1 00:00:00,680 --> 00:00:13,160 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. 2 00:00:13,240 --> 00:00:17,440 Speaker 1: Always with Michael McKee. Daily we bring you insight from 3 00:00:17,480 --> 00:00:22,279 Speaker 1: the best in economics, finance, investment, and international relations. Find 4 00:00:22,320 --> 00:00:26,880 Speaker 1: Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of 5 00:00:26,920 --> 00:00:33,960 Speaker 1: course on the Bloomberg Let's bring in our first guest. 6 00:00:34,040 --> 00:00:36,239 Speaker 1: And we tried to get him on last week and 7 00:00:36,360 --> 00:00:38,680 Speaker 1: he was putting bunting. He was hanging his house an 8 00:00:38,760 --> 00:00:41,680 Speaker 1: Upstate New York like the World Series with all the red, 9 00:00:41,680 --> 00:00:46,760 Speaker 1: white and blue around at Carl Weinberg has terrific experience 10 00:00:47,360 --> 00:00:51,280 Speaker 1: in getting out of crisis. Dr Weinberg. What will the 11 00:00:51,320 --> 00:00:54,520 Speaker 1: Italians have to do? High, Good morning Tom. Well, you know, 12 00:00:54,600 --> 00:00:57,040 Speaker 1: the Italians are going to have to convince the Europeans 13 00:00:57,080 --> 00:01:00,760 Speaker 1: that protecting the positors of Italian banks is just as 14 00:01:00,760 --> 00:01:06,240 Speaker 1: important as protecting the euro zones rules on public putting 15 00:01:06,280 --> 00:01:09,520 Speaker 1: public money into supporting banks capital. And this has been 16 00:01:09,800 --> 00:01:12,760 Speaker 1: a challenge for the European banks, for all governments to 17 00:01:12,760 --> 00:01:15,680 Speaker 1: wrap their heads around. The Europeans have adopted a view 18 00:01:15,720 --> 00:01:18,000 Speaker 1: that says that investors in banks are to bear the 19 00:01:18,040 --> 00:01:21,160 Speaker 1: brunt of a problem. But if the investors aren't forthcoming 20 00:01:21,200 --> 00:01:23,360 Speaker 1: with the capital to bail a bank out, and the 21 00:01:23,400 --> 00:01:26,360 Speaker 1: bank needs to serve the public, then the state has 22 00:01:26,440 --> 00:01:29,000 Speaker 1: to step in, and that's the procedure that that's the 23 00:01:29,040 --> 00:01:31,920 Speaker 1: process they're working through right now and trying to resolve 24 00:01:31,959 --> 00:01:34,920 Speaker 1: Italian banks. But Carl, the problem is that to these 25 00:01:34,959 --> 00:01:38,000 Speaker 1: banks are frail, right and what people are concerned about 26 00:01:38,080 --> 00:01:40,880 Speaker 1: is run on the banks. We're not there yet right. Well, 27 00:01:40,959 --> 00:01:43,520 Speaker 1: the banks are fail there's no doubt about that. Nonperforming 28 00:01:43,600 --> 00:01:46,240 Speaker 1: loans are high. To Bank of Italy would probably want 29 00:01:46,280 --> 00:01:49,040 Speaker 1: to insist that there's plenty of collateral to ensure that 30 00:01:49,080 --> 00:01:52,240 Speaker 1: the capital of the banking system is intact. But of 31 00:01:52,240 --> 00:01:55,040 Speaker 1: course the Italian court system is very low and resolving 32 00:01:55,080 --> 00:01:58,040 Speaker 1: bankruptcys and that means that that collateral is not available, 33 00:01:58,160 --> 00:02:00,600 Speaker 1: and the newly empowered regulator at u c B is 34 00:02:00,600 --> 00:02:03,040 Speaker 1: anxious to show that it's on the job. So we've 35 00:02:03,040 --> 00:02:05,000 Speaker 1: got a lot of different by players going on in 36 00:02:05,080 --> 00:02:06,960 Speaker 1: the background here. But you're right, for end seeing the 37 00:02:07,000 --> 00:02:09,440 Speaker 1: banks are a week they do need a capital injection. 38 00:02:09,680 --> 00:02:12,240 Speaker 1: The public is not providing that capital of the state 39 00:02:12,320 --> 00:02:14,840 Speaker 1: really does have to step in or else the public 40 00:02:14,919 --> 00:02:17,840 Speaker 1: is going to be harmed. Alright, but Carl, so the Commission, 41 00:02:17,880 --> 00:02:19,919 Speaker 1: the European Commission, and at the end of the day, 42 00:02:19,960 --> 00:02:22,120 Speaker 1: Angela Merkel and the ECB have a huge problem on 43 00:02:22,200 --> 00:02:25,240 Speaker 1: their hands, right, because what you're saying is that state 44 00:02:25,320 --> 00:02:27,480 Speaker 1: support is difficult to give to the Italian banks with 45 00:02:27,520 --> 00:02:30,400 Speaker 1: the current bail in rules. But because of Brexit, doesn't 46 00:02:30,400 --> 00:02:33,280 Speaker 1: it not make it more likely that europe will be 47 00:02:33,360 --> 00:02:36,519 Speaker 1: more flexible with it. Toly, this could be bigger than 48 00:02:36,520 --> 00:02:38,800 Speaker 1: Brexit and they don't want a second problem. Well, this 49 00:02:38,880 --> 00:02:41,280 Speaker 1: could actually be a good outcome from Brexit. You know, 50 00:02:41,320 --> 00:02:44,160 Speaker 1: if Brexit forces them to recognize that their bail and 51 00:02:44,320 --> 00:02:47,840 Speaker 1: rules are myopic and that they that they look at 52 00:02:47,880 --> 00:02:50,880 Speaker 1: only a small number of the problems associated with the 53 00:02:51,200 --> 00:02:53,800 Speaker 1: problem of a bank failure, then probably this is a 54 00:02:53,840 --> 00:02:56,400 Speaker 1: good thing. I don't know if Brexit is specifically the 55 00:02:56,480 --> 00:02:58,560 Speaker 1: cause of it. I think the real root cause of 56 00:02:58,600 --> 00:03:00,840 Speaker 1: it is just that the Italian banks are so big 57 00:03:01,120 --> 00:03:03,600 Speaker 1: that we can't really allow them to sell easily. This 58 00:03:03,680 --> 00:03:06,440 Speaker 1: is a really important conversation, folks. You go, Okay, why 59 00:03:06,480 --> 00:03:09,280 Speaker 1: do I care about the Italian banks? And the number 60 00:03:09,280 --> 00:03:12,359 Speaker 1: one reason is we've never been here before with a 61 00:03:12,480 --> 00:03:17,160 Speaker 1: major country. Carl Weinberg state for our audience, why this 62 00:03:17,360 --> 00:03:21,960 Speaker 1: isn't Greece. We got Greece fatigue, but Italy is not Greece. 63 00:03:22,120 --> 00:03:26,000 Speaker 1: Is Italy's not greace tom Italy has the resources, you know, 64 00:03:26,120 --> 00:03:28,600 Speaker 1: to pay off its debts. And while its debts are 65 00:03:28,720 --> 00:03:31,840 Speaker 1: very very large, almost as large as greases as a 66 00:03:31,880 --> 00:03:34,480 Speaker 1: share of their GDP, the Italians have a much more 67 00:03:34,639 --> 00:03:38,400 Speaker 1: viable economy, a much more greater capacity to save more 68 00:03:38,480 --> 00:03:40,960 Speaker 1: and to pay down their debts and to service their 69 00:03:41,000 --> 00:03:43,440 Speaker 1: obligations to the rest of Europe and to themselves. They 70 00:03:43,480 --> 00:03:46,120 Speaker 1: also have the capacity to support their own banking system. 71 00:03:46,400 --> 00:03:49,320 Speaker 1: And right now it's the regulations that are the rules 72 00:03:49,320 --> 00:03:51,040 Speaker 1: of the Union that are standing in the way of 73 00:03:51,080 --> 00:03:53,880 Speaker 1: them doing so. And I suspect that they're going to 74 00:03:53,960 --> 00:03:56,000 Speaker 1: have to beat Francine. I want to interrupt and just 75 00:03:56,040 --> 00:03:58,160 Speaker 1: look at pounds sterling. I mean, folks, I'm gonna put 76 00:03:58,160 --> 00:04:01,680 Speaker 1: this chart out on Bloomberg Ideal Plus right now. But 77 00:04:01,840 --> 00:04:07,040 Speaker 1: Francine down, we go to a little make that one fifteen, 78 00:04:07,680 --> 00:04:10,160 Speaker 1: We come up on Carney and we've rolled over a 79 00:04:10,200 --> 00:04:12,200 Speaker 1: third of the way already, just as he stopped his 80 00:04:12,240 --> 00:04:16,120 Speaker 1: press conference. That's remarkable. Sorry to interrupt, francing Tom. You know, 81 00:04:16,160 --> 00:04:17,599 Speaker 1: I want to push back a little bit against what 82 00:04:17,640 --> 00:04:19,440 Speaker 1: Carl was saying, is that to me is not Greece. No, 83 00:04:19,520 --> 00:04:21,680 Speaker 1: it's actually a lot bigger. Sure they can deal with 84 00:04:21,720 --> 00:04:24,279 Speaker 1: the problems, but if there's something, you know, if there's 85 00:04:24,320 --> 00:04:26,880 Speaker 1: a real worry with the Italian banks, it's going to 86 00:04:26,960 --> 00:04:30,280 Speaker 1: be so much bigger than anything with breggit with gregsit Well, 87 00:04:30,320 --> 00:04:32,760 Speaker 1: I agree with that, Francine, but I think that you know, 88 00:04:32,839 --> 00:04:36,760 Speaker 1: for invest something for investors to contemplate is specifically because 89 00:04:36,839 --> 00:04:39,239 Speaker 1: the banks are so much bigger as a part of Europe, 90 00:04:39,279 --> 00:04:42,320 Speaker 1: that they cannot possibly be allowed to sell. And this 91 00:04:42,400 --> 00:04:44,880 Speaker 1: is now we're getting to a Leavin's moment kind of conversation. 92 00:04:45,000 --> 00:04:47,640 Speaker 1: But I think that the lesson was learned that the 93 00:04:47,680 --> 00:04:51,200 Speaker 1: institutional stability has to be viewed as well as systemic 94 00:04:51,240 --> 00:04:54,040 Speaker 1: stability when you think about these things. So I doubt 95 00:04:54,120 --> 00:04:56,640 Speaker 1: that the Europeans are going to allow the big Italian 96 00:04:56,680 --> 00:05:00,680 Speaker 1: banks to sell in any uncontrolled way. And I suspect 97 00:05:00,720 --> 00:05:03,080 Speaker 1: that investors might want to take a think about that 98 00:05:03,200 --> 00:05:05,280 Speaker 1: thes sake, you know, with the sheriffs being priced as 99 00:05:05,279 --> 00:05:07,760 Speaker 1: low as they are, Carl, overall, do we need to 100 00:05:07,760 --> 00:05:11,000 Speaker 1: to see some defaults or you know, do some banks 101 00:05:11,040 --> 00:05:12,919 Speaker 1: need to go. I know Tom's been trying to figure 102 00:05:12,920 --> 00:05:16,560 Speaker 1: out whether we need to merge them. At the end 103 00:05:16,560 --> 00:05:19,320 Speaker 1: of the day, we need to to give maybe investors 104 00:05:19,320 --> 00:05:22,560 Speaker 1: a clear, clear view that they won't take any losses. Yeah, well, 105 00:05:22,600 --> 00:05:25,919 Speaker 1: I think investors are probably going to take some investors 106 00:05:25,960 --> 00:05:28,560 Speaker 1: already have taken some losses. The question is whether they 107 00:05:28,560 --> 00:05:31,839 Speaker 1: haven't already priced in the losses that are yet to come. 108 00:05:31,960 --> 00:05:34,920 Speaker 1: And this remains to be seen. I think that at 109 00:05:34,960 --> 00:05:37,480 Speaker 1: the end of the day that the Europeans are going 110 00:05:37,560 --> 00:05:39,880 Speaker 1: to step up and allow the government of Italy to 111 00:05:39,960 --> 00:05:42,960 Speaker 1: recapitalize the banking system, and then we have a situation 112 00:05:43,000 --> 00:05:44,880 Speaker 1: not unlike but we had in the United States in 113 00:05:44,920 --> 00:05:48,080 Speaker 1: two thousand and eight where we had effect on nationalization 114 00:05:48,360 --> 00:05:51,040 Speaker 1: that worked out. Okay, you know, and I don't understand 115 00:05:51,080 --> 00:05:53,479 Speaker 1: why that model isn't more compelling to European do it. 116 00:05:53,520 --> 00:05:55,640 Speaker 1: I mean, I go, I love this conversation. Let me 117 00:05:55,680 --> 00:05:57,599 Speaker 1: go to both your Francy and I'm gonna start with you. 118 00:05:57,680 --> 00:06:00,200 Speaker 1: I think this is critical. Is this nothing more are 119 00:06:00,560 --> 00:06:04,320 Speaker 1: than protecting the elites of in this case, Italy or 120 00:06:04,320 --> 00:06:07,320 Speaker 1: for that matter, any other European country or is it 121 00:06:07,360 --> 00:06:11,200 Speaker 1: an actual workout like what we saw in the United States. 122 00:06:11,240 --> 00:06:13,479 Speaker 1: I mean, Francine, from where you sit with all of 123 00:06:13,520 --> 00:06:16,680 Speaker 1: your heritage, is this nothing more than an elite bail 124 00:06:16,720 --> 00:06:18,880 Speaker 1: out in Italy? So I think its is a little 125 00:06:18,880 --> 00:06:20,800 Speaker 1: bit different. It's a it's a lot like Greece, where 126 00:06:20,839 --> 00:06:23,080 Speaker 1: you have a lot of bond holders that are actually 127 00:06:23,080 --> 00:06:26,000 Speaker 1: you know, mom and pop bank. I remember my grandmother 128 00:06:26,440 --> 00:06:29,560 Speaker 1: Tom would give me some some Italian bonds for Christmas. Now, 129 00:06:29,560 --> 00:06:31,400 Speaker 1: this is kind of the cultural thing that people used 130 00:06:31,400 --> 00:06:32,760 Speaker 1: to do a lot like in Greece. So if you 131 00:06:32,800 --> 00:06:36,400 Speaker 1: do start, you know, enforcing these bail in rules, then 132 00:06:36,400 --> 00:06:39,240 Speaker 1: actually it's the households and the normal person on the 133 00:06:39,279 --> 00:06:42,360 Speaker 1: streets that suffers. Okay, Carl, But is this an elite bank? 134 00:06:42,640 --> 00:06:44,919 Speaker 1: I mean, are they trying It's almost like Silicon Valley. 135 00:06:44,920 --> 00:06:48,320 Speaker 1: Are they trying to do it in Italy to protect 136 00:06:48,320 --> 00:06:51,400 Speaker 1: the elites instead of just doing an immediate bank bailout? 137 00:06:51,680 --> 00:06:54,080 Speaker 1: You know, Thomas is one of the decisions that governments 138 00:06:54,120 --> 00:06:56,640 Speaker 1: take for us on the basis of our social values, 139 00:06:56,920 --> 00:06:59,960 Speaker 1: and it's hard to judge, you know what our banks, Okay, 140 00:07:00,279 --> 00:07:02,880 Speaker 1: is their job to make money for their shareholders or 141 00:07:02,960 --> 00:07:05,400 Speaker 1: is their job to serve the public. If their job 142 00:07:05,520 --> 00:07:07,400 Speaker 1: is to serve the public and the public has an 143 00:07:07,440 --> 00:07:10,000 Speaker 1: interest in keeping them going, If their job is only 144 00:07:10,080 --> 00:07:13,360 Speaker 1: to make money for shareholders, then shareholders should lose money 145 00:07:13,360 --> 00:07:15,520 Speaker 1: when the banks lose money, and the government has to 146 00:07:15,600 --> 00:07:18,760 Speaker 1: decide workstands on these issues. Francine la in London. I'm 147 00:07:18,760 --> 00:07:21,480 Speaker 1: Tom Keenan New York burning it up with Carl Weinberg. 148 00:07:21,520 --> 00:07:23,600 Speaker 1: We were talking Italy. Carl, I want to bring it 149 00:07:23,640 --> 00:07:26,000 Speaker 1: over to Britain. You were the first one to give 150 00:07:26,080 --> 00:07:31,440 Speaker 1: us a clinic on the current account balance, goods services 151 00:07:31,760 --> 00:07:35,640 Speaker 1: and money flows. Governor Carney was asked about this. Why 152 00:07:35,760 --> 00:07:40,240 Speaker 1: is the current account balance Governor Kearney's worst nightmare? Well, 153 00:07:40,280 --> 00:07:42,560 Speaker 1: you know, the current account has to be financed, and 154 00:07:42,600 --> 00:07:45,040 Speaker 1: in order to finance it, you have to have an 155 00:07:45,080 --> 00:07:48,680 Speaker 1: attractive value proposition on the other end. When I say financing, 156 00:07:48,680 --> 00:07:51,480 Speaker 1: and I don't mean just trade, and I have to 157 00:07:51,520 --> 00:07:53,800 Speaker 1: say that the cheaper pound is going to make trade 158 00:07:53,800 --> 00:07:57,280 Speaker 1: substantially better. I'm just looking at my London shirtmakers summer 159 00:07:57,320 --> 00:08:01,040 Speaker 1: sale catalog and the shirts not actually free, but they're 160 00:08:01,080 --> 00:08:03,240 Speaker 1: a good bit cheaper than they were a year ago. 161 00:08:03,240 --> 00:08:05,480 Speaker 1: At this time, given the exchange rate. We're going to 162 00:08:05,520 --> 00:08:07,760 Speaker 1: see some improvement on trade as a result of the 163 00:08:07,840 --> 00:08:11,640 Speaker 1: cheaper pound, but bringing capital into the UK, people who 164 00:08:11,680 --> 00:08:14,560 Speaker 1: bring money into build buildings, people who bring money in 165 00:08:14,600 --> 00:08:17,280 Speaker 1: to buy homes, people who build money and to buy 166 00:08:17,360 --> 00:08:20,480 Speaker 1: companies or to invest in companies. People who bring money 167 00:08:20,480 --> 00:08:23,640 Speaker 1: and to be managed in sterling by British banks. This 168 00:08:23,720 --> 00:08:26,600 Speaker 1: has all become the big big capital loss is already 169 00:08:26,640 --> 00:08:29,000 Speaker 1: on the pound and they have to attract a lot 170 00:08:29,080 --> 00:08:32,360 Speaker 1: more money in each quarter as their current account deficity 171 00:08:32,400 --> 00:08:35,479 Speaker 1: gets water. If they can't do that, sterling will depreciate 172 00:08:35,520 --> 00:08:37,960 Speaker 1: even further. And I think that's what we're seeing right now. 173 00:08:38,600 --> 00:08:41,120 Speaker 1: I'm so happy your tweet is that much cheaper. Yesterday 174 00:08:41,120 --> 00:08:44,240 Speaker 1: we heard from Standard Life Investments they suspended their trading 175 00:08:44,800 --> 00:08:47,960 Speaker 1: on their fund right because they are seeing an increase 176 00:08:48,000 --> 00:08:50,880 Speaker 1: in redemption requests. Are we going to see BREGSIT getting 177 00:08:51,000 --> 00:08:54,840 Speaker 1: much much uglier? Lost Friday? Well, ten days ago after 178 00:08:54,880 --> 00:08:58,559 Speaker 1: BRAGGSIT it was ugly and then markets resume their onwards drift. 179 00:08:59,120 --> 00:09:01,080 Speaker 1: Have we seen the work to it? Well? You know, 180 00:09:01,160 --> 00:09:05,080 Speaker 1: this is a test of the state versus to leave hypothesis. 181 00:09:05,120 --> 00:09:07,400 Speaker 1: You know, the Leaf people said that it wouldn't happen 182 00:09:07,480 --> 00:09:09,480 Speaker 1: that we'd have a quick panic and then we'd be 183 00:09:09,559 --> 00:09:12,720 Speaker 1: over it quickly. Whether ten days is enough to be 184 00:09:12,840 --> 00:09:15,240 Speaker 1: over it or not remains to be seen, or whether 185 00:09:15,280 --> 00:09:17,439 Speaker 1: this is going to turn into a longer route as 186 00:09:17,480 --> 00:09:20,079 Speaker 1: the state people had suggested it would. I mean, I'm 187 00:09:20,120 --> 00:09:23,200 Speaker 1: open to the idea. It could go either way. Uh, 188 00:09:23,240 --> 00:09:25,400 Speaker 1: And I'm just going to wait and see. For the moment, 189 00:09:25,400 --> 00:09:27,880 Speaker 1: it certainly doesn't seem to have stabilized, you know, and 190 00:09:27,920 --> 00:09:30,520 Speaker 1: keeps on getting cheaper. Dr Weinberg, you teach at New 191 00:09:30,600 --> 00:09:34,360 Speaker 1: York University with a guy named Irvin King from from 192 00:09:34,400 --> 00:09:36,400 Speaker 1: London as well. He was just on our show. I 193 00:09:36,400 --> 00:09:39,760 Speaker 1: thought the interview was spell binding, and he spoke of 194 00:09:39,800 --> 00:09:44,000 Speaker 1: the alchemy around his wonderful book, What's the alchemy the 195 00:09:44,080 --> 00:09:47,080 Speaker 1: British elite are going to need? You know? Mervin and 196 00:09:47,120 --> 00:09:49,160 Speaker 1: I had a conversation on the subway about a year 197 00:09:49,160 --> 00:09:53,199 Speaker 1: ago and we talked about fiscal deficit reduction versus external 198 00:09:53,240 --> 00:09:56,080 Speaker 1: deficit reduction. He said, he says, this government they have 199 00:09:56,120 --> 00:09:58,760 Speaker 1: a great fiscal deficit reduction plan, but they have no 200 00:09:58,840 --> 00:10:02,240 Speaker 1: plan whatsoever for external deficit reduction. And I think that 201 00:10:02,520 --> 00:10:04,880 Speaker 1: Mervin is very much aware of the problems on the 202 00:10:04,960 --> 00:10:08,040 Speaker 1: current account and the problems that that causes for financing 203 00:10:08,080 --> 00:10:11,439 Speaker 1: Britain's pound and for keeping the value of sterling in there. 204 00:10:11,559 --> 00:10:13,439 Speaker 1: So francing Does that mean if I take the New 205 00:10:13,520 --> 00:10:18,240 Speaker 1: York subway, I can run into Central Bank hits something 206 00:10:18,280 --> 00:10:23,080 Speaker 1: like that? Fancy? Um, we're seeing so much nervousness on 207 00:10:23,120 --> 00:10:25,800 Speaker 1: the sterling markets. Is it going to get worse? We're 208 00:10:25,800 --> 00:10:27,840 Speaker 1: trying again, I'm trying to get a sense of who 209 00:10:27,920 --> 00:10:29,560 Speaker 1: the adult in the room is. Right, Tom and I 210 00:10:29,600 --> 00:10:31,600 Speaker 1: were listening to Mark Carney. He's the only one that's 211 00:10:31,640 --> 00:10:35,560 Speaker 1: keeping it together unless we have a political um, you know, 212 00:10:35,640 --> 00:10:38,079 Speaker 1: stronghold here in the UK that actually means business. Is 213 00:10:38,720 --> 00:10:41,160 Speaker 1: it going to drift off? Well? I think Governor Carney 214 00:10:41,200 --> 00:10:43,679 Speaker 1: is doing a great job communicating with people and trying 215 00:10:43,720 --> 00:10:45,920 Speaker 1: to present the voice of calm and reason. I think 216 00:10:45,960 --> 00:10:49,120 Speaker 1: his conversation with everyone this morning, his third one since 217 00:10:49,120 --> 00:10:52,079 Speaker 1: this crisis, has certainly been what the city needs to 218 00:10:52,160 --> 00:10:54,120 Speaker 1: kind of give it to take a deep breath, that 219 00:10:54,200 --> 00:10:55,960 Speaker 1: you know that there is an adult in the room. 220 00:10:56,040 --> 00:10:57,800 Speaker 1: But at the end of the day, you know everyone 221 00:10:57,840 --> 00:11:00,240 Speaker 1: turns to the Bank of England to calm this down. Okay, 222 00:11:00,280 --> 00:11:02,560 Speaker 1: what he gave us today, and he really gave us 223 00:11:02,600 --> 00:11:05,720 Speaker 1: nothing that we didn't already effect before. You know, he 224 00:11:05,840 --> 00:11:08,880 Speaker 1: identified the problems, this is what we've done already. These 225 00:11:08,880 --> 00:11:11,760 Speaker 1: are the contingency facilities in place. And the action he 226 00:11:11,800 --> 00:11:14,520 Speaker 1: gave us is one that was widely telegraphed ahead of time, 227 00:11:14,679 --> 00:11:16,920 Speaker 1: and it wasn't going to take effect till next March anyhow. 228 00:11:16,920 --> 00:11:19,120 Speaker 1: It's not a net material change in condition. So there's 229 00:11:19,160 --> 00:11:21,920 Speaker 1: only so much that can be done to calm the markets. 230 00:11:21,960 --> 00:11:24,720 Speaker 1: The markets have to calm themselves, and I don't know 231 00:11:24,800 --> 00:11:26,600 Speaker 1: what it takes to do that, but I do give 232 00:11:26,640 --> 00:11:28,800 Speaker 1: Governor Carney a lot of credit for doing what has 233 00:11:28,840 --> 00:11:30,840 Speaker 1: to be done to try to make that happen sooner. 234 00:11:31,280 --> 00:11:34,040 Speaker 1: What do you need? I mean, I guess Mario drag 235 00:11:34,320 --> 00:11:37,160 Speaker 1: is so beleaguered, it's just a cheap question. What do 236 00:11:37,200 --> 00:11:40,520 Speaker 1: you need from Anglo Miracle? I mean, to to wrap 237 00:11:40,600 --> 00:11:45,200 Speaker 1: up this entire conversation, Carl is the idea once more 238 00:11:45,760 --> 00:11:49,320 Speaker 1: of Germany to the rescue. What does Chancellor Miracle has 239 00:11:49,400 --> 00:11:51,680 Speaker 1: to do? Well, Chancellor marcle is the one who's sitting 240 00:11:51,679 --> 00:11:54,480 Speaker 1: on a fiscal surplus. She's got the money to spend, 241 00:11:54,840 --> 00:11:57,199 Speaker 1: all right, and our fiscal surplus. Is they're made to 242 00:11:57,480 --> 00:11:59,600 Speaker 1: you know, just you know, collect the savings and too 243 00:12:00,040 --> 00:12:02,040 Speaker 1: not to improve the savings, or are they there to 244 00:12:02,080 --> 00:12:05,040 Speaker 1: be used to stimulate the economy when it needs it. 245 00:12:05,320 --> 00:12:07,840 Speaker 1: We saw Euroland retail sales this morning and the one 246 00:12:07,840 --> 00:12:10,000 Speaker 1: month figure was of quite a bit, but the three 247 00:12:10,040 --> 00:12:12,840 Speaker 1: month figure is dead flat. The second quarter looks like 248 00:12:12,880 --> 00:12:16,640 Speaker 1: it's going to be flat, and the economy is slowing. Overall, 249 00:12:16,679 --> 00:12:19,679 Speaker 1: we need fiscal stimulus and I think Germany can step 250 00:12:19,760 --> 00:12:22,120 Speaker 1: up to the plate and provide some of that if 251 00:12:22,160 --> 00:12:24,560 Speaker 1: it wants to, you know, if it feels that, you 252 00:12:24,559 --> 00:12:28,040 Speaker 1: know that that Europe's interests are more important than Germany's interests. 253 00:12:28,240 --> 00:12:30,400 Speaker 1: And at the end of the day, that's the whole question, 254 00:12:30,440 --> 00:12:33,600 Speaker 1: you know, are they Germans or the Europeans. Carl terrific briefing. 255 00:12:33,679 --> 00:12:52,480 Speaker 1: Thank you so much, Carl Weinberg. The gold was up 256 00:12:52,520 --> 00:12:55,760 Speaker 1: eleven dollars. James Steele has been way out front. Will 257 00:12:55,800 --> 00:12:58,880 Speaker 1: they just bec on getting the gold call right? Looking 258 00:13:00,000 --> 00:13:03,080 Speaker 1: even south there for higher gold prices. He joins us 259 00:13:03,080 --> 00:13:07,080 Speaker 1: for an update right now, James Steele, is your world linked? 260 00:13:07,120 --> 00:13:10,600 Speaker 1: Is your gold world linked to Brexit? Very much so? 261 00:13:10,920 --> 00:13:14,280 Speaker 1: At least for the moment um. Gold is a sensitive 262 00:13:14,280 --> 00:13:21,360 Speaker 1: barometer of geopolitical risk, financial and economic market risk, and Brexit, 263 00:13:21,480 --> 00:13:24,400 Speaker 1: of course is the particular event in the last few 264 00:13:24,440 --> 00:13:27,520 Speaker 1: weeks that that has grabbed the financial markets. Event and 265 00:13:27,520 --> 00:13:31,319 Speaker 1: and and as such it has impacted gold quite notably, 266 00:13:31,400 --> 00:13:34,520 Speaker 1: giving it giving it a substantial boost. James, how much 267 00:13:34,559 --> 00:13:37,040 Speaker 1: more can gold rise on the back of Brexit. Well, 268 00:13:37,600 --> 00:13:39,280 Speaker 1: there's a number of factors I think that are going 269 00:13:39,280 --> 00:13:43,360 Speaker 1: to create some headwinds. We issued a report today UM 270 00:13:43,480 --> 00:13:46,640 Speaker 1: that confirmed the high for the year of likely to 271 00:13:46,679 --> 00:13:51,160 Speaker 1: be around four and the reason for that is that Brexit, 272 00:13:51,200 --> 00:13:54,160 Speaker 1: of course is in the news. Now the currency markets 273 00:13:54,200 --> 00:13:58,360 Speaker 1: have reacted. We still think there's some more bang um 274 00:13:58,400 --> 00:14:03,319 Speaker 1: as as geopolitical risk continues to evolve and the currency 275 00:14:03,360 --> 00:14:06,080 Speaker 1: markets remain volatile, but the market has had some time 276 00:14:06,120 --> 00:14:09,080 Speaker 1: to react to it. And uh and we have seen 277 00:14:09,120 --> 00:14:13,520 Speaker 1: a physical demand diminished as a result of of high prices, 278 00:14:13,640 --> 00:14:15,480 Speaker 1: which is what I mean the target times. I know 279 00:14:15,520 --> 00:14:19,360 Speaker 1: it's difficult to give targets right, but given that, unlike 280 00:14:19,440 --> 00:14:22,200 Speaker 1: some of the other proxies such as Swissy and Yeend, 281 00:14:22,280 --> 00:14:25,160 Speaker 1: gold is not subject to intervention risk, what's the end 282 00:14:25,200 --> 00:14:28,160 Speaker 1: game here? Well, that that is the key thing that 283 00:14:28,160 --> 00:14:31,840 Speaker 1: that is in gold's UH favor. UM. If you're going 284 00:14:31,920 --> 00:14:34,440 Speaker 1: to move into a safe haven asset, says like the 285 00:14:35,200 --> 00:14:38,280 Speaker 1: swissy or the end you you do have And I'm 286 00:14:38,320 --> 00:14:41,600 Speaker 1: not saying they will intervene personally, but there is always 287 00:14:41,680 --> 00:14:45,680 Speaker 1: the threat of of of currency intervention. Now that does 288 00:14:45,720 --> 00:14:48,440 Speaker 1: not exist with gold. There is no central bank UM. 289 00:14:48,520 --> 00:14:52,200 Speaker 1: So as a consequence, gold upside is not is not 290 00:14:52,360 --> 00:14:56,120 Speaker 1: limited in that sense, but it does have to obey 291 00:14:56,440 --> 00:15:01,560 Speaker 1: other market fundamentals, including demand and by etcetera, etcetera. And 292 00:15:01,600 --> 00:15:04,480 Speaker 1: that's where we think the the opposition will come from. 293 00:15:04,720 --> 00:15:08,720 Speaker 1: James Francine was looking this weekend get the two butterfly 294 00:15:08,880 --> 00:15:12,480 Speaker 1: ear rings van Cleveland our pills thirteen thousand six d 295 00:15:13,480 --> 00:15:15,440 Speaker 1: I just I just know she was just looking at 296 00:15:15,480 --> 00:15:18,960 Speaker 1: those this weekend. You say that the price of gold 297 00:15:19,120 --> 00:15:23,320 Speaker 1: actually affects Francine's demand for the two butterfly ear rings 298 00:15:23,360 --> 00:15:27,680 Speaker 1: thirteen thousand six dollars. Is that true? Well, firstly, I'm 299 00:15:27,720 --> 00:15:31,520 Speaker 1: sure Francine deserves much more than a poultry thirteen thousand 300 00:15:31,600 --> 00:15:34,760 Speaker 1: dollar a piece of jewelry UM, but there is a 301 00:15:34,840 --> 00:15:39,800 Speaker 1: difference between Western jewelry UH and and emerging market jewelry. 302 00:15:39,960 --> 00:15:45,400 Speaker 1: And in the West, particularly in a place like New York, Paris, Tokyo, London. Um, 303 00:15:45,520 --> 00:15:48,680 Speaker 1: you're paying substantially more than the price of gold because 304 00:15:48,680 --> 00:15:51,800 Speaker 1: you're paying for labor, overhead, etcetera, etcetera. In a place 305 00:15:51,840 --> 00:15:57,480 Speaker 1: like India particularly, but also China, Southeast Asia, the cost 306 00:15:57,520 --> 00:16:00,040 Speaker 1: of the jewelry item, particularly outside of the majority it 307 00:16:00,240 --> 00:16:02,600 Speaker 1: is it's much closer to the actual price of gold. 308 00:16:02,640 --> 00:16:06,000 Speaker 1: The markup is relatively low, the labor that goes into 309 00:16:06,040 --> 00:16:10,640 Speaker 1: the jewelry item is modest, and therefore, and that's where 310 00:16:10,680 --> 00:16:13,840 Speaker 1: you get the price sensitivity. The sensitivity rests in the 311 00:16:13,880 --> 00:16:17,760 Speaker 1: East and uh. You know, between China and India, that's 312 00:16:17,880 --> 00:16:21,520 Speaker 1: about two thirds of all of the physical jewelry that James. 313 00:16:21,600 --> 00:16:26,320 Speaker 1: Is gold a currency? Can it ever be a currency? Well? Um, 314 00:16:26,360 --> 00:16:31,080 Speaker 1: it has survived for a very long time with uh definition. Um. 315 00:16:31,160 --> 00:16:33,480 Speaker 1: One of the ways that one could argue that gold 316 00:16:33,560 --> 00:16:36,320 Speaker 1: is a currency is that it's counted as part of 317 00:16:36,440 --> 00:16:41,960 Speaker 1: central bank foreign exchange reserves. Uh. Yes, it is part 318 00:16:42,000 --> 00:16:46,240 Speaker 1: of the foreign exchange reserves of any central bank has 319 00:16:47,200 --> 00:16:50,440 Speaker 1: a number of currencies of course that it adds plus 320 00:16:50,440 --> 00:16:52,840 Speaker 1: it plus the value of its gold. So that that 321 00:16:52,840 --> 00:16:55,880 Speaker 1: that would be an argument that that gold is a currency. Also, 322 00:16:56,040 --> 00:16:58,760 Speaker 1: gold can be used to settle debts between nations and 323 00:16:58,800 --> 00:17:02,880 Speaker 1: meat uh current counter deficits switch which we saw for 324 00:17:02,920 --> 00:17:06,879 Speaker 1: example with Korea back in the Asian Crisis of the 325 00:17:06,960 --> 00:17:11,439 Speaker 1: nine nineties. Gold was used to shore up the wand 326 00:17:11,560 --> 00:17:14,119 Speaker 1: in that case, they they used it to they sold 327 00:17:14,520 --> 00:17:18,360 Speaker 1: domestic gold supplies and they used it to stabilize their currency. 328 00:17:18,560 --> 00:17:21,840 Speaker 1: I mean, it's a great image. The United States Department 329 00:17:21,920 --> 00:17:27,320 Speaker 1: of Treasury Bullyon depository at Fort Knox. Have you ever 330 00:17:27,359 --> 00:17:29,919 Speaker 1: been there, James? I have not. No, I have never 331 00:17:30,000 --> 00:17:32,760 Speaker 1: been to Fort Knox. I have never seen the gold 332 00:17:32,800 --> 00:17:35,320 Speaker 1: that we have there. Is it like a room with gold? 333 00:17:35,520 --> 00:17:38,119 Speaker 1: I mean, is it like James Bond? I believe, I 334 00:17:38,119 --> 00:17:41,320 Speaker 1: believe it's a vault, but I of course, uh it is. 335 00:17:41,400 --> 00:17:44,639 Speaker 1: It is off limits to such lowly personages as me. 336 00:17:45,040 --> 00:17:47,040 Speaker 1: You don't tell one of the when you look at gold. 337 00:17:47,600 --> 00:17:50,320 Speaker 1: Gordon Brown at the time where he was Finance mercer 338 00:17:50,359 --> 00:17:53,280 Speaker 1: a Chance for the Exchequer sold most of Britain's golds, 339 00:17:53,280 --> 00:17:55,240 Speaker 1: and I guess um there have been more and more 340 00:17:55,280 --> 00:17:58,160 Speaker 1: calls for him to actually explain why he sold all 341 00:17:58,160 --> 00:18:01,480 Speaker 1: of that gold, given it's risen so much. Yes, indeed, 342 00:18:01,520 --> 00:18:04,800 Speaker 1: and that that that that was a signal I believe. 343 00:18:04,840 --> 00:18:08,400 Speaker 1: At the time, I remember there was some jocularity going 344 00:18:08,440 --> 00:18:10,639 Speaker 1: around the market stat if the Bank of England was 345 00:18:10,640 --> 00:18:13,720 Speaker 1: selling gold then that in fact meant that the market 346 00:18:13,760 --> 00:18:15,760 Speaker 1: at bottomed. But in fact that was the case. The 347 00:18:15,800 --> 00:18:19,840 Speaker 1: market bottomed around two fifty five on the UK sales, 348 00:18:20,359 --> 00:18:23,840 Speaker 1: you know, there were very heavy sales, not just the UK, 349 00:18:24,040 --> 00:18:29,520 Speaker 1: but there were sales from central bank reserves from right 350 00:18:29,600 --> 00:18:32,439 Speaker 1: through to just a few years ago, just to around 351 00:18:32,640 --> 00:18:35,240 Speaker 1: two thousand and seven, with the peak of the sales 352 00:18:35,280 --> 00:18:39,040 Speaker 1: in the nineties, and it was all from Western almost 353 00:18:39,080 --> 00:18:42,119 Speaker 1: all from Western central banks, and most of it was 354 00:18:42,160 --> 00:18:45,280 Speaker 1: in reaction to the end of the Cold War, because 355 00:18:45,680 --> 00:18:49,080 Speaker 1: many many countries had built up their foreign exchange reserves 356 00:18:49,240 --> 00:18:51,760 Speaker 1: in case of conflict, and when the Cold War was 357 00:18:51,760 --> 00:18:55,520 Speaker 1: declared an end, a number of central banks decided that 358 00:18:55,560 --> 00:18:58,320 Speaker 1: they were over laden with gold and they sold and 359 00:18:58,400 --> 00:19:01,560 Speaker 1: they sold a portion of their holdings. The last to 360 00:19:01,600 --> 00:19:03,280 Speaker 1: do it was, or one of the last was the 361 00:19:03,320 --> 00:19:06,960 Speaker 1: Bank of England, but that has not been the case recently. James, 362 00:19:07,080 --> 00:19:09,840 Speaker 1: do you see gold as probably the biggest bubble I 363 00:19:09,880 --> 00:19:12,160 Speaker 1: know that there's a lot of positives around it because 364 00:19:12,160 --> 00:19:14,800 Speaker 1: it's a haven. Because the longer US rate hike is delayed, 365 00:19:14,800 --> 00:19:17,679 Speaker 1: that that's better for gold. Also, neutral funds rates is 366 00:19:17,760 --> 00:19:21,119 Speaker 1: gold positive. But overall, if you have so many people 367 00:19:21,200 --> 00:19:24,440 Speaker 1: piling into it, is it a bigger bubble than yields? Well, 368 00:19:24,440 --> 00:19:26,399 Speaker 1: you have to be careful because it is a market 369 00:19:26,440 --> 00:19:29,399 Speaker 1: after all, and it is suspect to the vagaries and 370 00:19:29,440 --> 00:19:32,800 Speaker 1: fluctuations of all of all markets. Gold gold is not 371 00:19:33,800 --> 00:19:37,399 Speaker 1: excluded from that. We do have net record net long 372 00:19:38,080 --> 00:19:41,160 Speaker 1: positions on the comics right now of over thirty two 373 00:19:41,480 --> 00:19:44,640 Speaker 1: million ounces. That that that that's very big, that's very 374 00:19:44,720 --> 00:19:47,679 Speaker 1: very high. We also have a rapid build up in 375 00:19:47,800 --> 00:19:51,200 Speaker 1: gold ETF so those two things would warn you. I'm 376 00:19:51,200 --> 00:19:53,080 Speaker 1: not saying that they can't go higher, but it does 377 00:19:53,119 --> 00:19:56,080 Speaker 1: show that there's been a lot of investment in the 378 00:19:56,119 --> 00:19:59,280 Speaker 1: market and in a fairly short time. Are the bars 379 00:19:59,359 --> 00:20:02,760 Speaker 1: of gold that is in all these places? Are they 380 00:20:02,840 --> 00:20:06,400 Speaker 1: so heavy that no one can walk off with them? 381 00:20:06,400 --> 00:20:08,760 Speaker 1: I mean, I've got a photograph your folks, of the 382 00:20:08,800 --> 00:20:12,639 Speaker 1: Bank of England's gold stored underground London, et cetera. So 383 00:20:12,720 --> 00:20:15,600 Speaker 1: the Daily Mail did a wonderful article on this four 384 00:20:15,680 --> 00:20:18,280 Speaker 1: years ago, which Francine I put out. But is that 385 00:20:18,359 --> 00:20:21,720 Speaker 1: bar gold so big no human could pick it up? No, 386 00:20:22,400 --> 00:20:25,840 Speaker 1: it's not that big, but it's it's not transported easily, 387 00:20:26,280 --> 00:20:29,120 Speaker 1: and it's not it's not thrown about easily at all. 388 00:20:29,640 --> 00:20:33,080 Speaker 1: So when one of these films of of bank rubbers 389 00:20:33,480 --> 00:20:36,560 Speaker 1: tossing around bars of gold and loading them into get 390 00:20:36,600 --> 00:20:40,639 Speaker 1: away vans, that's uh that that could not be done exactly. 391 00:20:40,800 --> 00:20:43,119 Speaker 1: That's the movies. Tell me about the E T f 392 00:20:43,200 --> 00:20:45,840 Speaker 1: s right now. Your recent research note says they come 393 00:20:45,880 --> 00:20:48,520 Speaker 1: to life. What do you mean by that? Well, the 394 00:20:48,600 --> 00:20:51,560 Speaker 1: ETS absorbed a considerable amount of gold and by the 395 00:20:52,080 --> 00:20:54,720 Speaker 1: since since their inception, and by the end of A 396 00:20:54,720 --> 00:20:58,320 Speaker 1: two thousand and twelve they had the equivalent of about 397 00:20:59,480 --> 00:21:03,040 Speaker 1: of the world um of one year of world mine 398 00:21:03,080 --> 00:21:07,000 Speaker 1: production and UH, and they began liquidating in two thousand 399 00:21:06,960 --> 00:21:11,719 Speaker 1: and thirteen round about April. We saw very heavy April. 400 00:21:11,760 --> 00:21:14,080 Speaker 1: In June of that year, we saw very heavy liquidation 401 00:21:14,680 --> 00:21:18,200 Speaker 1: based on ideas that tapering was coming to an end 402 00:21:18,240 --> 00:21:21,840 Speaker 1: and that FED policies were changing. We continue to see 403 00:21:21,880 --> 00:21:26,360 Speaker 1: sales in fourteen and fifteen, but but we have seen 404 00:21:26,359 --> 00:21:29,920 Speaker 1: a noted recovery. UH. This year. And I think that's 405 00:21:29,960 --> 00:21:33,919 Speaker 1: gone in tandem UH with the dollar not being as 406 00:21:33,960 --> 00:21:35,840 Speaker 1: strong as it was a few a few years ago, 407 00:21:36,119 --> 00:21:38,919 Speaker 1: and also ideas that the Fed of will not be 408 00:21:39,000 --> 00:21:43,840 Speaker 1: increasing interest rates UH rapidly or by a number of accounts. 409 00:21:43,880 --> 00:21:46,800 Speaker 1: So UH, in a sense, the E T F market 410 00:21:46,840 --> 00:21:49,320 Speaker 1: has had to and the gold market in general has 411 00:21:49,359 --> 00:21:53,120 Speaker 1: had to recalibrate. Much of the liquidation we've seen UH 412 00:21:53,200 --> 00:21:55,600 Speaker 1: for the three two and a half three years previous 413 00:21:55,640 --> 00:21:59,280 Speaker 1: to two thousand, UH sixteen had had to be brought 414 00:21:59,359 --> 00:22:02,920 Speaker 1: back because ideas of FED policy had changed, right, James, 415 00:22:02,920 --> 00:22:05,480 Speaker 1: When you look at the FED policy, right, You also argue, 416 00:22:05,560 --> 00:22:08,320 Speaker 1: and and this seems very intuitive that a fightening U 417 00:22:08,359 --> 00:22:11,920 Speaker 1: S yield curve means that there's um, you know, further 418 00:22:11,960 --> 00:22:15,480 Speaker 1: to go in of course the price of gold. Yes, 419 00:22:15,600 --> 00:22:18,760 Speaker 1: And in addition to that, you know, the gold is 420 00:22:18,800 --> 00:22:22,000 Speaker 1: principally influenced by the US monetary policy, but it's also 421 00:22:22,080 --> 00:22:25,840 Speaker 1: influenced by monitored policy outside of the US. And it 422 00:22:25,960 --> 00:22:28,359 Speaker 1: was the introduction of negative rates at the end of 423 00:22:28,480 --> 00:22:31,240 Speaker 1: last year. You know, if you look at when negative 424 00:22:31,320 --> 00:22:35,800 Speaker 1: rates really took off full steam in December of last year, 425 00:22:36,240 --> 00:22:39,280 Speaker 1: within a couple of weeks that actually coincided with the 426 00:22:39,320 --> 00:22:41,919 Speaker 1: low of the gold move, which was one thousand, fifty 427 00:22:41,920 --> 00:22:45,080 Speaker 1: four dollars announced, And ever since then the gold market 428 00:22:45,119 --> 00:22:47,520 Speaker 1: has been it might be a bumpy, right, but it 429 00:22:47,600 --> 00:22:50,600 Speaker 1: has been pretty pretty much straight up as had more 430 00:22:50,600 --> 00:22:53,879 Speaker 1: and more bonds issued with a negative yield. James Steele, 431 00:22:53,920 --> 00:22:56,400 Speaker 1: thank you so much. They just see great recent there 432 00:22:56,440 --> 00:23:10,800 Speaker 1: and update. Francine and I wanted to bring in Michael 433 00:23:10,880 --> 00:23:14,240 Speaker 1: Harton and he is chief investment Strategists of the Global 434 00:23:14,240 --> 00:23:17,680 Speaker 1: product of Bank of America Mary Lynch. But that barely 435 00:23:17,960 --> 00:23:24,399 Speaker 1: describes his ownership of charts with very long ex axes. 436 00:23:24,880 --> 00:23:28,360 Speaker 1: There was a professor Angus Madison, the late Angus Madison 437 00:23:28,520 --> 00:23:32,360 Speaker 1: years ago who went back to middle evil medieval times. 438 00:23:32,880 --> 00:23:36,639 Speaker 1: Michael Harton is I believe rumored to have charts that 439 00:23:36,760 --> 00:23:39,920 Speaker 1: go back to King's landing in Game of Thrones. I 440 00:23:39,960 --> 00:23:42,520 Speaker 1: mean they go back that far and Michael Harton it 441 00:23:42,640 --> 00:23:45,280 Speaker 1: joins us right now, Michael, you have a chart that 442 00:23:45,320 --> 00:23:49,960 Speaker 1: goes back to of US yields. What to you with 443 00:23:50,119 --> 00:23:53,600 Speaker 1: that chart is a significance of new low yields right now? 444 00:23:53,800 --> 00:23:56,480 Speaker 1: Good morning tom Um, Yeah, I mean I was asked 445 00:23:56,480 --> 00:24:00,399 Speaker 1: the question. I remember last November Empower. It's by a 446 00:24:00,480 --> 00:24:03,080 Speaker 1: very very famous invest There was a rhetorical question, but 447 00:24:03,119 --> 00:24:05,840 Speaker 1: the question basically was why do you think interest rates 448 00:24:05,880 --> 00:24:08,359 Speaker 1: or as low as they are? And he answered the 449 00:24:08,440 --> 00:24:10,960 Speaker 1: question before I can answer, But he answered by basically saying, 450 00:24:10,960 --> 00:24:14,040 Speaker 1: because they're not working. And that's the answer to your question. 451 00:24:14,160 --> 00:24:16,920 Speaker 1: Interest rates or as low as they are today because 452 00:24:16,960 --> 00:24:21,399 Speaker 1: they're actually not working to stimulate economic activity. The reason 453 00:24:21,440 --> 00:24:24,280 Speaker 1: they're also low is obviously the central banks are using 454 00:24:24,920 --> 00:24:28,760 Speaker 1: the fixed income markets to try and stimulate activity. The 455 00:24:28,800 --> 00:24:32,120 Speaker 1: problem we've had is that the shift into negative intrust rates, 456 00:24:32,119 --> 00:24:34,920 Speaker 1: particularly in Europe and Japan, has actually done the opposite 457 00:24:34,960 --> 00:24:36,919 Speaker 1: of what they wanted it to do. It's really killed 458 00:24:37,600 --> 00:24:41,400 Speaker 1: animal spirits rather than revive them. I look, Michael, where 459 00:24:41,440 --> 00:24:44,639 Speaker 1: we are right now, and literally as we speak, Sterling 460 00:24:44,920 --> 00:24:50,200 Speaker 1: works to new weakness. How coordinated? How correlated are markets 461 00:24:50,320 --> 00:24:55,399 Speaker 1: right now? Oh? Extremely um? And you know they can 462 00:24:55,440 --> 00:24:57,480 Speaker 1: be correlated on the upside as well as the downside. 463 00:24:57,520 --> 00:25:00,480 Speaker 1: I think you're watching the right thing. I think Sterling 464 00:25:00,560 --> 00:25:03,120 Speaker 1: really is the eye of the storm right here. And 465 00:25:03,560 --> 00:25:07,080 Speaker 1: you know, until Sterling stabilizes, holds the one thirty level 466 00:25:07,280 --> 00:25:10,840 Speaker 1: or you know thereafter, can stabilize somewhere between one and 467 00:25:10,880 --> 00:25:14,240 Speaker 1: one thirty. Investors are going to remain extremely sort of 468 00:25:14,320 --> 00:25:17,560 Speaker 1: risk off in terms of their mood. The cash will 469 00:25:17,600 --> 00:25:21,800 Speaker 1: only come back into the markets when you see sterling stabilize. 470 00:25:21,840 --> 00:25:24,879 Speaker 1: What markets investors also need to see see as credit 471 00:25:24,920 --> 00:25:28,040 Speaker 1: markets stable. But even that will really give you a 472 00:25:28,080 --> 00:25:31,880 Speaker 1: trade upwards rather than in investment upwards. The investment upwards 473 00:25:31,920 --> 00:25:37,000 Speaker 1: really requires coordinated fiscal policy stimulus, which you know is 474 00:25:37,000 --> 00:25:39,479 Speaker 1: obviously quite wanting at the moment. Michael, how much more 475 00:25:39,480 --> 00:25:41,840 Speaker 1: of an adjustment are you expecting from a lot of 476 00:25:41,840 --> 00:25:45,160 Speaker 1: these markets. Marcarney, talking a little bit earlier, was saying, well, 477 00:25:45,160 --> 00:25:48,920 Speaker 1: this is an adjustment that was warranted, that was telegraphed. 478 00:25:49,280 --> 00:25:51,400 Speaker 1: Is it going to go even further? Yeah? I mean 479 00:25:51,400 --> 00:25:54,359 Speaker 1: I think that is the sort of area that that 480 00:25:54,480 --> 00:25:58,680 Speaker 1: I would start nibbling, certainly UK assets. So it's got 481 00:25:58,680 --> 00:26:00,639 Speaker 1: a little bit more further to go. I think that 482 00:26:00,880 --> 00:26:03,400 Speaker 1: you know, what the central banks did incredibly well last 483 00:26:03,440 --> 00:26:07,119 Speaker 1: week was was, you know, keep the corporate bond markets 484 00:26:07,600 --> 00:26:10,840 Speaker 1: doing well. If you look at h zero a zero 485 00:26:10,920 --> 00:26:14,000 Speaker 1: on Bloomberg or see zero a zero on Bloomberg, these 486 00:26:14,040 --> 00:26:17,720 Speaker 1: are the high yield and investment grade Merrill Lynch industries. 487 00:26:17,760 --> 00:26:20,960 Speaker 1: They're both at all time high. So what you didn't 488 00:26:20,960 --> 00:26:25,280 Speaker 1: see was the contagion across financial markets from Brexit. Um 489 00:26:25,320 --> 00:26:27,399 Speaker 1: and that was very, very welcome and what was one 490 00:26:27,400 --> 00:26:29,760 Speaker 1: of the big reasons that you saw, you know, markets 491 00:26:29,800 --> 00:26:34,439 Speaker 1: rally last week. But that has to continue. Obviously, the 492 00:26:34,480 --> 00:26:38,359 Speaker 1: Italian bank situation is probably the most fluid and most 493 00:26:38,359 --> 00:26:40,960 Speaker 1: important at this particular moment. But I think it's when 494 00:26:40,960 --> 00:26:43,560 Speaker 1: you start to see things like Sterling stabilized that that 495 00:26:43,800 --> 00:26:48,040 Speaker 1: investors will be tempted to come back in and certainly 496 00:26:48,160 --> 00:26:50,360 Speaker 1: you look for a trade upside, but you know that's 497 00:26:50,359 --> 00:26:52,439 Speaker 1: certainly not the case today. All right, But Michael, how 498 00:26:52,480 --> 00:26:54,160 Speaker 1: much does this have to do with what Mark Arney 499 00:26:54,320 --> 00:26:56,680 Speaker 1: has done? Right? It seems that the central banks a 500 00:26:56,800 --> 00:27:00,520 Speaker 1: post Brexit plan has worked. But then he's basically say 501 00:27:00,520 --> 00:27:03,600 Speaker 1: he can't fully offset the volatility triggered by Brexit crue. 502 00:27:03,640 --> 00:27:06,080 Speaker 1: I think the volatility though, has been sort of sort 503 00:27:06,119 --> 00:27:08,720 Speaker 1: of held down and held down well by central banks. 504 00:27:08,720 --> 00:27:11,000 Speaker 1: At the end of the day, Um, you know what 505 00:27:11,080 --> 00:27:15,399 Speaker 1: markets need to go, you know higher is profits. You know, 506 00:27:15,440 --> 00:27:18,439 Speaker 1: markets very simplistically really are about two things. One is 507 00:27:18,600 --> 00:27:21,200 Speaker 1: interest rates and the other is corporate profits. Well, the 508 00:27:21,240 --> 00:27:24,399 Speaker 1: interest rate card has been played as aggressively as it could, 509 00:27:24,520 --> 00:27:27,280 Speaker 1: so really, you know, for markets to go up and 510 00:27:27,440 --> 00:27:31,000 Speaker 1: stay up, you need to have confidence that corporate profits 511 00:27:31,000 --> 00:27:34,000 Speaker 1: are getting better. And I think that monetary policy, unfortunately 512 00:27:34,119 --> 00:27:36,600 Speaker 1: right now, is failing to do that. And that's why, 513 00:27:37,000 --> 00:27:39,199 Speaker 1: in response to the first question, interest rates are at 514 00:27:39,240 --> 00:27:41,159 Speaker 1: the levels that they are, so I think it's going 515 00:27:41,200 --> 00:27:43,680 Speaker 1: to need more than you know, just Mark Karni in 516 00:27:43,720 --> 00:27:45,720 Speaker 1: the central banks at this particular moment, You're going to 517 00:27:45,800 --> 00:27:48,520 Speaker 1: need a little bit of political stability and belief that 518 00:27:48,600 --> 00:27:52,440 Speaker 1: the politicians can coordinate a fiscal response. Michael, I love, love, 519 00:27:52,480 --> 00:27:56,639 Speaker 1: love your reports. Wall Street Boom, Main Street bus. Do 520 00:27:56,680 --> 00:27:59,560 Speaker 1: we know what that shirt looks like? We're living it longer, 521 00:27:59,640 --> 00:28:03,639 Speaker 1: roll by short humans. And then you've got a killer 522 00:28:03,840 --> 00:28:08,879 Speaker 1: chart on the collapse of our commodity business. The rolling 523 00:28:09,000 --> 00:28:14,800 Speaker 1: returns some commodities is back eight zero, folks, eight decades, 524 00:28:14,960 --> 00:28:19,119 Speaker 1: eighty years, lows blows through post World War two, blows 525 00:28:19,119 --> 00:28:23,000 Speaker 1: through the Eisenhower Depression, and we're back to the nineteen thirties. 526 00:28:23,400 --> 00:28:26,359 Speaker 1: Do you what will that mean for China to see 527 00:28:26,359 --> 00:28:30,159 Speaker 1: a rolling return from commodities back to the thirties. Well, 528 00:28:30,160 --> 00:28:32,160 Speaker 1: obviously you can be very good for China. If China 529 00:28:32,200 --> 00:28:34,719 Speaker 1: wants to buy commodities, it's able to buy them at 530 00:28:34,800 --> 00:28:37,159 Speaker 1: very cheap levels. But of course there's a chicken and 531 00:28:37,200 --> 00:28:40,600 Speaker 1: egg aspect to this, because the weakness of the Chinese 532 00:28:40,600 --> 00:28:43,280 Speaker 1: economy and the you know, the shift that structurally is 533 00:28:43,320 --> 00:28:45,760 Speaker 1: making away from investment to consumption is obviously one of 534 00:28:45,800 --> 00:28:49,080 Speaker 1: the reasons among many that you know, the commodity prices 535 00:28:49,080 --> 00:28:51,520 Speaker 1: are as low as they are. The other big reason is, 536 00:28:51,840 --> 00:28:56,480 Speaker 1: of course technological disruption, and that's why long robots, short humans, 537 00:28:57,000 --> 00:28:59,360 Speaker 1: you know, is a big feature of our landscape today. 538 00:28:59,360 --> 00:29:04,400 Speaker 1: It's something that causing wage uncertainty. It's got this whole 539 00:29:04,480 --> 00:29:06,960 Speaker 1: sort of inequality thing attached to it, and it's why 540 00:29:07,000 --> 00:29:10,560 Speaker 1: the policies that politicians will pursue going forward are going 541 00:29:10,600 --> 00:29:12,520 Speaker 1: to have a big, big impact on markets. You know. 542 00:29:12,520 --> 00:29:15,440 Speaker 1: If they pursue the war on inequality so to speak, 543 00:29:15,520 --> 00:29:18,320 Speaker 1: via taxation, that's probably going to be good for bonds. 544 00:29:18,320 --> 00:29:21,000 Speaker 1: If it's via higher minimum wages, that's also going to 545 00:29:21,080 --> 00:29:23,360 Speaker 1: be good for bonds. What we need to see, as 546 00:29:23,400 --> 00:29:26,600 Speaker 1: I said before, is a much more coordinated fiscal response. 547 00:29:26,640 --> 00:29:29,440 Speaker 1: That's the thing that's much more likely to get risk apped. 548 00:29:29,480 --> 00:29:31,920 Speaker 1: You know, long terms, you have to get animal sprates, 549 00:29:32,040 --> 00:29:36,479 Speaker 1: both of individuals corporations and says moving again, Michael, are 550 00:29:36,520 --> 00:29:39,360 Speaker 1: you worried about UK banks? It seems that again McCarney 551 00:29:39,440 --> 00:29:43,560 Speaker 1: has stepped into ensure the stability continues. Yes. I mean, 552 00:29:43,600 --> 00:29:46,320 Speaker 1: I think that the you know, the Italian bank situation 553 00:29:46,440 --> 00:29:49,680 Speaker 1: is the one that you know, investors, certainly the macro 554 00:29:49,800 --> 00:29:54,200 Speaker 1: community are watching most closely today, so I think that 555 00:29:54,280 --> 00:29:58,160 Speaker 1: some resolution is required there. I think, more broadly for 556 00:29:58,200 --> 00:30:01,760 Speaker 1: the UK I'd be less worried about the banking system. 557 00:30:01,800 --> 00:30:03,520 Speaker 1: I don't think that that means that the banks are 558 00:30:03,600 --> 00:30:07,440 Speaker 1: necessarily a raging buy, because for that to occur, you 559 00:30:07,520 --> 00:30:10,200 Speaker 1: need confidence that economic growth is going to go up, 560 00:30:10,760 --> 00:30:13,480 Speaker 1: housing activity is going to go up, and you need 561 00:30:13,560 --> 00:30:16,120 Speaker 1: to see interest rates go up. Those are the things 562 00:30:16,160 --> 00:30:19,240 Speaker 1: that will make bank stocks go up. But nonetheless, the 563 00:30:19,280 --> 00:30:22,480 Speaker 1: shock I think to the UK economy just incoming chuses 564 00:30:22,560 --> 00:30:26,400 Speaker 1: is much more likely to be via trade than credits, 565 00:30:26,440 --> 00:30:29,600 Speaker 1: I think, Michael Hartnet, You've got a great idea of 566 00:30:29,640 --> 00:30:33,360 Speaker 1: comparing US stocks to European stocks, and we're four hundred 567 00:30:33,360 --> 00:30:38,360 Speaker 1: and seventy two standard deviations in the rich US cheap Europe. 568 00:30:38,600 --> 00:30:41,640 Speaker 1: When does an experience guy like you go long Europe 569 00:30:41,880 --> 00:30:45,200 Speaker 1: short America? Well, when I want to go long banks 570 00:30:45,240 --> 00:30:49,720 Speaker 1: and short technology, because they're very different indices, And obviously 571 00:30:49,720 --> 00:30:51,959 Speaker 1: there are a number of reasons why, you know, as 572 00:30:52,000 --> 00:30:56,280 Speaker 1: you rightly put it, the U stock market is extraordinarily 573 00:30:56,400 --> 00:30:58,960 Speaker 1: rich versus the European one. But one of the big 574 00:30:58,960 --> 00:31:01,360 Speaker 1: ones is that the in the European market you have 575 00:31:01,440 --> 00:31:04,400 Speaker 1: a tremendous amount of financials, and those financials obviously aren't 576 00:31:04,400 --> 00:31:07,560 Speaker 1: doing very well. In Italy and Spain, for example, those 577 00:31:07,600 --> 00:31:13,120 Speaker 1: two markets, the financials are roughly a third of the index, 578 00:31:13,160 --> 00:31:16,120 Speaker 1: which is which is remarkable really if you think about it. 579 00:31:16,120 --> 00:31:18,000 Speaker 1: Who knew the Italians and the Spanish were so good 580 00:31:18,000 --> 00:31:22,760 Speaker 1: at banking? But that level of financials within the market 581 00:31:22,920 --> 00:31:25,760 Speaker 1: is a real dead weight and until unless those banks 582 00:31:25,760 --> 00:31:27,560 Speaker 1: start to do, you know, a lot better, and they 583 00:31:27,600 --> 00:31:29,600 Speaker 1: can only do a lot better when the economy does better. 584 00:31:29,720 --> 00:31:33,880 Speaker 1: The US market, by contrast, is very very heavy with technology, 585 00:31:33,960 --> 00:31:37,600 Speaker 1: so you know, the value growth, you know, if people 586 00:31:37,600 --> 00:31:39,880 Speaker 1: want growth rather than value, then the US market is 587 00:31:39,880 --> 00:31:42,440 Speaker 1: going to outperform. And that's exactly what's happening, you know, 588 00:31:42,560 --> 00:31:43,920 Speaker 1: right now. So you need to turn around in the 589 00:31:43,920 --> 00:31:46,240 Speaker 1: European banks and you need people to believe in economic 590 00:31:46,240 --> 00:31:49,600 Speaker 1: recovery and interest rates going up. Michael, is it to 591 00:31:49,640 --> 00:31:51,960 Speaker 1: the under Italian banks? Could they be a bigger threat 592 00:31:52,000 --> 00:31:54,000 Speaker 1: to the your zign stability than breaks in? You know, 593 00:31:54,000 --> 00:31:55,720 Speaker 1: at the end of the day, they've been a threat 594 00:31:55,800 --> 00:31:59,000 Speaker 1: for for some time, you know what, the markets have 595 00:31:59,120 --> 00:32:02,880 Speaker 1: been waiting for some sort of resolution in terms of recapitalization, 596 00:32:03,320 --> 00:32:07,000 Speaker 1: probably some creative destruction within the sector that would allow 597 00:32:07,040 --> 00:32:10,479 Speaker 1: people to believe that, you know, those banks, which are 598 00:32:10,560 --> 00:32:14,160 Speaker 1: terrifically important to funding you know, the European economy can 599 00:32:14,200 --> 00:32:16,720 Speaker 1: actually fund the European economy and actually get the economy 600 00:32:16,760 --> 00:32:20,040 Speaker 1: moving again. So I think Brexit, you know, clearly thus 601 00:32:20,040 --> 00:32:25,320 Speaker 1: far the financial market stress component of it was, you know, 602 00:32:25,480 --> 00:32:28,160 Speaker 1: as it's been relatively well behaved. And Tom mentioned the 603 00:32:28,200 --> 00:32:31,239 Speaker 1: Standard Life news this morning, which obviously is important in 604 00:32:31,240 --> 00:32:34,000 Speaker 1: that regard. But I think the markets have been relatively 605 00:32:34,040 --> 00:32:37,480 Speaker 1: well behaved post Brexit, but obviously another breakdown in terms 606 00:32:37,520 --> 00:32:40,240 Speaker 1: of the banking system in Europe, a run on the 607 00:32:40,240 --> 00:32:42,640 Speaker 1: banks would be a very very bad thing, particular at 608 00:32:42,680 --> 00:32:45,840 Speaker 1: this stage in the macro. I look at the back 609 00:32:45,880 --> 00:32:48,680 Speaker 1: and forth in what we all know from experience as 610 00:32:48,720 --> 00:32:52,800 Speaker 1: there's exaggerant sharks out there. I am to be blunt, folks, 611 00:32:52,840 --> 00:32:56,320 Speaker 1: and I said this for weeks focused on Italian banks 612 00:32:56,760 --> 00:32:59,880 Speaker 1: and the spill over into Eastern Europe. What does Mike 613 00:33:00,240 --> 00:33:04,760 Speaker 1: Hearten it thinking about? Is the exoggerous shock that gets 614 00:33:04,760 --> 00:33:07,160 Speaker 1: your attention? Well, I mean it's a great question. I mean, 615 00:33:07,200 --> 00:33:09,760 Speaker 1: just to back up on to Francene's point, because just 616 00:33:10,040 --> 00:33:12,920 Speaker 1: to finish off, the one thing to watch, Francene is 617 00:33:13,320 --> 00:33:15,800 Speaker 1: for rates to go up. You know thus far if 618 00:33:15,800 --> 00:33:17,840 Speaker 1: you think about the bank stocks in Europe and pretty 619 00:33:17,880 --> 00:33:20,320 Speaker 1: much everywhere else, when the bank stocks go down, rates 620 00:33:20,360 --> 00:33:23,480 Speaker 1: go Now, that's a deflation trade. When the bank stops 621 00:33:23,520 --> 00:33:26,600 Speaker 1: go down an interest rates are going up, that's a 622 00:33:26,680 --> 00:33:29,760 Speaker 1: default trade. And that's when it turns very pernicious. You 623 00:33:29,800 --> 00:33:32,440 Speaker 1: haven't got to that stage yet in terms of you know, 624 00:33:32,520 --> 00:33:35,520 Speaker 1: your question, Tom, in terms of what are the exogenous shocks? 625 00:33:35,560 --> 00:33:37,480 Speaker 1: I mean, look, I mean I suppose it's like asking 626 00:33:37,520 --> 00:33:40,440 Speaker 1: what is the black swan out there? I think that 627 00:33:40,720 --> 00:33:42,960 Speaker 1: you know, the bulls would say that you know, the 628 00:33:43,000 --> 00:33:45,520 Speaker 1: black swan is there? There is no black swans that 629 00:33:45,520 --> 00:33:49,720 Speaker 1: that that we're all way too paranoid, you know, we 630 00:33:49,720 --> 00:33:53,600 Speaker 1: were are cash levels are just ridiculously high. That actually 631 00:33:53,680 --> 00:33:56,480 Speaker 1: the economy, I mean, it ain't going to do great, 632 00:33:56,480 --> 00:33:58,960 Speaker 1: but it's going to do okay, and you're going to 633 00:33:59,080 --> 00:34:01,640 Speaker 1: see some sign and I think the signs of the 634 00:34:01,680 --> 00:34:03,959 Speaker 1: area to look for it is the housing market, some 635 00:34:04,000 --> 00:34:06,880 Speaker 1: signs that interest rates are having an impact. That the 636 00:34:06,920 --> 00:34:09,880 Speaker 1: bear would say the black Swan event is what I 637 00:34:10,000 --> 00:34:14,240 Speaker 1: just described, is that right now you have a total 638 00:34:14,400 --> 00:34:17,720 Speaker 1: enough a capitulation into the view that every single interest 639 00:34:17,840 --> 00:34:20,600 Speaker 1: rate in the world will fall to zero. People are 640 00:34:20,600 --> 00:34:23,799 Speaker 1: piling at the government investment grade high quality stocks. If 641 00:34:23,880 --> 00:34:26,759 Speaker 1: rates suddenly go up for the wrong reasons, you know 642 00:34:27,040 --> 00:34:30,160 Speaker 1: that's bad. Michael, Our fondest hope is we get you 643 00:34:30,280 --> 00:34:32,920 Speaker 1: on set in London with Ethan Harris at some point. 644 00:34:33,400 --> 00:34:36,719 Speaker 1: That would be a great, great moment Michael Harton had 645 00:34:36,760 --> 00:34:52,400 Speaker 1: with Bank of American Marylands with terrific reports. This is 646 00:34:52,440 --> 00:34:55,319 Speaker 1: the most important interviewer to We've been trying to do 647 00:34:55,440 --> 00:34:59,279 Speaker 1: this for weeks and we can't because Francine Luigi's and 648 00:34:59,360 --> 00:35:02,680 Speaker 1: galas smarter than you or I. He's at the Boost 649 00:35:02,680 --> 00:35:07,400 Speaker 1: School Chicago, his wonderful books Saving Capitalism. He's been on 650 00:35:07,480 --> 00:35:12,040 Speaker 1: before to explain Italian soccer to us. But the real issue, Francine, 651 00:35:12,080 --> 00:35:15,880 Speaker 1: and please, folks, Francine is gonna help here. He's calling 652 00:35:16,000 --> 00:35:20,880 Speaker 1: us from Friuli, which is in the tippy tippy northeastern 653 00:35:20,960 --> 00:35:26,759 Speaker 1: Austrian part of Italy. Francine, American idiots like me think 654 00:35:26,800 --> 00:35:31,520 Speaker 1: of Italy as Rome, maybe Milan, and we know Patent 655 00:35:31,600 --> 00:35:33,880 Speaker 1: did something in World War Two down in the south. 656 00:35:34,239 --> 00:35:38,719 Speaker 1: That's our total knowledge. It's close. But it's like the 657 00:35:38,920 --> 00:35:41,960 Speaker 1: it's a glorious part of Italy, right, Francine. Right, So 658 00:35:42,080 --> 00:35:44,960 Speaker 1: it's you know, almost Germany, it's all. It's it's like 659 00:35:45,400 --> 00:35:48,240 Speaker 1: it's a part of Italy, folks, that we never think about. 660 00:35:48,680 --> 00:35:52,719 Speaker 1: And Professor Zingalis joins us today from Friula, Luigi, why 661 00:35:52,719 --> 00:35:55,480 Speaker 1: do you go to Friuli? What is it? Friuli in 662 00:35:55,520 --> 00:35:58,799 Speaker 1: the summer is cooler than the rest of Italy, as 663 00:35:58,880 --> 00:36:02,840 Speaker 1: one of the best wine, is as organized in Austria, 664 00:36:03,320 --> 00:36:05,880 Speaker 1: and is as beautiful as Italy. There we go, there's 665 00:36:05,920 --> 00:36:08,480 Speaker 1: the explanation. I need to know why I'm going to 666 00:36:08,560 --> 00:36:11,440 Speaker 1: be going to freely. Luigi. We are honored to have 667 00:36:11,560 --> 00:36:14,640 Speaker 1: you on today. Do you just leisure? Do you just 668 00:36:14,800 --> 00:36:19,640 Speaker 1: assume the government will bail out the Italian banks. I 669 00:36:19,680 --> 00:36:23,719 Speaker 1: think that probably they will. It's a very tricky situation. 670 00:36:23,840 --> 00:36:26,840 Speaker 1: As you know, I'm not a big fan of government bailout. 671 00:36:27,040 --> 00:36:32,280 Speaker 1: But in Italy the situation is particularly bad because banks 672 00:36:32,280 --> 00:36:35,239 Speaker 1: have sold a lot of their bonds and spout not 673 00:36:35,400 --> 00:36:38,800 Speaker 1: the bonds to retail investors. In particular amount of PASKI 674 00:36:38,880 --> 00:36:43,399 Speaker 1: has five billions US of subordinated that in the ends 675 00:36:43,600 --> 00:36:49,320 Speaker 1: of great investors that sold them as sub sived deposits 676 00:36:49,680 --> 00:36:52,440 Speaker 1: and UH and so if you were to the fold 677 00:36:52,520 --> 00:36:56,760 Speaker 1: on those, this will easily create a bank panic in Italy. 678 00:36:57,160 --> 00:37:01,280 Speaker 1: So I think that the situation is really really milli tense. Luisie. 679 00:37:01,280 --> 00:37:03,160 Speaker 1: First of all, when need to talk about a bank panic, 680 00:37:03,200 --> 00:37:04,960 Speaker 1: this is a run on the banks. I mean at 681 00:37:04,960 --> 00:37:07,480 Speaker 1: the moment, what are the chances of that happening? Is 682 00:37:07,480 --> 00:37:12,239 Speaker 1: it more like or are we si there? It's very 683 00:37:12,280 --> 00:37:16,399 Speaker 1: difficult to tell. I think that already in January we 684 00:37:16,440 --> 00:37:20,280 Speaker 1: had a day difficult moment because, as you probably have heard, 685 00:37:20,440 --> 00:37:24,920 Speaker 1: in November two actually four regional banks basically where we 686 00:37:25,000 --> 00:37:30,200 Speaker 1: structure and for the first time subordinated that was wiped 687 00:37:30,200 --> 00:37:35,440 Speaker 1: out and UH investor committed suicide. There were a lot 688 00:37:35,480 --> 00:37:40,320 Speaker 1: of people severely distroyed, and in particular in my region, 689 00:37:40,360 --> 00:37:44,239 Speaker 1: which is Veneto, where there are two banks in serious difficulties. 690 00:37:44,440 --> 00:37:48,520 Speaker 1: People started to withdraw money from their banks and they 691 00:37:48,600 --> 00:37:51,840 Speaker 1: found a temporary solution. So there were two capital increases 692 00:37:51,880 --> 00:37:55,920 Speaker 1: in two UH Veneto banks that sort of tranquilize the 693 00:37:55,960 --> 00:37:59,040 Speaker 1: situation for a little while. It is very hard to know. 694 00:37:59,160 --> 00:38:02,560 Speaker 1: I know the situation the tense. I know that the 695 00:38:02,600 --> 00:38:07,759 Speaker 1: government is afraid of letting any bank default, even on 696 00:38:07,840 --> 00:38:11,640 Speaker 1: the subordinated debt, because this could be sort of the 697 00:38:11,760 --> 00:38:15,360 Speaker 1: end of this government and UH, and I know that 698 00:38:15,800 --> 00:38:18,879 Speaker 1: if there are generalized losses, people will start with drawing 699 00:38:18,880 --> 00:38:23,200 Speaker 1: their money and bring it to Germany branks ability across 700 00:38:23,239 --> 00:38:25,799 Speaker 1: the solution what's the solution right? I mean, it's very 701 00:38:25,800 --> 00:38:28,680 Speaker 1: clear that state support, which we're probably looking at, does 702 00:38:28,760 --> 00:38:32,319 Speaker 1: not sit with the current bank bailing rules imposed by 703 00:38:32,440 --> 00:38:36,240 Speaker 1: the EU. Will this change? Actually? You know, in Italy 704 00:38:36,280 --> 00:38:38,880 Speaker 1: we have this expression that whenever you find you create 705 00:38:38,920 --> 00:38:41,839 Speaker 1: a role, you find a way around it, and there 706 00:38:41,840 --> 00:38:46,080 Speaker 1: are ways around it. In particular, both France and Germany 707 00:38:46,200 --> 00:38:50,720 Speaker 1: have created these institutions. Is the cust de poor in France, 708 00:38:51,239 --> 00:38:54,839 Speaker 1: UH and there's a similar name in Germany that technically 709 00:38:54,920 --> 00:38:57,920 Speaker 1: are not part of the government because the government owns 710 00:38:58,040 --> 00:39:00,920 Speaker 1: less than eight percent, And immediately there is an institution 711 00:39:01,040 --> 00:39:04,040 Speaker 1: is called Casa Deposity Oppressity, which is identical to the 712 00:39:04,120 --> 00:39:07,520 Speaker 1: cast de Pow, the French cast Depau, where the government 713 00:39:07,520 --> 00:39:11,960 Speaker 1: owned only very night presents. And so this institution could 714 00:39:12,000 --> 00:39:16,719 Speaker 1: easily inject money in the banks and then satisfy the 715 00:39:16,920 --> 00:39:22,120 Speaker 1: requirement of the European rules, or at least have this 716 00:39:22,280 --> 00:39:24,799 Speaker 1: discussion later on. So first you do it and then 717 00:39:25,200 --> 00:39:28,040 Speaker 1: you sort of discussed with the rest of of Europe. 718 00:39:28,160 --> 00:39:30,239 Speaker 1: All right, Luigi, what you're talking about, of course, the 719 00:39:30,360 --> 00:39:33,839 Speaker 1: Cassady Deposity is basically the Italian Sovereign Wealth Fund. Well, 720 00:39:33,880 --> 00:39:36,480 Speaker 1: we had a great surveillance exclusive and we actually spoke 721 00:39:36,960 --> 00:39:39,360 Speaker 1: to the guy that heads it, Mr Coustamannia, and he 722 00:39:39,440 --> 00:39:42,280 Speaker 1: was very koy. I mean, the EU are not that stupid. 723 00:39:42,280 --> 00:39:44,280 Speaker 1: If there if the rule is broken, the rule is broken. 724 00:39:44,480 --> 00:39:48,280 Speaker 1: But wait a second. When when the Italian government sells 725 00:39:48,760 --> 00:39:52,360 Speaker 1: a company to cast for the posity is considered privatization 726 00:39:52,760 --> 00:39:57,000 Speaker 1: in Germany and France, this has been considered outside of 727 00:39:56,800 --> 00:40:00,200 Speaker 1: the perimeter of the state. So I agree me that 728 00:40:00,239 --> 00:40:02,560 Speaker 1: the substance of the rule is broken. But I don't 729 00:40:02,560 --> 00:40:04,879 Speaker 1: know why the rule is different when he's applied by 730 00:40:04,960 --> 00:40:08,040 Speaker 1: France or Germany or applied by Italy. I mean, I 731 00:40:08,560 --> 00:40:11,240 Speaker 1: can just imagine the two of you over a wonderful 732 00:40:11,280 --> 00:40:15,279 Speaker 1: bottle of wine and freely going NonStop and Italian, none 733 00:40:15,280 --> 00:40:18,320 Speaker 1: of us in America. With my fractured language, I wouldn't 734 00:40:18,320 --> 00:40:20,239 Speaker 1: get a word of it. Luigi, let me cut to 735 00:40:20,239 --> 00:40:24,680 Speaker 1: the American chase. Is Frankfurt gonna bail out Italy? No? So, 736 00:40:24,880 --> 00:40:27,319 Speaker 1: but that's what not not what I'm proposing. What I'm 737 00:40:27,320 --> 00:40:31,440 Speaker 1: proposing is that the Italians, the Italian government, uh there's 738 00:40:31,480 --> 00:40:36,120 Speaker 1: are the Italian bondholders, not the Italian the bank holders, 739 00:40:36,120 --> 00:40:39,120 Speaker 1: but the bondholders because and this is the important thing, 740 00:40:39,239 --> 00:40:43,560 Speaker 1: is because is the fault of the Italian regulators that 741 00:40:43,680 --> 00:40:47,160 Speaker 1: this stuff was sold to real investors. Both the Italian 742 00:40:47,280 --> 00:40:51,200 Speaker 1: sec concept and the Bank of Italy closed one eye 743 00:40:51,239 --> 00:40:54,799 Speaker 1: and probably both letting these things happen for years. Why 744 00:40:54,880 --> 00:40:57,440 Speaker 1: because this was considered good for the stability of the 745 00:40:57,480 --> 00:41:01,319 Speaker 1: banking sector, and so I in they What I would 746 00:41:01,320 --> 00:41:03,480 Speaker 1: do is, first I would ask the resignation of both 747 00:41:03,520 --> 00:41:07,760 Speaker 1: heads of these institutions, and then I would proceed with 748 00:41:07,840 --> 00:41:12,520 Speaker 1: this bailout because you cannot let small investors stay for 749 00:41:12,600 --> 00:41:15,880 Speaker 1: the mistakes but done by regulators, Luigi. Does Italy have 750 00:41:16,000 --> 00:41:19,360 Speaker 1: the money to bail out their banks? Is it a 751 00:41:19,480 --> 00:41:22,040 Speaker 1: rounding error? Is it? Is it a lot of money? 752 00:41:22,400 --> 00:41:24,000 Speaker 1: Or are they gonna have to get a cash call 753 00:41:24,360 --> 00:41:26,880 Speaker 1: from the rest of Europe. No, I think that it 754 00:41:27,200 --> 00:41:30,120 Speaker 1: is not too much money. We're talking about between fourty 755 00:41:30,160 --> 00:41:34,319 Speaker 1: and sixty billion US, which, of course for you and I, 756 00:41:34,520 --> 00:41:36,440 Speaker 1: at least for me, a lot of money, but for 757 00:41:36,480 --> 00:41:40,120 Speaker 1: the Italian government is not so. I if used properly 758 00:41:40,520 --> 00:41:43,919 Speaker 1: in the form of an equity capital injection, I think 759 00:41:43,960 --> 00:41:47,640 Speaker 1: this amount of money sufficient to stop the problem unfortally 760 00:41:47,640 --> 00:41:51,080 Speaker 1: as as well discussing earlier European rules make it difficult 761 00:41:51,480 --> 00:41:54,160 Speaker 1: and and actually I'm sympathetic to the European rules. I 762 00:41:54,160 --> 00:41:57,560 Speaker 1: think that European rules are right. The problem is that 763 00:41:57,600 --> 00:42:00,479 Speaker 1: have been applied to a country where for a long 764 00:42:00,560 --> 00:42:05,200 Speaker 1: time bonds and subordinating bonds were used to they were 765 00:42:05,239 --> 00:42:10,280 Speaker 1: sold to unsophisticated investors who would be devastated by the laws. Luigi. 766 00:42:10,440 --> 00:42:13,120 Speaker 1: If the banks aren't serge and sex months will bring 767 00:42:13,160 --> 00:42:16,200 Speaker 1: down the government. I think so if if they are 768 00:42:16,239 --> 00:42:20,280 Speaker 1: not able to cope with this banking crisis, the government 769 00:42:20,360 --> 00:42:24,399 Speaker 1: will be brought down. I think the level of rage 770 00:42:24,440 --> 00:42:28,520 Speaker 1: of he is among small investors is out of this world. 771 00:42:28,719 --> 00:42:31,600 Speaker 1: And we've seen with sort of there are already two 772 00:42:31,600 --> 00:42:35,120 Speaker 1: people who committed suicide and a lot of a lot 773 00:42:35,160 --> 00:42:38,239 Speaker 1: of they they angle in. And I think it's difficult 774 00:42:38,520 --> 00:42:40,520 Speaker 1: for the make it to understand because many of these 775 00:42:40,520 --> 00:42:44,880 Speaker 1: banks used to be sort of cooperative banks where there 776 00:42:44,880 --> 00:42:48,760 Speaker 1: are a lot of friendship relationship, and so people feel 777 00:42:48,880 --> 00:42:53,560 Speaker 1: betrayed by their own friends, feel betrayed by their own 778 00:42:53,560 --> 00:42:57,600 Speaker 1: local institutions, feel betrayed by everything. So I don't know 779 00:42:57,680 --> 00:43:00,040 Speaker 1: what how the way react. You know, time we of 780 00:43:00,640 --> 00:43:03,400 Speaker 1: a great Bloomberg story, and I known times of crisis 781 00:43:03,400 --> 00:43:05,360 Speaker 1: we need to remain serious, but sometimes a little bit 782 00:43:05,360 --> 00:43:08,560 Speaker 1: of a sense of humor doesn't hurt. And they basically say, 783 00:43:08,560 --> 00:43:11,120 Speaker 1: it's now a familiar refrain of European prime minister calling 784 00:43:11,120 --> 00:43:14,080 Speaker 1: a referend him his job could be underlyining and markets 785 00:43:14,120 --> 00:43:15,880 Speaker 1: are getting worried. I mean, you need to find a 786 00:43:15,920 --> 00:43:18,360 Speaker 1: solution for the banks, Luigi, is there a model in 787 00:43:18,400 --> 00:43:20,680 Speaker 1: other countries that we should be looking at I think 788 00:43:20,680 --> 00:43:22,480 Speaker 1: that at the end of the day, as you know, 789 00:43:22,760 --> 00:43:24,480 Speaker 1: I wasn't a big supporter, but at the end of 790 00:43:24,480 --> 00:43:27,000 Speaker 1: the day, the TOP, the last version of TOP, the 791 00:43:27,000 --> 00:43:29,680 Speaker 1: one that was eventually implemented, walk distantly well in the 792 00:43:29,760 --> 00:43:32,719 Speaker 1: United States. So if the government has to intervene, I 793 00:43:32,719 --> 00:43:37,399 Speaker 1: think has to intervene with some formal preferred so to 794 00:43:37,440 --> 00:43:40,799 Speaker 1: make sure to wipe out of the shareholders if the 795 00:43:40,840 --> 00:43:43,320 Speaker 1: bank is not solvent. But if the bank is solvent, 796 00:43:43,680 --> 00:43:45,600 Speaker 1: the share holders can buy a bank, le profiles and 797 00:43:45,680 --> 00:43:48,480 Speaker 1: make it viable. So I think that is very important 798 00:43:49,000 --> 00:43:53,799 Speaker 1: not to penalyze banks that have been doing well. But 799 00:43:53,840 --> 00:43:57,640 Speaker 1: it's also important to intervene fast. And so you need 800 00:43:57,719 --> 00:44:01,560 Speaker 1: to have a rule that fits at all and that's 801 00:44:01,760 --> 00:44:05,320 Speaker 1: very treaty. Could this plunge us back to those darker 802 00:44:05,400 --> 00:44:08,120 Speaker 1: days in two thousand and eight where we don't actually 803 00:44:08,440 --> 00:44:11,839 Speaker 1: know what's the worst that could happen is? I think 804 00:44:11,880 --> 00:44:14,640 Speaker 1: it's for Italy that's worse than two thousand and eight. 805 00:44:15,320 --> 00:44:17,560 Speaker 1: We have to allize that Italy is coming out of 806 00:44:17,640 --> 00:44:21,880 Speaker 1: basically seven years trade of recession. So it's a miracle 807 00:44:21,920 --> 00:44:25,359 Speaker 1: that there's any bank still standing at this point. And uh, 808 00:44:25,400 --> 00:44:28,719 Speaker 1: and this banking crisis is is running the risk of 809 00:44:28,960 --> 00:44:32,759 Speaker 1: creating a great depression in Italy. Were already into a 810 00:44:32,840 --> 00:44:37,920 Speaker 1: severe recession and very long lasting one. But if the 811 00:44:38,280 --> 00:44:41,520 Speaker 1: banking sector were to collapse, it's a generalized bank run. 812 00:44:41,600 --> 00:44:47,359 Speaker 1: We're talking about United States ninety three. Luigi very importantly, 813 00:44:47,840 --> 00:44:51,160 Speaker 1: does this tell us about the elite structure of finance 814 00:44:51,200 --> 00:44:54,880 Speaker 1: and Italy? Is it like us where government people say no, 815 00:44:55,000 --> 00:44:56,880 Speaker 1: you're not going to make out, or do we just 816 00:44:56,920 --> 00:44:59,600 Speaker 1: assume the elites make out like a bandit in a 817 00:44:59,719 --> 00:45:02,560 Speaker 1: risk ructured in Italy. That's a very good question. I 818 00:45:02,600 --> 00:45:05,120 Speaker 1: think that there are a lot a lot of local 819 00:45:05,200 --> 00:45:09,000 Speaker 1: banks that are intrinsically related to the political power and 820 00:45:09,040 --> 00:45:12,960 Speaker 1: the local elite, So I think would be very difficult 821 00:45:13,080 --> 00:45:18,120 Speaker 1: to make sure that these people are penalized. My proposal 822 00:45:18,160 --> 00:45:20,839 Speaker 1: has been you go with an American version of TOUB, 823 00:45:20,920 --> 00:45:24,440 Speaker 1: but at the same time you have a national uh 824 00:45:24,600 --> 00:45:31,200 Speaker 1: investigation where everybody who did something incorrectly paid severely for this. 825 00:45:31,200 --> 00:45:33,800 Speaker 1: This is what has been missing from the American tap 826 00:45:34,160 --> 00:45:36,560 Speaker 1: and this is what would be crucial in Italy to 827 00:45:36,640 --> 00:45:39,320 Speaker 1: do if you don't want to have a social revolt, 828 00:45:39,960 --> 00:45:42,400 Speaker 1: because as we know, there is the five Star movement, 829 00:45:42,920 --> 00:45:46,319 Speaker 1: which is very angry with the current situation. So we'll 830 00:45:46,360 --> 00:45:51,680 Speaker 1: see any opportunity to bail out to criticize the bailout. 831 00:45:51,800 --> 00:45:55,960 Speaker 1: That bail out also the bankers and not just the banks, 832 00:45:56,160 --> 00:45:58,680 Speaker 1: Luigi have the financial system initally does go down, This 833 00:45:58,719 --> 00:46:01,719 Speaker 1: would be much worse than a stable Greg's it right. 834 00:46:01,800 --> 00:46:05,560 Speaker 1: What we almost dealt with with Greece is it Can 835 00:46:05,560 --> 00:46:08,359 Speaker 1: it actually take down the whole your zone with it? Yes? 836 00:46:08,520 --> 00:46:12,040 Speaker 1: I think so. I think that if you have a 837 00:46:12,120 --> 00:46:15,080 Speaker 1: bank rund in Italy, I think at some point the 838 00:46:15,080 --> 00:46:18,680 Speaker 1: Italian government will have to do something. And it's not 839 00:46:18,760 --> 00:46:21,960 Speaker 1: other question that this something is to sort of get 840 00:46:21,960 --> 00:46:25,880 Speaker 1: out of the Euro. After all, the biggest obstacle to 841 00:46:25,960 --> 00:46:28,319 Speaker 1: get out of the Euro is the transition and what 842 00:46:28,360 --> 00:46:31,839 Speaker 1: happens to the banks. Once the banks are most then 843 00:46:31,880 --> 00:46:34,680 Speaker 1: the cost is limited and then you start looking only 844 00:46:34,719 --> 00:46:36,960 Speaker 1: an upside. You guys have been going at it here 845 00:46:36,960 --> 00:46:38,960 Speaker 1: in Italian banks, Francy and I'm just looking at the 846 00:46:39,000 --> 00:46:41,440 Speaker 1: restaurants and for Willy and you know, we've got to 847 00:46:41,480 --> 00:46:44,560 Speaker 1: do a remote thing. We can have Zingalisan and one 848 00:46:44,600 --> 00:46:48,680 Speaker 1: of my heroes, accel Leana Vood, who lives up there, 849 00:46:48,840 --> 00:46:52,040 Speaker 1: is well was was icon of get U c L 850 00:46:52,080 --> 00:46:56,120 Speaker 1: a years ago. Luigi, let's sun this up um, Luigi, 851 00:46:56,160 --> 00:46:59,799 Speaker 1: what will you look for in the coming days from 852 00:46:59,800 --> 00:47:03,759 Speaker 1: the Nzy government or from the Italian banks, particularly the 853 00:47:03,880 --> 00:47:06,839 Speaker 1: larger banks. What will you look for? The first thing 854 00:47:06,880 --> 00:47:10,520 Speaker 1: I will look at excuse plan to inject equity in banks. 855 00:47:10,719 --> 00:47:13,880 Speaker 1: Whether this is done by the government, this is done 856 00:47:13,920 --> 00:47:17,080 Speaker 1: by the private sector, this is done by Europe. I 857 00:47:17,120 --> 00:47:21,040 Speaker 1: think that's uh, those are technicality. Is the important thing 858 00:47:21,120 --> 00:47:24,520 Speaker 1: that we need to is a major capital injection in 859 00:47:24,560 --> 00:47:27,840 Speaker 1: the banking sector. Without this, I think the entire banking 860 00:47:27,920 --> 00:47:30,799 Speaker 1: sector is at risk. Luis's and Galas thank you so 861 00:47:30,880 --> 00:47:34,600 Speaker 1: much from Northeastern Italy today for really greatly appreciate it. 862 00:47:37,000 --> 00:47:41,080 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 863 00:47:41,120 --> 00:47:46,520 Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform 864 00:47:46,640 --> 00:47:50,719 Speaker 1: you prefer. I'm on Twitter at Tom Keane, Michael McKee 865 00:47:50,800 --> 00:47:54,359 Speaker 1: is at Economy. Before the podcast, you can always catch 866 00:47:54,440 --> 00:47:57,000 Speaker 1: us worldwide. I'm Bloomberg Radio