German Elections and Markets

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This is an honor actually with a service to the International Monetary Fund.

And now at Berenberg Bank.

Holger Schmieting, a truly expert on continental Europe, on the core of Germany, the Netherlands of France, all the challenges of Eastern Europe, over to Ireland, maybe a booming Ireland, the challenges of the United Kingdom and across the Atlantic. Doctor Schmiding, thank you so much for joining on this

Well, he would probably be quite disappointed because we now have right wing fringe parties and left wing fringe parties in the sense of being at the somewhat extreme ends of the political spectrum. We have these parties with more than one third of the seats in German Parliament. That was clearly clearly not the case under our law or anywhere over the last last decades. Germany is facing significant problems. The key is that the next government tackles the issues

Us The solution for Germany in this goes from a share of Germany of the forties and fifties to particularly the collapse of the wall and all the reunification of eighty nine ninety ninety one.

Holger Schmiding.

The speed of parliamentary process has always been slow motion by United Kingdom standards and of course by the fractious American standard. Can Germany speed up their parliamentary process?

Given the challenges right.

Now, well, given the challenges that we have to build a coalition first before mister Mattz, the leader of the center right, will be chancellor.

This is not easy to speed it up.

The chancellor to be Mister Matz aims to have the coalition talks over by Easter, which is about eight weeks from now. That by continental European standards for building a coalition would actually be fairly fast. But at a time when we get almost every day news from Donald Trump out of the US, that is of course a problem.

We have a bid over well, vacuum is too much over world.

But we have a bit of a period right now where Germany and Europe cannot really act fully and that is of course a quite unfortunate thing.

At the moment Holgar, it's.

Being reported that the far right alternative for Germany, the AfD party, doubled its support to become the second strongest party with twenty point eight percent of the vote. Is the expectation that that momentum in terms of growth for this party will continue going forward.

Well. First of all, the AfD fortunately did not do significantly better than opinion polls had projected beforehand, and it will now depend on the new government by maths whether it can tackle the issues the AfD really feeds on discontent, especially discontent about controlled migration, where quite likely the new government will take a harsher approach, but it also needs the return to economic growth to dent the appeal of these parties at the left wing or the right wing

The economic challenges Holger talk to us about really kind of what they are and in reality what can be done to address them.

The economic challenges are that the core of the German economy, the middle stand these small and medium sized companies which often have their dominant position in global markets in a tiny meach. That these companies are no longer investing as much at home as they should. They are unhappy about bureaucracy, They are unhappy about the political uncertainty that we had in the last fifteen months during the demise of the

So we need to do.

Quite a bit in this country to strengthen our pare. It is less about physical space. Yes we need physical space for the military, but it's mostly about the more difficult outward supply side. Crow growth reforms, which include pruning of welfare benefits so that people seem more reason to work rather than on beyond welfare, which includes a few

If it's just joining us around the world.

Holger schmating a Behreenberg Bank with this was some very good answers, a learning process and the German elections. What it means for Europe, what it means of course for Germany, and a curse across Atlantic what it means for America again with Behrenberg Bank, Paul, I.

Think I speak for a lot of Americans when I looked at the map of the voting in Germany and it really just surprised me the strength of the far right alternative for Germany in the eastern part of the country, the geographic differences in political support here. Can you give assist a little history there and how the various parties and a coalition might try to deal with that.

Well, the map really looks stop if you look at it in a sort of first half the post which party came number one, Well, then we really have pretty much a clear East West divide.

This says many reasons.

Part is that in East Germany fear of economic transformation is more prevalent in the west. After all, the East had after the collapse of communism in nineteen ninety a very very painful transition. Part of that is also that in East Germany there is more of an inclination in the sense of let's rather do a deal with poutine with the Russians than give money to Ukraine. The East Germans have been occupied by the Soviet Union the Russians of course for a long long time, so that's a

As for demographic.

Means, quite a few people from the more rural regions of East Germany have left for the cities, partly in the West, and so this left behind feeding is more prevalent over there. Again, the government needs to tagle deep seated fears about migration, uncontrolled migration, and get economy going in order to address that.

Part of the work of Bloomberg surveillance over the years folks, and I think of American experts like Richard Clarita expert and Germany at Columbia University here Adam Posen at the Peterson Institute are delicate questions.

We do that now with Holger speeding Holgar the Great Fear.

Not so much in America, where I think it's distant. But what I see in the European press is is any sort of analogue not back to World War Two, but back to nineteen eighteen to nineteen twenty three and the invention of something called the National Socialist German Workers Party?

Is it overdone? Is a media ploy?

Give us a measurement, doctor Schmieting of the analogue back to another time of the far right in Germany.

I think this is far overdone. The far right is not like that.

We had a bit of a party, or we have a bit of a party called bs W which tried to combine a kind of national tinge art on migration with a social tinge a lot more welfare. And this bs W did not do that well. They only got just below five percent of the votes. It is much more a feeling of left behind. And what I said about the remembering the pains of transition that is behind the strength of.

The AfD in the East.

And the AfD is a nasty party and they do have some neo aasis, but it's an exaggeration to say we are back to day where we were in the early nineteen thirties. I think an analogy for the political situation in Europe is much more like the one before World War One, you could say, where we had a lot of nations competing with each other, rather than a European union. What we now see is a bit of a rise of return to nation rather than focusing on European issues.

Doctor Schmiding, well, thank you for that. There was a very elegant answer to a very delicate question, doctor Schmiding. If we have an isolationist America is posited by the President of the United States, how does that affect all of continental Europe and particularly your Germany.

It of course affects us a lot.

First of all, we are relatively open to global trade. We depend on global trade, and isolationist America, the protectionist America is bad for American consumers with higher prices and bad for our companies which can.

Deliver and do deliver great goods.

Even more importantly, an isolationist America that does no longer have a protective umbrella over its European allies means, of course that we a have to do much more on our own to defend against Putin, and we really.

Should do that. But it also by putting.

Into doubt the basic premise of NATO we defend each other against any potential aggressor. That is an encouragement to potential aggressives, that is an encouragement to the nationalists, and that of course is something we would not like to see all in all. To some extent, the Trump policy seems to boil down to I don't like the European Union.

So getting rid of this kind.

Of joint market f one hundred and fifty million consumers in Europe seems to be one of the things that's underpinning the Trump approach to Europe, which of course is a challenge to us, as the European Union, our common market is the basis of our prosperity and to some extent of our peace.

Hobert on immigration here in the US. Here in the US, it's relatively straightforward dealing with immigration. We know who's coming into this country, we know where they're coming in. It's just a political will to limit that if we choose to do so. How is it in Germany.

Well, we could close our borders much more than we have done. Of course, that would have repercussions on our immediate europe neighbors. Yeah, who might then be stuck with more of those migrants who actually want to get into the richer Germany. So there are European repercussions upon taking

It to Germany.

And second, to better protect the common external borders of the European Union so that the uninvited migrants do not even get into any of the EU member states. It is a process that is on its way European migration policy is being toughened and the numbers are coming down, But of course it is this is Europe, a process that takes time, and the populace feed off on what they think were past mistakes rather than on what is the current Stars.

Of Holger, thank you so much, greatly, greatly appreciate it this morning, Holger schmading delicate questions there in Germany.

I hope that was informative. I learned a lot there.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from seven to ten am Eastern. Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube.

Joining us now Michael Wilson.

He's chief US equity strategist at Morgan Stanley and exceptionally well timed here with a really smart Sunday note A bit ago on alpha over beta. Explain the Greek letters, Mike Wilson to us, What is alpha?

What is beta? And why does alpha win?

Hey?

Good morning, Tom.

Yeah, I think most of your listeners understand this. Beta is sort of your market level risk, where you just own the index and an alpha would be your stock picking.

It's that simple.

And you know what's happened in the last three months is that the the index itself has gone sideways and and but there's been great opportunity under the surface. And that's really the job of most investors is to pick stocks and try to beat people. So it's it's a good it's a good outcome if it can sustain for active managers.

And by the way, people say, oh.

Stock picking market, it doesn't mean it's easy, but I mean it does feel like what we're dealing with.

Kids kills me.

He puts at the end of his notepall enjoy your Sunday. Come on, Mike, that's a Sunday, Mike. I'm looking at the Bloomberg launch pad and I got a one ninety nine on the ten year real yield. My idiot ambiguity meter is that's a slowing economy. When you look at Seth Carpenter and companies work, do you model in a slowing or level economy where we walk away from double digit earnings growth?

Yeah?

Well, I mean, remember the economy is not always the market or earnings. And what we've seen in the last I would say a really three years is an economy that looks fairly robust at the you know, at the aggregate level you can talk about at the consumer level or just in terms of GDP, but then when you look at earnings grow for the last several years, it's been pretty lousy for most companies until recently, recently we've seen a pickup.

More companies are starting to grow again, and I.

Attribute this to essentially the government being you know, crowding out if you will, much of the economy. That is the reason we have inflation. For the main the main reason we have inflation, too much government spending. Also it has it has kept interest rates higher than they would

They're not going to raise rais in our view, but.

We're trying to find that equilibrium now, like how big should the government be? How how can we liberate the private economy in a way where we have better velocity kind of in the in the real private economy than just government.

Mike, I'm looking also your chart book where you guys track what companies are actually saying on their conference calls, what's top of mind for corporate America, And I guess, not surprisingly, one of those key issues is tariffs. How did teriffs kind of factor into kind of your view of inflation and maybe how the FED will proceed and how that might impact stocks.

Yeah, well, I think the FED has told you, you know, pretty straightforward since December that the uncertainty around terrace is another reason why they're probably going to take a pause on the rate cutting campaign.

Now, remember, they have another lever.

They can use, which I think they will, which is to basically end QT finally, which is you know, a decent amount of repurchases then across the curve. They can probably start doing that in May or June. And that's another lever that they can sort of pull on. As far as companies go, I mean, companies are always you know, trying to incorporate these changes into their their business models

Marcus, we have Mike Wilson with us, with Morgan Stanley, Bob Doll to join later.

We welcome all of you on your commute.

Accrastination on all over different radio platforms and on Bloomberg podcasts. Subscribed to YouTube Working for us each and every day. Subscribe to Bloomberg Podcasts on YouTube.

Paul Mike, We're gonna get We're gonna hear from Nvidia Wednesday after the close. That's one of the last big, big companies reporting earnings in this in this cycle. Here, what did you take away from this quarterly's earnings cycle? And you know, more importantly, maybe the guidance you've been paying attention to.

Well, first of all, it shows that fourth quarter was boon times. Now.

Some of that, once again was government fiscal deficit was up forty percent year every year. But also there was some excitement around you know, just a clean election, maybe have more pro growth, you know, administration, and so there was more activity in the fourth quarter. And so what we're seeing now is kind of just that holling off a bit. Then maybe we get a little ahead of ourselves. Higher rates and hire.

A strong dollar was weighing on some of the guidance for twenty five.

You know, companies tend to do that seasonally anyways, they want to lower the bar a bit at the beginning of the year. But then the other things that have been we've been focused on really in no particular order, terrorists as you already mentioned. Number two, we have immigration enforcement, which has been a huge fiscal boost and also a labor supply boost. And then we have dose, right, the Department Government efficiency. They they're off to an aggressive start.

Those those require congressional approval, and.

So that's just not you know, that's going to take six to twelve months, and so the bad stuff first and good stuff comes later.

Mike will So to get back to your idea that ELFA is the way this works, and let's just generalize that as individual stock selection. What is the Mike Wilson process? There is it securities research, Graham, Dot and coddlet bottom up. Is it a cell side concept of looking at what's going to win or is it more factor based where you're looking at different items and trying to figure out like say, well we'll momentum or something else win.

That's a great question, Tom, and it has changed over over time. I think the main thing that's changed in the institutional world anyways is the time horizon. So you know, twenty years ago, you know, I would say institutional investors were kind of in the six to twelve month time horizon. It's now, you know, one to three months and in some cases one to three days.

So that's what's.

Changed, and that means you just got to be really laser focused on kind of news at the margin, whether it's fundamental news around a specific company, whether it's a macro changing event that can affect certain companies differently, so all the things we look at. I would say that quantitative analysis and factor analysis has probably picked up the most most institutional investors now putting ourselves as advising them

Bottle that for all of you worldwide, whatever your sophistication. What Mike Wilson just said there and Paul Sweene and I lived this of where three years became eighteen months and twelve months became three months. And what are we doing the window dress at the end of the quarter. The short term ism now? And how can you prosper by pushing against that? Is Mike Wilson alluded to there. That was extraordinary.

Yeah, a lot of it. I think coincident with the growth of hedge funds as well. Mike, what screens well for you guys these days?

Well, getting back to the stock picking, I mean, you know, now this particular factor always screens well, but it's extremely important now is earning your vision breath. So companies that are showing are showing the ability to kind of you know, continue to raise numbers.

You're getting paid for that more now that you normally do.

You always get paid for that, but now you're getting paid for it more and you're getting punished for it.

On the other side. The other factor that's really working is quality.

Quality has been working really well the last two or three years because of that sort of crowding out feature.

But in the.

Fall we saw a movement towards low quality, and then now we're giving that back. So large cap, quality, earning division breath. Those are the three most important factors. And of course pricealmnum still you know, is important as well.

How About on the industry side, what stands out to you guys these days.

So it's been consistent really since November.

Financials mainly the banks as opposed to other financials and capital markets companies. Software particularly relative to say semi connectors and hardware, they're less affected by tariffs, and there's some reinvestment now as we go from the enabler to the adoption layer for AI. That should benefit media entertainment, you know, not just the media and entertainment and a traditional media entertainment names are doing well.

Remember those are mostly domestic businesses, yeah, mostly domestic. Yeah.

And then of course services, consumer services, which is the one part of the private economy which is still doing quite well.

Services is doing much better than goods.

Mike.

I'm guessing from your clients you get an evaluation question or two every day. Boy, this market seems expensive. How do you respond generally?

You know, we don't get many questions on evaluation anymore. I think people have given up on that metric. That metric is faded, and it's importance in the short term, okay, And as I like to say, you know, in the short term, valuation doesn't matter at all. In the long term, it's the only thing that matters. So we've seen, you know, as race went back through four and a half percent of the upside, we identified that as an.

Area where valuation would matter. It has mattered, but not to the degree that it has historically.

So I'm not sure what's going to get us, you know, for that to become in vogue again.

But it's it's not an important factor at the moment.

Told us about breath of the market, Mike. A lot of folks in a tors and slot today was just out with the note from Apollo, just talking about the concentration within this equity market, particularly in big cap US technology names, and how that's really relative to the rest of the world just getting more and more pronounced. How do you think about breath or lack of breath in this market.

Well, it gets back to quality.

So and I would say the as bad as the concentration is in the US, you know, we have like five stocks are thirty percent, it's even worse in places like Germany where we have three stocks or thirty five percent, or in parts of eight. And what's going on is the same thing that's going on here, which is that people are crowding into kind of these large camp quality stocks.

You know.

Basically people, you know, the markets are smart. They've crowded into what's working. What's working is large camp quality, particularly quality growth, because they have scale and they can operate in this world where perhaps rates are high, the government is a big part of the economy, you have a lot of uncertainty. Multipolar world, geopolitics is you know, kind of putting pressure on certain regions, and you know, I

Mike Wilson very quickly here talk about enthusiasm. I mean Michigan State taking up Michigan and basketball. That was like Big Ten Classic, wasn't it.

Well, there's a classic for if you're not a Michigan fan. But we can still come back. The Big Ten is always competitive time, as I like to say, in both basketball and football and other sports as well.

So and Big Blue has had a good run.

Yeah, I mean they're in second place. I mean they have the two teams up top of Big Ten. Is important? Why is USC in the Big Ten? Does Michael Wilson understand?

Please tell the kids from.

Los Angeles to come all the way to Piscataway, New Jersey to play basketball.

Oregon, it's in the Big Ten. Mike Wilson, this is Unamerican.

I hope Michigan takes every victory from the way pushes those Westerners.

Out of it.

Mister Wilson is with Morgan Stanley. Thank you so much, Mike Wilson.

This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Apple Corplay and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.

So what you got to do.

For Bob Dahl, particularly having Mike Wilson and then Bob Dole's great Bob Dahll with is the Crossmark Global right now?

Bob, you know what I did. I did all imitson.

So I go back to what I call the Guadalcanal Low of nineteen forty two, and you strap out a log Dow Jones Industrial average and we're really not all that extended. I mean, we're out one standard deviation. But do you see an extension of prices right now? Do you see an exuberance right now that I'm missing?

Well, the way I see the exuberance, if there is any I think you're raising a good question is about valuation.

It's rare.

We see stock selling it twenty two to twenty three times earnings unless we're in a recession and have depressed earnings.

Earnings are far from depressed, of course.

And it's likely that those earnings are going to fall short of expectations.

I look the total return from that nineteen forty two low Paul dow Jones seven point seven percent here, So there's that single digital return.

Worth exactly Bob. As Tom mentioned, we were just talking to Mike Wilson Morgan Stanley and I asked him, you know, how many valuation questions does he get every day? And he says not many. Is that in and of itself a reason for concern?

It is?

I find the same thing went out on the stump talking to financial advisors. Very few questions about valuation. It's more about, you know, the Trump agenda and AI and other subjects that generally the looking for a positive answer.

They don't want to hear the yellow flag of value.

So how do you try to how do you try to frame that valuation discussion as a either a headwind, a risk or maybe not so much.

Yeah, My view is the valuation is a bad short term indicator. We all know that, but you can look at the long term returns one, three, five, ten years after certain pe ratios, and it's over the five and ten year periods. It's a great indicator. So it doesn't tell us markets are going to have subpar returns starting tomorrow for the next three months, but it could mean for the next three to five years.

What do you do with MAG seven?

I mean, you know, Bob, you're too young to remember nifty to fifty, but I'm sorry. Maybe it's a nifty seven is what we ought to call it. Yep, that's what people own, right.

Yeah, there's a lot of ownership.

My accountant recommendation is own some MAG seven, but be underweight those benchmarks.

It's it's a.

Big, big, big waiting, as you know. And my fundamental backing is to look at quarterly projections of consensus numbers for the MAG seven and then the other four ninety three. MAG seven growth rates are slowing for ninety three are rising, and that tells me I want to be underweight the MAG seven and overweight the four ninety three.

All right, we're about eighty eighty five percent of the way through this earnings season here, Bob, what's your takeaway here.

What have you heard?

What's the guidance kind of suggest to you.

The numbers have been very, very good, with a few notable and visible exceptions. As you know, the banks, the financials out of the gates were just amazing numbers. The problem in my view is revenues are up five percent, earnings are up fifteen percent. I can't expect margins to expand at that pace going forward. That's almost what's necessary to eke the twenty twenty five and now early twenty twenty six numbers, they're for strong Earnie's gains.

I think they're overstated.

Bob.

We've got a.

Crushing market drawdown from the recent higher down two point one percent. I'm absolutely just crushing.

This came up this weekend, and it's a phrase from you know, years ago, Bob dog. If we get like a.

Ten or twelve percent correction, an eight percent correction, dare I say fourteen percent?

South? Do shares move from weekends into strong hands? What does that mean?

So generally, as you know, as we go down, more and more people want to sell. They don't sell at the top, they sell as things are moving down. So it would concern me somewhat, but I come back to not just evaluations, but the fundamentals. Are we in the face now of some sort of growth scare. Whether the whether the scare leads to actual slowing growth, who knows. But when you look at recent housing data and the bad tail sales, the consumer sentiment numbers the housing data.

You have to wonder somewhat if things are going to slow down a bit. My guess is they probably will.

Bob Doll, thank you so much.

The cross mark this morning just a wonderful way to get Monday started.

Here.

This is the Bloomberg Surveillance Podcast. Listen live each weekday starting at seven am Eastern on Apple Corplay and Android Auto with the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.

The daily front page is the Lisa Mantale Hour. She was at one am working on this. What do you have?

Lisa?

This is starting with the Wall Street Journal. So they're saying there's a shift in the housing market. Buyers are finally starting to get the upper hand again. Redford is saying the average home now changing hands for less than two percent less than the price on the listing two percent. Yes, So the reason why I know growing lists of supply of home on the market, the houses on the market are there a bit longer. The most buyer friendly area

Under that and I went under it.

So now you have the extra, you know, side place for the family to enjoy on the weekends, and you still get your place, but you don't have to be so competitive and be outpriced and frustrated.

What do you see on the shore, I mean it's just crazy.

Yeah, and people buy something if it wasn't built in the last ten or fifteen years. They knock it down and build something. Yes, yes, that's amazing.

Okay, so something new at Springs Raining they were testing out the robot empires. They had it in the miners like the past few years.

Yeah, but I see.

The thing is is that it's not actually erupt so the umpire is there. The only people that can challenge it is a picture of the catcher of the batter. Those are only three people that can challenge it, and when they do, you only get two misses.

Kind of like football. I guess it's the same thing.

So that's a difference. But what they're finding is that they're not sure if it's going to work or not. I mean, it could be in twenty twenty six, but do people want this? Do the fans want it?

Do the players want it?

It's not as clean as the incredible rule changes of two years ago.

Yeah, it's all there is Terry.

Francona, the smartest guy in the planet. Do you know he's down the Reds. He's out there, you know with the Cincinnati Reds.

A lot of.

Terry Franconis is we're not going to do it because it's not going to be in the majors this year, right, distract.

So I think it's like a year ahead.

Yeah, there's maybe.

Not.

But but the thing is is if you're a batter, you know, and you see it and and you know that it's not a strike, but you you're mad and you don't want to strike out, and you challenge it, Well, you're risking materials.

You're going to have this or we're going to have you know, calling the balls.

So I don't know, I don't know that's parents will take that one.

Okay.

The Mark German he was were had in the in the in the studio last week. Okay, so his Power On newsletter actually asked a question, do you go for the cheaper iPhone or do you go for the regular, the normal one? And he actually breaks it down. We're talking about the iPhone sixteen E. So it's five hundred and ninety nine dollars one hundred and seventy more than the iPhone se that it's replacing.

So should you buy it?

The price difference he said, it amounts so an extra eight dollars a month if you have that two year installment plan. And he says, oh, you're not missing much by buying the sixteen over the regular. He feels confident recommending the cheaper option as a good enough phone. So his basic advice here it is, if your current iPhone is out of date, right you're paying for new devices

I mean.

Issues he put. He says, Look the various features. I didn't even know they were there. It's at like.

If you camera features, video features, those kind of things, phone call with Okay.

Well, thank you Mark German for being with us and profound with his release this morning of job formation in America.

Lisa Mateo, thank you so much the newspapers.

This is the Bloomberg Surveillance podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday seven to ten am Easter and on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal