The Bears are Bailing | What the Last One JUST Said.

my gosh everyone around me is a bear

like in other words when when he's

researching or studying or whatever or

reading reports whatever it is he's like

oh my gosh everyone's bearish

so he makes this argument he's like oh

no I've been caught

as a contrary in a room of contrarians

and so the irony is like wait a minute

if you're a bear because you thought you

were contrarian but everybody's a bear

are you really a contrarian

and it's this this is funny irony and so

we joke about it but but anyway you know

I guess as as Finance people we think

that's funny but it's probably just a

lame joke but uh yeah it is really

interesting because there is a lot of

bearish sentiment especially amongst I

would say people uh I would say some of

the people who are more prone to be

bearish right now are

actually I would say people who are

above 40 years old and that's not to be

uh how should I say um you know I'm not

trying to be like ageist here but I

think that people above 40 years old who

are bears right now uh or potentially

bearish because they have that that uh

ingrained memory of how horrible 2008

was or maybe even the.com era or if

you're older and you remember how

terrible the the late 70s and early 80s

were in terms of of recession or even

the SNL crisis which a lot of people

skip over when it comes to talking about

Federal recessions and that but you look

at the Savings and Loan crisis and how

terrible that you know real estate

crisis was in the late 80s you know

you're 87 88 89. uh then then you've

you're very jaded to economic pain and

uh it wouldn't make sense uh that you

know quote-unquote words this time is

different that this time would be

different it just doesn't make sense so

when you look at how invert the yield

curve is there is this this complete

explanation to say look I might not know

what's going on but I I know how I felt

in the past and I know what the bond

market is saying via the inverted yield

curve and this is bad that's uh a a a

strong argument uh that the Bears have

but and we're going to look at what

Morgan Stanley's biggest bear Mike

Wilson has to say in just a moment but

it is interesting that if if history

potentially Jade's older folks into

being more bearish then there is a real

risk that they potentially just

completely miss out on this recovery in

the stock market which which would be

quite disappointing especially for those

who are whom are older because those who

are older would would likely have more

of their retirement at risk and so the

the risk of actually not being in the

market might be substantially greater

than than you know trying to play the

tithing of it based on sort of this

intuition because quite frankly uh the

the inverted yield curve you could

explain laying it away very quickly and

and look this is going to be a bear

piece we're going to look into Morgan

Stanley's bear argument here Mike

Wilson's Best Buy argument we're going

to look at but I want to say one thing

before I talk about Morgan Stanley's

best bear argument

why would the yield curve be inverted

well the yield curve practically is

inverted when the two-year yield is

higher than the 10-year yield right

why might that be

well what if the yield curve is actually

so inverted because in this cycle

markets have actually come to believe

that inflation will prove to be

transitory

well if markets believe that inflation

will prove to be transitory then you

know you're going to have high inflation

for you know this year this you know the

last 12 months in the next 12 months and

you're going to be able to capitalize on

higher uh bond yields and other well I

should say you you're going to demand

higher bond yields so in other words

you're not going to buy the two-year

Bond unless you're getting compensated

more because inflation is high so the

market is actually requiring higher

compensation now

because inflation is high now but the

market is willing to take lower

compensation in the 10-year on a year by

year basis because we expect inflation

to go down so ironically you can yet

again dismantle the inverted yield curve

simply by making the argument that well

of course if inflation is going to be

high for a couple years here and then

lower in the future of course people are

going to buy the two years unless they

have a higher nominal yield than the

10-year most otherwise yeah anyway so

let's get into the bear piece I don't

want to belabor that too much let's get

into Morgan Stanley's bear piece here uh

let's see what's going on what what we

have to say over here so

this is uh Morgan Stanley's biggest bear

it's Mr Mike Wilson I I actually I think

he's smart but I think he's so smart

that he's buried himself into this

bearish corner and he just can't get out

uh he just can't get out

so what does he say this time and and I

want to be clear when he published this

this was published the 11th so yesterday

yesterday evening ish since there was a

gene well where would there be more

whatever

last week we released our mid-year

outlooks for strategy and Econo

economics

for U.S equities our key differentiated

view now centers on our well below

consensus earnings forecast for 2023

followed by a forecast for a Sharp EPS

recovery in 2024. okay so let me

translate that to English because that

was a pretty ridiculous

so uh in terms of like the language here

let's let's simplify this language

Morgan Stanley's biggest bear is telling

you that the earnings recession in 2023

is going to be really painful but then

there's going to be this massive

recovery in earnings per share next year

hey now what I've done yesterday is I've

made this argument and I want to compare

that to what Morgan Stanley here says I

made this argument yesterday that

you have three scenarios the three

scenarios are that either the FED

completely pauses and chills uh and

eventually Cuts rates which is going to

be great for stocks that's the the

bullish argument the base argument is

that maybe the fed's got another hike in

it or two hikes in it and quite frankly

Even If the Fed has another hike or two

in it I think the market will probably

just keep marching on it's like you know

John Brown's Body the glory just keeps

marching on okay

and then there's the bear case which is

we go into recession you have this

earnings recession and you have more job

loss in which case the FED will likely

cut rates anyway which probably will

also be bullish for markets because well

just look at Germany I suppose there is

a fourth scenario which is stagflation

which is where inflation runs hot which

disallows the fed from cutting while you

have an earnings recession okay fine

that would be a potential fourth case so

uh but but again you know we want to

evaluate where is the inflation coming

from to support stagflation right now

we're not seeing that but but let's keep

listening here so what do we have here

Morgan Stanley it's Mike Wilson says for

the past several years our overarching

view on the markets has been shaped by

our hotter but shorter cycle framework

and this is basically where he's saying

like hey this cycle is going to be very

similar to the uh World War II the end

of World War II where basically what

happened at the end of World War II was

you had this really big build up of

excess savings and because people had so

much extra money at the same time that

manufacturers were focused on building

guns instead of butter right guns and

butter the old school version of that uh

manufacturers were not able to basically

fulfill orders as easily for goods and

there weren't as many laborers in the

correct positions yet to fulfill

services so you had what was a a

post-world War II inflationary boom and

this post-world War II inflationary boom

was seen as very similar to post covet

and what's interesting is post coven

listen to what Morgan Stanley suggests

happens He suggests that in each case

after that is post covet and post World

War II fundamentals and asset prices

returned to their prior cycle Highs at a

historically rapid Pace the Boom in

inflation and earnings in 2021 which we

forecast well in advance eventually led

the FED to tighten policy at its fastest

Pace in 40 years this boom and the FED

reaction proved surprising to many now

we suspect many will be surprised Again

by the depth of the earnings decline in

2023 as well as the subsequent Rebound

in 2024 so in other words that he thinks

that there's going to be this really

short and Rapid bust and then boom again

and that's because he thinks we're going

to go from boom of 2021 to bust of 2023

and boom again in 2024. somehow he

thinks we're going to pendulum swing to

the other side so very very rapidly that

this earnings recession is going to be

so bad that you won't even want to be in

stocks for it but it's going to recover

very rapidly so be careful not to be in

it it's kind of a really weird argument

and I'll tell you almost every time I

read Morgan Stanley's Mike Wilson I feel

his bearish argument becoming

weaker I hate to say it okay but I mean

you can read the piece here you've seen

every word of this so far we'll keep

going here but let's keep going

the boom bust period that began in 2020

is currently in the bus part of the

earning cycle a dynamic that we believe

has yet to be priced in during this bear

Mark at the begin 18 months ago and is

largely related to just higher interest

rates in other words margins and

earnings will decline rapidly as

inflation Falls so be careful what you

wish for very interesting argument

because there's this argument that hey

wait a minute all y'all Bulls want

inflation to go down but don't worry

when it does oh boy it's gonna also kill

earnings I'm going to talk about that in

a moment in terms of where but let's

keep going

we think many investors are making two

key assumptions that may be at risk

first the impact of interest rates on

growth is behind us this is assumption

number one in other words assumption

number one is interest rates have

already affected us

and assumption number two of the Bulls

is that several areas of the market

including consumer cyclicals Tech and

consumer communication Services have

already had earnings recessions last

year I've actually mentioned this I am a

bull and I have mentioned this I have

mentioned that we already added earnings

recession you look at like Nike and the

chips and stuff you've already seen this

this is true and therefore are likely to

see accelerated earnings growth even as

other parts of the market suffer true in

fact now this is a Morgan Stanley

responding that re-acceleration is now

built into consensus it's basically

saying yeah but the Market's already

pricing in that rebound in other words

you've got Morgan Stanley now responding

with we think this consensus view stems

mostly from some large companies

sounding more optimistic and artificial

intelligence and what it means for both

growth and productivity while individual

stocks will undoubtedly deliver

accelerating growth from spending on AI

we do not think it will be enough to

change the trajectory of the overall

cyclical earnings Trend in a meaningful

way instead it may pressure margins

further oops I put some charts in here

for companies who decide to invest in AI

despite flat or decelerating Top Line

growth in the near term okay this is

such an incredible mind Twist of Mr bear

here

that we have to pause for a moment and

think about what the hell he just said

he literally just said

that some companies are going to spend

money on artificial intelligence and

because they spend money investing in AI

they're actually going to end up having

even worse earnings because they're

going to waste money on AI and it's not

going to work

oh boy

you really have to be a bear to make

that argument don't you let me rephrase

that one more time

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that out as well okay so with that said

think about what Morgan Stanley just

argued Mike Wilson they made the

argument that okay fine artificial

intelligence is actually hurting our

bear thesis but but but did you know

there are going to be companies who are

going to waste money on AI and it's not

going to be very productive and that's

going to feed right back into The

bearish Narrative of an earnings

recession and earnings falling

it's a pretty damn weak argument for a

bear I have to say that's a very very

weak argument I see what he's saying but

it's incredibly weak okay we note that

earnings recessions over the past 70

years have often bottomed close to 17

percent in terms of earnings growth the

exact decline we're forecasting for 2023

this estimate is based on output from

our earnings models which capture the

timing and magnitude of the deceleration

and earnings growth we have seen so far

in the cycle the historical analysis

suggests it's unlikely that the earnings

recession will stop and reverse at its

current levels giving us the confidence

in our estimates finally earnings

quality as measured by net income to

cash flow recently we reached its

weakest level in the past 25 years we

see this as yet another warning sign

that earnings growth will deteriorate

further as the cycle turns and

accounting policies reverse slash are

reset to more conservative assumptions

we further note that over earning during

the pandemic and the low quality of

those earnings is broad-based in other

words a lot of companies are going to

have really bad comparisons to the last

few years because they made money even

though they probably weren't supposed to

make money because everybody made money

because of copen as we head into 2024 we

see the market processing a much

healthier earnings backdrop and note

that our 2024 earnings estimate growth

is plus 23 okay so he's so bearish

he's extremely bullish on 2024. this is

so bizarre to me I find it so bizarre

that Morgan Stanley is is holding on to

this bear argument so strongly that they

have to go as far as saying that well

some companies are going to waste money

on AI man and and and then but don't

worry 2024 is going to be great we're a

bull in the long run but it's just gonna

be bad in the short term yeah

okay all right Mr Morgan

for investors who agree with our

earnings path they may decide to Simply

look through the downside this year

however given where valuations are today

we think that is a risky strategy this

is him basically saying look we don't

think you should be in stocks right now

and we think you should be careful for

2023 but in the long run earnings are

going to be great

so let me summarize the really horrible

bear argument the really horrible bear

argument is hey you need to pick stocks

because some stocks are going to waste

their money on AI and some stocks aren't

going to do enough or or are going to do

well enough in fact remember right here

he says individual stocks will

undoubtedly deliver accelerated growth

right

so some stocks are going to do great a

lot of stocks are going to do poorly but

in 2024 everything's going to go to the

Moon

that's the biggest bear argument on Wall

Street right now I don't think

I don't think you can find I mean I'm

sure I mean Jeffrey gunlock is another

big bear but he's a he's a bond market

you know technician and and I don't

blame him for using the bond market to

say dude the yield curve is so inverted

just wait for it to reinvert

you know you're gonna have a massive

recession and that's that's that's

probably the the other bear argument

that Morgan Stanley isn't even bringing

up over here well Mike Wilson at Morton

Stanley

um

but again a lot of that inverted yield

curve can be explained Away by of course

if we're going to have high inflation

for 2022 and 2023 and maybe into 2024

you're going to demand a higher yield on

your two year because why would you put

a dime into a two-year Bond

if the tenure

will compensate you more

you wouldn't so you wouldn't buy the

10-year or sorry you wouldn't buy the

two a year until the yield is higher

because inflation is high right now

which means when people don't buy a bond

the yield goes up and then the yield

Rises to the point where people actually

start buying it

so it's it's quite remarkable when we

consider

that this is supposed to be one of the

biggest bears on Wall Street and it's

just it's just not looking good

um so and then of course we have

commodity Steve a fellow Canadian a uh

suggesting that uh lithium will still be

in high demand so remember to check out

your rocks and he's not wrong lithium

will absolutely still be in high demand

I agree with that

uh let's see here uh second wave okay

and then and then Steve does reiterate

this part of the bear narrative which is

that the second wave of inflation is

going to come due to a reduction of

capex spending on future growth across

multiple sectors

are you suggesting a decline in

productivity that's an interesting

argument a second wave of inflation is

going to come due to a reduction of

capex spend on future growth well if you

don't

invest into future growth you're

basically reducing your your you know

your your future productivity

um look I would argue and and I think

this applies to both what Steve is

saying and what Mike Wilson is saying

I would make the argument that you

really are going to see some companies

suffer uh I believe and I've believed

this for a very long period of time

about you know probably about eight

months that the consumer staples uh have

had their had their run okay they had

their safety run at the beginning of

2022 they had their lingering price

increases but the days of Coca-Cola

Walmart McDonald's Target Costco the

days of these staples Home Depot those

that the Kimberly Clark Procter Gamble

3M the base of the Staples are over

Walgreens the Staples are done honestly

most of them have been on a downtrend

for the last six seven months they've

sat out the tech rally uh and so now I'm

a little weirded out because you know

six seven months ago I I was basically

all in on

I was basically all in on uh chips and

Tech but now chips and Tech have run so

much to where the peg ratios are

starting to get out of whack again you

know I like to buy with a peg around

like 1.6 1.7

Tesla's above that now the chip

companies are all above that now

although you know it's it remains to be

seen what the actual growth will be of

these these chip companies you know

that's the other question is like how do

you calculate earnings growth when

what's driving growth keeps changing and

and so there's this question like well

is artificial intelligence spending just

going to create one cycle of massive

revenue for a company like Nvidia or is

this going to be you know multiple years

of adjusted Revenue up uh you know who

knows

Steve and Mike sitting in a tree k i s s

i n g oh my God

kindergarten's in the house here

okay I'm suggesting that companies are

not investing in their future because of

the high cost of capital IE Supply will

not increase in the future okay yeah so

that's actually an interesting argument

that because it's so expensive to to uh

for to basically access working capital

right now it might make less sense to

invest in Machinery or whatever going

forward

um I I think as a counter argument I

think you might be slightly over

evaluating how much interest spend

affects

um you know some of the larger uh

drivers of innovation today uh I I think

that most of the large companies today

that are really driving productivity uh

see interest expenses is a really

nominal sort of footnote on on their

income statement uh it would be worth

looking at each company in individually

like I don't think that's true for

cruise lines right for cruise lines

interest expenses is massive for a

company like a Disney interest expenses

is a massive expense but then when you

look at a company like apple or you know

some of the other technology companies

interest expense is relatively nominal

uh to where you know it would be

interesting to look at the manufacturers

though maybe look at like a TSM right uh

how much does interest really affect

them I I I'm not I'm not entirely

convinced that the drivers there are not

going to double down on investment but