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This is incredibly well timed for the news. Laurie Calvesina with this.
At RBC in where they work at Credit Squeeze.
Over the years, Lauriae, I've never seen this where once again vix out three big figures, and I just don't see the sweat that I should see with a vix out three big figures. We're just weaned. We're hardwired by in the dip, aren't we.
So it's interesting, Tom, if you look at aaii net bowls, they dropped like a stone, sunk like a stone. I guess I should stay in August. And the last time we saw that was the first quarter of this year, which predated the tariff sell off that we got. But in retrospect was an indication that maybe that by the mentality wasn't going to be rushing in to save the day. So you know, it's funny, Tom, we're having sort of a red day or red morning to start the week.
I'm a little surprised, you know, by the timing of it necessarily, but you know, of this particular day. But that being said, we had been telling people, you know, back in August AAI I had sung valuations were stretched and seasonalities poor in September and October.
Well, I've been remiss and mentioned it's the Nasdaq one hundred a negative one point five percent this morning.
Absolutely, So let's let's just start with valuation. How are you thinking about valuation here?
Is that?
Is that a cost for concern as we think about it?
So?
I think it is.
And if you look at just plain old fashioned vanilla forward pe multiples, a market cap weighted s and P five hundred number has been bumping up against recent highs
and started to stall. We've seen the same thing on the Nasdaq one hundred, even if you look at it on an equal weighted basis, And you know, the way we put it is that we sort of hit a valuation ceiling and things get a little bit tougher, and it really just represents a headwind that you're kind of not really vulnerable to good news anymore, but you are vulnerable to bad news, and this morning the bad news seems to be the bond market acting out.
Yeah, exactly, We've got the ten year treasure yields out about six basis points four point two nine percent here, so we do have a FED that presumably is going to start easing. How does that play into your outlook?
So it's a great question, Paul, and I'll tell you. We have a you know, sort of a top down valuation model where we project where the PE should be at the end of the year on a trailing basis, and three inputs into that are inflation, the FED, and ten year yields. The FED cutting, you know, getting some relief there should give you some upward lift to that PE, but inflation moving up should give you some downward pressure.
And we'll see you know, TBD on the ten year yield, but it tends to be more of an inversely correlated factor. So even if we have cuts coming off, ten year yields are moving up.
The way the.
Math works says, you know, at best, they sort of net out, you know, at the end of the day if you throw inflation and may give you some downward pressure.
Right, So how do you screen here in this kind of market? Again where it's a most people call it an expensive market, but it's supported by some pretty solid earnings out there.
How do you screen here? You screen by industry, by factor.
How do you think so we you know, we tend to do less work on factors. I tend to do more work on sectors and industries. And I'll tell you I put another chart into the weekly this week. I'm sounding like a broken record, but it comes back to the financials and we did some work around ism prices paid last week, just looking at its relationship to the stock market, and then I ran it against sector performance and guess what financials comes out as your top sector.
If that sort of leading indicator of inflation is moving up, things like healthcare and staples tend to underperform.
Do you have a vector of inflation higher or is it a vector level persistent?
So you know, our economists are looking for inflation on a head line basis. I think to move up to around two point nine percent at the end of the year, So nothing crazy like what we saw in sort of the you know, kind of post COVID era or even back in the seventies, but you know, certainly far away from that two percent target that the FED has, And you know, I think this is just going to be the question. You know, we've got this real test coming up.
We know the inflation pressures are there. We don't know what the demand picture is really going to be, but we know that tariffs are creating some upwards seen into sectors.
I mean, I like this idea, how quaint sectors If I have a persistent inflation, which sectors win?
So you've actually been seeing energy act a little bit better. And that's another one that typically, you know, we've just noticed more anecdotally less so in a study like the one I mentioned, But if you expect to see you know, sort of inflation pressures mount, we often will see the commodity sectors do quite well. We actually upgraded materials the last time we made sort of our quarterly changes to sector bets, and we liked the valuations there. Our analysts
were pretty enthusiasm. There are clearly some tariff headwinds, but there's also a lot of you know, kind of a dollar benefit from a weeker dollar.
I about just the concentration risk in this market.
Every once in a while, like every other week, maybe it gets called out somewhere that boy it's ten percent. You know, they're you know, halfu of stocks are really responsible for the performance of the S and P five hundred.
How do you guys think about that?
So we have one chart in our deck.
This may be the first time I've ever talked about it on TV, but we look at those top ten market cap names in the S and P five hundred as a percent of net income of the S and P, and then we compare it to the percent of market cap. And what we're seeing is that the market cap has exceeded the net income percentage. But that gap has been pretty stable in recent years, so.
You're getting the premium. I will tell you.
In August, it did seem like the gap got a little bit wider between the two. Nothing super alarming, but you could have made the case looking at that chart that the concentration, you know, maybe got a little bit of ahead of the relationship that have been in place the last time.
So what is I mean?
Come on, it's September. I believe the quarter in September thirty the present and can't change.
That, right, I don't think so?
Okay, thank you anyone, but September thirty. JP Morgan is October fourteenth. I mean, we got earnings wrong last time and the time before. Are we reducing it again?
Well, look, I will tell you that on earnings this last reporting season, I would sort of fade the idea that it was the best reporting season ever. I think one of my competitors actually said that. And if you go through and you look at the data, a lot of it was backward looking. And it was because of all these tariff impacts that weren't as bad as what people had put in in the last reporting season. And guess what, everybody figured that out starting in May, right,
and so it really had already gotten baked in. It was a very sort of backward looking beat. If you look at, you know, kind of the forward looking growth expectations for twenty twenty six, we only saw them go up. And you know, if you look at that percentage growth rate twenty six over twenty five, it only went up for two sectors, tech and materials.
It went down everywhere else.
That doesn't mean to me, that doesn't scream that we just injected a bunch of optimism into the outlook.
I have one final quest. I mean, you're so healthy, I mean for your children, are you going with the leaded cheese or Kraft singles two percent milk American cheese.
We do not do Kraft, the Kraft singles we do. The mozzarella sticks were big.
Those are very big. Thank you.
Yeah, the little one likes those.
Yeah, you gotta keep them happy.
Who does match sha go long mozzarella sticks.
Also, we also.
Have a daily dose of chocolate milk, so very good.
I like that.
I like that too. Remember Bosco, come in. You've been Bosco. Your mother know you're too young to remember. I remember powdered milk. You talk about Death's door. Lauri Calvicina, thank you so much, greatly appreciate it.
Stay with us.
More from Bloomberg Surveillance coming up after this.
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Henrietta Trey's briefs This avoiding the speculation of the weekend and the president's health. Henrietta, if we have a war department, what is the symbolism of going from Harry Truman's defense Department back to a renamed War Department.
I think the most important takeaway here is that Congress is about to reinsert itself into the conversation for the first time in a month. Recall that the House left early at the end of their scheduled the scheduled work period. They called it quits early because of the hullabaloo around
the Epstein files. So now the President is going to be facing a serious litany of competition from Congress when they get back to talk about, you know, Miron, the firing of Cook, the firing of the your Labor Statistics Commissioner, the why not rename the War Department. It's a great way to have another way to control the narrative, which is going to be critical going into a potential government shutdown.
The fact that the Federal Court of Appeals ruled that his aipatas were unlawful, and a whole host of other things that he hasn't had to address for five weeks and is going to have to starting today.
So a great way to have a counter cycle.
Who in Congress is going to drive the agenda over the next several weeks and months here the social play.
Out, well, really we're going to see the government shutdown probably start to drive the narrative pretty quickly because it is the most pressing issue for them. This month, we're going to do the National Defense Authorization Act in the Senate this week. We'll get the mirror confirmation hearing in the Senate Banking Committee on Thursday. The House is going to take up their NDAA next week. Those let's just avert a government shutdown narratives are really going to drive
because that's the most urgent, pressing issue. There will be press conferences with Republican Congressman Massy over Epstein.
They'll try to get that bill to the floor.
The Senators are going to talk about, you know, whether or not they can cobble together an appropriations bill and pocket recisions. The driving narrative is really going to be the legislative agenda. I love the using the calendar just for that purpose. It's all about a shutdown.
So, Henryette ken you, I feel like I ask you this question every six or nine months. What is the calendar look like as it relates to a shutdown?
What is the timing and the milestones we have to pay attention to.
Basically, we need them to come to an agreement to keep the lights on by September thirtieth at midnight. Asking any more than that is probably unrealistic. The House and Senate having come to an agreement on all twelve appropriations bills since I want to say Bill Clinton's era in ninety six, so you know, any hopes of camaraderie and
bipartisanship have flown that they are not realistic. But a short term staff gap that's going to probably weigh on the legislative agenda another one or two times for the rest of this year is what we should expect.
I don't think there will be a shutdown. My odds are twenty five percent.
That's pretty high for me, to be honest, But that's because the administration is doing something called a rocket recision where they try to cut spending.
The Congress is already.
Appropriated, but the shutdown would start at twelve oh one on October.
First, and too short a visit.
Let me squeeze this in and I got like eight ways to go here, folks. We literally could do two hours with the Henrietta this morning. How does the imagery, the pageantry play of putin g mody all the different Bloomberg is a beautiful images g and Putin best pales, best buds. How does it play in your world, Henrietta, In.
My world, which is very much tariff world, it shows you the negative consequences of tariffs. You penalize our global allies, NATO allies, You push India, who we've tried to foster a relationship with for thirty years, that have made incredible strides considering their neighboring China.
Is really really telling.
And the part that's really striking is how personal the President makes his relationships with all of these men, whether it's President She, President Putin Modi. The President has gone out of his way to explain that he can fix the US, the Ukraine Russia war on day one, Gaza
on day one. He has an incredible relationship with President She, an incredible relationship with Mody, and yet we see precisely the opposite, this relationship actually not being valid and driving those men together because.
Of the tyriffs.
It's a obvious consequence, but nonetheless unintended from the administration.
We got to get you on daily and the new slow extraordinary Henry ou to trace, Thank you so much, stay with us. More from Bloomberg surveillance coming up after this.
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Or watch us Live on YouTube. This is the interview of the day.
It is Ernie Tedesky, the Budget lab at you on your grocery bill, on the tariffs, on vespas, the tariffs that are happening. The Budget lab At, y know, absolutely expert under his leadership, Ernie, what inning are we in in the impact of tariffs upon us all?
Is it like the second inning? Or are we like along the way?
I think that we're like in the sixth word. We're not quite at the seventh inning stretch. Yet we are starting to see impacts on actual economic data. So so core goods prices are about two percent higher than they would have been based on pre twenty twenty five trend and that suggests that like as of June and July, consumers were paying about three quarters of the tariffs and probably American.
Businesses the rest.
There's very little evidence that foreign producers are paying them right now.
So look, there's obviously more to come.
We expect announcements on things like semiconductors, pharmaceuticals, et cetera.
But you know, it's we're beyond the beginning of the game.
Ernie.
I've been talking a lot about the microeconomics and dynamics of the substitution effect, where Paul wants a vest but in study by Zah Harley, I get that idea. But there's also any income effect. Are you at the budget lab at Yale? Are you seeing a diminished appetite for growth? Are you seeing a diminished nominal GDP because of this tariff tension.
It's tough to see right now because consumers and businesses are timing the tariffs and they're still trying to sort out what we're all trying to sort out, which is the best time to import things, the best time to buy. So, you know, we've seen big declines in consumer spending in certain months, especially late last year early this year, that seemed to definitely be anticipatory tariff effects. But then they're followed by big spikes as there is a tariff pause
or tariff relief. You know that's temporary, and so people try to get their spending in. So it's really clear what the ongoing effect is, you know, looking through all that noise, we think that ultimately the terriffs that have been announced will be the equivalent of, you know, about twenty four hundred dollars off of the purchasing power of the average American household. But that's going to take about two years or three years to get there.
Paul Harley, this most like a vespa is a Harley soft tail, slim oh okay and crimson stonewashed white and pearls so solid.
For the executive, I got the vesta pree tariff Ernie talk to us about it. Kind of the nature of these tariffs is it as a white house which to suggest a one time price adjustment versus maybe a beginning of a inflationary trend.
So that's also really hard to parse right now because on the one hand, like the textbook will tell you that this is a one time price adjustment. On the other hand, when the given the chaotic rollout of the tariffs and the gradual rollout of the tariffs, even if it is a one time price adjustment, because it's so you know, incremental, it feels like true inflation to people because they get a little bit one month, they get a little bit more the next month, and so it doesn't feel like one time, it.
Feels like it's this ongoing thing.
Plus there is the FED concern that this is going to spill over into supply chains and actually be more persistently inflationary. We haven't seen evidence of that yet, but you know, like I said, we're it's not the beginning anymore, but it's not you know, it's not the late game still, so we're still looking for more evidence.
Well, on the other side, Ernie, I guess it is in fact true that the government is raising tariff revenue.
Is It's correct, no doubt.
We've raised almost ninety billion dollars this year from just the new tariffs that have been announced in twenty twenty five. That's not total tariff revenue. That's just from the new tariffs that is. Look, that is substantial. We think that that is consistent with three trillion dollars new tariff revenue over ten years if the tariffs are kept in place. Nobody should downplay that is that is a major amount of revenue.
Just to tie it together for our listeners and viewers, of that nine twenty billion a month, sixty to eighty percent is being paid for by consumers and the rest buy American businesses.
So that's what we think. So this is a tax on Americans, let's be clear about that. The other thing that's interesting so far, and we're going to start incorporating this into our modeling, is that some tariffs are coming in much lower than we expected, in particular Canada, where ninety two percent of Canadian trade is now tariff free,
which is much higher than we expected given USMC. So it appears that Canadian firms and American importers are taking advantage of lots of different I won't say loopholes because I'm sure it's all legal, but you know, available authorities to bring things in TIF free.
You know, I know, I knew, haven Ernie, you just doing pizza to takeout. I mean, you know that's what you're rolling. But I look to groceries this weekend and it's just jaw dropping out. Everything's up. Are the price of groceries and produce up because of your world of tariffs.
So a little bit so a couple of things. One, we get a lot of produce from Canada and Mexico. Mexico in particular, and like fresh produce especially falls under us mc A ninety percent of the time. And if remember, if something is us mc A compliant, it's tariff free. So you know, Mexican avocados are probably not very sensitive at all to tariffs. The other thing is that there's a lot of non tariff stuff going on in groceries right now. Beef obviously, you know that's a whole thing,
but that's got very little to do with tariffs. That has more to do with worldwide drafts, et cetera. So so I think that I think the tariff story is more on the good side things like appliance, is tronics, furniture rather than groceries.
I know, you to front run your academics, but when you have a meeting today with Miss Gimbal and the rest, what's the thing that you're thinking about at the Yale Budget Lab.
So the thing is, so we're thinking about we think about lots of things all the time, but I mean the thing that we're thinking about most is, you know, where do we go from here in terms of tariff revenue? Because we're we're a fiscal and a macroeconomic think take. So you know, we've we've done a lot of work on the macroeconomics. We're trying to think about ways that you know, we're number one, how much are tariff's actually going to raise when all of a sudden done. Two?
Is there a better, more efficient way of raising the same amount of revenue?
Because look, like I said before, you can't dismiss three trillion dollars in revenue over ten years. But is there a way to raise the same trill three trillion dollars in a way that doesn't hurt business investment the same way?
Ernie, thank you so much. Journey to this great work. I really can't say enough about it. Migrate folks over to the budget lab at Yale. Just really real brilliant work. Stay with us. More from Bloomberg Surveillance coming up after this.
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Fatima Bulani, I need like six bullet points to move forward here. You've been doing this since Thomas Weisel. I want you to explain. This weekend you're at some family get together and everybody's a I A I E I E I O. What's the biggest misconception mere mortals have about your world at City Group? What's the single thing we most get wrong about tech that you cover?
Look, thanks for having me here to explain what we're working through right now to my two year old, which I have one, and the eiio lands very well because my mind is very preoccupied with nursery rhymes. Is Look, the most consequential technology paradigm shift in our lifetime. And you know, there have been a lot of analogs made towards you know, when the Internet, corporate Internet broke out onto the scene twenty five.
There I have said this. It is so much like late ninety four or ninety five. You're saying, it's.
Bigger, it's bigger, it's better.
It's far more consequential because you've had a democratization of computing that.
Has compounded over the last three decades. Right.
Your iPhone today is five thousand, maybe ten thousand times more powerful than the first iteration of the computer that IBM spun out, you know, thirty forty years ago, right, and so just the sheer power of computing infrastructure, and you see this from the hyperscalers. It's just at your fingertips and that's really what you think is going to move the ball forward, and you know, you know it's chatting earlier. We are hosting our flagship conference in New
York City this week. We have, you know, close to five hundred investors from some of the biggest asset managers.
Are you guys taking every room at the Waldorf Astoria?
I wish it were the Waldorf Astoria. It's the Hilton though.
So I mean, I'm just looking at your line up here.
Everybody in tech TMT is going to be the tech, media, tech telecom.
Everybody's going to be there.
How do you wind the AI theme throughout this three day conference that you have.
We think about it from a supply chain perspective, so to speak. Right, So, my colleagues within the tech franchise between you know, the individual who covers the media names, the individual who covers the telecom and tower names. Myself, I cover enterprise software, which is you know, dare I say some of the sexiest places should be in technology.
So just thinking about the AI value chain from a supply chain perspective, and I will tell you that the number one burning question, the most polarizing debate right now is how are companies in the software sphere going to be monetizing this trend. We understand, you know, what's going to happen, and we are understanding and witnessing what's happening.
In the power and utility space.
I mean, AI gear data centers are just hoovering massive amounts of power right and data center infrastructure and all the adjacent investment around that. So what does the downstream monetization path look like? And that is the single largest debate, And so that's sort of what we're endeavoring to do at the conference, weaving a lot of these themes from a subsector.
Is Apple going to be there? I mean maybe they'll learn something.
Apples so far behind with you, Tyler Radkin the rest When you and your team look at how Apple's quote unquote behind on AI, what's your response to that.
Look, we're not ruling Apple out.
I mean our perspective is purely from the enterprise software standpoint, right, So, how are organizations standing up an AI strategy where they can operationalize AI in the sense of how do we improve business processes? How do we improve customer satisfaction. Right, So our perspective in our lens is very much geared towards how very large entities and professional organizations are going to be deploying this technology as opposed to you know, from a consumer angle, if you will, who.
Loses an AI? We have them because I'm always asked the question who wins, Who's when? How do I plan it? Who loses in AI?
You know, I'm glad you asked my team and I We've had a big piece come out overnight. You know, between Tyler and myself, our team covers close to eighty software stocks, right, so there's plenty of nuance to be had and thinking about how this is going to be impactful.
There's going to be some winners, there's going to be some losers.
And the way we've thought about it is, you know, if you stratify our software space between applications, so the household names there are at Salesforce, dot Com and Adobe Infrastructure which is more or less cybersecurity, you know, and some other names of where you're building your IT environments
with these capabilities. You know, we generally think the infrastructure software space has more stickiness and teeth to it, So in broad strokes, there is a level of insulation around the infrastructure names, whereas application there's absolutely trepidation, absolutely fears.
Around that I'm gonna squeeze this.
And you're having a cup of coffee right now with our of insern of us of Perplexity. I'm absolutely blown away at the game changing nature of that, the software around it. And what's your number one question to the leadership at Perplexity.
Look, it's really how do you continue to innovate in a space where you know, frankly, there's a Cambrian explosion of sworts going on in LOI patent pending, and you know, the the confluence of the Russia VC.
Capital, the you know, the the.
Unabated appetite to become the number one standard bearer and AI because you know, to the victor goes the spoiled, and the massive amounts of market share. Right so we are absolutely in a gold rush phase right now. So really, I think the most inquiring minds will want to know, you know, how are you keeping up with the rapidly changing pace of technology preferences and procurement.
Wait for sure, you got to come back after the technology conference to briefast and It's fifteen year about Bulani is coded.
US software equity research at City Group.
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