Surveillance: Weighing Equities with Kettner

twelve months. Got it. Second half is gonna be better. You get a recovery. The year starts boom, everyone's wrong. Then that's Stack one hundreds up about eight percent year to day, the stocks fifty, the euro stocks fifty here in Europe is up about nine percent year today. Max Kenna of HSBC said, get on board. Max joins us. Now, Max, I have to say once I new is coming to

London for a week. You were the man I wanted to catch up with that note from a couple of weeks ago, and I'll share the quote with our audience just in case they missed it. So he bears the whole of twenty two super underweight max underweight. Then you said this to start twenty three having been staunched bear so much of twenty two we think the consensus is wrong. We see a variety of reasons to be less bearish on risk assets in the first half. So let's talk

about what you see so far. Do you like what you see so far? So far? I think yes, But we've got to be honest and also say there has been some you know, some easing also on the bond side of things, right, So it's not just been cyclical strength, but it's also been strength on the bond side of things. So that has been taken pretty positively, I would say by risk acters as well. That's part of the reason also why the nastag was out performing, why growth and

text dogs were out of performing. Now, I do think if we look at the consensus, right, I do think, look, we've got very pessimistic expectations. I think everyone is saying, look, earnings expectations are still too high. I don't disagree with that, but I disagree with the sequencing. I disagree with the timing right, because if we've got pretty much everyone agreeing that age one is going to be tough if we've got you know, economists agreeing like they've never agreed before.

Look at the Philadelphia Fed survey right on this, on this recession probability that's on like as the highest in fifty years. So we've got consensus agreeing on the probability of a recession, on the factors driving it, and on the timing. Now, what's the dime downside surprise? Then? Right?

What's the downside surprise to earnings? If you've seen a queue for and now in Q one those earnings revisions down what's particularly in the cyclicals, in consumer discrestion, in materials, in the megacaptain, I T and communication services, so exactly where we want to see them, what's the what's the actual downside surprice? Now I would I would argue, look, if we get an average recession, right, it's not going

to blow anyone's boats. It's not going to be like, oh yeah, this is a massive surprise, you know, this is this is why we need to get baris No, not at all. Actually, what we need now is we need to get something properly going wrong right well, and we need to have something break. Then you can be barish. You clearly thought it was upside risk. We've got a squeeze right now, that's clear. I'm trying to work out one of the durable tail with for this market. I

get it. Everything you've said had a lot of people on board with it. What's durable about what we're saying. I think it's still durable because sentiment and positioning is still so, you know, so down beat. I mean, let's not forget. We've just updated our sort of aggregatet real money invested positioning study on Monday, and that still shows underweight positions on aggregate in equities and in high yield credit. That's normally not the case, right, That's historically been rarely

the case that you see outright underweight positions. You see the same thing, right If you look at c t A equity beaters, they're still down. Yes, they've gone up a bit, but there's still on the in level terms, still down. Look at equity beaters of u as equality funds massively underweight, multi acid fund beaters are sort of average. None of that is telling us, oh yeah, like everyone's

already gone bullish. And if anything, when we talk to clients in the last of two three weeks, the biggest pushback we've got was, well, I know that everyone else is already bullish, Therefore I have to continue to be let's break this up Equodi's versus credit and Star with equities, Microsoft desmonic or rather after the close yesterday, how many messages did you get saying look at Microsoft, you're runk. What did you say back? Now? Look, I mean what I would say is it's not the time yet to

go full on max overweight equities. Right with that, I agree, But that is mostly very very tactical because look at what's priceton for the FIT for the next two meetings. We've got less than fifty basis points priced in into FIT funds now cumulatively from the next two meetings. So they're just gonna come out next week and say, look,

we're gonna go go, but we'll do another in March. Right, they're going to guide us to towards that, And even that would already be a slightly hawkish surprise, and that would weigh on high multiple tech stocks and so on. Right, it would weigh on valuations again, perhaps a bit of a higher rates well, but a bit of higher real rates than that means than weighing on multiples in tech, so very tactically. I don't like equities like you know,

I'm not massively massively bullish on equities just yet. I would say in a modeling through scenario right where you say, look, it's gonna be not neither here or there, right, we uddling through in terms of growth, slow grind lower rather than really a swoshdown and the recovery and H two. That means that credit, you know how yeld credit is fine. Emerging market debt is fine. I G debt is fine. Right,

all of that you just turn over the carry. That's fine. Well, let's talk about emerging markets, and let's talk about credit emerging markets. I think it was more constandy investment management yesterday. Get on board, They're not alone. That's quickly becoming consensus em international outperforms. Can we talk about domestic US credit? Triple C's City came out yesterday, and I have to say it was a nuanced report, but the headline is by Triple CS, how much risk do you want to

take in credit? Do you want to go right to the bottom of the quality stack and get into high yield in Triple CS? Yeah? I think that doesn't make sense. To an extent. Right, if we look at triple Bees versus single A's and we compare that against P. M. Myers, there is actually much less weakness price. Then if you look at triple cs versus double Bees, that looks you know, it looks much fairer priced relative to where macro indicators on.

So there you could actually argue, well, the weakness as price, particularly if you compare it right with then high yield, that weakness is pretty much under price. So that's good, right, it would be much worrying I think if we talk about the macro side of things as well. One of the pushbacks we got is I remember we had a note doubt, and you know, people said, but look at the I M look at the services or something. He orders, it's forty credit with turn more constructive. Now. My answer

is very simple. I wouldn't turn constructive. It was if it was still at fifty five or sixty, because then now leading indicators would still point out and we'd say, hey we've got another ten fifteen points lower. Be careful now you're at forty five. I look at him like, well, this is exactly what I wanted to see done. Right, Let's get on Max Kenny, You make it sounds simple, it's not. We've got a challenging year ahead of ahs v C. Max Kenner there of HSPC has framed the

last twelve months. This is important. We've been wrestling worldwide with inflation and central banks have made a move. The u c B has gone to fifty, the Bank of England's gone to three fifty, the Fellow Reserve has gone to four fifty. The Bank of Japan, the b o J, has done absolutely nothing. Is that going to change this year? Jane Furley of Rabbit Bank alongside us and the beating card of foreign Exchange, Jane, fantastic, the catch up with you. Let's start there sub zero with the b J. Is

that going to change this year? You know it might, but it might not. And I think that's the really crucial here, crucial point here because if we saw, you know, the meeting in January, it's all speculators all egging on for a change in your curve control, and what do they get? Nothing? And I think this is the risk the market is now assuming that we're going to get a replacement for Corroda in in April. Of course, as he steps back and they're assuming that we're going to

get maybe a significant change in policy. We might get a change in policy, but it may not be significant, and that's the point. We might get another tweek two your curve control. We may get an interest rate high. We may not because if you look at the type frame for the Bank of Japan, they're probably not going to be hiking interest rates next year, when, for instance of the FED could be easy in another central So you know you've got a limited time frame. But then

you look at the fundamentals. At the fundamentals, yes, inflation is above its target, but only because import prices are not because it's domestically generated, which is the golden goose for the Bank of Japan. And if Corona gets replaced, as a very good chance that he gets replaced, maybe by one of his deputies, maybe by somebody else from the Bank of Japan, all of which have been supportive of the very accommodative policies for a long time, so

disappointment could be coming. Well, let's pick up on what you just said, is the replacement. I think that's what everyone's attention. The fact that we have this final meeting with Corona in March and then the handoff in April, which chalice carries the most poison? Does Governor Corona handover policy already sit on a path to move away from your curve control and towards higher interest rates? Or is he handover what there is right now? Which chalice carries

the most poison? I think it depends on the outcome of the Spring wag Weight rounds, really, and you know that the indicators are that, yes, the Spring ray Weight rounds are going to bring some moderate increase in domestically generated inflation age in plation, which is what they wanted to see. And you know that could lay the framework for a change in your co control and another tweak. Will it lay the phonework for a change in interest rate policy? You know that's a little bit further down

the line. I don't think we can make that decision yet. But you know that the the the Corona might be leading the Bank of Japan, but he leaves it with a whole board, and that board won't necessarily be changed that much. So I think there is not going to be this massive change towards a very hawkish central bank. You may get a slightly less dubbish central bank. The perspective within the BOJ was that this was perhaps a once in a generation opportunity to reset inflation and expectations higher.

He's been doing this now for ten years. I think we all remember when he took this on back in Does he leave walk away with any success whatsoever? I think there is some success. I mean again that that hurts back to that the whole Peter Pan issue, that the whole psychological issue, that he thought that if you would bring in an inflation target, people would assume inflation might be higher and they would alter their spending behavior accordingly. But as we know, that really has taken a very

long time. But you know, with inflation around the globe, this perhaps has given a little bit of an inPulse impetus into inflation. So there is a little bit here. You've got the government of the Bank of Japan behind Coroda. You've got the Prime Minister saying to fans, yeah, you know, guys, you need to raise wages, and therefore you get what they're looking for, which is a virtuous circle behind higher wages,

high domestic demand, higher profitability, etcetera. And there are some glimmers of optimism that this might be coming but I don't think there's a huge amount of confidence that they're there yet, Hence the cautious take you've implied there could be some disappointment Dolly's come back from one fifty subone thirty about right now, push that through the ethics market for me, where does that leave Dolly, Anne, I think

we can still see one in three months. Of course we we are, assuming it was the dollar is weak and that's perhaps a large part of that movement back from one fifty, So you know, is possible, can say, you know, there is the possibility of another movement, another tweak in your curve control, maybe some indication that they could move away from that in the months ahead. But the problem is again is that the wind of opportunity

is quite short. So is possible, you know, maybe even one six and in the middle of the year, But I don't think we're going to be, you know, falling hugely in Dolly. And you mentioned the U. S. Dollar. I remember Tom, Lisa and I sitting here with you maybe in September. I think it was back end of September we were looking at cable at one oh three fifty strong dollar Euro dollar ninety five something strong dollar.

It's all back away since then. I think it's been a ten eleven move on the x y. I'm sitting here this week trying to work out what's durable about all of this, particularly for euro dollar. I know there is a positive surprise. I know that we've got that adjustment as we move away from the risk of recession. What's durable about these tail winds that we're seeing start

to build? Well, you know, I think this is really particularly interesting when you come to the Euro part of euro dollar, because you know, the market has now priced in a much better situation then was it was supposed to be. We were supposed to be in recession for Germany, and now we've got the Schultz the chancellor last week, so no recession for Germany. We've got the governors of the Bank of France, the governors at the Bank of

Italy saying, yeah, you know, our outlooks are improving. You look at the performance of European stocks this year relative to US, so that the market has been buying into this far better than expected story for Europe, and we've got euro dollar in a touching this week at at

one oh nine. I think the big question is how much of that is priced in and how much further can the Euro sort of dine out on on that story, because you know, it looked this week at the Poms the perms were like, oh, you know, they're not really that good. There are still head winds coming and as we move into the certainly into the summer and the autumn, we could have another phase of the energy crisis. We don't know how cold next winter is going to be,

so there are still head winds facing the Euro. And the market now was quite long of the Euro, so don't think it's going to be that easy to push up to another leg. But of course a crucial element of this is the honor and will the market continue to disbelieve the FED guidance the interest rate outlet for this year? So I've asked this question three times this week. Maybe you've heard me ask it. Let's make it four. Who hikes more this year the feed of the CP.

I have heard you asked that, and I have had the answers, and I think you know what I'm going to say too, because it's the same as everybody else. You know that that the CP is likely to to hike more. But the question really is is that in the price now or not it's fourth or four and that's an important question, that's for sure, Ji of Rabba Bank, that's tasting the cash up with you here in London.

Let's get to it. If you're if you're in Global Wall Street, this is with our question your interview of the day. If you need to be optimistic, there's no better place to be in a Deutsche Bank with their chief global strategist and how to ask an allocation bank from Charter. Mr Charter has made clear he is enthusiastic and as it hasn't happened, he's simply moved his timeline out. We're got an update this morning from BANKI Charter, Banky, you're at fort hundred, no what it believes you. You've

never been this lonely in your storied career. Give us the X access. When's the timeline when Schota Nirvana happens. So, actually, what we have in terms of our outlook for this year is really the rally in Q one, which we think of as basically a continuation of the rally that began late last year. I wouldn't necessarily describe it as you know, sort of a bullish view on fundamentals. Uh, the the basic driver of the rally in our view,

is really a positioning squeeze. As we know since late April of last year, it's all really been about the central banks. And if you look at our measures of positioning, you know, the fundamental investors we call them the discretionary equity investors, you know very quickly moved down to neutral too slightly negative. What got squeezed as a result of the last six months of last year is really systematic strategies.

Systematic strategies ned to follow the market. So to have this big divide between systematic strategies, you know, two Z scores below neutral, let alone where they most of the slugged out on the CFS and Chase Well Fan Kompor and technical analysis is adamant we made in October low and the dal Jones industrial average. He's as bullish as you are. So there's a short squeeze. We're squeezing out the bloom. I get that. What's the then what after

we squeeze out the bloom for you? And Mr ran Kampora, so you know we have our your end target, which yes, I understand it looks bullish. I would say it's only a little bit more than ten percent up from where we've been recently. We see most of that happening basically in Q one, and then we have basically, as you know, a call for a recession in the US starting in Q three, so second quarter, keeping in you know, in line with the recession playbook. Historically we have the market

going sideways. So that's still we have if the recession happens in Q three, Uh, pretty severe sell off which would take us all the way down to thirty two fifty. But I think you know, very important aspect of the recession playbook to keep in mind if you're thinking about twelve months is that equities, you know, pretty robustly bottom about halfway through. So if we have a two quarter recession, they will come all the way back basically in Q four.

And so my Q one target is my year end target. Yeah, you said something pretty radical that it's all been about the FED. It is not necessarily about some of these other issues like earnings, which we keep getting in a lot of people keep looking at. So how do you push back against that? And how much do you expect tech to continue to lead regardless of the up or

the down because of that macro play. Yeah, so a tactically our call is to be you know, the rally will be led by tech in the financials UH and and and some of the consumer six goals where you know, priced in of an average recession. I think it's UH

starts to make things pretty asymmetric. Um. You know, I'm sorry I lost the last part of this is an issue because right now we're looking to just because of me, you know, this is an issue interesting issue because right now I'm watching earnings and people are saying there's a real fundamental shift underneath the market that you have tech that's not necessarily going to lead in growth, even though they now are leading in returns to simply because it

cuts etcetera. And I'm wondering whether you see that, whether we're heading back to a different normal in terms of leadership, or whether we're heading back to the same regime. It's

just sort of dependent on the FED. So you know, in terms of earnings UH for the year as a whole, you know, if you put in a recession in there like we have, you know, we're talking about a hundred and so the question is, you know, what happens if the alternative, which is a very popular question given the market price action, and it's more likely to go sideways and even just start to recover. I think in terms of thinking about earnings, you know, everybody talks always about

growth rates. I think it's also important to keep in mind where the levels are. You know, equity evaluations come off of levels, and and earnings have been running you know, sort of well well above trend levels, and and and and so you know, we have this issue where I mean, even if you looked at real activity, you know, the good side of the economy, it's essentially been going sideways for two d Now you know SPX and what Mr Chat has just said there, Lisa is religion to me?

Which is it financial? TV is addicted to change movements. Stay with us Microsoft right now down under two thirties six, that kind of stuff. He's looking at levels and this is the bathtub story. You're looking at the water coming in and out of the bathtub, or you're looking at the level. Olivier Blanchard and his new monograph is on the same page in economics has been from Chatta inequities. Levels matter, the levels, the scale the mass of Microsoft matters. M.

William mcdonnaugh is founder, he's chief executive officer. They've got a bunch of other titles for him and Element Funds. What he is is one of the wisest people across a span of this thing called wealth management, is managing money and really really trying hard to do the hardest thing, which is not lose money. We are thrilled that William

McDonagh can join us today. It's wrapped around Tesla, It's wrapped around what Mr Musk is doing in these historic Muskie and times, but there's about eight other things to talk about as well. Well, thank you for joining us. You really center and in your research note that the Tesla cars are a trojan horse. So many people agree

with you on that. What does Mr Musk really up to? Well, you know, let's look back to two thousand six when Musk really kicked the thing off and and and his kind of opening mandate for the company was build a sports car, use the money to build an affordable car, use the money to build a more affordable car, and provide zero emissions power generations options to the world. Um, he's following that. We need to listen to what he said, and I think what we're gonna see from Tesla when

they report today, we might not see Musk. I think they're starting to realize that maybe he isn't the optimal person to do the SEC communications, much like Apple did with Steve Jobs back in the day. Let's throw a black turtleneck on this guy, Let's put him on stage, let's talk about the cyber truck. Let's stop all these communications with regulators that ain't his highest invest us that basically, how much can you put him into? The back? Continues? Will you when you say a trojan to horse for

the ev for the battery? Is this a positive for the stock or a negative when you look at its longer term market share and potential? Well, you know, I was interested in what Julian just said, and I think there's a broader war on Wall Street right now and in a juxtaposition between the top line and the bottom line, like what are we do being judged by these days? We just came out of an environment where it was growth, growth, growth at at all costs. I don't care what it

costs to acquire a user, get the user. And then the tide went out and we saw that that probably wasn't the right way to approach it, and now people are repositioning their thoughts around, well, what's the bottom line, what's the revenue, what's the ebit dot And when you look at a company like Tesla, you know there's no justification for it being a one point two trillion dollar company.

We have our perspectives on on why that happened, which I'll share, But when you really look at their numbers, you know they have less revenue than GM, than four than VOLKSWAG and then BMW, but they have eight times the market cap of Ford and GM. So what are we really doing here? What are we really looking at? We think investors played Tesla as a vehicle to get exposure to EV adoption, But um, what our business charge, our ticker on the New York Stock Change allows people

to do. It's just by the base metals that are required for all EV, all solar and all the wind. Well, but well, then what are you looking for in today's Tesla earnings? Because your sound sounds like you've got a very strong belief there are a lot of questions people are gonna be asking about the discounts that recently elon Musk and Tesla and stated in some of the vehicles. What are you looking for to inform how much you amp up your view? Yeah, I think that they're gonna

put their toe in the water a bit today. I don't believe that they're gonna come heavy. You know, they have announced that in March they're going to do their first investor day and that you're going to brand that. There has been talks that they're going to launch their own investor platform that's going to allow for them to engage directly with their investors, much like you've seen must do with Twitter pulling. Do you think I should be CEO or not? I think you're going to see more

engagement directly with the investors. The investors feel like they're doing what they want to do. But if I'm Tesla and I'm on the board of Teslau, I looked to I'm putting him back in his corner and saying, go stand next to the semi truck and let us report the numbers and then let's do the fancy stuff and the exciting stuff in March. Well, I got eight ways to go here. Whant to get you on here in

Tesla and musk is is interesting. I want to go to your experience not only with Bob Diamond, and we thank Bob Diamond so much for coming on recently on the death of Scott Minored. But I want to talk to you Will about your stance in Florida and your management of people's money, celebrity management, and that in this thing called crypto, the Bitcoin losses have been taken, but far more the upset of crypto right now, which is

tard and feathered. I believe one of your clients over the years, Mr Brady, who throws footballs in Tampa, tell me about the McDonough view on crypto. I think what happened in crypto in the last kind of hundred days is net positive for the industry um because it flushed out a lot of the centralized players. It flushed out a lot of the unregulated players. Which crypto needs to

have a barbell approach to success. It needs to have pure decentralization that allows people globally to interact with it in a fair way. And then it also needs to have a heavily regulated on ramp that allows investors and allows scale to come into the space and trust who their counterparties are. And I think if both of those things are accomplished blockchain has no end. How does the United States use a regulatory reach internationally? Given the criminal

allegations within crypto? The U S is the on ramp for all global financial systems, right, I mean, let's just admit it. The volumes that come in through the US markets, the volumes that trade on the US exchanges, this is where the money comes from. Even if it isn't sourced here, it's managed here. And so this is the on ramp to crypto. That's how they can control it is by saying we control how you get money into the system

and out of the system. And then the good thing about these block chains is that they're very easily auditable. And so once you're on that system and we know who you were coming in, I can track what you do while you're in there and then you come back out. But do you have and with with your immense you know, international perspective or your work at Golden SAX over the years, etcetera.

William I, I'm absolutely fascinated how a guy like you feels Department of Justice or SEC can fix the international regulation conundrum of crypto. How do you envision them moving forward? I think they need to do it just like they've done any other industry over the last one years. You gotta punch it right in the face, and you've got to address it and embrace it and really get to

know it and understand it. You know, some of the times they've come out with statements have just shown that they actually truly don't understand the underlying when I believe that the majority of the real players and crypto embrace that regulation because they know that that will open up those floodgates for that institutional capital, and so they just to really get people around the table that know what

they're talking about and put some regulation in plate. It brings comfort to be clear here, Well, bitcoin fifteen to twenty three thousand, are you considering it's appropriate in a portfolio today? I always do, you know. I think bitcoin's trading at year end was somewhat driven around the fact that people tax lost harvest into the new year and they realized that they can put a little bit away.

People don't realize that bitcoin isn't subject to wash rules, So there's a lot of trading like that that occurs. And then you've seen a lot of people leaning in here in Q one because the FCX stuff and a lot of bad stuff flushed out in Q four. I'm not sure how much bad news can can continue to come. Well, thank you so much, very candid there well William McDonald with us from Element Funds Today. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from

seven to ten am Eastern. I'm 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