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Speaker 1: Joining us now is Seth Carpenter of Morgan Stanley. We're
Speaker 1: so pleased to say, Seth, what stands out to you
Speaker 1: initial job as claims actually having an upward trend or
Speaker 1: this idea that housing is flat on its back.
Speaker 3: I mean, I think if I take them all together,
Speaker 3: I'm actually pretty constructive on the US for this year
Speaker 3: as a whole.
Speaker 4: However, I think it's clear to me that.
Speaker 3: We need to see we're going to see slower growth
Speaker 3: over twenty two twenty four relative to twenty twenty three,
Speaker 3: and so the incremental softening that you all were talking
Speaker 3: about when you talked about jobless claims where they were going.
Speaker 3: He always came back with some sort of adverb to
Speaker 3: modify how much it was up, sort of slightly modestly
Speaker 3: or whatever. So it's not as though things are falling
Speaker 3: off of a cliff. I think for the housing sector
Speaker 3: it's really important. The supply for single family homes is
Speaker 3: clearly constrained because anybody who's got a two and a
Speaker 3: half or three and a half percent mortgage, they're staying put,
Speaker 3: and so the supply, as Mike was saying, is constrained.
Speaker 3: On the other hand, monetary policy has always worked through
Speaker 3: the housing sector primarily, and I think builders have to
Speaker 3: be a bit cautious because they got to ask themselves
Speaker 3: where is demand going to be, and so what does
Speaker 3: it mean? I think it just means all cumulatively together,
Speaker 3: we're getting that modest slowing in the economy. We think
Speaker 3: things should slow down. We think inflation's coming down as well,
Speaker 3: and taking together that allows the FED to cut But
Speaker 3: I don't for now see any of these data as
Speaker 3: being harbingers of just doom somehow that we're going to
Speaker 3: go off of a cliff anytime soon.
Speaker 1: Well, we can find plenty of people who probably do
Speaker 1: find it doom saying, and this sort of question of
Speaker 1: a tipping point has often been thrown out there Neil
Speaker 1: data saying this is a time to cut race, because
Speaker 1: if you don't, you never see a linear increase in unemployment.
Speaker 1: You never see a linear kind of weakening in the
Speaker 1: jobs picture. What gives you comfort that we're not seeing
Speaker 1: the precipice of some sort of market increase in unemployment
Speaker 1: at a time where we are seeing an inflection higher
Speaker 1: in jobless claims.
Speaker 3: Well, we've also never seen an economic recovery from a
Speaker 3: global pandemic like the one we're living through right now.
Speaker 3: So as we were coming out of the pandemic, there
Speaker 3: were lots of frictions, lots of dislocations, lots of things
Speaker 3: trying to sort out where to be. Businesses were running
Speaker 3: shorthanded for years at a time, and so now we're
Speaker 3: seeing them settling into Wow, this is staffing closer to
Speaker 3: what we're going to want in the long run. And
Speaker 3: so that kind of readjustment from a truly unprecedented shock.
Speaker 3: I think we're now starting to move into the more
Speaker 3: normal stage. So to say that we haven't seen this
Speaker 3: situation but four is true on the other hand, we
Speaker 3: haven't seen this situation before, and so drawing massive conclusions
Speaker 3: about whether or not this sort of pattern is telling
Speaker 3: us something. I think we want to be super cautious not.
Speaker 5: To ask you to draw a massive conclusion, but can
Speaker 5: you add just the retail data we got from earlier
Speaker 5: the week into this that there does seem to be
Speaker 5: some price fatigue. So you have companies who are not
Speaker 5: as worried about labor shortages and now their margins are
Speaker 5: starting to get squeezed.
Speaker 3: Absolutely, so we think of this as all going in
Speaker 3: the same direction. If we look even the full quarter
Speaker 3: for the first quarter, where we have all the data
Speaker 3: for the quarter, durable goods spending quarter on quarter was negative.
Speaker 3: Non durable goods inflation adjusted was flat quarter on quarters,
Speaker 3: So where the residual strength was for the consumer was
Speaker 3: in services. That's exactly this sort of slowdown that we've
Speaker 3: been expecting to see. And I think the retail sales
Speaker 3: data again overweight goods, sort of shows you know, the
Speaker 3: consumer is not dead. The consumer hasn't stopped spending entirely.
Speaker 3: The consumer hasn't said that's it for me, I'm checking out. Instead,
Speaker 3: what they said was, yeah, we've already bought lots of
Speaker 3: lawn furniture, We've already bought lots of computer screens, We've
Speaker 3: already bought a home office three times over.
Speaker 4: Maybe it's time to cool down a bit.
Speaker 6: Two issues you just brought up there. One is consumers
Speaker 6: and they're concerned about higher prices so becoming more discerning.
Speaker 6: But also what's going on in the labor market. Two
Speaker 6: issues that you say are the biggest when it comes
Speaker 6: to you a selection tariffs, which many would say inflationary,
Speaker 6: and also immigration. How are you looking at twenty twenty five.
Speaker 3: With a lot of trepidation because lots of different things
Speaker 3: could happen. I agree with you when clients ask us
Speaker 3: questions about the elections, Immigration and tariffs are two really
Speaker 3: important things I would say to the earlier conversation about
Speaker 3: have we ever seen a situation where the unemployment rate
Speaker 3: drifts up gently over time?
Speaker 4: It's not very common.
Speaker 3: On the other hand, neither is the kind of increase
Speaker 3: in the labor force that we're seeing from immigration. That's
Speaker 3: not very common either, And so in lots of ways, though,
Speaker 3: gentle ride in the unemployment rate that we've seen four
Speaker 3: percent unemployment, I'm will enough to remember when four percent
Speaker 3: was considered pretty good.
Speaker 4: So we did see a rise.
Speaker 3: On net but a big chunk of that has been
Speaker 3: coming at least over the past year from increases in supply,
Speaker 3: and I think immigration matters there. And so with the election,
Speaker 3: we put out a piece of research for our clients
Speaker 3: over the past week or so, and you could see
Speaker 3: a range of outcomes of what happens to the labor
Speaker 3: force depending on policies that go to get put in
Speaker 3: place in there. I just think the range of outcomes
Speaker 3: in the election is vast, and we have to be
Speaker 3: super humble about what's going to happen. You could see
Speaker 3: big constriction in the labor supply, which would be adverse
Speaker 3: for growth and could be inflationary. Or you could see
Speaker 3: things sort of status quo, a little bit of a reduction,
Speaker 3: in which case the economy gets to trundle on.
Speaker 6: We have to be humble or the fetest to be humble.
Speaker 6: How do they think about these kind of contential massive
Speaker 6: changes while they're deciding whether or not they're going to
Speaker 6: make a cup before.
Speaker 4: The year end.
Speaker 3: So I think humility is called for all around, particularly
Speaker 3: for anyone in economic where we're not particularly good at it.
Speaker 3: On average, we need to practice humility a lot for
Speaker 3: the FED, they're going to have to sit back and
Speaker 3: wait on the policies. I do think if we listen
Speaker 3: to J. Powell, if we listen to sort of where
Speaker 3: our analysis is that monetary policy is currently restrictive, they
Speaker 3: can come off of the peak now this year and
Speaker 3: not have to worry about having done too much in
Speaker 3: terms of easing policy. I think as we get into
Speaker 3: twenty twenty five, though, they probably do need to think
Speaker 3: a lot more about what the election outcomes mean for policy,
Speaker 3: fiscal policy, tariff policy, all other policy, immigration policy before
Speaker 3: they can have any sort of conviction about which way
Speaker 3: they need.
Speaker 4: To go with policy.
Speaker 1: I asked Terry Wiseman, is this fun? And he just said, no,
Speaker 1: is this fun for you?
Speaker 3: This is, I have say, one of the most challenging
Speaker 3: macroeconomic environments to do forecasting in. And it's a double
Speaker 3: edged sword because, on the one hand, very hard to
Speaker 3: do forecasting when there's so many cross currents in so
Speaker 3: many situations that you haven't seen before. On the other hand,
Speaker 3: maybe it's a good time to be a forecaster because
Speaker 3: nobody else knows what's going on.
Speaker 1: Either well, The reason why I ask this is just
Speaker 1: simply because when I try to put together even the
Speaker 1: themes to really hook into, I'm not sure which takes
Speaker 1: pre eminence. I'm not sure if it's the rate cutting cycle,
Speaker 1: I'm not sure if it's the weakening, or I'm not
Speaker 1: sure if it's some of the disruptions that are causing
Speaker 1: inflationary increases. I don't have a sense of where the
Speaker 1: balance of risks are. Is it that any cut rates
Speaker 1: you have a resurgence in inflation, or as if you
Speaker 1: don't cut soon enough, you fall off a cliff into recession.
Speaker 1: I can make a good argument for any of these,
Speaker 1: and I believe it. So how do you sort of
Speaker 1: plan with any kind of long term forecast When the
Speaker 1: likes of Muhammadellary you're saying, if you don't have that
Speaker 1: type of long term forecast, you're going to have a
Speaker 1: mistake and you're going to have just volatile markets that
Speaker 1: are going to essentially break No.
Speaker 3: So I think that's fair. Lots of volatility in the
Speaker 3: real side of the economy and in markets. I do
Speaker 3: think the time horizon matters a lot. So some of
Speaker 3: our clients are very short term focused and they're say
Speaker 3: for the rest of this year.
Speaker 4: I feel pretty constructive.
Speaker 3: I don't see a scenario where the US really falls
Speaker 3: off of the cliff over the course of twenty twenty four.
Speaker 3: I do see inflation coming down over the rest of
Speaker 3: this year pretty substantially, and with that, I do see
Speaker 3: the FED cutting getting beyond that. To the mid medium
Speaker 3: term outlook, I think the uncertainty absolutely goes up. I
Speaker 3: think the elections are a huge component to which way
Speaker 3: things go, and I think it is impossible to have
Speaker 3: high conviction. So the best thing investors can do, the
Speaker 3: best thing policy makers can do is to think about
Speaker 3: all of the outcomes contingently and to try to come
Speaker 3: up with your best set of scenarios. And then you
Speaker 3: will end up in one of the scenarios over time.
Speaker 3: But you really have to do a lot of advanced planning.
Speaker 3: This is one of the reasons why when we talk
Speaker 3: to our clients we try to say we're.
Speaker 4: Not going to tell you.
Speaker 3: We're not going to predict what's going to happen.
Speaker 4: With the election. That's a mugs game.
Speaker 3: However, if we think across the different plausible scenarios, hear
Speaker 3: what the key outcomes would be for fiscal for tariffs,
Speaker 3: for immigration, and then here's how you should try to
Speaker 3: think about.
Speaker 4: Plan for that.
Speaker 5: Just to add to this, because this idea, it's been
Speaker 5: a criticism of the FED that they're not being more
Speaker 5: clear in their outlooks. They keep saying we're waiting for
Speaker 5: more data. There are people been clamoring who say, no,
Speaker 5: give us something concrete, give us a clear direction. But
Speaker 5: what you and Lisa were just describing as one where
Speaker 5: there is not a clear direction. So how would you
Speaker 5: rate FED communication in this environment? Should they be giving
Speaker 5: us scenario analysis, should they be giving us more clear forecasts?
Speaker 5: Or is it right just to say, look, we need
Speaker 5: more data, we don't know right now.
Speaker 3: Yeah, I think, especially the way you framed it, when
Speaker 3: some of the FOMC members sort of ask me questions
Speaker 3: about how they're doing, I actually think under these circumstances
Speaker 3: they're doing a pretty good job. The quip I like
Speaker 3: to give them is be as clear as you can be,
Speaker 3: but by all means, be no more clear than that.
Speaker 3: And I think they would be doing themselves a disservice.
Speaker 3: They'd be doing markets a disservice if they tried to
Speaker 3: be precise at a time when you can't be precise,
Speaker 3: and I think that would be false precision.
Speaker 4: I think would be false confidence.
Speaker 3: And so when the world turns out different than expected
Speaker 3: and they have to change course, which is exactly what
Speaker 3: they should do, everyone will complain, Oh my gosh, you
Speaker 3: told us you're going to do one thing, and now
Speaker 3: you're doing something else. So just buy Nvidia.
Speaker 1: Organ Stantley, thank you. Savvi's site of Raymond James joining us. Now, Savvi,
Speaker 1: what are you expecting to hear from some of these
Speaker 1: investment meetings, the latest being from Delta at a time
Speaker 1: where it seems like there is an ongoing divergence between
Speaker 1: people going across Atlantic versus domestic.
Speaker 7: Yeah, even in the domestic market, you know, things are
Speaker 7: really strong.
Speaker 8: Is this good demand?
Speaker 7: There's a little bit of oversupply, And I think that's
Speaker 7: the difference between the Atlantic and the domestic markets is
Speaker 7: we're still kind of getting back to you twenty nineteen
Speaker 7: levels in the Transatlant market, whereas capacity in the domestic
Speaker 7: market has surpassed that.
Speaker 8: So demand is really strong. But you're right, there is
Speaker 8: still strong demand in the Atlantic.
Speaker 7: Despite you know what we looked at last summer as
Speaker 7: being maybe pent up demand.
Speaker 6: Tom a pricing standpoint, Do you think that domestically you
Speaker 6: can get you know, cheaper airfares the way you're not
Speaker 6: going to be able to get going transatlantic this summer.
Speaker 7: I do believe so, and I think you're seeing that
Speaker 7: in the data. We've seen pricing being a little bit softer.
Speaker 7: You saw airlines in the first quarter really pull back
Speaker 7: their growth a little bit.
Speaker 8: But as we got into.
Speaker 7: The second quarter and heading into the summer, you're seeing
Speaker 7: a high single mid to high single digit growth in
Speaker 7: the domestic market, and that's kind of creating, especially if
Speaker 7: you're willing to have flexibility in some of those off
Speaker 7: peak days or times there.
Speaker 8: Are some better pricing available out there.
Speaker 7: But as we're heading into July, we're definitely seeing fair
Speaker 7: strengthen here.
Speaker 6: When you look at the domestic market, who's winning this
Speaker 6: space especially we are seeing cheaper airfares.
Speaker 8: Yeah, I mean, I think consumer wins. There's a lot
Speaker 8: of kind of optionality out there. The fares are coming
Speaker 8: in better. You'll hear a lot of.
Speaker 7: The executives say that we're seeing record revenue, and that's true.
Speaker 7: I think this is probably the highest revenue this industry
Speaker 7: has seen.
Speaker 8: The problem is we also as having record costs. You've
Speaker 8: seen a lot of.
Speaker 7: Labor costs increases, few well stable, which is great news
Speaker 7: for the industry. It is still higher than what it
Speaker 7: was in twenty nineteen. So there are airlines that are
Speaker 7: kind of struggling a bit more. I think those airlines
Speaker 7: exposed to corporate demand, especially large corporate demand that is
Speaker 7: starting to see a nice recovery here. I think they'll
Speaker 7: stand out better heading into the summer season.
Speaker 5: Sabbi Lisa has been talking about how we're expecting a
Speaker 5: record travel season, especially around fourth of July, and the
Speaker 5: ability of airlines, whether they're ready for whether they have
Speaker 5: enough updated planes, and what the airports will look like.
Speaker 5: Can you just contextualize the chaos that all of us
Speaker 5: should expect if we're planning to travel this summer.
Speaker 8: I always be ready.
Speaker 7: The thing with summer is you have these thunderstorms that
Speaker 7: just pop up from nowhere, and then kind of winter storms.
Speaker 7: You can see it coming, you can prepare for it,
Speaker 7: and that's the issue. Air traffic control centers, especially in
Speaker 7: the Northeast and a little bit Florida, are still understaffed,
Speaker 7: and so the risk of disruption is greater when there
Speaker 7: are events, and you know, summer means there are going
Speaker 7: to be storms somewhere, and so just kind of be flexible.
Speaker 7: But I think airlines have done a lot to help
Speaker 7: address that. You've seen, you know, some airlines just to
Speaker 7: change the way they build a network. Some airlines just
Speaker 7: taking advantage of what the FA has loved them to
Speaker 7: do and kind of bring down capacity in the Northeast
Speaker 7: to make sure.
Speaker 8: That there's reliability. So I do expect this to.
Speaker 7: Be a better summer than we've seen for a couple
Speaker 7: of years, But it all depends on the weather.
Speaker 8: So I would say, kind of be prepared and flexible.
Speaker 5: You're giving me like a little bit of confidence, So
Speaker 5: I feel better about this. Zevihia. How about this Spirit,
Speaker 5: United and Jet Blue all delaying their analyst days.
Speaker 4: What's going on?
Speaker 8: They all delayed it for very different reasons.
Speaker 7: So United, you know, they had that FA review and
Speaker 7: they just didn't feel like that that was the right
Speaker 7: time to do it.
Speaker 8: If you look at Spirit.
Speaker 7: It sounds like they still they are trying to come
Speaker 7: up with a standalone business plan and there are some
Speaker 7: initiatives that are trying to roll out, and maybe that's
Speaker 7: taking longer.
Speaker 8: Maybe they think that the.
Speaker 7: Bondhold bondholded discussions might take a little bit longer and
Speaker 7: want that behind them. But generally, look, there's just a
Speaker 7: lot of uncertainty, whether you look at supply chain, whether
Speaker 7: you're looking at the economy, and I think airlines are
Speaker 7: feeling much more comfortable to do their investor dates towards
Speaker 7: the end of the year, when they'll have better.
Speaker 8: Clarity on twenty twenty five.
Speaker 7: Even when it comes to what the aircraft deliveries that
Speaker 7: they can expect, it's better to provide.
Speaker 8: That towards the end of the year than doing closer
Speaker 8: to the summer.
Speaker 1: Sally Sythe of Raymond James, thank you so much for
Speaker 1: being with Jonathan Miller of Miller Samuel writing this. When
Speaker 1: the Fed does cut, I suspect there will be an
Speaker 1: outsize pickup in sales, even with only a twenty five
Speaker 1: basis point cut. Many it would be buyers have been
Speaker 1: waiting two and a half years to see easing rates.
Speaker 1: Jonathan joins us. Now, this to me, Jonathan, is really
Speaker 1: one of the most interesting questions, and I love having
Speaker 1: you on as always that there is this belief that
Speaker 1: when you cut rates, you can do so in a
Speaker 1: way that isn't going to reignite animal spirits. How much
Speaker 1: of a rate cut you see only twenty five basis
Speaker 1: points of a rate cut as reigniting a lot of
Speaker 1: interest in the housing market. So how does that factor
Speaker 1: into pricing in this idea that we can get a
Speaker 1: soft landing with rate cuts given the backdrop that we
Speaker 1: have right now, well.
Speaker 9: I think that outsized response to the twenty five basis
Speaker 9: point cut or a modest cut of some sort. You
Speaker 9: have to think of the last two and a half
Speaker 9: years have been this era of pent up demand that
Speaker 9: suddenly the sort of legs are cut out from under
Speaker 9: the housing market and people that were in the process
Speaker 9: of thinking about it were stopped on the tracks, and
Speaker 9: everybody's waiting. And the problem with the waiting part is
Speaker 9: that when if you have a rate cut and this
Speaker 9: surge of an activity, I think you're going to see
Speaker 9: prices rise again. That the only way for more supply.
Speaker 9: That's been one of the reasons why we've had such
Speaker 9: price growth is inventory has been very lacking. We are
Speaker 9: seeing inventory come in, but we haven't seen the same
Speaker 9: amount of demand respond to it because of rates. So
Speaker 9: when you see rates cut you're going to see a surge,
Speaker 9: at least in the short run, you're going to see
Speaker 9: a surge in demand, and that's going to keep prices elevated,
Speaker 9: which has sort of broken all the rules of economics,
Speaker 9: where we're talking about record price and mortgage rates are
Speaker 9: more than double where they were.
Speaker 1: There was a theory out there that when the Fed
Speaker 1: cuts rates, that's actually going to cause more volume to
Speaker 1: come on to the markets. You'll actually see more houses
Speaker 1: go out there, which will actually cause prices to fall
Speaker 1: because you'll actually get price discovery in a way that
Speaker 1: we haven't had for four years.
Speaker 4: Why don't you believe that?
Speaker 9: So let's take a market like Miami, and there's been
Speaker 9: lots of discussion about inventories coming in. Over the last year,
Speaker 9: inventory has risen about thirty eight percent, so you'd think, wow,
Speaker 9: you know, prices are going to be challenged, But that
Speaker 9: inventory result of after that increase is still twenty five
Speaker 9: percent below pre pandemic. So when you look at the
Speaker 9: percentage of inventory growth, and we are seeing it, and
Speaker 9: it is good for consumers in the long run, but
Speaker 9: it's not enough yet. That there was such an incredible
Speaker 9: deficit of supply that sort of you know, a high
Speaker 9: percent or whatever the local market number, you know, the
Speaker 9: sort of headline grabbing increase in inventory is still coming
Speaker 9: from a record low, and it's not it's not even
Speaker 9: I want to say, it's not even close. But it's
Speaker 9: still well below long term norms. And that's the dilemma,
Speaker 9: you know, it's sort of you know, everybody's waiting for
Speaker 9: rates to to to become more affordable. But in the meantime,
Speaker 9: I think we're going to see price growth, and so
Speaker 9: someone waiting for a lower rate, you know, another you know,
Speaker 9: another fifty basis or even more, Uh, they're going to
Speaker 9: be disappointed because I think two or three years from now,
Speaker 9: prices are going to be higher than they are now,
Speaker 9: even with more supply coming into the market. For example,
Speaker 9: in a lot of suburbs that we track, bidding wars,
Speaker 9: especially in the New York metro area are forty to
Speaker 9: fifty percent of the closings. So what does that tell
Speaker 9: you about supply. It tells you that it's extremely low.
Speaker 9: It's not the same in every market. Some markets have
Speaker 9: more supply than others, but it is still a challenge
Speaker 9: in housing right now is supply and the FED you know,
Speaker 9: if you look at what happened this spring, this is
Speaker 9: a very underwhelming spring market, right. I think consumers were expecting,
Speaker 9: you know, this is you know, rates are going to
Speaker 9: come down and we're going to see this sonic boom
Speaker 9: of demand. But rates until the last few weeks have
Speaker 9: really been sort of stuck at an elevated level, and
Speaker 9: you're not going to see a lot of You didn't
Speaker 9: see the surge that everybody was expecting this spring, and
Speaker 9: now the consumers are you know, I don't know if
Speaker 9: anybody's taking the forecast seriously because it's like we just
Speaker 9: keep setting the rate cut date two or three months
Speaker 9: from now.
Speaker 5: If you are one of these people who had been
Speaker 5: hoping for that twenty five basis point cut to be
Speaker 5: the thing that ignites things and not just ignites things,
Speaker 5: but to Lisa's point, makes housing prices going down. Asking
Speaker 5: for a friend, when does that moment come? How long
Speaker 5: will it take for enough supply to come online that
Speaker 5: actually you see some relief.
Speaker 9: I think it's three or more years. I think it's
Speaker 9: not a couple of quarters. I think it's a long
Speaker 9: process because rates were too low for too long during
Speaker 9: the pandemic and literally existing inventory was wipe clean off
Speaker 9: off the earth basically, and we're coming from a very
Speaker 9: low point and that's a challenge. And in fact, in
Speaker 9: this period, new development or new construction, which is only
Speaker 9: ten percent of supply, is where we could see faster
Speaker 9: supply coming into the market. Except but that's only ten
Speaker 9: percent of the market. The other ninety percent is based
Speaker 9: on organic growth, and it's starting from a very low point,
Speaker 9: and that's the challenge.
Speaker 6: Can we talk about the rental market in New York Manhattan?
Speaker 6: Prices are actually decreasing?
Speaker 4: Why?
Speaker 9: Yes, actually Manhattan. So the way to think of pricing
Speaker 9: in Manhattan on the rental market is it's almost like
Speaker 9: it's a choppy I don't know if you call it
Speaker 9: a bottom, but it's this one month, it's up, one
Speaker 9: month it's down. It's been like this for about six
Speaker 9: or seven months, but still remaining at very elevated levels.
Speaker 9: In fact, rents right now are about twenty percent higher
Speaker 9: than before the pandemic.
Speaker 1: So I guess that when you put all this together,
Speaker 1: this is actually kind of a counter to what the
Speaker 1: FED is saying. They're saying that actually when they cut rates,
Speaker 1: they're going to be just adjusting things and that inflation
Speaker 1: will continue to go down and that rents are just
Speaker 1: a lagging indicator and that they're coming down much faster.
Speaker 1: From what you're saying, it sounds like that's not the case,
Speaker 1: and that when they cut rates, they're going to reignite
Speaker 1: some of the price increases that have kept inflation where
Speaker 1: it is given where rents fall in terms of waiting
Speaker 1: in the inflation metric, Is that true? Is that kind
Speaker 1: of how you see So.
Speaker 9: That's how I see it. But the sort of the
Speaker 9: bigger question mark for me is that sort of initial
Speaker 9: burst in activity of a modest rate cut. How long
Speaker 9: does that surge or that pent up demand last? You know,
Speaker 9: is this a six month phenomenon? Is this a long
Speaker 9: term phenomenon? You know, that's the question in my mind?
Speaker 9: How long will this hold up?
Speaker 1: Jonathan Miller, It's always wonderful to see you. Thank you
Speaker 1: so much for being with us, Jonathan Miller of Miller
Speaker 1: Samuel At a time when people around this table are
Speaker 1: inquiring minds about rents and buying home.
Speaker 6: Two out of three are two out of three are?
Speaker 10: Some people have a locked in mortgage of about three percent,
Speaker 10: But whatever.
Speaker 1: And Asasia Amrosovi capital saying this, our market's becoming too stretched.
Speaker 1: The answer is definitely a yes, near term, and I
Speaker 1: think it's time for a breather after a monster rally
Speaker 1: we've had since Abook twenty second and a Stasia joins us. Now,
Speaker 1: so are you bearish or are you just basically acknowledging that, Yeah,
Speaker 1: things feel pretty heady, and so yeah, things could happen.
Speaker 11: Look, you have to trade this market. You have to
Speaker 11: take a week to week. And you know, if I
Speaker 11: look at video right now, if I look at the NASDAK,
Speaker 11: if I look at, for example, the relative strength indicator,
Speaker 11: it has been screaming over bought for probably the last
Speaker 11: week or maybe a little bit longer. And when you
Speaker 11: have this condition, you know something is inevitably going to happen,
Speaker 11: and you're going to have some consolidation, You're going to
Speaker 11: have some pullback. So yes, I do think the trades
Speaker 11: like Nvidia and the NASDAK near term are overstretched. But
Speaker 11: that's why I really emphasize, Lisa the word near term
Speaker 11: is because I do think they are fundamental catalysts that
Speaker 11: are propping up this rally, whether it's in semiconductors or
Speaker 11: something else. And I don't think those fundamental are going
Speaker 11: to dissipate near term too much exuberance, for sure.
Speaker 1: The problem with this idea that fundamentals are good. Sure,
Speaker 1: but how do you price out the kind of gains
Speaker 1: that we're seeing. How do you price in one and
Speaker 1: a half trillion dollars of market cap gains in less
Speaker 1: than a year for a company with a business model
Speaker 1: The yes seems to be hinged to the future, but
Speaker 1: that is not necessarily tested in terms of longevity, right.
Speaker 4: But you can see it in the data. You can
Speaker 4: see it in the numbers.
Speaker 11: You can see it in the spending intentions, for example
Speaker 11: from hyperscalers and also other companies and other governments trying
Speaker 11: to build that artificial intelligence.
Speaker 4: You know.
Speaker 11: I don't think it's a coincidence that the stock is
Speaker 11: rallied as much as it did when you have I
Speaker 11: think in the last quarter you have a four hundred
Speaker 11: and twenty seven year over year increase in data center
Speaker 11: spending on Nvidia chips. So that's what I mean by fundamentals,
Speaker 11: and I don't think that's a one off obviously. I
Speaker 11: don't think it's a couple of quarters, but it might
Speaker 11: still be into twenty twenty five that we see this
Speaker 11: surgeon spending on artificial intelligence, because let's face it, this
Speaker 11: is the biggest, you know, megatrend that we have today,
Speaker 11: and you're either going to implement artificial intelligence or you're
Speaker 11: going to be left behind. And that's why everybody from
Speaker 11: a hyperscaler to I think a smaller fintech company, you know,
Speaker 11: to probably a logistics producer, all of those companies are
Speaker 11: figuring out how to embed AI, and you can't do
Speaker 11: that without those core.
Speaker 5: Chips, even though some of the fundamentals are there. If
Speaker 5: I wanted to build a really successful trading strategy this year,
Speaker 5: what kind of would have been simple? I'd get all
Speaker 5: of my best quant friends together, which you know I
Speaker 5: have many, not really, you know, and put together an
Speaker 5: equity momentum strategy. In fact, that strategy has done so
Speaker 5: well market neutral momentum that it's the best year from
Speaker 5: it for two thousand and seven. So it's clear that
Speaker 5: a lot of algos are writing this wave. I'm worried
Speaker 5: about the bots.
Speaker 11: Should I be well, if the trend is your friend,
Speaker 11: you know, you shouldn't be right. But the question is,
Speaker 11: you know, what's going to derail this at the very moment,
Speaker 11: and actually this is something that we're thinking about as
Speaker 11: we ponder the second half.
Speaker 4: Of the year. What are the risks?
Speaker 11: You know, one of the risks is that maybe growth
Speaker 11: is too weak. The other one is growth is too strong,
Speaker 11: you know. The third one is maybe in Nvidia or
Speaker 11: artificial intelligence doesn't deliver a nearer term, so I think,
Speaker 11: and of course there's politics. There's the elections in France
Speaker 11: and the United States. So if any of those things
Speaker 11: present a hiccup that I think that's when you worry
Speaker 11: about the unwinds of those trends. But I think the
Speaker 11: comfort level in the market right now is that those
Speaker 11: are periphery risks. But we are, and we've been talking
Speaker 11: about this, we're in the sweet spot right now because
Speaker 11: you know, if growth is strong, that's great for all
Speaker 11: sorts of trades. If growth is weak, well, guess what
Speaker 11: the FED is going to step in and actually cut
Speaker 11: interest rates. So that's why I think so many investors
Speaker 11: have been sticking with the trades that are working.
Speaker 5: Even so, even if growth is strong, you look at
Speaker 5: what some of their earnings estimates are for next year.
Speaker 5: We're at fourteen percent, I think is the latest consensus,
Speaker 5: which would make it the strongest year for S and
Speaker 5: P earnings since two thousand and eight, if you get
Speaker 5: rid of some of the COVID weirdness from twenty twenty one.
Speaker 5: Does that make sense to you or do we need
Speaker 5: to reckon with something different if there is a tinge
Speaker 5: of slowdown in this economy.
Speaker 11: Look, this makes sense to me because one of the
Speaker 11: things I'm encouraged by, beyond their artificial intelligence, you know, momentum,
Speaker 11: is that I actually think there's a fair bit of
Speaker 11: economic momentum globally. You know, for example, it was all
Speaker 11: about the US consumer really holding out the overall global economy.
Speaker 11: We still have the US consumer, but we now also
Speaker 11: have the global economy that's pacing something like four percent
Speaker 11: growth versus point eight percent that we saw just a
Speaker 11: few months ago. We also have the global manufacturing momentum
Speaker 11: that's really picking up in the United States and China
Speaker 11: and Korea, Taiwan, Europe. So that's a whole lot of
Speaker 11: to Lisa's point, broadening out that I actually think is
Speaker 11: playing out beneath the surface.
Speaker 6: Based off the retail sales that surprised the downside earlier
Speaker 6: this week, are you concerned at all about cracks in
Speaker 6: the US consumer.
Speaker 11: You know, it's the story of that bifurcation. Unfortunately that
Speaker 11: continues to play out. And for example, when we look
Speaker 11: at the spending intentions and the perception of prices across
Speaker 11: the consumer cohorts, and fortunately the lower income consumer is
Speaker 11: seeing that price pressure and is therefore lowering the spending intentions.
Speaker 3: You know.
Speaker 11: So that's that's one thing that you don't actually see
Speaker 11: the same dynamic in the higher income consumer.
Speaker 4: You know.
Speaker 11: The other thing that's happening, of course, when you look
Speaker 11: at credit card default rates for example, that's the same dichotomy.
Speaker 11: We're seeing some of the normalization and the lower income
Speaker 11: cohort and those delinquencies rising. But that's not the case,
Speaker 11: for example, when you look at American Express and you
Speaker 11: look at those default rates. And the last thing I
Speaker 11: would say, look, retail sales are important, but it's not
Speaker 11: your entire consumption basket. You know, it's what you spend
Speaker 11: at some of the online shops and brick and mortar
Speaker 11: and you know, gas stations. But when you think about what,
Speaker 11: especially the high income cohor is going to be spending on,
Speaker 11: it's entertainment, it's travel and you're seeing very strong momentum
Speaker 11: in those parts of the economy.
Speaker 6: I also want to ask you about the politics of Europe,
Speaker 6: because you have a call on this. You think now
Speaker 6: is the time to actually pile in.
Speaker 4: I do.
Speaker 10: I do.
Speaker 11: We wrote a piece and we called it the Summer
Speaker 11: of Europe. And you know, I don't think it's just
Speaker 11: a summer trade. You know, I think beyond the politics.
Speaker 11: I'll come back to this in a second, but beyond
Speaker 11: the politics, I think there's a lot of strong economic
Speaker 11: momentum that's playing out in Europe. If you think about Europe,
Speaker 11: in the last couple of years, you had a spike
Speaker 11: in oil, in natural gas prices. You had a spike
Speaker 11: in mortgage rates because fifty three percent of those mortgage
Speaker 11: rates are adjustable rate mortgages. So there's a lot of
Speaker 11: pain that has occurred for the European consumer. But you
Speaker 11: fast forward to today and we have one rate cut
Speaker 11: that's already in place, hopefully more to come. And so
Speaker 11: I think the peak pain from mortgage rates is now
Speaker 11: behind us in Europe. And so when I look at
Speaker 11: the real disposable income and the forecast that we have
Speaker 11: for this year and next, they're supposed to pick up
Speaker 11: relative to where they've been last year. So that's why
Speaker 11: fundamentally business confidence is recovering in Europe. And I think
Speaker 11: there's a lot to like from the economics. And then
Speaker 11: you know, when you look at prior election cycles, for example,
Speaker 11: twenty seventeen, we did see that volatility picks up into
Speaker 11: the election. It's likely subsidies thereafter, So I think there's
Speaker 11: enough precedent to say that election volatility should be bought.
Speaker 1: Do you think that basically travelers going to single handedly
Speaker 1: support the European economy. I'm just so well, I mean.
Speaker 11: I don't know about you, but you know, as far
Speaker 11: as everybody I talked, seems to be heading to Europe
Speaker 11: this summer, right, and obviously there's data to support that
Speaker 11: as well.
Speaker 1: Yeah, well, I mean, I'm just wondering how much this
Speaker 1: is actually going to help. When you put out all
Speaker 1: together what you're saying, it seems as though you're not
Speaker 1: bearish on Nvidia, but you're not bullish particularly at this
Speaker 1: point in order to sort of see a massive surge. Basically,
Speaker 1: don't get out, but it might be a little late
Speaker 1: to get in, and that basically right now, the gains
Speaker 1: are to be had elsewhere. Is that basically the way
Speaker 1: that you would frame it, that independent of all the
Speaker 1: uncertainties of rate cutting cycles and elections, that right now,
Speaker 1: if you just follow the economics, things aren't that bad.
Speaker 4: They're not going to get that bad.
Speaker 1: The broadening out is going to work, and some of
Speaker 1: the really kind of expensive trades might need to pause.
Speaker 11: For Yeah, that's right. I think there's some rebalancing that
Speaker 11: can be done in the portfolios right now. I don't
Speaker 11: think you should wholesale get out of the video or
Speaker 11: the the Nasdaq trade, but maybe just maybe you want
Speaker 11: to pair back some of those gains that you've had
Speaker 11: in the position. It may you want to reallocate some
Speaker 11: of those parts of the market that actually consolidated over
Speaker 11: the last couple of months and have not participated. And
Speaker 11: so things that I would be looking to is partially
Speaker 11: consumer discretionary, consumer finance. I mentioned this some delinquencies arising,
Speaker 11: but they're actually you know.
Speaker 8: Pretty well in check and normal.
Speaker 11: You know, you may want to look at an industrial's
Speaker 11: sector as well, because actually the manufacturing momentum is rising,
Speaker 11: and manufacturing apswing typically lasts about nine months, so I'm
Speaker 11: not satying getting wholesale out of the winners, but peel
Speaker 11: a little bit back and reallocate to the broadening out
Speaker 11: trade and.
Speaker 1: Then I seed. Also my speed time for vacation. Have
Speaker 1: a great time on your vacation. On the other side
Speaker 1: at the Shamrosi Capital.
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Speaker 7: Mm hmm.