From Investment Banker to CIO with Mike Wilson

Bloomberg Audio Studios, Podcasts, radio News. This is Master's in Business with Barry Ridholds on Bloomberg Radio.

This week on the podcast, I have an extra special guest. Mike Wilson has been with Morgan Stanley since nineteen eighty nine, rising up through the ranks of institutional sales, trading, investing, banking to eventually becoming chief investment Officer and chief US

Thanks Bary, it's great to be here.

It's great to have you. I've been looking forward to this. Let's talk a little bit about your background. You get a BBA from University of Michigan, Go Blue, NBA from Kellogg at Northwestern. Was investing always the career plan.

Yeah, you know, it was in some way, shape or form.

I mean, you know, my mom was a financial advisor in the early eighties. She was kind of an inspiration. With a single parent family household, she was basically making ends meet, and she, you know, with that time, a woman as a broker was, you know, really an endangered species. It didn't exist at all. So she got me interested looking at stocks at a young age. And of course I got hooked early because probably to this day, my largest percentage winner of all time was the first stock I ever.

Picked when I was thirteen years old.

What was that stuff?

So I was thirteen years.

Old in nineteen eighty A boy, I can't imagine. I picked Nike, worked out pretty well and ended up paying for a good chunk of tuition. And of course, once you have a winner like that, you're kind of in.

So I went to school.

I didn't think I would be necessarily doing what I'm doing today, but I knew that I was going to be interested in financial markets of some kind, and I think I probably ended up in the right place. It took a long time to kind of get to the right role, but but yeah, I mean I've always had an interest in markets.

For sure.

Do you still have that Nike I don't.

Actually I sold it. I finally sold it, all of it, I believe, in the late nineties. So I left a lot on the table. Yeah. Yeah, it was still my biggest winner.

But still, right, that's a good run.

Yeah, that's good.

That was the fat part of the curve with them. So I can't help but notice a Northwestern in Chicago and then you come to New York City. What was that transition like from a quiet Midwestern upbringing to New York City.

Yeah, I mean it really was.

It kind of a you know, a turbulent sort of emotional thing for me. But I had changed school so many times through my childhood. I lived in Illinois, I lived in Texas, and went to a bunch of different schools, so so like new Adventures was not not you know.

A challenge for me. But yeah, the big city was. It was a big change. That was I'm a rural guy.

I kind of grew up on a you know, farmtown in Illinois and in Texas which is in Dallas, but not really a farm town, but you know, more rural definitely more Midwestern, southern even And so yeah, New York was eye opening.

And New York in the nineteen nineties was like a boomtown party totally. What was that first decade like as a junior level banker at Morgan's down A lot of fun.

I had a lot of fun.

I mean, you know, you work long hours, but you're kind of burning the candle at both ends.

You're you know, it's sort of that's.

What your twenties are. Four.

Yeah, work hard, play hard, and nothing bad, nothing we shouldn't be doing. And it was great the nineties still to this day. I mean it felt in America was really booming. It wasn't just New York City. I mean it was almost a coming of age for the entire country, as you know. I mean, the late nineties was sort of you could say peak USA in many ways. We can measure that in a lot of different ways, and New York was, you know, a big part of that.

So it was a lot of fun. It was exciting.

What were your experience is like as a junior I banker and.

Not so fun.

I mean, you know you're learning, but it's you know, it's an entry level job and it's not glamorous. You're punching the clock pretty heavy hours.

But boy, you're.

Surrounded by some really smart people and you're working on things that are are forcing you to grow intellectually. It really challenges your resolve. Do you want to be in this business?

You know?

Do you want to because it's constant as you know, I mean being in the in the investment business, being in the financial services business, it's it's a constant you know, evolution. You know, you have to improve your skills. You have to eve all of your skills, and if you don't, you kind of die.

So I had a John Mack on the show last year and one of the things that really struck me was his respect and reverence for the culture at Morgan Stanley. Tell a little bit about your your experiences dealing with Morgan Stanley culture.

Yeah, I mean for me, I mean it was perfect because I you know, I grew up very independent. You know, my mom put that on me early, and so Morgan Stanley's kind of the same way. It's your career to manage, try to permitted support internally, to make sure that you have what you need, but to generally encourage you to explore your limits. And so that to me has always been a very endearing part of the Morgan Stanley culture. It served me well, it's challenged me, it's made me

And thirty five years one firm, your whole career, that's a rarity in the modern era. What's kept you there your entire career.

It's just what I said, I mean, they've given me the opportunity to do a lot of different things. I don't think I could have spent thirty five years at any firm doing the same job function.

It's just I need a variety.

And so I would probably say that I've had six or seven careers over that thirty five year period, and that's.

What's kept me interested.

It's been exciting, it's been you know, it's been a thrill of a lifetime to be able to do these different types of careers.

So we were chatting earlier about our holding periods getting longer as we get older. You and I both started as traders. What was that experience like again, nineteen nineties, big institutional activity at Morgan Stanley. What was your trading career like?

Yeah, that came later, So I was really investment banking, and then I went into really more of a sales role in the nineties, and then I became more of a prop trader in the two thousand, sort of post the tech bubble, and I was involved in trading tech stocks proprietarily, you know, helping the desk make money before you know, before that became abolished, you know, POSTGC, right, and and that was another incredible growing experience. I mean, as you know, you know, trading forces you to really

You know.

It's a love hate thing. The P and L is everything. And you know, I discovered I didn't really like that, to be honest, I don't.

I didn't. I didn't enjoy you know, being married to a screen every day. That to me is is not investing. That's trading. And I'm not a trader.

I mean, I understand trading I'm more of somebody who is intermediate term. I'm a cycles person as opposed to a trading person.

So the question that comes to my mind because of my experience doing something very similar is I find that trading has influenced how I look at investing. What has your experience been now that your time horizon is much longer, how did your experience as a trader in the two thousands impact how you see the world?

Well, it absolutely helps.

I mean, you know, because it forces you to be honest about you know, your positioning, and it forces you to revisit like why am I involved in this call or position?

And does it still make sense?

And that trader instinct forces you to be honest with yourself where I think if you hadn't done I hadn't done that, I probably wouldn't be, as you know, open minded to things changing. And oh yeah, I could be wrong. You know, it's funny to be a lot of people are afraid to admit the wrong. I'm happy to admit that I'm wrong, because that's how a trader closes out.

A position that's exactly right.

I mean, like you guys, say I'm wrong, and then okay, I've got to do something different, and I think, you know, my worst mistakes have been when I've been unable to admit that I'm wrong, and so the trading experience helped me to kind of get past that.

The line I recall my head trader drumming into my head was it's okay to be wrong, it's unacceptable to stay wrong.

Correct.

So you hold two roles, and if someone asked me what are the two best gigs in all of Morgan Stanley, my answers would be, I don't know, either chief US Equity Strategist or Chief Investment Officer. You have both of those titles. How does that work? How do you handle both of those?

Well?

I mean, you know that's also evolved over time. I mean they're very different constituents. So I would say the challenge of having those roles is that our institutional clients are much shorter term, and you know, Morgan Stanley has all types of different clients. We have institutional clients, we have retail clients, we have you know, pension funds, we have endowments, and so it's sort of managing that all of those different constituents with communication. So that's the challenge.

So it's just different, you know.

And what I find challenging and satisfying is that every meeting I do, I almost got to put on a different hat. You know, I go into a meeting and I'm talking to somebody who really doesn't care at all about next week, and they didn't even care about this year. They're thinking about five, ten years down the road. It's a completely different conversation. In fact, we end up talking

Huh. Really interesting. So I'm looking at all the various roles you've had at Morgan Stanley over the past three and a half decades, investment banker, trader, salesman, strategist, product manager, and of course chief investment officer. What's your favorite role and if you could create just one sort of amalgam of it, what would that look like.

Yeah, that's an interesting question.

I mean I would say, you know, I had a lot of fun working on the trading desk.

I was younger.

We had a group of people kind of the same age, and you're rowing the boat. It's a tight team of fifteen people or so. And that role was essentially I sort of built what we call institutional sector sales, sort of a desk analyst role. We were the first firm to do that. I was a TMT specialist and then I built out that effort over the course of I don't know, five six years for every industry, and it was a it was kind of like your team, and we built it from scratch. Now, every firm has those

Huh. Really interesting? All right, So you cover a lot of really one of my favorite topics, the five things that are within your purview US equity markets and trends, economic indicators, how political events impact markets, corporate earnings, and then federal reserve policies. That's the big five in my book. I love that area. There's always things to talk about. We were chatting earlier and I said, I got a

Well, to me, it's all just about the riddle. You know, you're just trying to solve a giant puzzle. I mean, that's that's what makes markets so exciting to me. It's the marrying quite frankly, of macro and micro. So I have a deep background in micro mailing the TMT space, and then I developed this macro affinity starting in two thousand and really twenty nine to ten in that role, and so marrying the two to me is the advantage,

Are we talking market cycles, economic cycles? Cycles?

Every but generally starts with the economic cycle. Where are you in the economic cycle? And then they're the business cycle effectively, and then understanding that there are also market cycles and marrying those two is also a big part of our framework. So you have to have some sort of fundamental framework. Mine has always been based on rate of change analysis. So to me, when people look at data, a lot of times, I don't think they look at

In other words, oh, were you accelerating or decelerating rather than specific points or exactly.

And that can apply to macrodata, and it can apply to microdata, and that should tell you whether or not an asset is probably going to be appreciating or deep creciating. So that's one part of our framework. The second part of our framework is valuation fundamental work, you know, earnings analysis, predicting earnings, whereas a great valuation based on kind of where we are in the cycle. And then of course, policy is a huge impact on how that cycle can be effected.

When we say policy, do we mean fed policy, do we mean fiscal policy?

We mean everything?

Yeah, all types of policy, but mainly fiscal and monetary. Also geopolitical events, and that's probably the least important for us because they're so hard to predict, right, But definitely fiscal and monetary policy. And I think that that's probably taken on a much bigger role in the last twenty years than it was prior to that twenty year period. That policy now has a outsized impact on markets and it did twenty years ago.

Huh. Really interesting. Not too long ago you wrote this is a humbling business. That's an attitude I completely share. But I don't see a lot of people in our industry discussing that. Tell us a little bit about what makes this such a humbling business.

Well, first of all, it's extremely competitive, probably the smartest, most motivated people in the world that you're competing against. And it's and you're also competing against yourself to try and figure out what's going to happen. So that's that's number one. So your probability of being correct okay is low, right, I mean, like if you're fifty to fifty or sixty forty on your ideas, you're really good.

Okay.

Think about overachievers, you know, when you and we recruit, you know, we talk to people young people always say you probably haven't even ever had a B on your report card. They can't imagine getting a B. Well, get ready to have a bunch of f's, you know. And that's humbling is to say, hey, you know, like this is difficult and you're going to be wrong a lot. And really the humility is important because you know, failure is all about how.

You deal with it.

You know, you're all going to be wrong, okay at some point, and how do you deal with that failure? Do you do you double down on your mistakes? Do you do you deny that you made a mistake? Do you learn from your mistake? And to me, that's that really encompasses why I like it so much because you're forced to grow.

You're always forced to be growing as a person.

As a colleague, as a client service person, and you're always you're constantly learning and relearning.

So let's talk about some of that learning. I've tracked your career over the years, and I don't know, a decade or two ago, you are more inclined to make bigger boulder predictions. Now I kind of see you as doing more nuanced strategies. You emphasize relative value you're looking for, where as an edge I can share with clients versus let's see if we can, you know, get the big one right. Why has that philosophy evolved over time and how do you implement it?

Yeah, I would say I would say it's changed completely. I think that there are times in the markets where you know, the big pitch is easier to go after. I still I'm a big elephant hunter. I mean, I still view myself as I tend to be more contrarian because I think that's where you make the big money. All my good calls have been going against the grain, whether it's.

Bullish or bearish.

I would say, you know, we get tagged with being you know, more bearish and bullish. I would say, we're

It hasn't been as easy to.

Have that conviction level that you get run over by policy, both on the upside and the downside. And so what we feel like we have an edge in is calling those relative value trades, and we've had great success in that in the last twelve to eighteen months, even though perhaps maybe our market call in the last twelve months has been not as good.

Well, let's give you some credit where credit is due. Earlier this year you had said, hey, we're very overdue for a ten percent correction in the market, and pretty much, you know, July and August, that's about what we've seen in twenty twenty four. Do you find it easier to conceptualize market activity when things become more volatile, How do market dis locations affect your ability to read the tea leaves?

Well, I mean, market dislocation always creates sort of opportunity. You know, this year has been very it's been very calm from a volatility standpoint, and that's somewhat boring, right, So we felt like in early July that you know, that had gotten kind of extreme. There was stuff that was, you know, peering its way out, and the risk reward was not as good. Now ten percent corrections are very common, you know, They're not like, that's not really that big

Look around the corner.

Okay, whether it's bullish or bearish, that doesn't really matter. It's more of like, what's not priced right now? What is priced right now is a soft landing, and that is the base case scenario for most people. So you have to ask yourself, Okay, well, what happens if that soft landing narrative is challenged? Doesn't mean it's a hard landing, just means it's challenged. Well, it means evaluations are probably too high, and that could set off a chain reaction.

Well, let's talk about a swing you took. You got twenty twenty two, very right. You said things were expensive and not prepared for a fed hiking cycle, and lo and behold, not only were stocks down twenty plus percent, bonds were down fifteen percent. It was a pretty awful year. You got the macro picture right, What led you to identify that correctly? And what made the two years that followed twenty twenty two so so challenging?

Yeah, I mean, I think what set us up was we you know, we got the low right in twenty twenty for the right reasons. We can't came into the pandemic more embarrassed than most because we thought it was late cycle. Then we got the pandemic and it was to us a really fat pitch. So we were very aggressive in twenty twenty in twenty twenty one, and you know, we don't get necessarily a lot of credit, but our

So we in some ways in eighteen months.

No, I mean so like that that actually made us feel then, oh my goodness, they probably overdid it and that's going to lead to probably a hard landing in twenty twenty three.

But we weren't alone in that view, by the.

Way, So let's talk about this that because Man did so many macro economists and strategists, they might have gotten twenty two right, but twenty three and twenty four was perplexing, and we continued to hear recession, recession, recession throughout I'm not saying you, I'm saying the street throughout twenty three, the first half of twenty four. As of August of

Well, I mean a lot of the traditional indicators were a flashed wrong sign. I mean historically that probably would have played out. And my personal view is that we had incredible policy support last year, mostly on the fiscal side, which essentially allowed the cycle to extend itself. I mean, if you take out the government spending, you probably are in a recession in a private economy. And look, many

So you bring something up that I'm fascinated by, and it plays right to the economists getting the recession wrong in twenty three and twenty four, and that's your focus on government, both fiscal and monetary support for the economy. When we have a year like twenty twenty, like the pandemic, when the Cares Act and there were three CARES Act, But the first Cares Act was something like ten percent of GDP. We hadn't seen anything like that since World

And we did, and that's why we got twenty twenty twenty one so right, because we agreed with professional single. In April of twenty twenty, we said look out for the inflation, and people thought we were nuts.

Right.

The pushback was pretty fierce there, fierce.

We got more pushback, by the way, being bullish in March and April of twenty twenty than being bearish in twenty two because people say we were being insensitive to like, you know, the disease, and we're not being insensitive. We're just trying to do our job. And anyways, the point is that that boom bust we compared exactly to World War Two. We wrote extensively about this. The way we adjusted it was we said, okay, these cycles now we're

Rate to change, which by the way, turned out to be really accurate. We got people out of all the high flying meme stocks and all that, like in March of twenty one, because we said, this is silly, this is all just COVID over consumption. It's going to be payback. So we did adjust all that.

But once again, barrious, you can't get everything right, you know, so we feel like that narrative is still right on track. We didn't trade it particularly well. Okay, Now, what we did trade well was our defensiveness and our quality bid staying away from small caps. We got out of the memes, you know, the high flying multiple stocks. People try to keep buying those and just got carried out. And what I find interesting is, you know, if you're if you're

So no kidding, I was just immediately assumed it was it was all mag seven Max.

Haven' killed you in twenty two, Right twenty two, that portfolio was actually up and it's long only.

So now what I'm saying is that calling the S and P five hundred is not really that important to making money.

Right.

Making money is, you know, pivoting into things that maybe are loved, getting out of things that are overloved at the right time, and not overstaying your welcome. And that's where I think our research and our advice has been really quite good.

So here's what I'm kind of intrigued by. You have all these different roles. You're looking at all these different aspects of the market, of the economy, of various government policies. How do you take that massive information and communicate it to both the Morgan Stanley staff, the sales team, the brokers, the asset managers, and the investing public. I know you do a weekly podcast on your perspective of the market. How do you get all of this information to your audience on a timely basis.

Yeah, it's it's a challenge I would I would say, of all the things, all the skills that I've acquired over the years, probably my best skill is communication. That whether it's verbal, written media of some kind. You know, people say I have a face for radios pot two. Yeah, the podcast is better. But the point is is I'm pretty clear. There's usually there's not really any uncertainty about what I'm saying. I could be wrong, but it's very clear and people like the clarity of the messaging.

So we write it out every week.

There's a cadence to it, right, We've developed as cadence with our clients. Every Monday at you know, twelve am in the morning the note comes out, so people are waiting for that, or we do we do these regular touch points and that regular communication, whether it's to the institutional community, to the retail community, to our endowment community.

Whatever that might be. And of course then we do a lot of marketing.

We do a lot of one on one meetings, you know, group events, et cetera. So it's all those touch points, and the challenge is that we have to deliver the message depending on who the audience is. When it becomes challenging is if I'm doing a media segment and that maybe the messaging is more for the institutional community, but then the retail community picks up on it and it's

Do you ever find yourself when you're putting these weekly conversations together, looking at the flow and saying, you know, most of the time these data series are just trending, and it's when either there's a major reversal or a big outlier that it's interesting. But all right, it's consistent with last month's trend, in the previous month's trend, do you look at that stuff and say, we don't really need to talk about ism again, do we? Or how do you deal with that?

Well, I mean it comes down to what we think is the most important thing this week. We also, you know, it's a bit of an art in terms of Okay, when do you press it? When do you lay low? When do you make a relative value call? When do you make a market call? You know, it's like, well, where's the opportunity right now? But we can kind of go anywhere. The beauty of my job is I can kind of talk about anything. I can talk about rates, I can talk about credit, I can talk about stocks.

Huh, really really interesting. So there's a phrase of yours that you use that I'm fascinated by. It's almost a wartime phrase. You had written, the fog of uncertainty reveals new investment opportunities.

Explain, Well, that's when things are mispriced the most right, when things are when things are certain, you tend to get pretty accurate pricing.

And of course that's dangerous too, because.

I was going to say, sometimes you get certainty in the wrong direction.

Correct, But when things are really confusing, like during COVID, for example, you had incredible value opportunities that popped up because nobody knew anything, including us, but we knew the price. And that was the main reason we got bullish in March of twenty twenty was that we were waiting for equity risk premiums to blow out, and they did, and I'm like, well, doesn't really matter. Does really matter what happens if I'm buying this at a seven hundred basis

Right, never does it never does right? How is the fog of uncertainty today? Is that it's clearly not March twenty twenty, but there is a sense that people have no idea which direction we're gonna head.

I would say that right now there there is more certainty in people's minds than in reality. Okay, and that's really where the opportunity comes up, which meaning there seems to be a lot of certainty about how things are going to play out, not economically but also from an earning standpoint. But I've heard these same arguments now for four to six months, four to six quarters, quite frankly, about this reacceleration in certain things which it keeps being deferred.

Okay.

There's also a lot of certainty apparently around FED policy because they guide, which I don't think there's any certainty around they don't know.

I mean, the street has, let's be blunt, been dead wrong about what the FED was going to do. It feels like it's a year and a half for ready, Yeah.

The Fed has been wrong. Okay, it's a hard job. I mean, you know.

I remember I'll just go back to an example, but in December twenty twenty one, there was fifty basis points of FED hikes priced in to the next year, okay, And I was remember talking to clients going like, do you I think this makes sense? I mean they were runaway inflation and the FED has told you they're going to start raising rage and like, well, yeah, it could be more, but like that's what the Fed's telling us. Oh okay, well, I mean so that you know this.

Well it changed in two ways. So the FED changed with.

Green span right with all this forward guidance, and then of course it's just gotten more and more and more dot plot now and it just it's just compounded. You give people a little bit of information, they want more. So the FED is now provide so much information they can't even tie their shoes without telling us first.

To be fair, when you and I first started, we didn't the FED didn't even announce they were tightening. You would just see activity in the bond market exactly, and someone would say, hey, it looks like the FED raised rates. Now, not only do they tell us the raising rates, we get the transcript.

From the meetings, and then they have to basically go through every line and they're like parsing each word. It's got to the point now where it's almost debilitating, okay, because the markets are almost unable to trade away from this sort of formal guidance. Now that served a purpose to a point. Now I think it's it's outgrown its usefulness in many ways.

Does the FED lose something by giving up the elements of surprise, the ability to shock the markets?

I think so.

But more importantly, what ends up happening is the market now gravitates to you know, pricing in the same outcome. Right, No one is willing to go away from the dot plot or the like. The market rarely gets away from the guidance. And I bring that up because it's the same thing in a stock market now right with regulation FD and now we have an entire industry dedicated to company conference calls.

So if you look at.

The variance in estimate analyst estimates, it has absolutely narrowed dramatically over the last fifteen or twenty years. In the mid or late nineties, when heads funds became a thing, and active managers were doing their thing. The variance and estimates was all over the place because we didn't have

Really interesting, So you mentioned earlier your focus on cycles, not just economic cycles and business cycles, but market cycles tell a little bit about where are we in the economic cycle and where are we in the market cycle today.

So we're pretty convinced that we're late cycle now. Late cycle period's gonna last for years. I mean, the late nineties is a great example of that. I mean went on forever, and so we don't know when it ends. But it's very hard to argue that we're mid cycle or early cycle because we're unemployment is I mean, you're basically at the fifty year low and it's kind of turning up. So we think we're pretty much late cycle, and that informs us where to be within the market.

Attention to quite a bit.

So we do use a lot of technical analysis One of the reasons we're kind of contrarying is I tend to fade like I fade exhaustion, exhaustion meaning things get ever bought or things get over sold. I like to I like to kind of press into those into those points.

That's really kind of interesting. So you mentioned the inverted yield curve, and now that that's dis and starting to steep in, everybody tends to focus on the inversion, but that's not where recessions a car. It's after the yield curve inversion on wines and things begin to steep in. So what are your thoughts on the possibility of a recession in twenty twenty four or more likely twenty twenty five.

Well, once again, like our house call is as soft landing's most likely outcome, we don't have to answer, okay, And I don't think the curve is resteeping in a way that would signal that the recession is more likely than not yet, but that can change. So we're very focused on that. And usually when the curve and resteepings from the front end, meaning the.

FED is catching up.

This is why I'm very focused right now in the two year yield relative to FED funds. So two year yield's got almost one hundred and eighty five basis points below FED funds, you.

Would think is anticipating massive cuts, right.

Like, not fifty basis points, okay, or seventy five. It's predicting one hundred and eighty five basis points of cuts over the next probably you know, twelve to eighteen months, which is a pretty aggressive FED cutting cycle. And that's all it's telling you. It's just telling you that the likelihood that the FED is behind the curve is gone up once again. Not a recession, but the risk of a hard landing has gone up.

All else equal.

If the market thinks we're getting almost two hundred basis points and cuts, it sounds like the bond market is anticipating a recession right now.

The good news is that has narrowed. So the spread now between two years and FED funds is down to one forty five. Why because the claims numbers were better. We got some you know, ism services data was a little bit better. So this like fear that you know, got priced in really quickly is now subsided. A bit doesn't mean it's extinguished. It just means that we you know, the pendulum is swinging back again, and so we're focused on that.

We're watching it closely. I would say the jury is out. We don't know.

So markets in twenty twenty four had a great first half of a year. A lot of people expected to build on that ten twelve, fourteen percent gains. Depending on which markets you were looking at, you I've come out and said, I think it's a low probability that there's a whole lot more upside for the rest of the year. Tell us what you're looking at there and why do you think. Hey, the most of the gains for twenty twenty four have already been had.

So all of the gains really since October of last fall has been multiple expansion in anticipation of a FED cutting cycle and a reacceleration in growth. So we went from seventeen times earnings SMP earnings in October of last fall to twenty two times earnings in June.

Well, that's about as rich as you can get.

So I'm pretty comfortable saying that multiples are likely to come down as the FED cuts. That's also something I think people don't appreciate. Once the FED like it's easier to travel than arrive, so as you're moving to the FED cuts. That's the best part of the cycle. We wrote about that at the end of last year when we sort of you know through in the tiel that we were going to have this you know, hard landing.

We thought there'd be a rally.

Okay, we didn't think we go to fifty seven hundred, but needless to say that that's what happened. But the best part of that rat has now occurred. So when the FED starts cutting, multiples usually go down and there's just not enough earnings growth offset a ten to fifteen percent multiple contraction between here and the end of the year. We have like eight percent growth built in for next

So you have this very nuance take that. I'm intrigued by what you're describing as somewhat cautious. However, the nuances pullbacks are opportunities for investors to put money into high quality growth companies that have strong financials and high earnings potential. That's a very nuanced position relative to the highs are in for the year, and we should expect a bumpy road from here.

Well, it's a little bit of both. I mean, I would say that I think the trajectory is down. I mean nineteen times. You know, next year's numbers is you know, which is the end of the year is lower than where we're training today. It's sort of that low five thousands is supposed to fifty four hundred.

But what is that five six percent? Not exactly like you said, that's.

Pumpy, it's not, you know, that's the way you phrase the question. So I think it is going to be bumpy. And that's to forget that we're going into this election season. There are some other things going on around the world. There is still excess leverage in the system that I'm

Let's talk about another nuanced position that you have that I find fascinating. Everybody's been so focused on the artificial intelligence enablers and Video and all the other semiconductor chip companies, but you've made the argument that investors should begin to shift from those AI enablers to the AI adopters as the big next opportunity. Talk about that, because that's really a fascinating concept.

Yeah, I mean that's sort of my technology background speaking, right. I Mean, that's how these cycles work. You buy the picks and shovels or the enablers initially, and then the real money, the real opportunity, is with the companies that can actually deploy that technology into a new business model. So if you think about the nineteen ninety as a good example, everybody will understand the enablers were the telecom companies, the Silicon companies, the telecom equipment companies.

Cisco, JDSUNI, Phase, all these companies that nobody, really the average investor had no idea what their hardware was really doing.

Right, But these were spectacular stocks, and that was in the build out of the Internet itself. But if you think about who actually ended up building the big stocks, the ones that really worked from the Internet, it's the mag seven, right, you know, I mean X you know one semi counter company that has gone crazy here recently, But generally, these are the businesses that took the Internet and then built incredible business models kind of for free.

I mean they didn't have to.

They have to spend the money to build a super highway, right, the guys who built a super highway, those stocks have been terrible.

Well, Metromedia, Fiber and Global Crossing. They spent thousands of dollars a mile and then got sold for pennies on the dollar. But that's how you end up with YouTube and Facebook and correct and Netflix.

So that's why it's interesting now, Barry where you know. So obviously hyperscalers have been the big winners of the last era, and there's nothing wrong with these businesses or companies. Okay, they're great, but they're now the ones spending all the money on this next generation cloud or AI whatever you want.

To call it.

By the way, AI, just to be clear, is really just an extension of machine learning. It's you know, I'm not sure we're going to have really artificial intelligence. I mean, that's an interesting way to get people excited. Okay, it's just another investment cycle. There will be use cases in business models that are very profitable built on the backbone of those cloud networks. Okay, great, We don't even know who those companies are yet.

Okay.

My guess is they're going to reside in areas where great efficiencies are needed, for example, in healthcare, which we were talking about earlier, right, like a lot of inefficiencies in healthcare. Well, you know, somebody's going to come up with a solution to kind of ring out that inefficiency. Okay,

It's amazing when you look in the healthcare space, they still use fax machines. I mean literally have your doctor facts, the prescription to the Why can't you do email? It's not secure? Some of this is technology, some of this is just, you know, having one focused business methodology that seems to not be rooted twenty thirty four. What is fax machine? Forty years old? It's amazing. So it's not so much AI as just a rapid adoption of better

It's just faster processing? Right?

And then once again, it's about the solution that it's built around that.

Right.

The Internet was a really interesting development. But I mean nineteen ninety five, and you remember this, like I did you know, We're sitting around in the desk and all of a sudden they're like, oh, there's this thing called email that we're going to introduce.

You Like, what is this? But it was such an easy apple.

But don't email clients. You have to get compliance. I still prove that yet. Do you recall back in the day where you literally had to have approval to send emails. It's amazing that that adoption period was a decade plus long, but.

It was fat. It was.

I mean, it was pretty immediate and anybody you know, could type, could could use email, and email was I think still to this day, one of the biggest productivity enhancements I've ever seen in my lifetime. Now, the browser was the other killer app. And now the problem is, weren't any websites to go to for a while. But those two sort of apps to me were so obvious, much more obvious than.

Say, chat GPT is okay, at least so far. We'll see where that goes.

Right now, you know, it does homework for high school students and can help you and I write a nice poem to a loved one, or help us write a speech or something great. But like, is it really enhancing productivity in a meaningful way? Like, we can't use that yet it doesn't. We can't trust it for the numbers, we can't trust it for mission critical type analysis yet.

Right, it's a research a dendum, but it still hallucinates. And so my favorite story is I had Bill Dudley the New York Fed and as a guest, and I used chat GPT just to see if I missed anything, And thanks to chat GBT, I learned that he was a linebacker for the Detroit Lions in the nineteen fifties, which kind of interesting because he was also born in the nineteen fifties. Chat gbt couldn't figure out two different William Dudley's that'll eventually get worked out. At what point

When the you know, Hyperscalers or somebody else hands them a solution, it's a package solution. I mean, it's no different than software in the nineties, right, sound like you and I were going to go develop Office or we're going to go develop Excel, you know, But somebody developed that for us. We deployed it in our enterprise and our employees became very productive. So we just need the

All those things are solvable. It's just a matter of time, you know.

But but is it money?

Is it decades or is it years?

Oh?

No, it's years.

But I don't think it's fast enough to prevent where we are in the economic cycle. Once again, going back to I think there are people making the argument that, oh, not only did the fiscal kind of bridge us another year, but now AI is going to extend the cycle another three or four years.

I'm just out of that belief because that's the next cycle. That's the next cycle. That's what to get, that's what's going to be.

That's what you're gonna want to get excited about when valuations come in at some point in the next twelve months, is my guess. And there's a fat pitch that people have forgotten about.

All right, last of our standard questions when you look at a market where we are today, When you look at the economy where we are today, what are your favorite metrics to focus on, whether it's valuation or the economy or inflation, what are your big three that you're you're watching.

So, once again it goes back to ry to change on a lot of the key metrics. I say, the key metrics I'm focused on now are things like revision factors, So earnings revision factors, that's what stocks are most highly correlated to. That's now rolling over. So the rate to change on that is in a bad slope, which means valuation has come down. It doesn't mean it has to go negative, but you know, it can go negative and then we'll have to adjust, you know, or targets further.

Now.

Everything else is kind of secondary. If the claims data and the payroll data stays okay, soft landing is the outcome.

If that deteriorates further.

I don't think it can deteriorate a whole lot further before the market start to get nervous.

In our last five minutes, Let's jump to our favorite questions that we ask all our guests, and we'll do this in a speed round, starting with tell us what you're streaming, what's giving you entertain these days?

Yeah, I'm watching sort of an eclectic group.

Now, The Bear. I don't know if you've seen that show. We just finished season three, which I didn't love.

The season three is.

Season two is still better, but three was interesting.

Yeah, it's all good. It's just great character studies, which which we enjoy. My wife and I have enjoyed that series. We just finished it. Other than that, the offer, if you've seen that, no, So the offer is about the making of the movie The Godfather.

We were just talking about this over the week.

Spectacular. We're not done with that yet, but it is.

But I can't remember the last time I saw Godfather too. It had to be decades, yeah, ago. And someone said, watch the offer. It's based on the book that the producer exactly did. And people said, when you go back and rewatch it, everything has a different context.

It's spectacular. So I would recommend that. And then I'm watching a Pete Rose documentary right now. I'm in the third of the fourth and it wasn't not what I expected. So I like to watch a lot of documentaries, and that one is pretty fascina really interesting.

Tell us about your mentors who helped shape your career.

Well, I mean, this is all it is going to sound the writer, you know, dishonest, but it's True's basically my mom and my wife. I mean, these are the two strongest women I've ever met in my life. They've been extremely honest with me and forced me to grow, and so those are the two most important.

For sure. There's no one.

Person, but many colleagues and many clients. I would say clients have shaped my views on the market's probably more than colleagues, because you know, they're actually putting skin in the game, and they've also helped me make good career decisions and judgments.

It's such an interesting observation you're making because we sort of forget how clients force us to rethink certain things. Or someone asked you a question where you think the answer is obvious, but you don't want to just give them a quick answer, so you do the homework and you discover, oh, this is a lot more complicated than I originally thought. I'm glad you brought that up because it comes up so frequently, and I think we don't

You know, if it was up to my wife, I'd be reading like a book a week. She's a literary giant, so she's always handing me books. And I'm kind of an eclectic reader. But I would say some of my favorite books are The Boys in the Boat.

Now series.

Now also, yeah, there's a movie. I didn't watch the movie because the book was just so detailed. It was fantastic. Like all the classic books, my favorite was Catcher.

In the Rye.

It's kind of a coming out of age story, you know, animal farm and those types of things, and then like the trashy type stuff, you know, like one of my favorites of all time still to this day is The Firm. If you remember reading the John Grisham novel became a Tom Kruise move. Yeah, but I mean, like so like you know, that's it's a gamut of it right now. I mean, I read so much for work. I don't probably read enough books, Like day to day, but I'd like to read more.

Huh really interesting. Our final two questions, what sort of advice would you give to a recent college grad interest in the career in investing.

Well, the advice I do give them is just, really, this is not a sexy business.

Okay, this is this is a grinder business.

So if you come into this business, understand, like we talked earlier, you're gonna be wrong a lot. You gotta have some humility. You're gonna be a lot of highs and lows. When things are feeling really good, take it down a notch. When things are feeling really horrible, don't you know, kill yourself. And it's just it's gonna be a roller coaster. And it takes a long time to become even close to being a domain expert in anything in this business. There's some many smart people. There's so

Really interesting answer. And our final question, what do you know about the world of investing today you wish you knew back in nineteen eighty nine when you were first getting started.

Well, I guess part of it is what I just said that it's a you know, it's not a sprint, it's a marathon. You know, cut yourself some slack along the way. You're going to make some wrong turns, and I would say, enjoy it, you know, because it's it's it's a journey, and it's a journey not just about like the people you're working with and the people you're helping your clients. It's joarning about yourself. This is a struggle with yourself. I mean, figuring out markets is an

I call that the first behavioral economics book.

I would agree, and it's a fictional character, but it's a real life experience of just how it goes down and understanding your faults, your own fault. Understanding your weaknesses and your strengths, you know when to press it when not depress it. And then and then you know, unfortunately and that story ends up with you know, killing himself because it just it eats a way too. So that's that's really what I wish I know thirty years ago, like it's gonna it's gonna take a pound of.

Flesh, right, Really interesting, Mike, thank you for being so generous with your time. We have been speaking with Mike Wilson, chief US equity strategist and chief investment officer of Morgan Stanley. If you enjoy this conversation, check out any of the five hundred or so we've done over the past ten years. You can find those at iTunes, Spotify, YouTube, wherever you

I'm Barry Rayhelts.

You've been listening to Masters in Business on Bloomberg Radio.