Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane
Speaker 1: jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
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Speaker 1: The Gentleman. Jenny, I want you to jump it off
Speaker 1: here with Julian Emmanuel b t I G. And I
Speaker 1: will only say that he's one of the few that
Speaker 1: is steadfastly participated in this great bull market by writing
Speaker 1: thoughtful pieces. He's not just going own stocks, you know,
Speaker 1: go go go. He's really tried to construct a theory
Speaker 1: to stay in the stout at the year as one
Speaker 1: of the biggest equity market bulls on the street out
Speaker 1: of all the strategists. We said, and I just wonder
Speaker 1: whether we've hit his price target already. Julian and Manuel
Speaker 1: at BT I G jointing us right now, Jillian to
Speaker 1: have you with us. Just want me through that what
Speaker 1: do you cite to clients after the runny we've already
Speaker 1: had to just stout a year. Well, our theory has
Speaker 1: been that this could be a year where you know,
Speaker 1: first of all, the backdrop is twenty plus percent. Years
Speaker 1: like we had in tend to be followed by positive years.
Speaker 1: That maybe counterintuitive. The average gain is around sort of
Speaker 1: sort of twelve to fourteen So from our point of view,
Speaker 1: in an environment where as we've said numerous times, the
Speaker 1: public has not really fully engaged in the equity markets.
Speaker 1: You look at flows. Flows have been going into money
Speaker 1: market funds. Flows have been going into bond funds very
Speaker 1: consistently for the last five years. Um, this could be
Speaker 1: the year where you get upside beyond our thirty four
Speaker 1: fifty price target based on the public actually becoming an
Speaker 1: active buyer of stocks. So our messages, you know, it's
Speaker 1: it's been a very good two weeks, it's been a
Speaker 1: very good four months. A stay patient, uh, you know,
Speaker 1: don't be aggressive buyers into moves this far, this stretched,
Speaker 1: because you could have a pullback at any time, but
Speaker 1: just be patient. Well, message a retail now, Julian, let's
Speaker 1: talk about it. Tom and I started the program by
Speaker 1: discussing valuations. How much higher could they go? If you
Speaker 1: look at this market right now and you have a
Speaker 1: retail client sitting in front of you that's missed down
Speaker 1: on this rally of the last twelve months or so,
Speaker 1: and they ask you, what's the one valuation metric at
Speaker 1: the moment that you're looking at that says green light?
Speaker 1: Get back in good old fashioned price earnings. Okay to
Speaker 1: us at what we expect sort of equality eighteen and
Speaker 1: a half to nineteen times. Uh, it feels high, But
Speaker 1: if you look at the last thirty years of history,
Speaker 1: it's really only slightly above mid range UM. And in
Speaker 1: a backdrop where we do expect long end yields to
Speaker 1: gradually creep higher UM, that is not necessarily at all
Speaker 1: ahead when, And in fact we would argue it's a
Speaker 1: tail when because the absolute level of rates are low.
Speaker 1: And again we do think there could be this psychology
Speaker 1: shift to the extent that you start poking above two
Speaker 1: percent in the ten year yield in the US and
Speaker 1: and and zero above zero in in the German tenure yield,
Speaker 1: that the psychology becomes even more pro Would you know, I
Speaker 1: I want to pick you up on the forward multiple
Speaker 1: If you take the thirty year history as an example,
Speaker 1: isn't that skewed by the excesses of two thousand, Bio
Speaker 1: six Bio seven as well? And if you look at
Speaker 1: the last ten years in this bull market. Eighteen and
Speaker 1: a half times forward earnings is the upper range of evaluations,
Speaker 1: isn't it based on the last ten years. But again
Speaker 1: I think for us we've looked at it sort of
Speaker 1: Cold War essentially, the thirty years prior to nine and
Speaker 1: post Cold War UM and and you can sort of
Speaker 1: best fit the data. But from our point of view,
Speaker 1: sort of Night nine onwards really repre sense the time
Speaker 1: when the embracing of equity investing is something that's permeated
Speaker 1: popular culture and permeated the average person's portfolio. That sort
Speaker 1: of justifies where we're thinking. You're just joining us now,
Speaker 1: Julian Emmanuel with his b T I G. He's in
Speaker 1: the interactive broker studios at our world headquarters, Lectington and
Speaker 1: fifty nine John fare and I asconced, I say it
Speaker 1: investsco our annual visit to the good offices of Investo
Speaker 1: here in a vibrant downtown Manhattan, Lower Manhattan. We're thrilled
Speaker 1: to with us coast to coast and worldwide as well. Julian,
Speaker 1: I want to go back to March of nine. This
Speaker 1: is a few years ago and in Barns, Tom Gelvin,
Speaker 1: the legend of d LJ talking a price to sells.
Speaker 1: I love the article dowst sixteen thousand question mark. I mean,
Speaker 1: explain the punditry of the market and the strategy of
Speaker 1: the market versus just being in the market and participating
Speaker 1: in nineteen ninety nine, what is that twenty I can't
Speaker 1: keep you twenty one years ago, twenty one years ago down?
Speaker 1: Thank you and Galvin And Galvin nails it by saying,
Speaker 1: you know, extrapolate out they're gonna get the sixteen thousand
Speaker 1: by two thousand six with Bony bullis absolutely nailed the call.
Speaker 1: Should we just throw all this away, Julian and just
Speaker 1: own stocks for the long term? Well, we will go
Speaker 1: with that tried and true saying it is never different
Speaker 1: this time. And part of what we're looking at is
Speaker 1: if we do get to a point of you know,
Speaker 1: real public enthusiasm sort of you know, that irrational exuberance
Speaker 1: that clearly we saw at the end of in the
Speaker 1: beginning of two thousand and you'll know if there is
Speaker 1: significant multiple expansion um that would be a caution sign
Speaker 1: to us. Okay, what's a bt I G exuberance meter
Speaker 1: this morning? I mean, is the irrational out there are
Speaker 1: we are we rationally bullish, So in the short term
Speaker 1: there is definitely a little bit of froth. But when
Speaker 1: we look at the medium and the long term, what's
Speaker 1: fascinating to us is the options market is actually telling
Speaker 1: you that the degree of caution, particularly over the election term,
Speaker 1: is very, very high. This is really important. What you
Speaker 1: just heard from Julian Emmanuel there, thank you so much.
Speaker 1: Julian Emmanuel would be t I g to get thank you,
Speaker 1: and I've lost on on the screen here. I can't
Speaker 1: see it through the plates of avocado. I I lost there.
Speaker 1: We are futures up, eight down, futures up seventy, Ellen
Speaker 1: may and go away, which means you've got to get
Speaker 1: back in at some point. Do you want to sound
Speaker 1: generally go away and go away and maybe look things
Speaker 1: down for a little What I mean? These are important decisions,
Speaker 1: and I would suggest that research shows it's not the
Speaker 1: selling action, it's a getting back into the market action.
Speaker 1: If you've missed this, Ronny, I think it's really difficult
Speaker 1: to find a point in entry right now. See see
Speaker 1: Christina how he says that with meanness because he knows
Speaker 1: I'm in the triple leverage all cash fund. Shall we
Speaker 1: introduce Christina Probably we're in her house. Okay, we're Christina
Speaker 1: Hooper welcoming us today at Invesco. We're thrilled to be here.
Speaker 1: She is the head of it all, the chief global
Speaker 1: market strategists. And she has one of the coolest degrees
Speaker 1: in America, which is if you are minted in labor
Speaker 1: economics high above Cayugas rotters. That is really really cool.
Speaker 1: It's one of the most prestigious degrees in America to
Speaker 1: have a master's and labor economics from Cornell. We take
Speaker 1: that academics to the full and imployed America right now,
Speaker 1: knowing that John and I are number one emails and
Speaker 1: messages and handwritten letters from people is no, it's not
Speaker 1: fully employed. Well, I think what we're seeing is the
Speaker 1: effects of having a very week job recovery for so long. UM.
Speaker 1: When we think about the post global financial crisis environment,
Speaker 1: it's one in which really the job recovery lagged everything else.
Speaker 1: And so yes, now we're at full employment, but we're
Speaker 1: in a different kind of employment environment, one in which
Speaker 1: there are more UM folks who are deriving income from
Speaker 1: multiple areas of employment, you know, pulling together, you know,
Speaker 1: sort of a task grab at economy. And so of
Speaker 1: course we've seen really unimpressive wage growth for years now.
Speaker 1: So so this is a very different environment than a
Speaker 1: typical um labor recovers. More wank economic questions, John's joint
Speaker 1: to ask you about, you know, the market of nine
Speaker 1: seven on the delt. We're on the delta. I don't
Speaker 1: do that, okay, I'm on one more question in debt?
Speaker 1: Does tepid wage growth go right over to inflation? Is
Speaker 1: the reason Chairman Paul struggling within relations simply because of
Speaker 1: an odd labor economy with tepid wage growth. I think
Speaker 1: that's certainly part of the problem. I know that for
Speaker 1: Janet Yellen it was a very big focus, right, She
Speaker 1: had that uh you know, nineteen point labor conditions indicator
Speaker 1: that she would use because there is, you know, a
Speaker 1: school of thought that believes that wage growth has so
Speaker 1: much to do with inflation. So what's the basic argument
Speaker 1: I hear from you at the moment, Because the recovery
Speaker 1: has been shallow, it can go on a whole lot longer.
Speaker 1: I think, so, um, it's certainly going to be a
Speaker 1: somewhat modest recovery. I think we're going to see a
Speaker 1: little steam loss this year, but we'll probably at the
Speaker 1: end of the year, uh see growth at about two
Speaker 1: in the United States. I think this is a time
Speaker 1: where we're going to see uh, you know, an improving
Speaker 1: growth environment in Asia e M, especially China. I think
Speaker 1: people comfortable this year in a way they weren't twelve
Speaker 1: months ago. That the biggest risk this year is not
Speaker 1: economic risk, it's market risk because of valuations. Coming into
Speaker 1: a year where we've already had a massive rally and
Speaker 1: we tried to eight seen plus times forward earnings. Your
Speaker 1: message to people at the moment, Tom and I have
Speaker 1: asked multiple people about it over the last week and
Speaker 1: already this morning. If people missed now on this rally
Speaker 1: over the last twelve months, was the one metric you
Speaker 1: look at right now that says green light come back
Speaker 1: in Well, I think it's looking at long term returns.
Speaker 1: That we know that, especially when we look at valuations,
Speaker 1: they are not predictive over the shorter term. Yes, over
Speaker 1: the long run, valuations are predictive of performance, but you
Speaker 1: can have extended valuations for an extended period of time.
Speaker 1: Uh And And the reality is that the biggest issue
Speaker 1: that most of the investors face is not participating in
Speaker 1: the equity market. But this is really really important. When
Speaker 1: you said it goes to the heart of all of
Speaker 1: financial study and academics. Ratios don't matter short term, then
Speaker 1: what does? So? What does? Certainly what we're seeing in
Speaker 1: this environment, the dominant factor has been and continues to
Speaker 1: be central banks, particularly the FAT. I think we can't
Speaker 1: underestimate the power of the FED, especially when it came
Speaker 1: out and made very clear in the fourth quarter of
Speaker 1: that the bar is extremely high on raising rates after
Speaker 1: giving markets three insurance cuts uh in environment when many
Speaker 1: where many could argue that there were they weren't necessary.
Speaker 1: I'm going to ask you this question because your General
Speaker 1: Council is going to get angry at me and cut
Speaker 1: off the avocad of toast. John Ferrell instead said, I'm
Speaker 1: going to ask you, since what is it the job
Speaker 1: of the Central bank to support equity markets? For the
Speaker 1: last ten years, they've decided that financial conditions matter a
Speaker 1: whole lot more and that they're in the driving seat
Speaker 1: for financial conditions. Let's have some sympathy with the idea
Speaker 1: back end of in December of that year, of the
Speaker 1: primary market for credit in the United States completely seizes
Speaker 1: up because people are worried about the economy and the Fed.
Speaker 1: Fed's got a job to do. They've got to get
Speaker 1: the money markets back open, and that was the job
Speaker 1: they had to do that in the financial crisis. And
Speaker 1: I'm not saying things we were as bad as that
Speaker 1: twelve months ago. I'm sutadly not even going there, Christina.
Speaker 1: But the FED season is their job to support financial conditions.
Speaker 1: The argument I would make at this point is that
Speaker 1: do they really need to be supporting financial conditions to
Speaker 1: the extent they are at the moment. Well, that's a
Speaker 1: great question. Uh, they believe it is, and it's within
Speaker 1: their purview. You know, one could argue that if you
Speaker 1: poorted J. Powell to the Bank of England there would
Speaker 1: be a few insurance cuts there too, just given the
Speaker 1: high level of economic policy uncertainty. But it is certainly
Speaker 1: within the purview of the FED to define its role
Speaker 1: and and focus on financial conditions. And there's a good
Speaker 1: argument for it in that in the United States, at least,
Speaker 1: the fortunes of the stock market tend to be somewhat
Speaker 1: correlated with the fortunes of the economy. If you're just
Speaker 1: joining us, John Fair on time, Keene. One of our
Speaker 1: favorite efforts of the year to wander downtown and the
Speaker 1: dark frozen warning, it is cold, it is cold. It's
Speaker 1: always find it colored downtown. Then in midtown that's the
Speaker 1: wind water, just Hudson River, you know, Washington across the
Speaker 1: downtown the college. Is this the second time? Police? The
Speaker 1: police picked up the entourage your on the Bentley and said,
Speaker 1: why is he downtown? Christina Huper here, she is our
Speaker 1: chief global market strategist in Investco and we're thrilled to
Speaker 1: be with investco this morning. What are the fist fights
Speaker 1: right now in your strategy meetings in Investco? What's the
Speaker 1: biggest point of debate? Because one of the hallmarks of Investco.
Speaker 1: She get in the room and everybody argues some houses
Speaker 1: do that, but Investco is codified constructive argument. What's a
Speaker 1: single argument right now at Investco. Well, one of the
Speaker 1: conversations that we've had, um uh, you know, quite frequently
Speaker 1: sort of an extended debate has been about where are
Speaker 1: we going to see strong growth this year? And certainly
Speaker 1: the US there have been question marks. We've even debated
Speaker 1: how much volatility we expect to see this year. How
Speaker 1: much economic policy uncertainty we'll see. Keep in mind we've
Speaker 1: got US presidential election where there is just no no
Speaker 1: visibility on who the Democratic candidate is going to be,
Speaker 1: so uh, you know, some of us expect a fair
Speaker 1: amount of volatility this year, especially if we see um
Speaker 1: more progressive candidates. When high profile primaries, you could see
Speaker 1: short term sell offs in particular industries that are expected
Speaker 1: to be more heavily regulated. UM. But I think there's
Speaker 1: general consensus and and a lot of excitement around Asia
Speaker 1: e M, particularly China that that's a really important topic.
Speaker 1: We'll cover that with Investco this morning. Are you still
Speaker 1: very quickly here, are you still international based overweight international
Speaker 1: with your expertise, Well, we are definitely UM more bullish
Speaker 1: on asia EM. We're we're very selective outside of the
Speaker 1: US UM modestly bullish on the US UM, but where
Speaker 1: we would focus is Asia EM, especially China. Christina Christina
Speaker 1: Christina Hooper, she is chief global market strategist And let's
Speaker 1: go question of the moment. George Evans is exceptionally qualified
Speaker 1: to answer the question. His world has been asleep for
Speaker 1: ten years. It woke up in Q four. Now what
Speaker 1: which is his head of global equities and portfolio manager
Speaker 1: for Investco, and I have your international growth fund. We
Speaker 1: simply asked him about finally international investment has come to like,
Speaker 1: let's look back quickly here, George, with all your decades
Speaker 1: of experience, how far behind was the international investment in
Speaker 1: the last two, five, even seven years. What if you
Speaker 1: go back to the early seventies, that was a basically
Speaker 1: flip flopped every two to four years between between US
Speaker 1: leadership and non US leadership. The last uh twelve years
Speaker 1: has been absolutely exceptional, with the SMP leading the a
Speaker 1: every year but one. So we are way due for
Speaker 1: a sort of an inflection point to turn towards international.
Speaker 1: Why did that happen, What effected the change, and what
Speaker 1: was in all the textbooks you and I read about
Speaker 1: a cyclic field to it to a structural shift to
Speaker 1: buy US or a structural shift to not choose to
Speaker 1: buy international. Well, I think the first thing to point
Speaker 1: out is that the the US sort of had leadership
Speaker 1: and a lot of the key global sectors over the
Speaker 1: last ten years, so I think the fangs by attach
Speaker 1: things of that nature. The other thing was the US
Speaker 1: did a much better job in grappling the problems with
Speaker 1: the financial system post global financial crisis, which the Europeans
Speaker 1: really failed to do. I think the third thing to
Speaker 1: point out would be that the emerging markets, A lot
Speaker 1: of the emerging markets are very much led by commodities.
Speaker 1: We had that huge commodity boom two thousand two to
Speaker 1: the end in two Chinaman. But also you know, all
Speaker 1: of Latin America, all of Africa, a lot of Southeast
Speaker 1: Asia's commodity oriented. So you just can't get away from that.
Speaker 1: So where are we now after a queue for was
Speaker 1: it a pup that will fade away or is there
Speaker 1: something substantial here to allocating more to international versus wheld
Speaker 1: we've been for a decade. Well, I think there are
Speaker 1: a few things that are very supportive. The first thing
Speaker 1: is that if you look at the dials of risk,
Speaker 1: a lot of those risk dials that were up through
Speaker 1: the basically the third quarter of last year have come down.
Speaker 1: So Europe is much more oriented towards global trade, and
Speaker 1: global trade was clearly negatively affected by the trade spat
Speaker 1: which lasted a year and a half. So global trade
Speaker 1: getting better is really good for more open economies Europe
Speaker 1: and Asia. Uh, the second thing is that you've got
Speaker 1: really good valuations. We've got risks that everyone's been aware of,
Speaker 1: particularly around Brexit, which are likely to be resolved in
Speaker 1: very short order. So risk down valuations are good, and
Speaker 1: you've got the potential for an acceleration of g d
Speaker 1: P in a lot of these more open economies. Can
Speaker 1: I buy the George Evans world by buying multinationals? That
Speaker 1: used to be a game in itself. So, I mean,
Speaker 1: the thing that everyone's got to realize is that pretty
Speaker 1: much every index is a multinational index now. So about
Speaker 1: more than fifty of the revenues and earnings of the
Speaker 1: SMP come from outside, more than I did not know
Speaker 1: that I thought it was less. So you have very
Speaker 1: much an international orientation of most of the big companies.
Speaker 1: Extra financials um in most of the world. So the
Speaker 1: US has many excellent global companies that are addressing global
Speaker 1: growth opportunities. There are excellent global companies that happen to
Speaker 1: be based in Europe and Japan. So if you want
Speaker 1: to buy luxury goods, which is a really good sector,
Speaker 1: you've basically got to be in Europe. Now. Loui Viton
Speaker 1: is European. I didn't reached more as European Louis vite
Speaker 1: is buying Tiffany really, um so there's a huge opportunity
Speaker 1: for uplift there. What is it about luxury which explained
Speaker 1: to me the mob, I mean, I mean we talk
Speaker 1: about Apple and the rest. Do you look at the
Speaker 1: ratios of luxury is out of kilter? Is what we
Speaker 1: see in selected thing and tech stocks. Luxury is a
Speaker 1: very very good area to invest because there's incredible growth
Speaker 1: dynamic which is like to last a long time, and
Speaker 1: they are really profitable because in many cases the prices
Speaker 1: the product, so they're able. You know, if you go
Speaker 1: into an air Miss store, No, that would never happen
Speaker 1: wearing about Boti folks. Okay, if you went into an
Speaker 1: air Miss store today, five years ago, ten years ago,
Speaker 1: they're all lots of very expensive goods and really the
Speaker 1: only thing that really changes is the price. So they
Speaker 1: just moved the price up about two to every year.
Speaker 1: No fashion risk, fantastic. George Evans with us with Investco
Speaker 1: is a creator into Friday and the weekend and what
Speaker 1: I'm going to do this week into salvage going away
Speaker 1: to Switzerland for one week. I'll talk Gucci Garden in Florence.
Speaker 1: I mean you look at luxury goods and the branding
Speaker 1: of it in those valuations. You mentioned Tiffany in the
Speaker 1: takeout in Van Cleave at fifty seventh and fifth Avenue
Speaker 1: and all that. The branding seems to be exquisite and
Speaker 1: on the revenue stream there do we underestimate the persistency
Speaker 1: of the revenue stream whether it's Gucci Garden or Tiffany
Speaker 1: at Fifth Avenue. Well, Uh, the the amazing thing with
Speaker 1: luxury goods is the degree to which emerging market consumers
Speaker 1: are buying luxury its. So over fifty percent hasn't abbed
Speaker 1: with the China slowdown thet There was a there was
Speaker 1: a bit of an ad when they had that Austarity
Speaker 1: package when people weren't allowed to gift each other ten
Speaker 1: and twenty thousand, thirty thousand dollar watches and things like that.
Speaker 1: But there's a relentless growth in the addressable market as
Speaker 1: emerging market consumers get wealthy. So over fifty of the
Speaker 1: sales of luxury goods emerging market consumers. The more unequal
Speaker 1: the incomes are in any country, the more people like
Speaker 1: to signal where they are on the TOTEM Pole, So Scandinavians,
Speaker 1: you know, lower lower propensity to buy luxury goods. People
Speaker 1: from Brazil, Russia, China, very high propensity to buy luxury goods.
Speaker 1: So there has been, as it's been an incredible sort
Speaker 1: of revenue growth over the last ten twenty years, which
Speaker 1: we think is going to go on. Uh, the returns
Speaker 1: on capital employed are very very high. Is this sector
Speaker 1: over or under owned by institutions? I mean, this is
Speaker 1: a raging debate on ample and the rest right now,
Speaker 1: but but is it over owned? I haven't sort of
Speaker 1: looked at the top ownership, but I you know, I
Speaker 1: think that you know, this is clearly a sector which
Speaker 1: has on a global basis, it is fantastically profitable, great
Speaker 1: growth dynamic, and I think there's going to be you know,
Speaker 1: it's one of those sectors where there's going to be
Speaker 1: consistent buying pressure. Okay, one final question, and we're going
Speaker 1: to have you back here to really go into some
Speaker 1: of the idiosyncrasies that we see at worldwide. Is the
Speaker 1: United States of America part of international investing? If you
Speaker 1: buy international, do you bring in the United States? You
Speaker 1: to really stay discreet from that. So international investing world
Speaker 1: means everything but the US. So the term global is everywhere.
Speaker 1: So our global funds have forty two in the US.
Speaker 1: The international funds are completion. So that's anywhere, but the US.
Speaker 1: George Evansworth, US is fascinating. We're gonna come back and
Speaker 1: some of the indiosyncrasies, I know Paul Sweeney's got questions,
Speaker 1: and some of the unique and eleven and economies as well.
Speaker 1: Is it wy to speak to Margaret Brennan the history
Speaker 1: that we have observed in the last forty eight hours.
Speaker 1: I could do it one hour conversation Margaret with you.
Speaker 1: You're going to enjoy a one hour discussion face the nation.
Speaker 1: See it on CBS Sunday morning. You could hear it
Speaker 1: on Bloomberg Radio Sunday afternoon. Margaret, I'm going to cut
Speaker 1: to the chase four inch headlines in the Times, in
Speaker 1: the Post. As a certain elite riveted. Is the rest
Speaker 1: of the nation engaged in what we're seeing in Washington?
Speaker 1: You know, I think when you see John Roberts, Chief
Speaker 1: Justice in Supreme Court, getting sworn in, and you see
Speaker 1: the decorum enforced centers not being able to speak on
Speaker 1: the floor, it's a good reminder of what we're watching
Speaker 1: being historic and not just the usual Washington fighting with
Speaker 1: itself moment. I think sometimes it's hard for the rest
Speaker 1: of the country to believe that or get perspective on it,
Speaker 1: because it just always seems like the part of bickering
Speaker 1: is constant. But our country has literally hardly ever done
Speaker 1: this before. This is the third time, um, and so
Speaker 1: I think it is worth pumping the brakes, taking a
Speaker 1: moment and saying this has tremendous gravity. You just said
Speaker 1: the House of Representatives, is you a vote to no
Speaker 1: confidence in the present, And now you have the Senate
Speaker 1: debating his removal, even though we know it is far
Speaker 1: from likely to get two thirds of the Senate to
Speaker 1: vote to do that, to eject the president. This is
Speaker 1: politically damaging, It is lasting, and it is politically a
Speaker 1: huge moment. In the Washington Post, folks with a terrific
Speaker 1: article on the background of the Justice during impeachment hearings
Speaker 1: and on Justice Roberts is, Well, Margaret, what is the
Speaker 1: back and forth between the senator from Maine and the
Speaker 1: Senator from Kentucky. What will be that back and forth
Speaker 1: in the coming days? Well, this gets fundamentally to the
Speaker 1: question of whether the Senate trial will allow for witnesses
Speaker 1: and evidence to be introduced. How Democrats acknowledge that their
Speaker 1: investigation was incomplete. In fact, one of the articles of
Speaker 1: impeachment is obstruction of justice because the president attempts to
Speaker 1: block witnesses and to not hand over documents. So the
Speaker 1: hope had been in the Senate for Democrats that they'd
Speaker 1: be able to get that handed over. Susan Collins of
Speaker 1: Maine has indicated that she does think maybe it's worth
Speaker 1: hearing from some of these people with firsthand knowledge, like
Speaker 1: John Bolton, the former National security advisor to the President.
Speaker 1: And so she's indicating that when it comes up for
Speaker 1: a vote, uh, that she might be actually voting alongside
Speaker 1: Democrats to say, I want to hear exactly what it
Speaker 1: is that happened from somebody who was in the room,
Speaker 1: because we haven't heard from any of those firsthand witnesses. Right,
Speaker 1: Republicans complain about that process in the House not involving
Speaker 1: firsthand witnesses. Now some Republican senators say, okay, well let's
Speaker 1: hear from some of them. Now, Um, that's the fight.
Speaker 1: Mitch McConnell, the Republican leader in the Senate, wants to
Speaker 1: help the White House get what it has set out
Speaker 1: as their hope for the fastest impeachment trial in American history,
Speaker 1: that it could be just a matter of a quick
Speaker 1: few weeks rather than drawn out eleven weeks or more
Speaker 1: as it was during John's period of trial. Margaret News yesterday,
Speaker 1: the General Accountability Office says that the White House broke
Speaker 1: the law and withholding aid to Ukraine. How important is
Speaker 1: that to the whole impeachment process. Well, it's not as
Speaker 1: material as saying new evidence, but it's a it's an
Speaker 1: exclamation point on a on a talking point that Democrats
Speaker 1: are are using to say, Look, this wasn't the President
Speaker 1: making a Palacey choice on his own. This was essentially
Speaker 1: him trying to overwhelm the uh sending powers that remember
Speaker 1: of Congress has the power of the purse and the
Speaker 1: will and intent of Congress, when they had already allocated
Speaker 1: these funds um and so that there was this withholding
Speaker 1: of money that had already been allocated in a way
Speaker 1: that is a violation of law. So it certainly helps
Speaker 1: the Democrat makes their point that this isn't just a
Speaker 1: political witch hunt, that there is actually some um, you know,
Speaker 1: relevant legal and constitutional um issues here, but it's really
Speaker 1: things like text messages and documents from individuals like Left Harness,
Speaker 1: who as the business associate indicted UM, business associated really Giuliani,
Speaker 1: and that kind of evidence that many Democrats would like
Speaker 1: to see introduced in the Senate trial. Margaret Brown, and
Speaker 1: tell us about Face the Nation Sunday morning. We will
Speaker 1: be digging into a lot of this with one of
Speaker 1: the top Republican leaders, Senator John Cornyn of Texas. We
Speaker 1: will press him on exactly what the public can expect
Speaker 1: and what we will see because not all of this
Speaker 1: will be done in front of the camera. Um. We
Speaker 1: will talk to him about how it will be proceeding
Speaker 1: on Tuesday, and we'll also talk to essentially one of
Speaker 1: the prosecutors, Gerry Nadler, Democrat from New York, chairman of
Speaker 1: the Powerful House. Interesting. We'll talk to him about the strategy.
Speaker 1: And we have Gary cone Um coming on to talk
Speaker 1: about the economic outlook and what that might mean to
Speaker 1: the president's re election. Very good, Margaret, Thank you. On CBS.
Speaker 1: See it Sunday morning on the CBS television network here
Speaker 1: at on Bloomberg Radio. We did that two pm in
Speaker 1: New York, Washington and Bloomberg one or six one Boston
Speaker 1: Newbery Report. That's Face the Nation this Sunday at two
Speaker 1: Bloomberg Radio. In this odd time and with the raging
Speaker 1: debates of the weekend, it is important to speak to
Speaker 1: Mr Whalen because he wrote a jewel of a book
Speaker 1: years ago, Inflated, How Money in Debt Built the American Dream.
Speaker 1: This is one of those books where you opened up
Speaker 1: Noi Rabini wrote the introduction, and Paul you opened it
Speaker 1: up and you go yeah, yeah, yeah, And it was
Speaker 1: abs absolutely riveting on the financial history of the country
Speaker 1: of the nation going back two hundred years. An extraordinary book.
Speaker 1: And Chris Whalen's got a twisted perspective Paul Sweeney on
Speaker 1: where we are exactly. Chris Whalen, thanks for so much
Speaker 1: for joining us. Chris as the chairman of Whaling Global
Speaker 1: Advisors and co founder of Institutional Risk Analytics. All right,
Speaker 1: so we had Goldman, Sachs, Morgan, Stanley, JP, Morgan, Bank
Speaker 1: of America, a whole bunch of the big money centers.
Speaker 1: They seem pretty good easy comps. What's my takeaway? The
Speaker 1: takeaway is at the consumer side did much better than
Speaker 1: the institutional side. The bank's side, if you will, of
Speaker 1: JP Morgan, it's only half bank. Uh, it's having a
Speaker 1: tough time. And that interest income fell again, which is
Speaker 1: a legacy of the normalization of the money markets. Right.
Speaker 1: On the other hand, the banks, the investment banking, trading,
Speaker 1: all of that did well. Uh, good volumes on more,
Speaker 1: they get a gain on sale on every mortgage they
Speaker 1: sell into the agency market. So you know, all of
Speaker 1: those things were good. But the thing I cautioned and
Speaker 1: have been cautioning people on for two years is that
Speaker 1: after the FED pushed down the cost of funds so dramatically,
Speaker 1: it had to come back and we're still only at
Speaker 1: eight percent where we were before the crisis. But the
Speaker 1: banking industry is bigger, so there's still a huge subsidy
Speaker 1: embedded in cost of funds. And as they lose that
Speaker 1: over time, Uh, you're gonna have spreads squeezed. Give us.
Speaker 1: I want to go ask you something about regulations. I know,
Speaker 1: post financial crisis, a whole series of regulations layered on
Speaker 1: top of the financial services industry. Uh, you know, having
Speaker 1: negative impact on the returns that those banks can generate.
Speaker 1: Are we at a point in time where we can
Speaker 1: expect meaningful rollback of some of those regulations. I know
Speaker 1: there's been some talk about it in the last six
Speaker 1: or twelve months. Well, I hope, led by Randall Corals
Speaker 1: at the Photo Reserve Board, they try and rationalize them.
Speaker 1: You know, you're ago people got together in Washington, the
Speaker 1: different regulatory agencies, and they had lunch and they said,
Speaker 1: what do we want? What has Congress told us? And
Speaker 1: how do we implement that in a rational way, because
Speaker 1: you don't want to hurt business. You know, all this fuss,
Speaker 1: for example, about non bank companies posing systemic risk, okay,
Speaker 1: which is pretty silly, uh, you know, misses the fact
Speaker 1: that we have a banking system that pretty much has
Speaker 1: a monopoly on short term funding. Years ago, when we
Speaker 1: were kids, mortgage companies could sell pass through as the
Speaker 1: money market funds. But we don't let them do that anymore.
Speaker 1: So what we've done with each crisis is diminished the
Speaker 1: freedom and diminished the utility of the markets, thinking that
Speaker 1: that will protect us. And so you saw the most
Speaker 1: recent experience with RepA. And yet the strange thing is
Speaker 1: we still is. My good friend Ralph Deilchi likes to
Speaker 1: remind we have a shortage of collateral even though the
Speaker 1: Treasury is issuing moroward amounts of debt. You know, Chris Whalen,
Speaker 1: your charm has been you've not been a critic of
Speaker 1: the bank banks, but you've been very aware of balance
Speaker 1: sheet risks, almost old school risk. And you've also said
Speaker 1: I want to participate in the banks. You've done that
Speaker 1: through preferred shares after a bang up year and the
Speaker 1: Keith Briett index out near where it was two thousand six.
Speaker 1: Can you be comfortable owning the common shares of these
Speaker 1: two big to fail banks? Can you be comfortable with
Speaker 1: their preferred securities with a greater yield? Or does of
Speaker 1: course Gray Whalan cut it and run no No. I
Speaker 1: own US Bank common and preferred. I owned City Trumps
Speaker 1: the nine and three quarters, which are wonderful. I owned
Speaker 1: Bank America preferreds by and large. I view the equity
Speaker 1: right now is pretty pretty well valued. You know, JP
Speaker 1: is almost two times. But I want to be clear, Christmas,
Speaker 1: you get hit like a pinata by people saying you're
Speaker 1: anti bank owned bank paper even while you're looking at
Speaker 1: the dynamics inside banks. Correct, But I am anti big
Speaker 1: bank and I'm anti sloppy badly directed bank. Smaller institutions
Speaker 1: like US Bank Corps, which has always maintained the same size,
Speaker 1: they refuse to get bigger. They like half a trillion
Speaker 1: dollars that lets them sleep at night. Are you suggesting
Speaker 1: James Diamond should not get bigger. I don't think the
Speaker 1: big guys need to get larger. But ironically, as our
Speaker 1: system grows in terms of debt and liquidity, which the
Speaker 1: entire world uses to function, this is the great conundrum. Uh,
Speaker 1: you know that that will change. Banks have to get
Speaker 1: bigger in a way. They have to expand, the currencies expanding.
Speaker 1: But Chris, you look at their operating income build out
Speaker 1: over the last five years, and I know they're going
Speaker 1: to build. I mean, you're gonna get an entire floor
Speaker 1: on Park Avenue when they build a new skyscraper, right.
Speaker 1: I don't know. You know, I've had a few institutions
Speaker 1: contact me about getting back in the game, but I'm
Speaker 1: affiliated with Cohen and Company, and a neat thing about
Speaker 1: those guys is they provide mortgage finance. We run a
Speaker 1: ten billion dollar plus book of agency securities and whole loans.
Speaker 1: And what do you see there? Well, well, you saw
Speaker 1: the repot crisis, we saw instability in the middle of
Speaker 1: a month, which is supposed to not happen, and these
Speaker 1: were the early warning silence that should have told the
Speaker 1: Fed that we had a problem. This is back in
Speaker 1: June and July. By the time everybody came home from holiday,
Speaker 1: you know, in September, it was too late to fix it. Chris.
Speaker 1: I'm looking at your institutional risk analysis note recent one
Speaker 1: and I see a chart hair the I r a
Speaker 1: bank deadpool. I'm a little nervous to ask what that is.
Speaker 1: I'm assuming I don't want to be on that list. Yes,
Speaker 1: those are four banks Deutsche, HSBC, Goldman, and City that
Speaker 1: have underperformed. You know, the financials are as expensive as
Speaker 1: they have ever been, and I think the only Goldman
Speaker 1: of that group is now at book value. Um the
Speaker 1: rest are at a discount. And that tells you a
Speaker 1: couple of things, but particularly their efficiency in creating revenue.
Speaker 1: Look how efficient Wells Fargo still is. Those guys make
Speaker 1: money even though they're under a out US bank. Amazing
Speaker 1: performance for an institution. It's large. But once you get
Speaker 1: really big Bank of America, for example, who by the way,
Speaker 1: I applaud this quarter they rallied you know interesting story
Speaker 1: time you like this. Jamie Diamond went long duration last December.
Speaker 1: He wrote it down. But it looks like Bank America
Speaker 1: missed that trade. And yet by the fourth quarter they
Speaker 1: had rallied and they dropped their cost of funds when
Speaker 1: everybody else's funding costs is going on. That's the inside
Speaker 1: baseball from Chris Whalen about the business is still being
Speaker 1: done like it used to be done. Chris, let's let's
Speaker 1: let's shift gears here a little bit. I want to
Speaker 1: talk about wealth management. James Gorman is the glory god
Speaker 1: of the moment. We will speak with Mr Gorman, Ian Davos,
Speaker 1: I was really looking forward to a set of important
Speaker 1: interviews with Moynihan, Corbett, Gorman and Mr Solomon over In
Speaker 1: goldn Sachs. But tell me about wealth management, Chris, because
Speaker 1: it used to be an afterthought, and now it seems
Speaker 1: like everybody wants to, in honor of the late Mr
Speaker 1: Marin be like Pain Webber, do wealth management do net
Speaker 1: worth blah blah blah. Can those margins actually be sustained
Speaker 1: if everybody wants in the pool? I think it can,
Speaker 1: but it's certainly competitive. So when Goldman, for example, says
Speaker 1: that they're going to go in and essentially take share
Speaker 1: in that market. That's a tough proposition. Many banks ups,
Speaker 1: a number of them made the decision, much like Morgan Stanley,
Speaker 1: to go all in on the advisor side because there's
Speaker 1: a low risk and the investment banking side. Dudes were
Speaker 1: not top tier investment banks, to be fair, but they
Speaker 1: knew to get it. But come on, this is on
Speaker 1: a microeconomic basis. It's like the way you're in your
Speaker 1: book Inflated, you explain into the financial crisis. It's about
Speaker 1: those seven You either make money there you don't. Oh,
Speaker 1: come on, I'm suggesting, Mr Whalen. There's too many players.
Speaker 1: Everybody's going to dive in a in a somewhat perfectly
Speaker 1: competitive milieu, can wealth management sustain these ginormous twenty five
Speaker 1: percent margins in the mainstream fat portion of it? Two
Speaker 1: smaller accounts know, but there is a clientele out there
Speaker 1: that wants high touch and as you know, I know
Speaker 1: a certain lovely redhead from Uruguay who's in that business. Um,
Speaker 1: and I you know it can be done in it?
Speaker 1: What is this? A sales kid always have to put
Speaker 1: a plug in for the white well that's good. You
Speaker 1: always say good morning to Mrs Whalen as well. Paul Sweeney.
Speaker 1: You know you're a high net worth kind of guy, Paul,
Speaker 1: You've been following this for years. Can they maintain those
Speaker 1: Gorman like margins. That's a great question, Tom, because you
Speaker 1: hear it from you know, Morgan Stanley's Tom mentioned made
Speaker 1: a big push under Gorman, you know, several years ago,
Speaker 1: taking Morgan Stanley from a swashbuckling trading culture to more
Speaker 1: of a you know, a wealth management credit. Swiss at
Speaker 1: the same time gets out of it, and they're both
Speaker 1: still in banking, but in in spots where they really
Speaker 1: have a comparative advantage structured finance for credit Sweetz Gorman,
Speaker 1: for example, has a great aircraft business, big aircraft leasing deals.
Speaker 1: Morgan Stanley is the first stop. So they picked their spots.
Speaker 1: But it's not like the old days when the broker
Speaker 1: tried to do everything, gave away lots of stuff, and
Speaker 1: those were the days, Tom, Those are those were the days.
Speaker 1: Chris Whale and thank you so much, greatly appreciate it
Speaker 1: today with Whale and Global Advisers and important conversation, always
Speaker 1: controversial conversation on the American banking system. Thanks for listening
Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews
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