Surveillance: Rotation Has Just Begun, Laidler Says

CEO Ben fantastic to catch up with you, sir. Let's just start with a simple one. It's the path of least resistance for equities still higher. Simple answers. Yes, I mean, I think we're very focused on the sort of bond market in the tantrum and everything we've had, and that's gonna bring valuations down. They're always going to come down from the sort of you know, twenty three times PU. It was not a normal number of the S and P.

It was a reflection of these very rest earnings. Earnings are now bouncing back, you know, very quickly, and things like the stimulus just give us more and more visibility on that. I think we're set up for a big earnings surprise. This year, We're gonna get strowth, not twenty out of the US, We're gonna get forty, not thirty out of international. That is a huge insurance policy to somewhat lower evaluations, and I think sets you up for, you know, another another very rare strong year for US

and global equities. Ben later coming out of HSBC with that wonderful car you made two years ago, and then with Tara Hudson, and you've announced you're moving on to a wonderful new opportunity. The timeline of that is what is key here, Ben Laidler, No one but you has talked about the robustness of this ballmarket a three year run. How does this end? Well, how do you visualize that the double digit Ben Laidler's stock market ends out there?

I mean, ultimately it gets killed by the fed um either a prematurely by a by a policy mistake, which I don't think we're going to get. I think, you know, Chairman Powell has been very very clear that rates are at least at the short end of staying are staying low for low for longer. But you know, ultimately they're going to have to They're gonna have to tape her, and but I think that's a discussion for another day. I you know, I don't think that's a discussion for

the next sort of six or nine months. So I think that's a little bit of a red herring. I think the focus right now is this unfolding growth surprise, which I don't think we have sort of fully baked into numbers, and especially from these sort of cyclicals, reopeners, sort of value stocks, where I think that rotation has just begun in the last sort of month or so, and after a decade of under performance. So I think to be calling the end of that or the top

of that right now is is dramatically premature. But I want to serve this idea of a policy error for a little bit, because there are some people who say there would be a policy error the FED does not hike rates in the face of persistent two and a

half per cent inflation. Do you think that if we do get that kind of inflation, which Morgan Stanley frankly is calling for next year, do you think then that it would be appropriate for the third to raise rates, that it would be taken well by the equity markets, or do you think that would totally change the narrative and would make you reassess your car and equities. Yeah, I mean, I don't think we're looking at those sort of inflation numbers. I mean I think we've got a

lot baked in already. I mean, inflation expectations, market inflation expectations already sort of over over two percent, sort of medium term. Again, I think we've sort of baked baked a lot in there. Um. You know, despite you know, this recovery narrative, we're still coming off very depressed levels. It's still a very big output gap. There were start very depressed sort of segments of the of the labor market.

We had a core inflation number sort of last week well well below that sort of two percent number, So you know, we're going to get a sort of headline spike over the next few months off this sort of very depressed sort of base level. But I think to be calling for those sort of you know, north of two percent core inflation numbers, which is really gonna get the Fed sort of concerned and and looking to sort of unwind um this sort of very easy policy starts.

I think to me having that discussion now, I just think I just think it's too early. Let's just go through the headlines from the Goldman note from last Friday to the revisions to forecasts eight percent GDP growth in twenty one Q four over Q four, unemployment to drop to four percent at the end of twenty one, three point five percent in twenty two, three point two, twenty three.

But here's the kicker here. It's about inflation dynamics, and as far as Goldman are concerned, Tom, we expect inflation dynamics to mirror those of the last cycle. So you can have that boom that reopening for about twelve months. But the dynamics and the cycle for inflation, at least in the view of Goldman Tom, doesn't change. Ben Laylor what to do to the denominators. I mean, if you get eight percent GDP and I get it, there's a

ramp down to wherever we're going. I mean, the fact is corporations adapt corporations are just do we grossly underestimate their revenue growth and margin expansion in this boom? Yes? I think, well, I think we're gonna where the danger is, especially for the sort of reopener's value cyclicals, calling what you will the amount of operating Lebridge is going to be dramatic because not only is the top line very depressed,

and let's not forget how depressed. I mean you look at you know, you look you look at the car rental companies, the hotels that you mean, you name it. Revenues are still down sort of um, but we also underestimate that the operating Lebridge, all these companies have just taken costs out over the last twelve months. So when you get a bit of revenue growth coming back of a lower a lower cost base, I think the earnings recovery is going to be dramatic. And then let's not

forget the tech names. So I mean these are still all secular growth stories that are growing sort of fifteen so um. You know by all means you know, overweight focus on those sort of cyclical recovery names. But you know, I don't think these sort of big tech names are out for the count. And I would just say you do need to share, have you if you're going to own us or Globe equity has just given how big they are. I mean, equities don't work unless so tech

at least sort of treads water. So I think we're looking for you know, cypronicals catch up, not a big rotation out of tech. Ben, we've gotta let you go. But before we let you go, congratulations on a tremendous last couple of years covering this equity market after the partnering HSBC. Just some really brilliant calls in the face of a lot of skepticism, and Ben, we look forward to seeing how you do in the new venture. Ben

later there Tallo Hudson Research. David Rubinstein is with Carlisle Group. His value to us, his peer to beer conversations have been wonderful. David, do you perceive an end to the pandemic? Not overnight, not anytime soon. I do think that if the vaccination program in the United States is as successful as the President hopes it will be, it is likely by the fall we can return to some type of normality. But I don't think it's going to happen overnight. Now,

what are business people doing? I mean, you've got great context, not only your daily work with Carlisle, but your earn credibility over the decades. And this is the key question I have, David. The business people ramp up for a seven to eight percent economy and hope and pray, or do they settle and manage for a three or four

percent growth rate? Which is it? I think the business community is assuming it will have a pretty good growth rate because the stimulus package is obviously going to stimulate the economy. It's a very very large package. For sure, I'd be very surprised if growth is at three or four percent given this stimulus. On the other hand, we should recognize that the country has two different business communities.

You have the business community of private equity or finance or technology, which is doing quite well, what might do better than four or five, six or seven percent. But then you have the the underclass, the blue collar workers that people have been laid off, people that that don't have enough food and so forth. Those people are not going to be growing at that kind of rates. So we do have two different economies we're really dealing with.

For your company that you are a leader at, how important is it for you to get your employees vaccinated right now? I think it's very important to have people to be vaccinated. Clearly, I think when you have a vaccination process, you're gonna have a healthier economy and you're gonna have a healthier population. You can't force people to get vaccinated. And I've been disappointed that so many people in the country, relatively speaking, are saying they don't want

to be vaccinated. And I say so many. Maybe the population is not yet convinced it needs to be vaccinated. And I think that we really can't get complete heard humanity, humanity, herd immunity unless we get a very large percentage vaccinated. So I'm disappointed that some people don't want to be vaccinated. I understand why, but I think it's it's probably the

wrong decision. Well, and this really raises a conundrum for a lot of executives where they want their employees to have the vaccine, they don't know how to encourage it. They can't force them, As you say, what are the best incentives and how important is it for you to get people back to the office, back traveling again, and

leading more normal pre COVID types of lives. I think employers are struggling with this, but to some extent, I think some employers will say, if you're not vaccinated, don't come into the office, And therefore some people will continue to work at home, or there will be special places in offices for people that are not vaccinated, but they'll have to be tested when they go in and so forth every day about whether they have the virus. That's

not an optimal situation. Clearly, it'd be much better for all employers if they're most local employees are willing to be vaccinated. For those who, for variety of reasons don't want to be vaccinated, they're gonna have to be special ways to handle them. But I don't think you can force people to be vaccinated against their their wishes. Yeah, this definitely has been an issue, Tom. I mean, think about a special place to put people at a time when there is concern about the ongoing spread of a

virus that is mutating. That's an interesting idea. And David, this goes back to your public service with President Carter a few years. How close are we, David Rubinstein, to the common sense idea of the vaccine passport. Well, I think it's possible, um, but I don't think that you really are likely to have uh um people being forced to take vaccines. And I just think there's gonna be too much resistance to forcing people to be vaccinated. I

just don't think that will work. There are many people and I would say, in the minority community, for example, many African Americans are have the view that very often they they've been used inappropriately for vaccines that maybe weren't as safe as or other uh tests that weren't as safe UH, And therefore there is some resistance in the in the minority community, African American community, there's some resistance among white males, many of whom, for political or other reasons,

just think that the government shouldn't be telling them what to do. So you see that white male voters who are Republicans, some of them are are fairly fairly determined not to be vaccinated, and you can't force them to be vaccinated. David, what's the pulse of mergers and acquisitions right now? Transactions and combinations not only traditional but also the effervescence we see in the market with SPACs and such.

Well for people who are in the M and A world and people in the private equity world, in finance world, it's almost as if there wasn't a pandemic because deals are going on, just people aren't meeting face to face by and large, and so it hasn't had a deletarious effect. Uh. Really on this part of the of the economy, and the SPACs are something that no one could have predicted. They clearly are very effervescent. It is the word you maybe have used um at some point, maybe some of

them won't work out. But I don't think spacts are going away. I don't think that SPACs are here just as a temporary measure because of the of the pandemic. SPACs do serve a purpose some cases. Some cases they do get wildly inflated in terms of the valuations when you have companies with no no revenue get very very high valuations. On the other hand, they do serve a purpose, and I don't think they're going away. They're gonna be a permanent part of our financial structure. I think David

always great to get you on the program. Come back soon, won't you stay close? David Rubinstein, that group found a with invest go on fixed income and particularly loans. No Choram joins us, and what's wonderful about Noel and she started out in the trenches of the trading desk as well, and that's really cool. It's a very rare that you get academics with her, you know, ability in the classroom that come out of the trenches of trading. What does the loan market look like right now? Invest goes up

to their eyeballs and loans. What's the character of the loan market? Tom? Before we get started, I have to tell you that my Todd so perfectly gave me this this morning, and I just thought it was too perfect not to show you for St. Patty's Day. So let's just Sat Patty's Day, which means when you have to have a Guinness on for people who are listening on radio. She held up a big sparkly bow tie from with sequence, just like wear it carry one. So how about those loans?

I want to give you more backdrop of kind of growth growth where just below Goldman I would say, we're expecting around seven percent growth for the year. Inflation we expect to be messy, and that's ultimately going to keep the Fed on the sidelines. We do expect as inflation is messy, we could see some more rates volatility, and um, we could see as a result loans um loans demand and you've already seen that, you've seen the retail investor

step in significant in a significant way. UM, I would you know caveat that the retail investor also steps out, you know, when they start to get worried pretty quickly. So just of course, um, you know, don't put We never suggest putting all your eggs in one basket. Diverse by where you can, especially with levels where they are, you know, in terms of evaluations, the first play across bond asset this is really important. Typically when we talk

about fixed income, we don't talk about retail participation. What is that incremental retail participation in leverage loans? Like, what does that look like in the last month or so, it's really stepped up because right a lot of investors are worried about that that raids volatility. We haven't seen it that we haven't seen the volatility carried through into the other asset classes though, and that's kind of, uh, you know, the main reason that we're still bullish on credit.

I wouldn't say we're over our skis and risks here, but we do think that growth is going to be supportive for fundamentals this year and that is ultimately why you know, we would suggest UM investing in in bonds. We think the growth is going to support UM companies throughout the year, and that's really what's gonna you know be be the the story in well, I want to pick up on one of your lines and it's without context.

You can give us that in just a moment. But it's something I've read a million times if ext income, and I've read it over the last months, I've read it six months ago, nine months ago, and over the last several years too. Valuations are rich, Thus investors are not getting paid for this risk. Is that just the story? And fixed income is that the new normal? That valuations will always be rich and investors will not be getting compensated for risk because we live in a new world now.

So it is a new world. We are, you know, at very rich levels. Um, and we do think a lot of this year will be about clipping the coupon. But because of the volatility that we are like this in stocks, the rates, it does make sense to diverse by your portfolio. So of course we're we're actually seeing a lot of crossover investors and I've got a lot of crossover demand come into high yield em to pick up the yield there and diverse by their portfolios there

and then um, you know, compensate themselves. We still think there's some value specifically within the services sectors um that you can also pick up, and there's still a little bit of value and leverage loans relative to high yield and of course i G. Taking a step back, there's a larger question going forward to what about whether the

FED is put a floor under the default rate? In other words, is the FED put basically going to prevent the default rate among corporate debt from getting too high because they will sweep in and they will end up buying that debt and reducing borrowing costs enough to let these companies continue to survive. This year, it's really about growth, right and you know, we expect the faults to come down. It's an i G. It's really gonna's expect lower supply.

It's going to be a lot about the leveraging. So a lot of companies are making the right moves that we would expect in a high growth year. We would you know, expect most of the growth to come in the next couple of quarters as the stimulus has spent, of course, and then you know, and before we would start to look for any kind of creeping back of COVID concerns. But ultimately we expect to end of the

year at potential in terms of growth. So if credit risk isn't the main risk here, are you delving also into the riskiest of corporate debt, the triple C rated stuff, even in on the fixed side, even on the bond side A little bit, I'd say, because valuations are where they are that in and if you see continued volatility and you're not being compensated as much as you know you'd like it as an investor, As an investor with rich valuations, it doesn't make sense, of course to go

you know, over your skis on risk and take a bunch of risk in your portfolio. But it does make sense to reach incrementally into these higher risk here higher risk areas, because we do expect growth to support these companies and allow them to improve their fundamentals on the ear. No, good to see you as always and love the boat high. Now call him that you started. You started out the program talking about a Sesame Street routs. We ended up first of all, do they watch Sesame Street the UK?

Did you grow up watching it? Watches st Okay, we got that and then we got to this weekend. Obviously carry on with us now a gentleman of profile encouraged Michael Mayo joins as well as far ago securities on banking. Michael, you're very good at buying straw hats and winner the banks that were in winter any number of months ago. The banks have had a great move. Can you still

own the banks here? Absolutely? Tom, I mean you still haven't made up uh, the underperformance versus the general market since the start of and so the catch up trade still has room to go for the banks. And today, in fact, we increased our esthmates on JP Morgan to the high on the street. Um, so we think that earnings will be a lot better than expected, uh, in the specific case for Jake Morgan and probably others. And what's so important here, Michael Mayo is you know and

pulse and he knows this too. Corporations adapt to the news that they are given the strategy they're giving out one year, three years, five years. How does James Diamond adapt to eight g D P Well, well, first I'd say, what's good for JP Morgan's customers, what's good to the banking industries customers is good for the banks. It's mutually beneficial. But uh, Tom, you know, I'll stay here. A happy birthday, Albert Einstein. That was yesterday. And guess which executive quotes

Albert Einstein the most. Mr Diamond exactly, And he often says, quote, everything should be made as simple as possible, but no simpler. So that's an Einstein quote that he uses to reduce the complexity of running a bank down to simple concepts. And one of those very simple concept is in a downturn, invest invest, invest like you would any other time time. So Tom, your question is what happens with this accelerating

GDP growth? Well, JP Morgan is a few steps ahead at a time when some other banks are dusting off some expansion plans, are trying to get everything straight. They've already been investing. In fact, they've increased their investment dollars by two and a half times over the last five years, and they're increasing it by one fourth of the last year. It raised a lot of ivan brows, like why are you spending all this extra money? I mean, there there

are a lot of concerned about that. And now you're saying, okay, hey, it makes sense to expand branches to all the lower forty states. It makes sense to expand bankers in the US and outside. They're investing more in tech. So they're coming this investing is really a sweet spot of the economy. So they've been very smart and let's face it, a

little bit lucky too. Who thought we'd be this far along with the vaccines, I mean President Biden talking about Independence Day, uh from COVID July four, and then the stimulus one point nine trillion dollars last week for the environment's looking up just at the time when Jake Morgan is at peak investment spending. So this is similar. It's kind of history repeating itself with JP Morgan coming out of the Global stands for crisis. JP Morgan came through

that much stronger and through the pandemic. We think JP Morgan will come through this much stronger once again. All Right, So Mike, there's this grand reopening trading in Goldman's Access raising their GDP forecast and there, uh, you know, take it down. Their unemployment numbers in the fourth quarter really

really bullish there. Do do I want to own some of the more consumer facing big banks like a Bank of America, Or do I want in a city, or do I want to own some of the more investment banking centric names such as a JP Morgan Goldman and Morgan Stanley. Well, you have a recovery play, but then you have a longer term play where the largest banks are going to trend towards the greatest efficiency in history. The pandemic has accelerated years of customer behavior in a

matter of months. So the role of digital banking is revolutionizing the way that banking has done. So, you know, our top pick is Bank of America. We had already increased ESMOS on them a city group with the new CEO, followed by JP Morgan. So Goliath is winning in banking, both both of the recovery trade but also for this long term you know tech revolution theme as it relates

to banking. Mike Mayo, we have an important global Wall Street essay out today on Goldman Sachs and Mr Solomon and some of the uproar of people leaving Goldman Sachs. You've got an overweight on Golden Sex I believe is Mr Solomon getting it done there or to the tone of the article, is he spending too much time jetting around on the Gulf stream. Well let him around in the gold stream as much as he wants, because all the schmoozing, all the lunches and dinners and everything that

Goldman does to create warmth. They're monetizing that warmth into market share. So at a time when the wallets growing, their share of the wallets increased. And as you know, he used to lead the banking side of things, so this is uh a period of stronger for longer capital markets. Goldman's on the top of its game. Um, they have been poached. So let's face a Goldman Sachs's like the you know, the Harvard of Banks, and so you work at Goldman, you have a pedigree, you get hired away.

If you had the head of their consumer initiative get hired away by Walmart. Uh, then you had the head of asset managing of aid management get hired away. You're You're absolutely right. They're getting poached. But they have a deep bench, they have a deefench and you know, some turn is okay. They the partnership ranks got very heavy. They promoted a lot of people, and David came in and staid, we don't need this many partners So some turn is it. We're out of time. Michael Mayo, thank

you so much. With the Wilson Friday, this is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight 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, and this is Bloomberg