WEBVTT - Solar Cost Declines To Persist Despite Tariff Disruption: Evans 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:33.040 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Earlier today, 0:00:33.280 --> 0:00:35.519 the dollar was just starting to get a bid in 0:00:35.680 --> 0:00:39.640 strengthening against rival currencies, but now it's back down in 0:00:39.720 --> 0:00:44.240 weakening against uh the rival currencies. Here to talk about 0:00:44.400 --> 0:00:48.199 whether we can expect to see the ongoing weakness continue 0:00:49.080 --> 0:00:51.960 for the dollar is Doug Borthwick, Managing director and head 0:00:51.960 --> 0:00:55.400 of FX at Chapter Lane and Co H. Doug, thank 0:00:55.400 --> 0:00:57.360 you so much for being with us. You know, this 0:00:57.440 --> 0:00:59.480 is a really important question, and I just want to 0:00:59.560 --> 0:01:02.560 frame this issue first because I was reading a story 0:01:02.760 --> 0:01:07.759 about how the pace of dollar denominated emerging market bond 0:01:07.800 --> 0:01:13.040 sales are hitting a record so far this year, and 0:01:13.080 --> 0:01:16.119 this is basically a leveraged bet that the dollar will 0:01:16.160 --> 0:01:19.920 continue to depreciate and then emerging market currencies will continue 0:01:19.920 --> 0:01:24.240 to appreciate. Is there any risk that all these investors 0:01:24.280 --> 0:01:27.959 are wrong? Well, there's certainly a risk of the investors 0:01:27.959 --> 0:01:30.200 are wrong. That there always is, there's no one way bet. 0:01:30.360 --> 0:01:32.840 But I think the one thing that they're putting their 0:01:32.920 --> 0:01:34.920 their money on is the fact that there will be 0:01:34.920 --> 0:01:38.120 a continuation of the dollar weakening. Now, dollar weakness is 0:01:38.160 --> 0:01:40.520 something that this administration has been pushing from day one, 0:01:40.800 --> 0:01:44.840 when President Trump has talked about making the US more competitive, 0:01:45.480 --> 0:01:48.240 and that's certainly the case, and we're seeing weakness in 0:01:48.280 --> 0:01:52.120 the US all However, it's it's expounded somewhat by what's 0:01:52.160 --> 0:01:55.320 happening with reserve managers and how they're managing the reserves 0:01:55.920 --> 0:01:58.400 given uh, you know, how they're moving money into China 0:01:58.520 --> 0:02:00.600 and moving it out of the US or not allocating 0:02:00.600 --> 0:02:03.200 towards US treasuries as much as they used to. And 0:02:03.280 --> 0:02:05.800 what's really interesting is that once the SDR the I 0:02:05.920 --> 0:02:08.840 M S currency came into being, and then they decided 0:02:08.840 --> 0:02:10.600 that China should be part of that, they made China 0:02:10.720 --> 0:02:14.440 ten percent or eleven percent allocation, and that man to 0:02:14.480 --> 0:02:17.720 bother the US is and it means that if the 0:02:17.840 --> 0:02:20.520 folks and reserve managers start building up Chinese reserves as 0:02:20.560 --> 0:02:22.840 you'd expect to, because China is now a rather large 0:02:22.880 --> 0:02:27.000 trade um trade partner with them, then they need to 0:02:27.080 --> 0:02:31.200 really start moving money into Chinese currency and out of 0:02:31.280 --> 0:02:34.240 US currency. We re estimate right now that if they 0:02:34.240 --> 0:02:36.800 allocate ten percent of the reserves to China, that's about 0:02:36.840 --> 0:02:39.239 one point three trillion dollars that they would no longer 0:02:39.240 --> 0:02:42.760 be buying in US treasuries but instead be putting into China. 0:02:42.960 --> 0:02:45.600 And that ends up as being of all of the 0:02:45.600 --> 0:02:48.320 holdings of US traasors that are held by foreigners right now. 0:02:49.120 --> 0:02:52.160 And so this constant drip we're seeing from reserve managers 0:02:52.200 --> 0:02:54.919 and the Bundesbank has already said that they're buying China, 0:02:55.400 --> 0:02:57.639 and they said the Central Bank and Francis said they're 0:02:57.639 --> 0:03:00.040 buying China. They're not the only ones, as more of 0:03:00.120 --> 0:03:03.280 folks by Chinese and that means there's less dollar demand 0:03:03.760 --> 0:03:05.760 that obviously the US dollar is going to start weakening, 0:03:06.080 --> 0:03:08.240 and we've been seeing that continually over the past year. 0:03:09.000 --> 0:03:14.720 Doug Borthwick more prosaic question, did you uh forecast the 0:03:14.800 --> 0:03:19.120 strength and sterling against the dollar? I haven't forecasted the 0:03:19.120 --> 0:03:21.760 strength and sterling against the dollar. I've sort of stepped 0:03:21.760 --> 0:03:24.480 away from sterling given Brexit, but certainly we did say 0:03:24.680 --> 0:03:26.639 when it was euro was at one oh four at 0:03:26.680 --> 0:03:28.280 the start of last year, that it was going to 0:03:28.360 --> 0:03:31.360 weaken considerably through one tent and we see the euro 0:03:31.480 --> 0:03:34.040 continuing to weaken and we see no reason why we 0:03:34.040 --> 0:03:36.280 won't see one thirty in the next coming months. Okay, 0:03:36.280 --> 0:03:38.480 but the reason I'm bringing up the pounds sterling is, 0:03:38.520 --> 0:03:42.640 you know, when we speak to four X experts, and 0:03:42.840 --> 0:03:47.280 it's always about how the market, you know, trades off 0:03:47.320 --> 0:03:49.920 of you know, little pieces of news. I didn't hear 0:03:50.040 --> 0:03:54.400 anybody over the last you know, two weeks say, boy, 0:03:54.520 --> 0:03:56.600 you know you've really got to go short the dollar 0:03:56.640 --> 0:04:00.040 along the pound, and you know you would have a 0:04:00.200 --> 0:04:03.440 four and a quarter percent just on a spot basis. 0:04:03.960 --> 0:04:06.800 That seemed like a really good trade, and I haven't 0:04:06.840 --> 0:04:10.640 heard anyone mention it. Yeah, I think that coin flippers 0:04:10.640 --> 0:04:12.680 would be very good in telling you where sterling is going, 0:04:12.880 --> 0:04:16.000 but not necessarily four EX experts. The interesting thing that 0:04:16.080 --> 0:04:18.280 the pound is because of the uncertainty and Brexit. Is 0:04:18.279 --> 0:04:20.320 it going to be a hard Brexit a soft Brexit, 0:04:20.640 --> 0:04:23.839 folks are mostly staying away from discussing it. And what 0:04:23.960 --> 0:04:25.719 you do find though, is that you know, as the 0:04:25.720 --> 0:04:29.520 dollars weakly cross the board against every single currency. Sterling 0:04:29.560 --> 0:04:32.640 is picking up on that, yeah, is really based on 0:04:32.680 --> 0:04:35.400 the euro strength or the weakness and dollar against the end, 0:04:35.440 --> 0:04:37.839 it's it's just getting picked up in the whole front 0:04:37.839 --> 0:04:39.320 of it. Yeah, But I mean, all you gotta do 0:04:39.360 --> 0:04:41.360 is look at a chart. You've got higher highs and 0:04:41.880 --> 0:04:45.240 higher lows. That's certainly the case. But then you know 0:04:45.360 --> 0:04:47.080 they could turn around in the UK and so they're 0:04:47.080 --> 0:04:49.000 doing a hard, hard Brexit and we're looking at one 0:04:49.040 --> 0:04:52.400 thirty in the Sterlings. So it's sterling is Sterling is 0:04:52.560 --> 0:04:56.640 less simple to to really identifying the divine all right, 0:04:56.720 --> 0:04:58.719 So what's the best call you've got right now to 0:04:58.760 --> 0:05:01.200 make some money over the last Over the next let's 0:05:01.200 --> 0:05:04.120 say two to three months, I continue to believe that 0:05:04.120 --> 0:05:06.680 sterling is going to move much much higher, and it's 0:05:06.720 --> 0:05:08.720 just really the beginning of the cycle. I think we're 0:05:08.720 --> 0:05:11.960 going to see these ten moves annually for the next 0:05:12.000 --> 0:05:14.800 couple of years of dollar weakness. Euro is gonna be 0:05:14.839 --> 0:05:17.200 a big beneficiary of this. I think folks thinks that 0:05:17.279 --> 0:05:19.559 dollyn is going to continue in this one ten, maybe 0:05:19.560 --> 0:05:21.719 moved back to one fift. I think that's wrong. I 0:05:21.720 --> 0:05:24.560 think we'll see one O five and dollar in dollar Canada. 0:05:24.600 --> 0:05:26.400 Canada has the trade surpace with the US. I think 0:05:26.400 --> 0:05:28.679 we're going to see that move lower the dollar against 0:05:28.720 --> 0:05:30.880 the Canada, and I think the dollar Mexican continue to 0:05:30.880 --> 0:05:34.200 move lower as well. So you're a dollar bear dollar 0:05:34.240 --> 0:05:38.960 bear across the board. Absolutely. So one thing that I'm 0:05:38.960 --> 0:05:43.240 trying to square is let's say, uh, the US economic 0:05:43.279 --> 0:05:46.000 picture is as good as people think it is, and 0:05:46.040 --> 0:05:49.640 perhaps even better, let's say that there's an upside surprise. 0:05:49.720 --> 0:05:52.720 We have seen the City Surprise Index showing that there 0:05:52.760 --> 0:05:57.599 have been more upside surprises of late um. At what point, 0:05:57.760 --> 0:05:59.720 especially given the fact that the Federal Reserve is going 0:05:59.760 --> 0:06:02.480 to be hiking interest rates, at what point is that 0:06:02.640 --> 0:06:05.760 enough to encourage people back to the dollar or is 0:06:05.800 --> 0:06:11.480 this something that's structural that that is going to continue regardless, Certainly, 0:06:11.520 --> 0:06:13.680 I think that if the sudden is very structural. Remember 0:06:14.560 --> 0:06:18.800 before the European bailout of Greece, you know, the euro 0:06:18.920 --> 0:06:22.080 was trading around this one thirty level, and then you 0:06:22.120 --> 0:06:24.080 saw a huge move into the dollar and out of 0:06:24.120 --> 0:06:27.560 the European currency. And now, if anything, we have we've 0:06:27.560 --> 0:06:30.880 heard nothing about Greece, nothing about Italy, leaving the euro Zone. 0:06:31.120 --> 0:06:33.760 And so what we're seeing now is folks not necessarily 0:06:33.760 --> 0:06:36.599 deciding they don't like the US, but they're certainly deciding 0:06:36.640 --> 0:06:38.400 that maybe it's time to get back into the Euro 0:06:38.480 --> 0:06:41.160 and unwind some of their safety play that they moved 0:06:41.200 --> 0:06:43.960 into the United States. And so, you know, moving up 0:06:43.960 --> 0:06:46.040 to one thirty doesn't mean that we don't like the 0:06:46.080 --> 0:06:48.160 dollar anymore. It just means that, you know what, we 0:06:48.200 --> 0:06:51.520 feel more comfortable with the Euro. And so where the 0:06:51.560 --> 0:06:53.799 Fed is, I think the Feds very much behind the curve, 0:06:54.320 --> 0:06:55.920 you know. I think that the fact that probably raised 0:06:55.920 --> 0:06:59.000 another hundred and fifty basis points before folks start thinking, oh, 0:06:59.080 --> 0:07:02.200 you know what, now the US dollar is more interesting 0:07:02.240 --> 0:07:05.120 to us. Remember, interest rates over in China are much 0:07:05.160 --> 0:07:07.120 harder than they are in the US right now. And 0:07:07.160 --> 0:07:09.360 as long as reserve managers need to get into China, 0:07:09.800 --> 0:07:12.320 and that means taking reserves maybe out of the United States, 0:07:12.800 --> 0:07:14.520 then that's that's that's going to be a move that's 0:07:14.520 --> 0:07:16.560 going to see dollar weakening. It's going to see us 0:07:16.600 --> 0:07:19.680 and streets naturally start to rise. One thing that certainly 0:07:19.680 --> 0:07:21.360 will allow the Fed to raise rates will be if 0:07:21.360 --> 0:07:24.000 the dollar we can considerably does that mean that we're 0:07:24.000 --> 0:07:28.840 going to see about of accelerated inflation. I think that inflation, 0:07:29.440 --> 0:07:31.600 you know, I think one of the best indicators of 0:07:31.680 --> 0:07:35.000 inflation was when Walmart moved into Mexico and suddenly pricing 0:07:35.160 --> 0:07:38.320 inflation almost disappeared overnight. And I think that the Internet 0:07:38.320 --> 0:07:40.840 has done something very similar to that with the prices, 0:07:40.840 --> 0:07:43.200 and that we don't there's now we have so much 0:07:43.280 --> 0:07:45.680 clarity in what pricing should be that it's hard to 0:07:45.760 --> 0:07:48.560 raise prices because we can always find somewhere else that's cheaper. 0:07:48.960 --> 0:07:50.960 So I think that when you look at prices rising 0:07:50.960 --> 0:07:53.760 above two percent in the US, I think that sometimes 0:07:53.760 --> 0:07:56.120 it's a fool's dream and that we can always seem 0:07:56.120 --> 0:07:59.280 to find pricing less ultras. I think high inflation something 0:07:59.280 --> 0:08:00.800 that's really going to be the back burner for a 0:08:00.880 --> 0:08:03.000 number of years. All Right, we're gonna leave it there, 0:08:03.000 --> 0:08:05.400 but thanks very much for being with us. Douglas Borthwick 0:08:05.560 --> 0:08:07.800 is managing director and the head of f X at 0:08:07.840 --> 0:08:26.000 at Chapolin, Dane and Company. President Donald Trump slapping tariffs 0:08:26.000 --> 0:08:30.880 on solar panels and also on washing machines imported into 0:08:30.920 --> 0:08:32.760 the United States. Here to tell us more about the 0:08:32.800 --> 0:08:35.720 tariffs and the effect on the solar industry is James Evans. 0:08:36.000 --> 0:08:41.040 He is our global clean Energy analyst for Bloomberg Intelligence. James, 0:08:41.040 --> 0:08:43.280 thanks for being with us. You know, last time I 0:08:43.320 --> 0:08:46.720 believe that we went through this whole tariff issue regarding 0:08:46.760 --> 0:08:51.000 the solar industry, Chinese companies decided to just relocate their 0:08:51.040 --> 0:08:55.680 firms to Taiwan. Isn't that correct? Yes, that's correct. So 0:08:56.160 --> 0:08:58.480 there was unecdotal evidence that a little of the Chinese 0:08:58.480 --> 0:09:01.800 manufacturers trying to get the previous tariffs at the US 0:09:01.880 --> 0:09:04.640 put on the imports of solar modules and cells by 0:09:04.679 --> 0:09:08.319 setting up operations in other countries in Southeast Asia like Vietnam, 0:09:08.400 --> 0:09:12.079 Malaysia and Thailand. So hopefully with the new section to 0:09:12.200 --> 0:09:14.959 a one tariffs that have been imposed, that won't happen 0:09:15.040 --> 0:09:19.640 because these tariffs are effectively impacted on every single country, 0:09:20.120 --> 0:09:21.920 no matter where you are. So that's not something that 0:09:21.920 --> 0:09:24.240 can be so easily skirted by a lot of the 0:09:24.320 --> 0:09:27.079 Chinese solar producers. Okay now, and I just want you 0:09:27.120 --> 0:09:29.880 to hold that thought and then tell me the manufacturers 0:09:30.000 --> 0:09:32.920 that are in the United States that have been asking 0:09:32.960 --> 0:09:36.400 for there's terror for leave their bankrupt, right, I mean, 0:09:36.400 --> 0:09:40.560 there's a SNIVA and Solar World. So a lot of 0:09:40.600 --> 0:09:43.600 the manufacturers that used just mentioned have gone bankrupt over 0:09:43.640 --> 0:09:46.559 the recent years. Part of that is because of a 0:09:46.720 --> 0:09:50.160 massive build up in production capacity of the solar modules 0:09:50.200 --> 0:09:52.920 in the in China and in Southeast Asia, and so 0:09:53.000 --> 0:09:54.880 a lot of those panels are being able to be 0:09:54.920 --> 0:09:57.920 produced at a very very low cost. And you know, 0:09:57.960 --> 0:09:59.920 we're operating in a very global market. So those pan 0:10:00.000 --> 0:10:02.520 are ending up in the US market, and it's been 0:10:02.559 --> 0:10:04.680 hard for a lot of the US manufacturers to compete 0:10:04.679 --> 0:10:07.120 with the scale of production that a lot of the 0:10:07.200 --> 0:10:11.439 Chinese manufacturers have been able to produce, so James, So, 0:10:11.480 --> 0:10:16.160 if this is going to potentially allow producer producers in 0:10:16.200 --> 0:10:20.880 the US to charge higher rates for their solar panels, 0:10:20.920 --> 0:10:24.400 that means that some consumers may not choose solar panels 0:10:24.440 --> 0:10:27.680 because it's more expensive. How much does this damp in 0:10:27.960 --> 0:10:31.800 the expansion of solar energy in the US. That's right, Lisa. 0:10:31.880 --> 0:10:34.320 So the big fear amount about these tariffs is that 0:10:34.720 --> 0:10:37.040 actually most of the jobs in the US market aren't 0:10:37.200 --> 0:10:40.520 related to manufacturing of solar panels or solar cells. They're 0:10:40.559 --> 0:10:43.920 actually in installing the panels, in developing the projects, and 0:10:43.960 --> 0:10:46.439 in making equipment that goes around the panels, so kind 0:10:46.440 --> 0:10:48.280 of the trackers, the racks, and a lot of the 0:10:48.280 --> 0:10:53.080 electrical equipment. So there's concerns about some of those job implications. 0:10:53.360 --> 0:10:56.240 But but also you're right. If the panel costs that 0:10:56.280 --> 0:10:58.720 are imported into the US will increase, then we're going 0:10:58.760 --> 0:11:00.319 to see the impact of that on love of the 0:11:00.320 --> 0:11:03.000 project economics are going to worsen. Um. It's going to 0:11:03.080 --> 0:11:06.760 have the most impact on the larger utility scale projects 0:11:06.760 --> 0:11:09.440 where kind of module costs are a higher share of 0:11:09.480 --> 0:11:14.080 the total system um the kind of residential and commercial scales. 0:11:14.120 --> 0:11:16.720 So the smaller kind of solar developments may be less 0:11:16.760 --> 0:11:19.680 impacted by this because there's a little bit more margin 0:11:19.720 --> 0:11:21.480 in there. There's a little bit more room for a 0:11:21.520 --> 0:11:24.040 lot of the panel producers to to get a higher price, 0:11:24.320 --> 0:11:27.960 whereas you may see some delays in development of utility 0:11:27.960 --> 0:11:30.959 scale the large solar developments over the next year or 0:11:31.040 --> 0:11:35.240 two until this kind of module tariff digresses over the 0:11:35.280 --> 0:11:40.120 next four years. James, did the US producers are poly 0:11:40.280 --> 0:11:44.360 silicon Did they end up connecting or hooking up with 0:11:44.520 --> 0:11:49.600 Chinese companies after the first round of UH sort of 0:11:49.920 --> 0:11:54.200 imports of of low cost solar panels, so poly silicon, 0:11:54.280 --> 0:11:57.560 you're you're referring to the raw material of solar panels 0:11:57.679 --> 0:12:02.040 and um. Effectively, what happened was when the US Imports 0:12:02.080 --> 0:12:06.280 imposed tariffs on imports of US modules UM sorry in 0:12:06.360 --> 0:12:10.720 Chinese modules into the US market, China responded by imposing 0:12:10.760 --> 0:12:14.800 tariffs on polysilicon, which is the raw material for solar panels, 0:12:14.880 --> 0:12:18.600 into China from the US, and that's still not been resolved. 0:12:18.640 --> 0:12:20.400 That's still an issue that's ongoing, and there are a 0:12:20.480 --> 0:12:24.400 number of US polysilicon manufacturers of producers that have found 0:12:24.440 --> 0:12:27.680 it really really hard to compete now that China has 0:12:27.720 --> 0:12:31.360 such a stranglehold on global module production and they can't 0:12:31.400 --> 0:12:35.000 effectively get their product into the main consuming market of China. 0:12:35.400 --> 0:12:39.360 So as part of the I t C investigation and 0:12:40.440 --> 0:12:43.040 this kind of announcement, they've also said that they want 0:12:43.040 --> 0:12:46.760 to have a separate investigation into whether there's any kind 0:12:46.800 --> 0:12:49.280 of deal that can be done to remove the previous 0:12:49.320 --> 0:12:53.320 tariffs and the Chinese tariffs on polysilicon. But given the 0:12:53.360 --> 0:12:56.160 fact that the Section two or one tariffs haven't really 0:12:56.200 --> 0:12:58.800 gone down very well, not only in China but in 0:12:58.800 --> 0:13:02.000 in the rest of the world, especially in Southeast Asian markets. 0:13:02.480 --> 0:13:04.319 UM that is going to be a bit of a 0:13:04.960 --> 0:13:07.600 long long shot. If you ask me, how much of 0:13:07.640 --> 0:13:10.680 a price increase our consumer is going to see in 0:13:10.720 --> 0:13:14.120 solar panels as a result of this. So from a 0:13:14.200 --> 0:13:16.640 typical basis, you're you're talking about a kind of ten 0:13:16.679 --> 0:13:21.200 percent um increase, So it's on the larger scale utility 0:13:21.880 --> 0:13:25.400 salt kind of side. From a consumer perspective, it's going 0:13:25.440 --> 0:13:28.040 to be in in the lower single digits. So there's 0:13:28.040 --> 0:13:31.920 going to be some small increase incremental increase in this um, 0:13:31.960 --> 0:13:34.120 but that's going to fade with time. It's going to 0:13:34.200 --> 0:13:37.320 fade as the tariffs go down over the next four years. 0:13:37.320 --> 0:13:40.200 They start at thirty and they decreased by five percent 0:13:40.240 --> 0:13:42.400 every year. But they're also going to go down because 0:13:42.800 --> 0:13:45.480 panel costs are going to continue to fall. You know, 0:13:45.520 --> 0:13:48.120 we've seen dramatic declines in the cost of a solar panel. 0:13:48.360 --> 0:13:51.240 Last in you saw a decline of about a third 0:13:51.280 --> 0:13:53.199 in the cost of a solar panel. Last year is 0:13:53.200 --> 0:13:56.000 about twelve percent, and we're anticipating that those panel cross 0:13:56.040 --> 0:13:57.880 de planes are going to continue going forwards. So you 0:13:57.880 --> 0:14:01.479 don't think necessarily that this move is going to undermine 0:14:01.520 --> 0:14:04.720 the expansion of solar or the industry more broadly. I 0:14:04.760 --> 0:14:07.160 think it's gonna it's going to be slightly disruptive in 0:14:07.200 --> 0:14:09.199 the near term, especially for some of the larger projects 0:14:09.200 --> 0:14:12.560 as I mentioned, but I think that the fundamentals are 0:14:12.559 --> 0:14:15.200 there and that solar is a technology the costs are 0:14:15.200 --> 0:14:17.560 coming down. It's not like you have a fixed fossil 0:14:17.600 --> 0:14:19.600 fuel base that you have to try and support all 0:14:19.600 --> 0:14:22.200 the fossil fuel prices. So this is a bit like 0:14:22.240 --> 0:14:24.360 on the semi conductor side. The costs are coming down 0:14:24.440 --> 0:14:26.640 over time and that's going to continue. That trend is 0:14:26.640 --> 0:14:29.200 going to continue. So there is I think a secular 0:14:29.240 --> 0:14:32.720 shift towards not only solar but also other technologies like 0:14:32.760 --> 0:14:35.880 wind energy UM that is going to see these costs 0:14:35.920 --> 0:14:38.480 declined further and further UM and you're going to see 0:14:38.520 --> 0:14:40.560 more and more of this into the market. There might 0:14:40.560 --> 0:14:42.600 be some near term disruption at least in the US 0:14:42.680 --> 0:14:44.720 over the next year or two as a result of these, 0:14:45.080 --> 0:14:47.280 but it's it's definitely going to be a trend that 0:14:47.280 --> 0:14:49.800 we're going to see continue going forwards. James Evans, thank 0:14:49.800 --> 0:14:51.960 you so much for being with us. James Evans is 0:14:51.960 --> 0:14:55.920 global clean energy analyst with Bloomberg Intelligence coming to us 0:14:56.280 --> 0:15:00.480 up from London talking about the tariffs that are being 0:15:00.520 --> 0:15:17.720 placed on solar panels and what that means for the industry. Well, 0:15:17.720 --> 0:15:21.520 we got some sense today of what JP Morgan plans 0:15:21.560 --> 0:15:23.880 to do with the money that it is saving from 0:15:24.040 --> 0:15:27.200 the tax overhaul. It's saying that it's playing the earmark 0:15:27.280 --> 0:15:31.200 twenty billion dollars over five years to boost lending, expand 0:15:31.320 --> 0:15:35.480 its branch network, and increase gifts to charity. Here to 0:15:35.520 --> 0:15:38.840 tell us what this means for shareholders is Charles Peabody, 0:15:38.840 --> 0:15:42.000 who we always love having on Managing director and research 0:15:42.000 --> 0:15:45.280 analyst at Compass Point. Charles, thank you so much for 0:15:45.400 --> 0:15:49.800 joining us. So what's your first dake on this? Well, 0:15:49.840 --> 0:15:52.960 you know, I think it's clearly a net positive for 0:15:53.400 --> 0:15:57.880 Morgan in the industry in the sense that it's clear 0:15:57.960 --> 0:16:01.040 that those institutions that have invested in their franchise and 0:16:01.040 --> 0:16:04.160 their employees over long period of time and consistently have 0:16:04.280 --> 0:16:06.920 done better than those that have not. Um Just in 0:16:06.960 --> 0:16:10.280 the last decade we saw JP Morgan do much better 0:16:10.320 --> 0:16:13.560 than City Group, and that's because Morgan was investing in 0:16:13.600 --> 0:16:16.280 its products and businesses where a City Group was capital 0:16:16.320 --> 0:16:19.120 constrained well, could just I want to break in there, 0:16:19.160 --> 0:16:21.840 because do we really have a sense of what these 0:16:21.840 --> 0:16:25.920 investments really mean? I mean, we do have a sense that, 0:16:26.040 --> 0:16:28.000 you know, the sort of minimum wage that they'll pay 0:16:28.000 --> 0:16:31.440 for workers will go from fifteen to eighteen dollars an hour. 0:16:32.040 --> 0:16:38.000 But beyond that, what does this really mean? Well, you know, 0:16:38.040 --> 0:16:40.480 I break it down into four pieces. I mean, there's 0:16:40.640 --> 0:16:45.080 ten billion being airmarked for affordable housing finance, and I 0:16:45.120 --> 0:16:47.920 think as an aside, you're gonna see JP Morgan invest 0:16:48.040 --> 0:16:51.120 much more aggressively going forward in and building out their 0:16:51.120 --> 0:16:53.880 mortgage banking operation, which had really shrunk over the last 0:16:53.880 --> 0:16:57.240 ten years. UM and I suspect acquisitions may be part 0:16:57.240 --> 0:17:00.480 of that. Um You're gonna see four billion invest in 0:17:00.480 --> 0:17:03.480 in supporting small business growth and that's been the fastest 0:17:03.480 --> 0:17:06.800 growing portfolio. They've got about a twenty billion dollar portfolio there. 0:17:07.320 --> 0:17:10.600 And you're gonna see another half a billion incremental investment 0:17:10.600 --> 0:17:15.120 in philanthropic investments. UM. So the balance of that twenty billion, 0:17:15.119 --> 0:17:16.520 which is about five and a half billion, is going 0:17:16.560 --> 0:17:21.440 to be invested in things like employees, branch expansion, innovation, 0:17:21.560 --> 0:17:24.800 et cetera. UM So, I think those investments, you know, 0:17:25.000 --> 0:17:27.720 JP Morgan has done invested wisely. I think they will 0:17:27.800 --> 0:17:30.080 enhance the value the franchise over a long period of time. 0:17:30.720 --> 0:17:33.159 So I'm just curious, Charles, why do you think the 0:17:33.200 --> 0:17:38.960 stock is not reacting today? Well, you know, short term, Um, 0:17:39.040 --> 0:17:41.359 one of the things that you have to acknowledge is 0:17:41.400 --> 0:17:43.680 this is going to add about a billion to a a 0:17:43.720 --> 0:17:48.360 billion and a half to UM JP Morgan's expense operating 0:17:48.359 --> 0:17:51.560 expense structure, and so you're in a sense increasing the 0:17:51.600 --> 0:17:56.800 fixed costs of that expense structure, hoping that growth will 0:17:56.960 --> 0:18:00.919 offset that that fixed cost uh. Um, But that remains 0:18:00.960 --> 0:18:05.000 to be seen. So one thing that I was noticing, 0:18:05.080 --> 0:18:08.880 Charles is that you actually or not that bullish though 0:18:08.880 --> 0:18:13.520 on JP Morgan's shares. Well, I think the shares are 0:18:13.520 --> 0:18:17.680 pretty fully priced. Um is where I'm coming from. Um, 0:18:17.720 --> 0:18:22.320 you know these actions aside, I mean, the stock is 0:18:22.800 --> 0:18:26.320 um trading you know almost at two times book, you know, 0:18:26.480 --> 0:18:29.080 and Jamie Diamond even said that, you know, at two 0:18:29.080 --> 0:18:32.520 times book his own investment in his own stock was 0:18:32.560 --> 0:18:36.320 not necessarily the best investment where he rationalized that he 0:18:36.320 --> 0:18:38.120 could buy the stock between one and a half two 0:18:38.119 --> 0:18:40.640 times book. But he's sort of captain at two times book. 0:18:41.800 --> 0:18:43.800 All right, So if you believe that the stock is 0:18:43.840 --> 0:18:46.320 a little too expensive for investors, what stock do you 0:18:46.359 --> 0:18:48.960 recommend people buy? What company do you think is not 0:18:49.320 --> 0:18:56.200 been overpriced? Well, you know, I will tell you him. 0:18:56.640 --> 0:19:00.439 The b k X index, which reflects the large cap banks, 0:19:01.000 --> 0:19:05.960 is around one fifteen today um the pre crisis top, 0:19:05.960 --> 0:19:09.240 and that b k X index was about one. So 0:19:09.280 --> 0:19:13.680 we're worthin five of that all time high UM. And 0:19:13.760 --> 0:19:16.439 as a as a relative to the SMP five hundred, 0:19:16.920 --> 0:19:19.480 the b k X index hit a high in March 0:19:19.640 --> 0:19:23.560 up two thousand seventeen, and despite all the hooplab around 0:19:23.600 --> 0:19:26.879 deregulation and tax reform, that b k X index has 0:19:26.920 --> 0:19:28.560 not been able to make a new high relative to 0:19:28.560 --> 0:19:31.719 the SMP five hundred. So I'm I'm thinking we're topping 0:19:31.720 --> 0:19:35.680 out here, and I'm not anxious other than very very 0:19:35.760 --> 0:19:37.560 very short term training. I'm not anxious to add to 0:19:37.560 --> 0:19:42.320 my long positions here to be peeling off. I wanted 0:19:42.320 --> 0:19:44.240 to just follow up in one aspect that you said. 0:19:44.240 --> 0:19:47.440 You said that you think that JP Morgan could potentially 0:19:47.640 --> 0:19:52.119 make an acquisition of a mortgage lender. Is did I 0:19:52.160 --> 0:19:56.800 hear you correctly? Yeah? I mean they there, they want 0:19:56.840 --> 0:20:01.119 to reinvest in the mortgage space. UM. What has held 0:20:01.160 --> 0:20:04.840 them back has been the litigious environment UM. And if 0:20:04.920 --> 0:20:09.160 if we can get some cleanup of that litigation risk, UM, 0:20:09.200 --> 0:20:12.359 I think you'll see them go out and start to 0:20:12.440 --> 0:20:16.680 invest in both organically and inorganically UM, in that space 0:20:16.800 --> 0:20:19.840 and rebuild that that mortgage banking franchise that used to 0:20:19.880 --> 0:20:22.760 be quite substantial ten years ago. And would they start 0:20:22.840 --> 0:20:29.280 to issue UH non agency mortgage backed securities again. You know, 0:20:29.560 --> 0:20:31.240 if you can, as I said, you can clean up 0:20:31.280 --> 0:20:33.600 the little litigation risk, I think they would do f 0:20:33.760 --> 0:20:35.840 h A lending again. I think you know Jamie Diamond 0:20:35.840 --> 0:20:40.080 talked about that in his annual letter UM two shareholders. Well, 0:20:40.200 --> 0:20:44.320 Charles said, if JP Morgan is too expensive, and you 0:20:44.359 --> 0:20:47.600 mentioned the possibility of adding to their mortgage business, is 0:20:47.680 --> 0:20:52.320 there a particular stock or even a non bank financial 0:20:52.480 --> 0:21:00.120 company that you believe is undervalue well on a relative basis. 0:21:00.240 --> 0:21:04.240 You know, Goldman Sachs has been treated very poorly by 0:21:04.320 --> 0:21:07.680 the marketplace UM year to date, largely because of their 0:21:07.680 --> 0:21:11.960 week thick trading businesses UM. Yet the other three businesses 0:21:12.160 --> 0:21:15.399 UM plus they're equity trading, are doing very well. UM. 0:21:15.440 --> 0:21:18.800 I think if we get some added volatility, and there 0:21:18.840 --> 0:21:21.400 are indications that we're starting to see that we could 0:21:21.400 --> 0:21:24.480 see better activity. So in many respects, I would say 0:21:24.480 --> 0:21:26.720 the thick trading business bottomed in the second quarter of 0:21:26.720 --> 0:21:30.120 seventeen and there's some leverage from that going back this year. 0:21:30.520 --> 0:21:32.480 I want to thank you very much for being with us. 0:21:32.680 --> 0:21:36.560 Charles Peabody, he is managing director Research Channelists at Compass 0:21:36.600 --> 0:21:47.800 Point in giving us his thoughts about the banking industry, 0:21:54.440 --> 0:21:58.359 House of Cards and other Netflix originals, Orange is the 0:21:58.400 --> 0:22:01.439 New Black, Stranger Things. Here to tell us about the 0:22:01.480 --> 0:22:05.120 success of Netflix is Paul Sweeney, US director of Research 0:22:05.200 --> 0:22:10.000 and senior Media and Internet analyst for Bloomberg Intelligence. Alright, 0:22:10.200 --> 0:22:13.520 Paul Sweeney, is this all about subscriber growth or is 0:22:13.560 --> 0:22:17.320 it about something else? Yeah, it really is about subscriber growth. Um. 0:22:17.560 --> 0:22:19.600 You know, this is a company where investors really focus 0:22:19.680 --> 0:22:22.040 on the growth of the subscribers, not you know, and 0:22:22.080 --> 0:22:24.399