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Speaker 2: Peter Scher is at a macro strategy academy Securities. They
Speaker 2: have a real study of geopolitics and military affairs over
Speaker 2: arching their finance, which is wonderful for the guy with
Speaker 2: the incredible acclaim out of Waterloo and Vanderbilt over the years.
Speaker 2: Is the stock market dislocated from our geopolitics?
Speaker 3: I think it's behaving fairly this morning.
Speaker 4: I would have expected maybe down one percent, But I
Speaker 4: think the reality is if this blockad can be implemented
Speaker 4: in such way that the ceasefire is not broken, it's fine.
Speaker 4: I think that's the risk though, is that this just
Speaker 4: causes some degree of escalation.
Speaker 2: World War two analyze return seventeen percent per year, Korean
Speaker 2: War eighteen percent per year, Vietnam single digit six percent
Speaker 2: per year, Gulf War twelve percent per year, Iraq War
Speaker 2: ten percent per year. All up, stock markets do well
Speaker 2: in military conflict, don't they?
Speaker 4: They have in the past, and I think they could
Speaker 4: do again over time with this one as well. Again,
Speaker 4: we Russia Ukraine have been in conflict and stocks have
Speaker 4: generally done pretty well. I think this time, though, we've
Speaker 4: got to be a little bit cautious, because I feel
Speaker 4: like this is more once again a shifting of the
Speaker 4: world order, and some of the prior conflicts actually shift
Speaker 4: of the world order heavily in favor of the US.
Speaker 4: This seems to be kind of a continuing this theme
Speaker 4: of deglobalization.
Speaker 5: Where are people going for safety or hedging at the moment?
Speaker 5: I mean, you look at the dollar and had a
Speaker 5: great week last week. You look Bitcoin down about one percent.
Speaker 5: Where are people diversifying, if you will, away from exposure
Speaker 5: to equities?
Speaker 4: You know, things that I still like are what we've
Speaker 4: been calling production for security, So anything that the US
Speaker 4: needs to produce domestically they should be buying. You look
Speaker 4: at Intel. Intel had a phenomenal week. That would be
Speaker 4: in there. I think energy companies, rarest critical minerals. I
Speaker 4: think you're going to see some you know, good plays
Speaker 4: continuing in the nuclear sector. You're seeing the same thing
Speaker 4: in Europe. You're seeing Nokia do well BP shall So
Speaker 4: I think everyone's going, what do countries need to make
Speaker 4: more of their own buy those stocks, Those companies will
Speaker 4: benefit from this kind of deglobalization.
Speaker 5: So if the ceasefire holds, you say, hey, look, even
Speaker 5: if we're able to successfully block the straight up Hormos,
Speaker 5: no big deal.
Speaker 4: I think there's only been three or four ships going
Speaker 4: through as it is, So if it kind of goes smoothly,
Speaker 4: no big deal. The flips the positive side would be
Speaker 4: if we're actually in there clearing up minds, that would
Speaker 4: be an awesome step for it. Right all of a sudden,
Speaker 4: you're potentially opening it.
Speaker 3: The flip side.
Speaker 4: The bat negative side would be if we, you know,
Speaker 4: get China involve somehow things could go wrong or does
Speaker 4: this cause the hoodies to do something in the Red Sea.
Speaker 4: That's to me that's the escalation risk, and or if
Speaker 4: Iran goes back after Saudi Arabia's pipeline. So I could
Speaker 4: see this playing either way. I think that's what we're
Speaker 4: all sitting there watching, is one what does the military
Speaker 4: actually do, what does this blockade look like?
Speaker 3: And from there we'll get a better sense of what
Speaker 3: the risks are.
Speaker 5: I mean, I think that's the big question. You can
Speaker 5: say it, but in practice, how do we block Iranian
Speaker 5: oil from getting to the rest of the world. I
Speaker 5: think you bring up an excellent point with China because
Speaker 5: I think the one country here that could get really
Speaker 5: hurt is China because how would they get their oil.
Speaker 5: It's heavily dependent.
Speaker 2: On a run.
Speaker 3: Right.
Speaker 4: So now China, though, did stockpile I think a billion
Speaker 4: barrels of oil. I'm sure they're depleting some of that,
Speaker 4: so they've got some wiggle room there. The other thing
Speaker 4: that we don't know is how much economic pressure this
Speaker 4: really puts on a rank. Clearly it puts economic pressure,
Speaker 4: but do they have one months of savings, three months
Speaker 4: of savings, six months of savings?
Speaker 3: Have they struck deals?
Speaker 4: I think it's not going to work as well economically
Speaker 4: as the administration.
Speaker 2: I mean, it's the earning season here in a moment.
Speaker 2: But Peter Cheer, I think we need to clarify. This
Speaker 2: is great this morning on this we have moved from
Speaker 2: the hysteria of a blockade. I think it was two
Speaker 2: days ago, correct me, Alexis if I'm red Sex, it
Speaker 2: was a long weekend. We've moved from a total blockade.
Speaker 2: The world's coming to an end to now a blockade
Speaker 2: of Iranian port traffic, which AI tells me is ten
Speaker 2: to eleven percent of the oil flow of the Persian Gulf.
Speaker 2: So we're not blockading Kuwait. We're blockading one and eleven
Speaker 2: barrels one in ten barrels right right.
Speaker 4: And I think that's to me the one thing A
Speaker 4: couple of our CAAA people in particular are always careful
Speaker 4: about this, but some of our generals as well, is
Speaker 4: everything that is said by either the President or the
Speaker 4: Secretary of War has a political angle. Everything that the
Speaker 4: military says and done is meant to be a political
Speaker 4: So that's where you're getting the real story of what's
Speaker 4: going on.
Speaker 2: What's the real story right now that we don't know?
Speaker 4: I think until we see what actually gets put out
Speaker 4: there in display what we're actually doing. And again, I
Speaker 4: would love to see our ships go into the strait
Speaker 4: and actually do the mind sweeping.
Speaker 3: I think that would be great.
Speaker 2: Are they at risk if they do that? What do
Speaker 2: your ediminals in general say?
Speaker 3: I think they're definitely at risk.
Speaker 4: And that is you know what I think everyone's trying
Speaker 4: to figure out is we've had these three or four
Speaker 4: days or maybe a week where cost sides are bringing
Speaker 4: out more weapons. Who has what? It's kind of like
Speaker 4: those old six shooter movies. You know, everyone's counting the bullets.
Speaker 4: I think we're trying to figure out what the RAN
Speaker 4: has left. They're trying to figure out what we have.
Speaker 2: John Bolton with Bloomberg this weekend. We're going to play
Speaker 2: that later, really brilliant interview with attentions here in her moves.
Speaker 2: Bolton didn't dodger. Bolton didn't mince words at all. Okay,
Speaker 2: I want to get back to the earning season. Gulden
Speaker 2: secs starting us off in twenty minutes as well. I
Speaker 2: saw in the Zeitgeist this weekend some number, which of
Speaker 2: course I can't remember because they had a beverage in
Speaker 2: my hand. Let's go to AI, Peter Shre. Mag seven
Speaker 2: makes up forty percent of earnings growth, the growthiness of
Speaker 2: earnings two years ago. Now they maybe make up twenty
Speaker 2: some percent. Is that diminishing? Are we going to have
Speaker 2: a Meg seven earnings growth this time around?
Speaker 4: You know, I think the Mags seven and Compasses come
Speaker 4: companies that aren't necessarily part of the AI story the
Speaker 4: way they once were right.
Speaker 3: You're seeing software kind of get hit.
Speaker 4: You saw Mythos calm out, you know, the Anthropic latest release,
Speaker 4: and everyone's talking about that. It dropped not just the IGV,
Speaker 4: which is a software ETF, but cyber CIBR, which is
Speaker 4: a cyber ETF. So you saw that, and yet the
Speaker 4: chip stocks are doing really well. So maybe this is
Speaker 4: just telling you if AI gets good fast, they're gonna
Speaker 4: need more chips. We're gonna need more data centers and
Speaker 4: more AI processing, and it's going to diffuse who benefits.
Speaker 2: Though. Is there a broadening of the market into April
Speaker 2: bank earnings, tech earnings everybody else after that? Is there
Speaker 2: a legitimate broadening.
Speaker 3: There should be.
Speaker 4: I think we might finally be hitting the stage where
Speaker 4: the benefits of AI don't just accrue to a few
Speaker 4: AI companies, They accrue to the companies that are using them.
Speaker 2: Peer share of this with Academy Securities, Johmbo Van Blackrock
Speaker 2: coming up an extended conversation with doctor Boven the view
Speaker 2: of the global economics from the desk at black Rock
Speaker 2: as well. Henrietta Treys to be long later. Lori Kelvicina
Speaker 2: At some point in the show, I don't know when
Speaker 2: do we have a lineup real they've been on fire.
Speaker 2: You know what it is. Let's be honest. Winter and
Speaker 2: spring interns are always better than summer interns. They're not
Speaker 2: in the bars. I mean there's a big difference, Okay.
Speaker 2: I mean they're just simply they're more productive on Thursday
Speaker 2: and Friday. It's all there is to it. Alexis Christopher's
Speaker 2: with petershere.
Speaker 5: I'm glad we brought up AI because I want to
Speaker 5: talk about AI and how it relates to the banks.
Speaker 5: I mean, I think we all know trading volume was
Speaker 5: probably off the charts because of what's happening with the war,
Speaker 5: So the banks made a lot of big money there.
Speaker 5: But are we going to find out AI's impact on
Speaker 5: the banks during this earning season? Do you think it.
Speaker 3: Might be early?
Speaker 4: But again I think you're going to see some positive
Speaker 4: messages that they're getting some benefits, some efficiencies from this.
Speaker 4: I think the next wave too, will be probably a
Speaker 4: little bit early, but you're going to see I think
Speaker 4: a lot more m and a activity, more IPO activity
Speaker 4: that pickup in around this space. Again, also, I think
Speaker 4: in and around the new military. As you start thinking
Speaker 4: about there's going to be a push for drones domestically globally, right.
Speaker 4: I think that's one thing that comes out of this.
Speaker 4: So I think there's gonna be a lot of opportunity
Speaker 4: for some interesting private equity deals to get done, some IPO,
Speaker 4: some M and A activity.
Speaker 3: So I'm excited on that prospect.
Speaker 2: What do your people say about Baron's to big splash on?
Speaker 2: This is weekend and I'm not up to speed out
Speaker 2: of folks the musk Ipo. This is the first time
Speaker 2: I've ever asked this question, Peter. I apologize in advance
Speaker 2: the musk Ipo.
Speaker 4: You know, we think space has been a huge part
Speaker 4: of it. Again, I think space fits into what we've
Speaker 4: been talking about this production for security. I think it
Speaker 4: talks into a lot of the things that we've.
Speaker 3: Been looking at.
Speaker 4: Is is it profitable? I think it ultimately will be.
Speaker 4: I think it will ultimately be very proper.
Speaker 2: You can't say that with a straight face.
Speaker 4: I do think things will have to get done out there.
Speaker 4: I'm not so sure about the data centers in space.
Speaker 2: We went to the Moon because of the Russians were
Speaker 2: all in tears this weekend with Artemis too.
Speaker 3: It was absolutely Spectacu's pretty beautiful.
Speaker 2: Are you telling me musk is going to be a
Speaker 2: profit function with space.
Speaker 4: I think we're going to see profitability up there, and
Speaker 4: I also think part of it's going to be driven
Speaker 4: by some military spending that we have treated space as
Speaker 4: a very friendly you know Kumbayas at a moment. Russia
Speaker 4: doesn't treat it that way, China doesn't treat it that way.
Speaker 4: So I think we're going to put together things to
Speaker 4: make sure that we secure a space right. It's if
Speaker 4: you think about how dependent we are on communications, satellite, communications, GPS,
Speaker 4: all these things that we kind of tossed up there
Speaker 4: and said, oh this is working. You know, it's ever
Speaker 4: going to be nefarious. So I think there's some real
Speaker 4: opportunities and kind of space defense effectly full disclosure.
Speaker 2: We're watching the re entry, you know, they're coming in
Speaker 2: at twenty four thousand miles per hour, and the coverage
Speaker 2: I watched it off the Associated pressed me down. Ludlow
Speaker 2: at Bloomberg doing a great job as well, and I'm
Speaker 2: like every other moron out there, going what if they
Speaker 2: hit a satellite.
Speaker 3: I mean, I thought.
Speaker 2: People in the business would laugh at before then, but
Speaker 2: that's what I was thinking. Oh, my god, I want
Speaker 2: to something.
Speaker 5: What you talked about M and A. I mean, we've
Speaker 5: seen the pickup in M and A activity in this
Speaker 5: environment with so much uncertainty. Are you surprised by that
Speaker 5: or is this the Trump administration being friendly to corporate America.
Speaker 4: I think it's partly the Trump administration being friendly to
Speaker 4: corporate America. And despite the uncertainty, again, you start looking
Speaker 4: at these themes, whether it's production for security data is
Speaker 4: an electricity generation? Right, those are the themes I think
Speaker 4: that are really catching on, and they're relatively new themes
Speaker 4: there the last couple of years. So I think as
Speaker 4: those themes play out, that's what creates the opportunity. Right,
Speaker 4: what can we do ourselves again? What can we mind?
Speaker 4: What can we do global shipping? We have to make
Speaker 4: ships again. So I think it opens up a whole
Speaker 4: new set of businesses that have been left for dead
Speaker 4: to some degree for the last five to ten years.
Speaker 4: And that's why you can get this MNA activity. You
Speaker 4: get good valuations and companies people believe will grow and
Speaker 4: be profitable.
Speaker 2: Quarter after quarter after quarter. We low ball earnings, OMG,
Speaker 2: that came in better? What this the pre war earnings
Speaker 2: granted earnings end of March. Fine guidance. We're just I mean,
Speaker 2: you can literally write the script right now. Everybody's gonna
Speaker 2: be OMG, they're gonna be terrible, right, We're all gonna
Speaker 2: wait for June thirtieth. Yeah.
Speaker 4: And what I'm even more than the geopolitical, which is
Speaker 4: obviously a big part of it. I want to see
Speaker 4: what they're seeing in global sales. How badly has Asia
Speaker 4: been hit. I think Asia has been hit much harder
Speaker 4: than us by the rise in oil prices, the inability
Speaker 4: to get oil. I think Europe's having their own set
Speaker 4: of affordability issues again, consumer confidence, which I don't pay
Speaker 4: a lot of attention to. It came out the worst
Speaker 4: of all time, so at least that I have to
Speaker 4: pay some attention to. I'm concerned that we are going
Speaker 4: to see a slowdown and spending as everyone becomes a
Speaker 4: little bit more conservative due to so much uncertainty and affordability.
Speaker 2: I got to go to news. There's so much newsflow. Also,
Speaker 2: we have somebody new doing news, so I got to
Speaker 2: get to them earliest. So it doesn't you know, doesn't
Speaker 2: screw up needs your side flash, you know, I'm nervous
Speaker 2: going to them. He's brand new. Here's here think thank
Speaker 2: you so much, Academy Securities. Stay with us. More from
Speaker 2: Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us Live
Speaker 1: weekday afternoons from seven to ten am Eastern. Listen on
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Speaker 2: So here's the way we roll, folks. J'all movan with
Speaker 2: US Global had a research Blackrock Investment Institute. And the
Speaker 2: reason that he's here is because Cole Calawfield had fifty
Speaker 2: goals plus and mister suzuki At I think his one
Speaker 2: hundredth point last night for Les Abidan. And it's good
Speaker 2: to have you been up to Montreal to see the excitement.
Speaker 2: I didn't get a surce.
Speaker 6: It was in Montreal a few weeks ago, but I
Speaker 6: didn't get a chance to see the hobs. But it's
Speaker 6: great to see the outcome.
Speaker 2: So I skim the politics this week. In a Quebec
Speaker 2: there's a new leader of the very very far Love
Speaker 2: Quebec Party. Are the elements of Trudeau and Quebec of
Speaker 2: Trudeau's senior incorrect or beyond that to where it's much
Speaker 2: more nationwide Liberal party affecting Quebec politics. I don't know.
Speaker 6: I think the election from the Miss Madame Cochette now is,
Speaker 6: I think is an interesting outcome. I'm not like a
Speaker 6: very closely following the Quebec politics to be honest, but yeah,
Speaker 6: I think there's going to be a change.
Speaker 2: It's like a generational change. This to me as well,
Speaker 2: let's get to the moment at hand. You're writing for
Speaker 2: Blackrock with all your wonderful people as well. Is there
Speaker 2: a good linkage of our geopolitical stress from the earnings
Speaker 2: juggernaut that is technology, the growth of earnings, of growth
Speaker 2: and revenues. Are they separate things or do they conflict together? Yeah?
Speaker 6: No, I think there has been with the conflict we've
Speaker 6: seen in the Middle East, a disconnect that has been
Speaker 6: a peer between what we think are very solid catalysts
Speaker 6: for for earnings and that have been materializing, especially in
Speaker 6: the tech space, and the degrading we've seen inequities during
Speaker 6: that period. So that is understandable in the context where
Speaker 6: there's significant worries about the knock on effect of the
Speaker 6: supply shocks and what that might be doing to the
Speaker 6: global economy, but to the extent that those get to
Speaker 6: be contained, and I think that gap becomes an opportunity.
Speaker 5: You know, Look, the markets are a forward looking animal, right,
Speaker 5: and it makes you wonder, what does the market know
Speaker 5: that we don't know when we're just an hours away
Speaker 5: from this blockade that that Trump is threatening against the
Speaker 5: straight of hormones and we just have WTI creweded about
Speaker 5: about one hundred and four a barrel.
Speaker 6: Yeah, I don't think the I don't think the market
Speaker 6: knows more than anybody. Actually, I don't know who knows
Speaker 6: anything about what's going to really happen, even the key
Speaker 6: decision maker involved. I mean they're they're you know, we're
Speaker 6: going to figure out a way out of it. But
Speaker 6: I do think that these are events that the markets
Speaker 6: cannot really priced in one way or the other. I mean,
Speaker 6: these are binary. If we're going to see a bad
Speaker 6: outcome coming, then your market will react. But until then,
Speaker 6: I think it's very costly to stand the sideline for
Speaker 6: for market participants.
Speaker 1: Uh.
Speaker 6: And there is a credible likely scenario where things, you know,
Speaker 6: the escalate from here, and I think that's that's what
Speaker 6: the market's gonna run.
Speaker 5: You're saying staying on the sidelines, hanging on a dry
Speaker 5: powder is not the way to go right now.
Speaker 6: I think I think, you know, there's no neutral position
Speaker 6: really in this in this environment. So you you can
Speaker 6: decide to say, I'm going to stand the sideline, but
Speaker 6: that could be the time where we get very significant
Speaker 6: return coming would be bad for our clients, or you
Speaker 6: can decide to to stay in and then if we
Speaker 6: do get a bad outcome, then that's gonna be that's
Speaker 6: gonna be, uh, you know, also detracting from portfolios. I
Speaker 6: think at the moment, it's a bigger call to say
Speaker 6: that we're going to see a very bad outcome that's
Speaker 6: going to sustain because I believe, I mean that's a
Speaker 6: strong belief, right, is that at the end of the day,
Speaker 6: they are very strong economic incentives that will shape the
Speaker 6: behavior of the actors and everybody is affected by these
Speaker 6: strong economic incentives.
Speaker 2: Jem levent with his folks Global how to Research black
Speaker 2: Rock Investment Institute out of the University of Montreal, and
Speaker 2: then he wandered to Princeton under a guy named Bernanki.
Speaker 2: Bernanke's heart and soul is the integrity of the financial
Speaker 2: system is the most important thing in crisis. That was
Speaker 2: a huge difference between Freeman's and Schwartz's work years ago.
Speaker 2: Do we have a solid financial system? To me, it's
Speaker 2: looking pretty well. As Jean Belevan worried about private credit
Speaker 2: creating the angst of previous eras, I think.
Speaker 6: We are in a very different situation than we have been.
Speaker 6: You know, if we go in the most recent financial
Speaker 6: crisis in two thousand and eight, right, so we have
Speaker 6: had a major uh you know, pause initiative that have
Speaker 6: been built over them many years. I think we've seen, uh,
Speaker 6: you know, a different financial system. And if you go
Speaker 6: back to the same kind of like source of crisis
Speaker 6: that we've seen back then, leverage in the system, hidden
Speaker 6: leverage and so on, it's difficult to put the finger
Speaker 6: on the on the same kind of phenomenon, right play here.
Speaker 6: Uh it doesn't mean and every crisis becomes a different things,
Speaker 6: right So, it doesn't mean that there we won't discover
Speaker 6: that there was some uh some excessive risk ticking. But
Speaker 6: I think at this juncture, it's hard for us to
Speaker 6: see uh, you know, systemic risk that creates these.
Speaker 2: John, you know where I am on this and the
Speaker 2: huge body of the financial media. I call it the
Speaker 2: parlor game. Want central banks and particularly the FED to
Speaker 2: get out front, to be ex ante. All of the
Speaker 2: history is an ex post study as well. They wait
Speaker 2: and they wait. How does that ex post study chain
Speaker 2: given a war? I mean they just have to wait.
Speaker 6: Yeah, I think in terms of you know, we're actually
Speaker 6: more jilly in this environment for central bank. I think
Speaker 6: we're facing a set of shocks. We call that an
Speaker 6: environment shape by supply. We face a set of shocks
Speaker 6: to which central banks are not that well equipped to
Speaker 6: deal with and as a result, you know, I think
Speaker 6: there's a good debate to know when central bank should
Speaker 6: lean against excessive restaking in accenty as you say, or not.
Speaker 6: But right now I think it's a different question. I mean,
Speaker 6: these are shocks to which, uh, you know, supply shocks
Speaker 6: to which monetary policy has a little to do about.
Speaker 6: And so I think that reinforces the case to you know,
Speaker 6: look at the inflation consequences and respond to that. But
Speaker 6: I don't think there's a financial objective.
Speaker 2: What's what's the choice set of data they look at
Speaker 2: to see if inflation shifts? Is it just ampule? Is
Speaker 2: wage and real wage growth.
Speaker 6: No, I think in this environment, in this and now,
Speaker 6: with the nature of the shock we're we're facing, I
Speaker 6: think it's going to be about tracing out the effect
Speaker 6: on the supply chains of the shock. It's not about oil.
Speaker 2: I mean, you're going to go over to a supply
Speaker 2: side analysis and ignore the demand side challenges.
Speaker 6: Well, I think in the scenario where we see some
Speaker 6: de escalation, I'm not expecting a lot of analysis to
Speaker 6: come through. I think it's going to be more of
Speaker 6: a we need to look through this. But if it
Speaker 6: is a world where the strait doesn't reopen soon and
Speaker 6: we have, like you know, months of that situation, then
Speaker 6: I think there'll be heavy into that supply chain analysis.
Speaker 2: A totally unfair question I have to ask it. Wayley
Speaker 2: would never answer it, but I'm going to go to
Speaker 2: you on this. Do we understand the profit making machine
Speaker 2: which is American Wall Street? Do we do we is
Speaker 2: a is a public the mass of JP Morgan, the
Speaker 2: sheer size, the brain power, the financial innovation that's out there.
Speaker 2: As a Canadian, do you do you think Americans understand
Speaker 2: the juggernaut which is American finance.
Speaker 6: I think the this is a manifestation of you know,
Speaker 6: a large set of things, but I think it comes
Speaker 6: down to a market that is very flexible, where you know,
Speaker 6: you have an ability to scale like you cannot scale
Speaker 6: in other countries. I mean one of the biggest challenges
Speaker 6: in Canada, you know. Ai'll leave with maybe I'll go
Speaker 6: with this point. I mean AI has been imagined, invented
Speaker 6: really in Canada. Two of the godfathers of AI are Canadians.
Speaker 6: But the monetization of it is a US story, and
Speaker 6: that speaks to your point I think, which is the
Speaker 6: ability to commercialize and monetize ideas in the US is
Speaker 6: on parallel and that thing that explains why the financial
Speaker 6: system as a result is also you know, as large
Speaker 6: as it is.
Speaker 2: Generous time. Thank you so much. Jambo is a Black.
Speaker 2: Thank you so much for coming in. Stay with us.
Speaker 2: More from Bloomberg Surveillance coming up after this.
Speaker 1: You're listening to the Bloomberg Surveillance podcast. Catch us live
Speaker 1: weekday afternoons from seven to ten am Eastern Listen on
Speaker 1: Apple Karplay and Android Auto with the Bloomberg Business app,
Speaker 1: or watch us live on YouTube.
Speaker 2: Christopher Smart is founder at managing partner at our Berth
Speaker 2: but as Bill Burns writes in Foreign Affairs this week,
Speaker 2: or I've seen Nicholas Burns, our former ambassador to China,
Speaker 2: out in the zeitgeist as well. Christopher Smart is part
Speaker 2: of that team, founder managing partner at Arberth with his
Speaker 2: public service to the nation in our diplomacy. So, Christopher,
Speaker 2: what's so concerning to me is we all at gunpoint
Speaker 2: read a thousand pages of Henry Kissinger diplomacy. Some of
Speaker 2: us read it cover to cover, full disclosure, eye did,
Speaker 2: and then the chosen few got Pickering or Rangel fellowships,
Speaker 2: including my first intern here at Bloomberg, and they could
Speaker 2: join the magic that was your State Department. Is that
Speaker 2: process still in place or have we broken our diplomacy?
Speaker 7: Well, Tom, that's a big question this morning, Good morning
Speaker 7: to you, and I think the the sad answer is
Speaker 7: we've broken a lot of it. I think there's still
Speaker 7: some extraordinary career Foreign Service officers at their posts this morning,
Speaker 7: but a great many of them have left, and a
Speaker 7: great many who have left had that both experience and
Speaker 7: institutional memory that is so important in negotiations, you know,
Speaker 7: just as an aside as you know, negotiations are not
Speaker 7: just about going into a room for twenty one hours
Speaker 7: and hoping to strike a deal. It's about building trust
Speaker 7: between the two sides. It's about following up on the
Speaker 7: very difficult details of any negotiation. And I think that's
Speaker 7: what we're seeing unravel in front of us right now,
Speaker 7: and what makes these next few weeks and months between
Speaker 7: the US and Iran so unpredictable.
Speaker 2: Away from the weeks or months. Alexis wants to address that,
Speaker 2: but Christopher Smart critically here, what do you perceive is
Speaker 2: our healing diplomacy after the time of President Trump.
Speaker 7: I think people want America to succeed around the world,
Speaker 7: and I think they will look at this period as
Speaker 7: a difficult one. We've had a lot of difficult periods
Speaker 7: in our history before, and I think they will hope
Speaker 7: that we can re engage with the world, not necessarily
Speaker 7: the way we've done it before under previous presidents, but
Speaker 7: in a way that is more predictable, more easily for
Speaker 7: them to engage with. And a sense that we in
Speaker 7: the United States are looking to build a set of
Speaker 7: rules and behaviors with other countries rather than, you know,
Speaker 7: so intensely focusing on just the next particular edge for
Speaker 7: our own advantage.
Speaker 5: Christopher, I just want to talk for a moment about
Speaker 5: what's happening over in Hungary. We saw that election this
Speaker 5: week in a crushing defeat for PM Victor Orbon He
Speaker 5: had such an outsized global influence, and of course we
Speaker 5: know he repeatedly blocked aid for Ukraine to fend off
Speaker 5: Russia's invasion. What does it mean now, the fact that
Speaker 5: he is no longer in that position, what does it
Speaker 5: mean for I think Ukraine especially.
Speaker 7: Well, I think you know, for I'll say this for Tom.
Speaker 7: You know, you never like to see a team like
Speaker 7: the Red Sox digging themselves out of a hole. Hungary
Speaker 7: is kind of a country that has dug a deep
Speaker 7: hole for itself for the last sixteen years and is
Speaker 7: in the process we see now digging itself out.
Speaker 2: And so that's the good news.
Speaker 7: It's also good news, as you point out, for Ukraine
Speaker 7: because the Urban government has been blocking Europe's efforts to
Speaker 7: assist Ukraine and Europe's efforts to increase pressure on Russia.
Speaker 2: So that's good news as well.
Speaker 7: But it does have a lot of internal repair to
Speaker 7: undertake right now, and Prime Minister madya Or, who is
Speaker 7: coming into office, will have to do a whole lot
Speaker 7: of addressing the institutional damage that Prime Minister Orbon has
Speaker 7: done to impose to politicize the courts, the central Bank,
Speaker 7: other institutions across the country. So that's the Hungarian's main
Speaker 7: challenge right now.
Speaker 5: What about I just want to stick with Hungary because
Speaker 5: there's so much to unpack. Orbon was Russia's closest ally
Speaker 5: in the EU and courted China. What of those countries
Speaker 5: are they distancing themselves already from the new government. I mean,
Speaker 5: I know it hasn't really been put in place yet,
Speaker 5: has it.
Speaker 6: I don't think it.
Speaker 7: Happens well, it will come, it will enter office very quickly.
Speaker 7: I think the other countries are trying to to understand
Speaker 7: what's going on. In some sense, this isn't a big
Speaker 7: surprise for anybody, because the polls had shown that he
Speaker 7: would win, although there was there was a lot of
Speaker 7: concern that it would be a close election and therefore
Speaker 7: a disputed election. I think the Chinese are very pragmatic.
Speaker 7: They will deal with whomever is the prime minister right now.
Speaker 7: I think Russia will do the same, although they will
Speaker 7: continue to work with Orbon, who's now moving into opposition.
Speaker 2: With his fetish party.
Speaker 7: But right now the momentum is on the side of
Speaker 7: the new Prime Minister rebuilding its ties with the European Union.
Speaker 2: They, you know, the leadership.
Speaker 7: Across Europe has embraced him. And I think the other
Speaker 7: interesting piece subtext to all this is the populist parties
Speaker 7: in France, in Germany and elsewhere around Europe, who may
Speaker 7: be feeling like they have to modulate their message a
Speaker 7: little bit to be you know, to understand that Europe
Speaker 7: is still a very popular message with a great many
Speaker 7: voters across the continent, and that turning too much against Brussels,
Speaker 7: against further integration is not necessarily a winning path for them.
Speaker 2: Christopher Smart, thank you so much. Haven't head you on
Speaker 2: a just We need to get you on much much more.
Speaker 2: Christopher Smart with our birth group and his public service
Speaker 2: to the nation at the State Department and the White
Speaker 2: House as well. Stay with us more from Bloomberg Surveillance
Speaker 2: coming up after this.
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Speaker 2: We are hugely advantaged when Neil sides with this. Then
Speaker 2: the way it works, folks, it's forty seven headlines come
Speaker 2: out and they go right away to our informed talent. Hogo.
Speaker 2: I haven't read the headlines yet, so I was going
Speaker 2: to jomble then there to give Neil Sipe some time here.
Speaker 2: Neil to the profit making juggernaut. And I don't have
Speaker 2: tangible book in front of me or that, but I mean,
Speaker 2: I'm sorry. It was a very strong first quarter of
Speaker 2: twenty twenty six.
Speaker 5: Put it mildly right.
Speaker 8: Yeah, it looks fairly strong. I think once we start
Speaker 8: digging into it, I mean, the first thing that I
Speaker 8: see is, you know, equities trading a sizeable beat. Mixed
Speaker 8: income trading looks like a pretty sizable miss, actually outweighing
Speaker 8: the beat inequities. And I think, you know, the main
Speaker 8: focus heading into the first quarter results was going to
Speaker 8: be how did the capital markets business perform? Yeah, particularly
Speaker 8: for Goldman and Morgan Stanley. These are the you know,
Speaker 8: the large businesses in these franchises that drive you know,
Speaker 8: drive the units. And so when you look at Goldman Sachs,
Speaker 8: about half a revenue comes from trading. What we saw
Speaker 8: in the first quarter was a pretty active market, right,
Speaker 8: particularly on the equity side. So the broad expectation heading
Speaker 8: into results was pretty pretty robust for the trading side
Speaker 8: of the business. And what we're seeing now is, you know,
Speaker 8: maybe a little bit of a confluence here where we
Speaker 8: have equities beating those expectations, fixed income a little bit lighter.
Speaker 8: On the fees side of the business. It looks like
Speaker 8: we had broad beats across M and a ECM and
Speaker 8: debt underwriting.
Speaker 2: So I got to interrupt. YEP, here's the headline. I've
Speaker 2: been looking for, folks, and our team does a great job.
Speaker 2: Return on average shareholders' equity nineteen point eight percent are
Speaker 2: they basically, and this is to begin in the earning season.
Speaker 2: We're hugely advantaged to have Neil Sipe's leadership here. Basically,
Speaker 2: these firms are trying to hide how much money they're making.
Speaker 2: They really don't want whoever, nineteen point eight percent Roe
Speaker 2: that's stunning, Yeah, and that's not in my textbook.
Speaker 8: And when you look at these businesses, you know, particularly
Speaker 8: on the fee side, things like that can generate pretty
Speaker 8: robust returns, especially you think about Goldman's strategy or returning
Speaker 8: to the core of the capital markets while simultaneously building
Speaker 8: out the even higher Roe business in terms of asset
Speaker 8: and wealth management. So when you have you know, I
Speaker 8: know markets are in flux right now, but when you
Speaker 8: take a step back, we're still only just a handful
Speaker 8: of percent off of all time highs and that's really
Speaker 8: a support to those asset and wealth businesses that are
Speaker 8: you know, helping prop up that nineteen percent Roe that
Speaker 8: you noted. And so I think as we really move
Speaker 8: into big bank earnings throughout the week and we get
Speaker 8: onto the earnings call today for Goldman, I think the
Speaker 8: main investor focus is going to be what happened with
Speaker 8: clients at the end of the first quarter and how
Speaker 8: has that trended in the first two weeks of April,
Speaker 8: because that's really what's going to inform the outlook as
Speaker 8: we sort of work through these numbers that I think
Speaker 8: we see some puts in takes here where there was
Speaker 8: a high bar there for trading revenue, it looks like
Speaker 8: we might have come a little bit lighter on that.
Speaker 9: But on the investment banking fee side, it looks like
Speaker 9: the beat.
Speaker 2: But I'm confused trading of equities and bonds and currencies,
Speaker 2: commodities or trading of bungalows out in the Hamptons.
Speaker 8: Which is trading of equities, currencies, commodity, these, etc. Right,
Speaker 8: And so that was again I think where we had
Speaker 8: a high bar heading into the quarter. The fees, of
Speaker 8: course look pretty strong for the first quarter. But when
Speaker 8: you bring all this volatility and uncertainty into the equation
Speaker 8: related to war, related to AI, related to software, etc.
Speaker 8: You start to question what was expectations for a really
Speaker 8: strong twenty twenty six looks like first quarter is going
Speaker 8: to hold out.
Speaker 9: But what has happened in April?
Speaker 2: Alexis jump in here, please.
Speaker 5: Well, I'm looking at Goldman stock right now, down one
Speaker 5: and a third percent. So I guess even the show
Speaker 5: stopping five point six billion dollar net earnings figure not
Speaker 5: enough to get I guess investors excited about this stock
Speaker 5: here in.
Speaker 6: The early going.
Speaker 8: Yeah, And I think that goes back to sort of
Speaker 8: what we're talking about here is we expected a pretty
Speaker 8: strong quarter for capital markets across trading and investment banking.
Speaker 8: And so I think when you have that high bar,
Speaker 8: the expectation is to meet or be right, especially when
Speaker 8: you think about some of the guidance that we got
Speaker 8: from peers like JP Morgan talking about mid teens growth,
Speaker 8: the trading business, particularly late quarter of volatility, feud fueled
Speaker 8: by the war.
Speaker 9: You know, where are we there?
Speaker 2: And did you see the steam come out of my
Speaker 2: ear I almost scorched Lexus over here. And Neil sides
Speaker 2: with as brilliant on the earnings as we dive into
Speaker 2: the banking season, We're gonna have them on a lot
Speaker 2: here we open the next couple of days, Neil. You know, Piers,
Speaker 2: But they're all different, aren't They describe how JP Morgan
Speaker 2: is the Park Avenue Juggernaut is different from Fortress Solomon.
Speaker 2: How are those two businesses different?
Speaker 8: Yeah, And so when we look at Goldman, it's you know,
Speaker 8: heavy focus on the capitol market side, building out.
Speaker 2: The Christmas Club account with Goldman.
Speaker 9: Right, that's right?
Speaker 8: And so when you when you pivot to JP Morgan
Speaker 8: and Bank of America alike, you're getting a much better
Speaker 8: gauge on the broader US economy, how the consumer is doing.
Speaker 8: And I think that's going to be a big focus
Speaker 8: there as well. Of course, we know JP Morgan is
Speaker 8: a leader in the capital markets space, but when you
Speaker 8: look at the franchise as a whole. There's much larger
Speaker 8: drivers there and so those will be focused.
Speaker 2: Nicely said, last ten years Alexis has been difficult. I
Speaker 2: mean we go Apple, Apple, Apple, Microsoft, you know whatever
Speaker 2: in Nvidia twenty point four percent per year total return
Speaker 2: Golden Sachs over the last ten years. Strina Rogen was
Speaker 2: telling me, mister Solomon was really challenged here a number
Speaker 2: of years ago. He's turned that poppy around like nobody, right.
Speaker 8: Yeah, and so so I think, as we mentioned earlier,
Speaker 8: it's the return to that core, right, what you think
Speaker 8: of when you talk yeah, and you think about the
Speaker 8: consumer franchise, that sort of foray into the consumer franchise.
Speaker 8: Most of that has been winded down after a series
Speaker 8: of losses there, and I think what you see is
Speaker 8: glind Sacks not necessarily trying to press into those businesses
Speaker 8: that JP Morgan might have leadership in or Bank of America,
Speaker 8: rather focusing on deploying the capital into those businesses, particularly
Speaker 8: asset and wealth management that you talked about, those high
Speaker 8: Roe business is. I think that's where we see Goldman
Speaker 8: heading in the future.
Speaker 2: Can you come back? Is it tuesday? They're off tomorrow? Right,
Speaker 2: are the Tomorrow's side.
Speaker 5: No, there are the JP Morgan and Wells Fargo, Tomorrow's
Speaker 5: Trent City and City as well.
Speaker 2: Yeah, okay, can you come back.
Speaker 9: We'll be here all week.
Speaker 2: This is great, my deepest sympathies.
Speaker 5: And you know what, I want to know what bank's
Speaker 5: going to talk about private credit because I don't see
Speaker 5: it yet in the Goldman nicely nicely.
Speaker 2: Said, but we'll see.
Speaker 9: I think we'll get some questions on that.
Speaker 5: I think I'm curious what the answer shall be.
Speaker 3: But yes, are you one?
Speaker 2: Do you ask questions on the conference call?
Speaker 8: I won't be on this call this quarter. Okay, we
Speaker 8: have someone else, but maybe we'll Maybe we'll funnel in
Speaker 8: a question if we can.
Speaker 2: Thank you so much about his workforce.
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