty twenty twenty twenty one good,
Speaker 4: twenty two bad, twenty three, twenty four good, twenty four
Speaker 4: to twenty.
Speaker 2: Five, and that's so good. Now we're into a new
Speaker 2: two year cycle.
Speaker 4: So you just have to understand that because inflation is
Speaker 4: right under the surface, and now you have a higher
Speaker 4: velocity economy that means you're going to have to trade
Speaker 4: it a little bit more. For right now, I think
Speaker 4: it's you know, we're in a pretty good position.