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Your point the camera now to our first guest, Cameron Dawson over a new Edge Wealth, joining us right now to talk.
A little bit more a welded.
That lopsidedness that we saw at the start of twenty twenty four is going to be lopsidedness at the start of twenty twenty five.
I think the most important point about breadth is that it actually has.
Been supported by earnings.
The reason why the market has been narrow, it's because earnings growth has been narrow so it's not just valuation alone, and we've seen that in the last four months. If you look at the mag seven their earnings estimates have actually been revised higher by about fifteen percent, but if you look at the equal weight index, their earnings have
been revised lower by about five percent. So that's spread in earnings revisions and earning strength is really what has been driving the fact that this market is led by such a few short names. The question is, if you look at estimates in twenty twenty five, they have the everything else starting to really participate in earnings. But that's a pretty high bar and pretty much has show these stories we get into next.
Year, how much if we do get a broadening of the earnings picture, how much of that is dependent on economic conditions and for that matter, policy conditions coming out of Washington.
It is rather peculiar that we've seen this economic growth environment where we've had consistent upside surprises to growth.
We've had growth be above.
Trend, and yet it has not materialized to the everything else earnings, meaning that you've had this strong GDP environment, but the average stock has continued to struggle. Part of that is just an overhang from the pandemic. You had some over earning that happened, margins got overextended, and that was coming back in But what you have now is this expectation that you'll have a huge reacceleration in those
four ninety three names. We're not sure if you get that in a potentially decelerating nominal growth environment.
You know, it's a little earlier that Romayne had mentioned the bond market. You're seeing that bid come back into the bond market in the last.
Week of the year.
However, just last week we're at four sixty one again on the ten year. At what point does that start to get in the way of this equity market rally or is it already getting in the way.
The thing that's been most surprising in twenty twenty four is how much we've been able to see multiple expansion despite having rising bond yields.
If you look forward, multiples.
For the S and P five hundred are up about seventeen percent over the course of the year, and that's with a bond market that has seen this constant pressure and rising yields. So at a certain point is a twenty two point three times forward multiple consistent with a
bond yield at four point six percent. We always have to remember that valuations are a very poor timing tool, but we're getting to a point where equity risk premiums are incredibly narrow, incredibly tight, so as equity investors, you're not necessarily getting well compensated for.
The added risk.
But even if you believe, if you believe that the reason yields are higher is because of strong economic data, then does that mean that any vulnerable economic data could set the market a little Haywire, I think.
That is a really good point, is that if you're looking at things like credit spreads being ultra tight, valuations being so high, it's not contemplating any kind of growth slow down. So if you were an environment where you're seeing growth estimates get cut versus getting raised, that would be a challenge to valuations.
We think the most important.
Charts over the last two years is GDP estimates for twenty three and twenty four. It has been a constant climb upwards. And if that starts to go in the other direction, meaning we're talking about GDP estimate scene to being revised lower, that's a very different market mood.
I'm curious though, too, when we talk about the expectations for economic growth, and we've seen what the market expects, what economists expects, so you've even seen what the FED expects. It's healthy. It may not be you know, Gangbusters, but it seems like a healthy enough foundation. So why are people why is there still some trepidation in the market, particularly when it comes to like I said, midcaps, small caps, the types of companies that would benefit from a stable economic environment.
Well, I think first on.
The economic growth expectations is that recession risk has been effectively completely priced out of the market as.
We forgot about recession.
P does that happen, But also it's been priced out of the psyche.
If you go back to Palace comments from a couple of weeks ago, he talked about how great the economy was and how optimistic he was about future growth. So if there's lue, believe me, Well, it does make us a little bit nervous if we're not considering any kind of downside risk, mostly as we're starting to see some signs of things like continuing claims last week, continue to march higher. When it comes to small caps in mid caps, we have to acknowledge that it really is about the
balance sheets. It's about interest rates being so high, and that there was this notion of sour five until twenty twenty five because POWE is going to bail you out, We're.
Going to get interest rate cuts.
If those don't come, then we have that balance sheet interest cost pressure.
That remains.
So in the realm of stocks in if I say the word value to you, what does that even mean right now? Is there value to be found in this market?
Value isn't necessarily dirt cheap at this point, but we do know that the relative performance has been so abysmal that it's likely primed for some kind of snapback. Jeff de Graff pointed out this morning that the value relative performance has been in about six percentiles, so very very depressed. The question is does that start to rotate in the other direction that is sustainable, And that's where it comes back to earnings, meaning that you can see a snapback
in value simply because it's underloved and under owned. But is that snapback lasting more than let's say, two weeks. And that really is when it comes down to the earnings line, because those have to deliver for it to be more than just a flash in the pan, you know.
Speaking of value, a lot of investors have been trying to rotate out of those high flyers, those big tech stocks out of Nvidia, for example, and take on some not Nvidia. You have seen some of that pullback here and there. But you know, if you think about the way that people are rotating, there is not a consensus. You've seen that small cap trade, you've seen some value, you've seen some rotation into different.
Sectors as well. How do you play it?
What is the most sustainable rotation at this point.
We think it's the steady hand of quality that remains still very very important. Over the last four months or so, you've seen a big surge in low quality, high beta, high momentum kinds of names, and so we do think that the best way to be able to take advantage of these rotations is to content you to focus on things like high free cash flow, good return on investing capital,
good balance sheets. They're getting left in the dust a little bit recently, but we do think over the long term that quality is the way to go.
It's people pulling out there at EQS screens on their Bloomberg terminal and running those terminal charts. Hey, listen, do you want to go back to something you'd said earlier about GDP growth Because so many investors are looking here at the way the Trump administration will tackle, of course, the.
Reorganization of the government.
Now we're talking about doge more and more on this program, aren't we, And.
Do you believe that that could.
Cut into growth if we don't see the same type of fiscal stimulus that we've seen in the last couple of years.
I think it's a really important point, which is that fiscal has been a big contribution to overall GDP growth, and so if you start pursuing something that looks like austerity, it might be beneficial in the long run if we want to talk about budget deficits and balance budgets, But in the short run, there is pain that you have to have for that gain.
So it could be that if we actually.
Are able and that's a big if to rain in some of the spending and do some reorganization of government, that that could detract from overall GDP growth.
We saw that the last.
Time we went through a balanced budget kind of outlook post squestration, it was a drag on growth.
So it is an important watch point.
Yeah, And it's a good point too, because I think a lot of people kind of forget just how much government spending contributes to the growth of the economy. And it gets to this idea as well about the kind of bifurcation. How you have kind of a higher end consumer if you will higher income people I just say that appear to be doing well. You have people in the middle and the lower end that at least anecdotally still seem to be struggling.
And there was some interesting.
Data that we just got out today about credit card delinquencies arising, particularly amongst lower income folks.
It is still very present that we have this ca shaped economy. And if you think about the lower income consumer, they're sensitive to things like interest rates, they're far more sensitive to inflation, and they're more sensitive to the job market. So the fact that you're seeing hiring start to slow down, that likely is what is creeping into those issues that we're seeing with the delinquencies for the for the low
income consumer. Then if you shift to the high income consumer, that's where we think the equity market is really important because that's been one of the things. Loose financial conditions, high interest rates, yet really strong stock prices, strong housing prices has led to the high income consumer being so resilient and good to remember, the top twenty percent of consumers make up forty percent of overall consumption, so they outpunch their weight.
And so if you start to see.
Equity market weakness, and that's an if, but if you start to see it, that could be one thing that could cause that high income consumer to begun to pull back.
I should just point out I did my economic part this holiday season.
I haven't seen I haven't seen.
My credit card statement yet, but I'm sure it will make me weep when I get it.
Yeah, I'm not excited to see it's the holiday seasons are always tough, you know. The credit card delinquencies are a great point. The other reason to look at them is because weeks away we have earning season starting once again and it's just starting to see credit card delinquencies rise. Do you start to worry about the banks again or do you shrug it off because the yields curve is steeper and rates are staying hi.
Yeah, it's a really good question.
Is that there's also this notion that the banks are going to see the benefit of a big IPO and M and a cycle.
That could be a bit of a hope.
We are seeing good performance out of recently iPod stocks, at least over the last couple of months, So maybe that's something that can defrost the ice that has been present for the last two years within that part of the market. But I think it is an interesting point, which is that markets have effectively priced out some of this credit risk, saying that the economy is strong, so we don't need as much compensation for credit risk. But you're starting to see some pockets of weakness, and if
rates remain high, we can't forget that. You have a big refinancing cycle that starts in twenty five and into twenty six, and maybe that starts to pinch some.
Of these borrowers.
All right, Camera, I'm going to have to leave it.
There.
No better way to close out the year than a conversation with Camera and Dawson to see Iisle over at New Edge. Patrick joins us right now to talk a little bit more about his outlook for energy prices, and it's kind of a big contrast to what we saw at the start of twenty twenty four when we had that ten to fifteen percent rally and everybody was talking about oil at one hundred bucks and beyond. And we've come a long way since then, just not in the
right direction. Well, not in the right direction if you're an oil producer.
Yeah, that's right. I think the bulls have been chased away at least for now, and under the President Trump's mantro drill, baby drill, I think it may be another challenging year, at least for oil. Keep in mind OPEX production cuts, keeping about five million barrels a day of spare capacity offline. That's where some of the downside risks potentially comes. Now. I don't necessarily believe that OPEC is going to open this bigot back up in April. That's
what they've delayed their restoration to for now. But I think it's going to be another challenging year for the upstream, whereas you still are going to see your seasonal swings when it comes to the midstream, the refiners. Maybe good news though for pipeline operators who may be able to expand a little bit more readily available. And then the retail sector. I think the CE store level is going to experience another good year. But for oil, you know,
there aren't a whole lot of upside risks now. I think there's more downside potential than upside for twenty twenty five.
Just staying on oil for one second, particularly on the production side, because I know there was a lot of optimism about the Trump administration coming in, particularly given the policies we saw the first time around. But there is an issue of capacity right now and whether there is anything to drill baby drill into that we haven't already drilled baby drilled already into.
Yeah, I mean exactly right. The Permian has been maturing. Now. There's been talk about potentially reopening the Arctic Wildlife Refuge, so you know that's something there as well. But I don't look for oil companies to go into rural Alaska and to be really excited about potentially drilling there. I think there's a lot of challenges with that. And keep in mind getting that oil online could take potentially years,
if not longer than that. So the Permian is slowing down, so there are potentially some upside there, but keep in mind, ope spare capacity. Guyana as well seeing a huge increase in capacity. Think one of the wild cards in terms of risk. Keep in mind is that candidate sends US over four million barrels of Canadian heavy oil every day through a couple of different pipelines, and of course president
like Trump's promise on tariffs. I think that I'd like to fall that hunder as talk, but you never really know. And again, President Trump's kind of against the status quo at least on some of these issues that do pose a potential upside risk for oil in the year ahead.
I want to go to your outlook for twenty twenty five, but first, can you just reflect back on the year that was in oil WQI basically flat for twenty twenty four. What was really driving that? I guess lack of movement.
Well, you know, on the supply side, Dopek had been taking barrels out of the market. There wasn't a whole lot to get excited. On the demand side of things, China's economy has been incredibly weak. Not only that, but they've been pushing evs much harder. And keep in mind that their gasoline demand may have already peaked now moving forward, and so Chinese demand is a huge headwind for this market. And it comes as there's a lot of supply that
remains offline. In the US's back at producing record amounts of crudal ourselves at about thirteen point six million barrels a day. So I think a lot of this story is really focused on the China economy that really has struggled for much of this year. Now there's a promise of stimulus moving forward, but there's simply too many spare barrels sitting offline here for the market to really see
much of a run up. Now. I think we could see a bit of a spring surge that may be tied more to refined products, but we'll have to keep an eye on the US economy. I mean, there's a lot of potential possibilities that could slow our economy down, which in turn could also slow down global oil consumption.
How do you think about inflation for twenty twenty five, because at least the Federal Reserve, the FOMC members did up their inflation projections. How do you kind of take inflation into your forecast well.
As you indicate.
I mean a year ago, we were sitting here talking about waiting for the Fed to cut interest rates rather aggressively, and now they've really toned that down, and now there's more caution in their statements, and that could post a negative for oil as well. I don't think oil or energy is going to be inflationary in twenty twenty five, but it's obviously a risk factor. If the FED slows down its interest rate cuts, there could be ramifications for the dollar, and of course a dollar right now has
been fairly strong. So keep in mind that oil is globally traded in dollars. That could even have an impact on the price of oil and certainly something we'll be watching. In your head.
I am curious that Patrick could maybe if you can circle this back to the consumer. There was obviously a lot of talk during this election cycle about gas prices, despite the fact that at least as of today, gas prices at the pumper about forty percent lower than where they were I think about a year ago or so.
It gets to the question here as to whether we see prices at the pump at the retail level kind of remain where they are, maybe even go lower, or are there some forces out there where maybe we should prepare our sales for higher prices ahead.
Well, I think for consumers it's going to be a third year straight of decline so ever since twenty twenty two, the yearly national average again in twenty twenty five likely to trend lower. Now, consumers shouldn't mistake that for flat gas prices through the year, because we will see gas prices start to go up as we get closer to
warmer weather. By the way, according to gas Pity data, this morning one of those rare moments where the national average has slipped below the three dollars a gallon mark. I do think that will be temporary, and in the spring we will see that surge. Prices will probably run up twenty five to fifty cents a gallon, and they could get closer to the mid and upper three dollars mark. But that's going to stop short of what we saw last year when the national average peaked at about three
sixty seven a gallon. So it's good news for consumers. They probably won't be shelling out as much in twenty twenty five. But keep in mind President Trump's promise to cut energy prices in half. That's a big difference talking about prices at three dollars versus his promise of cutting them in half, which would represent a price below two dollars.
Yeah, something we haven't really seen on a sustained basis, probably since I was in diapers. Patrick, I am curious about this idea of an export economy for our energy. We've obviously seen the US over the last few years become energy independent, and of course now has a relatively thriving export business. How much can that expand based on our own demands here locally and how much is going to be left over to ship out and sell to other folks overseas well.
I mean, you look at US exports, A lot of that is lighter, sweeter crude oil, and really the bigger boom is LNG, and that's what certainly could expand under President Trump, the exports of LNG. I mean, he's already threatening Europe that if they don't buy additional US energy that there's going to be ramifications. And I do think there's room to grow.
Well.
Natural gas prices have been blossoming here in the last couple of months on the promise of potential more exports. Now natural gas now above the three dollars mark, so I think there is room to grow. The US is the world's largest any energy producer, and I think we'll probably see that continue to grow in the years ahead, especially as Russia continues it's war in Ukraine and Europe
continues to turn to the US. So I think there's a lot of premise in US exports, and again look for exports, especially of LNG and crude oil to continue increasing this year as countries potentially make the shift, and as President Trump may push countries to make the switch over to US energy.
Patrick, what geopolitical risks are you looking at for twenty twenty five that could potentially pose a risk to your forecasts?
Well, again, I think President Trump is a bit of a wildcard. You know, what he says and what he does. It's a little bit against the status quo to come out and you know, talk about potentially putting tariffs on oil and other things, everything really from Canada and Mexico. So the political relationships could shift in the years ahead. And keep in mind China still really big one. How they're shifting away from fossil fuels is a big turning
point here. They've potentially already seen peak consumption. We turned to India to see growth there as well. And there's a lot of geopolitical issues. The Middle East has been quieting down, but there's still the potential of conflict there in Russia's invasion of Ukraine certainly something to keep an
eye on. But I think geopolitically, with somebody like President Trump in the White House, he may strong arm other countries into potentially doing what he likes a little bit more, and that certainly could keep energy prices from climbing much more substantially if he uses that strong arm.
Frequent life curious, do you think there will be any sort of meaningful global coordination on some of this? Obviously we know OPEK plus has its own cartel, but in the past we had seen I guess, cooperation for lack of a better word, among some of the other major oil producers that aren't in OPEK in dealing with OPEK Or is this the relationship so fractured and so disparate right now that investors she really shouldn't pay any attention to that.
Well, I think it is certainly fractured. I think there's a dissension amongst the ranks at OPEK. I mean, we've already seen some of that. Some countries certainly want to raise production, Saudi Arabia and Russia kind of going against that, trying to hold the line. The Saudis are spending a lot of money and they have a lot at stake here if oil prices were to decline even more significantly,
So there's certainly some driving factors. But again some OPEC members do want to increase production while others do not, And that's something to keep an eye on because certainly not as coordinated as it once was.
All Right, Patrick Craig Patrick Dahan, overhead gas buddy of Terry Haynes a Pangaea policy, joins us right now to help reflect on the life and legacy of Jimmy Carter. A lot of important dates there.
We talk about.
January ninth being a day of reflection and remembrance, of course his birthday October first, back in nineteen twenty four, his death of course on December twenty ninth. But I want to start Terry with July fifteenth, nineteen seventy nine.
That was the day that Carter gave that famous Malaise speech and just a few weeks after that appointed Paul Vulker as Chairman of the FED to fight what at the time was just an almost unprecedented level of inflation that this nation was facing, a levelly of the inflation that for years he didn't necessarily get credit for taming.
Oh, I think that's absolutely true, Ramaan, good morning to you and Critty. I think it's absolutely true. You know, I said to Marcus this morning, I think they should all thank and remember Carter for the crucial role that he played in breaking the back of inflation.
Over several years.
I mean, that was as well as not only appointing Paul Vulker, but defending Vulgar personally and fed independence through his term, something which President Reagan also did no small pull up cost to Reagan, even though he eventually got
the benefits out of it. You know, that set the stage for not only you know, the great markets runs that we've seen, even through you know, great geopolitical crises, health crises like COVID, a bunch of other things, but also set the stage in helping the United States win the Cold War by boosting the relative economic strength of the United States against the Soviet Union at a crucial time.
It's kind of interesting to read some of the biographies of Carter, particularly some of the ones that have come out over the last decade or so that have really painted him, I think, in a much better light than maybe how the country viewed him back in nineteen eighty when he lost to Ronald Reagan. And I am curious that if it weren't for the hostage crisis in Iran, the oil embargo, and of course the level of inflation. Is it possible that he might have been re elected in nineteen eighty.
Oh sure, absolutely.
You know, the President Reagan's run, the then candidate Reagan's run began fairly late, uh and and Carter was absolutely bedeviled by a lot of these policies. You know, I've met President Carter, but I was privileged to know a lot of the people that were his senior aides, most prominently including Jody Powell, who I knew decently well and so got a window into a lot of these things. And you know, Carter's Carter's strengths turned out also to be some of his weaknesses.
You know.
The mulishness and commitment that he showed to Vulcar, which made such a huge difference for the country even today, was also in large part what helped bring him down. He had a split in his own party that led to a primary challenge from Ted Kennedy. He had a revitalized right under Reagan that ultimately that ultimately swept him out of office.
And he also was guilty.
Of probably too much candor in talking to the American public.
About things lays that you bring up that.
Led to the impression that he was either out of control or unable to respond effectively.
So, Terry, that's a lot of the domesticstoril. Let's talk about his record internationally as foreign policy record, the Camp David Accords, his role in the Panama Canal, even boycotting the Moscow Olympics as well. These are all flashpoints that are just as relevant today as they were during during his tenure as president. What does Donald Trump take away from that? Are there lessons to be learned?
Absolutely, And the first lesson to be learned, I think is that the presidency has limits. You know, every victor in a presidential campaign, and you know the people around him tend to be a little triumphalist. They all want to talk about the legacies and or excuse me, mandates and the like. You know, Clinton came in in ninety two talking about a mandate when he had basically won forty three percent of the vote. You know, there's the there's always a lot of salesmanship that involved in it.
But the lesson you can learn from a from Carter's presidency, and you know a lot of presidencies, frankly is that presidency has limits and it is uh, it's wise to remember those even even while you're trying to maximize your political benefit in the moment. Uh. You know, Carter. What Carter's presidency showed really was that he found it very difficult to bring his own congressional party along with him. Congress is a co equal branch for government and acts
like it. Uh and uh, and he didn't. And Carter's also, while president, did not bring the public along with him as much as as try to try to lead public opinion, and that also came back to bite him. So it's a balancing act with presidents, and any any president after Carter was wise to remember that.
Terry, we we talk a lot about energy security, and we certainly did and the contents of oil embargo during during Carter's time as president, but we're also talking about it now in terms of tariffs, in terms of what's going on in the Middle East, and the idea that the United States is the largest energy exporter in the world at the moment. What does that mean for the here and now when we're talking about modern politics. Is that is that a good thing or is that a bad thing for the United States?
On balance, I think it's a good thing. I mean, we you know, we have strengths and weaknesses geopolitically, but one of our geopolitical strengths is energy and energy export. And we are in a situation now where we're in the most difficult geopolitical risk situation in more than fifty years. So it be who's the United States, no matter who's president, frankly, to make sure that it uses its advantages wisely, but that it maximizes those advantages as well. Certainly energy is
one of those. And you know, I frankly look to the next administration and President Trump personally to try to do everything possible to maximum is that advantage.
Let's talk about President Trump, the forty seventh president, his inauguration on January twentieth, what is his relationship going to be like with world leaders, particularly in contrast to kind of what we saw with Carter back in the seventies. I know, there are two completely different people with two completely different agendas here, But are there any parallels that we can draw?
Oh?
Absolutely, And I think Carter had you know, it's Carter had a very fractious relationship with many with many countries in the world. You know, his China policy was very successful. But on the other hand, you know, even coming up with the Camp David Accords required that kind of hardheadedness, that mulishness that I lauded him for earlier on monetary
and economic policy, and he succeeded in that. He did not shrink from from confronting world leaders in a way that he tried to push the benefit of peace and the United States a gemony. Frankly, this is a different world, but you know Trump is has that same broadly kind of push poll relationship and fractiousness. It's going to be you know, the thing I would just say to President Trump is, you know, a spoonful of sugar will really
help a little bit. He's he's been largely succeeding in pushing allies towards a greater defense spending and a variety of other things. He can continue that, but it's going to take a little more. It's going to take some finesse, and then he's shown the ability to at least understand that, and that's a good thing.
Terry, appreciate you coming on. Obviously we had a totally different conversation planned for you, but really great to get your insights on the life and legacy of Jimmy Carter, Terry Haynes, there of Pangaea policy.
This is the Bloomberg Seventans podcast, bringing you the best in markets, economics, antient politics. You can watch the show live on Bloomberg TV week more links 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 OLM