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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie 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. Morgan Stanley's Mike Wilson saying this, we believe equity markets have been trading poorly in April, primarily due to the repricing of fed cuts, with ten yere yields now well above our key four thirty five four forty target. Stock appreciation from here would largely have to be earned through earnings upside rather than multiple expansion. Mike and Polica says with us around the table, Mike,
good morning to you. You're worrying how high is the bar or low for those tech fis through this week.
Well, it's mixed, as you were saying, it's it's not all one trade anymore.
It's sort of the Magnificent three or four.
Some are falling by the wayside for fundamental reasons, some are falling by the wayside.
For rate reasons.
And look they've got they've got tougher comparisons now, so I think that always the case, right, It's not so much about the earnings results. It's about the reaction of the stock to the earnings results. And I think that's what I'm really fascinated to see how much goodness is already priced into even the winners, and there are some big winners in that group.
I agree with you, Lisa.
I think what's more interesting is what's going on away from those stocks that will that will inform us more about.
What's actually happening in the economy.
You know, what the expectations are around FED for example, and also some of the geopolitical risk, which I think you know that's not our number one concern, but it's also one of the reasons we're overweight energy.
You said, we can learn something from the earnings themselves and how the stalk responds to them. What if we learned so far as we get deeper into any season, Well.
It's about fifty to fifty, So fifty percent have been up to plus one, fifty percent have been down.
That's worse than normal.
This is in line with what we've been saying for quite a while now as we think now we're in a period.
Of moultiple contraction.
Right.
If you think about the last six months, all that really happened was, you know, the Fed pivoted treasury. I would argue, sort of squeeze the bomb market. We had a duration rally into year end and that affected a huge multiple expansion. You know, it doesn't get a lot of press, but twenty twenty four estimates for the S and P five hundred have really gone up. Okay, they've been sort of flat over that six month period. It's all multiple expansion. So our call basically is that we
first always thought seven cuts was silly. I think a lot of people agreed with that, and now we're down to one and a half. So why wouldn't multiples come down in that environment? And I think that's what we're facing now during earning season is you've got to really put up a serious beat and a revision.
To the upside for the stock to go up.
I'm very curious to see how that plays for the next two weeks.
What we're seeing right now in the earnings is not a cohesive story. I mean, honestly, you're seeing some areas where it's cost cutting that's keeping margins afloat, in other areas where you see, you know, for example, demand for trucks in the US going gangbusters. Are you seeing any themes that you can kind of grab onto so far?
The theme is that it's a very unbalanced economy, and that's the theme we've had.
For a while.
So post COVID has just been a very unpredictable environment for a lot of reasons.
Some of those things we got really right.
So most things we got really wrong, and I think we're trying to figure out kind of what the next stage is. Let's look at the last year as an example. So a year ago hard landing recession was the consensus view market overpriced that. Then we got a soft landing price in in two q Then we had a sort of a fiscal sustainability problem where growth got too hot and rates went up and we had a big correction. Then we went back to the soft landing and now
we're in no landing. So this is our view at the beginning of the year, there's a third of a percent. There's a thirty three percent chance of all three of those happening soft landing, no landing, hard landing, and I think it's the same. So in other words, right now we're trying to price that no landing scenario, but I'm not confident that we're going to stay in that environment.
And companies are a reflection of that.
Right Some companies do better in that scenario, and that's why they're doing better things like energy and materials, financials.
But is that sustainable.
We're going to find out, you know, we said that we're going to see how much multiple expansion could continue and whether we see multiple contraction. The multiple expansion has been really concentrated in big tech.
It has been really.
Concentrated in some of the quality names that you like. It has not been concentrated in the Russell two thousand, which has not experienced that same kind of run. Do you start to like some of those areas because suddenly it is an economy that's okay, maybe supported by a couple rate cuts, and frankly, you haven't seen that multiple expansion.
Well we did, I mean November December was one of the biggest short squeezes I've ever seen in the lower quality parts of the market. So we did absolutely see multiple expansion. Now we're giving some of that back, right, And that's our call, which is that I don't really want to go to the low quality world, Okay, and
that includes small caps. Not all small cap companies are low quality, just be clear, but as a group, okay, Russell two thousand is a low quality index and that's why it's underperforming again because race are too high for them.
Like our star. People talking about our star, Okay, Well.
Our star is different depending on who you are and what kind of company you run. It's extremely variable, and the market's been really efficient Lisa in saying, look, rates are too high for a majority of the economy, whether it's consumers or small businesses. So we're sticking with that
until rates really get cut. We think that the trade is still you got to go with self funding businesses that have idiosyncratic kind of growth opportunities are pricing power and just playing out again this year in space, A.
Lot of people think about you as a bear because yesterday, for last year, I should say, you are really calling for some sort of downturn in the economy. Where are we in terms of that cycle, in terms of just how close we are to a downturn? Are you basically saying, you know what, this isn't something you can really call with any definitive conviction that you have to sort of just look at specific companies and stay away from that stuff.
You know, it's me it's a humbling business. And I think, I mean seventy percent of the street I think was in the recession camp a year ago. Our economists were not, but a lot of people were in that camp and we had to reprice that out. So where we think we're still very much late cycle. I heard you all chatting. One of the questions we've had is why can't it be early cycle. Well, there's a lot of reasons why we don't think it's early cycle. Labor market's very tight,
the old curve is still inverted. We don't have a lot of supply in the labor market. We have immigration maybe supporting that, but generally it's a tight labor market. You know, margins are still at record high levels. So all of the things that we would look at from an early cycle perspective are just not there. So we're still late cycle, and what does that mean. It means this can last for another two years, or it could
be over tomorrow if we have another shock. So we're probably going to sider we're not going to be as aggressive trying to make that shock because we don't know what it is. We thought it was a regional banking crisis last year turned out to be not the case. The economy turned out to be stronger. I would also argue that we have an incredibly imbalanced policy mix, which has helped the economy to sustain itself. So economic data
does not look like the earnings data to us. Okay, economic data is much stronger than the earnings data.
Why is that? An enormous amount.
Of fiscal support into the economy is keeping the economic data looking strong, which is preventing the FED from really cutting rates for an early cycle rotation. And that's we're just kind of stuck in that and we could be there for a while. I don't see that breaking. I don't see any discipline in Congress. We're spending more money this week with this bill, I mean, so that is
where we are. The question is is that overpriced? And I think it is because should I pay a higher multiple for what I call low quality growth, government sort of driven growth. I would already know for some companies you can pay higre multiple because they're IDoc and credic to that. And that's what's happening. Companies that don't need government support are doing better. Companies that we're getting constrained by higher rates are underperforming.
Let's talk about fiscal and the fact that it doesn't matter who wins the election, there's going to be more money coming out of Washington. It's one of your questions you ask in your note, how are you thinking about the election as a driver of markets this year? Is it too soon to start preparing for November?
Yeah?
I mean historic, and we put this in a note. I mean typically the volatility the market picks up two to three months before the election. My experience is that until we have the conventions and we really see the platforms at the stock level, and we don't see.
A lot of action.
Now, interestingly, this year, the market is rallied in the beginning of the year. Typically it doesn't do well in the first half and it does better in the second half as it becomes more clear. So is that going to reverse this year? We have a tougher second half maybe, But I agree with your first sort of position, which is I don't see a lot of difference between these two campaigns in terms of the fiscal and even the
monetary mix. The one thing I would say is focus on the areas where the president can do things that are executive order okay, And the biggest one in my mind is immigration, and terrass is the second one. That's the second one. So terroris and immigration could be done without congressional voting. So that's where I think, because I'm not confident that we're going to get a sweep either way, that's probably the least likely outcome. It's probably ten percent chance.
It's going to be very close. But to get one party as a sweep, I think it's going to be challenging. So the executive order lever, if you're thinking about Trump or Biden, that's where that's what the action is going to be.
I just want to work that's through an extra step. You suggest that might be if we get a president Trump. Volume two to this supply site, Nevana that some people in the world of economics are embracing my be threat.
Since I think that's exactly right.
I would argue that there's a chance that maybe something is done prior to the election for political because this is a hot issue for the election, right, Immigration is a hot topic, and the question is do they try to curtail some of that inflow prior to the election.
I have no idea, but we're going.
To learn more about that, I think in the conventions in terms of how they're talking about it.
So your point that mind, this could change quickly in the space of a couple of months. I'm just trying to work out how quickly that would shot upen the data, how quickly the market might respond to that change.
Well, here's the real takeaway, John, I feel like there's been a lot of marking to market going on, right, So I would argue everybody's been wrong about the fundamental picture in many many ways over the last two years, including ourselves, Okay, and that marketing to market. All of a sudden, you mark yourself to market, Why are you
any more confident you know what's going to happen next? Right, And that's where we have a problem with valuations is there seems to be this perceived certainty again being priced in.
It's like I'm not certain at all. Maybe I'm the dummy in the room.
I don't know, but I feel like there's a little bit of complacency around just knowing what's going to happen.
By the way I send all bad.
There could be some positive surprises, but those positive surprises may lead you to a different group of assets that you want to own. Okay, I mean I think bonds are just suspend a minute on bonds, so my goodness. I mean this is one where I literally can flip a coin and I would fit.
Okay, that's it, you know, because I could.
See rates higher from the standpoint of fiscal sustainability problems, we have a term premium increased like last last year. Or I could see things slow down again because rates are now higher, right, the wealthffect is kind of being priced out of the market, and maybe things slow again. Our house call is we're going back to sort of four fifteen. I think you just had a guest saying three seventy five. Yep, I mean three seventy five would argue that we're probably back into a soft landing or
hard landing scenario. Four to fifteen is kind of more the things just kind of slow down a bit.
Can I put you on the spot just a little bit? Is it easier to foresee than being one hundred basis points lower than being one hundred basis points higher?
Or you actually ten more and split?
Yeah, one hundreds big, okay? And those are the tails, right, So one hundred on the upside would be the market is really concerned about unding sustainability, almost like the UK okay, two years ago. And I think one hundred base of points lower from here is kind of a hard landing.
Give me the next fifty.
Yeah, so fifty, I'm I'm still leaning to higher, but our house call is lower, so you know, and I got to go with the.
House call.
There.
But I mean, but the bond guys, I.
Mean, that's their job, and so I gotta, I gotta, I gotta bet.
With them, okay. And so that would be okay.
So what happens in that scenario for stocks, Well, all of a sudden, our no landing scenario probably isn't the case, and we probably would downgrade energy, and we probably would go back to some of the things that were doing better last year. And so it's just I think you just got to keep a really flexible open mind that's what we try to do now with the with the
stock picking. We haven't really talked much about index in the last four or five months because we're trying to focus on the relative value trades and we've got a lot of those right and hopefully, knock on wood, we can continue to do that.
Stick with a Mike, you're gonna sty Clive Smike Wilson, that of mulch and Stanley.
Matters with us.
Now for more My congratulations because I think a lot of people have moved to your view of the world. You were talking about a mid cycle adjustment quite a while ago, and I think everyone else is caught up now this is no longer about the start of a cutting cycle and perhaps an adjustment mid cycle. Can you frame the difference and what led you towards that conclusion?
Yeah, absolutely so. We have I think two historical examples of mid cycle adjustments. You had one in the mid nineteen nineties, you had one in twenty nineteen. And the logic there is the FED is cutting rates, not necessarily because we're in a recession, but maybe they're seeing some weakness in the economy that they're trying to get ahead of,
or they're seeing that inflation's coming down substantially. I think this cycle was going to be all about inflation coming down and the FED being able to cut rates modestly in response to that. Certainly we're seeing that that get pushed back.
But with a labor market where.
It is, with growth as resilient as it is, with financial conditions as easy and accommodative as they are, there's really no reason for the FED to guide towards a full cutting cycle at this point in time pre pandemic.
I can remember a phrase that Chairman Pound talked about the objective to extend the CINCO. It's not the objective now, and where are we in a so called cyco.
Yeah.
I think you've seen FED officials talking about risk management for a long time over the past three years. Risk management meant being hawkish raising grades in order to ensure that inflation doesn't become entrenched. I think three or four months ago we saw better balancing of those risks.
As inflation was looking softer.
And the FED became a little bit worried about growth. I think the past three months of stronger inflation prints have put inflation back to the forefront for the FED and extending the cycle at this point, I think does mean ensuring that inflation does not get entrenched, not cutting rates prematurely. We hear more FED officials talking about the risk that that's the bigger risk, cutting rates prematurely having to rehike later.
I like Ben Bernike's idea of scenario analysis. I would like to have a sense of exactly how the FED would respond if certain things happen. Since it's been such an unpredictable cycle. How many hot inflation prints will it take before we start talking about no hikes this year and no more cuts this year? And how many we prints does it take for the FED to cut?
Yeah, I think we're close to talking about no cuts. You know, our expectation is the FED only cuts once and it comes cut in December. Well, we also expect that you're going to see disinflation come back over the next several months. So even if you get disinflation, you know, three four months ahead, I think the FED is going to be a little bit more reluctant to cut rates because you know, they've seen a headfake from the inflation data. It's going to take a while to rebuild that confidence.
I think if you take take a step back. You know, core PC inflation on Friday might be two seven or two eight. We have growth, which you know around two and a quarter percent. We have financial conditions that are easy. We have the labor market, you know, adding more than two hundred thousand jobs per month on average, with a historically low on employment rate. There's just not very compelling reasons to cut rates within that environment, and I think the FED is coming around to that view.
How much are they basically also kind of tacitly admitting that the pivot last year really kind of worked against their goal of disinflation, that that might have actually contributed to the stickiness that we're seeing right now. Is some of the data.
I think, you know, perhaps it's somewhat of a contry beating factor. I think a lot of this may be seasonal, So you do have some seasonal factors that boost.
Inflation early in the year.
But what that means is the disinflation we saw last year was overstated, and so overall inflation is just going to.
Be more elevated than then we thought.
I think financial conditions will help to boost growth as we look ahead, but I don't think that it's been a key factor for the stronger inflation prints of the first three months of the year.
Mid cycle adjustment doesn't sound like we're near any kind of hard landing. And yet the different rolling cycles that we're seeing in a lot of these earnings reports and what people are talking about the two sided economy, it's very real. How do you play that out given the fact that if rates were made at this level, the lower tier, the lower half, frankly of the population is going to struggle all the much more so. And I'm talking about both companies and individuals.
Yeah, I think from my perspective, that's returning to more normal conditions. You know, it is the reality of the US economy that you have delinquency rates that are more elevated for for lower income households, for for lower education households. So a lot of this is returning to a more normal pre code environment as that access savings gets drawn down. What we've seen in that environment still is robust consumer spending. We saw it with the retail sales report recently. We
see GDP growth that looks quite solid. We see employment gains which are above two hundred thousand. We see households adding meaningful income growth with decelerating inflation. All that I think is pretty supportive for still solid growth for the US economy and something.
That theft shouldn't be worried about.
What about for twenty twenty five? How are you thinking you had twenty twenty five given the fact that we might have very different policies fiscal maybe immigration coming out of Washington.
No doubt, And I think it's a key challenge to think that the Fed cut cut rates in December. So when we change the view and we have one rate cut in December, I think that that could be highly conditioned on the election outcome that we get. If you get an election outcome that has meaningful fiscal stimulus and has inflationary policies, whether it's their trade or immigration, the likelihood that the Fed cuts rates in.
December is reduced.
So I do think as we look about potential to cut rates, the Fed certainly will have to factor in economic policies that will impact inflation, the labor market, and growth. And if those things suggested that they shouldn't cut them.
They're less likely to.
Let's wrap it up with a cancer point. Andrew Honhorst of City on the program a little bit earlier this morning. He still thinks midyear only until recently you were looking for midyear as well. You push that back out to December. Can you walk me through how low the bomb might be to rate cut midyear. I'm just trying to work out how this market would respond. Let's say, in a
few weeks time, get a really soft inflation print. Did the conversations of the last month just disappear and we start going back to what we're talking about two months ago? How does all that work?
Yeah?
I think to get a cut by June seems very unlike like at this point in time, absent a weakening in the growth environment.
To get a cut by by July.
You know, I think you need to see a pretty quick deceleration in the inflation data, because we've now had three inflation prints that were well above the FED subjective. We see three and six month in your lized rates, which I've been accelerating. It's unlikely you get core PC inflation down to two and a half percent year over year by that.
Period in time.
So I think you really need to see a swift in compelling and convincing several prints of weaker inflation data, probably coupled with some weakening of the labor What do.
You see in the inflation mix right now that makes you think that's very unlikely.
So when you look at things like trim mean and median, those things have remained elevated, telling you it's not all about.
Outliers at this point in time.
I would also highlight last week we got this new tenant and all tenant rent index data from the Cleveland Fedit it has a little bit of a lead, and the alternate index actually stabilized at elevated levels. And so that tells us at least through Q two, we're unlikely to see shelter inflation decelerate quickly. If that happens, we're unlikely to get the soft inflation the Fed needs.
Matt.
This was smart always to can't shut up the brilliant Matttersati that Deutsche Bank looking for the first rate cut to come in December and looking for that to be maybe some moderate adjustment in twenty twenty five, and what the team of at Deutsche Bank are cooling a mid cycle adjustment.
VJ.
We've got some time.
With you on place to say the work through a lot of issues and the coaching question for us on this program over the last few weeks has been do we have an industry problem here or a test the problem? Which one is there?
I think it's a little bit of both.
I think in terms of industry, we have seen a very strong adoption of eb's the last two three years, and now you've gone to the first round of early adopters and evs, So now getting to the second ground is a little bit tougher as most of the low hanging food has been taken. So you are seeing broadly ev industry face of challenges, especially even in China significant
price competition. But that said, on Tesla specifically, you have a fleet that needs refresh people where investors were looking for the model too, so that'll be the focus to earnings call if the models too is still on track per second half twenty five or do we see that get pushed out to twenty six, which in which case, you know twenty four and twenty twenty five, you don't have a lot of new more is coming to market, So so I would.
Say a little bit of both. VJ.
If we don't have growth, how do you value the growth company? It's a question that wels Fargo. We've tried to answer you've raised this question, so kind of valuations you put on that name?
Yeah, I mean I think it's really a tale of two scenarios.
One is definitely near term where you have challenging growth expectations because of a you know, a fleet that needs to reflesh.
But longer term, you still have.
The sicular tailwind that electrification is still very much on track, and we will see the global EV market grows significantly as you look out tons and twenty eight because that's where everybody is placing their chips.
I mean, all the global auto ems.
All global economies, everybody is pushing on the EV roadmap.
So that's where the trend is. Near term, you have some challenges because.
You're fishing a conundrum of lowering pricing, lowering costs to drive sales and are not there yet. The EV market still needs to make sure to bring costs down, bring asps down, and the Model two would have been a very welcome addition to that fleet, but it looks like there are some question marks around that.
So given that, what gets us to one hundred and ninety five dollars a share from the current one hundred and forty two dollars a share on Tesla as you project.
Yeah, I think a lot of the pullback has been given some of the recent trends in slowing EVSs, but also some doubt around the model to timeline, especially if it's still on second have twenty five or twenty six. I think the more clarity CEO, Elon Musk and Tesla can give to the street, the better chance you have for the stock to consolidate or move higher. So I
think that's definitely what investors really focusing on. I think robot taxis are a good roadmap, but obviously there are some significant challenges around, you know, regulatory clients, you know, getting the standards there, getting nitsa to a poet, putting some you know, guidelines around what is accesible, what's not not acceptable, not a pilot eccepter.
So it's still a roadmap that needs evolving.
Might be we see something happening BET twenty twenty eight at the earliest Sonata. You know, the big focus has to be getting Model two back on track.
So VJ.
We were talking about this with our own Craig Trudell earlier this morning, about which Elon Musk would show up to the earnings call. How much does it matter to you his tone, whether he likes you guys, or whether he just excoriates you for boring questions.
I think, you know, we have to disassociate the execution troum. You know, basically the valuation should be linked to the execution of the company. And so I think as Tesla has done an excellent job in kind of evangelizing evs and growing that whole market, being first to market, and they have a massive balance sheet, so all those are not issues. Now. The focus should be on getting the product roadmap back on track, you know, getting growth back
on track. So I think that's where, you know, that's really what the tie valuation of Tesla stock is really the execution on the product loadmap and how that you know, how that top line margins evolved.
Going out, so as it deals with this cost war, this price war in China, was it a mistake to get rid of the cheaper version twenty five thousand dollars Tesla?
I think we are not there yet, right.
I think there have been you know, press reports to that that model gets delayed.
There have been you know.
Twitter posts about not getting delayed, so we I'm sure that's where all the investor questions and focus on the call will be. It's much less focus on what learnings for the current quler looks like because estimates for the current quarter have come down very significant. So I don't think, you know any there will be much of any concern around what the numbers are for the court and where.
The margins are.
All the questions will be how does Tesla get through twenty twenty four to twenty five? Is a low cost model still on track extra So I think that's really where the focus will be. That's really where all the questions will be based as they plan.
To roll out the ROBOTAXI in August. You went through a slew of issues that they have to deal with before August. I mean, this doesn't even have government approval yet. What do you need to hear from US today to make you think that, Okay, August, we can actually see this product.
Yeah, I mean, I think seeing the product is it is really not a big challenge.
I think we can have the product there. The real question would be, Okay, what's the execution on it? What's the performance? You know, what's the driver intervention levels?
You know, what are the standards we are going to you know, be guided by kind of commercializing the robot taxi.
How many miyers.
Do we have, you know, what's customer feedback. So there is multiple challenges. You know, at this level, the autonomy that we haven't even got into yet. So I think there are significant challenges to that. And that's why we think any significant rollout will need not just a revamp an upgrade on the Tesla fest but also significant infrastructure upgrades as well. And so it's a route that everybody
wants to see happen. You know, we have seen this multiple times before where where timelines get pushed out, And at this point, I think it's fair to assume that twenty seven twenty eight is where we think that there could be any chance of really seeing.
Globo taxing on the road.
That's not geofens, you know, having a little bit more flexibility on where you run.
It, etc.
At this point, it's still in the very early experimental stage.
Je let's wrap things up by talking about leadership. Alon Musk wasn't always a polarizing figure. It's been highly successful. It's incredibly unique amount of success he's had across various industries. If you think about payments in the early days the time at PayPal. I go back to what he's doing right now, innovations in healthcare. It's unbelievable. At the same time, he's doing things with SpaceX and again with Tesla, and
we can talk about sweater another day. But I think, in fact, think VJ more recently, the experience of Twitter has led to this increased polarization of the man himself. When you have conversations with clients about leadership, do they feel like he's isolate, isolating a certain portion of the consumer base.
Yeah. I think.
You know, when you look at geniuses, as you mentioned the list of accomplishments along, I think they always tend to be eccentric. And so that's exactly why we have to, you know, kind of compartmentalized the execution on the stock and how Tesla itself is doing from personalities. I mean, I know it's very tough to do that, but I think when you look at Tesla and you look at SpaceX, you know, you have to look.
At how is that company curing? What's the roadmap?
Is there something that drives you value valuations, what drives ecretionment this company? Except so, but obviously, you know, like you said, I mean a real genius got there because of their accomplishments, because you know, and none of them are seemed to be normal people. They all are eccentric and they all have their works, so I wouldn't go there.
It's a double edged sword.
It's very diplomatic j Well navigated feature Racash and mis zero. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, ANNGIO politics. You can watch the show live on Bloomberg TV weekday mornings from six am 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.