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What's wonderful about this? Our guests get lost in the building, there's so many.
Floors, get snacks and stuff, or they go shopping.
You know, Madison Avenue is just so close joining us now, just back from the new Prada store.
Thanks guys.
Did you see the product expansion the store? They bought the building and they just blew it out one hundred percent is well? What does the luxury boom? Alicia Levine say about the caution the worry the consumer in America? I mean, there's like two worlds out there.
It's two worlds out there. I mean, look, it's obvious. I think that if you just look at results of luxury. You know, asset prices have skyrocketed since twenty twenty, and global wealth owners have simply become wealthare And if you had your assets in the US, you're about seventy five percent wealthier than you were six years ago. And it's evident. I mean, if you just look at the airlines, they're talking about one hundred and ten dollars oil prices, raising estimates because demand is so.
Rgic Christ fifty six fifty seven United Airlines out of Newark. It's the one benchmark I use in two cups of coffee. You go, it was seven five hundred dollars business class. Well, you'd be enjoying that this morning at ten one hundred.
Oh boy, there you go.
That's that's your list.
So what do we do with Alicia?
I mean, it seems like the market's trying to discount, trying to price.
In I guess higher energy costs.
I guess maybe some higher inflation, maybe even some slower economic growth.
Has that changed the way you view the market?
So it has not changed. And we've had some really interesting discussions in our investment Strategy Committee where we discuss all these things. And we came into the year, you know, overweight the US and we have a healthy allocation to international because we recognized earnings our moving higher, develop international and emerging markets for the first time in a long time. So we came into the year we were not one of the dollar is getting crushed shops. We were I'd
say more ambivalent about it. This could see some dollar weakness, but not overall because the US economy is so strong, and we really expected close to three percent growth this year, you know, on January first, twenty twenty six, so we never really changed our views. You have to be concerned about tail risk. I think what we've seen since the cease fire and some of the leaks about what the discussions were about, you've got to bring the tails in right.
You're not going to get the best case scenario where US owns oil globally, but you're not also getting you're not getting a catastrophe either. And so therefore, if I can dare say the word tariffs, which nobody has talked about in the last six weeks, I can say, if you go back a year ago, right, but the market priced in when it's not the worst case scenario, we bring in the left tail risk and we continue with
our story. And the story is earners are moving higher three percent from the beginning of the year.
Alicia Levine with this with BNY well through thrilled that she's with us this morning. She's under selling herself. I'll talk about that in a moment. Good morning around the world, Good morning across America. The way you choose to listen to us major good morning to YouTube. Alicia Levine was one of the first people to say, hey, stupid, look at YouTube. It's what everybody's using. Because her kids are
glued to it, absolutely glued to it. They do. They look in they go Lego construction and there's like four hundred videos abound how to put legos together. Make sure you're underselling yourself. You had the courage here with your prodigious math skills to say, have courage stay in the market. The percentage of people, particularly institutions that were you know, they didn't where, they weren't in Chicago looking at cartosis
and the answer is they missed this. Yep, what's the pop now after the shortcover?
So look, thank you for that. It's not easy, as you know, I think. Here we're now looking at earning season. So now we got to the nitty gritty, what are the fundamentals going to tell us? So that three percent earnings increase in expectations driving into something like fifteen or sixteen percent earnings growth for the year has come from the energy sector, obviously, because the earnings are now massively
positive and not negative materials. And also our old favorite of the tech sector, remember dance with the one that brought you. So that's what's driving earnings higher. What has not happened is that we haven't seen companies guide down. We haven't heard a discussion about hire input costs, and analysts have not put pen to paper yet because why would you. An earning season is this week starting and the next three weeks we will know a lot. So
I guess that's what we're looking at. We're really looking at. You know, what are the sectors that are most exposed to higher input? Cause from the energy side, I'll say this, the airlines are remarkable. And we have a merger possible merger announcement this morning too, So.
Okay, stop the show. We go to aircraft carrier Lander lives at Newark. Paul Sweeney, are you kidding me? No way?
I mean way the regulators.
So I asked Jen Rey, who's our you know, anti trust analyst at Bloomberg Intelligence where the regulators ever allowed that deal?
And she's like, no way.
Can you can you get her run? Or are you going to steal it? We're working on it. He steals our guest folks at ten am. It's flud. She's ruthless, scarletless, absolutely ruthless. January is world class in this. On This Paul Sweeney with Alisia Levine.
At least before we got into this war.
Aspect to the market, that black Swan, one of the bigger stories was just AI and how do I.
Play AI now?
Because it used to be I just buy the hyperscalers and whoever spending the money, that's where I want to own it. Now the market seems to be saying winners, losers were not sure kind of buckets.
How do you guys think of it?
So I think you want to look at what was working before the war, And interestingly, what was working before the war, about four or five months before was energy because energy is powering this. So energy is a winner from the war. Energy was a winner beforehand. So you want to play build out. You want to play things right because I think what we learned in the software sector that there's some risk to the terminal value as
yet unknown what the discount should be. It looks like the market is paying you to play right because the discount and software has become so extreme. You've got names down fifty percent. But ultimately, I think what you're playing here is the hardware side, the scare city side, the energy side, the commodity side, and the builds out. And so we like industrials, we like energy, and we like materials here because that's what you are going to need
for the build out. Now. The other thing if you look at just memory, is that that was this was a very sleepy area of the Semis that just exploded in the last eight months because that also was scared.
Come from Michael.
Yeah, others, What.
Are your kids doing? Alicia Livin's kids are well behaved. What are they doing with a AI? Do you have like one problem child? It's totally all day in their bedroom just killing AI.
No, but I wish I did. I wish I did.
It's like the future. I'm waiting for some of the offspring to go. You know, well, I'm in anthropic this you know stuff I don't understand.
Well, I mean, you talk to the kids. I mean, it is their life. It's not something that they use, it's just there.
It's part of the research process, it's part of their process of learning, it's part of who they are.
One of my heroes is Kent, a husband who wrote a book called Iceberg Risk. It's about you know, think of the Titanic movie with Kate Winslet and the other guy. They're on the tip of the bow looking at the icebergs. Except Ken opens a book with two statisticians. One of them is as nerdy as Alicia Levine, and they're certain they're not going to hit an iceberg because that's what the distribution says. And buried in his book is heavyweight binomial theorem on the xyz space the volatility matrix of
a given derivative instrument. Can AI help you when you were at Chicago killing it?
Oh?
It helps all the time. It helps right now. We all use AI at the bank, all of us use it for everything, for daily, for everything.
Forevery because I agree, my life would have been different.
It would have been very different, the way our lives would have been different if we had, you know, technology in our pocket in a way. I mean some of us whose typewriters just going to say, just going to.
Say, you know, they don't unlictit is too young, you didn't know what to typewrite. It help me alsha with the estimate forward on the standard of course, five hundred, everybody's recapitulate and seven thousand plus. Can I make some news today? Can we get to eight thousand?
Can we get to eighth? O? Look, we're in print at seventy six hundred. Okay, three weeks ago when I kept it at seventy six hundred, and we're still there. It's Look, it's a midterm election year. Things get very volatile. Since nineteen thirty eight, the pattern has never been broken. As a historian, I'd have to say, if we just get away with a seven to nine percent draw down, I'll consider myself lucky. But we do see a rally
into the year. I would think that you really have to pay attention to input costs here because right now expectations are for the highest margins. Ever, not sure that's realistic.
Alicia, Thank you so much. Alicia Levine, head of investment strategy ban Why Wealth, thank her. Stay with us. More from Bloomberg Surveillance coming up after this.
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Shannon O'Neill owns a high ground on a study of Latin America. She drives so much of the research capability at the Consul on Foreign Relations. We're really honored she could show up, given a war, given a geopolitics, Shannon, the output of CFR and Foreign Affairs Magazine is a national treasure. Over the last what is it forty eight days? More? Yeah?
We up to five? Oh yet close close, you know, whatever it is, Shannon, Michael O'Hanlon from Brooks in there, the gentleman from King's College writing on warre them halfway through the article, and on and on and on. Where's the realist thought? Now? The heritage of Kissinger, the heritage of Robert D. Kaplan, the heritage of Kindie Rice. Where's realist foreign policy given this war?
Well, the great thing about CFRs there's a lot of perspectives, and we've got a great lineup of folks that look at Iran and look at the Middle East more broadly. But I think what we are seeing from lots of those scholars is, you know, looking at this and this is one of.
The most difficult situations.
And this is partly why the United States, for years there's been tensions with the Iranian regime, but nobody went to war because it was such a pickle to get out of. And we're seeing that. We're seeing that this asymmetric warfare basically which United States has a long history with. We're in that right now where they can shut down the strait of our rooves with some drones, with some fast foods. We have the most powerful navy in the world.
Nate Swanson just publishing is a resident senior fellow. That means he gets our coffee, gets sharing his coffee. Is that means okay? You know, seriously, director for Iran, for the National Security Council, I mean Nate Swanson publishing this morning, Shannon O'Neill, Trump is still underestimating Tehran's resolve. Full the cultural aspects of Persia, the levant in America into the debate.
You know, I think it's right. You see, if you remember, it seems like an eons ago, but just at the start of this year you saw the Trump administration go into Venezuela and remove the head of state there, set up a regime that's very friendly to the United States
and has been exporting oil since then. And I think there probably was a little bit of a misperception that Iran could be as easy, and just as you're saying, right, there's a huge difference in terms of size, huge difference in terms of culture, huge difference in terms of the resolve of the regime and the ideological nature, which wasn't the case. So I think there's a mismatch here which has gotten us where we are today, Shannon.
At this stage, what would be a reasonable I guess ceasefire agreement with Iran?
And do we have the right people negotiating this?
You know, it seems I think we may end up in a space there's lots of different possibilities, but we may end up in a space where we don't have a war. We have some oil coming out, but we don't really have oil either. We get into this freeze where it's not a hot war. But it's hard for me to see where we find real resolution here. So a shaky cease fire, but also challenges for the rest of the Middle East, right, because this isn't just now Iran.
This has to do with Lebanon, it has to do with other parts of the Middle East, So it will be I can imagine a scenario where we're not in a hot war, but we continue to see these real tensions and flare ups.
What are the next steps here? I mean, it seems like, you know, both sides are ratcheting up the rhetoric here. Is there an argument that this is a really, really a pressure point for a Ran, that they do need peace here in this region?
You know, I think Iran has come out of this surprise. Well, there's a great column this morning from Javier Blass in Bloomberg that you know, I read it, I recommend everybody read. But the idea here is in the end, they kind of came out winning. Yes, they have had real challenges. There have been you know, leaders killed and the like, but they're selling more oil, they're making more money on the international markets, and they've been able to consolidate control
in fun. I think the interesting thing here is while it's the United States and Iran that are negotiating here, the countries that have been hit hardest by this are those in Asia, right in many of these countries in the Philippines, and like they're really having a hard time keeping the lights on because they are the countries that took the oil, that took the natural gas and that really took lots of the petrochemicals, the helium. You know, Asian supply chains depend on a lot of what comes
out of the Middle East. So that is an area of the world that is being hit hardest, even if they're not right after negotiating.
What's to the headlines right now with doctor O'Neil, folks, I mean, this is a telegraph in London. Love their work, really really current, like t live for Bloomberg as well. China East tanker sails through Armas despite Trump blockade, and the trick is the tankers didn't go to Iranian ports. And there's if I read the quick article, folks, there's three tankers out there trying to slide by because they're not out of Iranian ports. I mean, what is your
study of this, Shannon O'Neill. Of blockades, I mean, this is not Aubrey and maderin you know, a Patrick O'Brien Napoleonic War novel. Russell Crawl's not out in the Persian golf getting it done. How do blockades work, Shannon?
I mean, the US could blockade all the ships. The question is geopolitically do they want to? I mean, as you Remember there's a planned meeting between she and Trump coming up in May, so just a month plus away. And you know, do you want to stop oil that China depends upon?
Right?
Trump doesn't want to see a pullback on the Chinese side there, and so perhaps they're going to let ships go through, not because they can't stop them, they could, but for g political reasons. You also saw, speaking of blockades, you saw the United States let a Russian tanker full of oil get into Cuba just a couple of weeks ago. So there is other reasons for the sort of geopolitical lens why you might let ships through.
Shenon At this stage, do you think a diplomatic breakthrough is likely in the near term or are both sides just so entrench that maybe not.
You know, they have said that they're going to go back to the table and have conversations, but it's hard for me to see what can be put on the table between the two governments that really leads to an agreement. I do think the Uuradians have been emboldened after what's happened over these last forty eight days to state their case. And for the Trump administration, while you know he often declares victory on various things. It's hard to see what
the US could agree to. So I think a sort of a ceasefire or a continuing freezing of the conflict maybe where we end up for a while.
Paul kind of do one Latin American question. Though Shannon's people aren't angry at Shannon Cuba. I remember my parents hiding the newspapers of the Cuban missile crisis. There's all that baggage. Are we beyond America's baggage on Cuba?
No?
I think here, actually, the Trump administration in the United States has has more leeway. This really is an area where there's a deeper set of connections, and the Cuban government right now is much more transactional than ideological, very different than the Iranian government. And so we do know that there's conversations going on between some in the Cuban
government and some in the Trump administration. You know, perhaps there's a space there where you could find some sort of of deal or some sort of of agreement between the two. But you know, right now, I'm sitting in Miami, actually here down attending a conference, and obviously there's strong feelings down here about the future of Cuba.
She's buying six thousand square feet and coral gables. Shannon Oni, congratulations to mister Frohman, to Kurt's Falen and all Foreign Affairs magazine. You people are leading the debate. Shannon O'Neil is with the Counsul on Foreign Relations. Stay with us. More from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance podcast. Catch us live weekday afternoons from seven to ten am Eastern. Listen on Apple Karplay and Android Auto with the Bloomberg Business app, or watch US live on YouTube.
Adam Farstrup right now, is leading the pack in chart and his set of charts in his research Don't Fall is absolutely to die for. He has a killer scattered dot chart here. That's a dark you know, it's like the dots with a fed It's like little Polka dot. It looks like a Damien Hurst print. Falling growth doesn't lower inflation expectations. Get his fabulous work from Schroeder where he has had a multi ascid. How do you put the charts together? Do you do it yourself at two am?
Or do you have a team that helps We have an amazing team. So our economics team in London is the one that's really driven that scenario analysis you're looking for, looking at trying to help us understand what happens from here with this degree of uncertainty.
The fact is the equity markets are walking away because double digit earnings expectation. Do Schroders believe double digit earnings will continue given a war?
You know, it's the question we're debating this morning at four am, not two am. But we actually think that the earnings are pretty resilient from here, and we've been saying we sound like a broken record. You have that right, and you think, surely the risk of recession potentially is rising here. And I think it would be naive to say it's not that chart that you're referencing. A stagflationary risk scenario is really starting to come into frame.
But when you look at what's happening with the.
Earnings power in US equities today, we're seeing companies continuing to maintain that optimism. They haven't cut their forecasts yet. Whether that's a degree of uncertainty or unwillingness to acknowledge energy prices or not yet.
Yeah, we say ninety eight dollars a parallel.
Yeah, absolutely, so Adam, here in the US, how do you think about asset allocation, stocks.
Bonds, and commodities alternatives. I know, where are you guys today versus maybe where you were at the beginning of the year.
So where we are today is really starting to wonder about the diversification pieces of our portfolio that have worked to this point. So things like energy. Look at the volatility that we've now had in the energy price. Can any of us actually map out I'm not smart enough anyways to figure out the spread between the future's market and energy and the physical market and energy. So you look at the data spread the data brent rather and so from an allocation standpoint, we still like equities.
The question is do you start.
Moving back into government bonds for that downside protection as recession risk starts to increase from here the valuations are come back a little bit right now, so maybe that's an attractive play.
And in US equities we had i think, starting late last.
Year heading into this year of rotation out of what had been kind of the higher multiple higher growth tech names MAGS seven into some more cyclical kind of stories even small to mid mid mid cap for that matter. Was that a short term trade or is that something we're still we should be still thinking about.
I think there's some short term trades out of that. I think, particularly in the small cap market, we have yet to see really that durable earnings coming through in the broad market, So you have to be very selective. We think within small caps when you look at that cyclical trade versus the more defensive trade, a lot of that is going to hinge on. Do we get that stagflationary outcome? Technology? I think still has legs to go on it despite all of the disruptions. You were talking
about private credit. I mean, we're getting into private markets here. But you know, when you look at Anthropic, they grew from nine billion to thirty billion in revenue right over what was at nine or twelve months, and that was limited by their access to compute.
Does all the earnings growth come from such a narrow set of sections? My reading over the last seventy two hours is everybody's revisiting this question. Like Paul, it's shocking if you say, okay, there's ten percent earnings growth, where are that growth's coming from?
Discuss I mean, it is so interesting, Tom, because we have seen this playing out and that concentration does continue to drive the earnings premium in the US. And I'll give a shout out back to Bloomberg and the brilliant Odd Lots podcast from Saturday when they talked about the difference between earnings and free cash flow and this paper that's out from the FED, because that actually goes to the heart of what you're talking about. Free cash flow
has been driven higher by the earnings of tech. Specifically, if tech is becoming more capital intensive, what happens to free cash flow goes down?
Yep?
What does that mean for the US equity market? I think this is what we're going to be wrestling with over the next thirty six months.
Is it just issue bonds? Paul, come on, yeah, they could.
You're at Duke, it's.
Open, You're at Duke. It's an eighty degree yep. April afternoon. Are you're doing Merton and Mediglia? Honey, No, I'm on the golf. Just issue just issue bonds.
Yeah, exactly, that's what.
That's what. That's what's you know, Shiffman would.
Say, yeah, exactly, no problem there.
So all right, So.
We do have this higher energy complex out there it seems like it's going to be higher for longer. What does that mean for inflation? What does that mean for growth? Are you guys changing your outlook or changing your position your portfolio?
Yeah?
So I think the first thing to reiterate here is this idea that none of us has certainty on what path happens from here. It hinges on the next tweet. And so this is where the scenario analysis really matters. If you map in a scenario of one hundred and fifty dollars barrel oil for a tracted period of time, we see that putishing inflation higher by almost a percent over time. When you think about the second order impacts, right, because it's not just the energy price itself, and that's
where we think you actually have to spend your time. Now, what happens to food prices, what happens to manufacturing input prices, what happens to labor? With this uncertainty about AI.
But to go back to your academics and your great work at first or over the years, I'm going to answer, the corporations are incredibly malleable, and they have lots of width to cut expenses if they have to. That's the history of our lives. They cut with a vengeance when they have to, that's right.
But what happens to demand destruction in that scenario when we have all these questions about the labor market?
So what are you modeling GDP for it?
So you model an initial hit with no dynamic response to GDP of about fifty basis points on GDP. But this demand destruct action is the thing we now have to answer because look at just we've had this discussion of airlines and saying, you know, we're resilient, we've got hedges in through May. But what's happening in Europe right now? Europe has have that got two weeks of jet fuel left?
Right. I agree with you on this because I full disclosure, folks. I got half my family on the phone to the Pacific rim thank you mister Lazier T mobile and always supporting him. I mean, this is not in the American zeitgeist right now that they're running out of things. Yep, that's right.
So when you run out of things, right, it's almost our commodity team talks about like a reverse.
COVID situation, right, I haven't heard this. It's good.
So you think about we've ignored running out of things, and that supply shock might be coming across the board. Rationing. I mean, you're talking about gas stations in Australia not having diesel fuel right now.
Yep.
Manufacturing might not be open five days a week in parts of Asia.
Right.
And the tankers, right, there's a great chart out there the tankers that the last orders are actually coming through. So we've had the physical supplies coming through and now the tankers are running out.
Yeah, Adam, thank you so much. What a great brief. And Forrester, whether this is schroeders to stay with us. More from Bloomberg Surveillance coming up after this.
You're listening to the Bloomberg Surveillance podcast. Catch us Live weekday afternoons from seven to ten am Eastern. Listen on Apple Karplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube.
Hermann Schan nailed krtosis, particularly the krtosis of the banking system. We get an update this morning. Just an open question. We've been so busy here with the newshow, folks Futures Up eighteen. How did Citygroup do versus the larger Brethren?
City Group did great, probably the best of the three that reported today, really strong results across all of its businesses, markets, wealth, services. Really interestingly, their returns on Tanaba equity thirteen point five percent, much higher than their ten to eleven percent they're targeting for the year. So starting off the year greats. We'd expect to hear more from management on expectations for returns going forward.
It's nice.
I mean, the stock has doubled over the past twelve months. It's the turnaround is there, which has been long, long, long way coming since a great financial crisis. Arguably, how do you position or how does Citygroup position itself vis a v JP Morgan, you know, Bank of America, even the Goldens and the Morgan Stanleys of the world.
How does City position itself nowadays?
Right?
So, really strong areas in markets, particularly in rates trading, really strong services business moving cast around for their corporate clients. That's been the crown jewel for the longest time. They're weaker in the US, specifically in consumer banking. They don't have a really strong branch presence. So there was a Bloomberg News article about a month ago saying that they might be interested in buying a large regional bank just to bolster their deposit presence, because.
Everywhere if you're in New York, yes.
They are not in sort of like your your areas that you're a betther, they're not. So they've retreated and gotten rid of a lot of their branches, which now has been to the detriments.
Do they have a Plano Texas? I mean, Paul's good question, I mean is what's coming is is Jane Fraser is going to say, Okay, we need to migrate from New York right somewhere else. Is that what's ahead?
What GP Morgan has shown And to your earlier question, Paul, is that JP Morgan is growing their branches everywhere. You can look in there and your shareholder letter that just came out last week and they talked about Alabama of all places, growing their branches. Saw the whole thing, right, And so City Group just doesn't have that. They have a very thin branch precedents that's really just focused on the large country.
The heritage is John Reid in Riston, and it's international banking Mexico. They got rid of it that right, is that their future is to really lead on international banking.
Well, they're reducing their footprint internationally as well they're trying. They only have about fifty one percent steak in their Mexican business.
Now I'm lost. Then what are they doing right?
So simplifying their businesses, focusing on returns and then potentially growing the US deposit base.
Yeah, I mean again, a stock's doubled over the last year. It's taken so so long. I mean, no, kid, it's even for the great financial I sold my stock the second I literally.
As I'm walking out the door, I'm so much.
Can you do a shout out? Mike Mayo? He's been long city Girl. When you back when he was fat, before you get the before I did the weightlifting and all that stuff. Back when he's a chubby old lad, he was long City group. But finally it's paid off.
Especially so what's the takeaway from just today with the big banks?
Yeah, there's something good.
Business is great. I think the market's quibbling over some net interesting income noise for JP Morgan that really, in the grand scheme of things, doesn't really move the needle for US. And then Weils Fargo had a bit of a some margin compression, so there's going to be questions about that on the call. But overall, everything looks really good.
How the regional's doing what you used to cover? Yeah, it's still cover.
You had a real job of an emphasis. I guess today regions are going to do great. Some of the trends that we're talking about for the largest banks are are happening for the region as well. Strong balance sheet growth, particularly in commercial commercial lending. Your your core small business borrower is coming back, and so that's been lifting results for the regionals expect for this year margins are going to be stable, and then you have a shareholder returns in dividends and bibecks.
It's way too much Optimism's got it, Alicia levin her can we get side? Can we get somebody in here? Gloomy credit in person in here? Something Tucker's coming in Herbert Chan, thank you, thank you, thank you so much. Seriously, folks, Mister Chan will be publishing today for Bloomberg Intelligence, and that's a must read on the Bloomberg terminal.
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