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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. I'm very pleased to say that joining us on this program, Howard Mark joins us some more. Howard, Welcome to the program, Sir.
I want to start.
We want to start with a central question that you pose yourself. Why asset price is so strong in the face of what you view as net negative developments. Howard, can you share your thoughts with us?
I'm glad to be with you this morning. Of course, as the quote you just put on the screen indicates, you know, this is all just feeling and an opinion. None of this is factual, but it does seem that stocks are expensive relative to what I call fundamentals. Or you might call reality. And you know, the outstanding reason I think is that, you know, there hasn't been a serious market correction in sixteen years, so people get out of the habit of thinking about market corrections. The biggest
single mistake. I've been thinking a lot what is the biggest single mistake investors make? And I've concluded that it is that they conclude that the way things are today is the way it will always be, and the things that have been happening will always continue to happen, whereas reversion to the mean is much more likely. So I just think that it's worked very well. Being in equity investor has worked very well. Doing it on leverage has worked even better. Concentrating in a few stocks has gone
very well. Investors are by nature optimistic, and that optimism dies hard. And you know, I just think that the fluctuations of the market are mostly related to psychological fluctuations, and people go from neutrality to liking stocks, to liking them a lot, to liking them a ton, to liking them too much, and that's the continuation that creates bubbles. And you know, we're we probably in the early days of that.
When you talk about liking Howard, maybe liking these assets a little bit too much. Can you put into perspective the last time you saw this type of environment that left you thinking, maybe some of the opportunities aren't as great when it comes to buying some of these assets at the current valuations. Is there another time that this sort of reminds you of in any capacity?
Well, I guess, Lisa, the last time was probably around a ninety ninety seven when the market was kind of falling in love with tech stocks, and you know, the market was rocketing along. People were not worried about the level of valuations. People were extremely optimistic about the opportunities for the Internet, and you know, Alan Greenspan famously cautioned
that there might be irrational exuberance. Now I picked ninety seven because even though green Span was concerned about exuberance, the market went on to rise for another two and a half to three years. So remember I said, we're in the early days. We're not at a critical at a nutty valuation. I'm certainly not ringing the alarm bells as the quote that you had on the screen said, no reason to think there'll be a correction soon. But
the point is that things are expensive. They may go on, they may go on to become more expensive, but the fact that they're expensive it should not be lost.
And Howard, I think a lot of people point to, in terms of the echoes of the late nineties, the tech sector of the market as being the most overvalued. What I thought was so interesting about your memo is that that wasn't your take, That that wasn't your bigger concern in the market at a time when people are counting on a certain robustness of growth and a certain kind of inflationary backdrop. Why is it that tech Is it the focus of your concern this time around?
A tech contributes to the aura it surrounds the markets, and a lot of people have been citing the fact that the so called Magnificent seven stocks like Amazon and Alphabet have been contributing disproportionally to the rise, and they are responsible for more than seven stocks. Their dollar gains have been responsible for more than half of all the gains in the five hundred stocks in the S and P seven out of five hundred. But they're great companies,
they're at high valuations. I think that I can't say those valuations are excessive, but the other four hundred and ninety three stocks are quite highly valued, not as highly as the magnizins of seven, but nobody says they're the same quality companies, quite highly valued relative to history. And it is the the fact that high valuations are being applied to more average companies that I think is more alarming then the fact that exceptional evaluations are being applied to exceptional companies.
How there's a quote you use in this memo. I enjoyed this quote. You said, he who knows only his side, his own side of the case, knows little of that. And then I worked through the rest of the memo and there was a conclusion there about credit. And I just wonder whether you focus on equities in this note offers you a greadit perspective on how much value is offered in credit right now?
Well, you know, it's as John Stewart Mill said, and I believe it was eighteen fifty nine, you have to know all the sides of the story to understand whether your side holds water. And I cite the book case there for why the market isn't overvalued. I think that's part of the job. But as you say, you know my conclusion is that it's as I said before, I'm not really seeing an alarm belt, but I do think it's time for some caution. And you know, this is a little bit of what we call on Wall Street
talking your own book. But you know what I do, what Oakrey does is mostly something called credit buying the debts of companies, and debt is inherently more defensive than equities. And you have a promise of payment, you know what your return will be. They if they pay interest in principle has promised and most of the time they do.
So.
I just think that this is a time to put a little more defense into your portfolio, and investing in credit as opposed to equities is one way to do it.
Is it still defensive, Howard?
If you're looking at credit spreads that are the tightest since nineteen ninety, I'm looking at investment grade credit spreads are thought to be a more defensive part of the credit market. I mean, is that sort of question what it means for it to be defensive where the evaluations are high there as well?
Well? First of all, it's what you see debt or fixed income or bonds or what I call credit, all different words for the same thing is different in nature from equities because you do have a promised contractual rate of return, and you can say that the promised contractual return isn't as high as it has been historically, or the increment that it provides over treasuries to compensate for the credit risk isn't as higher as high as it
has been historically. But you can't say that they don't promise seven and a half percent, and a promise of seven and a half percent you're going to pay for some fees. You're once in a while going to encourage encounter a credit loss. I think it's highly likely to provide let's say, a return in the sixties over the
next ten years. A contractual guarantee approaching something in the sixes over the next ten years is I think more defensive than being in the stock market at these elevated valuations. That's the point. And you know you just said tighter than they have been since ninety eight. And if you looked at where they were in ninety eight, and you hypothesize that put an investment in a portfolio HYO bonds in ninety eight, how did you do over the last
seventeen years? Of twenty seven years, and I think you did fine. That's my point. It has a high probability of doing fine, whereas stocks, if the valuations are elevated, have some reasonable probability of doing less than fine.
Is the United States still the focal point for defensive investments?
You know? I think? I said in the memo that I think the US is still the best place in the world to invest. The things that make the US exceptional, the spirit of innovation, the free markets, the rule of law, the capital markets, the growth and dynamism, the great companies. These things are still all true. But as I said in the memo, we're the best place. We may be a little less best than we used to be. The world is thinking that maybe the US is a little best less best than it used to be. I can't
argue against that. I mean, fundamentally, as an investment environment, I think things are a little bit deteriorated.
Is there a place that you see has more opportunities right now, just based on valuations and based on maybe affirming up of contract law and other aspects that really lead to a robust investment backdrop.
Well, as I say, I still think we're the best place in the world to invest. And you know, we're a great car at a high price. You can get some cars around the world that are not as great as ours cheaper. Which do you prefer less good at a cheaper price or better at a more expensive price.
So you know, other parts of the world do not have our dynamism, and lots of places in the world are overregulated compared to the United States, But if they're on sale relative to the US, it's not unreasonable to want to have some representation there.
Stay with us More Bloomberg Surveillance coming up after this. Eugenio Alamann for Remond James, writing the following inflationary effects from taris should start making inroads into those nominal retail numbers, and we should expect to see weakness and consumer demound during the rest of the year. Eugenia joins US Now for more. Welcome to the program sir, what's your read on the US consumer. Let's just build on what you said there and how broad based will that weakness be.
Yeah, we have been seen weakness in the US consumer for a while. The first two quarters of the year were relatively low, I mean weak, and as we expect the full impact of times continued to make in roads. We are expecting the consumer to continue to slow down. So our second, third quarter and fourth quarter expectation is very, very weak, very very close to recession. We are still not calling a recession. We have fifty percent recession, but it is a very smooth slowing down of the consumer.
There is no falling of of consumer demand, but it is weakening. I mean we have employment numbers weekend considered, aurienda is going to continue to keep the consumer contained.
Can we focus on the potential for further bifurcation within the consumer?
Eugenia.
This came from the Bank of America Institute, and they said total credit and debit card spending per household increase one point eight percent year over year in July, the highest growth rate since January. So bounce back and spend in July coming through the summer. But they also said this the difference in wage growth between higher and lower
income households the largest since February twenty twenty one. Is there something more regressive about the policy effort of the past few months that you see playing out in a much more negative way in the months to come.
Yeah, it is clear that tires effect are very regressive effect the lower income individuals households compared to the higher income and we have seen this wave of a splitting consumer, let's say, in terms of income for a while. I mean, we also have student loans that are going to have to be repaid again, so those spendings are going to
come down on discretionary side of the economy. So yes, I mean, we are concerned that this bifurcation of the consumer through income levels will will put I mean, will help to weaken the consumer even further.
How much do you see some of the retail sales data that we've been getting is somewhat clouded, Eugenio, given the fact that inflation has been present. You have seen a couple of key goods really see pretty significant inflationary pops, and that's included in the absolute number that people then say, look, it shows.
The consumer is strong, the consumer is robust.
Yeah, I mean, the biggest issue with nom with retail sales is that they are nominal. Right. The DA used to calculate some real retail sales, but they don't have enough resources, so they no longer calculate them. So every time that we see nominal retail sales, we say wait a second. Yes, it was relatively strong in July, but you have to take into account that most of it
is probably price increases. So that is one of the reasons that we say that the consumer consumer demand has been slowing down, so you have to take away and increases in prices. We are seeing some increases in prices. A third of consumption is good, so those are the ones that are most impacted by by tires, and there are goods that affect the lower end consumer more than
the upper end consumer. So it is concerning. We don't see a crisis, so we don't see something funny enough right now, but you know, the shock from times is going to continue to making roads.
Into Stay with us. More Bloomberg Surveillance coming up after this. Eric Friedman of US Bank writing, as long as CAPEX continues and technology diffusion occurs at a measured pace, we see further upside, but would not mind the pause. The refreshes. Eric joins us now for more. Eric, welcome to the program. So last time we spoke a little more than a month ago. Around a month ago, I remember you were
maintaining that overweight risk on posture. Eric, are you maintain in that posture going through summer.
Yeah, Jonathan, we are great to see you as always. I think that our viewpoint is certainly trees don't grow to the sky, and I think a level of skepticism around you know, leads. That's a great point made about the return on capital with an AI that for us is really the big factor. We think that with respect to technology, we are seeing that diffusion pick up.
In other words, we're.
Seeing more access to AI technologies across a broader plethora of companies, which is a good thing. At the same time, though companies have to make money. This is about return of shareholder capital and so you can't just have a plan where you want to spend a bunch of money on AI. There needs to be some evidence if you will have returned. So we think that CAPEX is a
good guide. It's not the only guide, but we're starting to see more companies talk about those returns on their capital deployed, which for us is still a positive.
So again we're still risk on. We think consumers hang in there.
We think CAPEX continues, but again we would not be surprised to see a bit of a pullback, which we'd like to be buyers of especially as we get deeper into the doldrums, if you will, pre labor Day.
So you've got a pro rispose quite clearly, and you've had that every time we've spoken over the last several times. What would begin to construc in that pro respose for you?
Eric?
What could you point too specifically?
I think two things.
Number one would be, Jonathan, the consumer rolls over, which we can't discount. We'd like to say that we have a working thesis mentality about consumers. A lot of concern about did we see a huge pull forward in demand around the Liberation Day announcement in the week shortly thereafter, and will that return? In other words, will that demand actually resurface. We have a couple of data points we can look at. Number one is back to school sales, and then number two is what we're hearing about the
holiday shopping season. So we'll have some good evidence right now. Our high frequency data checks, things like TSA data, things like open table bookings are still very robust, So consumers are not rolling over. The second area that where we could be wrong would be companies actually don't use this opportunity with a bit more tear iff clarity to hire people. And again we do think the labor market softness has been very well documented.
That for us is a red flag.
So those two elements consumer pulling back, but then also the notion of will businesses actually come back to higher folks now that we have a little more tear if clarity, that for us would be a bit of the concerning points. It would take that glass half fle thesis to task.
Relative to where we are right now, it seems like the potential for disappointment is in the four hundred and ninety three, based on what you just said, not necessarily the magnificent seven. You never said in that entire risk paradigm, the idea that suddenly we're in a bubble in tech valuations and that it would crash as people lost faith
in just how much artificial intelligence could actually do. Why is that not necessarily a concern for you in the same way that just sort of the more humdrum aspects of just a slowing consumer would be.
Yeah.
I think that's a very thoughtful challenge, Lis.
I mean, if you look at the broader marketplace right now, you look what's really developing from a core spend standpoint, we need to see a development beyond AI and cyberspect that's something that is a very played out thesis. Again, we're weary of being involved for too long. I think that that's something that gives us again some level of skepticism about the rest of the of the markets participation.
One thing that I want to really emphasize it I think is probably undercovered, is is that cash flows are actually becoming more valuable. If anything, when we look at our discount and cash flow models when we're evaluating the other four hundred and ninety three companies out there, you know, there's the expectation that FED funds goes down to three percent by the end of calendar year twenty twenty six. That's a pretty significant development. Again, that's not necessarily new news,
if you will. I mean, the forward curve has that pretty well priced in. But when we're discounting cash flows, we're using a much lower interest rate, which makes those cash flows more valuable.
So, if anything, you know, we.
Think that that should the FED continue with a more measured gradual reduction for a prolonged period of time. Again, the move from four point three three to three percent on a discout rate that has been hero impacts on stock valuation. So I think if anything leads so what would be another challenge, if you will, would be if the FED decides to be more incremental, if the yeld curve doesn't have that twist shape, and in fact the front of the curve remains more elevated, that would make
that four to ninety three less valuable. Because we think that that will likely be the outcome. The FED will be measured but still bring the front rates down. That makes the other four ninety three more attractive, even with more prosaic sales growth.
This is the reason why so many people are thinking that ten am on Friday Eastern Time is going to be so pivotal for equity m bond markets. Given the fact that potentially FED chair Jay Powell could come out and say in September we're going to cut, or in September we're not going to cut.
He's not going to say either of those things. What are you actually going to hear?
That will give you a sense of whether this market has baked in too many rate cuts or has gotten a little bit overly excited about the pace of the easing cycle that's ahead.
I think it is very much a horse race, Lisa about which risk is the FED more focused on. Again, the labor market is softening, That's that is something that we think has been evidenced for a couple of months, a couple of quarters, versus what about this inflation issue? Is in fact inflation going to be more ephemeral in nature. So I do think that the labor market, you know, sort of having the lead if you will, right now, versus a little bit of a viewpoint that perhaps the
FED is rounding down with its inflation expectations. Again, the Fed has had many opportunities to come off that two percent long term inflation target and they haven't budged. We do think that the Fed is actually rounding down if you will say, hey, if we see something in the mid twes, that's probably okay to start a or at least to continue the rate cutting cycle. But again I think that the terminal rate leads to probably lasting I'd say,
is of the utmost important to us. Again, while we are very focused on where the front of the curve maybe in twenty twenty six.
We also care a lot about how long it'll actually be there.
The FED has been very stealthily increasing their terminal level of FED funds that has material implications for equity investors like us. If we're discounting again a higher terminal rate, that's not a good thing. So we think that two things are really important. Number one, how long will we actually be at that terminal rate? At Number two, which of those two risks of the Fed more focused on.
We think that right now the labor market softness is getting a little more attention from the Fed versus inflation, which has been again well on their sites for some time.
Let's focus on inflation. Let's just finish there. We spoke to Jim Caron and molk and Stanley just yesterday. Now, as I asked this question, I do understand the stocks are still close to all time highs and we're trading at are pretty anovated forward multiple. But Jim at this to say inflation is acting like a guard dog keeping unrestrained bullish sentiment at bay. But what if the doc
doesn't bark, then markets might be under risk? Eric from man with a pri Risk APPT site pri Risk by do you have some sympathy with those lines coming from Jim Careen and Molgan Stanley.
Oh?
Absolutely, I think one great imagery from mister Karen in terms of that visual. But you know, I think that the inflation issue is a material risk. And again, we don't want to just whistle past this idea that perhaps inflation is going to have some normalization effect just because
that's what markets currently expect. If you look at the great reporting that your team has done, you know, companies right now are still eating inflationary pressures, not just on the good side, but also on the services side as well.
That may not persist.
We could see an about face where companies say, hey, you know what, I'm going a thin margin business and other companies are also passing through inflationary risks. So we'll do the same thing if that actually occurs, Jonathan, and that that bark may be a lot louder than we
think it will. Again, we do expect again even just looking at differentials, look at forward estimates for in the US at like you know, two and a half to three percent versus Europe and an em at sub two percent out another you know.
Twelve eighteen months.
That's a differential that this administration as well as companies can't maintain indefinitely.
Something has to give.
Again, we do think that inflation will bend, but not break, and we're a little more i think optimistic about inflation, nestment's coming down, but we certainly have to respect the case if that, of course is wrong.
This is the Bloomberg Survendans podcast, bringing you the best in markets, economics, angier 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.