Stocks Stare Down a 'Low Bar'

with us to take his place. This week on the show, though second quarter earning season has officially started, we'll walk through how it's shaping up so far and the Trump administration keeps mentioning the idea of dollar devaluation, Could the US actually intervene and what would that look like? And of course we'll close out the episode with our very own tradition, the craziest thing I ever saw in markets this week. But thankfully we have some great guests to

join us this week. First, we have Evan Brown. He is the head of multi assets Strategy at UBS Asset Management and he was also an associate at the New York Federal Reserve back in oh six to oh nine. So that means you're gonna tell us exactly what's going to happen on U. That's right. I know I can read J pals. Yeah, no problem at all. And then we also have Lennan new In. Thankfully she covers finance and Wall Street for Bloomberg News, so she's here in

a very busy week that she had. That's right. And in my past life I was in markets geek too, so she can play in and everything dollar devaluation as well. Evan, I do want to start with you. I know we are not very far along in the earning season at all, very early days, but we came into it very low bar. From what we've seen so far. What can we actually

take away from it? So we've mainly seen earnings come out for for the banks, and I actually think the news on that front talking about the big banks focused on the consumer businesses. It's been recentably good um, seeing consumer loan growth, business loan growth, The economy generally looks decent um and the guidance has been decent. So, like you said, it is early days, but a low bar,

and and right now earnings are coming in. Okay. Bloomberg is a story up right now saying that banks are undoubtedly the hugest Wall Street banks, They mean are having their worst quarter in some like a decade or something for trading. Is that meaningful to anyone but a bunch of insanely rich New Yorkers. Well it's not. Uh. I think it's more comments of the challenging environment for markets and the lack of volatility and the lack of trends

that we're seeing across markets. Just people are not trading that much and conviction is low, especially when you have the trade tensions and the Lake. So um, that's more of a specific comment on how the markets have been as opposed to how the economy. Well, why is that true? Though the market I've noticed or doing rather well this year? Up we're like halfway through the year. What's the problem. Yeah,

it's just uh, it's it's too easy. No, it's um when when every asset goes up and there's not a lot of differentiation and and uh, you're not getting kind of also the same kind of conviction. Like just as as as much as markets are going up, we're seeing outflows from investors and a lot of what's being griven as corporate buybacks in the Lake and so the client flow that you would see on these trading desks has

just not been that active. Come in here, because I know you've been in very early every single day this week ahead of each of the big bank earning releases. Yes, I have what you sound so happy about that. What have been the big standouts, whether that is a company or a certain trend, whatever that may be. So Evan summed it up, but it's basically main street good trading bad. Um. So we've seen that the big main street banks, the ones that have a big presence and then sumer side

of the market have done really well. Um. The Bank of America, the bank that I cover, reach record profits for five quarters in a row. Um. So generally banks that have a big consumer facing business are doing extremely well. The question is when that's going to turn around, when the guidance is going to roll over. Um. You know, we did hear some warnings about that this week throughout the consumer banks, so JP Morgan whilst Fargo City, But

for the time being they're doing pretty well. One area that has been a little bit softer has been net interest income net interest margins. JP Diamond came out and basically described it as blowing in the way. You can't know which way it's going to go right, well, it's blowing against them right now, right right. So when you actually look at this unit, this entry into the bank's balance sheets, how big of an example, how big of

an effect has it actually been. It's their main revenue driver, so it's very, very important, and Jamie Diamond is kind of diminishing it's importance. But at the same time, it's a key and put people are looking at. And again we're gonna have to bring it all back to j Powell because if rates are cut on July thirty one, and that's going to really squeeze those margins for banks. So they're watching that very closely, and analysts ask them about this multiple times on every call this week, so

it's a huge focus. How does the whole calculus work. I mean, I get that the profitability of the loans goes down, doesn't the volume go up potentially or at least to sustained because the lower rates keep the economy potentially potentially, And they did make this point as well, which is that you know, the even if they're squeezed on one side, potentially act activity in the economy goes up elsewhere. But I think generally it's not seen as

a good thing. Interest rates are the input here, and that brings us to the FED over at EUB seven. What is your guys take on what's going to happen at the end of the month that we're gonna get a twenty basis point cut fifty basis points are nothing at all. I think we will get a cut. That seems quite clear after last week's uh Ja Palace testimony where he essentially focus st on every potential negative thing and downplay at anything positive going on in the economy,

and so he wants to cut. There will be a cut. So, as you say, the question is between twenty basis points and fifty basis points, And to be honest, we're really not sure at this point. It seems that there there are arguments for doing fifty basis points. If you are concerned about the economy, why not uh do it in one go and and kind of shock the market and and uh um try to steep in the yield curve. That's that's something that is being discussed at the FED

and markets in general. Um. On the other hand, you do have other members of the FED who do don't think there's a case for a ray cut. At all. Um, we're we're we're hearing from a few names, uh Kaplan and Boss Stitch and in a few of the regional FED presidents. And so it's gonna have to be a consensus building exercise. And and usually the the the the chair is able to to get their their way. Um. But but it is notable that you you do have people who just don't even think a cut is necessary

on the FED. Right now, I can sort of see where they're coming from. I mean, you can you can easily form form arguments on on both sides of the on both sides of the art. Um. One thing that somebody mentioned to me today, I don't even know how legitimate this is, but his point was that what they

don't want to be what they want to avoid. Ultimately, it's not a recession they want to avoid, seeming like they were Ben bernankey, like they were sort of fiddling as the economy fell into the UH into a hole. And only, you know, six months later, did anyone realize doesn't have any residents. I think that that certainly this

is a risk management cut, right. It's a tremendous uncertainty we know about about trade tensions and so they acknowledge that maybe the economy doesn't look so bad right now, but just in case, let's air on the side of being a little easier, and uh, you know, we're like, we can do that because inflation is relatively low. John Williams, New York Fed President, he kind of made his voice

known this week as well. He put out a speech on Thursday and it was called Living Life near the zero lower Bound, and my inbox had been flooded with analysts and commentary basically saying that now John Williams is setting the stage for a rate cut. This is huge because he has a lot of influence on the board as well. Lynnon coming back to you, if we get a fifty basis point rate cut or even twenty five, say,

is that actually good or bad for the banks? I've heard some people make the case, alright, you have lower interest rates, that's bad for the banks. But at the same time, theoretically you could see the yield curve steep in because on the short end you'll have rates go down, and then on the long end you could potentially hopefully is the inflation pick up a bit? I think generally it's being read as a bad thing for banks, But

again these implications are lumpy. A lot of the banks on the earnings calls this week did mention, Okay, if we get an x basis point cut, this is how much it will affect our new So from a pure numbers perspective, that is a downside. However, the banks were also talking about the fact that clients have been on the sidelines. We heard sidelines like million times this week

because people are unsure about the interest rate environment. They're unsure about how much the FED is going to cut, you know, if at all, and so they've been waiting for that certainty. So perhaps when certainty comes and when the Fed makes it more clear what they're gonna do, clients will start to reposition their portfolios and we might see some of that activity that's been waiting on the sidelines come back into the game. Is things like credit

quality and stuff like that. Does that is that a factor for banks at all at this point or is they just just it's just rock solid, it's pristine, it's wonderful. Right now, no one has said anything bad about credit quality this week. In fact, Bank of America actually made fewer provisions for loan losses this quarter, so right now it's just looking pretty good. Another thing that could potentially

gave cover for more rate cuts. You love to hear pristine than when it comes to credit quality from Ladan Evan. I know over at U b S, you guys brought down your recommendation, brought down your rating on US equities to neutral. What's really the reasoning behind this? Is it just the fact that we've seen such a crazy gain already this year and you might as well wait and see what happens. So we took our exposure to equities down mainly because we just think a lot of the

good news is in the price we've we've seen. It's not so much that we've had such a great year of equities, it's that the year and equities has all been driven by a multiple expansion as opposed to expectations of earnings rising. And so a lot of that is based on a more devish fed and we think that's in large part priced in at this point. Uh And and we think that, you know, the global environment is

still a little bit murky. We we do. And we came out of the G twenty, and there was euphoria out of the out of the G twenty that we we didn't get fresh teriffs. But when you look around, not much has has changed. I mean, maybe there's a cease fire, but uh, there doesn't seem to be at this point clear signs of dialogue or any kind of movement towards towards any kind of deal at this point. And so I think there's some downside risk to to

business investment. Uh and and UH still China, Europe, some of the data is a little bit a little bit murky. So UM, in general equities, we've we've taken down a little bit, having been overweight for most of this year. It's true that we're up a ton in two thousand nineteen. I saw someone else saying a couple of days ago that if you sort of annualize it over the last

two years, it's not that huge Martin. We're basically about where we were, well maybe a little few percentage point above where we were at the beginning of two thousand and eighteen. Isn't that strange given that we just had the biggest tax cut in the history of America. I mean, you would think that earnings would have driven something a

little bit more significant than that by now. So it's a great question I think what the point is is that the tax cut, which took effect in two thousand eighteen, really got priced into markets in two thousand seventeen, such that you you come into the start of two thousand eighteen and it's basically priced in at that point, and then President Trump starts the trade wars, right and so uh Ever, since the trade wars started, we've basically been flat in the smp um. You know, maybe a little

bit higher, but but that gives some contact. It's interesting what the turn of the year does to people's opinion of the market. Everyone's walking around like we're having this drake energy better than here, and we're not that far above where we began in the beginning of what fourth quarters. You go from one government policy, though the tax plan, to another, and that is potentially currency manipulation at this point.

President Chump tweeted earlier this month about Europe and China how they have been manipulating their currency and saying that the US should match it, and Evan, I know you've been looking a lot into this. Is this even possible if the US were to come in and manipulate the dollar, what would that actually look like? Well, manipulate as a strong word, I think someone else's words when I just use the President can authorize the Treasury to intervene in

foreign exchange markets. It's a Treasury department that does own foreign exchange policy. And if you add up UH dollar liquidity SDRs which can be converted into dollars, and then for an exchange reserves that can be swapped into dollars, it's about billion dollars worth of mm oh. They have to intervene in foreign exchange markets, and then the treasure the FED actually has the same amount, and traditionally on

on its own balance sheet, the SOMMA balance sheet. Traditionally the Treasury and the Fed have acted in concert to intervene. The big question right now is well, if the Treasury does decide to intervene, will the Fed necessarily follow Because typically to justify intervention, it's it's based on disorderly markets, and it's hard to argue that FX is disorderly at this point. In fact, it's barely moving, so calm, everyone's

complaining about how common actually is. So if somehow the Treasury Department did decide that they were going to move on this, and in a hypothetical scenario in a hypothetical world, the FEDS said, okay, we'll match it. Does this pose any risks? I mean, what would be the fallout from this?

I do think markets would initially be unsettled. Um, you know, we've had a long time, about twenty five years of a strong dollar policy, or at least a las fair dollar policy, and then all of a sudden that's changing, and that will shake markets a bit. I do think that once the dust settles, maybe a slightly weaker dollar, it's gonna be good for US equities, it's gonna be

good for emerging markets, and and you go from there. Um, what I think would be really interesting, and something we're talking about, is if there's not just intervention, which there's more or less two hundred billion of AMMO, which is decent but but not huge given the size of foreign exchange markets five trillion dollars exchange during during a given day.

But if the Treasury starts moving in a direction of a strategic recalibration of its reserves, if they say, hey, we've only got forty billion dollars worth of foreign exchange reserves and Europe has three fifty billion dollars in Japan has over a trillion dollars. We should have more foreign

exchange reserves. We're gonna make that argument. It's only fair, it's only it makes sense to modernize our our for an for an exchange portfolio, and that sends a very powerful signal to the market that that the Treasury is looking to UH to weaken the dollar over the medium term. Is this a thing that you actually take into account the idea that this could be possible going forwards when you try to come up with the target for the dollar and other currencies. I think what you have to

do is is probability weighted? So is it our base case that there's going to be intervention? No, we think ultimately probably UH Secretary Minution and others are successful and advising the President not to to move in that in that direction. But I would say there's given that President Trump has been tweeting about this, given that there was a report that he had actually tasked AIDS to look into how to weaken the dollar, we have to take

it seriously. So maybe there's a twenty risk of it of it happening, and so we have to embed that into our our our views and way that when we consider going long dollars and in an FX portfolio. Bloomberg has had some reports out saying that behind the scenes, when President Trump has been interviewing potential FED candidates, but he's been asking them about what they think about the dollar as well. So that's pretty interesting. But even besides,

you put manipulation that strong word aside, intervention aside. Is the path of least resistance still down for the dollar? It seems like people have been talking about that for a while, but now we're in this holding pattern. Yes, we think so, we think. We think it's it's not just based on potential intervention, it's based on the US economy catching down to to the rest of the world. Right.

We remember we had that big fiscal stimulus which is really rolling off as we speak right now, and the rest of the world is is hanging in US economy decelerating FED cutting over time that should lead to to a week er dollar. But you guys are positive on European equities, correct, We we actually we yes, we we like European equities. Um, we think is just too much negativity on Europe. You're the only person I've heard was

actually Bullis on European thoughts. Yeah, I mean, any anything you read about Europe, it's always very negative about the economy and and and the outlook. And I don't mean to downplay there's plenty of structural and political issues that that always seemed to come up in Europe. But when you look at the economic data, it's just not that bad. You know, the consumer has held in well. You would have expected investment to take a much bigger hit given

the trade tensions, and investments has held up well too. So, um, we think a lot of the bad news is in the price and the European economy is actually in reasonably good shape and you can see some outperformance there. They should be benefiting from some stimulus, one would argue, it seems like it seems like they actually pull that off

fairly well over there at the moment. Yea, So we've got likely some monetary stimulus coming from the e C b uh, and we have a little bit of fiscal stimulus happening, and in Europe at least not fiscal restraints. You know, for the first time in a while, Italy, France expanding fiscal and even Germany doing a little bit uh here. So, so there is some policy support there in Europe. As well. With that said, Chris, uh, you

know what time it is? Though in the podcast, I believe I do, but remind me what we call it the craziest thing I ever saw in markets this week. I'm so excited taking Mike always brings it. So I really hope that you're gonna step up to Matt. I would have to bring anything. Like we said, every week we reach out on Twitter, we ask around see what people are noticing. So I'll start with a couple of the things that we have seen out in the Twitter sphere.

I'll say, this isn't breaking the rules. Bloomer's own Dave Wilson, he's a stock market columnists, very frequent person who appears on radio on TV. He tweeted it and he said, maybe I'm not eligible, but I said, there's no rules here. It's the crazy this thing. Iri was on markets this week, So he said, trucking stocks rise one day because JB. Hunt's results go over well, and then railroad shares decline the next day because cs x's figures are disappointing. That's

some contrast is supposed to do when that happen? What are you supposed to do? Normally? Such a license to print money down theory, Evan, when it comes to you guys, how you guys actually go about evaluating the economy. How much do you guys actually take into account earnings reports from some of these big transport names. We definitely look at them, and we look at the certainly look at

the guidance. And you know, one thing in particular that we like to do is we're using natural language processing to to dive into the qualitative comments of all these earnings reports, and so we can we can really detect and see how the language is is shifting, and that in many ways can be actually more useful because it's more forward looking than the than the backward looking earnings reports. So it's a little bit early for us to make

a strong judge tamens right now on that. But but that's what we'll be doing over the course of this earning season alright, Lenan, I think you're up. So initially I was going to talk about the dollar and the prospects of dollar intervention, but we have covered that that that is actually something crazy that started last August with the note by Michael Thoroli from JP Morgan and it made a big splash at the time because everyone thought this is crazy town. It's now part of the mainstream

lexicon and part of people's thinking. Obviously I haven't looking into it and everyone is thinking about it, so that's wild. But secondly, because we've already discussed that, I wanted to raise a report that our colleague Natasha Doff in London wrote about, which was intelligent dictators are more attractive to

foreign investors. So this this is a report that basically says that dictators or authoritarian rulers who are well educated, who maybe worked in business, are viewed favorably by investors. I guess because they'll kind of keep things on and even keel. Things are calm, Yeah, people are happy, yeah,

which we've seen in markets. Sometimes there are people in certain regimes, you know, maybe Evan can cite something who are um you know, maybe you'r you don't agree with them in terms of their politics, but because they have have a strong hand, it keeps the nation fairly stable, means that you can invest there. Who knew. Maybe it's just come across well on TV. It almost doesn't matter how unbelievably evil you are. At this point, unbelievably evil

you are. Christy got uh so this isn't that weird. But there was a story in a rival publication pointing out that right now the SMP is a couple points away, a couple of percentage points away from doubling from its high of the last Bowl market. So that's October of two thousand seven. So in other words, if you bought stocks at absolutely the worst time you could pick with hindsight over the last twenty years, you're now up about

nine annualized. So it's kind of a stock stock journalists geek out because this is what happens at all virtually any longer horizon that you get to about nine eventually when you even it all out, except for one period, which is this is really interesting. If you bought at the top of the Internet bubble, if you made the mistake of buying in March of two thousand, your annualize

gain is five percent at this point. It's like one of the big anomalies of that entire series going back a hundred years, that that long of a period would have that poor return. And just as we've discussed sendlessly or I have basically forced everyone to discuss our team, markets go up, Yeah, markets go up constantly, but the dot com bubble is really the big artifact of the stock market over the last half century. Everything, Evan, I

think that means it's your turn. So the craziest thing that I've seen this week Thursday morning, Treasury Secretary Minution coming in and saying that the dollar policy of the United States is not going to be changed as of now. He did not have to say that, and he said even that's something we could consider in the future. All things that that did not need to be said, but

he went ahead and said them. And words matter, and central bankers, sovereign wealth funds around the world that that are using uh, the dollar as as the main store of value and reserve currency. Listening to that, that's really really stunning. I do think there has to be some risk premier placed in the dollar, given that US dollar policy may be changed. Even Lenna are really on the

same wavelength here, currency geeks. When I say he said no, but it was really it is stunning, And I think that's um something that really was very very very much of an outside chance. And even when I was reporting on it last summer, everyone was like, this is crazy. But now we're actually having to look at it and now everyone is looking at it. So it's um, it's a really spectacular change. See what happens in the next six months here? Who knows? So Evan and you and

Lenon are clearly having a connection. Here. While at a connection with a Twitter follower of the podcast this week and he tweeted his handles J D scotty d Y, he said, in a word, Neuralink. Do you guys know what this is? So it's one of Elon Musk's startups. He is very heavily invested in it and this company, Neuralink, they're now saying that they are able to do brain surgery and they're approaching the f d A to see if they can go in and get approval to do

surgery on human beings as soon as next year. Now, what they do and what they're hoping to do in the future is they drill these really really tiny holes in your skull, four holes, and then they put these extremely small wires that they call threads into your brain that have electrodes. And the idea is that they're supposed to admit these neurons so that you can communicate with

the computer without Africa actually having to say anything. All you have to do is think so you can think, all right, I want to send this text message, I want to send this email and it will go. And they hope that in the future maybe telepathy will be a thing. You can read other people's thoughts, and you can also download languages into your brain, and on and

on and on. It's pretty crazy cats right now. Supposedly they've been doing this on rats, and there were rumors that they were doing it on primates, and supposedly Elon must come out and said, yeah, I'm addressing the quote unquote monkey in the room. There's a monkey that's communicated with the computer. This does refresh my memory. And apparently it's like the same way that you would mount a flat panel TV to a wall, is the way to stick wires into the brain. I guess it sounds like

the same thing. Pretty easy, although I would happily volunteered for it. At this point's been going we're going to the clinical trial next year if they get approve of If they do, that would be um pretty crazy. But I had never heard something like that, So there we go. With that said, though, Evan Brown, Lyn and new and thank you so much for coming on, and Chris Angie, thanks so much for stepping into film Mike's shoes. Thank you,

Thanks What Goes Up. We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us. And you can find us on Twitter. Follow me at at Sara Pontzack, Mike is at Reaganonymous, Chris nag is at Chris nag One, and Lenan Newen is at Lenan T. Newan. You can also follow Bloomberg Podcasts at at Podcasts. What

Goes Up is produced by toporh Foreheads. The head of Bloomberg Podcasts is Francesca Levi. Thanks for listening. See you next time, bo