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00:00Mike Wilson of Mork & Stanley writing, if there is a stable resolution in the Middle East, the bond market
00:05might walk back the Fed hike it's currently pricing in.
00:08Our conviction in the current bull market is intact. Mike joins us now for more. Mike, always great to see
00:13you. Thanks for being here.
00:15Let's start there. This idea of what a bull market means. Does it mean stocks just go up and to
00:20the right?
00:21Or does this mean that there is some sort of cyclical undercurrent that shows an economy that truly is strengthening?
00:27Well, let's go back to why we're in a bull market. It's all about the recovery from the rolling recession
00:32from a year ago, this operating leverage story.
00:34It's an earnings driven bull market. Right. So last year we got the multiple expansion in advance of predicting that
00:39that was going to happen.
00:40And as you recall, going into this year, there were a lot of kind of boo birds on the economy.
00:45People were very nervous about earnings. And we were we took the opposite view.
00:48I mean, nominal GDP is booming. It's seven to eight percent. And that's that's in place.
00:52So what's going on now is the multiples coming down over the last six months. But the earnings have been
00:57so good that the market can still go up.
00:59So the next phase of the bull market at this stage typically is multiples are flat to down.
01:05Earnings come through as expected, but that can drive the earnings or the stock market higher.
01:09And you get rotations to the areas where that earnings growth is underappreciated.
01:14And we think that yesterday's action is some evidence that maybe we're going to have that next rotation.
01:18We've already had several rotations this year, and we think that next rotation is in some of the areas you
01:22mentioned, like regional banks or consumer goods,
01:24which are asymmetrically positively inspired by oil prices coming down.
01:29This has been the argument that the rally in the equity market is entirely driven by fundamentals.
01:35And then SpaceX happened. How much does that kind of torpedo some of this thesis?
01:39Well, look, I mean, you know, markets are driven by fundamentals and animal spirits at the same time.
01:44I mean, you can't separate the two. They work in harmony.
01:47And so, yeah, I mean, is it a little frothy right now in certain areas?
01:50I mean, not necessarily in areas.
01:53There's a lot of leverage in the system in semiconductors, OK, as an example.
01:57And that's coming out now a little bit. That's something we wrote about two weeks ago.
02:00To me, that's a healthy development as long as there's some place to go to, right?
02:03And so if there's no place to go to, then you can have much more serious downturn.
02:07It can turn into something that's more severe.
02:09We don't think that's happening. We think this is a normal transition.
02:11I want to go back once again to the beginning of the year when people were really, you know, kind
02:16of pessimistic about growth.
02:17All we've seen this year is one rotation to the next from commodities, OK?
02:22What happened this year? The Fed started printing money again, right?
02:24They did the R&P. That went into gold and silver stocks.
02:28Then it went into metals and rare earths.
02:30Then it went into energy stocks. It ended up in semiconductors.
02:33What do all those have in common? They're all commodities, OK?
02:35So we've had a commodity rally basically bouncing around.
02:38And we think now we're going to get that broadening out story that was kind of going in January and
02:42February.
02:43And it was halted by the war in Iran and the oil price spike and the repricing in the Fed.
02:47That now is subsiding.
02:48And so we can rotate back to some of these areas, pro-cyclical areas where the earnings are quite good,
02:53but they're underappreciated by the market.
02:55What if we get a hawkish Kevin Warsh? Could that hurt the rotation?
02:58Well, define hawkish Kevin Warsh. I mean, there's a couple ways to think about that.
03:01I think one is on the rate side, which I think is unlikely, OK?
03:04The other is on the balance sheet. And we don't really know yet how he's going to want to position
03:07that.
03:08What I would say, and we wrote about this this past week, is we already know what's happening, OK?
03:12Which is that, you know, Jay Powell left him a nice little package,
03:15which is that we're basically already seeing a deceleration in the R&P.
03:22I've spent the last two years painstakingly trying to follow liquidity
03:26because that has been the main driver of kind of the animal spirits.
03:29And it was very positive at the beginning of the year when they restarted the R&P or asset purchases
03:34and you had treasury buybacks as well.
03:35And the SLR, you know, increased some capital from the banks.
03:39That now is decelerating, right?
03:41You've gone from $40 billion a month in R&P to $10 billion a month.
03:44So that's a deceleration that's already in place.
03:47He's inheriting that.
03:48Is he going to come out and say, hey, we're going to increase that?
03:51Probably not.
03:52Is he going to say we're going to kill it?
03:53Probably not.
03:54But that deceleration is still in place.
03:56So I think we already know the answer to the test, OK?
03:58We're having a deceleration in liquidity in the moment.
04:01And that, to me, as we've been talking about, that's where you can have this sort of summer chop and
04:05summer correction.
04:06Like in this rotation yesterday, you said it already, we're getting a rotation in a down tape, OK?
04:12That's what I expect.
04:13We're going to get a down tape, but we're going to get a rotation.
04:15And that's a signal that we're seeing a leadership change.
04:18What's the next risk on the horizon?
04:20The market was able to get through tariffs.
04:22Obviously, they're looking beyond now the conflict in Iran for the rest of the year.
04:27Is it just that potentially?
04:28I mean, the president says if his line, when he sees in Iran, he'll start strikes again.
04:32Is that what potentially could be disruptive?
04:34Well, I mean, your viewers probably won't like me saying this, but the markets moved past the war.
04:39You know, they moved past tariffs a year ago.
04:40I remember in this time last year, June of 2025, everybody was still harping around tariffs.
04:46And we had said a month before, like, we've moved past tariffs.
04:49And so I feel it's the same thing.
04:51The other thing we learned in this war, which is amazing, OK?
04:53And I didn't expect this, is we just learned how much supply is out there, OK?
04:57I mean, like, if you had the situation, this is a perfect storm.
05:00If you were an energy bull at the beginning of the year, by the way, energy stocks did incredibly well.
05:03And then they peaked literally the day of the attacks.
05:07So if you think about this event, you can only get to $125 in oil.
05:12And if you inflation adjust that, that's so far below where we were in the Russia-Ukraine war that began,
05:18you know, five years ago.
05:19So that, to me, is just a really strong signal that the world is very resilient in terms of finding
05:25energy supply.
05:26China's a big part of that because they have all the storage.
05:28But to me, it's a very bearish view for oil going forward.
05:33You're pointing to something that's fascinating.
05:36Do you think that the trade in terms of bullish on commodities is ending, the idea that that is going
05:41to be the outperforming sector in the rally, which has worked at least year to date?
05:46Well, no. I think what I'm saying is that there are multiple types of commodities.
05:50And the reason why commodities have done so well this year at different times is because of the liquidity picture,
05:55which was so robust.
05:58We've written a lot about this the last two weeks, which is we think that between the Fed, the Treasury,
06:03and then the deregulation, they've added over half a trillion dollars of liquidity to the system.
06:08So the whole rates argument is a sideshow to me. It's just a sideshow. I mean, it's been neutral.
06:12You know, yes, has the Fed been less dovish than expected at the beginning of the year, including me? Yes.
06:19Have they been way more dovish on balance sheet? Absolutely.
06:23And that has trumped, you know, the negativity.
06:25Now, having said all that, multiples have come down this year.
06:28OK, so multiples have come down because we're later in the earnings cycle.
06:32We're going to get our peak rate of change in earnings revisions, too.
06:35So the combination of peak rate of change on earnings revisions, peak rate of change on liquidity tells me that
06:41we're in a corrective mode right now.
06:43Well, I guess another way to ask this is, do you expect that Fed chair Kevin Warsh to pull back
06:47some of this liquidity in the face of these pockets of froth, as you called them?
06:50It's already happening.
06:51It's already happened. In other words, the path has already been set.
06:55We're having a deceleration, OK, a deceleration on a rate of change of liquidity being provided to the market.
07:00That's what the market's picking up on now.
07:01The question, which you may or may not answer today, is what are you going to do going forward?
07:06Are you going to be active using the balance sheet and helping funding markets stabilize, which is what the last
07:14Fed chair did, Jay Powell, which is still there, by the way.
07:17So they're probably having a conversation about this.
07:18So, you know, I think they will ultimately.
07:21Like, in other words, I think the Fed and Treasury will provide more liquidity if they need to.
07:25But right now they don't need to because bond volatility is totally under control.
07:29Funding markets are totally good.
07:31We're seeing issuance of equities and credit being absorbed.
07:35So they don't need to do anything right now.
07:37Why spend your bullets?
07:38And so there's a lesson in that.
07:40We kind of need the markets to pressure them to provide more liquidity.
07:45And the reason why we need more liquidity is because the economy is booming, OK?
07:48I mean, we're growing 7% to 8% anomaly.
07:50That absorbs a lot of capital.
07:52Money supply is only growing 6%.
07:54So that money has got to come from somewhere.
07:56Do you think that the market could still hit your 8,000 target for the S&P by the year
08:00end if you do see a rotation away from some of the hyperscalers, away from some of the semiconductors,
08:05given how much they've rallied, given the proportion of them into the entire rally, and given how small the relative
08:12economy has gotten in response?
08:14Yes, because I don't expect these stocks to correct more than whatever 5%, 10%.
08:18I mean, they're going to correct and then they're going to come back.
08:21I don't anticipate that this is the end of the AI CapEx cycle or the end of these stocks working.
08:26I'm just saying the relative outperformance doesn't make sense to me, given the relative earnings revisions in these other areas.
08:33And by the way, just a reminder, that happens at the beginning of the year.
08:36At the beginning of the year, these stocks are all underperforming.
08:38So, you know, it's just the hot dot becomes all, you know, the attention of the market goes right there.
08:43And I like to try and think six months in the future.
08:46Like, I try, you know, my job is to tell you what's going to happen, not what is happening.
08:50OK?
08:50That's harder.
08:51And so people don't like to do that.
08:52But I try to do that.
08:53And I'm telling you that I think we're going to get a rotation, but it doesn't kill the bull market.
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