Surveillance: Stock Breakdown with Wilson

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Mike Wilson, Morgan Stanley.

He's been making a lot of warnings recently, the latest saying that risks are building for US consumer stocks, writing quote, this price action is picking up on slowing consumer spend, student loan repayments resuming, rising delinquencies to certain household cohorts, higher gas prices, and weakening data in the housing sector, the quinfecta of threats or however money you want to say that. Mike Wilson of Morgan Stanley joining us now, Mike,

Yeah, look, I mean, I think the question for investors is always price. I mean, we're in a late cycle environment.

They probably overpriced that.

In the summer. So what happens is investors get whipped around by price action. And I would say what's happened in the last two months is we are seeing a breakdown again in a.

Lot of the stock market.

Okay, yeah, the overall averages are down four five percent, not a big deal, but some of these consumer stocks are really really struggling. And I think that reflects kind of what we were talking about a minute ago before we get on the air, which is that the middle lower end consumer definitely is out of excess savings. That's starting to bleed a little bit into the higher end

Can you see some of these retail and consumer facing stocks, these small cap stocks get blown out, have their valuations completely decimated, and the rest of the markets hug along and no one noticed because the Magnificent seven keep heralding all of the cautious votes of confidence from a lot of the consumers that see them as cash cows in perpetuity.

Well, it can continue if you don't have that heart landing. Okay, if you have a heart landing, then even the big winners will feel that, right, And I think that's what the market's betting on. The market's betting there is no recession. And we taught you know, the bomb market. Is that signaling, you know, greater strength or is that signaling that maybe the bond market's pushing back on the fiscal you know, kind of spending.

I think it's a little bit of both.

And if we don't have a hard landing, then the big names are probably going to continue to lead because they have scale and they have better bantle treets.

Let's go back to Graham dud cottle one oh one.

Mike Wilson, how can you be as cautious as you've been and not have a massive cash position? What is your cash position? How invested are you within your caution?

Yeah, I mean we're we're basically ninety five percent invested. You know, we're like five percent underweight equities. And we've talked about this before. We never go one hundred percent cab.

Yeah. What the financial media does, of course, great theater of course.

Now what we can do, Tom is we can be positioned more defensively within our equity exposure, which is what we've done, right, So we're skewed more towards kind of defensive growth. You know, late cycle cycle calls as the post to that. We're not grabbing for beta, we're not grabbed for small caps. We're not grabbing for the stuff that's really kind of vulnerable if things go sideways.

Okay, you're with James Gorman. He's saying, Mike, I don't care about it in this blather. Just tell me about the damn banks. I've been remiss on this Keith Friett Index. You and I know it, we love it, And the answer is it's a grim chart. You go back to pre California, pre idiocy out there with one.

You know, you know the game that they went through.

It's one of the barest charts I've seen in years. When do you know to load the boat on banks?

Well, look, it's the same story as the broader market time, the bigger getting bigger. There's concentration, you know, in the winners. Again, it's it's like the higher quality banks are performing. So you long Apple, Well, I mean we are in many portfolio was obviously because it's such a big part of the index. But Apple's another category of stock where people are paying up for the quality of the barel sheet, the lack of need for financing.

But the banks are representative of the broader market.

Okay, the higher quality banks are outperforming the lower quality banks.

That's just that's just where we are for everything.

Lisa Shallon emails in and she says, ask Mike Wilson with his easy day job, she's got the real job managing money. Do you buy an R squared tyke to the S and P five hundred or if I'm active.

Managed, do I want to be idios? Who did we talk to in London? Kathy?

Kathy said, who Kathy would arc?

Oh, Kathy would Kathy would arc?

I mean, do I want to buy an R squared tyke to S and P five hundred or do I want to get more idiosyncratic?

You want to be more idiosyncratic? For sure? This whole year, right, I mean, even though the.

SMP is outperformed, it's been ten stocks that's idios And I mean, if you pick those ten stocks, you did really really well. If you pick the you know, if you pick the other four hundred and ninety three, you didn't do very well. So it's been the dispersion is really really high. And it makes sense right now. The market's paying up for what I would call operational efficiency cost leaders. It's paying up for good balance sheets, paying up for scale. Okay, will that change? Can we broaden

What does it mean to be defensive? And I keep asking this because some people say it's tech stocks, some people say it's consumer staples.

What do you say, Well, I think it's both.

I think I mean obviously, the market this year has voted with its feet saying they want to buy large cap growth stocks, not just tech, but growth stocks with good balance sheets that have scale.

And I will just want to I want to point.

Something out that's really important for these seven or eight stocks this year now X one or two. Most of the earnings recovery for these stocks has been a result of cost cutting.

Right.

They all got over their skis on too much spending last year. They rained that in and so they've kind of manufactured and earnings recovery if they don't see top line reacceleration. This is where we're starting to see a separation now, even in those seven and I think that's going to be another story for the fourth quarter and next year's. The market wants revenue growth, not just cost cutting stories.

What we're talking about right now is the bottom line. We're not talking about the rates picture and what that does overall to some sort of macro call on equities. Bank of America Strategies came out today and said, do rates matter for stocks? And if so, it's not priced.

Do you agree?

Well, for once again, for some stocks it's mattered a ton, right. I mean, I just think, look, we said this at the end of the year. This is the most difficult part of the economic cycle when you are late We know we're late cycle for one reason, because we got full employment. So you can't argue we're mid cycle or early cycle.

That's silly.

What you can argue is that the late cycle period can persist for a lot longer than people expected. And that's what's going on. Rates are the one while because the rates have really surprised everybody, vond investors and stock investors. Normally, in the late cycle environment, rates come down. Why because the Fed's done As you not well know, this cycle is unique. That's the tricky part of the cycle because the FED can't be proactive in.

Cutting rates ahead of the recession.

So we're just gonna ride this until basically you run out of gas, and that could be another year.

You don't know the answer to that yet.

I mean, I find it absolutely fascinating here. Let me, I want to touch on this through the next number of minutes, Mike Wills, So, Mike Wilson and Morgan Stanley with US folks, dovetail your revenue line, your animal spirit in the equity market with Zetner's Ellen Zenner's nominal GDP bringing in a real GDP. Who knows what disinflation is even Jim Karen doesn't. He Karen doesn't have a clue. But the answer is model out nominal GDP and how it affects your revenue line.

So this is really interesting. This is where Ellen and I are kind of aligned. I mean, I think we're the only bank industry where we called for soft landing and an earnings recession both turned out to be true. So why is that, Well, because revenue growth and pricing has been actually not as good as the the sort of pricing and the inflation numbers in the government statistics. Now, Ellen is, I would say, far from excited about economic growth.

Growth three point eighty four percent.

Nominal exactly, And so you know, three to four percent nominal GDP growth. I mean, could that lead to three to five percent revenue growth. Maybe here's the risk the economy is not the is not company with companies. See what companies are seeing in pricing is very very different than what the economic statistics will tell you. Very similar in twenty twenty one when companies were getting twenty percent price when CPI and Core CPI were saying six seven eight.

Mike Wilson with this. Here at.

Jonathan Faraoh staying in London in conversation with the former Prime Minister of the United Kingdom, Gordon Brown, Mohammed Alarian of the University of Cambridge, and the Nobel Prize winning economist Michael Spence of New York University.

The book is.

Perma Crisis, A Plan to Fix a fractured World, Brown, Alarian and Spence an AI and crisis to manage in the future. Here is Professor Spence.

When jen AI came along, then I saw it sort of multi domain capability, the fact that you can use it with no technical training, just a little bit of a you know practice, you know, creating prompts, and its

It.

Yeah, I think we're heading for a low growth decade if we don't have the productivity surge that AI can give us. And I think what Mike is pointing out is it can transform a whole range of industries. You'll never see the accountancy or legal or even medical professions

And it's critical because we have a debt issue that has to be resolved with an inequality issue. We need resources for critical transitions. So you know the notion, as Mike and Gordon correctly said, that higher, more inclusive growth and most sustainable growth is a massive enabler to deal with all these other problems.

All three of you understand the risks involved.

Though.

If globalization hollowed down manufacturing bases domestically in places like America, in the United Kingdom to some extent as well, and I'm asking the question, why wouldn't AI do the same thing to services? My question, if I'm a member, a citizen, someone who's got to vote, is why would I trust the same people? Loll over again, who should I trust to manage that transition, that integration of those technologies.

That's what my children say, My young teenagers say, you guys have messed it up. And it is true that we tried to create a more inclusive system. We tried to deal with the problems of environment, but we couldn't get the agreement that we needed, and we tried to have more equity and better jobs. But I do think when I talk to young people, they want to see

Mike agree. I mean, you know, Eric Brynolfsen talked about the touring crap. You know, the touring test basically pushes you in the direction of automation. We want to push in policy should be pushing in the direction of augmentation, of giving people powerful tools that make them more productive. So this is the journey we're setting on. But it's not it's not I don't think right to just capitulate

But our global institutions have got a reform to be capable of dealing with this. They're not for purpose at the moment, and the IMF has got to be a crisis prevention mechanism to proper surveillance of the world economy. It can't just be there for a crisis resolution. The World Bank has got to become a global public goods bank and deal with the energy transition as well as

As I'm listening to I'm getting the same feeling that I got when I read the book. This makes a lot of sense, and then I end up in the same place. Is there any evidence that people are willing to vote for it?

Now?

You say it's incredibly popular, you go around, you speak to people, and they're convinced by it. I don't see any evidence from recent general elections that anyone wants this vision that the three of you have.

I think people want hope. I think the lesson of COVID and of the energy and food crisis and people's reaction to the war in Ukraine is that things have got to be better than this, and I think those leaders that can show that there's a hopeful future. Now you see me and Motley in the Caribbean producing her plan for global growth. You see now politicians in Africa

I think he's absolutely right. I mean, there's a people want hope. I think there's a world recognition that the world we're on is unsustainable and it's getting more and more bumpy. And third, we're dealing with a loss of trust, and if we don't directly re establish trust in our institutions and our policy making in global cooperation, things.

Are going to go and get worse.

I think the reason why we wanted to put this down is hoping to start a conversation on a set of steps, and we keep on saying there is no silver bullet. This is not a big bang, you do something tomorrow and then everything's fine. This is building a foundation that turns vicious cycles into virtuous ones.

Well, let's take the Feederal Reserve as one example. You've written about this extensively over the last eighteen months. I still remember a conference we did together in the summer of twenty twenty one when you warned about what could possibly becoming. How ill prepared the institution that is the Federal Reserve was for this moment. How do they recover from the mistakes they've made in the last eighteen months to help contributes the vision the three of you have.

So the recovery is starting. I think there's much broader recognition now that has been five failures, analysis, transit or inflation forecasts consistently too optimistic, action too late, communication modeled, and regulation had We almost had a big banking crisis just six months ago. So I think that's now there's more understanding, and what we propose is a few steps that reduce the chances of that happening, things that minimize groupthink,

Elarian, Elaron Brown, and Spence Prima Crisis is the book, John Farewell, just a wonderful effort there joining us now Kathy Jones, chief fixed income strategists.

Here on a higher yields, on the real yield.

I'm sorry even to schwab Lisa, it's been an adjustment.

Yeah, I mean, honestly, right now people are looking at these yields and saying can they last? And you are even saying yesterday, as you looked at them, why so why.

Yeah, you know, I do think that we are adjusting to this new world where we have a positive term premium and we have a stronger growth outlook and certainly you know, higher for longer yields. The question is, you know, what is the endpoint of all that, and so when we look at it, what we say as well, the FED might hold here for a while, but it's very difficult to see why they want to go a lot

Partly because the economic data keeps surprising to the upside. It's part of the reason why we keep hearing from different CEOs Jamie Diamond, David Solomon talking about resilience, and they're seeing it. They would see it first if they were seeing it really start to crack. Consumers are still able to spend, albeit not at the levels they previously were.

Yeah, I think that we will see a decline in yield. Obviously we're not going back to zero or one percent or two percent or whatever. But I do think we'll see a decline in yield. So consumers are spending, but they're filing for bankruptcy, you know. That's that's kind of the two sided issue here. We're seeing a lot of delinquencies on credit cards, on auto loans, We're seeing defaults in the corporate sector. The speculative default rate is starting to pick up. I mean, there's a lot of evidence

Ren Okay, bring up the chart you just put up there, Amy and nailed it with that ten year chart on radio, folks.

It's just the ten year chart in the yield here.

I'm gonna get a little fancy here with Kathy Jones because she's a fancy at person.

I have nice log convexity, I have.

A beautiful two standard deviation trend in a higher yield. I've got elegancy on my climb in moving averages, I have a trend in place.

How do you know when the yield turns and goes lower. I don't see that here. I see higher ten year yield.

Oh, you're right, I mean I pick trying to pick the peak is really really hard. It is in every cycle, and this cycle has been you know, particularly unusual dynamics because of the pandemic and the fiscal stimulus and you know, all the special things that have happened.

I have an inertial force in the yield space to higher e ELD.

How do I respond to that?

Do I stay wicked short term money market fund cash and that or am I a brave fall on a knife and dive in here? Dollar costs to average into it?

Yeah, we don't fall on knives typically, that's usually not our yeah exactly, but yeah, we leave that for the equity folks. They can try that. But you know, we're dollar cost averaging in. So you know, we're looking at the agg with a duration of six and a yield of five and a quarter, and so mimicking something in

The concern that some people have is that bon vigilantes are getting a little bit stronger, and there are many more of them, and there are many fewer of the international banks that might step in, say from Japan.

How do you respond to that?

Are you seeing the mix of buyers change and become more aggressive in their demands?

You know, we still seeing foreign inflows are pretty pretty attractive, have pretty steady, so it's it's hard to parse the numbers because of the way they're reported through different agencies, but foreign investments still pretty strong, so not too worried about that. I think a lot of it is the Fed's pulling back in QT right. The FAD was our big backstop, and now the Fed's not buying the FEDS allowing to roll off, and I think that that's one

Kathy, I'm asking for a friend, folks. The Austrian ninety seven year I've enjoyed from a one thirty four I bought it just below that, like one thirty one to thirty six. I'm down seventy two percent on a ninety seven year piece of paper, and on a stochastic basis, again, how do you know when that's going to reverse and be the distressed debt.

By of all time? When do you go long Austria?

You know, Tom, I wish I had the answer to that. I think that you're gonna put on.

A technical basis, we haven't seen this in seventeen years, right, I mean this is you know, Lisa has no memory of this. What percentage of Wall Street has no memory of going? Okay, when do I go long Austria? That question hasn't been asked for seventeen years.

Yeah, when you go along super long duration, I think you're going to have to wait for a pivotal moment such as you know, such as a big recession or some sort of crisis.

Kathy, that was such a diplomatic way of answering a question where Tom is basically like, please let me offload by Austrian piece finally cash out.

That's essentially what you're saying.

Yeah, no, it's not potentially what I'm saying, folks. This is the dumbest investment I've ever made. I mean, I'm not kidding here it But Lisa, this brings up what Kathy and Lazanne have to deal with every day. These are markets that what percentage of the public in their adult lives have never even listened to this surveillance dialogue.

And I'll take that a step further.

The concept of distressed debt investing probably wasn't thinking about sovereign debt from top rated governments, and suddenly we are thinking about top rated gooddet from sovereign governments, because.

That's the kind of yield that you're getting.

Kathew Jones, thank you for briefing me on the Austrian at Peace. Right now on presidents in history across the American fabric. Aline Comark joins us right now to say she's senior fellow at Brooking's former Clinton administration official. Doesn't touch upon her wonderful books which are really richly researched and written on the foibles of our presidents. Olaine, thank you so much for joining us. You are you know, I think of you and Michael Bachelots of the two

Harry Truman wouldn't have done.

That, right, right.

I think it's a big deal, and it's say it's probably long overdue. You know, the American labor movement has gotten weaker and weaker since Harry the days of Harry Truman. In fact, it used to be that thirty three percent of the American labor force was unionized. It's now down to nineteen percent and I mean nine percent sorry of the industrial unions and a little bit more of the government unions. And at the same time, what we've had

Who has the voice of Coolidge and the rest of them? Who has the voice of business across America?

Oh, I think that the I think the President is very concerned about business across America, There's no doubt about it. And the old Republican Party. Okay, the traditional Republican Party used to be the party concerned with business across America. Now this Republican Party is off in La La Land and can't even get a budget, right, can't even keep

Elaine, How complicated is this issue at a time where the Democrats have been trying to transition away from fossil fuels and lean into electric vehicles, at a time when a lot of the electric vehicle battery manufacturers do not have unions, and this is part of what spurred a lot of the discontent among the unions. How confused is the messaging right now?

Well, it's pretty confusing, and it's pretty it's pretty difficult. But it is the price of progress, right, I mean, we are going to move away from fossil fuels. We are moving to electric vehicles. You see more and more of them on the road here on the East Coast between Washington and Boston, where I travel a lot, there's a ton of ev charging stations at all the rest stops. So it's it's coming, and I think the unions need to cope with that and try to organize as much

Is this enough of a headwind or rather a tailwind for President Biden to get him over a hurdle that is increasingly big in terms of popularity, which is cost of living, which is his age. Which is a question around some of these kind of confused messages coming out supporting labor but also having the energy policy that kind of goes against someone what he's talking about.

Well, good, that's a great question. And what you have to remember is presidential elections are not about the whole country. It's about certain states wining certain states. This is going to be a big deal, a big EFI deal, as the President himself says, in those states that are swing states. It's going to be important in Michigan, important in Wisconsin, important in a lot of those Midwest industrial states, and I think it's going to be huge in terms of his reelection.

For a Republican and Democrat listeners and viewers eline comer. Does a president need a new vice president? There's such a tradition second term to recharge, reinvigorate, and figure out the politics of the next vice president. What's president what's he do with the president vice president as he moves forward?

I think she stays exactly in place. And one of the things that's missing and all the discussion about Kamala is guess what she does really well among young voters, voters under the age of forty five. And one of the things that is always forgotten in these discussions is that by the time of this election, people under forty five are going to be practically fifty percent of the electorate. By twenty twenty eight, people who are today under forty

There is a debate between Gavin Newsom, governor of California, coming up with Rond De Santis of Florida, a very unusual kind of debate at a time where Gavenusom is not running. Do you think that it would be a good thing if there were some other options out of time? When a lot of voters are very concerned about Joe Biden's age and have said so in polls.

Well, they do say so in polls, but guess what, they don't vote that way. They said so in polls in twenty twenty two, they voted for Democrats. Every special election in twenty twenty three has seen a growth in the Democratic vote. So I think, yes, people are concerned about Biden's age. You have to be You have to be concerned about Trump's age too. He's not a spring chicken. He looks like a walking heart attack. Okay, you got

Elaine, thank you, someone's the next book out, Elaine quickly.

He next book is probably out in November, and it's about disinformation in American politics.

Elaine, thank you so much, Elaine Commark. Whether you're a Republican or Democrats, she speaks her mind, and every time she's on the show, folks, I learned something I had no idea. The preponderance of people under forty five.

Years old in America speaks to the anger that a lot of people have that there isn't a representation that matches that at a time where the two front runners for the presidency are of a different generation.

It's great when she's out. Sheila Johnson be Et co founder. She's the author of Watcher Fire, a memoir of picking herself up from her childhood, getting it done, getting totally slammed by a divorce, and keeping it going. She's of course done better than good over the years. In Washington is Mike McKay and I were talking about a modest acquaintance with the ice hockey capitals, with women's basketball and a sours and she has written an exceptionally terse mustard

In a Humby.

Absolutely, yeah, and he gave you a lecture. Oh you know, I got to know him because I was on the board of sun Dance and I've admired everything that he's done for the film industry, and we just got to know each other. And he came all the way to Middleburg, Virginia as I was getting ready to start construction, look down on the town and he says, you got to put a film festival here. We are now into our eleventh year of doing that.

Yes, I like that you showed up at a Humbye, which speaks volumes about Sheila Johnson.

I want to go back to the emotion.

Of the beginning of the book, which people you know, you didn't come out of some fancy prep school and got it going with the first.

Million or two million. Now take us before the first million.

What was the catalyt to pick the pieces up from your childhood?

Well, first of all, it was a learning area where I, for the first time in my.

Life, had to grow up very fast.

At the age of.

Sixteen, my father suddenly left. We're a middle class family of first African American not the first, but one of eight African American neurosurgeons in the country, and so we had some sort of status in society, and for him to suddenly leave it just left my mother broke. Women did not have the wherewithal to have our own bank accounts or anything. So that is stuck with me forever, and that has been the impetus in which I have decided to leave my life and take charge of it.

Would people want to know from me? I'm going to slam it forward to the present. Lisa's got a bunch of insight as well. What do you think of the expression of our culture? War now is witnessed by a corporate effort of diversity which seems to stumble on itself. Was it witness as Hollywood and mistakes made or just the general debate over this word woke? You're about as anti woke as I've ever seen. How do you synthesize that?

Well, I don't quite understand woke. I just know hard work is at the bottom of everything I do. My value systems are there, and it's really really important that I continue to push on and not really focus so much on race. But I am very aware of it and the pitfalls that I just try to fight through it and I deal with the people that want to challenge me on it.

What do you make of some of the recent striking activity, particularly with Hollywood, given your intimacy with that at a time where people are trying to take charge of their life and don't know what the future landscape will look like with artificial intelligence and streaming and don't have those guarantees, do you think that there are legitimate issues that are not being dealt with responsibly and in the public eye from some of these companies.

Yeah. I think what what's happening is it's all media is transitioning so fast, and even in the film industry, and I know people in the film industry, they're seriously concerned about what their future is going to look like. I mean, I deal with the film festival. I have a LA Film advisory Board, and they're talking to me all the time about are we going to get films this year? Are there still films being shot? Are there

You've got these great vignettes.

I want to take a vignette and take it to business as well. You're sitting there one day, you're over your saying a coffee.

You know, you're hanging out. You've probably you know, you're going.

Ben's Chili bowl, U Street lunch.

I think we can do that.

Yeah, And Whitney Houston wonders it. What's it like when Whitney Houston comes in the door.

Well, first of all, she's just one of the most beautiful women I'd ever seen. She's very thin, very talented. But I also could just set it's a little bit troubled, but I admired her. She's a great talent. And you know that was some of the fun things about Bet. You would see all these celebrities that you've heard about, talked about, and they're coming into your studio. So, I mean, we really were the core of black media back well, you were the core of it.

And you know, like you said, you wanted to be Abny magazine, really high end in academic and then boom, it all changed, and you know, in some ways it blew up in that, but.

I got to drag it forward.

Now, Sheila Johnson another cup of coffee, except it's a fancy cup at the Sunset Teller Hotel. It's you and mister iger, what's your advice to the modern train wreck known as Disney?

Oh my goodness, that's something I really can't answer, but I will tell you Disney has always been a force. It's a force in media, in entertainment, and I'm just terrified about what's going on in Florida right now. I really am.

Well, if you push it forward from your BET experience, would you be able to found that company today in today's world?

You know this question has been asked of me many times. I'm really concerned about where BT is now. I think we need to look at it. I have not been happy with it for years and years and years. There's not enough balance programming, and I just think that the landscape and the racial landscape of what African Americans are watching has changing. And I just think that we have got such a broad perspective of people out there that

The heart and soul your voice, You've got to wrap it up here, Sheila and celebration of walk Through Fire. But the heart and soul of your work is to find a middle ground and in these cultural wars. You know, I was weaned on Edmund Burke, Senator from Massachusetts.

This is a long time ago.

How do we get a fractured America back to a middle ground?

Well, I think what we're doing through the Salamanders, through my company is we're bringing in programming. I've kind of taken it from bet and into the hospitality business with the film festival. Also, I've been able to check the box on the diversity issues where I bring in forty one of the top black chefs from all over the country to really celebrate food from the African diaspora. We

Sheila, thank you so much for joining me. So welcome today.

Sheila Johnson of Course of Beet Walk Through Fire, a memoir of love, loss and triumph. Deeply personal and courageous book.

As well.

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