Surveillance: Market Opportunities With Wilson

A joy to have Michael Wilson with this. Mike Wilson with Midwest Academics out of Michigan and Northwestern legendary of Morgan Stanley, and he joins us now for an update. I love what you say, Mike Wilson about the alpha in the beta. This is not options dynamics, folks, delta, gamma, all the other Greek malarchy we talked about, Mike Wilson. It's about relative performance versus absolute performance. Parts that yeah, well, thanks Tom. I mean, look, I think that's what this

year is going to be about. Last year, you know, we're obviously in the midst of the pandemic, the lockdown, that the economy was falling apart, and of course stocks discounted the recovery and it was really a beta trade, meaning everything kind of went up together because everything had got crushed at the same time. Now it's about, okay, well, where can I find the sort of needles in the haystack? The stocks that are there, are companies are gonna really

outperform as we reopen. And oh, by the way, there's gonna be some losers as that happens to right, There's gonna be a wall of share shift as we go back to normal. There's gonna be cost pressures. You were just talking about the inflation trade, something we've been on for quite a while. That's going to create some cost pressures for many businesses. So so we want to take

advantage of that. We want to take advantage of the companies that can benefit from that environment and then try to avoid those that are gonna be going to be punished by that. And then it's just it's individual stocks with the Morgan Stanley research combine. You say the haystack, what are the sectors in the haystack? You know, we were just talking about when it's the banks, right, So we've we've been on the rate trade for a while, we've been on the reslation trade for a while, and

we think, look, let's let's take advantage of that. I mean, there are going to be companies that benefits from higher rates and higher commodity prices, so materials, metals and mining, obviously, the banks, um clearly some of the cehtical parts of technology that you know have benefit the benefit front reopening of an economy. Maybe the industrial sectors we get an infrastructure buill those are gonna be areas from a sector standpoint, they could do quite well. Let's just build on the

year and coal thirty nine hundred. I imagine you filled a lot of calls and they say to you, Mike, thirty nine hundred, why haven't you lifted to your price target? Is this just down to the member waitings, the sector wait things, just the mechanics of the makeup of an index like the SMP five D. Yeah, I mean, let'

let's talk about the SMP itself. That it's really a large kind of growth index, John, as you know, and I mean, those tonics have done terrifically well over the last decade, and part of that story has been the fact that rates have come down. Right, they're they're great businesses, but they've looked they've been over valued because rates are been repressed and that's changing now. Well, then their multiples are going to come down, probably more perhaps than what

the earnings can offset. So good, I'm still feel really good about that target. A year end. We have a bowl case of where do you want fifty? Okay, fine, um, but that's not the story. The story is what's going on underneath the surface. I mean you mentioned it earlier. Some of the medals of mounting stacks, some of the bank stacks that are really doing well. These are the these are the opportunities for portfolio managed to find what

I've really enjoyed in the last couple of ways. Catching up with you guys, and Morgan Stanley is just putting all the pieces together. Allen setting the last week of Morgan Stanley talking up five percent GDP growth next year, six and a half percent this year. I imagine a Matt hornback high yields call is in there as well. Mike. Can you just put it all together for us, join the dots between the different calls coming from the bank at the moment. Yeah, I mean, the macro team has

really been in sync over the last twelve months. I mean, because the pieces have come together, and you know, Ellen's calling the economy, mets calling rates are call on kind of the sector dispersion and rotation that's been going on. It's all part of the same narrative, and it goes

back to almost a year ago. Now it seems it seems like it was yesterday, but a year ago, you know, we're talking about this regime shift as we move from a monetary policy dominant regime to a fiscal policy dominant regime. And it's clear now that that's what's happening. What does that mean. It needs to higher velocity economy, it means higher nominal GDP, it means inflation, and those are things

that are going to change what works going forward. So within the churn, the churn can be nice and it can be uh, for example, a hot tub, or it can be the ocean where you're getting smashed against the shore and there's a question about how much leverage there is beneath the surface. It's going to lead to some pretty violent moves. Mike, what's your sense of how much leverage has been pushed out of the system or how much has been built up in preparation for a relatively

violent churn over the next few months. Well, that's right. I mean, I think one of the one of the things that we're not that comfortable with at the moment. To be honest, it's been a really a one way risk market. Okay, there hasn't been a lot two way risk. We had that little you know, snaphoo in January, some shortcovering and some de leveraging that went on. But we're right back to those high leverage areas. When I say high leverage, I mean across both the institutional world and

the retail world. We've rarely seen leverage as high and that can't bite both ways. And so the wild cards and me is, let's send that we go into the reopening phase, which it looks like it's gonna be sooner rather than later. Some of these cost pressures arise. We do have supply chain issues. You know, this event in Texas with the weather is not helping that, by the way, so we could have margin pressure, we could have rates go up more quickly than people are anticipating in evaluations.

So so I think that leverage will will create more two way risk, will create some more volatility in the marketplace, and by the way, we'll create some opportunities in the areas that we do like That's exactly what I was going to say, how do you use that? How are you preparing to jump on that with respect to specific market calls. Well, we're advising clients right now to probably take their leverage down. And we think people have leverage

that's too high that it looks things are. And even then, the things that we like right now there are a bit of ahead of themselves. And we wouldn't be surprised if we had another surprise over the court the next thirty five days and we get a bigger correction, and and so it's like run lower risk right now. That's that's and and then let's take advantage of the drawdown like we got in January, or like some of the

drawing after got last year. Mike fantasticic catchups, great work as always, Matt Wilson, that Morgus, Downey Cio and Chafe us equity strategists. Megan Green joins us right now. Harvard County School Senior Fellow. Megan. There's all this debate about economics, and we all toss around ratios like productivity three ratio six unit idea, and then there's a strange thing, the output gap. Do we really have knowledge of where these

relationships are these ratios. Given the pandemic we look, we never really know where the output gap is because it's predicated on this idea of potential growth, and measuring potential growth is much more of an art than a science at the best of times, let alone in a crisis is But I would also argue that this idea of potential growth, this equilibrium that the economy is naturally going to come back to, might be a bit and antiquate. Antiquated.

I mean, in economics we believe in equilibria. Um usually there's just one. But we've all spent the past year looking at eideline epidemiological models. And the hard scientists don't view the world this way. They look at the world very differently, thinking, you know what, there is no actual

equilibrium that we know about at the beginning. Instead, we're gonna look at actors, use agent based models to see how they respond to things, use machine learning to build models around that, and figure out what the outcome is. And so I think this debate about the output gap based on some kind of equilibrium is probably missing the point.

And you know, we economists, we we assume that they are very intelligent actors in a very simple world, and I think scientists have have a very different view of the world. They assume they're very simple people in a complex world, and there's a lot that we could probably learn from them. Economics. Okay, well, what's the timeline here? What are we getting wrong right now about the X axis? We're talking about this across the simulcast all morning, the

guestimates out to June, the guestimates out to September. Do you have a belief in the X axis right now or is that a mystery as well? Look, I think everything is a mystery at the moment. This isn't a typical kind of downturn and it won't be a typical

kind of recovery at all. And as I've been saying since the beginning of this virus, the virus is going to dictate everything and we'll be determining prices and quantities and so uh, you know, it's it's actually the epidemiological data that's much more important than the economic data at the moment. So make a reason people were gravitating towards the output gap that we're trying to assess how big this package was down in day say, and perhaps whether it was too big. So what's the best way of

assessing that size too big, too small? So I don't think we should think of this package as a stimulus at all. It's it's unfortunately been deemed that, but I think we should think of it as cataxtrophe mitigation. And so the point isn't to figure out the size of the whole, to measure how big it is and how much dirt we need to fill it in. The point is to get dirt out to those most vulnerable um so that we can protect them, and then in the next stage think about trying to provide a stimulus so

that we can get on our way to recovery. And in this sense, I think the next package is almost the more important one. If you want to think about potential growth, or if you want to consider there might be multiple equilibria and we're trying to end up on a better one. The next package, the build back better package, is the one that's going to do that. So what do you think that package specifically mag and should look like.

I think it should be full of public investments. I mean, it doesn't matter if you believe in secular stagnation or not. If you think that we've had low growth, low inflation, low rates for so long because of supply side issues or demand side issues. The is one thing that fixes both of those issues, and that's public investment. So, you know, a massive infrastructure spending program that's green in nature, I think is an absolute no brainer, and a lot of

money should be behind that before we get there. Megan, i'd love your assessment of the efficiency of this one point nine trillion dollar package. Greg Valier was talking about that Wall Street Journal op ed talking about the pork built into this plan. Do you have a sense of whether that's actually the case or whether there is a sort of sense behind each dollar and sort of a firepower behind it. So I think there is firepower behind you know, purely based on the size. Is every dollar

perfectly allocated? Absolutely not. But we've already learned in this crisis and the previous crisis that we don't have great tools for ferreting out exactly who needs how much money and getting it to them, And so the idea is you just get out a lot quickly. It's not particularly targeted.

It could be more targeted, certainly, and it doesn't includ of things like automatic stabilizers, which I wish it did, so that you took the politics out of this process a little bit, and it was all based on what's actually happening in the economy. Um. But the idea isn't to fill in the hole perfectly, We're we're clearly over doing it on filling in the hole. But that's okay, because the point is just to get money to the

most vulnerable businesses and individuals. But Megan, what about people who look at the savings rate the fact that it's climbed so incredibly high. Yes, this gives people firepower arguably when the economy does reopen. But does this indicate to you that people are not going to necessarily get this money out into the economy right away, and then it's not as efficient and that perhaps the people who are getting it aren't the people who need it the most.

So that that's where I think this might be targeted a little better towards those with lower incomes or no incomes, certainly, rather than a check going to everyone, which I wouldn't advise.

But that being said, I think that the savings rate is a little bit misleading because it doesn't consider all the forebearing that we have um at the moment, and so the savings three has skyrocketed, so has household debt actually, and you have to consider that what bills finally come do, which many of them aren't because the forbearance, a lot of the savings are going to have to be plowed into that. Megan, part of your charm is folding politics

into your economics. Mit Rochelle was on Friday from Florida, where houses are being sold in twelve minutes. I mean, clearly the benefits are being skewed across different income levels. Do you have any confidence at all that Washington has a political will to actually get money to those that

really need it? So I think, you know, from a macro sence, absolutely, If you just look at who the administration has hired on the on the domestic side, it's a load of labor economists, and that's because there is a real concern about income and wealth inequality in the US. So I do think in a big sense the Biden administration and does want to do something about this. But as I said, you know, we don't have great tools for figuring out how to get money specifically to those

who needed the most. Um and what you mentioned in the housing market, I mean that's clearly a result of central bank policy, and that's the fed UH mortgages cars. Those markets have been on fire because RS are so incredibly low, and you know, I think they will be for a very long time, but I think we can can continue to see those markets do well. Mag and

good to hey from you. Thanks for joining us this Monday morning, make and green that at the Hobbit Kennedy school Sania Fellow right now in the change landscape of this virus, this pandemic and all the good news we're observing when we look at hospitalizations and the improved statistics of death. Is Joshua Sharfstein's with Johns Hopkins Bloomberg School

of Public Health. Mr Bloomberg, of course a philanthropist, is engineering school at John's Hopkins and all of j h U and of course founder of Bloomberg LP in this radio and TV property as well, Joshra Sharfstein, I get upset when I hear the media talk about her herd immunity and simplistic phrases. You and I know it's some really interesting differential equations. Explain how prose like you take the fancy math of diff e Q and get us

to where her immunity clicks in. Well, I think they're models of her immunity, and then there's the reality of her immunity, and so people can estimate when we think her immunity might kick in and what that means for people, But then we really have to see it because those models are generally based on assumptions. I think one of the key important points to remember about her immunity is that you can have generally herd immunity, meaning that cases

really don't have a good opportunity to keep spreading. But then you have communities where there's a lot of vulnerability. People have an been vaccinated and a few people have gotten infected that could wind up with pretty serious outbreaks as well as hospitalizations and deaths. So general herd immunity can leave some serious pockets. And then the second question is you know what will it really take and that may depend on how these variants behave and other factors

we don't know about. And one of the factors is the virulence of whatever you're talking about. Have you changed your perception of how virulent this vaccine is, this this virus is rather given the new variants that are out there, well, there is certainly some evidence that some of the new variants may be more lethal, but it doesn't appear to be, you know, fundamentally changing the epidemiology of the of the

virus so far in the United States. So right now the cases are coming down, hospitalizations are coming down, deaths are coming down. But we know with five hundred thousand people who have died, just how serious this pandemic is, and we can't let up. We have to keep pushing it down, um, so that we can really minimize the chance we get in trouble with variants or any other kind of problem. Professor, do you think we are understanding the vaccine at all? I think the vaccine is pretty

awesome really. I mean, if you think about it, that within a year we have um incredibly effective vaccines with very strong safety records, and you see now the data from Israel's showing staggering declines and risk for people who have been vaccinated. I think that there's no reason to undersell the vaccine. But we shouldn't think that. You know, in a week after you know that everything is going

to be fine, there are a lot of risks out there. UM. The way I'm telling people, as you know that list of things that you want to do when this is all over. You can't do them all today, you know. But if you've been vaccinated and you're you're through that period, there's probably some things on that list you may be able to do. Well. Don't you think it would be more optimal so to speak, to tell people who have had the vaccine that they can do the things on

the list. Wouldn't that be a better way of selling this vaccine, So actually encourage people to go and get it by saying to them that you can't start to return to normal once you've had it. Well, I think you you can say you can start to return to normal. I think that some people are really itching to be able to say it's all done. You know, you're done, and that's not really a great message for for for

everyone right now. But you, I think can say, for example, that people have been vaccine, you can get together for dinner. You know, you can go see your grandkids. You know, perhaps depending on the situation, with a few modifications, but a lot closer than you were before. So you know, I'm fielding these questions every day from people and they're just amaze when I start to tell them yes, after a year of telling them now it has a psychological impact.

I would say everyone, particularly younger kids, who have seen this as the majority or a significant portion of their life going forward. What's the time frame that you see at this point, given the vaccinations available, where you expect anybody to be able to go to their local drug store or say a stadium and get vaccinated. You know, I would I defer to the estimates of the federal government. I think they're they're talking about the summer for adults

more or less for that. Obviously, it's going to take longer for kids because the studies have to be done. But um, I think we're going to see that this is going to turn from an excess demand situation pretty quickly. I mean in in you know, in a matter of weeks or a couple of months, to a vaccine acceptance situation where we really are going to be waiting for people to get ready for vaccination. And we need to start that process now, offering vaccines, answering questions, doing mobile teams.

You know, there's there's vast inequity in access to vaccination right now, and we should be fixing that because that's going to turn in to the most important endgame for this virus. Conversations like this are important, Joshua. We appreciate it's on this morning. Thank you so, Joshua Shastain that of Jones Help Kids, dianel over the jpmorganist management where the real focus on emerging markets joins us UH this morning, Diana, I want to look in your research notes at the

distinctions involved. You can't buy em blind. You can't buy big developed countries blind either. What are the distinctions right now of placing capital in emerging markets? So right now, the big driver and they're seeing that playing out as

well in developed markets is actually growth. UM. The vaccine rollout has been a very big focus on the markets, and I think there is growing confidence now as the pace accelerates and you have more vaccine candidates coming into play, that this is going to be done in a sustained manner and in some cases we might even see the openings of the economies as early as Q two, full reopenings in places like the US, the UK, markets like Israel where they're fire runs to the curve. So in

emerging markets, very similar stories are playing out. UM. The focus has very much been on focusing on those economies where a rollout of vaccine has been credible and it's actually well ankered. Um So you look at somewhere like Chile, Chile stands out amongst the latter and actually amongst broader E margin markets as being one that's really ahead of the curve rolling out vaccines and that's actually traded well. Bringing a story with Turkey, so Joan, I know you're

a great student. That's what's so important here is a maturity, the maturation rather of emerging market bonds, the size of scope to scale to the commodity e M nations have a greater, more sophisticated bond pool to play with. Um So, by and large commodity exporters tend to have more issuance. Um they're larger economies, so that's not unexpected. But then um so those two those that side of things is actually a positive for them in that liquidity is not

necessarily an issue. But actually where we're seeing interesting opportunities right now is in the smaller idiosyncratic stories within emerging markets are those are markets that have less beta to what's happening in coreates and are less likely to be impacted by the big duration move that we're seeing in the US Diana. So much of the emerging markets call

has hinged on the weaker dollar consensus. And here we have a growing number of naysayers who argue that you have American exceptionalism, that basically you have an economy that's going to break away and accelerated a faster clip because of the vaccination schedule and because of the fiscal support and stimulus that the Congress is passing. How much does that disrupt your thesis, disrupt your argument that you need to go into emerging markets debt in order to get

any yield. So so far, what we've seen this year is most markets have actually been from a total return perspective, most markets have been dragged higher in yields um as treasuries have moved. However, spreads have held up quite well in e M and the big distinction up until now has been the move higher has been led by brake events.

What we saw last week is somewhat concerning for the outlook going forward, where it's no longer a break even lead repricing of rates that we're seeing in the US, it's actually being led by real rates um and that's actually something that we think The FED is likely to be more sensitive too, because not only are we seeing that spilling over to e M, we're also seeing that impact in US markets. So you see mortgage rates are starting to rise. Um, we had the biggest rise in

US mortgage rates that we've seen since August last year. Well, the economy is looking promising, the recovery is still at the early stages, and it's still quite fragile, So we do think the FED is going to want to lean against this. Wait. Hold on a second, Diana, this is important.

Are you saying that a key component of your emerging markets call is a belief in faith in the Federal Reserve to come in buy more longer duration bonds to suppress yields if you start seeing real yields continue to rise, No,

that's not what I'm saying at all. What I'm saying is if it's rates moving higher because growth is picking up globally and it's an orderly reprice seeing higher of rates both real rates and break events, that's a good environment for EM because growth is what matters, and exports from emerging markets are a key driver of returns. However, if we see rates markets running ahead of what we're

seeing in the data, then that becomes a concern. And I think right now where we are, the data is not their market surprising in a stimulus that hasn't yet been approved. So that's the big distinction. We actually need to see that growth being realized and we need to

see that inflation being realized. And that's something the FED has been quite key in reiterating time and again that it's actually realized core PC that they're focused on downal Let's said on the feed just for a moment, then share and power tomorrow advice check claratory in the mix as well. If there's some kind of intervention, it's usually verbal. First. Do you expect any actual real action of the back of that. It's probably too early for them to do

anything more. So I think they'll want to sequence the tools that they used to talk to markets and to communicate with markets. So this week we have a raft of speakers coming in, starting with today where we'll see the first speaker, and tomorrow where we have GERALN. Powell speaking. I think verbal intervention is going to be key. Um, we already had your own Power speaking in previous weeks

reiterating the messages. So it will be key to see them doubling down on that message that while the outlook is looking better, the economy is far from a strong enough footing for them to be easy and back on accommodation um and I think if markets still continue to price in or accelerate too fast, then it's likely that we might see more tools coming to play. Tom. This is the issue at the moment, isn't it. A couple of weeks ago, if you'd asked me about cham and

Power would have said us down script, nothing new. Look at the moment we've seen in the last week alone, it was a struggle to break one twenty for about a minute three through one thirty, and now people talking one fifty in the very nettime future. I haven't done the tannical work above at one point three six, but John, I'll make it clear the one person I'm watching and the speaker than this week is Richard Clata had a Columbia Economics, truly one of our great academics on monetary theory.

If there's one person who's going to say one sentence, it's going to be Richard Claire. He has provided the guidance for financial markets, that's for sure, over the last couple of years, there's maybe Chairman Palet's fumbled things just a little bit. Danny, do you have a number of mind where we get to on the nominal yield on a ten year that starts to infect risk assets elsewhere? It's not one thirty six and we see an equities gap below. Now is there something a little bit higher

or are we there? So? I think the technical charges have been plugging one thirty eight as a key level um and it's not surprising that as we approach that we're starting to see a bit of a spill over into other financial assets, which the FED will be watching closely. But I think one fifty is also another one to watch because that's the point where the tenure yield is

equivalent to the SMP dividend yield. And so for people who have been saying, why would I want to buy fixed income when the yield I'm getting from equities is much higher than becomes a different conversation where fixed income is actually yielding enough and still providing you the ballast in the in the extent that we see any growth drawdowns coming forward um to be meaningful in a portfolio. Again, So I think one fifty is going to be the

next level that we're watching very closely. Diana. I'm sitting here and thinking about what you have been saying, and I'm struggling with one aspect the idea. Yes, the data has not been showing the growth that perhaps markets are pricing in. But markets are forward looking and they are looking to the reopening of the economy and the expectation of the stimulus being passed. What if the FED is wrong?

What if the FED buys a whole host of longer duration bonds and allows risk acids to keep going up, and that reflation that everyone is talking about comes back online and that growth, I mean, does that increase the chances that the Fed will have to hike much more rapidly on the back end. So for the Fed to change their conversation around UM when they'll start hiking, you need to see inflation come meing in and staying elevated for a sustained period. We already got guidance previously from

Clarida that a sustained period means twelve months. So it's very difficult for marked for me to see the Fed in the next twelve months starting to hike rates. UM they might signal that they will be rolling back on some of their purchases. Before that, we'd expected that to happen in Q four as as September, but if the economic data looks promising, they might start preparing the markets

for that move. But in terms of hiking, I think we need to see realized inflation above target for a sustained period of time, and that's really not yet where we are. Danna, always great to catch shop with you. Thank you time, Dana of Jack Morgan as Management. Thank you Dinaker to say it. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern and Bloomberg Radio and on Bloomberg Television each day from six to nine am for site from

the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg