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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin to sout
with stocks extending gains after posting fresh record highs. Max Katner of HSBC writing, what matters more than geopolitics is what's driving the global earnings outlook. The big question is whether US exceptionalism will make a proper comeback. Max joins us.
Now for more.
Max, you've been Max overweight for quite a while. We were talking about it at the top of the program.
Here.
Do you see this as comfort with the risk in the Middle East or renewed confidence the US tech trade.
I think it's probably more the latter. In fact, I think I would argue does really does the iron more really matter that much to the global earnings out look, particularly to the earnings outlook of the SMP. Bear in mind, when you look at the SMP, you look at you with large caps. It's not like consumer cyclicals are thirty forty percent.
Absolutely not right. Actually, you look at consumer discretionary strip.
Out Amazon and Tesla, you're talking about sort of four and a half percent of the SMP. And even there, when you linked within those, you look at the proper consumer ciclicals, you're talking something like two to three percent of the SMP. So even if let's say the lower end of the k of the slightly weaker households in terms of household health and financial health, if they are hurt the least, does it really matter for SMP earnings?
I would argue no, because you look at tech, you look at the tech sector, you look at the AI sectors.
Actually, when you.
Look takeing AAI together, that nowaday for almost fifty percent of market cap. So to me, I don't think what we've seen in the last eleven training sessions is the irrational reaction. I think actually what was irrational was the really sort of the twenty percent de rating and compression that we've seen in S ANDP multiples at the beginning of the war.
Max two points you made SMP earnings S ANDP multiples. It's the same true of the international backdrop, the global earning story, the European equity story.
I think on the European earning story is probably slightly more nuanced. When you look at stuff like chemicals, stuff like authors, they are going to be probably more effected. So I think where we're in right now, we're probably in the sort of global relief rally, not just because of US runt, but also because of things like interest rate volatility that has basically more than doubles right during March. That's now really really come down quite a lot, and
that helps pretty much everything. Now, when interest rate wall comes down, what helps that? The most that helps really gets from March. So what do you want to do right now is basically lip the performance picture of March.
So my advice to investor is very simple.
You just download a performance picture across sectors, across region, across asset classes in March, and you.
Just flip it right.
You buy the stuff that didn't work in March. You sell the stuff that did work and protected you. I think in a second stage, the second trade, probably in a couple of weeks or a couple of months, that is probably then more going towards Okay, what's actually changed from the fundamental backdrop a little bit like with Russia Ukraine were on a redative basis, then we're probably talking about right.
The AI outlook, the takeout look.
Is still strong, so probably then it's worth rotating from Europe to.
The US, but not right now. Right now you're still.
Playing that reshaped recovery trade.
And how much max is this really predicated on the idea that big tech suddenly is once again a have in trade after kind of being kicked around for a couple of months. Are we seeing anything fundamentally different now? Given the pressure from higher commodity prices, that will press certain consumers in some regions more than another's.
Yeah, look, I think I'm not disputing that it will hurt certain consumers. But at the end of the day, our job as analysts, our job as portfolio managers is to look at the aggregate number. We've got to look at the aggrid PC or retail sales number. What's that driven by? That's not driven by the lowest twenty percent. Right,
this is a very cynical thing to say. The lower end of the K that's been struggling already since COVID, that's been struggling even more with you know, stuff like food prices going up even more than more and headline CPI they've been really struggling even more.
They're now going to struggle even more.
Now from our perspective, Does that matter for the PC or for their headline retail sales numbers. No, they are not the main contributors to that. So therefore that's why I'm saying, you know what, actually on the headline numbers, there's probably not going to be that awful much of change. And on the tech side of things, I think one thing has fundamentally changed to the last two quarters, pretty much since November, since the Q three reporting season, we've
kind of given up on the AI earnings outlook. Right, that was the first times where markets have actually not rewarded but actually punished higher AI capis. The result of that was black prices of AI, of hate for hyperscalers, but earnings going through the roof still and now relative tech valuations if you look at S and P tech versus X tech or Max seven valuations, you're close to ten year lows, so that tech premium is almost entirely vanished.
That really puts TAG and us on a bit of a longer term perspective on a really really I would argue even cheap foundation there.
Max, I feel like you should change your name from Max Ketner to Max Polish because you've had Max Polish for quite a while with one huge caveat, which is what the yield backdrop ends up looking like. That could be the fly in the ointment if you see that danger level, particularly with the ten year yield. There's a lot of uncertainty around the FED. The polymarket trading betting odds now have the chances of a FED cher J. Powell leaving the board by May thirtieth at only thirty
one percent. I mean, how much do you see this as a real risk versus just some sort of theoretical risk out there given the fact that a lot of inflationary metrics have been relatively under control.
Yeah, just to be clear, so we've not been sort of Max bullish on equities for a year and we don't see any risks at all. It was just more in mid March that we thought, right, probably there's been enough happening now and you know, we're probably pretty close to particularly systematic positioning very clean, which is still the.
Case, and that has driven on us to that max bullish stance. Am I still going to be that in three to six months time?
I think that's very questionable because what you've been asking, I think that is not a theoretical risk. That is a real risk because at the end of the day, look, US earnings out look is really strong. At the end of the day, actually Q one reporting seating ahead of that, we've now seen the highest negative to positive pre announcement ratio.
From US corporates.
US Corpress are telling us ahead of the Q one reporting seeling things are not only fine, they're even better than they themselves have expected by the most in five years.
And that really I.
Think that is something that brings perhaps the danger back that things are not going sort of goldilocks, not too hot, not to gold. But then in a couple of months, with so sicky inflation and with perhaps the unemployment rate going down even further because of that very low brake even payroll and a really really solid and accelerating earnings backdrop, that suddenly things are just too good.
So I wouldn't put it on Kevin Walsh.
I would simply put it on the data perhaps in a couple of months just looking too hot and therefore the terminal rate maybe having to move more towards four percent, and that of course would put pressure across all the asset classes with the dollar the only say havement again, well.
Max in that situation, could us exceptionalism make a proper comeback? You say that's your third stage in your note.
I think that is then the case.
Yeah, I absolutely think that's the case, because right now, what is the use acceptionalism, right it is inflation is sort of sticky, and actually growth is kind of fine and accelerating as particularly the superior profitability.
Right against the rest of the world.
Now, when you nick something, I priced the book ratios of the US against the rest of the world, and you compare that to the return on equity on a relative basis between the US and the rest of the world, what you will see is that the compression, that relative compression was way more significantly more than is justified what's been happening on the relative profitability side. So I do think people have really really overreacted to some sort of
AI funding concerns since Q four last year. And I think that is then when we realizing, you know what, maybe the US is as stupid as that sounds, is even too cheap given that superior profitability outlook at some stage, I think, given that sticky inflation backdrop, given that the pop down growth side also is more than fine, I think in a couple of months we're talking probably about a bit more of a challenging rate outlook.
There.
Stay with us.
Marvel and Birk surveillance coming up after this, General Karon Gibson of Academy Securities, you think I'm joking. Maybe I'm not writing each day that the golf remains closed to business increases risk to the global economy around benefits from a closed golf.
We do not.
General Gibson joins us now for more. General Gibson, good morning, Good morning, and welcome to the studio here in Washington. It's good to see you. Let's talk about the risks on the ground right now, the state of the ceasefire and the state of the blockade.
What's your assessment of things.
So the ceasefire is holding, which is a good sign, establishing the ceasefire was a positive step by stepping off that escalatory kinetic ladder that we had been on, and an extension of a ceasefire I think is a sign that perhaps there's some productive dialogue going on in the back channel. If it were increasingly frustrated, we would probably see a bold an additional bold action by the United States in terms of the blockade.
I think that's a very.
Bold move and attempt to decline or decrease some of Iran's leverage and to deny them revenue, whether that's from the toll that they exact on passage of vessels or from their own exports, and ideally that will bring them to the table to make additional concessions. I have no doubt about the US Navy's ability to execute this mission with the same kind of competence, professionalism, and precision of
all the missions they've performed throughout this campaign. But it does not solve the transit problem of vessels that remain stuck in the golf well.
In the past, we've seen the Fifth Fleet escort tankers through the straight or from most can we see.
That that is certainly possible. It's another feasible option. It's resource intensive, and so now there is another carrier as I understand, steaming towards the Golf. Both the blockade and escorts are resource intensive. It's not just the ships that are escorting them, destroyers of fighter cap for combat air patrol, intelligence,
surveillance and reconnaissance, mind sweepers. And even if we are scorting vessels, particularly if we're the only nation that's doing it, we can't escort the same number of vessels that previously we're flowing through the Golf prior to this conflict, so.
The volume will be low. But if the US fIF Fleet were to do this, when could they actually start doing it?
I think if they want to impose both the blockade and escorts, we probably want to wait for the arrival of the other, the additional carrier strike group that as I understand, is on its way there. I think it's important to note, though, that Iron's ability to choke off the Golf is very broad. It's really based on a perception of risk. It doesn't take a lot of resources on their part. It's not hard to drop a mine or two, or even to say we've dropped minds over here,
and then someone has to verify it. Demonstrate the feasibility of sailing through there, and the decision to flow through the golf as you know, well, it's not a military or a political decision, it's an economic decision on commercial risk.
Unless there is a transformation in terms of the way that trips transit through the strait of ourmous, will things ever be the same again because of this perceived risk that is now in the forefront of every shipping company's minds.
I think perceived risk is exactly what it boils down to, and so there's a much that must happen to lower that perception. The ceasefire is an important step because right now we don't see anyone you know, taking any hits from drones and missiles.
Et cetera.
Also, progress on the diplematic front would be an important confidence builder. But this period of risk, or this perception of risk extends beyond shipping. You know, we've seen strikes against airfields, against you know, to buy There's much that will need to be done to lower that temperature across the region, and I know that our golf partners are very interested in seeing this result so that they can resume a normal commercial and iron Man.
Stay with us more Bloomberg surveillance coming up after this. Bob mcmalley of Rapid and Energy Group expecting a prolonged hormost disruption, writing, if the strait does not reopen by three q we estimate the oil price rally, we'll likely need to be counted by extensive demand destruction in the form of severe hits to GDP growth. Bob joined us
now for more, but welcome to the show. I wonder if you share that enthusiasm and confidence of the Treasury Secretary for lower gas prices in the months ahead.
Well, good to be with you.
You know, our base case is that we will avoid that worst case recession caps the oil price fake.
That's how it's been done in the past.
We're cautiously optimistic we will get to a better outcome. Not right away, but we will have either a cease fire in the coming weeks that allows a full resumption of hormos flows, or or the US military will get on with the job of degrading around's ability to interrupt shipping in the coming weeks. That may take a little longer, but I'm cautiously optimistic we maybe see the end of the oil price rally, hopefully before it has to come
to recession. However, gas prices that's another story. We have to see how things turn out this summer. I hope maybe by the end of the summer and have a three handle, but that would be that would be optimistic.
Bob, what is the reporting that Iron could consider rallying ships to safely go through the.
Gulf of Oman. How would that affect flows?
How many more vessels could we see actually then start to move?
Well? In the old days before this, the way out we go through Omani waters and the way in through Iranian waters, they kind of split the highways if you will, the t SS's and I think, you know, if it's just Omani waters open, it's not clear we can get back.
To a full and safe restart of flows.
Possibly. But I think what Iran is really signaling here, and it's more important, is that it realizes, and this is very important and very hopeful in the long term, it realizes no one's going to let them be the toal keeper of Hormuz.
In the long term. They did move and play the oil card.
I don't think the US expected that, and because they have this leverage, they have stronger ability to extract concessions from the United States on nuclear and other things, and they probably WI will. However, they realize that Golf Cooperation Council countries Israel, the United States, there's no way we're going to allow them to choke this thing forever. So I think it's kind of an admission that, yeah, we
know at some point flows are going to resume. Whether it's through totally Omani waters, we could do that if we had to, or back to the old ways, partially Irani and partially Omani, but it's going to come back to freedom of navigation eventually.
The President yesterday was talking a lot about his conversations with on his upcoming trip to China. Right now, I know China is taking him much less crude from the Middle East, about half of what's going on in terms of they used to import from Saudi Arabia. How are they dealing with the problem right now, because I know you have a new note right now actually talking about how China is going to weather this storm.
So China stocked up well, I mean, they're not enjoying it, but they're doing better than their many other Asian neighbors. They had one point two billion in crude inventories they've been hoarding like mad other commodities as well. They're going to begin to draw those down. They're dropping runs again. They're in a better position than many of their neighbors with regard to this famine of oil that is now certainly in Asia.
So with regard to the loss of the one.
Point six or so they were getting from Iran, I think we expect more stock draws, more run cuts. No fun, but it's not a disaster. But I just step back and say this, I think this whole Iran and China link is overstated. China has much more going on with the other side of the Golf and the Golf Cooperation Council countries in terms of economic and financial linkages, and
the relationship with the United States is very important. It's got big agenda items on trade, chips and other things, Taiwan and so, you know, I wouldn't overstate how tight that linkage and that relationship with Iran really is. With China, and they're dealing with it, you know pretty well. I don't think they're going to militarily challenge our blockade. I think they understand this is not about China, It's about Iran.
And so I'm optimistic that the China aspect of this can be managed pretty well.
Bob, what are you looking forward to understand? Whether the blockade of the blockade could get removed, and the first blockade get removed, and the second one could get removed, we could actually get free flow in some form or another in the near term.
Well, I don't think the blockade is going to be removed, the US blockade on Iran. Indeed, it looks like it's being expanded this morning to allow checks for ships that may have contraband or weapons and nuclear weapons and so forth.
So if it's expanding, so.
I think, Look, there's going to be a big deal at some point, and there'll be resolution on nuclear on missiles, on proxies, on giving her on some of its money back, et cetera. And that'll include the straight of horror moves, and we'll be lifting a blockade. We don't think we're there yet. Unfortunately, we think this has to get worse
before it gets better. But at the end of the day, I think there's going to be a settlement of all the issues and we'll see a lifting of blockades being imposed by both sides, and we have to hope that by then we will not have seen extensive destruction to physical infrastructure, which would prolong the recovery in flows beyond the three to four months we're already looking at.
This is the Bloomberg Savandics podcast, bringing you the best in markets, economics, angient politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Easton. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and, as always on the Bloomberg Terminal and The Bloomberg Business An speak to