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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: We begin with our top story, calling labor market data

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Speaker 2: reinforcing speculation the Fed will cut rates this year. Bob

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Speaker 2: Time at Aventless Merchant Capital say the market is caught

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Speaker 2: up to reality of Fed rate cuts, saying quote any

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Speaker 2: cuts they make in the second half will be minor.

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Speaker 2: Bob joins us Now for more bbcome morning morning, Jonathan.

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Speaker 2: The market's moved towards you. They were looking for six

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Speaker 2: cuts this year. It was ridiculous. We're now looking for

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Speaker 2: like one or two. Can we just start with what

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Speaker 2: you think of the recent economic data, the information we've

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Speaker 2: sort of got our hands around over the last couple

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Speaker 2: of days.

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Speaker 3: I think it's consistent with what we're seeing in the

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Speaker 3: whole first half, which is, if you look at the

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Speaker 3: second half last year, then the numbers coming out were

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Speaker 3: a little bit pleasing for economic growth, probably a little

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Speaker 3: bit pleasing for inflation being lower than we expected, and

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Speaker 3: the labor market continued to be very robust. You get

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Speaker 3: into the first half of this year and the economic

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Speaker 3: numbers are probably a little bit weaker than we thought,

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Speaker 3: the inflation numbers are a little bit higher than we

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Speaker 3: had anticipated, and for the first time, we're seeing just

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Speaker 3: a little bit of looseness in the labor market. I

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Speaker 3: don't want to overstate that because I think, you know,

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Speaker 3: the labor market is still in very good shape. But

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Speaker 3: I think in both cases, you know, the economy strong

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Speaker 3: second half last year, you can't cut inflation a little

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Speaker 3: bit higher than you want this half, you really can't cut.

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Speaker 3: So Jonathan, I think twenty five basis points here or there.

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Speaker 4: Who knows, right, There's.

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Speaker 3: No precision in this, but by and large, I think

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Speaker 3: the risk for the FED, the risk for the chairman,

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Speaker 3: is to cut too early before there's any economic weakness

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Speaker 3: and then having to reverse course as.

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Speaker 4: Inflation, you know, begins to grow.

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Speaker 3: So my senses, they're going to be patient, they're going

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Speaker 3: to be you know, everyone's.

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Speaker 4: Used this word data dependent.

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Speaker 3: But until we see a weakness in the economy or

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Speaker 3: inflation really down to two percent, then they're just not.

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Speaker 4: Going to cut.

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Speaker 2: But the economy in the market have surprised a lot

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Speaker 2: of people. I talked about expectations in January. Where we

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Speaker 2: were there, where we are now, Let's talk about where

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Speaker 2: we were last spring. Last spring, if we were sat

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Speaker 2: around this table, the majority of people were speaking to Lisa,

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Speaker 2: to me, to Anne Marie, and they were telling us

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Speaker 2: that what we're going to see is a real tightening

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Speaker 2: of financial conditions. Thanks won't be able to lend us

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Speaker 2: much anymore. Companies are going to suffer. Here we are

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Speaker 2: twelve months later. Credit spreads are super super tight, and

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Speaker 2: credit availability, particularly for large companies, is there and ready

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Speaker 2: for everyone, even with rates of five point five percent.

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Speaker 2: You've got your finger on the pulse of this if

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Speaker 2: you've been surprised by that, the availability of credit to

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Speaker 2: this economy still with interest rates where they are.

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Speaker 3: By and large, No, and I think sometimes there's an

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Speaker 3: advantage to travel.

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Speaker 4: A lot of times there's not.

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Speaker 3: But I spend a fair amount of time in the

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Speaker 3: Middle East and in Asia, and when you listen to

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Speaker 3: people there looking at what's going.

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Speaker 4: On in the US, it was okay, we did too

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Speaker 4: long on caming.

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Speaker 3: Inflation raised rates five hundred and fifty bis points in

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Speaker 3: nine months.

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Speaker 4: We all know the economy is going.

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Speaker 3: To collapse, and it's kind of like, really like, the

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Speaker 3: economy is still there, the labor market is still there,

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Speaker 3: and is so clear to me that we have such

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Speaker 3: a competitive advantage in this country with the depth and

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Speaker 3: breadth of the financial services industry, and I think it's

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Speaker 3: a real asset. Europe doesn't have it, China doesn't have it.

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Speaker 3: You know, hedge funds, venture capital, private credit, you know,

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Speaker 3: all of these ways to get credit into the economy,

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Speaker 3: into small businesses, into middle market businesses. We have many

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Speaker 3: investments with Cascadia in Seattle, in Austin, with Marshbury in Cleveland,

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Speaker 3: investing in advisory platforms for middle market in family owned businesses.

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Speaker 3: And it is incredible how many angles we have to

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Speaker 3: get credit out into the economy in this country relative

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Speaker 3: to other countries. And I think it has you know,

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Speaker 3: I think looking at the US from outside, there's real

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Speaker 3: admir for how did we manage this with five hundred

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Speaker 3: and fifty basis points and nine months and the economy

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Speaker 3: has stayed relatively stable.

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Speaker 1: There also is a question underpinning that, which is how

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Speaker 1: effective is FED policy and really having any influence whatsoever

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Speaker 1: on credit growth, et cetera. There's a theory that the

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Speaker 1: economy's just been a whole lot more resilient to rates

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Speaker 1: as they go up to five and a half percent.

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Speaker 1: Is anyone talking about how rate cuts won't necessarily have

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Speaker 1: any effect whatsoever on the economy, also, especially just peripheral ones,

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Speaker 1: because of all of this credit creation already in the system.

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Speaker 3: You know, I think there's a lot of people that

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Speaker 3: haven't ax to grind. You know, if you're in commercial

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Speaker 3: real estate, you want to see rates come down for

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Speaker 3: kind of the sector that you're in. But if you

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Speaker 3: mentioned history, Jonathan, if we take a more historical look,

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Speaker 3: since two thousand and eight, the Great Financial Crisis two

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Speaker 3: thousand and eight, until the FED started raising rates, FED

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Speaker 3: funds to averaged just under one percent.

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Speaker 4: If you look at.

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Speaker 3: Two three four decades prior to two thousand and eight,

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Speaker 3: FED funds would have averaged about four percent. So I

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Speaker 3: think we're in a much more normal environment right now,

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Speaker 3: and I think the worst thing that could happen is

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Speaker 3: that we saw the FED every well, you know, if

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Speaker 3: the FED starts aggressively cutting rates, it's going to be

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Speaker 3: because the economy is weak, and so that's that's not

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Speaker 3: necessarily good news.

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Speaker 4: So we're not rooting for FED rate cuts, but we do.

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Speaker 3: Think you know, if you look out over the next

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Speaker 3: couple of years, rates in the four to four and

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Speaker 3: a half percent four and a half to five percent

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Speaker 3: range is probably the logical explanation a bit lower than

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Speaker 3: here over time, but not below four percent.

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Speaker 1: We've been talking about is good news, bad news, bad news,

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Speaker 1: bad news, bad news, good news for smaller companies, it

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Speaker 1: has been bad news regardless. It seems like over the

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Speaker 1: past couple of weeks, and for small banks regional banks

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Speaker 1: as well. In particular, the KBW index is down some

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Speaker 1: twelve percent on the year, really down sharply over the

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Speaker 1: past couple of sessions. Do you think that rate cuts

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Speaker 1: will eventually be positive for these shares or do you

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Speaker 1: think that there's some sort of structural issues with holdings

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Speaker 1: and other potential challenges, but just make it bad news

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Speaker 1: as bad news for them no matter what.

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Speaker 3: We have a strategy to invest in regional banks, so

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Speaker 3: I do have a bias here. We see a great opportunity,

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Speaker 3: and you know, kind of you if you turn that

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Speaker 3: on its head and say, your strong regional bank, you've

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Speaker 3: addressed your capital issues. And we all know that higher

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Speaker 3: interest rates we're impacting their treasury portfolios as they have

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Speaker 3: for every bank, and they've impacted loan provisions. But let's

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Speaker 3: just you know, pick an example of an investor I

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Speaker 3: US investing in a strong regional bank, so the capital

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Speaker 3: levels are fine, there's no issues with a portfolio, and

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Speaker 3: then look forward, you're really doing well with interest rates

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Speaker 3: at this level. Higher interest rates are really good for banks,

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Speaker 3: and it's been a long time since we've seen loan

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Speaker 3: demand like this. So the go forward position for a

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Speaker 3: strong regional bank is actually outstanding. The question is will

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Speaker 3: we see consolidation, which we believe we will, and are

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Speaker 3: there strong banks, which we believe there are. And I

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Speaker 3: think one of the great attributes for again you go

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Speaker 3: back to the depth and breadth of the financial services

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Speaker 3: industry in the US. The fact that we have these

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Speaker 3: regional and community banks providing a service that the larger

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Speaker 3: banks can't to small family businesses is a real strength.

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Speaker 1: If you talk about consolidation, I wonder how much it's

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Speaker 1: going to be consolidation and how much is going to

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Speaker 1: be failures. Yesterday, there is Access Financial the latest potential

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Speaker 1: target of some bad research, and a lot of it

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Speaker 1: stemmed around its commercial real estate holdings. Some people argue

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Speaker 1: that lower rates will actually cause property prices to go

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Speaker 1: down because it will allow more sales to kind of

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Speaker 1: get unleashed in the market. Do you think that there's

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Speaker 1: going to be a rash of failures that basically, it's

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Speaker 1: sort of like people sniffing out cockroaches and if they

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Speaker 1: smell something that's not okay, they just pull their money in.

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Speaker 1: It's sort of a self fulfilling prophecy. Do you expect

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Speaker 1: that kind of activity to sort of come back?

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Speaker 3: Well, I think in our view, one thing that is

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Speaker 3: certain is that since two thousand and eight, when the

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Speaker 3: regulator is and the politicals claim that we will never

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Speaker 3: see too big to fail again, the larger banks in

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Speaker 3: the US have gotten bigger, more concentrated, closer to government,

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Speaker 3: and far more systemic, so they're safe. You know, the

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Speaker 3: economy is good, but it's in no one's interest to

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Speaker 3: allow the larger banks to continue to acquire the smaller banks.

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Speaker 3: What we think is appropriate is that we strengthen some

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Speaker 3: of the strong regional banks, whether it's the capital markets,

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Speaker 3: whether it's Atlas Merchant Capital, doing investments to give them

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Speaker 3: the capital levels that are necessary for them to acquire

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Speaker 3: some of the banks that I think are too small

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Speaker 3: to succeed, really really good banks that have been more

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Speaker 3: like community banks that have had good, solid roes for decades,

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Speaker 3: but in this environment, with the shock in rates, they

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Speaker 3: have to adjust their treasury portfolio. With the loan loss provisions,

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Speaker 3: they have to adjust that. And the thing that is

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Speaker 3: more permanent is the regulatory intrusion post SVB will increase

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Speaker 3: their costs around technology in KYC.

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Speaker 4: So we do see an.

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Speaker 3: Environment where consolidation is a positive and a natural as

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Speaker 3: opposed to weekend failures and big banks taking them over

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Speaker 3: at the last second.

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Speaker 2: We started this conversation by talking about some of the

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Speaker 2: misconceptions people had from the outside, looking in, from outside

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Speaker 2: of America, looking inside America, from inside the financial system.

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Speaker 2: What do you think is the biggest misconception that people

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Speaker 2: in Washington have about the Worldie workh.

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Speaker 3: I think they misunderstand what has happened over the last

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Speaker 3: fourteen fifteen years since the financial crisis, with larger, more concentrated,

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Speaker 3: more systemic, you know.

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Speaker 4: The Big Four, the Big eight.

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Speaker 3: If you look at the top banks, I think you

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Speaker 3: know between the top two or three banks of Wells

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Speaker 3: Fargo and Bank of America and JP Morgan, it's over

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Speaker 3: fifty percent of the deposits. And we saw a recent

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Speaker 3: report where if you take four and a half thousand

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Speaker 3: banks in the US, JP Morgan alone is twenty percent

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Speaker 3: of the profitability. So banks are more concentrated, and I

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Speaker 3: think what they're missing is the value to the economy

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Speaker 3: of having a strong, robust, regional and community banking sector.

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Speaker 3: And I think for US that is an opportunity over

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Speaker 3: the next couple of years. And I think the thing

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Speaker 3: that is really really key here that people miss is

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Speaker 3: the go forward if you are a healthy bank, to

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Speaker 3: go forward with higher interest rates and loan demand is outstanding.

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Speaker 4: The question is are you ready to be investing and

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Speaker 4: are you ready to be lending?

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Speaker 2: Well, we've got to talk about November, all the concerns

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Speaker 2: that people are talking about, Trey tariffs, the erosion of governance,

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Speaker 2: at least was talking about that a little bit earlier

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Speaker 2: this morning. What are you concerned about? What's the radar

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Speaker 2: for you going into twenty five.

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Speaker 3: So I think, Jonathan, if there is a dark cloud,

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Speaker 3: and I've been pretty positive when we were talking earlier

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Speaker 3: on the depth, the breadth of the financial services industry here,

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Speaker 3: the strength of theomy, the strength of the US dollar

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Speaker 3: relative to other If there's a dark cloud, it's it's

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Speaker 3: the debt levels. You know, when President Trump started his

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Speaker 3: first term, so seven and a half years ago. Between

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Speaker 3: then and now, during the four Trump years and the

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Speaker 3: three and a half, if you will Biden years, the

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Speaker 3: debt of this country has gone from twenty trillion to

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Speaker 3: thirty six trillion. And you can't say that was about economy.

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Speaker 3: It was kind of a goldilocks moment, right of seven

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Speaker 3: and a half years of a strong economy. So where

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Speaker 3: are we going to go? It's not in the markets

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Speaker 3: right now, Jonathan Elis. I don't think it's talked about

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Speaker 3: a lot.

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Speaker 4: But if there's a.

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Speaker 3: Dark cloud over the next couple of years, it's how

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Speaker 3: are we going to manage?

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Speaker 4: You know, what changes are we going to make?

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Speaker 3: I think the second piece of it is, no matter

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Speaker 3: who is elected president, you know, out as far as

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Speaker 3: we can see, what president is going to come in

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Speaker 3: and say, you know, no more debt. It's kind of

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Speaker 3: been the easy solution to spend, spend, spend, and so

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Speaker 3: I do worry about it. I think it's out there somewhere.

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Speaker 3: Is it a year away, is it three years away?

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Speaker 3: Is this is this comes back to be an impact?

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Speaker 3: I'm not sure, but I'm a little bit surprised it's

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Speaker 3: not talked about more in the markets.

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Speaker 5: Well, we talk about it plenty too much.

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Speaker 1: Some people might say we talk about it pretty much

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Speaker 1: on a daily basis. And Steve Weisman of Newberger Berman,

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Speaker 1: I just can hear him if he were sitting over there,

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Speaker 1: he'd say, this is all hogwash. People have been talking

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Speaker 1: about this for forty years and they've been wrong, They've

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Speaker 1: been late. I mean, it's not going to happen for twenty.

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Speaker 4: Years, thirty years.

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Speaker 1: It could happened, and then it doesn't really matter. It

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Speaker 1: shouldn't be baked into the markets. Do you agree?

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Speaker 3: No, I mean, I think I do think that there's

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Speaker 3: going to be consequences of the debt levels. And I

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Speaker 3: think going from twenty trillion to thirty six trillion, and

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Speaker 3: you know, economists will give you all kinds of different

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Speaker 3: percentages of it's too high and it's become a significant

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Speaker 3: burden in terms of, you know, balancing the budget each year.

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Speaker 3: So I think it is going to have an impact

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Speaker 3: on the US economy over time, and I think it's

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Speaker 3: going to have an impact on tax policy and other things.

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Speaker 3: It's not discussed much in the market today.

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Speaker 5: How do you see a planing out?

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Speaker 2: You've got some experience in the Ringdom we'll do over

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Speaker 2: the last couple of years, particularly or focused on what

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Speaker 2: happened with liszt trust. How do you see this ultimately

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Speaker 2: playing out just a slow game where they've got to

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Speaker 2: slowly respond to this and show the market they're serious

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Speaker 2: about it. Or is it something where you see the

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Speaker 2: market starts to reject the policies that come out of

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Speaker 2: the White House.

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Speaker 3: Listen, right now, the dollar is very strong. I think

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Speaker 3: I don't have the data exactly, but I think we're

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Speaker 3: at an all time high relative to most competing currencies.

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Speaker 3: And I think one of the implications, if I'm correct

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Speaker 3: that the debt levels are too high in the US,

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Speaker 3: would be is there an alternative to the dollar? And

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Speaker 3: it's a legitimate question, but there is no legitimate alternative.

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Speaker 4: Where are you going to go? I mean Europe.

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Speaker 3: I remember Jonathan in nineteen ninety two and I was

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Speaker 3: with Morgan Stanley. We did the first euro wa European

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Speaker 3: currency bond for of all people, the Bank of England.

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Speaker 3: You know, there was a lot of hope that you'd

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Speaker 3: have a single bond market across Europe. But today you

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Speaker 3: do eurobonds for Italy, you do them for Germany, you

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Speaker 3: do them so each one has different risks, and there's

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Speaker 3: not an integrated capital markets in Europe. I think they

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Speaker 3: look at what happens in the US with hedge funds

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Speaker 3: and venture capital and private capital, and they look at

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Speaker 3: what happens in the US, you know, in the impact

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Speaker 3: of that on the economy, and they don't even have

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Speaker 3: an integrated bond market. If you look at China, they

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Speaker 3: have absolutely no interest in the transparency or convertibility that's required.

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Speaker 3: So I think it's a very very legitimate question to

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Speaker 3: look at an alternative for the dollar, but there is

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Speaker 3: no legitimate alternative, and.

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Speaker 5: That's the problem when it hits the fan, what are

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Speaker 5: you going to do?

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Speaker 4: Well?

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Speaker 2: This is fantastic, always great to see, so thank you,

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Speaker 2: Jonathan blub Diamond.

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Speaker 5: I've Atlas mentioned capital