WEBVTT - Atlas Merchant Capital CEO Bob Diamond Talks Fed Rate Cuts

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>We begin with our top story, calling labor market data

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<v Speaker 2>reinforcing speculation the Fed will cut rates this year. Bob

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<v Speaker 2>Time at Aventless Merchant Capital say the market is caught

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<v Speaker 2>up to reality of Fed rate cuts, saying quote any

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<v Speaker 2>cuts they make in the second half will be minor.

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<v Speaker 2>Bob joins us Now for more bbcome morning morning, Jonathan.

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<v Speaker 2>The market's moved towards you. They were looking for six

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<v Speaker 2>cuts this year. It was ridiculous. We're now looking for

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<v Speaker 2>like one or two. Can we just start with what

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<v Speaker 2>you think of the recent economic data, the information we've

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<v Speaker 2>sort of got our hands around over the last couple

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<v Speaker 2>of days.

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<v Speaker 3>I think it's consistent with what we're seeing in the

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<v Speaker 3>whole first half, which is, if you look at the

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<v Speaker 3>second half last year, then the numbers coming out were

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<v Speaker 3>a little bit pleasing for economic growth, probably a little

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<v Speaker 3>bit pleasing for inflation being lower than we expected, and

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<v Speaker 3>the labor market continued to be very robust. You get

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<v Speaker 3>into the first half of this year and the economic

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<v Speaker 3>numbers are probably a little bit weaker than we thought,

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<v Speaker 3>the inflation numbers are a little bit higher than we

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<v Speaker 3>had anticipated, and for the first time, we're seeing just

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<v Speaker 3>a little bit of looseness in the labor market. I

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<v Speaker 3>don't want to overstate that because I think, you know,

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<v Speaker 3>the labor market is still in very good shape. But

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<v Speaker 3>I think in both cases, you know, the economy strong

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<v Speaker 3>second half last year, you can't cut inflation a little

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

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<v Speaker 3>So Jonathan, I think twenty five basis points here or there.

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<v Speaker 4>Who knows, right, There's.

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<v Speaker 3>No precision in this, but by and large, I think

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<v Speaker 3>the risk for the FED, the risk for the chairman,

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<v Speaker 3>is to cut too early before there's any economic weakness

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<v Speaker 3>and then having to reverse course as.

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<v Speaker 4>Inflation, you know, begins to grow.

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<v Speaker 3>So my senses, they're going to be patient, they're going

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<v Speaker 3>to be you know, everyone's.

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<v Speaker 4>Used this word data dependent.

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<v Speaker 3>But until we see a weakness in the economy or

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

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<v Speaker 4>Going to cut.

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<v Speaker 2>But the economy in the market have surprised a lot

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<v Speaker 2>of people. I talked about expectations in January. Where we

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<v Speaker 2>were there, where we are now, Let's talk about where

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<v Speaker 2>we were last spring. Last spring, if we were sat

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<v Speaker 2>around this table, the majority of people were speaking to Lisa,

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<v Speaker 2>to me, to Anne Marie, and they were telling us

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<v Speaker 2>that what we're going to see is a real tightening

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<v Speaker 2>of financial conditions. Thanks won't be able to lend us

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<v Speaker 2>much anymore. Companies are going to suffer. Here we are

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<v Speaker 2>twelve months later. Credit spreads are super super tight, and

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<v Speaker 2>credit availability, particularly for large companies, is there and ready

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<v Speaker 2>for everyone, even with rates of five point five percent.

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<v Speaker 2>You've got your finger on the pulse of this if

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<v Speaker 2>you've been surprised by that, the availability of credit to

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<v Speaker 2>this economy still with interest rates where they are.

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<v Speaker 3>By and large, No, and I think sometimes there's an

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<v Speaker 3>advantage to travel.

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<v Speaker 4>A lot of times there's not.

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<v Speaker 3>But I spend a fair amount of time in the

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<v Speaker 3>Middle East and in Asia, and when you listen to

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<v Speaker 3>people there looking at what's going.

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<v Speaker 4>On in the US, it was okay, we did too

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<v Speaker 4>long on caming.

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<v Speaker 3>Inflation raised rates five hundred and fifty bis points in

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<v Speaker 3>nine months.

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<v Speaker 4>We all know the economy is going.

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<v Speaker 3>To collapse, and it's kind of like, really like, the

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<v Speaker 3>economy is still there, the labor market is still there,

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<v Speaker 3>and is so clear to me that we have such

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<v Speaker 3>a competitive advantage in this country with the depth and

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<v Speaker 3>breadth of the financial services industry, and I think it's

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<v Speaker 3>a real asset. Europe doesn't have it, China doesn't have it.

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<v Speaker 3>You know, hedge funds, venture capital, private credit, you know,

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<v Speaker 3>all of these ways to get credit into the economy,

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<v Speaker 3>into small businesses, into middle market businesses. We have many

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<v Speaker 3>investments with Cascadia in Seattle, in Austin, with Marshbury in Cleveland,

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<v Speaker 3>investing in advisory platforms for middle market in family owned businesses.

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<v Speaker 3>And it is incredible how many angles we have to

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<v Speaker 3>get credit out into the economy in this country relative

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<v Speaker 3>to other countries. And I think it has you know,

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<v Speaker 3>I think looking at the US from outside, there's real

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<v Speaker 3>admir for how did we manage this with five hundred

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<v Speaker 3>and fifty basis points and nine months and the economy

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<v Speaker 3>has stayed relatively stable.

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<v Speaker 1>There also is a question underpinning that, which is how

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<v Speaker 1>effective is FED policy and really having any influence whatsoever

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

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<v Speaker 1>economy's just been a whole lot more resilient to rates

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<v Speaker 1>as they go up to five and a half percent.

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<v Speaker 1>Is anyone talking about how rate cuts won't necessarily have

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<v Speaker 1>any effect whatsoever on the economy, also, especially just peripheral ones,

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<v Speaker 1>because of all of this credit creation already in the system.

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<v Speaker 3>You know, I think there's a lot of people that

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

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<v Speaker 3>real estate, you want to see rates come down for

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<v Speaker 3>kind of the sector that you're in. But if you

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<v Speaker 3>mentioned history, Jonathan, if we take a more historical look,

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<v Speaker 3>since two thousand and eight, the Great Financial Crisis two

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<v Speaker 3>thousand and eight, until the FED started raising rates, FED

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<v Speaker 3>funds to averaged just under one percent.

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<v Speaker 4>If you look at.

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<v Speaker 3>Two three four decades prior to two thousand and eight,

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<v Speaker 3>FED funds would have averaged about four percent. So I

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<v Speaker 3>think we're in a much more normal environment right now,

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<v Speaker 3>and I think the worst thing that could happen is

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<v Speaker 3>that we saw the FED every well, you know, if

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<v Speaker 3>the FED starts aggressively cutting rates, it's going to be

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<v Speaker 3>because the economy is weak, and so that's that's not

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<v Speaker 3>necessarily good news.

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

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<v Speaker 3>Think you know, if you look out over the next

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<v Speaker 3>couple of years, rates in the four to four and

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<v Speaker 3>a half percent four and a half to five percent

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<v Speaker 3>range is probably the logical explanation a bit lower than

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<v Speaker 3>here over time, but not below four percent.

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<v Speaker 1>We've been talking about is good news, bad news, bad news,

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<v Speaker 1>bad news, bad news, good news for smaller companies, it

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<v Speaker 1>has been bad news regardless. It seems like over the

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<v Speaker 1>past couple of weeks, and for small banks regional banks

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<v Speaker 1>as well. In particular, the KBW index is down some

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<v Speaker 1>twelve percent on the year, really down sharply over the

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<v Speaker 1>past couple of sessions. Do you think that rate cuts

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<v Speaker 1>will eventually be positive for these shares or do you

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<v Speaker 1>think that there's some sort of structural issues with holdings

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<v Speaker 1>and other potential challenges, but just make it bad news

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<v Speaker 1>as bad news for them no matter what.

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<v Speaker 3>We have a strategy to invest in regional banks, so

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<v Speaker 3>I do have a bias here. We see a great opportunity,

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<v Speaker 3>and you know, kind of you if you turn that

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<v Speaker 3>on its head and say, your strong regional bank, you've

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<v Speaker 3>addressed your capital issues. And we all know that higher

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<v Speaker 3>interest rates we're impacting their treasury portfolios as they have

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

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<v Speaker 3>just you know, pick an example of an investor I

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<v Speaker 3>US investing in a strong regional bank, so the capital

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<v Speaker 3>levels are fine, there's no issues with a portfolio, and

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<v Speaker 3>then look forward, you're really doing well with interest rates

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<v Speaker 3>at this level. Higher interest rates are really good for banks,

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<v Speaker 3>and it's been a long time since we've seen loan

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<v Speaker 3>demand like this. So the go forward position for a

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<v Speaker 3>strong regional bank is actually outstanding. The question is will

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<v Speaker 3>we see consolidation, which we believe we will, and are

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<v Speaker 3>there strong banks, which we believe there are. And I

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<v Speaker 3>think one of the great attributes for again you go

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<v Speaker 3>back to the depth and breadth of the financial services

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<v Speaker 3>industry in the US. The fact that we have these

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<v Speaker 3>regional and community banks providing a service that the larger

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<v Speaker 3>banks can't to small family businesses is a real strength.

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<v Speaker 1>If you talk about consolidation, I wonder how much it's

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<v Speaker 1>going to be consolidation and how much is going to

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<v Speaker 1>be failures. Yesterday, there is Access Financial the latest potential

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<v Speaker 1>target of some bad research, and a lot of it

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<v Speaker 1>stemmed around its commercial real estate holdings. Some people argue

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<v Speaker 1>that lower rates will actually cause property prices to go

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<v Speaker 1>down because it will allow more sales to kind of

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<v Speaker 1>get unleashed in the market. Do you think that there's

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<v Speaker 1>going to be a rash of failures that basically, it's

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<v Speaker 1>sort of like people sniffing out cockroaches and if they

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

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<v Speaker 1>It's sort of a self fulfilling prophecy. Do you expect

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<v Speaker 1>that kind of activity to sort of come back?

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<v Speaker 3>Well, I think in our view, one thing that is

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<v Speaker 3>certain is that since two thousand and eight, when the

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<v Speaker 3>regulator is and the politicals claim that we will never

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<v Speaker 3>see too big to fail again, the larger banks in

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<v Speaker 3>the US have gotten bigger, more concentrated, closer to government,

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

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<v Speaker 3>economy is good, but it's in no one's interest to

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<v Speaker 3>allow the larger banks to continue to acquire the smaller banks.

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<v Speaker 3>What we think is appropriate is that we strengthen some

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<v Speaker 3>of the strong regional banks, whether it's the capital markets,

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<v Speaker 3>whether it's Atlas Merchant Capital, doing investments to give them

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<v Speaker 3>the capital levels that are necessary for them to acquire

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<v Speaker 3>some of the banks that I think are too small

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<v Speaker 3>to succeed, really really good banks that have been more

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<v Speaker 3>like community banks that have had good, solid roes for decades,

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<v Speaker 3>but in this environment, with the shock in rates, they

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<v Speaker 3>have to adjust their treasury portfolio. With the loan loss provisions,

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<v Speaker 3>they have to adjust that. And the thing that is

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<v Speaker 3>more permanent is the regulatory intrusion post SVB will increase

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<v Speaker 3>their costs around technology in KYC.

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<v Speaker 4>So we do see an.

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<v Speaker 3>Environment where consolidation is a positive and a natural as

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<v Speaker 3>opposed to weekend failures and big banks taking them over

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<v Speaker 3>at the last second.

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<v Speaker 2>We started this conversation by talking about some of the

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<v Speaker 2>misconceptions people had from the outside, looking in, from outside

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<v Speaker 2>of America, looking inside America, from inside the financial system.

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<v Speaker 2>What do you think is the biggest misconception that people

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<v Speaker 2>in Washington have about the Worldie workh.

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<v Speaker 3>I think they misunderstand what has happened over the last

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<v Speaker 3>fourteen fifteen years since the financial crisis, with larger, more concentrated,

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<v Speaker 3>more systemic, you know.

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<v Speaker 4>The Big Four, the Big eight.

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<v Speaker 3>If you look at the top banks, I think you

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<v Speaker 3>know between the top two or three banks of Wells

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<v Speaker 3>Fargo and Bank of America and JP Morgan, it's over

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<v Speaker 3>fifty percent of the deposits. And we saw a recent

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<v Speaker 3>report where if you take four and a half thousand

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<v Speaker 3>banks in the US, JP Morgan alone is twenty percent

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<v Speaker 3>of the profitability. So banks are more concentrated, and I

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<v Speaker 3>think what they're missing is the value to the economy

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<v Speaker 3>of having a strong, robust, regional and community banking sector.

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<v Speaker 3>And I think for US that is an opportunity over

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<v Speaker 3>the next couple of years. And I think the thing

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<v Speaker 3>that is really really key here that people miss is

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<v Speaker 3>the go forward if you are a healthy bank, to

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<v Speaker 3>go forward with higher interest rates and loan demand is outstanding.

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<v Speaker 4>The question is are you ready to be investing and

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<v Speaker 4>are you ready to be lending?

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<v Speaker 2>Well, we've got to talk about November, all the concerns

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<v Speaker 2>that people are talking about, Trey tariffs, the erosion of governance,

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<v Speaker 2>at least was talking about that a little bit earlier

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<v Speaker 2>this morning. What are you concerned about? What's the radar

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<v Speaker 2>for you going into twenty five.

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<v Speaker 3>So I think, Jonathan, if there is a dark cloud,

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<v Speaker 3>and I've been pretty positive when we were talking earlier

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<v Speaker 3>on the depth, the breadth of the financial services industry here,

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<v Speaker 3>the strength of theomy, the strength of the US dollar

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<v Speaker 3>relative to other If there's a dark cloud, it's it's

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<v Speaker 3>the debt levels. You know, when President Trump started his

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<v Speaker 3>first term, so seven and a half years ago. Between

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<v Speaker 3>then and now, during the four Trump years and the

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<v Speaker 3>three and a half, if you will Biden years, the

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<v Speaker 3>debt of this country has gone from twenty trillion to

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

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<v Speaker 3>It was kind of a goldilocks moment, right of seven

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<v Speaker 3>and a half years of a strong economy. So where

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<v Speaker 3>are we going to go? It's not in the markets

0:11:34.440 --> 0:11:37.200
<v Speaker 3>right now, Jonathan Elis. I don't think it's talked about

0:11:37.200 --> 0:11:37.680
<v Speaker 3>a lot.

0:11:37.840 --> 0:11:38.559
<v Speaker 4>But if there's a.

0:11:38.559 --> 0:11:41.640
<v Speaker 3>Dark cloud over the next couple of years, it's how

0:11:41.679 --> 0:11:42.559
<v Speaker 3>are we going to manage?

0:11:42.640 --> 0:11:44.640
<v Speaker 4>You know, what changes are we going to make?

0:11:44.679 --> 0:11:47.680
<v Speaker 3>I think the second piece of it is, no matter

0:11:47.720 --> 0:11:51.360
<v Speaker 3>who is elected president, you know, out as far as

0:11:51.400 --> 0:11:53.360
<v Speaker 3>we can see, what president is going to come in

0:11:53.400 --> 0:11:55.960
<v Speaker 3>and say, you know, no more debt. It's kind of

0:11:56.000 --> 0:12:00.320
<v Speaker 3>been the easy solution to spend, spend, spend, and so

0:12:01.000 --> 0:12:03.559
<v Speaker 3>I do worry about it. I think it's out there somewhere.

0:12:03.679 --> 0:12:05.760
<v Speaker 3>Is it a year away, is it three years away?

0:12:05.880 --> 0:12:08.800
<v Speaker 3>Is this is this comes back to be an impact?

0:12:08.880 --> 0:12:11.200
<v Speaker 3>I'm not sure, but I'm a little bit surprised it's

0:12:11.240 --> 0:12:12.840
<v Speaker 3>not talked about more in the markets.

0:12:12.920 --> 0:12:15.320
<v Speaker 5>Well, we talk about it plenty too much.

0:12:15.320 --> 0:12:17.440
<v Speaker 1>Some people might say we talk about it pretty much

0:12:17.440 --> 0:12:20.079
<v Speaker 1>on a daily basis. And Steve Weisman of Newberger Berman,

0:12:20.160 --> 0:12:22.240
<v Speaker 1>I just can hear him if he were sitting over there,

0:12:22.480 --> 0:12:24.720
<v Speaker 1>he'd say, this is all hogwash. People have been talking

0:12:24.720 --> 0:12:26.400
<v Speaker 1>about this for forty years and they've been wrong, They've

0:12:26.400 --> 0:12:28.600
<v Speaker 1>been late. I mean, it's not going to happen for twenty.

0:12:28.400 --> 0:12:29.040
<v Speaker 4>Years, thirty years.

0:12:29.080 --> 0:12:30.760
<v Speaker 1>It could happened, and then it doesn't really matter. It

0:12:30.760 --> 0:12:34.040
<v Speaker 1>shouldn't be baked into the markets. Do you agree?

0:12:34.600 --> 0:12:38.080
<v Speaker 3>No, I mean, I think I do think that there's

0:12:39.760 --> 0:12:43.120
<v Speaker 3>going to be consequences of the debt levels. And I

0:12:43.160 --> 0:12:45.760
<v Speaker 3>think going from twenty trillion to thirty six trillion, and

0:12:46.000 --> 0:12:48.040
<v Speaker 3>you know, economists will give you all kinds of different

0:12:48.080 --> 0:12:52.400
<v Speaker 3>percentages of it's too high and it's become a significant

0:12:52.400 --> 0:12:55.480
<v Speaker 3>burden in terms of, you know, balancing the budget each year.

0:12:55.640 --> 0:12:58.200
<v Speaker 3>So I think it is going to have an impact

0:12:58.440 --> 0:13:01.040
<v Speaker 3>on the US economy over time, and I think it's

0:13:01.040 --> 0:13:04.040
<v Speaker 3>going to have an impact on tax policy and other things.

0:13:04.040 --> 0:13:06.319
<v Speaker 3>It's not discussed much in the market today.

0:13:06.440 --> 0:13:07.560
<v Speaker 5>How do you see a planing out?

0:13:07.600 --> 0:13:10.439
<v Speaker 2>You've got some experience in the Ringdom we'll do over

0:13:10.440 --> 0:13:12.520
<v Speaker 2>the last couple of years, particularly or focused on what

0:13:12.559 --> 0:13:14.920
<v Speaker 2>happened with liszt trust. How do you see this ultimately

0:13:14.920 --> 0:13:17.280
<v Speaker 2>playing out just a slow game where they've got to

0:13:17.280 --> 0:13:19.679
<v Speaker 2>slowly respond to this and show the market they're serious

0:13:19.720 --> 0:13:21.400
<v Speaker 2>about it. Or is it something where you see the

0:13:21.440 --> 0:13:24.040
<v Speaker 2>market starts to reject the policies that come out of

0:13:24.040 --> 0:13:24.600
<v Speaker 2>the White House.

0:13:25.120 --> 0:13:27.559
<v Speaker 3>Listen, right now, the dollar is very strong. I think

0:13:28.480 --> 0:13:30.760
<v Speaker 3>I don't have the data exactly, but I think we're

0:13:30.800 --> 0:13:36.199
<v Speaker 3>at an all time high relative to most competing currencies.

0:13:36.240 --> 0:13:41.120
<v Speaker 3>And I think one of the implications, if I'm correct

0:13:41.160 --> 0:13:43.440
<v Speaker 3>that the debt levels are too high in the US,

0:13:44.040 --> 0:13:47.080
<v Speaker 3>would be is there an alternative to the dollar? And

0:13:47.400 --> 0:13:51.880
<v Speaker 3>it's a legitimate question, but there is no legitimate alternative.

0:13:52.480 --> 0:13:53.920
<v Speaker 4>Where are you going to go? I mean Europe.

0:13:53.960 --> 0:13:56.880
<v Speaker 3>I remember Jonathan in nineteen ninety two and I was

0:13:56.880 --> 0:14:01.559
<v Speaker 3>with Morgan Stanley. We did the first euro wa European

0:14:01.640 --> 0:14:05.239
<v Speaker 3>currency bond for of all people, the Bank of England.

0:14:05.360 --> 0:14:07.160
<v Speaker 3>You know, there was a lot of hope that you'd

0:14:07.200 --> 0:14:10.360
<v Speaker 3>have a single bond market across Europe. But today you

0:14:10.440 --> 0:14:13.480
<v Speaker 3>do eurobonds for Italy, you do them for Germany, you

0:14:13.559 --> 0:14:16.720
<v Speaker 3>do them so each one has different risks, and there's

0:14:16.760 --> 0:14:21.000
<v Speaker 3>not an integrated capital markets in Europe. I think they

0:14:21.080 --> 0:14:24.080
<v Speaker 3>look at what happens in the US with hedge funds

0:14:24.160 --> 0:14:27.240
<v Speaker 3>and venture capital and private capital, and they look at

0:14:27.520 --> 0:14:30.560
<v Speaker 3>what happens in the US, you know, in the impact

0:14:30.600 --> 0:14:32.600
<v Speaker 3>of that on the economy, and they don't even have

0:14:32.640 --> 0:14:37.040
<v Speaker 3>an integrated bond market. If you look at China, they

0:14:37.080 --> 0:14:41.640
<v Speaker 3>have absolutely no interest in the transparency or convertibility that's required.

0:14:41.720 --> 0:14:44.920
<v Speaker 3>So I think it's a very very legitimate question to

0:14:45.640 --> 0:14:48.040
<v Speaker 3>look at an alternative for the dollar, but there is

0:14:48.080 --> 0:14:49.840
<v Speaker 3>no legitimate alternative, and.

0:14:49.720 --> 0:14:52.560
<v Speaker 5>That's the problem when it hits the fan, what are

0:14:52.560 --> 0:14:53.040
<v Speaker 5>you going to do?

0:14:53.240 --> 0:14:53.400
<v Speaker 4>Well?

0:14:53.480 --> 0:14:55.440
<v Speaker 2>This is fantastic, always great to see, so thank you,

0:14:55.720 --> 0:14:56.680
<v Speaker 2>Jonathan blub Diamond.

0:14:56.720 --> 0:14:58.080
<v Speaker 5>I've Atlas mentioned capital