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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. We begin with our top story, stocks on track for a fifth straight day of gains following a week of softer than expected inflation data. Darrel Cronk of Wells Fargo saying the following, as the S and P five hundred makes news highs, it's important for investors to rebalance to avoid portfolio equity concentration risk, trim tech and communications services to neutral waitings.
Darrell joined us for more. Darren, good morning to you.
Good morning, jar What did you can opening exchange with us?
I'm with you one hundred percent. I mean, so everybody knows the concentrated returns. I just ran the numbers yesterday. If you look at just the top five names, right, not the top ten, top five, they're driving about eighty two percent of the index thirteen to fourteen percent year to date return. So strip that out, you're you're up maybe two three percent you're to date on the broad level.
But maybe what's more important is when you look at those names, the top five ten names, the correlations are as high as they've been since August of nineteen ninety seven, right, So what's that tell you? It tells you that people are chasing, right, they're chasing those winners and continuing to feed into it. And to Lisa's very good point, if you take the Nasdaq one hundred against the Russell two thousand, so tech against small cap five year wides, right, I
mean we're at the widest level we've been. So you know, small cap continues to underperform. Not surprisingly. I keep getting asked every conference room I go into every meeting, when's the time to buy small wins? It time to buy a small cap? And I keep saying, not yet, not yet, not yet? Right, when is the sun? I the rustle too, probably needs to be somewhere in the eighteen hundreds, maybe even seventeen hundreds before. I think you get a compelling
risk reward to flip there. That makes sense, but nowhere here above two thousand.
So why do you have this argument that you should be more concerned about concentration since that's one, and more interested in some of the others that keep lagging behind.
I think because eventually you end up with this kind of think of it almost like a you know, it's a teflon market, right. Nothing seems to stick to it. Every risk that we roll at it, right, whether it's you know, the France risks this morning and the tails or anything like that, just seems to bounce off of it. And the same theme plays through AI wins, tech wins. Right,
it's seven months into that. You you know, if you run a marathon or a race and you sprint for seven months, which we have sprinted, Let's be honest about it, you're going to be tired. And I think the market
is tied here. It's you know, when you look at those top concentrated names to the point, they're doing extraordinarily well, right, And I'll take it, but I get under the surface, right, whether your point equal weighted small cap, I look at some of the other sectors, they're just not participating at the same level.
So I guess the question is do you sell your big tech exposure or do you buy everything else. It's a big distinction. Are you bullish on the other sectors or are you just simply getting a little bit more skeptical of how much further tech can run.
So yes to the former, right, which is so I think when you get underneath. We just released our mid year outlook this week.
Right.
One of the things we did in the midia outlook was took energy to the most favorable we could possibly take it too, right in the portfolios. Basically, we ran it up to the highest big pullback obviously in oil prices. We've taken all the political risk premium out of oil prices, which kind of shocks me. Given the global landscape and where we are. I'm getting a lot of big whether it's you know, the integrated energy names or even some
of the expiration companies. At twelve thirteen fourteen times pace ease with a three and a half percent dividend, I will take that all day long. We also like materials. We think healthcare is a good value play here, and we would fade places like you know, the consumer obviously reads and even financials look a little bit over.
Brought to us here, wait, consumers reads and financials. This is very interesting at a time where the fed estensiply is going to be cutting rates pretty soon. And at one point this was supposed to fuel the next consumer spending wave in the sense of consumer strength and ability to borrow in a new way. Why is it not playing out that way?
Because I'm not sure the consumer is as strong as people want to give it credit for, right, I mean, if you everybody does the including us, you know, the top five quintiles of income, right, we know that the bifurcation of the high end is doing well, the low end is not. But what people are missing is kind of the creep up into the middle income levels of where people are trading down for value. They're not spending as robustly as they want to. You see. You know,
consumer confidence numbers are still on a downtrend. Small bit business numbers are still you know, pretty ugly right when you get below the surface. So there's just not a lot of reason to believe, you know, to us, it looks like the consumers kind of running that last mile here right, they've they've been able to stay durable and spend I'm just not sure how much gas is left in the tank.
So this time last week, when we read out the payrolls number two hundred and seventy two thousand, you didn't hear two hundred and seventy two thousand.
You had something else. So I think payrolls and the labor market in general are getting skewed heavily by some of the lag effects of what's happening with immigration in this country and everything else. So we ran the numbers again. If you take just immigration from pre COVID levels, we're three point three million people higher today in the labor force than we were coming into twenty twenty, if you will. That's having real impacts on the labor force, right, And
those numbers, so the labor market is still strong. We'll take a four percent unemployment rate all day long, but I'm not sure that it's as strong as maybe the numbers might be. Sending a little false outquos there to us.
This is what Chairman Pound basically said in the news conference. One of my sort of biggest takeaways from the polls over the last year is this poll right here from Guardian Harris Pole that came out in the last month or so, and Aretus follows. I'll give you some headlines a stonic fifty five percent believe the economy shrinking, fifty six percent think the US is experiencing a recession. Forty nine percent. Forty nine percent believe that unemployment is at
a fifty year high. Wow, forty nine percent. That's the poll that came from Guardian Harris in the last month or so.
It's the reason why consumer sentiment has been so low. People don't feel good? Is that wrong? Can you say that people's feelings are wrong or are they feeling something? The numbers aren't showing in quite the same level and people explained by the K shaped recovery. Stay tuned for the University of Michigan Sentiments survey. We out in approximately one hour and forty nine minutes.
Well, maybe we're just not measuring things properly. Correct in a households versus establishment survey, allows sway was the big stand doown down?
I think that's I think you're spot on right. I mean, I think you've got to really you can't just take those headline numbers as they stand, right, You've got to dig in under the surface and kind of take the second derivative, third derivative and understand what those numbers are telling you. I am a big firm believer that liquidity
is masking so many things around the economic element. I mean, if we just went back and around the numbers from just the twenty twenties, where now twenty twenty four, obviously, financial markets are up about forty six trillion dollars in am right, government debt is up twelve trillion dollars. Right. Think of just the liquidity that that pushes into the engine, right, and the ability for consumers to stay longer, right, for businesses to feel better. Right. All of that has had
this kind of long lasting use. It called the marathon effect.
Right.
We run hard seven months. But Wall Street isn't Main Street, right, and so the S and P isn't what people are feeling. If you walk up and down Main Street to the point of the survey, right.
Forty percent belief the S and P is down for the year.
This is quite a pole, isn't it.
A lot of a lot of the companies are down. So it also speaks to the non AI and members.
Darren, this was great it's going to see us, sir, thanks for sharing your thoughts. Darren Pronk there of wel Faco, Poosha Shreenramp and the team over at Barclays maintaining their call for one cut this year, writing quote, we continue to think the cut to take place at the earliest in September. Our baseline is predicated on inflation gradually moderating in the coming months on a sequential basis and the economy gradually slowing. Foosua joins us now for more POSA.
Great to have you with us on a program. I just want to summarize the data we've had so far this week. CPI cooler than expected, PPI downside surprise, then jobless claims happened wrong kind of upside surprise. What did you make of the claims print yesterday? And how concerned should we all be?
So I thank the good morning. I think, you know, we really did take too much signal from the claims data, you know the fact that it did tick up for the week. I think if that trend continues, it would be in line with you know, some continued moderation in labor market conditions, which you know really is a welcome sign I think we should all remember labor market conditions are very strong, whether you look at you know, the three month moving average of payroll gains or even the
latest payroll report. I think some moderation is welcomed, particularly from an inflation standpoint.
Jeff You earlier this morning from PNY said the market is more dubbish than the Fed. It certainly seems that way based on the bond market rally that John was just talking about. You could see that into some of the implied cuts. Do you think the market is wrong to be so or do you see that the Fed basically is trying to have a hackish health just so they don't get it wrong to reversal of what happened at the end of last year when they indicated that they would be cutting rates.
I think, look, I think the markets don't necessarily price just the baseline. They've got to price, you know, risks around that, so you know the pricing is what it is. And as faw it, you know what the Fed signaled I think with a very balanced sort of a message. You're right, you know they have been burnt once the end of last year when there was a dubblesh stilt in December after a run of you know, weak inflation prints and then look what happened in the first quarter.
Of this year.
So I think just you know, they don't want to make too much of one data point, and the totality of the data that they keep talking about, whether it's activity or labor markets, those haven't really shown a material easing. And so you know, what they signaled in their SEP on Wednesday was very much a tone of patients of caution, of course, being cautious, and they want to gain confidence that things are moving in the right direction.
What do you make then, of people who say, well, if you put it all together, core PCE, which is one of the key inflation metrics to the Federalserve looks at, is something that is very predictable. If you have the inputs of PPI and CPI and some of the other
data that's already come out. People are now mapping out something akin to a zero point one percent increase in core PCE, which would be very much in line with the Fed's goals bringing a year over year inflation to something like two point six percent.
How much do.
You see that as actually giving a green light to the FED as early as September, even though that's not your base case.
So look, I think we we agree with that translation. Our own forecast for core PC in ME is a point one three percent, so to your point, a very benign, very soft looking core PC inflation print that said, you know, we like to say that the FED is not data point dependent, and it came across quite clearly in check ours press conference as well, that they didn't want to meet too much of one data point. He did say that, you know, he welcomed the ME inflation outcome and that's
the step in the right direction. So, you know, like we've written, should inflation outcomes continue to you know, move in the right direction, i e. Come and soft. I think that will open the door to a rate cut. But is the may PCEE alone enough clearly not.
Pose sure some personal bass here, I have to say, I wonder how many people agree with me. I'm far more interested in how we end the year on unemployment than i am on inflation. I sense from a lot of people that come on this program they have far less confidence about where this labor market will be by year end than they do want how inflation's going to attrack.
And the reason I asked this question is because the federal reservers come out and said, basically, we will end the year with unemployment where it is right now, and I'm trying to work out how much confidence you have the unemployment does actually stabilize at these levels the next twelve months plus.
You know, it's that that's a hard one to forecast. You know, we work with the indicators that we have, and clearly we haven't seen much by the way of move up in the unemployment rate. Of course, you know, we were at three four at some point in time. You know, we've definitely ticked higher, but a four to four point one percent is clearly not something that is you know, weak by any standards, and I think this
is a labor market that is still running strong. You know, we we look at the data as SOS we as we can. Of course, you know, we're cognizant. A lot of the games are concentrated in the private sector, particularly services, particularly you know, education and healthcare, some from leision, hospitality. So we've we've heard those arguments that the games are all pretty narrow, but the fact that they continue, you know,
month on month is one thing. And second is you know, we're looking at the Joel Stata job opening is sure, you know, come down a bit, but still quite elevated. And you know, if anything, it looks like you know, that momentum is still there. So you know, we've we we're looking for any signs of cracks. We haven't seen so much. So you know, we're we're sort of with the ft that we don't see a big spike in the unemployment rate by the end of the earl.
Push you appreciate it. Push your stream ramp of Barclays. Tesla shareholder's foken to approval on must fifty six billion dollar pip package and green light. The company has moved to Texas to stock having a pretty decent twenty four hours, Tasha Kni of our constructive on the name right in this our confidence in test usibility to launch a robotaxi network within the next five years has increased considerably. A place to say that we can catch up the Tesla.
But right now, Tasha, great to catch up with you. I just want to start with the shareholder votes of the last day or so. Of course they've been going on for a number of days. Do you think we can leave this issue in the past now and move on.
Well, you know, I'm not a legal expert, so of course, you know, we know what investors want, and now it could be up to the courts again. But what I'll say is that I think it's positive that you know, we saw investors considering the proxy and putting their own
votes in voting for themselves. You know, when we look at Tesla, where we certainly want Elon Musk to be at the helm, especially when you can consider the transition to fully autonomous driving, which is what we think will drive the majority of the value of the company over the next five years.
Can you walk us through why and why you think that's the real deal and we'll see it that quickly over the next five years.
Yes. Well, so we already have robotaxis right Waimo, which is Alphabet's autonomous driving project, is driving around Phoenix. They're you know, starting an effort in La. They're in San Francisco, but we don't have them at scale yet. Tesla could be one of the first companies to offer a service like this at scale, and it's because they have a massive data advantage. They're collecting information from customer cars that
helps them train their models. You know, and they have more cars on the road than any other autonomous effort that I know of in the US, And you know, this is their plan. They're layering on software updates incrementally. Right now, it's the full self driving software that's available to customers. Eventually customers will be able to take their
hands off the wheel. And then last night, you know, we heard Elon Musk talk about extensively the robotaxi effort, where you, as a customer, could sign your car up when you're not using it, you know. But more likely, I think it'll be a fleet model, so you'll have
perhaps another company that owns and maintains the fleet. Tesla collicks a take rate off of the mile revenue, and you know, I think this could have very attractive margins, higher margins than the current business model today, which is mainly selling vehicles, right, and this will be a recurring revenue. So so again we think very attractive from an economic perspective to Tesla. But more importantly, it'll change all of
our lives. You know, I think this is one of the greatest AI projects in our time, and we are so lucky that we get to witness it.
Tasha, there are some real questions about Elon Musk's leadership and whether he is focused enough on Tesla and diverting some of the chips that have honestly reportedly have gone to some of his other companies to really get some of the ROBOTAXI efforts fully underway. Why do you think that's not a concern.
You know, I actually think it's a positive that Elon Musk runs a number of companies. One we've heard and we've heard them talk about this. It's great for talent acquisition. We've seen employees move in between his companies. You know, if you're the top a AI engineer in the world, you're not going to get bored working for Elon Musk. You know.
The chip story.
What I point out is, you know, automakers actually often negotiate on behalf of their suppliers, and they do so because of economies of scale, they have better negotiating leverage. So I think having you know, all of these companies that you know, many of which might use in video products,
is again actually a positive here. And we've also seen manufacturing innovations come from SpaceX that bleed into Tesla, So you know, and I think you have to look at the Tesla results here, right, I mean when you're talking about the pay package that the stock has risen over one thousand percent over that time period, So he's really delivered shareholder value. And I'm again so excited for the future because we're really on the cusp of autonomous driving today.
Tasha, is there absolutely anything that could happen that is a potential event in the next year that could shake your confidence right now in Tesla?
Well, you know, really, what I'm looking for is for Tesla to cross that threshold into fully autonomous driving. We've seen them tease this robotaxi service or a ride hill service, both on the past Earning's call and at the event last night, so I'm looking for that launch. So we have an event coming up in August from Tesla that's going to look at the purpose built robotaxi, the next
generation car. I don't think they need that car to necessarily launch the service because the current fleet is capable of it. But I am looking for details at that event about what this business.
Model will look like.
We heard some of that last night, so we know that they're thinking through the back end logistics of how this will work. So I think that you know, they could cross this threshold within the next year or two, and that is the catalyst that you know, I'm most looking forward to.
It's Tesla twenty six hundred dollars price target, which is pretty punchy, as you know, and certainly gets attention, that's for sure. Can you tell me the biggest risk factor associated with your cal what would change your mind?
Well, you know, certainly, I think that solving autonomous driving is a very difficult problem and so and you know it's hard to time that exactly. But I again, as you mentioned, you know in our blog which is on the Ark and Best website, we think that this could happen in the next five years, and our confidence has increased with all the advances in AI and Tesla's you know, improvements that they rolled out to customers that actually own the vehicles.
In the software.
So you know that that is a risk. Again, we're confident that they can do it, but it is a difficult problem to solve. I think, Uh, you know what gives us confidence from last night is, you know, if this pay package gets totally approved, you know, we know that Elon Musk is going to be at the helm with this company for at least five more years. He has limits and when he can exercise his options. So I think that that is another key piece that we
want Elon Musk to stay. We want them to be incentivized. So I think that's ultimately a good thing.
I do you know controls the fight of this call? Do you think it is tested on their ability to execute or do you think it is the regulator local authorities who will ultimately have the decision to make to give this the green light or not?
Great question, you know, it's just going to touch on that. So often people are concerned about regulation. I actually think that, you know, again, the more difficult problem here is actually making the technology work and scaling this type of service. The US has actually been surprisingly lenient with autonomous driving because it's been up to the States and we've seen you know, Tesla right now they have over a billion miles cumulatively in the full self driving software suite driven.
So I think that they'll be able to statistically prove to regulators since this is safer than humans. And actually we've done some research on this, so if you look at their full self driving software suite, the last time they give us a statistic which is a little over a year ago. Now it looked like it was five times safer than human driven tesla's and even safer than the average car on the road. So we're already seeing those proof points, and I think, you know, it could
get even better. In fact, Elon Musk has hinted that they have line of sight to maybe a four x movement of that, and that's what's going to matter to regulators here. So we're already seeing those safety points.
Tuchakny, great to catch up with you. Thank you to Kenny There of ARC Investment. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiopolitics. 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 opp