Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day, we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Right now, let's go to the banks. Alison Williams joins us, Hermit Chan joins us as well. Alison covers the big banks, Herman Chan the regional banks. We had some stress tests and they do that for bloom Bloomberg Intelligence. Allison, let's let's start with you. What did we learn from the stress test results yesterday and what does it mean for some of the big banks?
I mean, really, what we learned from these tests are what the firm's capital requirements and their flexibility are for the coming year and so these it's sort of interesting because last year, based on the result, capital requirements went up eighty two one hundred basis points for Bank America JP Morgan City. That was very unexpected. They had to manage their round sheet to get to those levels. And this year we still started the reverse for JP, Morgan,
Bank America and Goldman Sacks. So really those three banks the big winners, if you will, in terms of capital flexibility. Their capital requirements are likely coming down of the three when we take into account what's happening in early twenty twenty four. Goldman looks best, but I think the best news that we got was for JP, Morgan, Wells, Fargo, Morgan Stanley also a little bit more flexible on capital.
Whereas City looks worse.
And the reason why I'm using the term capital flexibility and not buybacks is because we still have two a couple of things coming. So Basil three endgame is certainly one of those, and we think that that as well as the uncertainty the economy, which is the other factor, is going to keep the banks a little bit conservative on buybacks.
So they have the flexibility.
We're probably going to see some good deviden increase is you know, for everyone except for perhaps City on Friday. But the good news is it gives them a little bit more flexibility.
Herman, I want to bring you into this conversation because you particularly focused on the regional banks. What did you take away from this?
That's right, So it's pretty much of a different story than what Alison just articulated. The regionals are already pausing buybacks because of expected tougher regulations on the regionals after the fallout from the failures of SVB and Signature and First Republic. So the banks are already not buying back any stocks on the regional bank side, so they're already pausing.
So it's a bit of a different story. I would say that in terms of the winners and losers for the regionals, citizens looks a bit weaker and surprised with weaker performance with the higher capital requirements, and M and C would be on the positive side with a bit better result versus the last year.
So do we have potentially tougher ahead when it comes to the regionals.
That's right.
So you would expect higher capital requirements, you would expect higher liquidier requirements, and so this is the stressed US was really just the first step in a series of tougher capital rules that are coming down the pike for the regional So it's the outcome of the stressed US. This year for the regions was less of a news story, but more of the regions are already pulling back, and this will just sort of reinforce that fact.
Allison. What's next for these big banks is they think about their capital return strategies going forward. What do they need to do and what can they do?
So I guess, you know, sort of the next event will be Friday when some of the banks do announced dividend increases. As I said, probably will still conservative on buybacks because the next thing, from a regulatory point of view is Buzzle three endgame. This is something we've been waiting for. We think it probably could come any time now. There's been various reports and actually in some testimony of how did confirm that the endgame could potentially raise capital
requirements by twenty percent for these banks. And so keep in mind that this the changes will take place over they'll be faced in over time. The banks have again bigger capital cushions for everybody except for a city.
Based on the numbers today and.
With earnings, it's completely manageable.
Up in here. I mean it just haven't they Aren't they over regulated? Aren't they over capitalized? If I'm Jamie Diamond, don't just push back and say, all right, great financial crisis was a long time ago. Guys, We're much better positioned.
Just stop, I think Jamie, I mean, he has definitely been pushing back, and I think you know, one of the things he brought up an Investor Day is something I alluded to earlier. Capital requirement is something so critical for the banks, and yet it's changing every year. So imagine running your business with with sort of a key metric of health changing every year. You know, one year it's up one hundred basis points, it's down one hundred basis points.
That shows that that the stress test is sort of flawed.
And then you know several other things that people are pointing out in terms of you know, what the test measures and what actually happened in March, what the real results are. So really the test has only come to mean you know, what's the requirement year to year for the banks, and you know, maybe there is a better way to have sort of a permanent hurdle. And to your point, Jamie pushes pushes back on some of the regulation.
It's just can we have clarity and consistency?
All right?
Alison Herman chan Allison Williams, both from Bloomberg Intelligence, giving us some a few minutes of their time on this important time for the banks, whether the stress test. We think forgetting a few minutes for you folks.
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Jess Mitten and Paul Sweeney Here in the Interactive Broker Studio, I want to get straight to our next guest, Jackie Bow, who's managing partner at Chatham Financial, joining us on Zoom. Jackie, I want to pick your brain about We've obviously had a ton of central bankers speaking this week, but we've seen continued divergence when we're looking at the inflation numbers. When we're looking at the US versus say, what's been happening in the UK? Why is there such a stark difference there?
Hi, very good morning. As I think in the UK there certainly seems to be an issue with a bit more persistent inflation than we've seen in the US, and parts of the reason for that is we are nice seeing here in the UK evidence of what we call a price wage spiral, where those higher inflation numbers that we've seen all year are becoming firmly embedded into wages.
And the data that we had last week in the UK and confirmed that, you know, with the service sectored inflation in particular, which is much more related to the cost of labor, really pushing up the overall inflation numbers. So the expectation that inflation would start to come down this year that's where Central Bank was forecasting, now looks to be overly optimistic.
All right, So we actually had I'm just looking at some of the some of your notes here. The core inflation rose from six point eight percent in April to seven point one percent in May. That's the highest level since nineteen ninety two. What's really driving it for our good friends.
In the UK, Well, I think what the headlines would would direct he too, is actually what we're seeing in terms of food price inflation. But I think that's a bit of a diversion because in fact food, well it's food and non alcoholic beverages is the category within the index only really makes up about twelve percent of the basket. So again that's where all the headline is coming from. Food inflation in the UK is high. It's like eighteen percent, but that isn't really what's driving it. As I say,
it's much more becoming embedded through the wages. And if you look at where average earnings have been going on the wages cycle, that's where we're seeing the more persistent impact of inflation.
So Jackie, does this mean we could actually see even higher rates when we're looking at the UK versus other major central banks across the world.
Yeah, for sure. And I think you know the Bank of England mood fifty basis points last week, and right up until probably two days before the meeting, there was an expectation they would raise twenty five and then we head back to back that wage data and then ultimately that CPI data that you referred to, and they decided to move fifty and they certainly have got room to go.
The market is looking at rates in the UK, you know, above six percent, maybe even up to six twenty five, and as the Bank of England continue to change when we are expecting to get inflation back to targets so back to that two percent, the market is becoming less convinced that the Bank of England's industry increases or having the effect that they need to have on inflation.
So is there any evidence, Jackie, is there any talk within the City of London that maybe Brexit is having some impact here on the UK economy that may be exacerbating some of the challenges.
Again, some of the headlines might direct you towards that as a reason, but when you dig into the data in a bit more detailed, there's really little evidence of that. The increased costs at the border, shall we say, is adding a small amount to UK goods, both intermedia and final goods, but in the grand scheme of where those inflation numbers are, it's actually quite minuscule.
One thing I've been curious about, whether we're talking about the Bank of England or the Federal Reserve, is when we're looking at these terminal rates, is there a particular level where it would get to to where it could potentially break the economy lead to a recession or is it a particular threshold of leaving it at a particular terminal rate for a significant amount of time. That could then turn that issue to what could that mean for global growth and that particular economy in that point.
Yeah, and that's an interesting question because I think the impact of the higher interest rates across those different markets. Is the mechanism by which they feed through to the real economy is very different, and part of that is
the complete structured differences in our mortgage market. So here in the UK we basically have what I call an adjustable rate mortgage markets, in that people either choose variable rates or they choose fixed strates, but for very short periods of time, so maybe three, four or five years. So as those in rates increase, you have this kind of lag effect as households have to refinance their mortgages
at much higher rates. And that's when you start to really get the tightening in terms of consumer budgets and discretionary spend every month. And we haven't seen that yet, so you know, there's still consumer confidence is still quite high, and that's partly related to the strength of the labor market.
But as those interest rate increases start to really feed through into the mortgage market and consumer spending through the end of twenty twenty three, then I think the risk of recession becomes very real for the UK.
All right, Jackie, let's jump across the English Channel get onto the continent here. What did you hear from ECB Central Banker Christine Legard from Portugal this week stand it again pretty adamant that there's more work to do there.
Yeah, I mean, the ECB have absolutely left the door wide open for further rate increases. In fact, their guidance, I believe has been pretty clear, and part of the question about the credibility of central banks and whether the markets believe them is really around that guidance that they give. So the ECB certainly have more room to go in terms of rate increases. Back to your earlier points, where that terminal rate peaks out currently looks to be quite
substantially below where the UK rates will be. You know, if you think again, if you go back to that six to six twenty five, for the UK euro rates are not expected to really go above four percent.
So can the US economy remain more insulated from what we're seeing with these other inflationary factors when we're looking beyond the pond? Or is the global economy just so interconnected that eventually that could also potentially hurt the US?
Yeah, I mean, the comments I was making about the structure of the mortgage market is quite imported, and obviously the US being you know that the agency has been such a big part of the mortgage market with people taking very long dated fixed strates, that doesn't impact consumer spending quite so much. And you know, we've seen inflation in the US literally ticked down every single month as you you know, you start, it's been very stark that the difference between the US and other markets.
I think for the.
US in terms of growth and potential risks to the growth in the future maybe comes down to a bit more about those sort of global relations with China. You know, the supply chain that comes from China globally is still huge in terms of intermedia and final goods, and if those relationships continue to deteriorate and that those products that come out into the global market are cut off for whatever reason, then you will see issues across global growth in the US will suffer from that too.
All right.
You put all that together, Jackie, and your responsibility is you're Middle East in Africa. Where are you suggesting or some of the more attractive opportunities here.
So I think there's still a price adjustment process happening across both the public markets as well as the private real asset markets, which is where I'm focused. So a lot of the work we do is within commercial, real estate, private equity, and it still feels that it we're in a risk off situation that there's not a lot of not a lot of excitement for new investments, and I think that will continue through twenty twenty three. So in a risk off situation, of course, that's more positive for
risk free assets and public bond markets. I do think there are some glimmers within other markets where it looks like assets are getting undervalued because there's this more sort of gloomy outlook, and it might be a case of just trying to pick through that debris to find the ones that have been unfairly punished. But I think in general it will continue to be a risk of few for the rest of this year.
All Right, Jackie Bowie, thank you so much for joining us managing partner at chatt and Financial. Bringing it down, Paul, As you know, we've gotten so many updates this week from these central bankers when we're talking about the Bank of England to the Federal Reserve, obviously the Bank of Japan as well, So it's going to be really interesting because we were just talking about that update to the first quarter GDP numbers.
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All right, to our next guest, Chris Whalen. He's a chairman of Whalen Global Advisors. Chris, You've had a lot of experience on the street, worked all over the street. You've been, you know, just kind of out there and with some really strong opinions. I'd love to get your thoughts just kind of what we heard from the central bankers this week. It was a week of just central bankers speak. We had a big conference over in Portugal
with the some of the big central bankers here. What's your takeaway what we're hearing from again the central bankers around the world.
Well, I think two things they're trying to get back on message. The message was central bankers are managing the process well and they are hoping and I mean hoping that another event does not occur that shakes confidence, because that's really what they're about, that's their stock in trade, is keeping the public confident that there is a hand on the tiller and that we are going in the
right direction. So I think, you know, for all of them, the tough part is there's so much to your conversation right liquidity in the system, that the economies aren't really slowing down. I mean, look at housing. We're at seven percent mortgages and we're still right mortgages mostly purchased. But that's okay. You know the world has not ended.
So then how are you advising your clients to position?
Well, honestly, I think we are seeing the end of the rate increased trade. It's very hard for the FED to get rates to go much higher if they're not going to sell bonds. It's just technically impossible. So I think they are trying to convince everybody that they can still raise rates further to address inflation. But I think the inflation is largely from non monetary factors. I mean, other than the metic cash they dumped into the system,
which is an issue. And you see the FED being criticized by the BIS by a number of people in Europe for going big because that's the issue. How do you control inflation when you still have trillions of dollars in pent up demand and also the cash to meet that demand. That, to me is the issue. You don't hear people talking about it. Also, a lot of the cash slashing around the system is just refinancing of existing debt. It does not necessarily drive growth and employment.
Hey, Chris, you know after the year we all had in twenty twenty two where there was just no place to hide equities fixed in time, you got crush kind of no matter where you were. I can sit into your treasury note here four point eighty five percent. Why don't I just do that? There's no shame in doing that. I can go to the beach play off. What's wrong with that?
No?
And I did that myself. I took a huge gain in video I had gotten in, you know, when it was down hundreds of dollars, and I stepped out just below four hundred. I had to. It was too big in my portfolio. And I still have some exposure. But it's a gift. The Fed has given people gifts through monetary policy. And to me, you know, to your question about what I tell my clients, I'm getting ready to shift to the long duration trade last couple of years.
Who made the money people that were short duration, people who bought mortgage servicing, for example. But I think it's time to be selling those assets.
I really do longer duration. What about tech gross stocks, Well, I don't know.
Should I step back into Nvidio for you?
You know?
And I love that stock, don't get me wrong, But I think as a trader, and it's an investor when you're staring at one hundred and sixty percent game to your point, right, and I dumped it into T bills. I own a lot of bank preferms. I am buying at bs now because when rates fall, if you buy a ginmy may at seventy five and you start getting pre payments at par, that's a beautiful thing, you know. So there are some trades out there that I think
are staring us in the face. But to your earlier point about risk in twenty twenty two being a difficult year, yes, it was a difficult year because people are so focused on short term and they're not looking at the big picture. They're not saying where should we be next? So let me give you an example. People are getting ready for the non performing loan trade again, both in commercial and residential. But there's some other interesting things going on in the
background that I think are very interesting for investors. My clients are institutional. I talked to banks, I talked to mortgage issuers and reads. So that's my work, and what I'm telling them is it's time to position for falling rates, higher volumes, but also you know, to be careful of things like mortgage servicing. It six times annual cash flow, that's a little high. Those assets are more like four. Okay, So the Fed has ejected a lot of fluff into
these markets. JP at one and a half times book, is that at a distressed price? No, of course not. We just did a piece on Comerica's nothing wrong with this bank except for j. Powell. That's the only problem with co America, you know, And you have this market
that's a washing debt. Janet Yellen, we really I think in strange times, it's like we wound the clock back one hundred years and it's nineteen twenty three and we're going through the deflation of the Underworld War One and all sorts of speculative craziness around the country.
As we just got off of the bank stress test results. Back in March, we were talking about how New York Community Bank was a great stock to own. Do you still feel that way?
Oh yeah, I've been buying more.
Yeah.
Baby, it's a great story.
You know.
It was a sleepy New York bank that was mostly focused on multi family, not particularly well managed in a sense of taking advantage of those branches in the relationship that they had with their customers. Then they buy flag Star, so they get back in the mortgage in a big way, and they're now a national service er with enormous liquidity. And then they buy the deposits and a lot of assets from Signature Bank. I think it's a great story.
I think it's one of the strongest regional banks in the US today.
And what did you take away from the stress tests? I mean, are these Are you depending that the banks have enough regulation they don't need any more, or how do you think about that?
We need people who think about market risk instead of capital and credit risk. If you look at credit today, US consumers are pristine. There's no problem in housing when it comes to residential commercial. Yes, this is commercial's time. Think of it that way. We're going to have lots of fun with commercial. But overall, what do we have to worry about. We have to worry about banks managing market risk and liquidity risk. It's not about capital. While i'm mister Bard, I think he does a great job,
he's still fighting the last one. We have to orient regulators on managing risk that's largely caused by central banks. And because they're dealing with very large numbers, banks get swamped and you could see some reeds tip over too. It's a tough time right now with leverage findings. All of them are hurting because of spreads and wire spreads so messed up because the FED bought nine trillion dollars for those securities. Okay, just look at the old curve.
I drew a little picture with SOMA and I put it on top of my Bloomberg chart, and that kind of makes the point that, you know, maybe we'll use visualizations to communicate with people in Washington. But I worry about the Fed. We have all these brilliant people with PhDs and economics and they don't understand bondmath. They think, oh, we could raise you know, FED funds another hundred bases points. No, No, we gotta have a new approach. I think and to me,
what do you do? You make people think about duration, You make bank management think about duration and articulate what their strategy is every month. Okay, and then you use the public data. And when you see somebody with fifteen percent of assets and mortgage packs right well, America, you know you have a problem. We've got to look at the data.
Right definitely is right there, right well. Chris Whalen, thank you so much for joining us, Chairman of Whalen Global Advisors, walking us through some of these bank calls. Paul, very important and once again looking at the S and P five hundred financials leading the way this morning up more than one percent, so keeping a close eye on that and obviously those stress tests for the banks coming in better than expected.
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Jessminton, Paul Sweene here in the Interactive Brokers studio, and I'm excited because our next guest, Paul is in studio with us, speaking with Robert Teeter, head of investment policy and Strategy at Silvercrest's asset Management. And I know, Robert, you've been focusing a lot, obviously on what's been happening with the Central bank speak this week, but also the headwinds that rates have been facing on some of this commentary.
What's your take from what we heard from these major when you're thinking about Pale to Christine.
Legard, Yes, I think while we got the pause and rates that folks were looking for, we've had a lot of pushback from the Fed in terms of hawkish commentary, and some of that came through in the past couple of days, and for me, it raises the question again of is the FED targeting inflation or are they targeting the economy? And so I think they've moved back into that mode of perhaps talking about targeting the economy a little bit and wanting to see some slow down there before they ease up.
We get some good economic data today, I mean, the economy is in pretty good shape. If I'm the Federal Reserve, I can talk tough here like I have been talking tough.
Yes, I think that's spot on, and that's the way I've been interpreting it.
As well.
They've had a license to talk tough if you will. They've been able to do that. They haven't caused a problem in the economy, and the tug of war continues. You know, inflation's been falling quite a bit, but the Fed's been able to keep up these increases in hawkish talk and put the pressure on killing inflation for the long term.
As the Federal Reserve in Droom Pale not gotten enough credit for what they've been able to engineer over the past year, especially obviously CPI is the Fed's preferred gauge. But when you think of June of last year, CPI at nine point one percent, now you're looking at what would be around four percent for that and obviously the trajectory of the stock market since last October.
I think that's a very fair point. I think because the Fed got off to a bit of a rocky start with the Great Hike cycle, a lot of folks not knock them down a bit in terms of credibility, but they've built that up a lot, and in my opinion, the Fed's earned a lot of credibility here with inflation coming down a lot, for a lot of the reasons that they've mentioned as well as remaining tough and resolute in their fight on inflation, and so they've been able
to do that without killing the economy. I think they deserve a lot of credit for that. I also think it builds in a lot of flexibility for the FED because the economy is okay, and because inflation has come down pretty clearly. Should they need to, they do have the flexibility to pause for an extended time or even cut if that need emerges.
Earnings, I think earning still matter. I'm part of the old school here. I know it's not just the FED here. We're gonna have earning kicking off in a couple of weeks.
Here.
A couple questions here, One, what are you looking for? And two how much earnings risk, if any, is there still in this market? Do you think so?
I'm looking forward to earnings because I think it may give us a little bit of a tailwind here. We've seen earnings estimates stabilized, tick up even just a little bit, because we've had the economy coming in stronger than expected. The data today shows that as well. The revenue side of the equation for companies is probably a bit better than had been forecast in those expectations, and on the same time, you have an environment where cost controls have
been implemented. So companies have been fearful of recession for a while and have been very cautious on the cost side. So I don't want to sam overly optimistic on earning season, but I do think it could give us a bit of a boost. I'm looking forward to it.
I was speaking with Marion Bartel's who's the chief investment strategist over at Sanctuary Wealth, and she was talking about how typically when CEOs start getting very loud about their concerns, that's when it should raise some alarm bells. It seems like so far, when you're thinking kind of on a company by company basis on aggregate, it doesn't seem like
we're at that point yet. So would that be more of an optimistic sign going into this earning season Obviously how that ties into the trajectory of the economy.
Yeah, it's a good observation.
We've certainly had these rolling fears of recession for some time, so dating back to the beginning of last year when we had slightly negative economic growth for two quarters, so people have been preparing for this recession for quite a while, and it hasn't been there, and so I just keep looking through the underlying data, both real time and estimates on the economy, and it shows to me that we
still have slightly positive economic growth. So I think that bodes well for the revenue side on earning and.
Also the consumer obviously being more than two thirds of GDP. We saw those upward revisions being partly not just exports, but also by the consumer. So when you're thinking about different sectors when we're looking at an earnings perspective, especially just Bloomberg Intelligence marking up those results, when we're looking at discretionary which obviously a lot of pressure it was under last year, as well as some aspects of staples
not necessarily packaged good companies. Obviously General Mills was warning on this, But what's kind of your thought as far as some of these more consumer oriented type companies when you are having some of them like General Mills saying we don't think we can continue to pass on these costs to consumers right now.
Right It's a super interesting environment there. And one of the things that I've been optimistic on has been on the theme of following the consumer and following the revenue, and so from a sector basis, I do think most parts of consumer look pretty encouraging here. Similarly, in industrials, I think you have some strength from reshoring and manufacturing build that's been going on, and there's certainly a technology
upgrade cycle. So you put those three sectors together and they all have some tailwinds in terms of revenue opportunity. I do think the interesting dynamic with companies is been at a company level, how they're managing through those situations. So we had people fearful of inflation causing profit margin collapse. We now have people fearful of inflation coming down causing
profit margin collapse. But companies buy and large have been very dynamic in their responses and done a great job in terms of managing through a really rapidly changing cycle in terms of both prices and their inputs. So I think I'm pretty optimistic in terms of how margins hold together here. Companies have done a pretty good job.
So with Silverquest asset management, I think you, guys, folks in part on global manager sourcing, what do you look for in managers these days?
Yes, So that's a fun question that I could ramble on for a long time, but I'll give you the concise answer. So thematically, we look for three things when we're looking for an investment manager. One is more concentrated positions than normal. One is a longer term holding period than normal than one is avoiding going from worse to first.
And our research shows that those three attributes really lend themselves well to quality stock selection with a bias towards fundament that tends to work over time, we tend to find managers outperform when they do those three things.
Are there any specific stocks you can talk about that you're buying or selling or maybe on an interview level.
Yeah, So I don't comment on a stock level, but from a sector basis, I am pretty intrigued and optimistic from the earnings backdrop for consumer discretionary as you alluded to, perhaps some parts of staples, as well as industrials and technology.
When it comes to discretionary, because there's so many different sub industries. If you're thinking about home builders, automakers, evs, obviously retailers. Is there a particular group with a discretionary that stands out to you?
Yeah.
One of the things that I've found the most compelling is the areas that have still been seeing pent up demands. So when you look at some of those spots, like in leisure and airlines and hotels and hospitality and things, that still continues to be going strong, and you see it in the data and you see it anecdotally. You know, anytime anyone gets out and travels these days, things are pretty crowded and pretty busy. But we also see that
in the data. So if you look at mobility data, if you look at where people are spending money, more people employed in the country than have ever been before, and they're happy to be out and about doing things, And to me, that leads to those segments within discussionary.
So do you think people have just been too gloom and doom coming into this year? Obviously, but now six months into this year, heading into the second half, do we need to maybe rethink those sort of recessionary projections that was almost seems very well telegraphed for so many people.
Yes, I do think that's a large part of it. I think one of the dynamics that happened was we had such a strong boom bus cycle that when the momentum on the economy started slowing down, that instantly triggered a lot of indicators for future upcoming recession. Well, at the same time, if you looked at what was actually going on in terms of data and employment, the stability
was there. So my take all along had been that economic momentum has been and continues to slow, but slowing back down to a low positive rate of growth, rather than dropping at the pace that it had been coming off of that really high momentum out of the boom bus cycle.
You know, we've had this kind of magnificent seven, if you will, stocks kind of leading the way. Is it worth trying to go out there and look for value stocks? God forbidden.
I do think that there's some value and value, although in my opinion it's more of a sector exercise than a value versus growth exercise, and part of that is because of how companies are managing through different cycles. But I do think there's some value in small cap here. That's an area where there's a lot of underperformers, but there are some great companies that have been underappreciated. We saw Breadth improving a little bit after the debt ceiling.
That was one of the things that we looked to was would breadth improve after that and it did, and so that's a bit encouraging as well that you might have some money flowing back into that.
Space in small caps obviously being the ones we're under pressure, but they typically lead the way before large caps, so I feel like that's obviously going to be a key area of the market to keep an eye on. We only have about twenty seconds to left. But what's the top question you hear from your clients right now?
That is a great question. I think it still comes back to the FED cycle and inflation. That is still very much number one on top of people's minds.
That's good to know, I mean, not surprisingly, right, Paul, when it comes to this, And then what we will have that FED meeting coming up at the end of July on the twenty fifth and twenty sixth, with that decision, so all eyes will be focused on that jobs day next Friday, average hourly earnings will be greatly in focus. And then the week after that we'll get another update
on July twelfth when it comes to CPI. So Robert Teeter, thank you so much for joining us head of Investment Policy and Strategy Group at Silvercress Asset Management and taking a look and a little check here on the market's SMP five hundred up marginally, as well as the Nasdaq one hundred.
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Let's move over to talking about some of these consumer names. I'm thinking these are some of the industries that I love. I'm thinking cruises, I'm thinking gaming, ie casinos and all the yeah, fun stuff, hotels, motels. We got a nice round table here. Jonathan Levin, he's an opinion columnist for Bloomberg News and Brian Egger. He's a senior analyst. He covers all the gaming, lodging, cruising, all the fun stuff. Somehow he's built a career on this. John, Let's start
with you. You got you had a column out today kind of looking at the Carnival results and how the stock traded, but you kind of expanded that out to this may be represented what we might see during this earning season, How did you view the Carnival numbers and the markets response.
Yeah, I just thought the reaction was was really fascinating because the numbers come out on Monday, you know, surface level, I thought they were really good, very very encouraging. But the stock sells off in a big way, and everybody sort of assumes, well, it's you know, it must have been by the rumor, sell the news. But the very next day the stock bounces right back, recovers everything that it lost, and then on Wednesday, uh has uh has another huge day.
Uh.
And so it's now trading well above where it was before the earnings, And I just feel like, uh, you know, this quirky series of events is a little bit representative of where we are in this in this funny market. You know, there's been this big run up in stocks. Not a lot of people tend to trust it a lot. If anybody was sort of fortunate enough to profit from this recent rally, they're kind of saying like, maybe I just got lucky here, Maybe it's maybe it's time to
to take some profits. And so I think there's an inclination to sell at the first sign of trouble or you know, as as we say, uh, you know, by the rumor, but then hurry, Harry, hurry to uh to sell the news. And as Carnival shows, you know, there's there's some risk in that knee jerk reaction.
Brian want to bring you into this conversation because whenever we need to know anything about cruise liners, we're obviously going to go to you, Paul and I. When it comes to Carnival in particular, some profit challenges there, but then they still saw a lot of optimism on the bookings. How do you square it away with what they've seen obviously the rebound that we've seen in some of these stocks in that particular corner of the market.
So I've seen this as kind of like a three phase recovery, if you will, in terms of what drive sentiment. First you had recovering from that long suspension, that long pause with now ebitdoc per capacity day yields back to where it was before the pandemic. Next stage, right now we've got bookings and pricing looking really strong, so the
consumer is holding up. I think that next test will be, to Jonathan's point, is one that they can achieve their long term goals, which is by twenty twenty six back to double digit returns on invested capital, increasing their ebitor capacity day by fifty percent. They've laid out some very specific benchmarks by twenty twenty six, and I think that will really frame sentiment going forward.
Jonathan, we got I gotta ask, are you a cruiser?
Well, so I'll tell you I went on my very first cruise, at least as an adult, when it was the first Royal Caribbean cruise back after the pandemic, and I did it as a Bloomberg journalist.
Oh oh, I see, which is so okay? You kind of all right? Sor right? So Jonathan, this you know, when you think about kind of how these stocks are trading because this is going to be an important earning season, is what we're hearing from a lot of strategist here. But well, he get to economic data today that says economy is pretty strong. What do you think corporate America needs to do during this earning season to kind of
just keep moving forward here? Because as you mentioned in your column here with Carnival, it was all over the place.
Yeah, I mean so obviously, you know, the trouble here is that the bar is very high so you know, traders analysts are going to struggle to answer the question like how good is good enough? With pricing being as strong as it is today. So you just look at like what the cell side strategists have been saying for the market as a whole. Most of them had their year end twenty twenty three targets around forty one hundred.
So as we're trading above forty three hundred here you say to yourself, you're gonna have to do a little bit better than good to keep up this momentum.
Is it possible?
I think maybe?
You know, I mean, the macro data has been really really, you know, nothing short of phenomenal. You have to say, if you look over at that Bloomberg Economics Surprise Index, it's the highest it's been in quite some time. You know, just you know, a lot of upside surprises on the macro and we may just see that filter down to companies bottom lines.
Brian, what about some of carnival rivals when you're thinking about Norwegian World Caribbean, how do they fare right now?
I mean also quite strong. I think across the white swath of consumer leisure casinos, hotels, and cruise lines, the leisure consumer of entertainment has really been quite resilient and that remains the case. Whether or not that will remain the case if we have a more significant economic downturn, that will be a test, but we really are doing so.
When the cruises, you do have the benefit of relatively moderate supply growth, fuel efficients used to offset some of the rise and fuel costs, and some real strategic redeployment, and in the case of Carnival, just a big deleveraging program. So that's really what helps them with wind in their sales.
All right, I can't let you go here with that. Talking about the gaming business, how are things Number one on the strip in Vegas and number two in Macau?
Yeah, it was a nice pivot to casinos. Overall quite strong. I mean Macau has suffered because of the long standing travel restrictions and the ban on VP junk at credit, but the mass business is beginning to come back. Vegas looks quite strong. I mean the good news there is not only do you have the leisure element, but you also have, unlike cruise lines, the business element and conventions seem to be back at full force.
Blair, what do you think the risk is to this market here. As we kind of come into earnings here, I mean, you know, the S and P five hundreds to two hundred and twenty eight dollars a share roughly for twenty twenty three, some folks will come into this studio and say, hey, two hundred dollars is not off the table, maybe even sub two hundred dollars in earnings. There's earnings risk here.
What do you hear?
Jonathan, Yeah, sorry, Jonathan, Yeah, what is the what is the earnings risk? I mean, coming into twenty twenty three, I got I gotta say. I was certainly in the camp of, you know, if we think we're going into a recession, you know, two hundred twenty dollars seems awfully rich. But all of the economic data that we've get gotten recently suggests to me that if we're going into a downturn, it's just not happening next month. It's not happening probably
three months from now. We've seen the professional economists, the professional forecasting community sort of steadily bumped back their recession calls. You know, a lot of people thought it would start in three Q. Now most people see sort of flat growth in three Q. Bumping back any recession calls to four Q So you know, all of that, I think,
you know trickles right down to companies bottom lines. If the macro economy is holding up and we know people are going on cruise ships, it's hard to believe that, you know, we're in for some massive downside surprise this quarter or even next quarter.
And Brian, obviously, what does that tell us about the consumer if there's still to spend money at all of this?
Yeah, the consumers hanging in there. I mean, what we see for Carnival at least now, are the bookings for the second quarter or seventeen percent above where they were in twenty nineteen.
Wow.
We see ticket price is really quite strong, and we see a nice backlog of customer deposits, people paying for cruises in advance. The key thing for them is can they hold up? Can ticket price and yield growth continue to outpace inflation and things like port charges, travel expenses, advertising costs. As long as they can maintain that balance and generate incremental cash flow per unit of capacity, this can continue. But obviously we're going to keep a close watch on.
The economy, right, so that's going to be really important to keep our eyes on. So I'm really glad that both of you were able to join us. Brianeger, senior Gaming and logging in list at Bloomberg Intelligence, who was just speaking with us as well, and so that's going to be really important. Paul, and we're taking a look at all of this. Also, we had Jonathan Levin, who's an opinion columns with The Bloomberg News, discussing Carnival.
You're listening to the tape cans our live program, Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty, jess.
Man and Paul Sweeney here in the Bloomberg Interactive Brokers Studio. Up next, we want to get straight to our next guest, Nancy Curtain, Partner Global CIO and head of Investment Advisory at Altman Titaman Global, And Nancy, thank you so much for joining us. We did get an update on the first quarter GDP numbers being uppardly revised, driven by strength in consumer spending. What's your take when you're looking at the trajectory of the US economy versus what we're seeing globally.
Look, the US has been a lot stronger than expectations. This is something that we expected as we entered the year. But the recent number that came out this morning, which is of course the third revision of the first quarter GPP in the United States was super strong, right, came in revised up two percent. But the real surprise there was the consumer is alive and well, there's no recession
going on with the consumer. In the first quarter, consumption was up four point two percent versus one percent in the fourth quarter of last year, and we see signs that this consumer resilience is continuing into the second quarter,
which we expect to be pretty decent here. And so I think one of the surprises of this year, which is always why markets climb that proverbial wall of worry, is that GDP has been stronger than expected, not just the United States, but actually globally, and in particular it's been the consumer that is added to that strength.
So globally, Nancy, where are you guys finding I guess the most opportunity these days? Maybe geographically by ass a class. Where are you spending most of your time these days?
So you know, we used our exposure to the United States last year, so we would have a globally diversified portfolio, and I think that's proven to give us both diversification benefits and also return as well. So we all know that the US market is up fourteen percent now, Stix
up thirty percent. Okay, very strong, and we can come back and talk about some of the reasons, but I think less well known maybe or US investors not focusing on it, as euro stocks is up close to seventeen percent, Japan in local currencies up twenty seven percent, So leaning into the rest of the world has actually been a fruitful strategy. Then it's mean that we've diversified some of
the concentration risk in the United States. So we like the rest of the world, we want to have a globally diversified portfolio, and more recently, within the United States, I would say more recently we've moved to a slight overweight, which is going to sound a bit controversial, and given some of the news of the FED and ongoing tight i'd say we're constructively optimistic or cautiously optimistic, which is to say, we're leading into those areas of underperformance MidCap
and value which are trading at multi decade lows versus their traditional metrics, and multi decade lows versus large cap as well. So we think the market breath will improve in the United States. So we still like the US market, but also we have exposure to rest of world, which is done pretty nicely here as well.
So more optimistic nancy when it comes to this market breadth debate that a lot of people have been having. What about when it comes to small caps? You brought up midcaps, what about small caps?
We just think the MidCap index has more quality companies with lower levels of leverage than small cap. But I would make the same argument small cap is pretty attractively valued, small cap, MidCap value. These are all the sectors that have been ignored by investors as they focus on generative AI and of course the tech sector, which has driven the rallies so far here today. But we just think there's more of a quality bias to the MidCap. We also see a long term secular theme in MidCap, which
is the onshoring of supply chains bringing manufacturing back home. Again, and also companies focus on automation. Cap X was up about four percent in the first half of this year. And we think these are tailwinds for the MidCap sector, which is I said, trades at very very attractive valuations versus its own history, and versus large caps as well.
Nancy, I know during your career you've amassed a lot of experience in alternative assets. How do alternatives fit into your outlook these days?
So our client base is ultra high net worth and therefore and foundations as well, and so they have a longer term time horizon. So when I talk about alternatives, I think it's really appropriate for our client base as I said, that has a mass, perhaps more wealth than a long term time horizon, etc. Because many of these alternatives come, we think we've enhanced return and interesting return characteristics, but also with a degree of illiquidity, so they need
to be appropriate obviously to client circumstance. Okay, so what do we like in alternatives? We think it's very interesting time for private credit. It's one of the things we'll be initiating, reducing some of our exposure to the shorter end where we've made very nice money. Thank you, very much yields a prison, etc. But we think we can
get double that in private credit. We like real estate, particularly what we're going to call long hold real estate, which we think for US taxpayers can bring some very interesting tax benefits but also benefits from the supply demand in balance in airs like residential real estate with good tax benefits, good inflation protection. And then we like private equity as well, csure to buy out managers, growth and venture.
We think, by the way, the generative AI, many of what i'll call the killer apps probably still to come or either on the drawing board or in many of the private sector today in growth and venture portfolios. And so we like this compliment of being able to play clearly technology and public markets, but also the digitalization climate, imperative decarbonization technologies, lots of tailwinds we think also happening in private markets as well.
He Nancy, What are some of the top questions you're getting from clients at this point when you do have this ongoing sort of divergence where people were trying to telegraph recession coming, but then you have a lot of this economic data, especially the GDP data this morning, seeing the contrary to that.
So we have said from the very beginning of the year that we want to remain invested. State invested is hugely important. It means I think most people didn't see this rally, at least to the extent of this rally, and so we've remained invested. We haven't tried to time market super important. But we've also said we thought that twenty twenty three would be a better year for risk assets.
And we said that because look back to back declines in both bonds and stock markets super unusual happens about two percent of the time in over one hundred years. We also said that the third slash going into fourth year of a presidential cycle tends to be good, particularly for US risk assets. But finally, we've begun the year
by saying investors are super cautious. Everyone was cautiously positioned bearish got even more bearish obviously after the banking stresses and what we said to clients, look on any good news, we think these markets could rally here. And of course we've had a lot of good news right. Growth has been better than expected. Q one earnings better than expected. Obviously,
this transformational technology in the form of generative AI super interesting. Again, maybe evaluations on certain stocks have risen too much again, but we think it has very very significant long term implications. And then we got through that crazy debt deal in the States without too much fiscal drag and pushed up the whole discussion to twenty twenty five to talk about again. So there's been a lot of good news here. And we said to investors' markets, climb a proverbial wall of worry.
And we've had a lot of good news and actually we think we could have some good news looking forward ahead.
But I'll hang on to that one, all right, Nancy, Just real quick, we heard from again more inflation concerns in the UK. How does that you got about thirty seconds? How does it impact kind of your view of the UK here?
UK?
I'm going to put in the special child department. UK has some issues with related to Brexit. The composition of the stock market very very energy intensive, banking intensive, and it's been had very very sticky inflation. We think that the UK could continue to raise rates, probably likely to go into a deeper recession. That is not our you about Europe, United States and Japan, by the way, So we have a more constructively optimistic view on those other
markets UK special child. Let me put it that way.
That's right, Okay, That's what we heard from some others as well. Nancy Curtain, thank you so much for joining us. Nancy Curtain, she's a partner Global CIO and head of Investment Advisory at ALTI Titaman Global. Interesting take there on a Global View.
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Mitt and Paul Sweeney here in the Bloomberg Interactive Brokers Studio. And up next we have Stacy Stephenson, the CEO of Family Equality, joining us to talk about the latest here when it comes to as far as what this could mean when we're looking at companies, especially being less vocal when it comes to pride munch during this anti LGBTQ
outcry right now. But Stacey, I wanted to start off first with you as far as your take here when we're looking at some of these Supreme Court rulings that are coming out.
Yeah, first, thanks for having me.
You know, when I think about the affirmative affirmative action case that just came down, the first thing that came to mind for me is that this is hate wrapped in legallees.
And so this Supreme Court.
Overturning yet another long standing precedent is devastating and it's worrisome. And you know, this is just yet another concerning court Supreme Court decision at a time when LGBTQ plus folks and marginalized folks are.
Under attack in this country. It's very worrisome.
How concerned are you, Stacy, that you know this ruling will not just be in effect academia, but will go permeate through other parts of society, whether it's the workplace or other areas as well.
I'm extremely concerned about that.
Right, this is set a precedent, and you know, much like when Roe was overturned, we saw that too. So this could certainly start permeating and expanding not in just academia, but start to seep into corporate America, started to seep in other sectors.
And that's very concerning.
One thing I will say is that we are not going to retreat, and our partners who are working in academia will continue to fight. And on the LGBTQ plus side, obviously we're watching this very closely. But one thing that I think is very important is that we will not retreat. We have to continue to fight. And at the same time, you're really realistic about this could start to seep into other sector's decisions like this.
Stacey, talk to us more about family equality and what you do there.
Sure you know, family is foundational to America, to American values, and every person in this country deserves the right to family. However, that is not the experiences so many LGBTQ plus people who want to create a family, who want to sustain a family, who want to have children. That is the work of family equality. For forty four years, we have been fighting for LGBTQ plus people to find to form.
And sustain our families.
And what we do is essentially ensure that we can create our families without social, without legal, and without economic barriers.
And we've been doing that work since nineteen seventy nine.
How do you do that, because it seems like today maybe tougher than it's ever been, particularly in certain parts of the country, certain states. Give us a practical case of how you actually try to do that.
Sure a practical case would be, for example, we know that we are seeing just a plethora of LGBTQ plus rhetoric and laws being introduced or passed in the state of Florida. For example, one of the strategies that we employed is that we, along with some other plaintiffs, are now taking the State of Florida or the Department of Florida Education to court over there. Don't say gay bill there,
don't say gay law it because it's frankly unconstitutional. And so when we can actually enter into lawsuits and to conversations like that, that not only signals to families in Florida that we are there for them, but it also helps to move the needle. We're gonna have to get really aggressive now, and we have over five hundred anti LGBTQ plus bills that have been introduced across the country. Those strategies have changed. I mean, I think twenty eighteen
we only saw forty one bills. Now we're up to five hundred. They've changed their strategy, So now we have to change our strategy, but a practical example would be our lawsuit in Florida.
And talk to us more about these inclusive hiring efforts that are really helped to be geared directed toward families. And obviously when we've seen larger corporations, we've heard about Target obviously having those particular backlash recently, and basically just looking at as far as what this means for hiring, recruiting, and some of the repercussions this could have there.
I mean, you know, you want inclusive policies, you want to hire people who are from marginalized communities. Yet we see organizations who are retreating, if you will, or understanding that there's.
No more what I call a middle ground. I feel like there used to be a middle ground where corporate Muerica could sort of satisfy both sides. That middle ground does not exist anymore, and what I see is going to be a shrinking pipeline, a shrinking pipeline of individuals who would you know, I've built be comfortable with applying for places like Target and others. I think those folks are going to think twice before working at organizations like this.
So now we've caused another issue, right, by retreating, now we effectively as shrunk the pipeline in terms of those organizations or those people rather who would otherwise be hired or even see these organizations as a viable place to work.
So, Stacey, what's your take on what we saw or what we are seeing with between Disney and the state of FAFE.
I can't necessarily speak to that, but what I will say is that.
Disney just just representative of corporate America. There's a company who tried to step up and you know, obviously felt some backlash, and that's Almighty Disney, That's Mickey Mouse.
Yeah, this is Mickey Mouse.
But you know what I will say is about Disney and others, is that I feel like there isn't there's an evolution that is happening with corporations. And so we know that Disney had some backlash, they retreated, There was a whole plethora of negatives that came out of that, and.
Then we saw Disney take a shift.
And I think that's exactly what's going to happen, is that these organizations, oftentimes thinking about revenue, thinking about I think trying to please everybody, will oftentimes retreat.
But if they are really connected to their values.
If they really are walking the walk and talking the talk, then we will.
See that shift.
And I'm hoping that we will see that with other organizations, because you're going to have to make a decision, and I often say that either you are foreign quality or you're not, and you can't take a middle.
Groil Stacy, thanks so much for joining us. Really appreciate getting a few minutes of your time. Stacy Stevenson, CEO of Family Equality.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm Fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.