Mike Wilson Reveals End of 2024 Outlook

I think what happened in August is really important because that was kind of your warning shot and I think a lot of people have just sort of think oh that was unfortunate you know a couple of weeks and and the reality is we have not made a higher high yet we're making lower highs we're sort of trending down in some key areas you've mentioned so the case is building and it's like the final straw that breaks the camels back you don't know what I don't know what it's going to be but I'm looking at the kind of the all of the evidence and the evidence is continuing to pile up more on the on the negative side of The Ledger then on the positive side of the leder welcome to the onap podcast gami always joined by Danny Moses Danny how are you great guy great to see you typically joined by Dan Nathan but Dan Nathan is in California I'm doxing him no on assignment in California he's what on assignment in California yeah yeah we are also joined On Assignment we'll go with that we're also joined by Mike Wilson the chief us Equity strategist at Morgan Stanley Mike last joined us on June 28th it is a thrill to have him back and it's a perfect time to have him back but before I even say hello to Mike Wilson prior to this podcast you were singing a little John Let It Roll let the market bounce come and save exactly that's where I was going let the market bounce come and save our just did that all right genius last time Mike was here as I mentioned June 28th the S&P 500 was 5500 today Mike's back today's Wednesday the S&P is Danny 5500 5500 let's welcome Mike to the main stage let's welcome Mike to the main stage Mike Wilson how are you I'm doing great guys how are you so the S&P is unchanged nothing's happened no no a lot has happened since then so let's go backwards first because I've listened to some stuff you've done and one of the points youve made a few of the points you made is you think the FED is basically tamed inflation rearview mirror you think there's still some hiccups uh ahead of us but one of the things you really sort of laser focused on and I agree with you I think Danny does as well is what's been going on with currencies specifically the end I want to start there because the move that we saw on August 5th I think was sort of basically precipitated by what happened with the bank of Japan and then the subsequent move in dollar Yen so let's start there and sort of work backwards if that's okay yeah I mean a lot has happened we have it's same thing you look at the index like well nothing's happened I mean a ton has happened and I want to go back to early July actually um that's when we got the first soft CPI number and that's when the yin bottomed meaning you know 165 was the bottom relative to the dollar and that was the beginning of this sort of unwind of this idea the Fed was actually probably behind the curve okay inflation was coming down so we we wrote about this at the time we said be careful what you wish for I mean inflation coming down that quickly is another sign that demand is weak it's another sign that growth is poor and and look I mean the growth surprises have been on the downside now really since April I mean it's been and it's been a precipitous decline in kind of economic surprises um and now inflation is disappointing on the downside so let's go back to early July I think we were on another program we we said there'd be a 10% correction before the election lo and behold it started the next day we got a 10% correction whatever I think we're still in this period though I think I mean we got it quick but doesn't mean it's over I think we're in this period between now and basically the election which includes another earning season another couple payroll reports and the FED kicking off its rate cutting C that's a lot of action where the markets going to remain extremely volatile kind of like today so back to early July we start to sell off um know the Yen starts to basically rally against the dollar some deleveraging going on there then we get what I would call in line to maybe slightly disappointing results from the AI names okay hyperscalers in particular people not that happy with the amount of money they're spending and the return on capital is not particularly impressive so those stocks all kind of rolled over and that has continued by the way those stocks are now well off their highs so the AI kind of theme I think has lost its luster many of our institutional clients have actually divested from that you know theme to some degree then of course we got the events at the end of the month where we had the the negative payroll number um not negative but disappointing payroll number and that was really really a shot uh which then got the the carry trade to really unwind the NK was down 20% sort of top to bottom in a very short period of time and and then everybody kind of went back to you know everything's great you know we that I'm glad that's over and I'm just not in that camp I think it's just beginning I think and and what's beginning is just more acknowledgement that we're closer to the end of the cycle than what perhaps the S&P 500 is saying at 5500 so what has actually happened is the following you talked about currency so currencies right the dollar has been weak against most major currencies now for a couple months and they have not recovered I mean the dollar is still kind of at its lows particularly against the Yen so that has not bounced at all the other markets the other macro markets that I focus on Commodities in the tank okay I mean literally a tank and then of course rates so now two-year yields and 10year yields are probing new lows twoyear yield spread to Fed funds is as wide as it's been in 40 years 190 basis points which is basically the bond market telling the FED explicitly you are behind the curve in a big way meanwhile S&P you know tried to get back to New highs didn't quite get there but we still closer to highs than the lows but internally okay and this is what we focus on internally in the stock market small caps are still nowhere and defensive stocks now are killing it so if you look at some of these low beta defensive stocks I mean they look like I mean they're on a flag pole and that is not a good signs in other words all these markets actually do agree whether it's currency Commodities rates and the internals of the equity Market all agree that growth is the problem and it's probably a bigger problem than what you know the mainstream media is talking about so you made the call last time you were on around that time period the shift from quality growth quality defensive and that's exactly what's happened on top of a 10% correction that's occurred I think you agree that the S&P 500 itself forget about what it's made up of we know the seven to 10 STS carry it is very expensive relative to all the other things you just mentioned so we have two choices here either we get an acceleration of growth in the economy and things kind of don't which I don't believe is going to happen because I think once you come off of this growth like this that we've had it's really hard to turn it around on time right or the opposite happens here and and it's self-fulfilling that at some point the S&P will come in and match what's happening in that piece of the puzzle I know your range is pretty broad 55400 because I think we're all done trying to predict the overall S&P when it's when it's so heavy weighted towards a few names so what are your thoughts here on if you had to pick a direction I think I know the answer and are you still with this quality defensive trade um for the rest of the year here well not about rest of the year but for now we are I mean now what's interesting is and we talked about this uh earlier today and we've written about it which is when you get these kind of really up moves in the quality defensive areas that the safety names and rates are going down what you really got to worry about is when those stocks start going down because then there's no place else to hide and that's what we got today which is the first time we've seen this which is those low beta defensive stocks actually selling off more than the broader Market was when we were we were at our lows and that's akin to the yield curve re steepening so you know we haven't seen the yoker fully rest steepen yet but it's in that motion so yes I think the direction of the overall index is probably back towards 5,000 um and then that's without a hard Landing by the way if we get a hard Landing obviously it's going to be much worse um and then of course the defenses should continue to perform but I'm getting a little bit nervous that that has had its move now and maybe the Market's going to kind of try to barbell it again with some of the mag 7 quality growth and defenses what I'm comfortable saying is that the lowquality stuff right the junk the cyclical and the small cat like that that stuff is your underweight what's interesting you bring it up I mean utilities is measured through the xlu if you know historically it shouldn't trade the way it's been trading over the last five or six months it looks like a Technology stock and that to me is a warning sign but you know you said it earlier and you've said it before what we're seeing is classic late cycle Behavior yet you hear people talk about you know people that I respect by the way to have mid early to mid cycle PR based on you know some of the other things that they're seeing I don't really fully understand that I think they're saying that because we seemingly have been in this late cycle for such a long period of time that I guess it feels like maybe we got through it and are starting a new one it thoughts on that because it's a hard hard not to crack for me at least it is hard and I would say Obviously the co cycle has been different in many many ways um and I think what happened last year I mean this is way I will describe it and people will disagree with this and some people agree which is the reason we avoided a hard Landing last year in my view is because the heavy-handed of government the fiscal spending was you know out of control and they found a way to fund it with the Laton QE programs of reverse repo and and that's great they I mean they basically I give them an A+ for extending the cycle I do I mean they did a good job that that was their goal they did a good job and that has now I think fooled people into thinking that oh we already had the recession that was 22 but that's that's not the case because in 2022 and 23 when we had those big sell-offs never once did the defensives lead never once did 10year yields and two-year yields act the way they're acting now meaning growth was never the problem in 2022 and 23 it was always about rates and the FED still being higher for longer that was compressing multiples this is different this is a very different setup now and this is classically now we are seeing true classic late cycle Behavior to be honest I jumped the gun along with a lot of other people like we got the ray call right and 22 right and part of 23 right because of the rayall and then we probably just jumped the gun a little too far on the the the ice part of the Fire and Ice calls and we've already you know we've admitted that there was a mistake but that doesn't mean that that that end game has been ex that risk of that end game has been extin okay couple things you're spot on you're spot on always but the best thing that happened in the market last year ironically was Silicon Valley Bank I mean we can go back and look does but you know in terms of just you overlay an S&P 500 chart with the Silicon Valley and it lines up really nicely for a miror of reasons but you said something and and you're right they extended the cycle and if that was their goal you give them an A+ but my question to you is should that be the goal because you're just B basically pushing out the inevitable and the EV inevitable winds up being worse than it would have been if you allowed nature to sort of run its course thoughts on that um I mean I think there's two ways to think about this number one if you're if you're a policy maker or you're you know in Washington DC you're always going to try to keep people out out of recession I mean like like it's just not your goal is to always avoid the recession if you can't because weird things happen in a recession now interestingly Neil Casher said this a while ago and I thought it was pretty interesting he said look I'm going around the country and I'm getting feedback from people you know inflation is still killing people and yeah inflation rates are down but the price levels are brutal and when you really think about it a recession is way better for the average person than inflation so it's a it's a really good question for policy makers to think about like should should we just take the recession yes it's terrible for the 5% who get fired but we have programs for them that can help them right get them back on their feet we can do unemployment insurance but you're punishing the other 95% by allowing inflation and levels of prices to stay elevated so it's a really interesting policy question guy I don't know that you're ever going to get people to agree on that but I think there's obviously motivations to keep us out of recession but if you're really looking out for the citizens I would argue recessions are actually not a bad thing 100% And I'm sorry Danny real quick I agree with you and if you think about it they'll look back historians will always look back in time but if what they were doing was successful in terms of keeping us out and extending the cycle then the president's approval rating when it came to the economy would be at historic close to Historic highs instead of historic lows especially against the backdrop of a stock market that's at historic highs so what have they done I mean people feel like it's not great yet they're trying to make it great understanding that the inevitability of the recession is just around the corner I I don't know if that sort of setup makes sense but again in trying to prolong the inevitable people are suffering now and I think they're going to suffer more on the back end of this entire thing you know we don't know if it's going to be better or worse outcome in in the end okay but I mean I think that these things explain sort of how most people's models were got it wrong last year ours included in terms of like this the magnitude of the earnings recession we got the earnings recession correct but it just wasn't as deep as we thought it would be and the and the negative shock of the rate hikes in terms of what that did to the overall economy so we're just always looking for reasons for why things didn't play it the way we think and then that way we can get the next thing right so now what I'm focused on is all this stuff has happened I'm still very laser focused on the data releases particularly labor and I think that's the thing that's really hard to argue now the labor market is absolutely weaker than anybody thought it would be six months ago if you look at the data clearly and not a recession yet but the trend is wrong so if that's the case and you have to be sort of you know rised off a bit in the structure of your portfolio bonds have done really well okay defensive stocks have done really well and that has worked and you know whenever you say things like we recommend things like that to people they get all depressed because you're like well why do you tell me to go into because that's what you're supposed to be doing I it's not I'm not here to depress you I'm here to protect you or help you make money so I think I think that's I think that's what I'm trying to do is just not get too you know laser focused on oh is this the right or the wrong policy but like Fair what's going to happen next no fair enough so it's the stock market is not the economy and vice versa that's really really what you're saying the stuff that I'm seeing I forget the government data the auto delinquency stuff that's rearing its head it's been ticking up for some time but all of a sudden people paid attention to it yesterday we know where credit card debt is we know the low income consumer is starting to get hit here that is a late cycle normal thing that's going to occur in 2006 and 7 and I'll never compare anything to the global financial crisis a great financial crisis whatever people want to call it because people were ignoring a lot of the stuff and I think a lot of the reason they ignore the stuff and I've said this all the time is just human nature a lot of the portfolio managers and people that control money don't deal with those issues they're in New York and Boston they don't see this stuff happening it's not happening to them until it's right in front of their face they're forced to make a decision so here we are and I think you would agree these things don't just bounce back as I said on the first question I had they don't don't turn around on a time they're in motion into a cycle so what is the Tipping Point it's some point that convinces people not on the government data not the jobs data but on an earnings recession data and earnings start to drop prly that whether it's banks that need to be reserved whether it's used car prices that continue to drop what are you looking at to really signal that or you know show people yeah I mean look it's been happening right are sort stock by stock sector by sector I mean like you have companies that report bad results and they get walloped so that means it's not in the stock and I've seen a bunch of those in the last two three four weeks meaning the consumer space or financial Dollar General Dollar same you know so that tells me that the Market's not priced or that news yet now what usually happens is you get some event okay like an svb or a Leman Brothers going bankrupt or 911 or you know covid where it's like it's just so insurmountable the market goes there typically though the market will will start to sniff it all out and it's usually about a month or two ahead of whatever that event is so I I think what happened in August is really important because that was kind of your warning shot and I think a lot of people have just sort of think oh that was unfortunate you know a couple of weeks and and the reality is we have not made a higher high yet we're making lower highs we're sort of trending down in some of key areas you've mentioned so the case is building and it's it's it's like the needle it's like the final straw that breaks the camels back you don't know what I don't know what it's going to be but I'm looking at the kind of the all of the evidence and the evidence is continuing to pile up more on the on the negative side of The Ledger and on the positive side of leisure to your point this has been much more of a stock Pickers Market it has been now for several quarters and the passive investing dominance has never been this dominant going into a potential slowdown or a cycle that we're saying so there in lies the opportunity your job is to not pick individual stocks your job is to pick the sectors and where to overweight underweight there but what do you tell people who take comfort in owning an ETF certainly it can be okay when you have winners and losers potentially in every single aspect of it what are the screens that people should be looking at are running I get the Russell you want you know rates to come down because there's a company that are high in debt cost of Finance is higher but what do you what do you do in that case in terms I me the most important variable right now is quality uh that that's a I mean the late cycle environment and only like you go you balance between quality growth and quality defenses we say quality just to be clear good balance sheet return on Capital right they they they have decent margins you know they some pricing power so these are the variables that typically line up and you know you can look on Google what ever and get a screen of like what goes into those things and then you can screen on some platforms you can screen for and ETF will it'll tell you is this a high quality low quality sort of ETF I wouldn't like flip over your entire portfolio and and and like move everything into quality which you what people should do is just make sure they they understand the risk they have on okay like everybody divested from their bond portfolio over the last you know three years right probably at the worst time they you know nobody owned b like we've had a great rally in bonds over the last year you know so like you know people kind of miss that so anyways my point is is that I think that you know people people's risk tolerances are different you know some people will say I don't really care what the market does I'm in it for the long term I'm I'm a compounder great good for you I mean and and they don't want to pay tax so I think everybody just has to understand the risk the risk they have on it's a late cycle environment Equity risk is greater than you think it is particular valuation high and earnings at a peak late cycle is something to clearly Warren Buffett is looking at as well so that Buffett indicator which we've talked about a number of times went north of 200% I think it's the first time ever if it's not it's probably close to the all-time highs in terms of percentage I think he now has close to $280 billion worth of cash and cash equivalents on the balance sheet they've been pairing down positions in Bank of America and apple maybe that's just a positioning thing but it's clear that there's something going on there he is clearly seeing what you're seeing now The Optimist will say Mike and I'm not trying to get in his head The Optimist will say well wait a second he's basically setting up berser Hathaway for the successor how whoever he or she may be I think we probably know my push back is I don't think that's what you know it's sort of the him and Roth thing he thinks he's going to live forever and I think he plays by the rules whether he's 50 years old or 85 years old he's going to do the same thing because that's what he's done historically so when you see what somebody like that is doing you can acknowledge it and say you know what it's different this time or you can acknowledge it and say maybe he's some sees something and I'm seeing that right now the Market's not sniffing out he's he's the greatest value investor of all time and there's not a lot of value out there uh particularly if you're doing any analysis around like what the earnings growth is projected to be versus what it looks like it could be and and by the way we don't need a hard Landing for stocks to correct another 10 to 15% I mean let's just look at the numbers right so we're between 21 times earnings and those earnings right now are forecast to be 10% growth this year 15% growth next year in an economy that's growing below Trend where inflation is actually decelerating below 2% most likely so somebody needs to explain to me how we're going to get how well we're not so so the question is now you're paying 21 times for earnings that probably got to come down by 5% in a soft Landing that just doesn't that doesn't add up so our our call has been consistently 19 times is sort of the about as much as I'm willing to pay in this environment which is about 10% just on multiples in a soft landing and that assumes no earnings correction so that's 10% down that's your 5,000 and then we'll then we'll revisit it but remember that's fair value that's not cheap Buffett is a guy wants to buy stuff cheaply right so that would be something more like probably 4500 or something lower before he starts getting really interested in you know taking big swings the way that he typically does okay agreed but again people say guy you don't push back so I'm going to push back a little I'll play Devil's Advocate The Optimist the bull will say globally what's going on you're willing to pay more in terms of valuation for the United States because of all the other junk that's in China in Europe and elsewhere so us is deserving of the current multiple it's trading at I don't believe that but that's part of the bull case thoughts on that well I think once again we raised our PE multiple from 17 to 19 17 times is is kind of the more fair value number quite frankly 7 but we said okay we'll give you that premium and we agree with that and by the way that was something that we maybe underestimated two years ago maybe we should trade it 19 times fine but 21 times okay that is in the top death of all history and that doesn't even adjust the earnings which are at Peak in other words the cyclically adjusted price earnings multiple is in the like the fourth or fifth percentile so it's just expensive no matter how you slice it it it's expensive markets can stay expensive for a long time I I I'm not you know I don't have a crystal ball I can't tell you that this is completely unfair but you know you're giving you're giving a lot of credit here for a lot of things earnings over above Trend multiples you know in the top desile late cycle with you know recession risk elevated uh and and you know policy that's behind the curve so I mean there's a lot in your face of all the things you mentioned at the opening that are signaling a Slowdown Energy prices being one of them oil to me is really interesting with all geopolitical noise that's out there oil's still hanging just at or below 70 bucks and it's gone down pretty hard in the last you know 6 weeks or so so energy stocks in general I know they normally fall into whatever whatever early stage late stage whatever they might be it's interesting because the sector's gone through a massive m&a area right and from a capex perspective from a balance sheet perspective they're unlike anything that they've been in quite some time so I'm wondering how do you think about energy stocks here and what is the explanation other than to slow down in China an economic SL I'm pretending here that oil is down where it is at these levels on a relative basis from where it was so energy is a classic late cycle group that typically does good at the very at the very end now it did in the earlier part of this year it had a nice February March April and then it literally peaked in April as we went to the defensive it's not lining up now is my point right well that's the thing so we've kind of cross like there's late cycle and then there's late cycle so we we're just in the we're in the later stages of the late cycle is what that's telling me we had a call with our commodity analyst today our energy analyst and he he was going around the world I mean demand is the problem all over the world it's not just China okay India demand is down us demand is down European demands diesel demand is down and the curve is structured in a way the you know in a way that they're trying to build inventory basically because you can sell product in the future now lock it in so that's telling people I want to buy stuff and then you know sell sell the forward curve so like that's all a sudden that demand is the problem and I think it's in emblematic of a late cycle economy where there's just not like not no pun intended not a lot of gas in the tank you know we're we're we're really going on fumes now in terms of organic demand but that doesn't match up I'm saying the obvious it does not match up to the market levels you're talking about 21 times it just doesn't because that that indicates some type of Landing whether it's hard or soft I'm just saying and I know you're not an energy expert but where the stocks are right now I know you say The Late Late cycle you're not buyers of the energy stocks here at this point no because if you're really I mean if they're telling you well I'm I'd rather own energy than other things that's what I'm asking yeah I mean on a relative basis we're that's why we're overweighted but it's been a bad call because it was cheap we said okay this will hold up better in the in the decline because it's already been wiped out it's just ironic to me that it's going to be deemed quality which I think it will be if we do go into a the so once again I wouldn't be buying like the EMP I'd be buying the the integrated higher quality names because they will hold up better in a in a in a fully late cycle economy that you know has a hard Landing so and eventually that will happen whether it's this year next year or 2026 I mean this isn't going to go on for four more years let's go back to the job market because I think this is more important than the market is is pricing in or talking about my opinion you know somr gets triggered a month or so ago when we printed 4.3% and the unemployment rate CLA Assam walked it back a little bit doesn't necessarily matter people say it's different time different this time given the historically still low levels of the unemployment all the you've heard it all without question to your point the job market is softening I think we can all agree on that this is one of those things though once it starts that sort of escape velocity it doesn't stop fed could cut 50 basis points today and this is in motion for a period of time so thoughts on the importance of the unemployment rate in the job market specifically it's everything for the cycle call it's everything and and to your appointment we've kind of crossed the point of no return on many measures whether it's the S rule there's the mckel rule the josi rule there's like a dozen of these things and they've all sort of been triggered now the explanation for why it's different this time is because of immigration that the denominator is driving the unemployment rate but then of course we found out a few weeks ago that we lost 800,000 jobs and that's another thing that happens in the late cycle economy is these revisions are always on the downside so last month we got a twomon revision of 100 plus thou or I think it was 86,000 jobs which means that the week report in July was actually even weaker so that's a that's a numerator problem right the actual number of jobs being created and then the third thing I throw into the hopper which is goes back to my original argument is that most of the job creation is government related yes whether it's government jobs directly or social services healthcare related jobs state and local employees and the private economy is just flat as a pancake it's not producing it's not you know creating new jobs right now so as far as I can tell the labor market is already topped and it's in motion as you rightly point out and now we're just waiting for when it inflects the other thing that it's worth mentioning and people say again it's a function of this different economy maybe but I think we have historic numbers of people working multiple jobs now in my youth that suggested that people just trying to make ends meet other people say no you're missing the boat that's just the way the labor market is now people can work I'm sure it's some combination of the two but it's never just that simple it's always one dominates the other I think it's because people are hurting and they're forced to do it thoughts on that if any I'll tell you what's different about this cycle from my perspective and you know we get our own opinion about this the first one is what we already talked about which is that it's very government heavy okay this is the most government heavy economy I've ever seen I mean the percentage of growth being produced by the government is you know I think it's 25 30% I mean of growth it might be 50% currently because the private econom is really not growing at all so that's different and the other thing that's different is inflation your your point earlier not the rate of change the price levels which is forcing people to to take on more jobs and kind of make ends meet you know they've spent down their savings they they're using credit cards now to kind of you know buy everyday necessities and we have this sort of K economy okay people who are geared to the government and you have government jobs are fine people who are more geared to the private economy are probably struggling a bit more and and and that that's not sustainable now it has been sustainable and it's probably lasted longer than I would have thought if you'd asked me two years ago but you know it's running on than ice now so we'll see we'll see how it goes but I think the market has a right I want to go back to this one more time the the Market's not ignoring this okay that's that's what's key here no it's I'm glad you mentioned that I should I should I'm mentioning through the lens of the S&P but below the surface there's absolutely damage being so I'm glad you're bringing this up please yeah and and and you know back to Danny's you question earlier I mean the S&P 500 is the biggest safest Lifeboat in the world particularly in a world where people are not that cool with government sovereign debt because of you know the deficits where they are so there are people saying I'm just going to own this high quality asset that has proven itself over time that's the S&P 500 it is a incredible like it is the luxury item of all luxury items and people will take comfort in that so I I can't disparage people for doing that it's not like it's irrational right right you you beat me to my next question which is the debt and the deficit since you were last on we've gone up more than a trillion dollars you approaching a trillion yeah just just another trillion since you were kind of last on here in the point you made earlier the amount of fiscal stimulus has masked a lot of the issues I go back to guys point he made about the savior of Silicon Valley and the btfp or whatever the thing was um at the same time they o raised the debt ceiling to an unlimited amount for a period of time so we're in this kind of period where there's there's all kinds of liquidity right in the market what happens when the market starts to care about that and I think it's starting to be reflected in certain asset classes the dollar obviously being one of them how do you judge that because you know I know it's hard to trade the end of the world but how do you think about that stuff because no matter who wins the election which we're going to get to because we're not gonna we're g obviously we're not going to have you on until after election probably next time but put that together here and and tell me what that looks like so well I mean it looks like what we've got which is is that I mean as long as the machine is rolling right I mean asset assets can still perform now I'm some of your listeners I'm probably are aware of this because you guys talk about all the time but gold that's what I was going has outperformed you has outperformed S&P not only since the you know over over the last you know two years but over the last 20 years if you think it's kind of crazy um Bitcoin doesn't pay a dividend and Bitcoin has done even better so so like the market once again is not dumb the market is is saying okay fine I mean stocks are an inflationary asset and if I'm if I'm GNA be debased or you know depreciated away or inflated Away by government spending as long as it's not a hard like if they keep it going yeah stocks can do fine I think that's where we are but you say that and what if rates start to move up on a term premium perspective that's a whole different ball game oh totally and but we're not there no we're not there but if that happens then the S&P is not a safe place to be and I know you don't have a recommendation on gold I don't believe that I don't know what it's included in Commodities where you because it's not a cyclical commodity as much no we're bull we've been bullish on gold as a firm yeah so as a firm but I'm saying in your in my world too sure yeah I don't I don't have a defined allocation to Gold but I'm you know anybody who talked to me knows it no I I know that but in minors in the in just in the hard asset both silver gold um also the miners uh I'm not a I'm not I'm not going to talk about Bitcoin here um I mean it's a it's also a different asset to me you know it's more of a spec asset it also hasn't had a test of it's a spec asset more than it is a it has proven to your point as a true store value currency I mean I just don't know okay but it has those properties and I think people are buying it for that purpose in less than two months there's going to be a presidential election I'm not asking you to tell me who do you think because it doesn't necessarily matter I think what matters is um regardless of who wins it feels as if they're going to be inflationary pressures for a my of different reasons now I understand that if it's a split government terms of Cong I get all that and that could be best case scenario but thoughts in terms of the market the importance of this election and not the outcome necessarily but the aftermath sure I mean cyclically I'm in a diff disinflationary deflationary Camp because that's where we are in the in the bigger cycle this goes back to our sort of 1940s boom bus cycle and you know that's still on track it just got extended you know the last boom got extended one more little pop here and and so we'll have a cyclical downturn in inflation we're we're in it now I don't know where it bottoms and then there and then the next wave of inflation probably won't be as bad as postco because that was a little extreme but directionally we should make a higher kind of normalized level of inflation I mean so if if inflation is bottoming at a at a higher level this time well then the next top will be somewhere in the range where we were last time and then we'll bottom at so it's a higher high lower or higher low higher high right kind of trend and you know that has to have implications for term premium has to have implications for you know real rates and nominal rates and valuations I mean that's why like 21 times in the context of that is even more doesn't make any sense even more extreme but until proving guilty people you know I think you know uh uh object in motion stays in motion how important is then the AI trade the sector to this entire thing I mean I think you would submit it's and I agree with this it's not going away without question it's it is a generational type of technology or you know we're in this sort of period of time where people look back and say okay that was the we're at the infancy stage but so much of it in my opinion has been pulled forward and priced in thoughts on that yeah well I mean look the AI theme has many facets to it I mean first of all let's talk about what it really is it's just the next um category of of compute right so it's machine learning the next phase it's it's the next generation of cloud computing the real productivity benefits which is what people should be excited about are years away we're not going to have real productivity benefits from this spending until there's a solution that's easily delivered to the average company right so and that's going to be done by the cloud the hyperscalers they're going to have a full Soup To Nuts solution that they can deliver that that Enterprise can turn it on give it to all their employees like email was in the '90s like boom it's easy it's it's it's simple we're just not I mean we're just not there yet we the application layer has to be developed okay the costs have to come down we have to figure out the energy consumption side of this thing okay and and so this is the first leg of it and it's and this is its own little boom bus cycle we've seen two companies that have seemingly are at the Forefront of monetizing that I would say Facebook did a decent job if you read their last quarter and to a certain extent Walmart did a really good job if you read their last quarter X the those two I don't think anybody's figured it out and at a certain point you know with all that spend the Market's going to demand the return on that investment and to your point it's probably sort of years away so what's that Pivot Point when the market says okay you know little to we're going to start to instead of rewarding you for that we're going to start to sort of punish you for that just start happening it happened last quarter as I mentioned earlier the hyperscalers got punished for spending too much over spend getting gouged almost on pricing for some of the compute U that they're paying for and you know not showing any return for that so will that slow them down in the short term they're all saying no but you know I mean it wouldn't be surprised if there's a little payback as you kind of put out and and that's the way investment Cycles go in technology it's usually all in digestion and then back in again for a second wave shifting back economics can you explain to the common person when you say 2% break evens and what that really means because I think you know obviously sure numbers that are put together but what does it tell you right now right so the the break even Market is basically the inflation expectation Market as priced by the market they tra and they're thinly traded people should know that this is not like the treasury market which is extremely liquid it's pretty thin but it's the best gauge we have of what's the Market's expectations about inflation over one years two years five years and 10 years so the 10year break even now is like 210 215 which you know is basically the fed's target so so the expectation of the 10 year yeld where it is versus where inflation expectations are is 2% 2.15% is what's priced into inflation expectations though one in twoe is Fallen you know it's it's Fallen even F at a faster clip so people like the market the market now knows that we're in a disinflationary part of the cycle why because demand has really fallen off Commodities are nowhere which is a big part of this the one area I think where you know inflation is still high is shelter you know shelter inflation is still quite High whether it's rents or home prices or apartment prices so so that the one area and that's one area where the FED is watching but if you actually look at the overall picture you I mean it's hard not to argue that inflation rate of change is at their target I have a real problem with that philosophy though okay just as a as a consumer I'm like okay well great so inflation is back to 2% congratulations problem is most of the things I buy are up 50% so how are we going to resolve that dilemma with that my income is not at 50% or that you know my my cost of living perhaps is even more than 50% because of where I live so there's just there's there's this real disconnect I think between the academic world and the real world and the goods and services component of what you just mentioned so you'll buy less Goods right you'll spend more on credit cards that's right to your point those things are happening that later stage so talk about the service component within the economy versus the goods because it continues to have yes it's slowing at the margin things there because that is really what's been driving yeah because there's latent demand there right in other words during the covid lockdowns there was no demand for service so there was pent of demand and then you obviously Services only had a certain certain amount of capacity so people have overpaid for that but even in that context Danny I mean if you think about restaurants and Airlines and hotels I mean these stocks are not doing particularly well and their businesses aren't you know they've slowed now airlines are trying to make it up a pricing um that you know sometimes is hard to do when you're a late cycle so I think even there even in Services the demand has now it's normalized clapping yeah it's not collapsing but it's normalized it was extreme much like good were coming out of the pandemic or in the sorry during the lockdowns and we had crazy Goods pricing well now they're in basically in a depression I mean they have deflation in many Goods because people overc consumed it it's in real quick it's interesting I agree with you on this as well and and it goes back to what I said about the approval rating of this administration because people know I mean you could say that we're winning the battle on inflation all you want and through the lens of Academia maybe that is in fact the case but the cumulative effect has been absolutely crushing people and you know you mentioned again owners equivalent rent and those types of things throw Insurance on top of that and if you're living in the United States right now you are hurting which is why recession no you deem it anything you want for a lot of people out there and I would submit anywhere from 15 to 18% I mean it's worse than recession you have people living paycheck to paycheck and trying to make decisions on am I going to heat my house am I going to feed my kids those types of things so there are structural problems without question again that seemingly the Market's just sort of whistling past well once again I mean I I don't think the market is whistling past I mean you know bonds have got a pretty good bid and commodities have collapsed and precious metals are trading well because of the policies that are in place and quality stocks have done well and low quality stocks have been hammered so I I I think the Market's done a really efficient job quite frankly and we just you know just have to get away from this you know focus on the S&P 500 or these even like the tax which is even more concentrated than the S&P 500 you just have this concentrated kind of asset pool so different than like real estate right highend real estate continues to you know that's always protected to some degree location location location there are parts of the real estate market now that are coming under pressure because there's a lot of supply and and you know there's a lot of construction that's being finished so $64,000 Question all the indications the break EV where the yield curve is they're telling you that the fed's behind the curve right so the Market's pricing already that the fed's going to be aggressive more aggressive than they're actually signaling what does a 25 50 or 75 cut in rates really do anyway and I say this under this kind of tongue and cheek this Market has all been about immediate gratification what did it do for me now what you know how do the orders mean to the AI stocks now so when when you do get the cut and I think it potentially if it's 25 it's a doish cut if you want to call it that you know they'll give an Outlook that they're here for you don't worry about it what the hangover effect of that what what happens well first of all um you know basically asset prices make highs on good news okay people always forget this I have to remind myself they make lows on bad news so if you think about the AI names we just kind of talked about um they all topped on really good news in the last quarter I mean there's nothing wrong with the quarters that were reported but they all topped and they're all down between 10 and 30% some are down 50% okay so next week I'm really I'm excited for next week because we've been waiting for this moment now it seems like for 18 months they've been throwing out that hey we're going to start maybe pivoting and maybe start cutting really for about 11 months okay and the anticipation of something is often more exciting than when you actually get it so it's e easier to travel than arrive so I think next week what's going to be critical is I'm pretty sure they're going to do 25 at this point they haven't prepared to mark for 50 and with today's CPI number which is a little hotter on the core side they can't do 50 plus it sends probably a signal they don't want to send so they do 25 I don't I mean that's not what's exciting what's going to be exciting is how does the market trade on that cut I don't know but it's going to determine the way people interpret the cut then you have Bank of Japan 36 hours later by the way just I think people are going to be oh fed and then what do you mean Japan what what happened on Thursday night which is Friday morning but anyway yeah well again I mean we started with that and I think you know we're not gonna end with that but I'm gonna say again maybe the market is paying attention to it in terms of the things that you mentioned you know I'm I'm I get laser focus in the S&P to my detriment but there are other obviously asset classes that have sniffed this stuff out but what's going on in Japan specifically with the Yen we here in the United States have a Yen problem there are 11 sectors um five overweight for Morgan Stanley five neutral one underweight the one that the one that I really want to sort of get your comments on overweight Industrials in what I think we all agree is sort of late cycle I think part of Industrials probably encompasses Aerospace defense names ex boing that have done extraordinarily well when does that start to scare you in terms of that overweight are we close are we still thoughts on that we've been very clear that in the energy and Industrial overweights that we want large cap quality within those buckets only so not going into the you know the really cyclical stuff within those within those groups um I'm getting nervous now because you know we've gotten more defensive some of the industrial data points have kind of fallen off a bit more recently you know the ism orders were 44.5 which is you know pretty weak so yeah I'm getting a little more nervous China isn't rebounding um so it's on a short leash let's put it that way um you know the industrial energy is there to protect us against being overly um defensive in our overweights so that's really the story um and the the main message we've been giving clients pretty consistently for really since April and really May is that you know we're we're going we're going further down the late cycle curve it's going to get more defensive that's worked it's now crowded those stocks are expensive too they're starting to act a little poorly now so I'm now I'm getting nervous about a correlated move and that's why I think next week is really important follow you know the boj and the FED collectively like this is where the action is it's like the policy moves and the reaction to those policy moves can really cause markets to get correlated like they did in Late July early August that's sort of the be careful what you wish for portion of this market so we'll see how it plays out you are a Chicago Bear fan good for you week one you emerged Victorious it was an ugly win but in the NFL you don't get style points Danny MOS you do not and so we have reach week two in the league where they play for pay first of all before we start yes you pick three games last week I did I think you were one and two if I had a guess off the top of my head Thursday game you can go count it even though people didn't get it one in one over the weekend but yes one and two I'm happy to eat it should have won all three that's we won't talk about the mean you're embarrassing foot on the line but it's fine I can live with it's football baby we have reached week I have five games this week well that's what so you have five games for us to disect I do I do and I'll I'll save the best one for last Mike Wilson over there all right so I got basically three favorites and two underdogs and I love home underdogs home dogs and I love home dogs three opening game of the season for the home openers for these teams right so Tennessee sorry Vinnie getting three and a half against the Jets jets fly West jets fly East jets fly to Tennessee Tennessee is not a bad football team obviously there was some bad plays by the quarterback there towards the end of the game I like Tennessee getting three and a half at home the Packers I know gami might be playing quarterback Willis was playing quarterback for the Packers you know what they'll keep that game close three and a half at home against the Colts I don't think the Colts are that good I think they keep it close and cover those the two underdogs my three favorites are the following Eagles are going to dismantle the Falcons now people forget yes Eagles flew to Brazil to play that game against Baltimore but they got two extra days of rest they're coming home I like eagles minus 6 and a half I love the Ravens and I'm a shame I didn't bet it earlier Ravens against the Raiders right Raiders flying East again they played a late game now they're coming East Baltimore had the extra day off Line's N9 and a half now so the way you Trend following on the alos and socks you should be pounding the Ravens at home they're pissed about what happening at Kansas City again three extra days of rest on there the best for last Mike is at Houston now going home after should have won by more than two points but they didn't going home against the Bears and now the Bears found a way to win that game that's great give me Houston I think the line is six so those are my five picks I never really normally give out five but I feel like early in the season you're feeling good about yourself I'm feeling okay about myself maybe four in one week maybe a four and one you're hoping to go four and one yeah that's it so logic suggests you'll go three and two which will make you 500 going into week three you guys both have bad quarterbacks not bad quarterbacks sorry you have a proven bad quarterback you have an untested quarterback Mike don't see when you say you're looking at me when you say people know our history guy about you arguing about Daniel Jones but can I can I say something we want want you to so you're you're you're picking the Packers and you're with with a second string quarterback really they found them on the you know off I know and you're picking against my Bears you're dead to me you're dead so foret about that home how about we settle this how about we settle this I'll take the parlay of those two I have to hit both okay right your two dinners to my one dinner I have to hit both to win okay fair fair you're getting six for the Bears right and I'm giving three and a half and you're giving three and a half for the other one all right fair enough Mike Wilson you're a must watch when you go on television a must read when you publish and we are fortunate to have you each quarter today is September 11th this podcast is dropping on Thursday the 12th as you're listening we're doing it a day early given the basically the stature of you we think we should drop it a day early and hopefully if we're fortunate we'll have you back in December of this year to close things out so thanks for joining us Mike thanks guys great to be here always thanks Mike [Music]