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It has been too long. Brian Levitt joins us right now with Invesco with a really interesting and holistic view of tying it together to have confidence to invest. Parktrin from the University of Michigan. Can you write a midyear review right now? June thirty becons, July onet becons. Is it possible to do an Invesco midyear review? Yeah?
I would say the midyear review is set up for the economy was good. We got policy on certainty. Policy uncertainty got worse than it was expected, led to some recession fee, and then policymakers generally backing off at least pauses with regards to tariff's federal reserve, perhaps sounding maybe a little bit more dubbish. And so the market is now set up for expectation of incrementally continued improvements with regards to policy.
How about the federal reserve?
What kind of policies should we expect from the Federal Reserve here today? It feels like the economic data that they rely upon suggest that maybe they kind of sit on their hands a little bit here.
Yeah, they may sit on their hands.
I think ultimately we're going to see rate cuts, and so the market, whether that comes in a month or six months, the market believes that interest rates on the short end are going lower, and I suspect that's ray. I mean, we all know the Feds in a little bit of a bind because growth is likely to slow, prices are likely to rise as the tariff's effect starts
to hit. But if you look at leading indicators for the employment market and for the inflation story, you've got jobless claims ticking up a bit, You've got inflation expectations very stable in the bond market, and so the Fed is likely to the air on the side of easing.
What I really this is really important question, folks. Everybody out there go to cash and market timing and that what is the Levitt prescription to get back in the market. When you know you blew it, you feel terrible, you're not telling your spouse, loved one what really happened. You've missed the boat to a record NASDAC high. How do you get back in the game.
Yeah, it's always a challenge. If you look historically, I mean people will talk about dollar cost averaging, or people will talk about, you know, slowly moving back into these markets. Historically you're better off. Even if you're investing at the market high, you're still better off historically than sitting in cash or or even dollar cost averaging. So I would
advise and investors to be in these markets. What you can do rather than have it tom be all or nothing, I'm in or I'm out, and you can focus if you're concerned, you focus more on quality. You focus more on businesses that are able to withstand some of the challenges that we're dealing with, which is really why Nasdaq
is back leading again. Could we see an environment where market's broaden out, where you want to be more small cap, more value, All that sure probably requires some easing and a pickup an economic activity.
So Brian, if the Fed's going to cut maybe once, maybe twice this year, that's about it. So it feels like if the market's going to move higher, earning is are going to come to.
The forefront yet again.
Yet I think most investors feel like there might be some earnings risk out there. How do you think about the earnings outlook here?
Yeah, there is some earnings risk with regards to what we're grappling with with tariffs. I mean everybody's talking about will.
We see some price shocks?
Will the consumer feel it? I think we sort of hope so, because if not, that these businesses are absorbing all of it, which will be a hit to profitability. But look, it's still a good backdrop. I mean, if you think of the nominal growth environment, you're you're looking at you somewhere around four four and a half percent.
So that's the mist call of the first six months.
Is nominal GDP nominal GDP state substinate. I mean that's why I say the set of coming into the year was good. The economy was resilient, inflation was stable, and inflation was stable at the upper end of the Fed's comfort zone. We hadn't seen that in years. That's a good nominal growth backdrop for corporate profitability. Policy can shift that, and that's why you had a twenty percent decline following
going into and following Liberation Day. I think the reality with regards to tariffs, is that consumers and businesses can make changes, we can adjust. We're really just looking for clarity.
Brian, talk to just about is there anything that screens well for you guys sector wise, factor wise?
Were you guys having your conversations these days?
Yeah, I would, I would say on the fact their side, it's still a quality story. So we're still in an environment where leading indicators are pointing lower, and typically when the leading indicators are pointing lower, you're waiting for the policy response, and so right now it's a it's more of a quality environment. I think we'll get back to more of a recovery feel where we get policy response and leading indicators pick up, but that that may take a bit. On the income side. I still like credit
thirty seconds. We didn't have you any of your talk markets. Danny Wolf of Michigan. Is he the real deal?
Sure? In the draft tonight.
I think he's the real deal. You can never go wrong having seven footers, right, you know.
How tall is the guy from Duke six short? Okay, Brian Levi, thank you so much. Thank you with the investo.
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This is a joy in our studios in New York. Is someone definitive in Hong Kong. He's never gotten over the redo of the Mandarin mbar where they ruined the top of the Mandarin Hotel in Hong Kong. Frederick Newman is Chief Asia Economists at HSBC with wonderful Johns Hopkins Academics. I'm gonna steal from Paul here. You walked in the studio and Paul said, is Hong Kong changed? What is the state of Hong Kong today?
So the economy is still a bit soft. We have very high interest rates. We got us interest rates chauness. Economy is not doing that well at the moment. But there is a real buzz there because we have equity markets coming alive, and we had about five years of down markets and the kind of the heart.
Of the city's equities.
You see cab drivers with their four phones playing, you know, equities all day long. And so if you get the market come up, you got ipo pine. I'm being full again, that really adds a bit of a buzz. So it does feel really there's optimism coming back into the Hong Kong Financial Center.
How does this world of trade, tariff's, trade policy uncertainty, how's that impacting Asia Pacific region.
Well, it's a huge headache, right that the region was built on exports and a lot of exports to the US, and so there's a lot of apprehension. And it's not just the exports we worry about. It is also the cap X that's associated with it, right, and so that's the worry. But on the other hand, if you look at China, for example, owned China's exports to the United States are only two point five percent of China's economy. It's not the end of the world.
And that slows down again, it's so important.
China's exports to the United States are only two point five percent of China's economy. Now many people intuitively would say it's a much larger share, but actually, if you add direct and indirect exports, about two and a half percent, maybe three if you not everything is statistically captured, but it's not more than a three percent.
I'll give you a statistic. Paul one hundred and twelve percent of Americans don't know what.
For exactly said, So, how are you guys thinking about China here in the short term and also that maybe intermediate two to three year term.
So look, even if only two point five percent of your experts go to the US, if you're not fifty percent of that off, that takes a percentage point off your GDP. That hurts in the short run, right, no doubt about it. But there's about two and a half percent of GDP fiscal stimulus in the pipeline this year, and you see a bit of that getting traction. So, for example, the past couple of months, you see retail
sales suddenly accelerating. You see at the companies we speak with are actually saying sales are picking up, and so there's a bit more stabilization coming through on the domestic side.
Actually ex China here.
You know, everybody here in the US, we've become a lot smarter about tariffs and kind of where our goods come from. And we've learned really since that pandemic that a lot of stuff is coming from Vietnam, from Malaysia.
Other parts of Asia.
Here.
Talk to us, ex China, how is Asia doing.
So big a problem for the other countries. So if you take Vietnam, for example, eleven percent of Vietnam's depend in the Vietnam Cup depends on American shoppers compared to two point five percent in China, So Vietnam is potentially much more disruption. Soda is Thailand, sodaes, Korea, sodas Malaysia, and so these countries worry a lot about the tariff deadlines coming up.
Frederick Newman with this, will they just see their chief economists their voice of Asia this morning. The zeitgeist, I'm sure when you're on the plane here, is that the tariff pain is being swallowed by Asian manufacturers, particularly Japanese car exports and such. They're eating that large new tariff. Do you buy it? And will that sustain.
Only to some extent? Because the Japanese yennas depreciated a lot over recent years, right, it seems like they're swallowing it, but really only back to twenty twenty one levels in terms of your profit margins. Perhaps, so I don't think necessarily it's that big a burden for Asia to carry in other areas. Actually, Asia will pass on these costs because China is the single producer of many, many critical items. There's nobody else who can tell you certain medical sort
of pharmaceutical ingredients. For example, vitamins right can mostly out of China these days.
How do other I'm just I'm looking at your research report because it's got a table of your forecast for HSBC. In the countries I don't think about as often as I do, maybe European, Malaysia, Philippines, Singapore, Indonesia. How did those countries interact with China?
Likely they're in some ways on trade caught to an I rock and hard place. China for them, in many ways is a larger market than the US, yes, right, And so when the US is we don't want your good or we're going to put terrius on you, then they turned to China. And and so it's in some ways if we push these countries too much, essentially it drives them, probably economically more into the Chinese orbit. Now they also face Chinese competition, so it's really tough for them to find the right path.
And look at your work, Fred Newman at HSBC and folks, it is the Hong Kong and Shanghai Banking Corporation with a heritage that truly goes back centuries. The only equivalent was John Anderson years ago at UBS. And the basic idea here is our misunderstanding of what's going on in China. And the heart of the matter to me is we have a president who thinks it's deal making or unilateral or bilateral discussions. But it's truly a multilateral Asia, isn't it.
I mean, that's the great misconception in America.
It is a multilateral Asia. The supply chains are completely interconnected across the region. Most of the goods coming from Vietnam have a very significant component to Chinese share in them, so from Malaysia. China is a dominant Asian producer and it kind of it's interweaved with all the other economy.
So, you know, we're weaned on Japan as the foundation capitalist society of Asia. Are they still? Is Japan still the dominant provider of finance?
No, no longer. It is an important finance provider, but China exports twice as much capital than Japan does, so in terms of financing the world economy, it's now China that stepped in in.
The Mandarin Hotel is a little cafe. Remember downstairs. Yeah, the little cafe. It was like something out of a Bond movie. People in there. I would read five newspapers in there is that little cafe still there on bottom.
They have refurbished it, but they rebuilt that pretty much the same way was before. So you little cafe sixties, it's still very fifty six. He has been redone, but it's still in that old island at cafe. You're still there and you still welcome to come and read your newspapers.
When you When you go to the Imperial Hotel in Tokyo, they have a huge lobby which is like a TV set for a dream of genie from the nineteen sixties. It's actually unbelievable some of the We won't talk about Fullerton's Bar in Singapore, now, will we, Fred, Yes, no, we won't. Have a few guys, Fred Newman, this has been wonderful. Please don't be a honor to have you here. He's with HSBC Hong Kong with Perspective. They're really good perspective there.
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This is a really important conversation right now. He is steeped in the international relations of Persia with all sorts of abilities as well. His book How Sanctions Work Iran in the impact of economic warfare is noted with important economics, including the University of Geneva. Oliveez joins us right now, Ali, what is a number one thing Americans get wrong about the culture, the fabric the people of Persia.
Well, I think the number one thing is that Persia is an ancient nation. It's a country that has seven thousand years of history. It had a government three thousand years ago, and you know, it is surprisingly still to this day, despite having an anti American government in the past nearly five decades, a very pro American population, which is almost the reverse of what we get in the rest of the region, which is we have pro American governments but anti American population.
How representative is the government of Iran of its people. Then that's kind of something that I think most Americans really don't understand.
Well, it's not a democratic government. It is an authoritarian government, and even its own surveys show that it's eighty five percent of the Runian population do not like this regime and would like to see it's back, But it has ten to fifteen percent of its core constituents who are true believers in this system, either for ideological reasons or because they have vested economic interest in it, and in a way they are very committed to make sure that the system survives.
So I guess one of the issues as we think about the conflict between Israel and Iran and then the US involvement over the past weekend, people have been talking about discussing regime change. Is that something that should be discussed. Is it even of a remote possibility in the near to intermediate term.
Well, first thing I would say is that we have to look at our track record of bringing about regime change in that part of the world, and it has been an abject failure after an abject failure. So engineering from the outside is not really something that we should
be looking forward to because of our track record. Second, internally, there is right now no viable organized discipline alternative opposition inside the country or even outside of the country that is able to push US regime over and take power. This is not Syria in twenty twenty four, when you have rebel group in control of parts of the country that could just march into Damascus.
Your essay in Foreign Affairs, don't give up on diplomacy with Iran. Just so important to me is the idea of who are we speaking to? Are we speaking to the theocracy? Are we speaking to the military that I believe supports the theocracy or uses the theocracy?
You're absolutely right, there's really not much difference. This is a militarized theocracy and talking to you know, like Ron's FIGN minister, for instance, was formerly a member of the Revolutionary Guards. There is really a coexistence between the clerical establishment and the revolutionary Guards. It's like the Deep States, basically Ali.
Just since the US attack on around over the weekend, there's been conflicting reports from various sources, including the Trump administration officials, about the effectiveness of and the damage inflicted by the Americans on the nuclear sites.
What are your sources telling you?
Look, the reality is, at the end of the day, there's only so much we can all know. Whether it's intelligence services or DoD or whichever government agency you look at, even the IAA, the un clear watchdog, they really cannot judge much by just looking at satellite images. The only way to get a full picture is to get the inspectors back on the ground, to be able to go into these tunnels and see the degree of damage that has been done. But there are two things we know
for sure. One, as Vice President jd. Evan said the other day, the Iranians had moved the stockpile of near bomb grade and rich uranium that they had about four hundred kilograms. And also they have a stockpile of advanced centrifutures, and those two things still provide them with a pathway to a bomb.
So that tells me Alivice that the determinant here is Israeli intelligence. I think we can all agree that the Israeli intelligence into Iran has been extraordinary and making this up folks, but stay with me, but Ali vas I mean that's that we don't learn this from a presidential statement in front of Marine one. We're going to learn this from traditional espionage and intelligence by Israel.
Right, that is correct, But there is also the reality that this kind of intelligence, when you go all out and using it the way Israel used it in its opening salvo of its strike on Iran. You also lose a lot of your assets on the ground, so it becomes harder to do this again and again. And in any case, even Israeli intelligence had admitted that the military solution would set back Iran's nuclear program by a few
months to maybe one to two years at max. Remember we had a nuclear deal with Iran in twenty fifteen. That agreement sets back Iran's nuclear program by fifteen years without firing a shot. So it's a simple math calculation of which one is more beneficial.
Ali, thank you so much. As with us are In Project, director of the Crisis Groups are In Project, is le recent essay in Foreign Affairs magazine.
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Alisia Levine, head of Investment Strategy Equities at BNY, this is what the show's about. You got Sam Stovall, with all that heritage. You and I this is before you are at Brown you and I worshiped his father, Robert stolevall years ago with lou Rukaiser and all that and Alisia Levine. To bring it over to your rigid and magical mathematics, I think is incredibly important. What is the convexity of this pain trade right now in this new bull market? What the accelerated force is shocking?
It's shocking. The if I if I just wrote on a piece of paper and that old fashioned way of what's going on in the world, a list of facts, dispassionate facts. The fact that the S and P is up this year is actually extraordinary, which tells you the pain trade is higher. The pain trade is higher because
there's so much negativity. Every conference I go to, every discussion I have, is about looming inflation, the crushing of growth, the all these terrible policies, and the market's telling you that it's not going to be that bad, and that we really have to quiet the noise around us in our in our heads and look at profitability of companies,
which is what we do as investors. Right So you know the reason that tariffs were such a shock to the market and the market sold off twenty percent, essentially pricing in two thirds of the way pricing in a recession is that that original level of tariffs was over two percent of us GDP at six hundred and fifty billion dollars. Well, that sends a two percent growth economy into recession, right, So that's why the market price in
the recession so quickly. As the tower's been rolled back, you're back to a growth area of somewhere between one and two percent, and the margins on the SMP are going higher, on the tech companies and communication service companies, and so the market's going higher as everybody's ringing their hands and talking about how how terrible it all is.
Do you think there's still earnings risk in this market? Because I think earnings are going to have to be a big driver of market performance. If the Fed's only going to give you one or two rate cuts in then this year, maybe, so I.
Do think that to sustain the market here move higher, you have to expect earnings moving higher, not necessarily in the next few quarters, but for twenty twenty six, right, because you know, over the summer investors start looking at four or twelve months, look at twenty twenty six earnings. I think the market is probably telling you that's what's
going to happen. The risk here is that we become a little complacent from the blowout earnings of Q one coming in at thirteen percent when seven percent was expected. It does sterilize the rest of the year in terms of downward pressure on earnings because you can bring that back in for the year. But then we just kind of go to sleep on the fact that there is
some earnings risk. And clearly on the retail side, you've seen some demand destruction and you're going to have some margin risk from the imports, like you can see that Tony Ism.
Numbers exactly, and the the inflation levels. You know, before this whole process, there were you know, three percent ish I'm sorry, the tariff levels were roughly three percentage. Now they seem to be ten eleven, twelve, thirteen percent something in that range, not the twenty or thirty or fifty percent that maybe was the concern, but still they're a lot higher.
A lot higher.
Is Corporate America just going to take that in the margin because it doesn't I guess that or they can be passed along to consumers.
We're not really sure yet.
I guess I think we don't really know. Okay, Like there's some discussion that also the the exporters to us are going to eat some of it as well. I think we actually don't know. If I go back to twenty eighteen, and of course the scale of the towers are much lower, so maybe it is an perfect look back. But actually inflation fell over twenty eighteen, really yes, because there was a little bit of demand destruction in the areas which had tariffs. So I think we don't actually know.
And in twenty eighteen the exporters eighth part of the tariff hit. This is much more extensive. It is akin to a consumption tax. I think there'll be rapid substitution on whatever is being tariffed. I think you see that fairly quickly. But it does mean that there's going to be some hit to certain sectors of the economy. I think likely tariffs wind up a little bit lower.
Can I go nerd?
Sure?
So? Okay, it's like it's one hundred degrees. You know, the beautiful Lego Starship in Alicia Levine's living room is melting right now from the keat.
It's got its own air.
Doctor Levine I'm going to go back to your mathematics at Chicago, and I'm going to take it back to game theory. I went back and forth with Mohamed Hilarian this morning, and he is a king of unknown unknown and the game theory. I take them market and speech is from the Guadalcanal low of nineteen forty two. You take the IBOCON chart log s and p. Five hundred and you enjoyed the leap out of seventy five. And many people will say the extrapolation of a bull market
started eighty eighty one eighty two off we went. Is that what we're missing right now is that kind of log linear lift in equities. It was a surprise in seventy five, a surprise in the early eighties.
So I think it's hard for me to see us getting to three percent growth, right. What you had in the eighties was three percent growth. So that's really what you need for nominal earnings, right, because earnings are nominal and growth is nominal. The thing here is, I just think what everybody's missing is the resiliency of corporate America and the resiliency of households. Of households. I have a chart that I use which shows the crushing of the
household's balance sheet of debt to assets. It is a crushing from fifteen years ago of the global financial crisis. It's basically been cut in half. Households are so resilient and there are fifty three trillion dollars wealthier than they were five years ago. So your assets, your financial assets, are going higher and your liabilities as a percent of assets are going lower. So you've got healthy balance sheets in the household sector. All that debt, of course was
transferred to the government. But the households are resilient, and corporate America is resilient. Large cap are resilient, less so for small cap because they've got floating right debt, but during a place where there's much more resiliency than the conversation we're hearing is.
But the concern on that side the household income. More than fifty percent of US households don't hold assets. That's true, So that's a problem.
Yes, Okay, so I'm going to sound ruthless here. Okay, but I'm going to say that they don't go into the number of shocker, they don't go into the aggregate numbers. It is true that the lower quartile of income has been suffering, and they've been suffering since the rate hikes of twenty twenty two, when the free money stopped and those households borrow short, not long, and what sterilized households and corporates is borrowing long. Rates were near zero. So we've got three percent mortgages.
We got to leave it here out of time. When you come back next time, I want to do a definitive distinction between log normal and plus on distribution.
Oh that's going to work. Sho you to the audience.
La Alicia Levin, Thank you so much from BNI.
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