Surveillance: Succession Plan with Gorman

Tim Well, I don't hear what you're calling car Lissa o'bramowitz, and we do, indeed have James Gorman, the chair and CEO of Morgan Stanley said, James, thanks so much for joining us here in Dabos. Your earnings came out everybody pay attention to him. And I heard a story you can tell it's true or not that once some time ago you're recruiting senior executives that you know. Wealth management may not be as exciting, but over time you do better,

more steady. Is that what we saw? I noticed your stock one up six percent when when Goldman's went down six pers on the same day. Well, firstly, thank for having us um you know it was a good day because I told our board a couple of years ago what I'd really like to see selfishly is a very difficult environment. I don't want to see it for the country. I mean it's not fair, but but for Morgan Sending, because I wanted to prove the business model would do

fine when things are really difficult. And in fact we had our second best year ever in revenues and net income, third best in EPs in our history. So you know what what it proved was the volatility of the markets business. Everybody understands the volatively of underwriting I p o s are not happening when things are very uncertain, trading on the like. But what we proved is by having you know, between five and six three and dollars of people's money

under management that is stable. And that's that was the design twelve years ago and we've got there. One thing that you said was you are planning to expand some of the wealth management aspect even as you cut back other parts of the business acquired each trade eating vance. Is there another acquisition that you're trying to target or is it going to be just sort of organic growth. No, I think it's a mix of both. I mean we

started off with Smith Bunney fourteen years ago. Then we acquite a wonderful little company in Calgary, Canada called Sling, which did all the sort of workplace stock plan businesses for a lot of the SMP companies. Then we bought each Trade. Then we bought Eating Vans, and we bought Masa West, which is another company. So we've we've been we've been building them, and those opportunities come up, we

keep we keep acquiring those spaces. Is a room for another large acquisition, there's always room, um, But we like things that aren't balance sheet intensive. We like things that help grow scale in spaces that we understand and um, you know, we like things when we know what the capital picture looks like. So we you know, at the moment, we've been quite aggressive with our buy back. Doubled our dividend two years ago, we increased the eleven per cent

last year. But we're also dealing with changing regulatory environment. So you're managing between what are the capital demands regulators require, how do you distribute it through dividends and through buy backs, and then what do you need to do to invest in the business. And part of that investment, of course, his acquisitions, so it's a multi sort of chess game that we're playing. James said, it was some there were some difficulties, and you were happy that you could manage

those difficulties and show that your map model works. Some of the difficulties were highly leveraged loans for some acquisitions and things like that. Is that crimping your ability going forward to make some of those highly leveraged loans. Are you changing the risk calculus? No, we've We've been I would say um urd conservative over the last two years.

In fact, it was September I think September year, year and a half ago that I met with the management committee and said, let's let's all just pull it in five ten per cent, right um and our our w A is a risk weighted asset. It's actually declined at the end of the year. So we did that, and so within the leverage loan space, again ear a little conservative, but we have a large portfolio obviously going to take

some losses in these markets. Within that they are absorbed in our numbers, but you're also generating a lot of interest income, a lot of fees on it. So I balanced, David, I think we're reasonably well positioned, but we're definitely not trying to be aggressive in this environment. There is one high profile loan that rhyme with Twitter that we're going to have to talk about, the Twitter loan that I know Morgan Stanley lead on. Could Morgan Stanley end up

owning Twitter? Could Morgan that I've never been asked that question. No, we could not end up owning true. Do you play on offloading those loans or do you just flater that? Firstly, Twitter is a great company, and and let's be fair, Elon musk Is is one of the greatest entrepreneurs and business people you know, in the last century, and that's something that's something exaggeration. Look what he did. Just take the boring company alone, let alone SpaceX, let alone Tesla.

I mean this, this person has extraordinary capabilities. Twitter is a great company. Obviously, it's gone through restructuring. Um uh, you know, it's it's part of our I'm not going to talk about the specific loan position we have, but we're very comfortable with that position. So there are things we don't know about the economy going forward. One thing that people see the reasonably coveted the rates are gonna be higher interest rates are going to be higher than

they have been in the past. How does that basic fact change your business? How do you manage your business differently when you've got rates at four or five six percents that have zero to one half percent? Well, we had we had an artificial environment, you know. I remember when I came to the United States. I mean obviously as as an unsecured student, it wasn't a great credit and the bank loan reflected it. I paid My first

mortgage was fourteen and a half percent. So we've lived in a sort of we've lived in a surreal world for a decade, which is the legacy of the financial crisis. To get the economy back to where it was, central governments around the world kept rates nes eerra and along came COVID, which delayed what would have been a natural rising rates clearly. Then long came the Russian invasion the Ukraine,

which further delayed it. Finally you turned the corner in two thousand two, mid twenty two, when the Federal Reserve and other central banks around the world, um not by coordination, just by need, had to normalize rates back to neutral. They've gone higher than that. They had to go higher in order to take some of the fluff house the economy. So I see it as sort of a natural consequence. I don't think of it's particularly alarming, a natural consequence.

But which parts of Morgan Stands business are hurt by higher rates and which are helped by higher rates? Well? Were benefit net interest income? In the wealth business, we you know, we manage over dollars to deposits um and you know rate rate volatility obviously helps your macro trading businesses in foreign exchange in rates. It hurts companies trying to wanting to do deals because the cost of financing is higher. It hurts your marginal loan business people bring

down their margin loans because it's more expensive. So there there gifts and gets, if you will. But what I loved about the performance of the business last year, which again wasn't a record uh but was a great year, was that with those gifts and gets, we came out in a position of ROTC and attracted over three hundred

billion of new money from clients. Here Davos, there seems to be an incredible amount of optimism and people have noted the shift in tone and that suddenly things seem to be moving around the corner, and I had asked you, you you know, do you think it's overplayed? You said, you're the most optimistic person you know, So why are you so optimistic? What does optimistic look like here? Well, you know, I've seen I've seen a lot of cycles in my career, and I've seen some really really dark periods.

You know, the financial crisis after September eleven, even though you know the early recessions in the US, the market bust and seven year I go back up a lot

olderan you. I go back a long way and and um, you know, I think what we've been through if you stack up the negative stuff that happened, first land war in Europe in forty years, first global pandemic in a century, first lamb or in Europe in seventy years, first global pandemic in a century, and highest rate increase because of inflation in forty years, that's a lot to throw up people. And where are we now? So bad? That debate is

will it be a recession? Will it be shortened? Shall nobody's saying we're going depression right, everybody's saying we can kind of deal with this. And two things I think have changed in the last month, which has caused this echo chamber we live in here and doub us where everybody's basically repeating back to each other what they've heard from the last person. Let's be honest. I'm not hopefully,

but most people are. Is two things have changed. Number One, the inflation numbers are definitely there's clear evidence inflation has in fact peaked and is coming down right how quickly whether it will get us to two percent and when remains the debate, but it is clearly the slope of

the line is positive. Is to everybody's favorite. And the second is not just the opening up of China, but China has embraced the rest of the world more aggressively in the last few weeks, witnessed by the Vice Premier meeting with Treasury Secretary yell on this morning things this morning um in a way that we haven't seen for some time. So the big question coming out of the Party Congress and President she uh you know, being real reelected by the Congress was where does China go from here?

Does common prosperity mean effectively dividing the pie up so everybody gets a piece of it, or by growing the pie? And what we're seeing is the tilter is now from divide the pie to grow the pipe. Does that mean you've got more confidence to expand in China? We've We've got We've got a very good business in Greater China. Obviously, we have a huge business in Hong Kong. Um, and we you know, we continue to have I think on the main land up to a thousand people in various

various functions. But no, I think we need to see a little more clarity of Chinese policy, a little more you know, sober discussion around global trade relations. Um. And uh, you know, right now, I think we're certainly in in a watch, but tilting more positive than we would have been three six months ago. We've come all the way over the Switzer and I'm struck at least by the fact that and I'll talk about Washington to be a debt ceiling a lot of concerning I hear two things.

One is it's ridiculous, and two is it would be catastrophic. What is your reaction that's saying, how do you take into account the possibility of US default? Well, um, it was a Churchill who said the Americans eventually get it right after, you know, and I can't remember thee. Yeah, so, um, you know, I'm confident that I'm confident that uh, politics will finally get to the right place on this. I'm confident about that because the the other option is just

not an option. One thing, as the people have also been talking about, is the new normal for work from home. We heard a bit of a retracement from City Group in an interview that David did here with Jane Fraser. What's the new normal? Is it coming into the office four days a week, Is it flexible? Is it work from home more freely? I think it's very very specific

to what you do. Um. You know, if you're a tax attorney, UM, who doesn't work with other teams, then obviously you can spend a lot more time by yourself. Doesn't matter if you're in office or not. I mean, there are different kinds of jobs. Is where I'd start with. The main point is post COVID, we learned you can function. I ran Morgan Centy for three months from my home office seventy three people, so that's it's pretty remarkable. We proved you actually can do it by not going into

the office. But should you do it by not going to the office? Now that clearly to me, the big answer, big answer that is no, Um, we won't put the genie back in the bottle. Five days in the office for everybody's not going to happen again. For some people, of course, and Morgan standing, we're kind of business univate business unit, it's three or four days in the office.

My rule has always been on this. If you're not spending a majority of your working time in the company of your colleagues, you are missing out on mentorship, on development, on EQ, on just reading the signals of being in a meeting and watch how people you know, handle the stresses that go on and the you know, the unspoken body language and so on. So it's three or four days a week. I don't think that changes in a hurry. Some people in some businesses are trading for is a

cheek to job. You go in there there five days a week. So it's very business specific. But my my golden rule is don't put the genie back in the bottle. You can't. On the other hand, it's not a complete This is not an employee choice. They don't get to choose their compensation, they don't get to choose their promotion. They don't get to choose stay home five days a week. I want them with other employees at least three or

four days. So, James, you've talked about some of the responses with the CEO, which are formidable alcant in capital making sure you're right there people sitting around corners. One of the jobs is succession for every good CEO, and we've seen it done well. We've seen it done that so well. A couple of years ago you said, maybe three more years. How do you approach the question of succession? How do you set it up for the good of

the institution of Morgan Stanley very intentionally. Firstly, you should always have a sort of an envelope for God forbid something horrible happens. We've done that from a very first board meeting in January of two thousand and ten. Um. But more realistically, you plan a generation people who can take over with Morgan. Sandy have now three executives whoper

replace me. They're all very, very talented executives and we're trying to fill out their skill base and ultimately the board will decide who is the best qualified to run our particular company. At this point in time, I'm extremely intentional about it. Um, I would definitely step down. I'm not I'm not going to stand this job for life. I've no us in that and it's unhealthy for our organ the way we're constructed. Right, We've we've got to focus on what's right for Morgan sounding and it's to

grow the next generation. I work on a ten year and twenty year plan in talent planning, and that's how far out I'm thinking about it. And you know, I've been in this job, well, this is my four ent years, so I've had plenty of opportunity to developed folks. And the great news is, David, we've got some unbelievable talent. JS Garman, thank you so much for being with us, the head of Morgan Stanley, We're gonna get some good news later this summer. The debt ceiling standoff looms in Washington.

Bloomberg Opinions. Bill Dudley wrote the following, the debt limit doesn't contribute meaningfully to fiscal discipline. It encourages political grandstanding. It risked the default of the world's wealthiest and most powerful nation, Tom it should be abolished. The words are

built Dudley on Bloomberg a strong strong language. William Dudley is an important economist, yes, the former president of New York FED, but someone more than any of the Feds stealed in the grind of market economics and actually working day to day through policy realities. Bill Dudley joins us

this morning writing for Bloomberg Opinion, A huge contributor. Bill, I was talking with our Michael McKee and this goes back to McKelvey and you on the fiscal state of the nation at Goldman Sachs in two thousand eleven and even more recently in two thousand and fifteen, the Fed was proactive in modeling out debt ceiling outcomes. Do you just presume they will do that this time? And how wild your own Powell and Company assist Congress in measuring

those tail risks? I will definitely be contingency playing. What do you do if there was a default on the debt? What do you do if there's non default? But prioritize payments? The way it works is, if you actually run out of money, the treasural just what payments to present to the Fed. Presumably the treasure will decide to prioritize debt repayment and interest payments, so there isn't a technical to fall and then the FED will basically honor the payments

that the that the Treasury presents. But what the Fed can do also is actually shore up market functioning and the treasury market. Uh. What we saw in two thousand eleven is the treasury market got unset, very unsettled as we got close to the deadline. People don't want to

buy treasury bills. That are worrying. Right around the time when the debt limit could be binding money market funds, there were outflows from treasury money market funds into commercial banks and so the Fed FED does have a responsibility here to try to preserve market functioning. And there's also the question, of course of the debt auctions themselves. The Treasury is auctions the debt, but the Fed actually runs

the auction process, and it's really important. And we have those auctions that there are more bids than what's on offer. If if there if there were not enough bids, uh, an auction would fail and that would be a terrible blow to the financial markets. Yeah, I look at this bill, and I'm gonna go to your Berkeley Economics and the great Berry Iken Green and what he said about gold and the emotion of gold. How do you respond to

the moral consequences of our debt? The emotion of the right And they had a huge response to your Bloomberg essay, the moral consequences of this debt. How do you respond to that like Iken Green would respond to gold? Well, very simple. Uh. The point is that, look what's happened to death in deadness over the last twenty thirty years Sword, even though we've had this debt limit ceiling in place all during that time. So the debt limits clearly doesn't

restrain spending. We've tripled the amount of government debt relative to the economy over the last thirty or forty years, and you know, so the debt limit is not really doing much to actually constrain things. Uh, As I think you don't really want to mess around with the credit worthiness of the United States, because if you do mess around with it, even if you avert a disaster in

the end, it can have consequences. In two thousand and eleven, the debt limit was raised at the end of the day in a time and barely in a timely way, and yet the SMP downgraded the reading in the United States from triple A to double A plus. So there was a consequence even when there wasn't a technical default on the dead But will you experienced this when you were at the FED. My McKay was talking to us earlier. You just messaged me said the f WEMC in game

down possible FED responses to a default. What did you think you could do back then? Well, I think there's a couple of things that I can do that FA can basically tell tell market participants that we're going to continue to engage in the treasury market, will take you know, we'll take defaulted securities as collateral just as well as

the securities that haven't defaulted. You know, you don't want the market to start to really uh lock up because people can't raise money against treasury collateral because they're worth that collateral could be in default. So the FED is basically said, we're going to treat, We're gonna treat, We're gonna take defaulted treasure securities and all our operations. The only difference wing defaulted securities and non defaulted securities would

be we value default as curious at market prices. So the FED basically saying we're going to keep the repo market functioning. We're gonna keep the treasury build market functioning. Now things got bad enough, the Feder Reserve could also engage in, you know, in interventions in the secondary treasury market. They can actually coming in and buy, like we saw during the early stages of the COVID pandemic. FED would not want to do that because they don't want to

get involved in the middle of a political controversy. But if the treasury market really started to melt down, the FED would probably come in and and and participate in the secondary market. The FED can't do anything about the auctions themselves because the FED is precluded from buying directly from the U. S. Treasury. So but let's just build

on this. The attitude of people on Wall Street, as you know and we're all familiar with, is that this happens, we get through it, and if it gets dicey, guess what we do. We buy treasuries now. But you get all those kinks of various tennis at the very front end of the curve on tables, but they'll ultimately people still buy treasuries. Do you see that change in whatsoever? I think that that's what generally happens, and I think

that's mostly right. I mean, basically what people assume that is that there's gonna be a lot of drawing, but at the end of dead limit will be raised in time. Now, So what that what that means is if all, if we mess up, even just one time and don't raise the debt in the timely way, it's gonna be a huge market surprise. So you go from the probability of default is you know, point zero one percent to all of a sudden there is a technical default, be a

huge blow to financial markets. Bill tell me about our ratios is compared to the maximum doom and gloom of Japanese ratios. To our listeners and viewers in a debt ceiling debate, the three or the four or the five ratios that matter? Are we fiscally constrained or are we doing okay? Well? I think the big difference between US and Japan is we very much depend on the kindness

of strangers that could hold our our government debt. The U s is run as you know, current account deficits for you know, decades, and so a lot of the US assets are held by foreigners. Foreigners don't have to hold US debt obviously, and so there is a risk that they can just idea that maybe the US isn't sell credit worthy, well their credit worthy. And I guess we're gonna you know, as John mentions, Wall Street says, Okay, let's get through this in the autumn and move on.

And you suggest there could be a singular damage given one screw up. What is the proactive process of secretary yelling not to get John, not to get a bipartisan support. That's impossible, But what is the proactive process of secretary yelling to solve this before the autumn angst? Well, I guess what you have to do is convinced us a number of Republicans, more moderate Republics to come over the fence and join Democrats and raising the te liment in

a timely way. But I just want to wrap things up with the recent economic dates if we can, because we have about sixty seconds late left with you. The recent survey data bill, how much weight would you put on it? What we sank in the I M what

we saw an empire manufacturing earlier this week. Yeah, things are definitely weaker, although I think part of this is just the rotation away from goods back to service is and I think we really need to see the January data because we don't know how much, you know, Christmas sales were distorted by the fact that people bought a lot of stuff uh in prior years during the pandemic.

So I want to see what the January looks like, January data looks like, and then I'll have a better sense of whether this Christmas weakness is just, you know, a lull, or whether it's something more serious. How would you change your thoughts going into the next dem C meeting if you were still there? Is there's doing anything to change your thoughts about the pace the ultimate destination.

They've They've made it very clear that basis points at the next meeting, and the weaker inflation data and weaker activity data confirms that. I think that's almost certain that they're gonna do another basis points move in March, and then they may may maybe the main meetings up for grabs. But you know, I think it's gonna be hard for them to stop because if they stop, financial conditions are

going to ease and the montefit is gonna lessen. But this was great as always, Thanks for squeezing that end. At the end, we appreciate it. Build down the performer New York Fed President. We can catch up with Great Battle now, the US head of Equity and Derivative Strategy for at BNP parent part, Greg Battle, We've got to leave with this. Thirty four hundred on the SMP year end is your price target. You're not looking for that dip and rip. You're just looking for a dip your

rent on the SMP. You are the most bearish strategist on the street right now that we track. So Greg, let's start there. Talk to me about the journey to thirty four hundred. Yeah, good morning. Well, I think the target itself is less of an out wider than it seems, because when you look through the forecast that many strategies have for the first half of this year, similar to US, people are looking for recessionary price action and for the

equity market to make new loads. Where our view is a little bit differentiated is we're not looking for the type of V shaped recovery that we saw back in twenty. We think there's going to be a harder environment to see fiscal and monetary response um and we think that leads us to an equity market that can have some

healthy declines this year. The BNP Perry Bus hallmark here is to understoot g d P of oys write about that you've never gone with the boom crew if you are Gregg, and that all devolves down to the x acts. Is the timeline? Give us the timeline of this equity weakness? Is it one quarter? Is it quarters? Or really can

you get out into the depths of two thousand twenty four? Well, I mean, obviously we've seen some pretty big declines in the last calendar year that was far more of a story of multiple compression than it was recessionary price action. What we're looking for in the first half this year is recessionary price action. We think that can start with this current earning season. We've seen some bad economic data

this week. Um, we've seen now CoA after the bell yesterday which was a little bit of a troubling release, and we think this earning season over the next couple of weeks could be a challenge. But really, when we fast forward three months to Q one earning season, we think that could be really the point of which the economic data is really decelerating and we could see some real capitulation in terms of earnings forecasts. So the next two earning season we think could be the most troubling.

Frequties What does this placement bets right now? When you look at the cross moments around the equity market and particularly skew when you look at the fancy derivative chat, what does it say about the bet that's being placed right now. Well, I think what we see in the equity vall market is a little bit of a reflection of what we've seen more broadly in the acting market,

which is a more constructive start to the year. We saw the VIX trade down to an eighteen handle, which is kind of very low relative to where it's been over the last year UM, and that's really reflective of this kind of China reopening, warmer winter in Europe UM starting to translate into some short covering into the US, which people are starting to weave into a narrative of maybe this elusive stuff landing is coming. But we think

that's pretty inconsistent with the data. I mean, when we look at the data this week, retail sales, industrial production, Empire manufacturing, UM, this is data that is decelerating aggressively. So we think there's some signs of complacency, and I think the VIX sub twenty has been a pretty a bad signal for the equity market other of the part. So there is a bit of pushback against this view. It comes from Neil Data over naissance Macro. We caught up with him a little bit later, a little bit

earlier this week. Just listen to what he had to say. Greg, the manufacturing data undeniably week. You mentioned the IP data yesterday. But why does this continue? He asks? Aircraft and autos have a lot of momentum. The dollars sold off, supporting the exports and manufactured goods, and global growth has rebounded. Neil is pushing this idea that we could have a more resilient economy than some people expect. Greg, what would

you say to that. I think we've had an incredibly aggressive tightening cycle from the Fed, and we know these things acts with these kind of long and variable lags, as they say, and I think we're going to bite some of the pain this year. So Kyl Rocord on our economics team point to the idea of nominal GDP falling below FED funds as something that historically has really been a signal for deceleration in terms of economic momentum.

They expect that to happen at the start of the second quarter, just when Q one earnings are being delivered. When we look at things from a more bottom month perspective, there's undoubtedly been a real deceleration in terms of earnings forecast momentum. We've seen it sequentially that each earning season

has seen downgrades a little larger than the last. We think we're going to get bigger downgrades as we moved through the next couple of weeks in this earning season, and we think we get bigger downrades than that as we moved through Q one earnings. So I think the outlook is challenging. Greg. How important is history here as well? We mentioned June and Emmanual have ever court a little bit earlier this morning when he said this line here, no bear market has ever bottened before the start of

a recession. Does that weigh on you too? Yeah? Absolutely, I think that's a great stat We produced a piece before we went back and looked at every recession and bear market over the last hundred years, and that was indeed one of the takeaways that we've seen when we look at recessionary bear markets, and we do think we have a recession this year. They tend to be deep and they tend to be very long. We've gone back

and studied all of these crashes. We see some notable similarities between where we are today and where we were in the early two thousand's. That was a born market that was driven very much by multiple compression, retail participation, tech and grow stocks. Lad very similar to the ball market we experienced prior to last year, and that on wind was long, it was deep, and we see a

lot of similarities of that to where we are today. Greg, your shop has an absolutely original heritage in China, folks. This goes back well into the nineteen century BMP, Perry Bar and China. Can there can there boom? Can there predicted boom? Can their end of COVID? Can their new five or six percent GDP growth? Can that overcome the

equity gloom? Well? I think we've obviously seen the power of the reopening trade in the US and that's certainly been the driver this year of this more constructive start for equity markets globally. I think that we would question a little bit about whether that's going to be sufficient alone to offset some of the headwinds that we see

here domestically in the US. But it certainly raises the question of relative performance globally and equities um and this is one of the reasons why I'm more comfortable with this Barrish view for US equities, and that in the case that we're wrong on the global macro economic outlook and global growth is stronger, we think there are regions other than the US that are likely to lead that charge higher spive and is the kill Gregg Mattle FBNP parent Bunk Greg, thank you, sir, Thank you very much.

We go math on a Thursday here twenty six minutes before economic data. Alicia Levine holds high ground and mathematical acuity and looking at equity and capital markets with b and why melon today, I'm gonna go Matthew on you right now, and let's go into Tony and calculus first and second, deservative, what's a convexity out there that mostly has your attention? What's the accelerated force that scares you?

What scares me is really the pricing in of the soft landing that has happened since the beginn ning of the year. Because as you know, it's not actually what happens in the data that moves markets, it's what's already priced in. So everyone was defensive. By the end of the year, we flipped over China, reopening the growth impulse. You know, tex is going to make a resurgence. Yields are going lower, great for stocks, great for multiples. The soft landing is out there, and it simply wasn't priced

in at all. Then we moved towards that, and I think that's ultimately the risk. And in the end, the peak FED funds rate, as priced by the market is about fifty basis points less than we think we're going. That's the issue. It's not that the market is necessarily wrong. It's that if it is wrong, the reaction is not going to be a pleasant one. In equities with my phrase last year, the gravity has returned, you know, the

sharp ratio of risk free rate and all that. He's got a book magisterial and misunderstood called anti fragile, which is the mathematics of what you don't see because you don't have skin in the game, which leads of the shadow banking debate. What's the mystery out there in the

bet that's being made for two. The bet that's being made is that the macro story from carries over to twenty three, meaning that if the second derivative on inflation is negative, that is lower growth rates or even this deflation, that that will rally the market. That is the problem, because the bond market has already priced in the recession,

has already priced in lower inflation. And with that, if you're only looking at multiple expansion as a way to rally the market, when most market participants are assuming that earnings have to come in, that's the problem. The story this year is the earnings risk and the recession risk, not the inflation risk anymore. That that second derivative is clear, has been clear for several months. It's being driven by a drop in commodity prices, a drop in the goods pricing.

That's been clear. But you can only go so far on that. And that's the dance, the dance between lower yields, lower inflation prints. But ultimately, if you're getting to two or three percent, it's because you have a recession. Tech have circularly challenges some of those names. So there's you know, we've talked about this, you know, for the last few months the multiples there are still too high. In every cycle,

there is that moment where leadership shifts. It typically is caused by a recession or some kind of an event, and you see it very clearly. What happened here was sort of that excitement of multiples and tech and you know, exponential growth, and then it started tipping over by the middle of twenty one more towards the value industrials, materials, commodities.

So we think the next cycle, I'm not saying for the next year, but for the next cycle, the growth stocks simply will be more challenged because that they were the leaders before. And if you go back fifty sixty, seventy years, they're very clear cycles of outperformance and the break tends to come around recessions or big events, and COVID was one of those events, and the slowdown is

one of those events. Raging change change phrase I think sounding a dollar of Microsoft's been pretty clear about it. They're not hiding. The Microsoft CEO this wait, Tom at Davos the following words, and I keep saying this. They are not hiding. They're telling you this loud and clear in their actions with job cuts. In their words, here's the quote during the pandemic, there was a rapid acceleration. I think we're going to go through a face today

where there is some amount of normalization in demand. Alicia. They're just telling us up front, aren't they that you don't You don't fire people when you have growth ahead of you. You fire people when growth is slowing, and so were The message we're getting from this particular sector is that growth is slowing. We've seen it in the stock prices. That's not all tech, but you still have stacks that are trading at sixty times forward earnings always

have to come down. They tend to be concentrated at the top of the market, concentrated at the in top of the index of the SMP. So ultimately that's a tough place to be relatively. You're not all in cash, No, no, we are not in cash. We don't. We don't do that, but we don't, so we we We recently raised our exposure to fix income. We did that at the end

of last year. We're implementing it this year. We have um tilted our equity exposure to me to be more value oriented and to look at some of those names that are underneath the surface, not the top ten names that everybody's probably still has in their portfolios hoping that they're going to outperform this year. So we're looking at more value. We're looking at growth at a reasonable price, tech names that have earnings and dividends on cash flow.

That's great, that's what's going to work this year. It's simply the growth at at any price won't work. And and that story was last year and that will continue in this cycle. If you remember, if you remember after two thousand, nobody wanted to own tech for about seven years, very hard tech rally here. Not the same thing here, but there is a there. The leadership will not be here, and the lesson will be hard, hard learned. That's going to compromise the index in a massive way, isn't it massive?

You can still make money in the different sectors. We like industrials, we like materials. We're still we're so long energy because we think. Let's just by the way, let's talk about the fact that w T I quietly went from sevent z. We've been talking about it. You haven't been watching, but we've been talking about that. She listens and watches every day time. What are you talking about? I just I think what the studio. This is just awesome.

Thanks for making the effort, makes a massive difference. So great to be here. That's because time's up. Tom just getting towards the end, start to be rude as well. Yeah, I just it's my job to rend you in sometimes Laicia, Thank you Leia, and right now and this is what we do with Bloomberg Surveillance. We want to bring you experience on the cell side on people advising and doing securities research. She is a legend in the business. She

is Jessica reef Airlic. She's media and entertainment analyst at Bank of America and long ago and far away, she would put out a ten page effort for OpCo and we would all have to stop and read every word and every sensitivity analysis of her work. Now she has a new war. It's the streaming wars. And we're honored for Global Wall Street to take notes this morning. Jessica, thrilled to have you here and honored. How bad are the streaming wars? Well, first of all, thank you for

having me and thank you for remembering open minded. That's a long time ago. Um, you know, it's with the exception of Netflix, everybody is losing a lot of money, but it's it's critical that the traditional media companies make the trans linear pay TV universe is declining and declining quickly. Um, and the viewers are going to streaming. They want to watch what they want, when they want, and so ratings

it down dramatically and the ad dollars will follow. Jessica, I look at your optimism on streaming, and I'm gonna go to the most troubled let's call it David Zaslov's Warner Brothers Digital w b D. You're you're at lunch with him at the Sunset Tower Hotel. What's your question? Does have love? And frankly for the rest of the

industry about what's the rate of change here? What's the speed forward for the streaming wars Well, they're a little bit different, so that's an interesting company to pick up. W b D. Warner Brothers Discovery will launch their combined service in Q two, and we don't know exactly what they will look like, how it will be priced. Um, do they keep Discovering? Plus? Do they do? They keep it all the carpet also integrated because there's a very

loyal following. Gosh, how but remember Warner Brothers Discovery has an enormous library. It's not just Warner Brothers TV and film, but they also have all the lie So when they launched, our expectations, they'll have news, they'll have sports, they'll have entertainment, they'll have documentaries, they'll have you know, nonfiction. So that's a little bit different. The ones who have launched already, like Paramount Plus or Peacock or Disney Plus. You can

see their numbers. They're losing billions of dollars um, you know, and again the loss But Jessica, to your enthusiasm on Netflix and to get to this afternoon or Mandalorian coming out for Disney Plus to save the day, When do they get to profit? What is your ex axis at Bank of America when they finally turned profitable. Well, in the case of Netflix, they are profitable. So they are at a completely different level than all of the other

traditional media companies who have kind of joined the party later. Um, there are massive losses um. In the case of Wonder Brothers Discovery, the losses of peaked to twenty two. In the case of losses should be this year, Paramount Plus and others next it's kind of a long road to profitability um and the margins and the business will see what they really are ultimately are they can they climb?

You know, can they scale up beyond that? But it's clear that the economics will be will be far worse than the PayTV you know, the traditional pat I got eight ways to go here, Jessica, I mean, I mean, there's so much to talk about in the firm, and of the loss is being taken. I think I've got to go to the heritages. We see right now debated at Disney over Fox. Mr uh Mr Pelts is in there knocking around and others, and it's about a gentleman

in his nineties, Rupert Murdoch. What is your outcoming? Wh If I was having coffee with you and Gordon Crawford, I'd say, what is the outcome for the Murdoch Empire five years from now? How do you visualize that? Well? I think Rupert Murdoch has proven to be the smartest person in Hollywood. He sold at the peak and the assets that had kept are the live assets, so lives,

live sports, and they're doing very very well. Obviously, there are cyplical headwinds in advertising and secular a TV, but they are not losing billions of dollars and streaming like others. So Fox is in a very different position because they're much smaller. They bite size. They could be broken up, or they have a great balanty, they could buy something, So they're in a completely different position than the other companies that you mentioned, whether it's Disney or Paramount or Comcast.

With NBCU, this might sound like a ramp, but perhaps because it is. Tom and I were both having this rand Jessica a little bit early this morning. This was meant to improve the user experience, It hasn't. It was meant to be cheaper, It isn't. Jessica has become increasing expensive. We all look at what we pay now for the streaming caps and it adds up so way, way more

than what we were paying for cable. How does all of that And jess could you think obviously consumers should have probably seen with the cable but that you know, kind of the that's over. I mean, that's you know, like the trendline is there. We'll see where cable levels out. But you're right, and that's why the biggest issue facing streaming is charm and consumers. It's very easy to turn on off and on and off. These services unlike cable where you have to wait for, you know, a serviceman

to come and disconnect. Take yourself top box, Um, this is it's just easy to go on and off. And so that's part of comics to streaming. Jessica, you and I lived this. I remember Dennis Leabo. It's a d LJ doing the same thing as one of the dumbest things I ever did. Folks leave it. What's told me that you're gonna have to pay fifty dollars a month for cable? And I told me it was nuts, and of course I was totally wrong. Let's take it back to the guy that invented this is Brian Roberts and

the Roberts family. It Comcast. What is traditional cable do to get back to the persistent cash flows that they enjoyed? To me, it's done well, briand percent a great Brian Roberts is one of the smartest people I know. And um, you know, they've done an amazing job. They're very suit when they do deals. They they've seen around Corners. Peacock actually launched they were the first a vod service. Um

their content you know. I mean, they haven't invested in content the way some of the others have, and they haven't had those losses either. But as far as you know, the video business, it's shrinking for them. But they've been very creative and strong and broadbany out. So their broadband businesses is um you know, it's much larger than video. And they've also been more aggressive in terms of trying to capture viewers and make it easier for them to

watch all apps in one service. I'm sorry the time wint to deal one a cable was the government wouldn't allow them to do it. Having Comcast in New York would have been an amazing thing because it's they really made television doing very easy. Jessica, John's gotta say goodbye. But Jessica, to be honest, all we want to know is do you have the power to get English football, Premier League football on one streaming service? Can you fix that for us? I don't know about that, but it

isn't a lot of it on Peacock. It is a lot of it, But then you've got a guess, is it on Peacock? Gonna find it on? Who do you want? It was down this year because it was on Amazon and old Amazon. Jessica, thank you. This was great. Continue this conversation, Jessica refel like the banks for America Securities. Thank you very much. This is the Bloomberg Surveillance Podcast.

Thanks for listening. Join us live weekdays from seven to ten AMI 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 pie cast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg m