Mike Wilson's 2025 Outlook
48:25 Share

On the Tape.

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Welcome to the On The Tape podcast. I believe, and I don't have it in front of me, but I think this man has now graced us for the seventh time. Easily seventh, by the way. We've been doing the podcast for four years. He is, I mean, he's a legend in our world. I don't say that lightly. The chief investment officer. Some other fancy title there, Morgan Stanley. What was that one? Head of U.S. Equity Strategy. That's a big job.

But he came in here and said, just tell people I'm like the chief. What, Michael? No, he didn't say that. We're messing around here. Michael Wilson, welcome back to the podcast. By the way, he's moving extraordinarily well. Like he's spry. He's in his mid-50s. Now, Michael was last year in September of last year. That was the last time he was with us. September 12th.

In May of last year, Dan, you'll recall that Michael sort of changed a bit of his tune, correctly, I might add. Now, you have found, Mike, I know I've found this as well. People label you regardless of whether or not you're tactical, you're trying to be fluid in a very fluid situation. So what did you see last spring? And then we'll get into what are you seeing now?

Yeah, it's great to be with you guys. I mean, look, I would say last spring, we kind of pivoted more bullishly simply because the recessionary outcome that I think a lot of folks were sort of predicting was just not happening. And not only that, but we noticed that the liquidity picture was improving tremendously. So we sort of made this call and

Of course, we got run up on the flagpole, "Oh, he's capitulating and we're going to crash now." I think they made the same call in November too when we got bullish. It's funny how people pivot off of your pivots. I would say where we were different than a lot of people was our earnings forecast was spot on the whole time. The thing we missed at the beginning of last year was the multiple. I still want to meet the person who said we were going to trade 22 times at the end of this prior past year.

And I think there's a lot of excuses being made. I think the very simple answer is that the liquidity picture was tremendous, particularly over the summer. I mean, M2 growth, global M2 growth in U.S. dollars was up 15% on an annualized basis between June and September. Now,

if you want to be one of these conspiracy guys, you could say that was jammed in for the election. I think it was really to help fund the government, quite frankly. So, I mean, pick your favorite reason. The point is there's a lot of money sloshing around, had to go somewhere. It continued to go into high quality stocks. S&P 500 is the highest quality index in the world. So, we didn't predict 22 times, but we were not surprised that we kept going. And I think in the fall, we were pretty visible on this going into the election.

We didn't know who was going to win, but it appeared to us that Trump would win from the poll. Not the poll so much, but how the markets were trading.

And we kind of put out 6,100 as a level we could get to, not justifying it from valuation, just pure momentum, and that that would be a level that we probably could react at. And that's what's happened. So, I mean, you know, whatever we got to write for the wrong reason, the right reason, whatever it is, that's really the reasoning. It's not because there's been some crazy earning story or that the economy is, you know, about to reaccelerate in a way. These stories that people like to make up – and I'll give you a good example why I don't think that's the case –

So, you know, a lot of folks have tried to make this call that, you know, we're going to broaden out, that the equal weighted S&P is going to outperform or that the Russell 2000 is going to take off. It just hasn't worked. OK, I mean, you know, it's sort of like the mistake people keep trying to make. What's working is high quality growth stocks or just high quality stocks in general. In a world where there's money printing and you're devaluing the dollar, so to speak, or any currency, basically you want to own things like gold.

Maybe crypto and high quality stocks. That's basically the portfolio and that's what's working and that's the reason it's working. And it's not because there's some new grandiose story. Now, there are idiosyncratic stories like AI or maybe obesity drugs or the power story. Those are real stories and those are idiosyncratic. But the overall story

Our overarching bullish story is excess liquidity. The thing that I missed a lot of things last year, but the one that was glaringly obvious in retrospect was just the passive money that flowed into the market. I read trillion dollars last year into ETFs and mutual funds, which was a record. And those dollars do not care about valuations. They don't care about multiples. They're just trying to find a home. And

I guess my question to you is, does that last in perpetuity? What derails the passive investing story, if anything? Well, it's not going to be derailing. First of all, it's economic. I mean, that was the main development of ETFs and passive strategies. It was just cheaper. And then, of course, now it's kind of taken on its own momentum. And so that attracts more capital. I think the thing that's really changed and could change going forward the other way is we've had incredible – it's like a magnet of international flows too. Yeah.

So what would change international flows? I think if the dollar were to weaken significantly, you may see some of the international money that's kind of, you know, been drawn into U.S.-based assets start to go back home. We'll see. And, you know, tonight's an interesting event, right? So the BOJ is going to be probably raising rates. The

The yen is probably the most undervalued currency. And that may be the beginning of what could be a dollar depreciation against other fiat currencies. If that were to happen, maybe we might see some of these international flows. But beyond that, I mean, I don't see what kind of changes that trend. It's Jan 23. It's Thursday. You talk about the BOJ tonight possibly raising interest rates. We know how the interest rate picture looks.

here has changed really since September, if you will. So what are some of the drivers then? We're about to hear a lot of companies reporting their earnings. We're going to hear constant currency. We're going to hear that a lot, right? So let's talk about over the next couple of weeks, how do things shake out here? Because a lot of the big winners from last year continue to be the winners, but we're going to get a scorecard a little bit on Q4 earnings and Q1 guidance. Yeah. And by the way, when I said earlier that earnings weren't the major driver, they were at the stock level.

So one of the big changes we made in the fall was to get overweight financials. And the reason we did that is because the earnings revision factors in financials have been spectacular. And so that's like there is money is moving underneath the surface to where the earnings picture is better. Four areas where the earnings have been better, financials, software, media and entertainment and consumer services. Those are four buckets. And then, of course, there are idiosyncratic names within tech.

benefiting from AI, but the average tech stock is not seeing a real benefit from that spend. It's a handful of semi-names and a few others. So I think what we're looking for, and you mentioned that already, constant currency. So first of all, let's back up to December where we peaked out at 6,100. That happened because rates broke through 4.5%. And we had said that between 4% and 4.5%, that was a sweet spot for equities at the index level. So once we got through 4.5%,

That really put pressure on a lot of stocks, and particularly the low-quality stocks. And so that correction in December, while the S&P was down like 4%, 5%, 6%, I mean, a lot of stocks were down 20%. And now it looks like rates have kind of stabilized again, so people are feeling better. And now it's about currency. And that is an idiosyncratic thing.

issue. So let's talk about what sectors could feel that. One of the names that reported Netflix, people were worried about currency. And in fact, their fundamentals were so good, it kind of overpowered that. So this is going to be an issue. Some are going to surprise us. Some are going to

not surprised us so much. But multinational companies for sure are going to feel that headwind. It's probably going to affect their guidance in a negative way. If you're more domestically focused, and by the way, banks and some of the financials are more domestically focused, it's not going to affect you as much. And so that's a trade that we've been recommending to clients is sort of owning

The companies that have less foreign exposure from a sales perspective and kind of fading the ones going into earnings season. That's probably the number one issue. And then I think the other thing we're listening for during earnings season, which is the tariffs and the policy changes we're hearing this week from this administration. I think a lot of folks got relief. We came into this week, a lot of people were worried about tariffs. And of course, they didn't announce anything dramatic.

I don't think it's going away. So there are a lot of names, particularly in the apparel consumer space that source from China. I think they've got a little bit of a pass here in the short term. And that's an area where I think you're going to hear more over the course of the next two, three, four weeks from the administration. And those stocks could come under pressure a bit.

When do valuations start to matter? And we talked about this on Market Call earlier this week, Michael, but I'm going to rattle off a few things. And everything I'm about to say is either in the 99th percentile or the 100th percentile.

PE ratio, the CAPE ratio, which we talk about all the time, which by the way, I think it's trading about 38 or so. The median is 17. I think the top ticked at 44. Dividend yield, price to sales, price to book, something called the Q ratio. I think that's Tobin's Q. That's the market value divided by the book value of a company. That's in the 98th percentile. The Buffett indicator we talk about all the time. Average household equity allocation. In the S&P 500...

divided by M2 money supply. All of those things, either 98th, 99th, or 100th percentile, meaning that they are all historically expensive. That sort of juxtaposes January of '09 when all the things that I just talked about were either in the one or two percentile of the other end of the spectrum. So again, not timing indicators, but all

All of these things have been flashing red now for a while. Yeah. Well, it'll matter when it matters, as you like to say. I mean, long term, it matters right now. So if you're a person who's looking over a 10-year time horizon, it's pretty obvious that a lot of these assets are going to be underperformers. I mean, if you pay a high price over a 7- to 10-year period, it's almost a guarantee you're not going to make a very good return.

There are two things that we also, back in May, that we kind of figured out and maybe late. But if the Fed is cutting rates, okay, and earnings are not going down, it's very difficult for the multiples to actually come down, even if they're already elevated. Right.

So as long as the Fed isn't raising rates, which could happen at some point later this year, right now that's not our call. Our call is they're going to cut one or two more times this year. If they're cutting rates and as long as forward estimates are still moving up, it's very unlikely that multiples are going to come down more than three, four or five percent like in a tactical move.

If we were to get a shock from two ways, I think there's two potential shocks here. One is there's an exogenous shock where growth rates come down. Okay, so then earnings don't go up anymore. It's not a recession, but it's an earnings recession. The other one would be what we're starting to see a little bit late last year is that rates kind of get out of control at the back end. So if you recall back in the fall, actually last summer, there was concern around a hard landing.

Stocks really sold off hard. Bonds rallied. How silly. That was a legitimate concern. There was going to be a hard landing. Remember, there was going to be a no landing, too, right? Last year, we had no landings, hard landing and soft landing all throughout the year. But my point is we priced that recession out. But then remember, the Fed got nervous, too. The Fed was worried a little bit, and they cut 50 basis points. And then they cut another two times. Can we talk about that for a second? Because you were here September 12th. That happened September 18th. Guy literally had –

Not I mean you kind of went nuts a little bit on fast money beat that day. Do you remember? I know not because Jeremy Jeremy Siegel made come I mean it was all around I think that was around August you were so right you brought it to him The guy was like screaming it, you know, his hair was on fire. They needed to like emergency, right? And literally guy he didn't go nuts He was like looked at the camera and it was No, but you know

Yes. So that was August 5th. And then September, obviously. But to your point about interest rates, I mean, I think it's fascinating that since the Fed cut,

We saw 10-year yields go from 3.6, a little lower than 3.6. We got up to 4.8%. I mean, that's a pretty dramatic move in a very short period of time. Well, first of all, it's unprecedented. This is where I was going with this, is that the Fed, I think, cut perhaps inadvertently. And they signaled probably too aggressive of a move. And the back end of the bond market hated it. Right. Just they're like, wait a minute. And so this 100 basis point cut at the front end was

was married with 125 basis point move up at the back end. And it's all term premium. A lot of it's term premium. So that is like toxic for stocks. And we had identified this correctly that we were fine as long as it didn't get above four and a half. So we're now about four and a half. So this is, I'm answering your question in a long roundabout way. I think if rates continue to move higher at the back end, Guy-

multiples will come down more than what people are expecting. Okay. So let's play that out. So where is it when the market obviously cared on December, I want to say December 18th, December 27th, but that cared for a day.

When does it care in earnest? Like, is there a level? I mean, I thought it'd be 4.5%. That proved to be wrong. We got up to 4.8%. Nobody seemed to care. Is it 5% because it's just a round number? Or is there a math behind this? Well, no. I mean, 4.5% did matter. I mean, we did see a pretty healthy correction in a lot of stocks. And it was fairly sharp.

Now, remember, the S&P, if you look at the S&P, that's the highest quality bucket. So it corrected the least. The Russell was down 10% or 12%. A lot of lower quality stocks were down 20% or 30%. And there was no change in their earnings outlook. So I would disagree. I think at 4.5%, the market did care. But then we got that, quote unquote, softer than expected CPI number. And then we had to kind of reprice that in.

And then we had the inauguration, which is, I think, a fairly euphoric event. So the combination of those two is just sort of, I think, fooled us that we're back here, but we haven't resolved this rate risk. Now, I don't know where rates are going, but if the back end were to go towards five, absolutely, I'd be stunned if multiples don't come in five or 10% kind of across the board.

So what's going to cause a move to 5%? That's the question. Well, that's my question to you. So I think it's a number of things, but I think the biggest factor is the number of issuances that are coming out in the beginning of this, which has just started. I mean, the Treasury issuances this year are probably historic.

And they played sort of the short end with Janet Yellen. They can't play that game in perpetuity. That's right. So I think this is an interesting transition to the new Treasury Secretary. Scott Besson is probably going to get confirmed. He's been vocal about what you just said, that we can't fund at the front end forever. The question is, is Scott going to address – is he going to deal with that immediately or is he going to do it over a longer course of time? Because he's a smart person. He doesn't want to shock the bond market either. Mm-hmm.

and kind of lose control. So so but it is there, right? The bond market is it knows about it. Eventually we're going to have to extend maturities. And the question is timing. So that's one potential risk. The other one is inflation does come back, right? I mean, why not? Why? I mean, we have a lot of animal spirits going now. There's a lot of activity happening. There's some higher velocity things happening because of the administration and some of the policy changes, maybe more lending growth.

If that happens, I mean, maybe the Fed has to raise rates again. I mean, that's definitely something that bond investors are thinking about. I think there's a 20% to 25% chance now priced in to the front end that that could happen. So that would be another reason why the back end might move out. Well, I'm sorry to sort it, but the CRB index, which is different than the GSCI, the Goldman Sachs Commodity Index is heavy energy. But the CRB index, as we're sitting here, is at levels we haven't seen in 15 years.

obviously a much different, it's comprised from different things. It's more of the soft commodities and what have you. But if you're just looking at that,

I mean, by definition, inflation is back. Yeah, but inflation is not to the target, okay? And I don't know many folks who follow this data closely, including our own, that think we're going to get to 2% anytime soon, right? But we may get there by end of the year. Even the Fed themselves are targeting that we're not going to get there until end of the year, early next year, assuming everything else kind of plays out the way they think it's going to play out. So inflation is percolating. And I just want to maybe pivot a little bit here and a

Now let's talk about Trump two versus Trump one. So when Trump got elected the first time, there was probably nobody more bullish than me because it was the perfect kind of president and policy change for that moment. Meaning we were coming off a period of secular stagnation. We had a big output gap. There was scope for stimulus.

Today, we don't have that, right? The output gap is actually negative. And we don't have supply in labor. We don't have supply in a lot of different things. And so if you do reflationary type policies, getting animal spirits going, the bond market is going to be the gating factor potentially. Now, I do think the administration understands this. Okay. So the question is, are they going to roll out

maybe some growth, all the negative stuff first, like tariffs, like dealing with the border, which is growth negative because you have less immigration, less people to work, less people to spend money. I mean, does he do that stuff up front, kind of slow things down in a way where then they can do the more pro-growth stuff later? These are the questions we don't know the answer to, but this is what I'm very kind of focused on at the moment, which is it's not going to be a repeat of 2017, which, by the way, was the highest Sharpe ratio year for global equities. Mm-hmm.

Because once again, the policy changes at that time were received very well by the global macro variables. And this time it's a little bit different. So I think it's going to be a messy first half. And if some of this stuff gets pulled off, though, I think the second half could be quite good. And that's when you will get the broadening out.

Because that's when rates can come down. If they can deal with this stuff the way I think they can, then actually the term premium will come down. They'll find a way to fund the government that the bottom market can get comfortable with, and they can actually get rates lower. So the browning out trade is an interesting concept. We've heard it again and again. People have talked about the narrowness of the top 10 names in the S&P 500. They're 30% or so of

the weighting there. They're also a disproportionate amount of the earnings growth, right, that we've seen. So that's attached to a secular shift. If you think about estimates for those top 10 names, they're not exploding to the upside. You know what I'm saying? So, you know, I think FactSet has 13.5% year over year expected S&P 500 growth. So I guess one of the things that, and this is a question, I guess, is that

The next phase of this generative AI trade, it has to broaden out. I'm not talking about the stock market. I'm talking about the use cases, right? And I know that, Mike, you and I go back 30 years or so, and you had a front row seat for the dot-com bubble. There was a lot of great concepts there, but the use cases didn't materialize until maybe 2003 or 2004 and that sort of thing. So is there a scenario where you could say,

see basically other industries, whether it be energy, whether it be healthcare, whether it be financials that start to get some sort of return on the sort of investments that they have made, that the infrastructure was created by the names that we all know about who've accrued all the value. So is there a second half of 2025, 2026 trade where people start anticipating the productivity gains and the processes that are going to be that much

better for these companies after the spend that they made? Well, I think the stock market is already kind of discounting some of that. Now the rubber hits the road. We need to see the actual meat of what you just said. What we're really talking about is the diffusion of technology into the broader economy. And you think about the average company. We're not tech companies. We need somebody to give us a solution, maybe over the cloud. AWS or Azure comes in and says, hey, Morgan Stanley, here's a great package of software that can make you more productive.

I think the different, and I think that will happen, by the way, we're very constructive on that, but that's probably 26, 27, even 28 story. And the market will kind of figure out what pockets to kind of bet on there. Initially, I think it's been kind of a,

you know, overhyped to some degree. Companies mention AI and then they get a big pop in their multiple, but then there's going to be some disappointment there. And it's going to be probably more disappointment than like satisfying answers or results from companies who are benefiting from AI, particularly in the top line. The second thing I would say is this technology appears to me anyways,

to be a labor saver, right? So that's how we're going to get productivity up this time. It's not necessarily making people more productive. It's actually eliminating people. That's what we've seen so far. So if you look at the big tech companies, they're getting rid of people faster than anybody. They're the companies who are benefiting from AI because they're the big data users. They know how to use data.

And so if that's the benefit, I mean, be careful what you wish for, because if that's if that's what this is bringing is elimination of jobs and there will be new jobs eventually. I agree with that. But the trend that transition could be very messy. So that's that's we don't know the answer yet, but I'm a little worried that it rolls out almost too fast.

Well, we're already seeing that with Microsoft and Copilot. You know, I mean, the adoption is not particularly there. And, you know, I'm in that same sort of camp. I believe that the infrastructure build, you know, the CapEx cycle that we've seen is unlike anything we've ever seen before. And this is just in the last...

two and a half years or so. And I just think we're going to have an overbuild of infrastructure. I think we might see that on some of the capex numbers, you know, that we get out of Microsoft, out of Google, out of Amazon and the rest of them. So I actually think at some point when that happens, the market is going to have a hard time because the rest, the broadening out story doesn't play out.

that way. You know what I mean? It's going to take until 26 or 27, like you mentioned. I want to ask you- Well, before you leave that, let's just, I mean, the way it usually works when you get a transition from narrowness to broadening out, usually it happens in a down market. Okay. Unless you have a recession, you don't get a broadening out, okay, without a down move. You get a down move and then basically the stuff that nobody owns goes down less.

And then from there, you get the broadening out. And that's how I see this one kind of playing out. Which is interesting because if you go back to the bear market in 22 when the NASDAQ was down more than 30%, you have chat GPT comes out in November of that year. A lot of big tech stocks had already bottomed.

But again, that could have been like a little head fake. And that was it, you know, into 23. I mean, I think investors were looking for anything to kind of grasp that could kind of take us out. And remember the malaise that we had in and around the regional banking crisis. Then I just think, you know, generative AI fever took over when no one even know what the hell was going on with it. Right. That's right. Yeah. So let me ask you this, though, and it's kind of related. There are pockets of risk. This is capital that's being allocated that no one's really

in the public markets taking too close of an eye at, look at a company like OpenAI that's raised $25 billion or Anthropic, which makes a competitive, you know what I mean, a CLOD, a competitive model, a large language model to ChatGPT.

They've raised $20 million. This is like in a year and a half or so. At some point, like, isn't going to be like, oh man, like what have we built? You know what I mean? There's like this monstrosity that's being built in the private markets that is just never going to realize this. And all of these models, by the way, I know you know this, they're all being commoditized. And they keep raising money. Well, I mean, we know that from the cost per hour to rent the space has come down. But that's Moore's law. That's what technology is. Don't forget, like, I mean, somebody makes an expenditure.

Okay. That technology or that investment is in place. The people who make money on it typically are the second and third tier people who get to use that equipment for free or that service for free. It's no different in real estate, right? The person who builds a trophy property usually loses money and it's usually a third owner that ends up making money because they could buy it 10 cents and a dollar. So it's no different. And there will be a transition. Now, you mentioned earlier that there could be a deceleration in AI CapEx.

That's what we think. Now, that's not negative growth, but you know how growth stocks work, right? Deceleration and growth can lead to a correction. And that transition, I think, in that transition, we'll be looking to put capital to work. I'm not looking for a 2000 crash or anything, but what we're looking for is a transition where this technology has time to be digested.

And the applications can then be built on top of it. And that, once again, that's a 26, 27 story. Yeah, I think we're going to start to hear a lot more about that. I don't know if you caught Satya Nadella, CEO of Microsoft. He was on Bill Gurley and Brad Gerstner's podcast, I want to say like two months ago. And they asked him specifically, are you still chip constrained? And he said, no, we are power constrained. And then, you know, I think about a few weeks ago, they

gave some guidance on CapEx, but they were looking at using their fiscal year rather than their calendar year. And they said about 80 billion, which actually looks flat on a year over year basis. So if they're not chip constrained, if they start spending less on CapEx, I think you could start looking at Nvidia or you could start looking at Taiwan Semi and say, we're going to see a slower year for the first time in three years. And that's when you start to kind of reevaluate valuations and maybe take a few turns off. Yeah, it's a digestion.

Okay, it's not the end of the cycle. The AI thing isn't like a fraud or anything. It's just, it's cyclical. These things go in waves. And I think that 2025 probably will be a year of digestion in that regard. Wouldn't be surprising to me. Which then, by the way, creates opportunity for that capital to reallocate, which is one of the reasons we like financials, which is one of the reasons why we like some of the power names that need to catch up. Right.

Right. The energy stuff and the stuff that we're doing on deregulation from like natural gas and pipelines and things to build natural gas fired electricity plants. I mean, so it's not it's not as if everything's going to go down. You know, we've been in this rolling kind of recession for three or four years. I think we invented that term. And I think that just continues. So not everything is going to have a cyclical downturn at once.

Maybe we see a manufacturing rebound. Maybe we see the reshoring thing kind of take off. Maybe we see this renaissance in some of the natural gas areas. Maybe we see financials deregulation helping lending in certain ways. Maybe IPOs and M&A activity. These are things that we think could actually see a cyclical upturn.

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Let's talk about the state of the consumer because depending on the time of day, you hear all kinds of different things. So these things are just factually true. Historically, and you talked about it, technology is the biggest deflationary force ever. It's also historically one of the biggest job killing forces ever. And you talked about the speed with which things are happening now. Now, that does not seem to be a problem at 4.1%, but there's an inevitability to this. On top of that,

I think. On top of that, credit card debt is now $1.1 trillion. It's risen by almost $350 billion over the last four years. The average rate is now north of 22%. I think the average household credit card debt is now north of $10,000.

What's happening, I think, is consumers are fighting inflation with debt, which historically is sort of a difficult recipe, especially if the job market's going to soften. Is there any concern whatsoever on the side of the consumer? Well, there has been. I mean, I would say the low-end consumer and the middle-end consumer has been struggling. And we see that in the retail stocks, right? If you're not offering some sort of value proposition or you're not in some sort of a niche position,

where you're, you know, you're, you know, sort of a, something that you, you provide something nobody else can. I mean, those stocks have been terrible for two or three years. So I think, like, in other words, what I'm saying is, I don't think the market has ignored all those concerns that are valid that you, you brought up. But in, but with, in the absence of those folks being cut off from the market,

from credit, like in a recession, or not having access. I mean, they'll just keep spinning that bottle. I mean, I think, and that's, and so what will end it is if all of a sudden the ability to lend from the lender stops,

Or just their credit gets cut off because their credit quality is so bad. So we're not there. Could it happen? Sure. Could we have a recession still? Absolutely. I mean, we're one more shock away from probably a hard landing. Let me give you one example of something I'm thinking about right now, which I think is not mainstream thinking. But if you think about the economy in the last two or three years, it's been very unbalanced. Like I can give you six or seven areas that have been in a recession. Housing, autos, manufacturing, consumer goods, etc.

Okay, most of the commodity sectors have been in a recession. They haven't grown. What's been booming? AI spending, maybe some of the life sciences, consumer services has been booming, and government. There's no bigger boom than government. Government has been growing like a giant blob.

So this administration, okay, Elon, who's not even in the administration and others, if their success – like what if they cause a recession in the government sector, okay, and they shrink the blob?

And this crowding out feature that we've been dealing with, which is keeping rates too high, that goes away. Is that really going to be that catastrophic for the consumers already been struggling? In many ways, I think that could be a relief. It's like taking this big paperweight off of the private economy. The private economy could then flourish. What's going to be tricky about it is to transition.

How do you get from point A to B? But if we can do that transition in a way, like I wouldn't be surprised if you had a mild recession driven by government, which goes into a really tough recession.

Okay, but then the private economy is just sort of kind of steady state. Like a lot of companies don't need to lay off anybody else. They sort of keep going. That allows the Fed to cut rates significantly. And then you can have this sort of recovery. Well, I mean, that's the best case scenario. I mean, small term pain, but- It's not small. It's going to be very painful for people who lose their jobs. By the way, that's what it says. Shrinking the blob is a surefire way to get voted out of office.

Like, it's going to take multiple administrations. It's going to be have to be bipartisan. You know what I mean? Because think about Congress people. They have to go back to their districts. You know what I mean? They got reelected every two years. And you're going to say, listen, Doge wants to cut jobs that are in effect. You know what I mean? Our district. Like, that's why it never happens. That's right. Because people want to protect, you know what I mean? Like their power and protect, you know, their seats, I guess, for all intents and purposes.

I think it's challenging, but I think this is the best chance we have of going down this path. And I think it would be liberating for the average person and the average company. Like the market is all over this, by the way. I mean, the Russell 2000 has gone nowhere for three and a half years. I mean, think about that. The average company is not really, the stock hasn't done that well. The average consumer, to your point, you just laid out some good detail, is not happy. That's why we're voting for change again. So I would argue if we don't get change,

they're going to get voted out. So it's kind of a lose-lose. I mean, if they don't do the things they said this time, then they're going to vote in somebody else. So I don't know. I'm kind of open-minded to this. I'm hopeful because...

You know, a guy from the Midwest, like I see it. I mean, I mean, like the middle part of the country has been under a lot of pressure, not just geographically. For decades. And it goes back to this whole. Howling out. I mean, like that's again, you know, if you were waiting for this reshoring trade, if you thought like there's been really no great ways to play.

It's hard. Think about it. Mexico, Mexico. Yeah. Well, and then he wants to put 25 percent tariffs on Mexico. You know what I mean? So, again, not much is that going to happen. I want to I want to ask you this. So if you think about the economy that, you know, Trump is inheriting.

You have unemployment at 4.1%. You have last year's GDP growth at 3%, better than expected. And then you have CPI or however you measure inflation has been coming down. And then away from the economy, you have a stock market basically at all-time highs. So if you think about like you had laid out earlier, like for the economy, you think the back half could be good and therefore the stock market would be pretty good. But they have the midterms coming up.

and they have a very narrow lead in the house so they got to think about what are the legislative accomplishments they want they want to extend the tax cuts what else do they get right because you know there's a there's a block in the republican party that are not you know what i mean they're not in lockstep with some of the legislative agenda so if we get tax cuts which is pretty much what we did um last time if they want to pay for those tax cuts

with cutting Medicare and cutting Medicaid and some of the other social safety net, the house flips, right? And then what happens for the last two years of this administration? Yeah, well, I think it's going to be messy. Like I said, this is not a, I mean, it's a very challenging path, but to me, it's the most bullish path. Like this is the only way you can get to a,

you know, what everybody wants, which is a broadening out in a sustainable way, which is a economy where more Americans feel better. You know, the consumer confidence numbers have been that you can afford a home. You can like inflation, the level of prices comes down, not just, you know, disinflation, but actually the price of things go down. The cost of money comes down again.

So I don't think there's a choice. I think it's either this is you go for it or we're going to end up in the same place we are right now, which is we have a bunch of deficits that's too high. We can't finance it. Interest rates then break out and then the stock market doesn't even work. So really quickly, um, fed meeting next week, uh,

98% probability they do nothing. There's no meeting in February. Then we have a mid-March meeting. By that point, if things are just kind of stagnating, we're gonna have some economic data on inflation. Let's just say it firms up, but doesn't go lower, doesn't go much higher. If Trump starts kind of railing against

Fed Chair Powell, how do you think markets react to that? How do you think investors react to it? We had this when he was raising interest rates in 17 and 18, and then there was a growth scare. Remember the end of 18, stock markets sold off nearly 20% or something. And again, they had to get easy. So my question is, is that if he starts threatening Jerome Powell, and I know people say he can't do it, he can't fire, how are markets perceived at it?

Well, the good news is I think that we've seen it before. So, you know, it probably won't be as dramatic and it'll be, okay, here we go again. Powell seems to, you know, be pretty tough. I mean, he can hang in there and do what he wants to do. He is in there until May of 26. I mean, he really can't remove him.

So, yeah, he can jawbone. It'll be messy. But I'm not worried about that as much as I'm worried about what we've been talking about already, which is that the bond market is already pushing back. Right. The bond market is already upset with the financing of what's been going on. I mean, first of all, the spending is out of control. And then how we've been funding it.

it. And they know that that's not sustainable. And to me, that's a much bigger issue than the president and the head of the Fed having a shouting match or arguing in the press. I think that the first issue is a much bigger deal. Is the steepening, the re-steepening of the yield curve a good thing or a bad thing on the margin? Depends. I mean, if the level of rates is too high, which I think it is for a lot of durable type purchases, then it's a bad thing.

And that's why that 450 level is so critical. I think that's the point where it starts to be a real governor on growth and a real governor on kind of velocity of things in the interest rate sensitive parts of the economy. So we'll have to just continue to watch this. And I do think it sounds silly, but like five is this like, well, what's so special about the five magic number?

Well, there's another thing that happens there, which is that people basically say, well, bonds now look more attractive than stocks too. Like pensioners and asset allocators, asset owners, right? I mean, they have basically abandoned bonds in many ways. Like if we look at our retail network, the thing that they've shrunk is their bond portfolio. And that has moved into equities.

And the part of that reason was because bond yields were so low for so long. But now if I look across the curve, you get a 2%, 2.5% real return. It's not that bad. And so maybe we could see a reallocation of capital towards fixed income. We'll see. 5% seems like a magic number in that regard. If you watch the different business networks, we all theoretically talk about the same things over and over again. What do we not talk about that you look at? You just said a couple of different things, but

What do you see out there that nobody's talking about that they should be more focused on? Well, I'll tell you one thing that I totally – not totally whiffed on, but I have a bad – I don't have a great framework in real time of figuring this out is how do you measure liquidity in the financial system? Right.

Because of all the alphabet soup over the last 10 or 20 years, like in the old days, you would just say, look at rates, and that tells you kind of everything you need to know, or money supply growth. But because of all these facilities they have, like the reverse repo or the overnight funding markets or the euro-dollar market, global flows of money, and then the movement in currencies,

It's just so hard to keep track of. And there were some people who were pretty good at this, and I'm sure people listening to this podcast know who they are. And they did a really, really good job of kind of staying ahead of the curve on that liquidity. The problem is the average person, even me, it's really hard to know what's happening in real time. And it's very hard to predict how it's going to happen. But that's kind of the plug guy that allows multiples to go both up

And down. Right. And we saw it down in 22 because liquidity was getting squeezed. And we saw that one. Okay. It was kind of obvious. Feds are raising rates. But like in 23 and 24, it wasn't quite as obvious that liquidity was that robust. But that's really kind of what drove multiples higher in an environment where the fundamentals were not as bad as people were fearing. All right. So let me ask you this. I understand the excitement around cryptocurrency and Bitcoin. I get it. Let's just shelve that for a second. Gold might be sort of that...

window as to what's going on in the opaque world that you just talked about. Because gold, theoretically, with rates going higher, with the dollar going higher, should have hit a bit of a roadblock. It's not. It continues to sort of grind higher. I think that, to me, is the tell. - First of all, gold tends to lead other assets, and crypto even leads gold, or has led in the last couple of years.

And, you know, if you look at both crypto and gold, it's kind of tiring out, which is kind of an early sign that liquidity may have kind of peaked in the short term. So that's something we focus on. Now, if I look at the perfect portfolio we talked about earlier, if we continue to live in this fiscally dominant world, to your point, Dan, we're not going to be able to cut. The government's going to continue to grow. They'll find a way to finance it. Maybe it'll be more expensive. Maybe we keep playing this game. In that world, you want to own gold forever.

crypto and S&P 500. Okay, high quality stocks, high quality stocks globally. And I mentioned we were talking earlier, you look at the high quality stocks overseas, they're also expensive, even more expensive than their US counterparts because there's fewer of them. So this is not just an S&P issue. It's any high quality equity in the world is expensive.

Because those are your trophy assets. That's what you have to own in a world where you're kind of, we have this underlying inflation that is persistent and it's not going away because of the addiction we have to government spending. Yeah, so let's talk about that. A little vibe check here. So this weekend you have Morgan Stanley, you know, your premier clientele, institutional clients, right? This Comfab down in Florida. And you're going to be speaking to them, keynoting. And, you know, anybody who's everyone there in the world of institutional fund management,

What's the vibe like amongst these? You speak to these folks every day. You're traveling around the country, that sort of thing. How are they feeling about what you just laid out that if you want quality, you're going to have to pay up for it right now? Is that something that folks are very comfortable with?

They're doing it. And by the way, the best money managers in the world have been doing it for years. This is not a new dynamic. I mean, this sort of bid for quality started really even pre-COVID. And it started kind of in 2017, 18, 19. And it just kind of has persisted. The only year we had a tough year was in 2022. We talked about earlier, it's funny, 22 is a horrible year for the S&P. That's the last time that breath was really good. The average stock was

actually did much better it went down less or some even went up in 2022. so it to me that's a great point because we make it all the time that tesla meta netflix and uh nvidia all went down 75 from their 21 highs to their 22 lows and it's just astounding to think about that so that means with

The S&P was only down 22% with some of their big contributors down that much. There must have been a lot of stocks acting far better than most tech stocks. They were. And the reason being is because in 2022, I mean, the economy was really ripping. The private economy was ripping because it was still accelerating off the COVID lows. And there was all that velocity and it really kind of were reopening. Right. So there were a lot of businesses that were, I mean, earnings were exploding. Right.

And yeah, rates were higher, but it was a better, like these companies were actually doing better. Here's a little secret that people don't appreciate, which is the average business is better when inflation is accelerating, right? Because that's pricing. And people don't put two and two together. Now, the stock doesn't necessarily do as well because multiples may come down, but the breadth is going to be better in that environment because think about it. In a world where inflation is decelerating and pricing is not there and the private economy is kind of shrinking or in a recession,

most companies are going to shrink their earnings. So the big monopolies who are still growing, of course they're going to get a crazy multiple. - Are we at peak margins? We saw Procter & Gamble report earlier this week and they're talking about passing costs through less and less than they had been over the last few years. And again, that is a global company that has a lot of exposure overseas, but the earnings were fine. And so what does it mean if we get to a period of kind of peak margins for the S&P after these companies during inflationary period,

we're able to kind of have some pricing power. Yeah, that's why I think the first half is going to be a little choppier. It's going to be harder because expectations are higher. Multiples are still high. The Fed's probably not going to be able to cut as much as people were thinking two or three months ago. Back-end rates are sticky to the upside. And so now it really does come down to there are going to be individual securities and stocks that can surprise to the upside, even within the magnificent 20, call it, right? We're seeing a dispersion.

I mean, we're seeing some continued winners and we're seeing some that have really underperformed since the summertime. So, you know, probably more of that. By the way, because you're going to be down with all your big clients, we renamed the MAG-7 here at Risk Reversal Media. No, not we. We're calling it, you know, once Broadcom got into that trillion dollar market cap, we call it the fateful eight.

Okay. The fateful eight. If you want to use that, have a ball because we kind of like it. The fate of the market is in those eight stocks' hands. One last thing from me. So next week, we are also going to see you at the iConnections Global Alts Conference. And one of the things that, you know, Guy has been involved with this, I think, for years, right? Global Alts or iConnections just kind of, they just gobbled up MFA, okay? This is becoming an absolute

massive event. I think they have over 4,000 allocators and fund managers there. And so for us, like when we're taking a vibe check and trying to get a sense for it, it's just amazing how much this thing has grown. And do you feel the market, again, you know, you've been doing this for a long time. Do you feel just...

this thing just getting bigger and bigger. Use the term blob as it relates to the government. It feels like this industry that we're in just keeps getting bigger and bigger. Part of it is passive, like you talked about. Part of it is willingness to kind of take more risk outside the curve. Part of it is what's going on maybe with rates and the funding and then the fiscal on the other side of it. I'm just curious, what's your take generally about just the whole infrastructure that we live in right now?

You know what they call this? What? A bull market. I mean, it's not complicated. But everything feels really bullish. Right. Right. But it's a bull market. I mean, of course, things expand and excitement expands because people are making money and everybody's a genius and it's fun.

I have people crawling out of the woodwork that I've not heard from a long time and saying, hey, I've seen you down at iConnections on Fast Money. I'm going to be down there. I'm not lying to you. Like dozens of people over the last six months or so, which just it says a lot to me about where folks are. It's a fine line between, you know, everybody, you know, bubble, bubble versus bull market, whatever. Look, it's an upward trending asset inflation. I've kind of made the joke that AI really stands for asset inflation, whatever. I mean, all those things are true.

And some are happening for the right reason and some are happening because it's excessive. Okay. So, you know, the job of an investor is to try and find the pockets that have yet to inflate.

and be careful about the ones that maybe have inflated too much and just be honest about it. And that doesn't mean you have to get off the train and sell everything. It just means you got to do your work. And that's why we keep going to these events because there's always opportunity, both on the long and the short side. We value our friendship. The fact that you come and join us quarterly has been wonderful for us and our audience. And the fact that you're still excited about what you do, and you are, I mean, you could hear the enthusiasm is really, I think...

A testament to who you are and who your team is. So Mike Wilson, once again, thank you for joining us. Thanks, guys. Always a pleasure.