00:00So I've been conditioned to ignore this situation.
00:02I wake up this morning, I want to ignore the situation.
00:06Can I ignore the latest situation in the Middle East?
00:08No, absolutely not.
00:10I mean, this is a geopolitical crisis that just won't go away, won't end.
00:16The ceasefire, according to the president, is over.
00:19And he's clearly in a position to know and in a position to end it.
00:24So we're back to square one in some ways, back to where we were in March.
00:30I think, though, I think both sides are testing one another.
00:33I think the president is demonstrating to the Iranians that while they may have, obviously,
00:40a significant impact on flows through the strait, he can shut off their oil to the rest of the world.
00:46The unsettling development here, I think, is it may very well be that Iran is basically out of control,
00:52that the Revolutionary Guard is not going along with whoever is, quote-unquote, on the moderate side.
01:03Moderate being that they'd like the ceasefire to continue and they'd like to come up with some sort of agreement.
01:09But the president made it pretty clear that it's very frustrating, if not impossible, to negotiate with the other side.
01:18And so clearly, we can't ignore this.
01:20At this point, it is sort of surprising, as John was mentioning, that oil prices aren't even higher if the
01:25truth really is over.
01:27Though the pace of increase is pretty notable.
01:29The two-day increase for both Brent and WTI is the most since at least April.
01:34And you see just sort of this surge upward.
01:36Is there a trigger point, either in the pace of increase or the level, that could make you rethink even
01:41the broadening out trade in U.S. equities?
01:45Lisa, the honest answer is I don't know.
01:48Nobody knows for sure.
01:51So we are all watching the price action in the marketplace, particularly in the oil market.
01:56And I think what we're seeing is we're being reminded constantly here that there was a bear market in oil
02:02before the war started at the end of February.
02:06The bear market actually started when Russia invaded Ukraine.
02:11We had a big spike there.
02:12And ever since then, we've been on a significant downtrend until this war started.
02:17So that kind of – and certainly everybody was surprised by how quickly the price of oil came down.
02:23And I think that just reflects that over in China, they really adopted electric vehicles.
02:29And on top of that, their economy is really very weak.
02:32And on top of all that, the United States has looked the other way as the Russians have been selling
02:38more oil to China and India and other countries.
02:42And meanwhile, we've been exporting a lot of oil to Japan and South Korea.
02:47So put it all together and the underlying fundamentals for oil are actually bearish, but they're certainly not bearish in
02:56the short term here with the end of the ceasefire.
02:58The volatility that we're seeing, Ed, though, just highlights how much inflationary pressures are coming from myriad places and seem
03:05to be persistent, even when you want to say, look, there's potentially a glut because of all of these release
03:11valves that you talked about.
03:12At what point do you think that this market is underpricing the risk of inflation running a bit hotter, putting
03:20pressure, yes, on the Fed, but potentially pressuring certain profit margins for companies that are facing a pretty wearied consumer?
03:27Well, before the June meeting of the FOMC, we thought that the Fed was going to pivot fairly significantly from
03:35an easing stance back in April to a tightening stance in June.
03:40And that's exactly what happened.
03:42And the big surprise to me was that Kevin Warsh turned out to be among the hawks because he had,
03:49when he interviewed for the job, he certainly sounded dovish.
03:53Now the Fed seems to be pretty much all aligned with the idea that price stability is much more important
04:00than the labor market.
04:02The labor market seems to be stable, but, you know, all bets could be off here depending on what happens
04:07with the Middle East.
04:09You know, the consumer has been doing just great, but if we get another spike in gasoline prices, there may
04:16be some kind of geopolitical fatigue.
04:20And meanwhile, the market has run into AI fatigue.
04:23And just, you know, as I saw in your brief cuts for all the strategists that you had interviewed recently,
04:31everybody was talking about rotation.
04:32I was talking about rotation out of the AI trade into companies that we know something about and we know
04:41their future more than we do the AI companies.
04:44And that was the Dow Jones.
04:46That was the Russell 2000.
04:48But now we're all back to, as I said, square one in some ways with regards to the Middle East.
04:55And that's become the main focus.
04:57And you're right.
04:58The inflation concerns are back in play.
05:01And as a result of that, the Fed is back in play.
05:04Not only is the Fed pivoted to tightening, but they may actually have to tighten.
05:09This is the three-punch combination right now to sentiment, Ed.
05:12It's not just the situation in energy, to your point.
05:15Correct.
05:15It's how you fold that into the outlook for interest rates.
05:18And the third point is this rotation.
05:20Quite vicious rotation away from the high flyers in this equity market right now.
05:23Lisa Shaloud of Morgan Stanley was pretty scathing in the last 24 hours.
05:27She said, while many investors are waiting for AI CapEx to actually slow before reducing semiconductor exposure,
05:32given what is implied about the sustainability of future growth, we're taking profits now.
05:37Ed, you were there too.
05:38And I just want an updated thought from you about where that chip stage trade stands now,
05:43given the 16% move we've had just in a few weeks.
05:46Yeah, well, clearly we did have a tremendous rally in the semiconductors.
05:54And that, of course, led the way up for the stock market.
05:59But the fact of the matter is it's not a FOMO melt-up.
06:04It's been a FEMO melt-up.
06:06FOMO means fear of missing out, which typically leads to very elevated valuation multiples,
06:13which basically is a valuation-led melt-up.
06:17This has been an earnings-led melt-up.
06:20And I'd rather have an earnings-led melt-up.
06:22I think there's less downside than there is in a FOMO melt-up.
06:26And I think it presents more of an opportunity in the market.
06:33Because the fact of the matter is earnings have really justified the rally in semiconductors.
06:39And it's not just expectations, but it's expectations based on actual reality.
06:44So I would view this sell-off more as an opportunity than a reason to panic.
06:48But right now we're seeing not so much panic, just massive profit-taking because there have been massive profits.
06:57So, Ed, you went there.
06:58When would you start buying these chips, these chip names that have been beaten up in just a few weeks?
07:02Well, I think we're getting pretty close because these things move, you know, they don't kind of do things in
07:11a leisure fashion.
07:11They go up very quickly.
07:13They go down very quickly.
07:14And so I think there's an opportunity starting right now.
07:18But I say that with some hesitation given that I don't really know.
07:23Nobody really knows how this latest end of the ceasefire plays out.
07:29And so the war is not over is the bottom line here.
07:32And the stock market is working on discounting that idea.
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