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Bloomberg terminal and the Bloomberg

Business app, Mike Wilson and Morgan

Stanley writing, "Falling energy prices,

peaking tariff inflation, and contained

services keep the Fed on hold rather

than hiking this year. Lower real rates

should support equities and further fuel

the broadening trade." I'm pleased to

say that Mike joins us around the table

for the next hour. He joins us for more.

Mike, good morning. Good to see you.

>> Good morning. Let's just start with the

stability we're seeing in the rates

market and how important that is to set

the stage for what you're anticipating

in the next few months.

>> Yeah, I mean I think you were saying it

earlier. I was listening to the show. I

mean, there's somebody expecting a hike.

There's someone expecting a cut and

we're on hold. And this is I think what

we got to get used to is that with the

new chair probably not giving as much

guidance. He's going to allow the market

to kind of figure it out on its own and

have these different different views.

We're in that adjustment period now and

we and I think that's one of the reasons

why the market's been a little choppy or

even correcting in the last month or so

is we're getting used to this new regime

which is going to be higher volatility

and potentially the bond market. But

over time I think what what's going to

end up happening is the market's going

to settle down. It's going to it's

actually more ex more estimates a wider

dispersion of estimates actually leads

to lower volatility in the pricing over

time but we're in that adjustment

period. So we think rates are lower

ultimately uh particularly at the back

end and oh by the way we've we've talked

about this on the show many times new

Treasury secretary you know new Fed

chair this kind of new Fed Treasury

accord to really anchor the back end.

That's what they're focused on. You got

to get the back end down or at least

anchored because you have so much debt

that you have to basically finance.

>> Do you think in the meantime we're

confusing a reduction in guidance with

an increase in hawkishness just in the

meantime?

>> Yeah, I think that's right and and and

and market's pricing that now. So that's

the good news is that we've already had

that adjustment and that adjustment

started 4 months ago, right? This is why

precious metals have traded really

poorly. You know, the day that wars was

announced as a nominee, the gold market

peaked and that that was a sign the

dollar has been stronger. So once again,

the market has really gotten ahead of

this.

>> So rates have reset. We've come down

from around 4.2% to 4.1. There's a

belief this morning at least we've

removed the urgency to hike as soon as

July. So we can put that story to bed.

crude decline, massive reset in crude

from triple digits down to the 60s on

WTI's. Does that open the door within

the equity market and let's talk about

the stock market exclusively. Does that

open the door to the broadening trade

again?

>> Yeah, that's that's our call basically

is that that was happening at the

beginning of the year. Then we had

Venezuela and then Iran. By the way, the

the market priced Iran before the

invasion even happened or the attacks

happened because because once again, it

was pretty well signaled and and so

that's when the broadening trade

stopped. the the bronning trade

literally stopped the day that the

attacks happened and we had the big

spike in oil and then the pricing of the

Fed to hike rates since ear I say miday

which is when we reiterate the broading

call. We had a different view than most.

We thought oil prices would come down

and that has allowed now Fed pricing to

sort of stabilize and that has allowed

the broading trade to to re to reignite.

>> Small caps have performed nicely just

had a massive quarter up by more than

20% on the Russell. We've seen the

broadening trade speak to the

performance we've seen in the equal

weight on the S&P 500 as well. Let's

talk about the MAX 7 which increasingly

was called the LAX 7. You've got a note

out this morning talking about maybe the

money going back into the hyperscalers.

Just walk us through how you're thinking

about what's happened in tech and that

divergence between the big spending

companies and the beneficiaries of all

that spending and the divergence that's

what really widened in the last few

months. Yeah, I mean there's a symbiotic

relationship between the spenders and

the beneficiaries and typically they

trade sort of in lock step and a couple

things I we've been writing about for

the last several months. Number one,

capex to sales that particular factor

has been straight up since the big

beautiful bill was passed, right? That

that basically uh the government's

incenting businesses to spend money

today rather than later. And so that

capex of sales factor has been driving a

lot of stocks higher. That looks like

it's peaking now. And by the way, the

hyperscaler stocks started to trade

poorly about a month and a half ago and

into this idea. And but that that's not

sustainable. You can't have the spender

stocks trading poorly and the

beneficiary stocks continuing to go

straight up. And now what we saw last

week, you know, Meta announced that

perhaps they're going to sell some

excess capacity, maybe turn into a

provider of of capacity. That is just a

reason for these things to take a break.

Also peak rate of change on revision

breath, right? the the memory stocks the

revisions have been spectacular but

there's they can only go so high so all

that's kind of happening at the same

time and I expect the hyperscalers now

to stabilize that's what's going on the

last couple of weeks and the

semiconductor stocks are going to are

going to correct that's a good that's a

good development that doesn't mean the

capex cycle is over but that ebbing and

flowing between the two is a natural

kind of governing factor because you

can't have this divergence continue it's

unstable

>> your words take a break that's

interesting some people have called it a

narrative shift for the overall trade

and maybe a shift in spending too. Why

is it one and not the other?

>> Well, we don't know for sure, but we've

had three of these already, John. So,

since Chad GPT was announced in November

of 22, we've had three of these sort of

mini cycles within the broader

structural capex cycle, which is that

the market starts to question, oh, the

return on capital isn't good enough to

support this kind of capex. What happens

then? The stocks trade poorly and then

the CEOs of those companies come out and

say, well, you know, maybe we won't

spend as aggressively. and then it es

the other way. And so that's that's the

story. That's the dance back and forth.

Now there is going to be a period there

is going to be a time we don't know when

it's going to happen yet where the the

capback cycle will exhaust itself and we

will have you know we've talked about

this that there is going to be

malinvestment here. We don't think that

that spending cycle is over because they

just started raising the capital in the

credit market. So they're going to spend

the capital. Okay. So but we can have

these many cycles within in the

structural bull market of capital. I

think as you know though, forget the

spending that's not yet happened. It's

the intentions that matter and a

deceleration in capex intentions from

here. How do you think this market is

going to internalize the prospect of

that in the coming months?

>> Well, it's doing it right now. So, we

talk about as a peak rate of change or

you know trough rate of change, second

derivative growth and that's exactly

what's going on. There's two things

we're focused on. Uh earnings revision

breath for the semicount stocks

themselves are like 75%. That's about as

high as it goes. We've documented that.

So that's going to roll over. That

doesn't mean it goes negative, but the

deceleration on that can cause those

stocks to correct. And then of course

the hyperscalers will benefit if the

market perceives these companies as

being somewhat capex disciplined that

they're not going to do willy-nilly

spending in a way where free cash flow,

you know, goes to zero or negative. And

and by the way, free cash flow

expectations for some of those companies

are going towards zero. That's why

they've underperformed. So it's just

stance, like I said, back and forth. And

now in the last week and a half, the

hyperscaler, some of the hyperscaler

stocks have started to trade better.

That's a good sign that we're going to

have this little correction. This could

last, you know, four, six, eight weeks,

something like that. And then we'll

probably have the next upcycle for this.

>> These newer names that were in bare

markets, I'm talking about Meta and

Microsoft. Meta had a better week last

week. Chips, you keep using this word

correct. When I hear that, I'm just

thinking, what do you mean by that? How

much is the downside? How big is the

downside for some of these chip names?

>> Well, these are high beta stocks. I

mean, they can correct 30, 40% in a bull

market. No, by the way, just look at the

200 day moving average. That's a that's

probably a really good gauge. These

stocks are so extended relative to those

moving averages. That's how you got to

think about it. Those moving averages

exist for a reason, right? They always

return to the moving averages. Does it

happen in a violent way or does it

happen kind of gradually over time?

We'll have to wait and see. But yeah,

30% correction in these stocks is I mean

well within possibility. In fact, some

of them already have corrected 30%.

>> You can have a 30% correction in chips.

Just bear with me here. And you can

still see the index move up and to the

right on the S&P 500 even with the

massive waiting they have. S&P

but I mean that's part of our call too

is that we think this rotation is

happening in a downtape.

>> Okay.

>> Unlike the correction we saw in the

precious metal stocks in January because

they're such a small part of the index.

Energy stocks had a big correction after

having a great run in in January and

February. Now the market traded off a

little bit because of the war itself.

But what I'm so I agree with what you're

saying or your premise or your question,

which is since these stocks are such a

big part of the index, it's going to be

really hard for the index to make any

upward progress until this rotation has

sort of happened.

>> This is a summer story for you.

>> Oh, yeah. This I don't I mean, we're not

bearish on the year end. We're we're

we're still 8,000 plus for year end. And

we've had that call for quite a while

based on the earning story. So that

earning story is very much intact. In

fact, the fact that we're rotating now

to some of these other areas almost

confirms the thesis we've had all year,

which is this is not just a tech story.

That's a great story. But the broadening

story is the story that I think people

have really underestimated the rolling

recession from a year ago. This

operating leverage story, which I think

is still very underappreciated.

>> Do you think the banks can start working

now too?

>> Well, they have been. I mean, the the

the money center banks and the capital

markets banks related have been

>> your stock. Absolutely. Goldman stocks

fantastic. I'm talking about the others

>> the regionals and so they've started to

perform and that's been an area we've

been highlighting. Now the yield curve

is flattening still or you know is

having trouble kind of reepening. So I

think that group could pause a bit. We

took that off of our list of favorites

for the for the broadening trade this

week. But ultimately between now and

year end we think we do think the banks

are going to do quite well because this

is a strategy of the Treasury and the

Fed is they want more lending going

through the traditional lending sector.

So while the York curve is flattening,

loan growth is accelerating and that's

feeding this whole broadening out story

of the economy. Right? This is a

strategy of the administration. They

want a a privately driven organic

economic expansion and that's what we're

getting. Notwithstanding that maybe the

labor market isn't as robust as some

people were hoping, but that's also then

feeding the earning story, right?

Because you're seeing revenue growth

without a crazy need to hire a bunch of

people. And that's the operating labor

story 101.

Stay with us. More Bloomberg

surveillance coming up after this.

Henry at Trace Vader partners looking

forward to the NATO summit saying it's a

prime opportunity to direct attention

away from the war and the energy

fertilizer price spike it has created.

So investors should be prepared for a

flurry of announcements. Henrietta joins

us now for more. Henrietta, welcome.

What kind of announcements are you

looking for?

>> Well, as you mentioned with Tyler, I

think the idea of a joint defense effort

with Germany is exactly what the doctor

ordered. You know, the president is

really looking to deflect away from what

is happening in the strait. And there

are so many issues, not least of which

is the toll that still hasn't been

agreed to and which NATO nations have a

real problem with. So, I expect them to

talk about pretty much anything other

than that throughout the next two days.

Um, the other piece would obviously be

Russia and Ukraine and the discussion

there as the United States Congress

provides substantial funding to not just

Ukraine in their various appropriations

bills, but also to the neighboring

regions, Latvia, Lithuania, and the

Baltic region as a whole. And as you

were mentioning before, trying to ensure

that we keep troops in the region as

well in Poland and elsewhere across NATO

nations.

>> Henry of the toll. Let's talk about it.

I get the Europeans and others aren't

happy about it, but right now it feels

like that's the price of admission to

get energy moving again. Is there

anything they can do about it?

>> Yeah, that's exactly it. The result of

this war is that Iran now has control of

the street. You see it with the U-turns

of tankers happening throughout the

weekend and on a daily basis as people

deal with the general uncertainty of

where these 80 mines are in the region.

So, Iran has the ability here and is

using different countries as an example

of how to set up a toll. Call it a

climate assessment, call it an

environmental fee, whatever you want to

call it, you're normalizing relations

with the IRGC. And this is in many of

the NATO nations uh opinions. I've heard

from Canada, for example, directly and

France directly, simply untenable. They

don't want to work with a state sponsor

of terrorism. Um, and I would also point

out that Treasury Secretary Bessant has

created waiverss for all these

sanctions, but those are only going to

hold as long as the administration

decides that they will. They've already

reversed that several times since the

start of the war and they don't have a

lot of comfort from banks or insurers or

NATO nations about what the policy is

going to be in the future. So this is

going to take a while to unfurl probably

much longer than the August 20th

deadline.

>> Henry Heights Mike Wilson. I had a

question with respect to just how the

world may get around the the strait

itself in the sense that what this war

has highlighted is how crazy it is that

we have this choke point to begin with

and how fast do you think the the world

itself will start to migrate towards

perhaps drilling for resources elsewhere

or building alternative ways to get the

oil out of the region through pipelines

etc. How fast can that happen and will

this be talked about over the weekend?

>> Yeah, perfect point Mike. I mean, the

way to think about this is that it was

so obvious that going to war with Iran

would result in some sort of closure of

the straight. No administration has done

it before. Very um transparent, very

understood. This was a potential choke

point. We have many of them around the

world. Whether it's in the Red Sea, uh

the Black Sea, the Southeast Asian uh

areas, there are problems like this all

around the world. So you're going to see

now a scramble to try to create

alternatives to whatever choke point

there might be in the entire world. And

what I think uh you know for investor

purposes what this means and

particularly for the Federal Reserve

chairman as they consider inflation is

uh permanently higher insurance risk

permanently higher costs of doing this

shipping higher tanker rates and those

are all things that we're seeing across

the board. So whatever level this

settles at is almost guaranteed to be

higher than it was before the president

made the decision on February 28th to

start the bombing.

>> And what about Taiwan? Is that is that

something that people are still talking

about in the in the mainstream? It seems

like that's kind of taken a back seat.

>> Yeah, absolutely. Great point. So Taiwan

has taken a backseat publicly, but in DC

it's still paramount. you have a pretty

substantial bipartisan um focus group as

a stand not a standing committee but a

select committee on China relations that

focuses directly on Taiwan and I would

say that as you look at BIS and what

they're doing with export control

restrictions they're very focused on

Taiwan members of Congress are very

focused on Taiwan so it may not be front

and center for this administration and

there's a lot of um questioning of how

the president's allegiances towards

Taiwan differ from prior administrations

But I would say Republicans and

Democrats are unified in wanting to

continue to provide protections to

Taiwan, whatever that takes.

Stay with us. More Bloomberg

surveillance coming up after this.

Here's a tape from Neil Data of Renmack

writing, "June's employment report is a

reminder that the economy remains

uneven. Inflation remains too high and

so the threat of hikes is not receding.

Neil joins us now for more. Neil, good

morning.

>> Good morning.

>> It's good to see you in person, buddy.

I'm not going to bury the lead. You are

not impressed with Kevin Walsh, Fed

Chair. Why?

>> Uh, well, I mean, I think he's kind of

blurring the lines between uh the Fed

having a reaction function and forward

guidance. Um, you know, getting rid of

forward guidance is fine. No one needs

to be spoonfed every single meeting in

advance. Uh, that's not what this is

about. But just to say, you know, kind

of swear on the monetary policy Bible

stack and say, you know, I believe in

price stability. I mean, that's fine.

Um, but the question is how you actually

achieve that. And he act and in my

opinion, he hasn't really done much to

tell us how how that will be achieved.

Um, so it's really about how they

respond to data and how that kind of

drives their decision-m process. And we

don't really know much about that which

you know if the market has one view of

it and the Fed obviously has the whip

hand they know more about their own

reaction function in the market. It

could mean that the closer you get to

these meetings

we won't know their reaction function

until it's revealed in which case it

creates some uh some volatility in the

financial markets. I think it's fine so

long as things are stable as guests have

been saying but you know that may not

always be the case. So he's going to

have to tell us eventually. Um, and I

would say sooner rather than later.

>> In the meantime, is the ambiguity

strategic?

>> Do you think it is beneficial?

>> I think for him it is, right? I mean, in

the sense that um I think by failing to

I mean, he's been very vocal about not

wanting to submit dots, give a forecast,

anything like that. But I I think

because the Hawks really are ascendant

on the committee, the the last jobs

number didn't matter one way or the

other. It's really about the inflation

data that's going to break the tie, so

to speak. Um but by not submitting a dot

he absolves himself of having to take

responsibility for

the hawks on the committee you know and

so it's kind of interesting. I mean it's

you know you do see um

some guidance from

people like President Trump um NEC

director Hasset talking about well you

know in his heart of hearts he's

actually doubish but he has these like

sort of people he has to deal with and

so you know I I think it kind of it

absolves him from having to kind of take

responsibility if he's able to say look

I didn't submit something.

>> At the end of the day though don't we

need higher inflation to kind of grow

out of the debt problem? And so he's

talking about rewriting the data sets

that they're going to use to sort of

justify maybe inflation is really only

2.5, but reality is every American knows

it's much higher than that. We've been

going through this song and dance for 10

years. So what's that framework look

like and what is the real target

inflation rate you think to actually

grow out of the debt problem?

>> I don't know, Mike. We'll have a task

force for that.

>> I mean to borrow from our chairman. No,

I I don't look I don't think you can

inflate your way out of this. I mean you

have to grow your way out of it. I

remember back after the financial

crisis, people were making the same

argument. We had to, you know, and what

what what ended up happening? We

essentially grew our way out of it,

right? We had sort of stable growth,

stable inflation, and over time, um, you

know, things kind of evened out in the

bond market. So, yeah, I mean, I don't

think he's leaning into the inflation

piece of it. To the extent he's been

leaning any into anything in terms of

dealing with it, it's the productivity

boom, the AI sort of golden age thesis.

um that's been the lynch pin for um you

know for Worsh I think

>> right so not letting it don't don't kill

the boom as President Trump likes to say

and and so having this obscurity around

what I'm actually looking at gives them

the freedom to maybe not be so reactive

to the data sets

>> well sure um but at the same time by not

laying out a strategy that's the only

thing that people are I mean the vacuum

is ultimately going to be filled by

something and so what's I mean then you

you in a in a in an odd way by trying to

get people off the data. He actually

pushed them towards the data because

they don't actually know what strategy

you you you have.

>> So, what do you think he is in his heart

of hearts?

>> Um, I think he's I mean, I've I've

thought he's hawkish. Uh, and I think

it's almost like a revealed preference.

By not saying anything, you allow the

hawks on the committee to become

ascendant. And so, you

>> and that's what he wants. It's by

design.

>> And you haven't done and you wouldn't

have done that if you didn't at some

level kind of agree with them. you know,

the the the idea that you can, you know,

the the sort of productivity golden age.

If you were thinking about that

honestly, the fact that inflation is

above target to pull a green span would

basically mean to allow productivity to

remain whatever it is to bring inflation

down to target. So, you wouldn't be

advocating for for cuts, which is what

he's doing. Um so but you know generally

generally speaking I think if you didn't

lay out a strategy you allowed the hawks

to fill the the void you wouldn't have

done that had you not believed um or

kind of agreed with them at some level

right

>> base case for you we've got Bank of

America on the one side looking for

three hikes city on the other looking

for something closer to two cuts this

year. That's how wide things are right

now on Wall Street. That's quite a

spread. Where do you fall? Well, I think

if there was going to be a Fed that was

dysfunctional enough to deliver a one

and done, it would be this one under

Kevin Worsh. So, I that's sort of I mean

to me it's sort of why wouldn't you

think the Hawks kind of come back for

more? And and in his and from his from

his seat, I I actually think it makes

sense because you can show that you gave

you gave a hike, you stood up to the

president, you're establishing yourself,

your credibility with the market, and

now we kind of can get past this and

say, "Look, we got the hike." I mean,

almost like the ECB, uh, you kind of,

um, take some of the, uh, the tail out

of the inflation risk, um, and you

maintain your optionality. So, there's a

way for them to perhaps go once without

having the market price in a lot more.

>> And what about balance sheet? because

that's been the real sort of angle on

Wars is he's a balance sheet hawk and

maybe he's less hawkish on rates which

is who knows but do you think it

requires market you know volatility to

get them to increase the R&P for example

or to start doing more liquidity

injection?

>> So I think that like this is one of

these things where um people say things

to get the job to create distinctions

between themselves and the people that

were there before and the balance sheet

is a good example of that. It's kind of

like, you know, hitting Yellen over the

head with how she's dealing with bill

management and then coming in and then

doing literally the same thing. Um, all

of these things are going to be met by

committee. I I think that's, you know,

that's something that people say to

rationalize it, right? Like, oh, he's

not really hawkish. He's just hawkish on

the balance sheet, so he can be doubish

on rates. Like, it doesn't work that way

because the balance sheet is not really

a tool of monetary policy. The only tool

is rates. So I I I don't I don't I don't

put I don't think it's to me it's not a

big a big factor

>> being hawkish on rates though we had

this conversation earlier in the hour.

Has it allowed the longer end of the

yield curve to stabilize and is that

something that both the Treasury and

this Fed would look at and say that's

beneficial. That's the kind of approach

we need right now.

>> Yeah. I mean I think but I mean that

like the first meeting was the most

hawkish meeting that you've had in the

press conference era and we had like

what like a 13 15 basis point rise in

your yield. So, um, you know, talking

helped take some of the risk out of the

back end. Yes, I would agree with that.

>> Do you think he fooled the president?

>> Do you think

>> Do you think he fooled the president in

the interview process?

>> What do you mean? Oh, fooled him. Oh,

fooled him. Um, yeah. I think if there's

a risk, uh, it's that the the president

was duped. Yeah.

>> How's that going to play out if he was

duped?

>> I mean, I think there seems to be like I

don't know. I mean your your colleague

Joe Weisenthal said uh I think you know

maybe um wars hikes and Trump is oddly

chill about it and I don't know it

sounds like he's giving him a lot of

grace at the moment.

>> Depends how close we are to the midterms

if that happens. Right.

>> Uh that's why I say get it out of the

way sooner.

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