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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and a Marie 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. Karen Murphy of Castra Investment Management, writing, we are modestly overweight equities, with lower exposure to mega camps in favor of mid cap, a tilt towards non us, and a focus on owning's growth. Kara joins us now for more. Kara, good morning, Good morning. Let's get to their last line earnings growth.
Where are you seeing it? Where's it coming from?
So I think we definitely had a pause heading into second quarter, and that's sort of what we're going to be chewing through over the next couple of weeks as we make our way through earnings season. But what is so important and what is usually important in earnings season is getting the view of the second half. And I think what we're finding is that CEOs are coming in a little bit bolder about what the second half looks like.
They're able to sort of like.
Take that slower growth in the second quarter, but then see a real reacceleration into the second half of.
The year where they getting cloarnity on policy from.
I don't think they are saying it.
Lisa is not saying, you saying.
I think what they're able to do. And this is where time is all of our friend. Right when tariffs are first introduced in early April, it was this huge change and people didn't really understand even what the implications
were for their supply chains. Over the last couple of months, many CEOs have been able to sharpen their pencils, understand where those implications are, sometimes diversify their supply chain so that they're less sort of behold UNTI let's say China, where that's sort of been ground zero for tariffs, and also be able to forecast different scenarios. So again, this
doesn't say that policy isn't an impact. I think policy uncertainty is still a really big challenge, but being able to have that time to work through it really makes it much easier, be able to manage through.
Is the air getting very rare for some of these stocks, and John was asking for the whole the totality of the morning saying, you know, not good enough, not good enough, and that seems to be the read through from bank stocks. Is that a sort of wider spread phenomenon throughout the stock market.
So when we.
Came into earlier this year, one of the main risks that we saw were high valuations in a very concentrated market. With the rebound that we've had more recently, we still have those same exact risks and so that's really a big reason why we're leaning a little bit more into midcaps, a little bit more into non US. So, yes, I think that's a challenge, but it's a challenge for certain names.
And then you mentioned financials. I think that's a really interesting area where these names got some really nice lift recently. So I think some of the maybe like lackluster reaction to the earnings is more a reflection of what the stocks have done recently. And I think importantly, as we look through those bank earnings, what we see is pretty decent and underlying economic growth, and I think again that augurs well for second half earnings growth.
In general, it feels very volatile.
There's been a lot of volatility at a headline level. When you actually look at the move index, which is implied volatility and treasure yields, it's pretty low. When you take a look at the average BIX, it's come down pretty significantly. Do you just sort of sit on your hands, decide what you like, buy it, go on vacation.
I like to describe the first half of the year as the Van Winkle market.
Right.
If you had gone to bed on January first, woken up at the end of June, you'd be like, I did a great job, Like.
I feel really good.
I wish I had, right, don't We always?
Many levels carry on, right, But the challenge is that we all lived through that.
The jury is is that experience.
That experience helped us sort of live through what we're going through now. And I think over the weekend, we saw this new introduction of tariffs and the market just didn't react, right. The market has reacted less and less with every new tariff announcement because and this is important, because the assumption is that the Trump administration is not going to accept a recession in exchange for its trade agenda. If that breaks, then I think we have a very
different market. But as long as that holds, the market's going to be like, Okay, you can tinker at you as you will, but we're not going to face a recession.
So all is good. How do you justify the tilt and non US at the moment?
So this has been a challenge for US investors for a very long time, and we talk with a lot of investors who are frustrated with owning anything outside the S and P. Five hundred and Over the years, you've seen again higher and higher concentration US stocks around the world, higher and higher evaluation differentials between those. But it's been
largely justified because of stronger growth in the US. I think as we're moving from a very unipolar free trade world to a multipolar world where maybe US is a little bit less dominant, I think we start to see capital flows outside of the US, and then on top of that you have maybe a little bit of a narrowing of the differential and growth rates, a little bit of a narrowing of that valuation different.
What is the European growth story? I can get excited about what is it?
So it's like it's a little bit better than what it was before, and that's what's important. So they do there is a lot of infrastructure spending that's happening, and so it's just that incremental growth. It's not necessarily that it's going to take off going forward, but it's priced for a slower growth environment than what I think we see in the next couple of years.
The growth story is fewer holidays, that's what we're learning for us. For us, sure, yeah, but in France right the idea that you're going to take two holidays out.
I just wonder, you know what this horde of.
Debt management and sort of when debt is too much discussion, whether that's really going to come into.
Play with bond vigilantes.
It seemed to be picking on Germany, even though German's debt to GDP ratio is really good. It's not as though they're particularly overly indebted, and yet you've seen yields on the long end climb there too.
I think if there's anybody who needs the finger pointed out that has a debt problem, it's the US, and as I think about, one of the largest challenges that the US faces, and a really intractable problem, is the amount of debt that we have. And clear it is Republicans and Democrats who have contributed to this. This is not a political issue. This is an American issue. We like to spend money, and so far the debt markets have given us a pass right. For many, many years,
we have really really low interest rates. Now that's changed, and that's why the equation really has to change. But I don't think we're going to tackle it anytime soon.
Kara, it's good to see you. Thanks for dropping by.
Karen Murphy there of Chestra Investment Management, PARTO GOO of New Street Research joins us now with a by rating on Nvidia and a price target of two hundred per joins US now pre welcome to the program.
It's a change of policy.
What kind of change does it make, what kind of difference does it make for this company?
Well, John, is literally a change of twenty See when you look at the last couple of years, Nvidia has been able to ship chips in China.
On enough.
As like the ex force rules varied over time. So like earlier this year, we had like a very strict like tightening of the rule that created a potential shortfall for Nvidia of like eight ten billion dollars, you know, over what was left of the year. And now there is an easy and again of these of these restrictions. We had a similar situation last year and the year before lust So I would say this is back and forth.
You shouldn't read too much into it. I think the reality is that you have a situation with three major metrics. One is making sure we protect like the US leadership in AI. The second one is making sure we don't completely cut off the relationship with China, because as Brandon mentioned, China has very important elements into the AI race, like
the are rare smart adioles. And the third one is that of course the US government, the US insestion is very careful to protect the interest of US companies, and so this situation always creates a back and forth. It's good sometimes to tighten the rules to slow down like the progress of China, but at the same time doing too much of that favors China is developing their own supply chain, and it's good to maintain the leadership of
US companies globally. So it's good, as Jensen said that they keep selling in China and you have like the right balance to find over time, and that would be the way I look at it.
Pierre, how much is in Video's fay really dependent on the close relationship that Johnson one has with President Trump and the fact that move over Tim Kirk, he's the new tech ambassador for the United States.
Well, you could almost invert the question. You know, how important is it for President Trump to make sure that he has like a strong ally in Yensen, like the number one or let's say one of the number ones you know, tech uh, tech tech leaders and uh. And we know that the relationship with Ilan musk Is is a bit south these days, so I think it's very
important to to maintain strong relationships and uh. And yes, I think there is no real situation where the US administration wouldn't have a careful here to the concerns of Jensen, because the success of Nvidia is what matters the most
to the US maintaining their leadership in AI development. And I think that that's what we have read in the in the trip to China our Fiens and his comments and his ability you know to speak before the White House and commitments from the White House tells you a lot. But how much darkening power he has in the in the conversation, But.
A lot, apparently, Pierre, quite a lot based on the experience of the last few days. Per favorite of New Street Research pre thank you, sir, Devon run As Citizens down grading goldment sanks to market perform ahead of the results, writes in quote, the bar is now much higher for another lego, Devin joins us. Now for more, Devin, We've come a long way. We've had a big rally for most of these banks coming into this earning season.
What do you make of what you've heard so far?
Yeah, hey, Jonathan, good quarter. We thought it would be a good quarter. We were quite a bit above the street, but they still beat our numbers. And so what we're seeing is terriffs were actually pretty good for trading, and so we'll have to see now that kind of the terriff volatility has died down a little bit, what the back half of the year looks like for trading. But then on the other side, investment banking activity is really
re excelerating. Remember in April we were questioning whether this is a pause or a break for investment banking right now, it looked like it was clearly a pause. And now all that activity that was kind of put on the back burner is now moving to the front burner. So we're seeing a pretty substantial reacceleration. Announced MINA volumes are tracking up twenty percent every year, even with losing a couple of months. IPO number of IPOs in the US
are up eighty percent, So we feel really good. You know, Goldman, we just we put a buy on it at two hundred dollars back in twenty twenty, so now it's seven hundred dollars. You know, the bar is higher. And that was really what the call was.
Do you see enough in the numbers this morning? At last? The question the Dan right, Devin, or are you sticking with the thesis?
Yeah, we're sticking with the thesis. Listen, it's a great company. And our thesis was, you know, they're taking market share and people don't really realize it. And then also they're growing their asset management business, particularly in alternatives, and people don't appreciate how much assets they're raising. And so I felt like we had a differentiated call. And now we've become more consensus. So we're just looking for opportunities where
we still have differentiated calls. But listen, you had a great quarter and I actually think the outlook again trading is going to be a little bit of a question market in the back half of the year because the Terra volatility did help. But Goldman Sachs and Morgan Stanley too, they're gaining market share, so you have the market backdrop which your volatility helps. Then on top of that, both firms are actually taking market share and trading you Goldman's
really leaning in on their prime brokerage business. So we feel really good about the tone of the business. We want to reevaluate on the stocks here and consolidate some of these games we've seen.
We've heard a pretty study story across all the bank earnings about how study the consumer is, how businesses are gaining confidence, and there's a feeling that everything is chugging along with a greater degree of certainty.
Than on April.
Second, I'm just wondering if this is a broader economic kind of read through, as John's been asking all morning, or if this is something that really indicates the banks have been much more cautious with who they led to the credit worthiness of all of their clients.
Yeah, I mean, I think what we're seeing and what we're hearing is that, you know, there's obviously always tail risks here, and I think people are cautious to make sure that there's a lot of macro events that are occurring at tariffs are still uncertainty there, there's geopolitical risks, and so I think there's obviously a sense of, you know, cautiousness just to be careful that you're not getting yourself
in trouble. But overall, the trendsit I think banks are seeing right now and that we're talking to both investors and CEOs about, is that things are good out there. You know, the consumer is in still a very good spot. The low end of the consumer is being more affected by inflation, and there's maybe a little more challenges here, but more broadly, the consumer is in a great spot. And then companies, as you see an investment banking activity or leaning back in so they're going back on offense,
m and A volumes are picking up. Companies are feeling good about raising capital, their stock prices that are at all time high. So I think there's a really good sense of kind of optimism in the market right now from both corporates and consumers, and that's what I think we're going to hear from virtually all banks through earning season.
Here, there's really a question about whether this is a pivot point where some of these banks that have been treated as other utilities for the past ten years can become more growthy, especially if they start to get deregulated to the point where they can compete more aggressively with private asset managers.
Do you see that as a likelihood this year?
Well, I mean, if you listen to JP Morgan's call yesterday, a lot of questions on fintech, a lot of questions on stable coins and tokenization. So I think the conversation is evolving a little bit. You know, banks are still I think obviously, you know, steadier types of business models and they're not going to take a lot of risk. But this this world of kind of less regulation, I think is starting to creep in and I think it's going to be a tailwind for banks over the next
couple of years. And then on top of that, I think another catalyst here is consolidation. You're starting to see a little bit of bank mergers. It's going to be in the kind of the small mid sized banks, but I think that's going to be very valuation enhancing and I'd look to the back half of this year to start to see some of that, and I think that will be a catalyst for the broader group, something that we really haven't seen over the past four years.
So Devin just drove down on some of that. As you mentioned earlier, some of these ideas became very consensus, Goldman being one of them, and it's certainly performed. If you were looking for something non consensus, something a little bit different in this sector, maybe the broader industry group, what would you look for.
Yeah, so we're kind of some of the large cap names I think are pretty well owned right now. You know, it's kind of the index plays. So we're looking at some of our mid cap coverage show company like Stiefel, which kind of looks like Morgan Stanley in terms of wealth management and institutional exposure, but you know, much more reasonable valuation at kind of eleven times our exit twenty twenty six earnings level, you know, but still get some
of those really good exposures. Then they also have a pretty good leverage to Bank m and A with their KBW business, so kind of that theme that we just talked about. So that would be one. A small cap advisory boutique called Pirella. Weinberg is a name we really like, so we want to be selective here just after these really big runs. And then i'd also in regional banks, as I just mentioned, with bank consolidation and deregulation, I think that could have a bigger impact on their business
models as well. So broadly that is a kind of an index play.
I Devin, appreciate it. Thanks for giving us some time, busy money for you. I know they haven't run there as citizens joining us around the table a potential candidate. They form a wealth bank president David Maltcas David and morning, good Mornington. Would you like to be considered?
Of course.
So it's a huge job and really important, really important to the Trump changeover that's going on in the world, saving the country. So but it means a lot of change at the FED. I think they've been making many mistakes and we can enumerate them and correct them and that will mean more growth and especially more growth and
median income. If the FED were allowing more small business growth, there'd be more jobs that are that are new jobs for people across the across the country, not just in urban areas.
Let's get into some of the details.
Walk us through a couple of the examples where you think they've made mistakes and the remedies for them.
How it correct?
Course, you know, I didn't like que think about QUI that the Fed and its wisdom is going to go buy bonds. So how did that work out? They've lost a trillion dollars. They'll lose much more than that before they're done with the losses on the bonds. In addition to that, remember they've paid out in interest constantly since two thousand and nine. They've paid one point three trillion dollars of tax payer money to banks and to money market funds. That's the source of funding that they have
to buy the bonds. So this has been the worst hedge trade in history. So that's a big mistake. It's also led to inflation because the federally allowed a merger of fiscal policy and central banking or monetary policy by buying bonds, as the government was really jacking up the deficit.
So you're rather running go ready because I have to say isn't that exactly what the president would like to see?
What would he like?
President Donald Trump would very much like to see minitary policy and fiscal policy very well allowed.
No, I think he wants to see them both improved, and is already doing that. The reconciliation built improves fiscal policy and the separation. What we need is lower interest rates, and you can't do that if you've got the FED carrying the load of all this fiscal deficit that Congress is generated.
So in the near term, as a candidate yourself, what do you do as a potential new FED shair to the composition of the Fed and the approach that you think.
Right size is?
I think really important is people to see the flaws of the inflation targeting model. I've been writing about this since then, literally since the eighties, that if you target inflation as your goal, it's backward looking and it doesn't comprehend all of the prices within the economy. It's just a flawed indicator. But that is the basis of how the FED sets interest rates. So one of the things is you switch and you say the dual mandate is
to have price stability. That's very different from CPI inflation, which waivers around and gives you false signals. That's what's happening right now. So you need lower interest rates because of the strength of the US economy. I think that's something that I understand a lot from working all over the world and in Wall Street in financial markets, that the US is the giant power and people want to invest in the US even at lower interest rate.
Okay, this is a fascinating argument.
It's one that President Trump has talked about, the idea that it should be almost a credit rating of the United States that backs what our interest rates should be. So like Microsoft or an Apple, the borrowing costs should be very low. People are pegging it to inflation, and they're pegging it to growth. I'm just wondering the market
doesn't see it that way, right. We're not there yet, So at this point, how potentially perilous is this discussion at a time where the market associates lower interustrates with faster.
Inflation and frankly higher borrowing costs For the United.
States, the market's inbred with the FED, and so as long as the FED is the sheriff of the land, the market is going to say, oh, we operate on that model. But as you change to a model that makes more sense, one that's based on the growth and credit of the US has something to say about what the interest rates are that we should pay. That can be a smooth, safe transition, but it has to be explained. Markets adjust. Think of what's going on on tariffs now,
there was a giant panic that didn't materialize. The change in the FED system is as big as the change that we need in the trading system, and it will work better for growth and especially better for the forgotten man. The median income has been doing very poorly over these maybe twenty years, and so if you have a new system that's very focused on defending the dollar, the dollar is the global reserve currency, and then people flooding into dollars, that's actually supportive of markets.
Seconds left. Have you spoken to the president about the role?
I don't want to talk about the process. What I really want people to focus on is the models that need to be changed. We can have a much faster growth economy with different FED models, and it can be done with the confidence that is absolutely necessary.
We can have a longer conversation about that next time. Sarah appreciate your time. Thanks and best the luck the former World Bank President David Malpass. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angio 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.