Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Leye. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg. Yeah. So,
Speaker 1: days after the anti establishment five Star Movement and the
Speaker 1: anti immigrant League walked away from a bid to form
Speaker 1: a coalition Italian government, according to a senior state official,
Speaker 1: the president of Italy wants to find out whether they're
Speaker 1: ready to revive it. Joining us now, I'm ready pleased
Speaker 1: to say is Luigis and Galas Chicago, both school finance professor,
Speaker 1: and he joined us on the phone, Professors and Galas.
Speaker 1: It was started by a president who gave legitimacy to
Speaker 1: an I here that wasn't clearly on the agenda at
Speaker 1: the time. It's a curious event that's taking place in Italy. Luigi, yes,
Speaker 1: it is. I think that I agree with you. That
Speaker 1: was the president that spook the market more than the populace.
Speaker 1: That the fact that he raised the issue of you
Speaker 1: will exit and made us think out of not appointed.
Speaker 1: Somebody has announcements to really created a lot of uncertainty.
Speaker 1: I don't know what is going to have to really,
Speaker 1: the situation is very much in flux now. So, Professor,
Speaker 1: the key question I think for markets that everyone should
Speaker 1: be looking out for is whether we get a new
Speaker 1: election one and two, what kind of platform did these
Speaker 1: two parties run on in that election? Is it clear
Speaker 1: to you, Luigi, that if we had another election in
Speaker 1: Italy that those two parties would run on a platform
Speaker 1: to leave the Eurozone. No, I don't think that they
Speaker 1: will run on that platform. I think would be suicidal
Speaker 1: honestly to a campaign on that front, because people were
Speaker 1: started running to get their money out of the bank
Speaker 1: as the ballots accounted. So I don't think they will
Speaker 1: do it. I think that the the Democratic Party will
Speaker 1: try to train them to run a campaign the direction,
Speaker 1: because it is in his interest to do that. But
Speaker 1: I don't think this will happen. So for anyone worrying,
Speaker 1: Professor about an existential crisis in Europe, once again, what's
Speaker 1: your message to them at this point? So? I think
Speaker 1: that we're always in theistential crisis. I think that the
Speaker 1: problems of Italy indicate that the you is not a
Speaker 1: well designed system. And I think that everybody knows it,
Speaker 1: but nobody has the card to say. It is a
Speaker 1: bit like the Emperor's no close and we need to
Speaker 1: fix it. The question is is their willingness to fix it?
Speaker 1: And if they is not willing to fix it? Uh
Speaker 1: was stun who used to say, is something is not sustainable,
Speaker 1: eventually will not su state And I'm stating the obvious.
Speaker 1: But eventually we're obviously state. Whether it is because of
Speaker 1: the fight that movement, or because of this or because
Speaker 1: of that, that's that's sort of accident. The substance is
Speaker 1: we need to fix it, right, Luigi, wonderful to have
Speaker 1: you on in this time of turmoil in Italy. And
Speaker 1: it ar cons back to what was the book of
Speaker 1: the summer for me. I recall a number of years ago,
Speaker 1: your wonderful book on American capitalism. Describe European capitalism right now?
Speaker 1: Help our European listeners with what capitalism is in Europe.
Speaker 1: I really can't figure out a good definition. Actually is
Speaker 1: very different across countries, and I would say that it
Speaker 1: is one in this moment. One advantage of the U
Speaker 1: over the United States is that they seem to enforce
Speaker 1: the rule of competition better than the United States. The
Speaker 1: anti trust is more aggressive and is less easy to
Speaker 1: buy out the legislator. At the European level, I think
Speaker 1: it's just a transitional phase and eventually things will converge
Speaker 1: in the war state. But at the moment, I think
Speaker 1: this is in advantage with the United States. I mean
Speaker 1: with within it is. I guess where GDP is in
Speaker 1: the whole disappointment here has been where GDP has been
Speaker 1: in the United States for X number of years, and
Speaker 1: for Europe and and all that as well. A little
Speaker 1: bit of inflation today reported in Europe. Are you optimistic
Speaker 1: that we will see a power like inflation lift in America?
Speaker 1: I think that my reading of the data is that
Speaker 1: the lack of inflation is due to the lack of
Speaker 1: increasing wages. And ironically, maybe we've gone too much the
Speaker 1: other ways. There was a huge pressure to reduced wage,
Speaker 1: reduced the power of label. We do s this will
Speaker 1: use that eventually, maybe we over shot and and we
Speaker 1: need to give a little bit more of arguing power
Speaker 1: to h to label so that wages will go up.
Speaker 1: And when wage you will go up in station, we
Speaker 1: go up as well. The professor, Before we lose you.
Speaker 1: I think what's already stood out to a lot of
Speaker 1: market participants this week is how quickly liquidity evaporated in
Speaker 1: some of the world's largest markets, which we would expect
Speaker 1: to have liquidity at times of stress, and it just
Speaker 1: was not there. The Italian bond market is one of
Speaker 1: the largest bond markets on the planet, and what clearly
Speaker 1: happened this week was a move sparked by politics, but
Speaker 1: amplified by the complete evaporation of liquidity. How concerning is
Speaker 1: that for you, professor, and what's the lesson that we
Speaker 1: can learn from this week? It is definitely concerning. It
Speaker 1: reminds me of the temper tantrum that took place a
Speaker 1: few years back, when the night just started to announce
Speaker 1: that you will start increasing rage. I think that what happened,
Speaker 1: in my view, is that a lot of people were
Speaker 1: long on Italian bombs, not because they believed in Italy,
Speaker 1: just because was the highest security around and as a result,
Speaker 1: we're ready to rush to the door for the first
Speaker 1: at the first sign of problems. So I think that
Speaker 1: we have seen the effects of this reaching for il
Speaker 1: which is as we know, tend to be the stabilizing
Speaker 1: and I think to some extent this book has been
Speaker 1: useful because as all people, that is not a one
Speaker 1: way back and they can actually lose money, and so
Speaker 1: I'm sure that they're going to be more careful in
Speaker 1: the future. Luigi, one final question, if we could have
Speaker 1: you made plans to attend the World Cup this summer?
Speaker 1: One World Cup this year? Don't you know that, professor? Professor,
Speaker 1: there is a more important question for you. Would you
Speaker 1: accept the positioners finance minister in Italy? It was that
Speaker 1: would be a more important question. Nobody has offered it
Speaker 1: to be, so you can give me a shoa that
Speaker 1: I would be watching their the world happen well. But
Speaker 1: within this Luigi to Mr Farrow's important question, Carlo Cardarelli
Speaker 1: has been a wonderful and sustained guest on Bloomberg Surveillance
Speaker 1: over the years with his fiscal work and original work
Speaker 1: at the International Monetary Fund. To see Mr Cardarelli and
Speaker 1: Zingalis in tandem in Italy, would I would suggest lift
Speaker 1: the spirit of markets? Is that politically feasible in your
Speaker 1: Italy to have academics associated with this phrase technocrats really
Speaker 1: run the show? Is that feasible? So first of all,
Speaker 1: I don't think that being on Bloomberg is necessarily the
Speaker 1: stat to go to become minister. That's Joli, a prerequisite, Luigi, you,
Speaker 1: I'm sure, but the reality is actively I respect uh
Speaker 1: calibery badge. We have different views on many things, so
Speaker 1: I don't think that all technicals think to stay the same.
Speaker 1: And I think that it is important in my view
Speaker 1: to feel the pain that is around in Italy. And
Speaker 1: I think people underestimate how devastated the country is. Twenty
Speaker 1: years of no growth in a cap almost fifty of
Speaker 1: youth and employment. I think that this is that this
Speaker 1: is a country that has lost hope and forget the
Speaker 1: World Cup. I think that people are not even dataset
Speaker 1: about that because there are much bigger problems around. And
Speaker 1: I think that whether you're a technocrat or not, I
Speaker 1: think that what people want is somebody ruling them that
Speaker 1: feel that pain. Professor sing Goes, thank you so much
Speaker 1: for those important comments, particularly on your Italy. We greatly
Speaker 1: appreciate his attendance. He is Uh, of course with the
Speaker 1: Booth School, University of Chicago as well. Luigi as in,
Speaker 1: this is without question our interview of the day and
Speaker 1: is without question timely as we may see further tariffs
Speaker 1: today from the White House. Donald stras, I'm essentially invented
Speaker 1: China market economics, darkening the door of Mary lynch warton
Speaker 1: economics and others over the years, including the Milk and Institute.
Speaker 1: He is with Mr Hyman over at Evercore I s
Speaker 1: I and continues a true focus on China. Who was
Speaker 1: the first premier or president of China that you dealt
Speaker 1: with professionally? You don't go back to mount right. No,
Speaker 1: John Zaman, who was uh in the nineties. Uh, he was.
Speaker 1: He was a smart guy, UM focused um any consensus builder.
Speaker 1: Now we are back to Chairman Mao days. Uh political
Speaker 1: strong man rule under Jin Ping. Uh. It's not uh,
Speaker 1: not my idea of a good time. Can you explain
Speaker 1: to me how Mr g reacts to the bipolar advice
Speaker 1: that Mr Trump is getting, maybe personified by one view
Speaker 1: of free trader Lawrence Cudlow and another by Navarro singularly
Speaker 1: saying China is not evil but unfair in their trade. Uh.
Speaker 1: He listens uh politely. He and his team Uh Wangchi
Speaker 1: Shan who's a vice president, and Liu Hu who was
Speaker 1: a guy at DAVA and is in charge of the
Speaker 1: U S. John economic and financial relationship. Um, they listen politely,
Speaker 1: but they don't react to tweets. They don't react to
Speaker 1: speeches too, reports. They react to actions. So wait until
Speaker 1: you see Washington do something. Then you react, but not before, don't.
Speaker 1: I read this term in the last twenty four hours,
Speaker 1: and I think it was in the Li Times. It
Speaker 1: was microwave diplomacy. I think it's a fantastic term. Microwave
Speaker 1: diplomacy short quick. You know, we used to diplomacy happening
Speaker 1: over time, over years of a decade, with with goals
Speaker 1: of a long time horizons. This is very fast high heat.
Speaker 1: Does microwave diplomacy worked on I doubt it. I mean
Speaker 1: I I heat up my uh my cold coffee and
Speaker 1: a microwave now, and I guess twenty years ago, if
Speaker 1: I did it in a regular avenue would have taken
Speaker 1: a lot longer. I suppose it still works. Okay, but uh,
Speaker 1: I think, uh China, it looks at washing and I think,
Speaker 1: and they see, um, they don't see policy, they see results.
Speaker 1: They see flip flop. They don't know what way to move,
Speaker 1: and so accordingly they were wait until Washington does something
Speaker 1: and then they react. Is it good? To keep China
Speaker 1: on the back foot, and he's China on the back
Speaker 1: foot right now. I don't think China is on the
Speaker 1: back foot right now. Uh. Some people have said that Washington.
Speaker 1: I've said that China. See is Washington is unreliable and
Speaker 1: uh unpredictable, and I think it means unreliable and untrustworthy. Uh.
Speaker 1: This last week, Um, we said we the US said
Speaker 1: we're go. We will impose the fifty billion dollars worth
Speaker 1: of tariffs. Will not. Maybe that's drawing a line in
Speaker 1: the sand and maybe being unpredictable as a point guard
Speaker 1: is okay to go either way, but not in international relationships.
Speaker 1: Done the difference here? And John, I just I just
Speaker 1: did this in real time, Folks. When I say go
Speaker 1: to China, it's a bunch of Bologney. I get on
Speaker 1: a plane, I get in a car and go to
Speaker 1: some fancy hotel. I'm within a football field of the hotel,
Speaker 1: a soccer field, John, and then I get back in
Speaker 1: the fancy car and come home. This time I actually
Speaker 1: went into China, but I didn't go to cheng Do.
Speaker 1: How is all this playing across all of industrial China,
Speaker 1: not in Beijing, not in Shanghai not in a long
Speaker 1: called how's it playing every place else? Well, companies throughout
Speaker 1: China who are involved in international trade and and all
Speaker 1: are in one way or another UM are perplexed. They
Speaker 1: don't know what to do. Uh, there's this great deal
Speaker 1: of uncertainty because their biggest trading partner in the world
Speaker 1: is on an an uncertain path. Uh. So what do
Speaker 1: you do when you're uncertain? You run in place. You
Speaker 1: don't make long term commitments because you don't know whether
Speaker 1: the step that you take is going to ultimately be
Speaker 1: a step forward or back within This is the American feeling.
Speaker 1: A lot of our listeners are saying, right, John, you've
Speaker 1: been I give John for a huge credit for articulating
Speaker 1: the frustration over there taking of our technology. Liz Economy
Speaker 1: really features us in her book The Third Revolution of
Speaker 1: how they're appropriating our technology? How do you respond to that?
Speaker 1: Are they? Are they bad guys that we can't play
Speaker 1: there unless we give them patent and copyright. I think
Speaker 1: China has been a serial um uh intellectual property, a thief,
Speaker 1: probably the biggest in the world, the best in the
Speaker 1: world for a long time. I don't think that's likely
Speaker 1: to change. Excuse me, we're it can be a hat
Speaker 1: trick off. Okay, there you go. Uh, that's not gonna
Speaker 1: change in any material way. I think the forced technology
Speaker 1: transfer as a completely non Uh, that's a non item.
Speaker 1: No company is worse to operate in China, but if
Speaker 1: they do, they have to follow China's rules. No companies,
Speaker 1: Chinese companies are not forced to operate in the US.
Speaker 1: If they do, they're going to follow the US rules.
Speaker 1: I think that's a non item. Uh. And three oh
Speaker 1: one tariffs are not going to help this. They are
Speaker 1: a step back. They are a lose lose, not a
Speaker 1: win lose or a lose win or a win win.
Speaker 1: They are a lose lose lose loses the red both sides.
Speaker 1: They're not forced to operate there though done. But the
Speaker 1: problem arises when the barriers to entry for Chinese companies
Speaker 1: in the United States are much lower than the barriers
Speaker 1: to entry for the United States into China. And I
Speaker 1: think it makes sense that we have an administration in
Speaker 1: the United States that tries to level the playing field.
Speaker 1: That makes sense. Surely, sure isn't that what they're trying
Speaker 1: to do. I think that is what they are that
Speaker 1: they're trying to do. We'll see how successful they are
Speaker 1: at it. China is has a very different UH strategy
Speaker 1: that state cap realism. Unlike ours, it has its pluses
Speaker 1: and within this UH done stress, I mean, if you're
Speaker 1: just joining us with a S. Donald Within this is
Speaker 1: the labor arbitrage that Steve Roach has talked about it
Speaker 1: years at Morgan Stanley and Yale, which is that marginal
Speaker 1: labor dollar in China migrating to Vietnam, migrating to other
Speaker 1: Asian geographies maybe Malaysia is one example. Give us an
Speaker 1: update on how China competes in a more advanced labor wage. Well,
Speaker 1: the uh this is exactly what is happening is but
Speaker 1: this is not not new. Is the the medium scale
Speaker 1: manufacturing jobs, the low scale manufacturing jobs are migrating, have
Speaker 1: migrated to the lower wage economies that will continue on
Speaker 1: from Vietnam to Africa and so forth. At the high end,
Speaker 1: our my own view is our USK through twelve education
Speaker 1: system is completely broken. China's is the best in the world.
Speaker 1: And what China has more than anything else is human
Speaker 1: capital that is of great value and importance. Alway goes
Speaker 1: a minute a half lift, Have done stress, I might
Speaker 1: want to talk about pollution. Can a totalitarian structure find
Speaker 1: the incentives to diminish air and water pollution? Or is
Speaker 1: that really want? An open capitalistic system is good at
Speaker 1: um Either side can do that. China, I think does
Speaker 1: not use the pricing UH tool well as they could
Speaker 1: on environment the force tool. Can they force? Sure? They
Speaker 1: can um uh And they are doing that. And I
Speaker 1: will tell you that I think the most important economic
Speaker 1: dynamic in China for the next twenty years is environmental
Speaker 1: preservation and remediation. They know they have to clean it up.
Speaker 1: They have to do that for their own self preservation.
Speaker 1: Is the leadership at the margin? Is it finally getting
Speaker 1: better air quality? In UH? Fifty cities in China? Biggest
Speaker 1: ones are down air quality. The air quality index is
Speaker 1: down from five years ago. It's still bad, but it's
Speaker 1: much better than it was. We continue to improve. Don stress,
Speaker 1: I'm thinking so much with the evercres I s I
Speaker 1: on China, Gino Martin Adams, with them, We're gonna really
Speaker 1: dig down here now into much more technical discussion of
Speaker 1: the equity markets. We do this for the cf A
Speaker 1: crew staggering late June UH and you know, see if
Speaker 1: a one, two, three, four, five, six. Where in the
Speaker 1: accounting statement is the dynamics that interest you the most
Speaker 1: in American corporations. I think it's a really good question,
Speaker 1: because what we've seen over the last several years is
Speaker 1: actually a migration of investor attention up the income statement
Speaker 1: toward the balance sheet. Right, so investors are actually paying
Speaker 1: for sales beats and uh discouraging sales misses more so
Speaker 1: than they're paying for earning speats and discouraging earnings misses
Speaker 1: in stock price reactions. We also see over the longer term,
Speaker 1: companies that are reporting consistent and robust sales growth. So
Speaker 1: companies with five year average sales growth that exceeds the
Speaker 1: market are outperforming companies with five year slower sales growth,
Speaker 1: and we're not seeing that extreme distinction on the part
Speaker 1: of earnings. You see it with cash flow as well,
Speaker 1: So cash flow like sales towards the top the upper
Speaker 1: end of the income statement, definitely providing performance. And then
Speaker 1: I also think the other thing to talk about is
Speaker 1: the balance sheet. When we've seen over the last year,
Speaker 1: in particular, is investors paying up for companies with lower
Speaker 1: debt or lower leverage ratios and certain punishing companies that
Speaker 1: have utilized debt to a large degree, to the extent
Speaker 1: that their debt to EBITDA is above average, and especially
Speaker 1: the companies with debt to EBITDA ratios well above average
Speaker 1: have actually underperformed substantially. From where you sit, the synthesis
Speaker 1: of all Bloomberg intelligence, what is the dynamic if yields
Speaker 1: lift to that debt burden. It's not linear, it's it
Speaker 1: is anywhere near where it is an inertial force. It
Speaker 1: really causes angst, not yet, because a lot of the
Speaker 1: debt is actually secured at long term low interest rates
Speaker 1: that do not reset. So that the positive aspect of
Speaker 1: this exactly so, even though rates are going higher, the
Speaker 1: companies are not experiencing a tremendous amount of pressure on
Speaker 1: their current debt. They can certainly sustain payments on that
Speaker 1: debt with earnings accelerating. The problem becomes later in the
Speaker 1: cycle if rates reset higher on a more permanent basis,
Speaker 1: say five years from now, when companies go back to
Speaker 1: tap the debt market, they're going to have to pay
Speaker 1: a lot more for new debt. They're gonna have to
Speaker 1: pay a lot more for that maturing debt to refinance
Speaker 1: the debt. The other thing that I think is really
Speaker 1: interesting is in the tax package that was passed in December.
Speaker 1: There's inherently a component of it that disincentivizes debt use.
Speaker 1: Because companies have been able to write off their interest
Speaker 1: expense UM when it comes to their tax bills for
Speaker 1: several years now, there's been a tremendous incentive to utilize debt,
Speaker 1: which explains partially at least why debt has grown as
Speaker 1: much as it has. As part of the tax component
Speaker 1: or a tax package, this year, they will only be
Speaker 1: able to write off, of UM that interest expense to
Speaker 1: the extent that that interest expenses percentage of underlying earnings,
Speaker 1: and going forward that will be the percentage that they
Speaker 1: can write off will become less and less over time. Yeah,
Speaker 1: so we're starting to disincentivize debt, which you know depends
Speaker 1: on if this tax reform becomes permanent. Right It's it's
Speaker 1: there's a lot that can happen in the next several years.
Speaker 1: But I think as rates rise, if we are going
Speaker 1: to continue to disincentivize debt, that could very much change
Speaker 1: the funding structure of companies as well. Something to look
Speaker 1: out for in the longer term, where is the tax
Speaker 1: dividend going the tax dividends, so that the extra cash, Yeah,
Speaker 1: it's for the most part so far going towards capital
Speaker 1: spending plans. Right, I wouldn't go so far as to
Speaker 1: say that we've actually deployed a lot of that extra
Speaker 1: cash or the savings from tax. Initially, companies suggested that
Speaker 1: they were going to pay it out in the form
Speaker 1: of wage increases, bonuses, one time bonuses to employees. And
Speaker 1: through the course of the first quarter earning season, which
Speaker 1: we just completed, what we found is companies starting to
Speaker 1: announce capital spending plans. In Mass we saw the capital
Speaker 1: spending the next twelve months. Capital spending growth is now
Speaker 1: expected to accelerate eighteen percent, for example, and we've been
Speaker 1: running at a pace below ten percent for the last
Speaker 1: year or so. So there is an evolution of um
Speaker 1: potential capex growth playing out through the earning stream. The
Speaker 1: company announcements. There's a little bit of buyback growth, so
Speaker 1: they are starting to deploy it back to shareholders, though
Speaker 1: I'd say that it's pretty slow in coming and it's
Speaker 1: very narrow, not that many companies are announcing it. Though
Speaker 1: we are seeing buy back growth accelerate, and some companies,
Speaker 1: such as energy companies for example, have really been ahead
Speaker 1: of this. They've started to deploy capital in the form
Speaker 1: of buybacks and dividends where they hadn't in past years.
Speaker 1: So this sounds positive on the debt side because there
Speaker 1: might be less issuance on the equity side because it
Speaker 1: should lengthen the cycle. Um if we do get this
Speaker 1: camp X story and supply side response when you have
Speaker 1: a fragile story internationally in a m now increasingly so
Speaker 1: in Europe too, do we see a buy America theme
Speaker 1: come back into this market in a way that we
Speaker 1: had things in say the back end early seven seen.
Speaker 1: Oh it's interesting because we have actually seen that the
Speaker 1: small cap stocks have outperformed tremendously. When we talk about
Speaker 1: large cap stocks have sort of been stuck in this
Speaker 1: malaise for the last two weeks, just stuck at their
Speaker 1: Hunter day moving every ridge relatively volatile on recent news.
Speaker 1: But small caps are making new highs. Microcap stocks are
Speaker 1: making new highs. So the companies that are more domestically focused,
Speaker 1: the companies that benefit when the dollar rallies that are
Speaker 1: more sheltered from international risks are absolutely doing better. It's
Speaker 1: that also going to mean a switch from from growth
Speaker 1: to value as well, given that those growth names are
Speaker 1: international by by definition on the spire, So normally it
Speaker 1: would and it really intriguingly has not yet. So you
Speaker 1: would think that the recovery and small caps, the recovery
Speaker 1: and dollar focused companies, the recovery and the domestic names
Speaker 1: would start to produce a shift in value stocks in
Speaker 1: the SMP five hundred, and we have not seen that
Speaker 1: in mass yet. As a matter of fact, that financials
Speaker 1: in the SMP five have been one center of extraordinary
Speaker 1: weakness in this environment. It's a it's a big conuntry
Speaker 1: circle back to the income statement. Is that I mean
Speaker 1: Charles Peabody is been brilliant on this portalent. Pebody was bullish,
Speaker 1: bullersh look like a genius. He flips to more negative.
Speaker 1: Now he looks like a genius. And is it because
Speaker 1: of a real question or revenue shortfall? I think it
Speaker 1: is for the top line companies, that's at least part
Speaker 1: of it. But the financials and the small caps are
Speaker 1: doing very well. So what I think is happening is
Speaker 1: the small cap financials are doing well because they're perceived
Speaker 1: to benefit from deregulation and wave. They're also still lending
Speaker 1: and lending to lower credit quality borrowers where the large
Speaker 1: camps have been extraordinarily conservative and they're exposed to more,
Speaker 1: they're supposed to the international story, and they're not producing
Speaker 1: that extraordinary top line. One minute left with all of
Speaker 1: your experience at Wells fargoing now at Bloomberg is simply
Speaker 1: what is the pixie dust of Amazon? Where they're valued
Speaker 1: not on profits? Where did that come from? Well, I
Speaker 1: think it comes from a desire for long term secular growth.
Speaker 1: So there industry cap there, there is a belief that
Speaker 1: a certain subset of companies are going to produce long
Speaker 1: term secular growth prospects that don't exist elsewhere in the index,
Speaker 1: elsewhere in the economy, and those companies are largely concentrated
Speaker 1: in the Internet space is a big theme. Amazon is
Speaker 1: one of them, Facebook is another. Twitter as another. Right,
Speaker 1: So you've got this whole subset of companies that has
Speaker 1: this investor following because of their long term outlook, which
Speaker 1: doesn't exist in a lot of places. We've got to
Speaker 1: have you back before the CFA exams. We're gonna do
Speaker 1: five ratio DuPont and analysis of Gina Martin Adams here
Speaker 1: in about ten days, you can I have to explain
Speaker 1: what BTPs and you get to say that. I think
Speaker 1: that's a good point. I think I think I've been
Speaker 1: checked there. We call that shade. Yeah, that was like
Speaker 1: the Big Chefs five ratio shade right there, Gina Martin
Speaker 1: Adams ahead of all of equities. Boomberg Intelligence thrilled. Ever,
Speaker 1: Deutsche Bank cannot find a bit. It's as simple as that.
Speaker 1: Four days ago we're down a good ten percent, almost
Speaker 1: eleven percent on a euro basis, we are a ten
Speaker 1: and change down to about with the news the ft
Speaker 1: article that we have. Deutsche Bank is a problem bank.
Speaker 1: We've moved and we're now trying to find a bit
Speaker 1: at nine on Deutsche Bank. Catherine Man with us right now.
Speaker 1: We're going to continue with this discussion even as we
Speaker 1: want to talk banking. Of course, doctor Man cannot speak
Speaker 1: to us about UH financials and banks in particular. But
Speaker 1: there's too much else to talk to Kathy Man about
Speaker 1: at this moment um. I have to rip up the script,
Speaker 1: doctor Man and go back to your iconic book. Is
Speaker 1: the Trade deficit Sustainable? Mr? Trump, believes it is sustainable
Speaker 1: in this moment where we may seem new in complex
Speaker 1: tariffs across different nations. From the White House, if Donald
Speaker 1: Trump was to read your classic, small book, easily digestible
Speaker 1: and three plane trips, what would he learn? What does
Speaker 1: he need to learn from your classic? Is a trade
Speaker 1: deficit sustainable? So I think it needs to learn that. Um,
Speaker 1: there are two sides of the trade deficit. One is,
Speaker 1: of course the goods and services, but the other side
Speaker 1: is capital flows. UM. And the two sides of the
Speaker 1: same coin. And if you try to squeeze one side
Speaker 1: through protectionist measures, you have to be concerned about what
Speaker 1: signal that sends to financial markets about the welcoming nature
Speaker 1: of business in the United States. Uh. So, I think
Speaker 1: that that's the important ingredient, because you can't be protectionist
Speaker 1: on the side of trade and at the same time
Speaker 1: welcome international capital flows. So the surprise then could be
Speaker 1: dollar dynamics. Is that where we observe his strategy. Let
Speaker 1: you see it with a strong dollar that surprises all. Well,
Speaker 1: I think that the strong dollar or the dollar dynamics
Speaker 1: are are driven by a whole lot of things. UM.
Speaker 1: Relatively stronger US economy, right now because of the degree
Speaker 1: of fiscal stimulus, no question about that, particularly visa the Europe,
Speaker 1: which is going through a number of issues. Uh. And
Speaker 1: when we think about the consequences for protectionism, UH, you know,
Speaker 1: there's a there's a lot of rhetoric out there that
Speaker 1: UM is perhaps actually going to be backed up by
Speaker 1: by changes in policy on the steel side, with the
Speaker 1: new rhetoric on two three two with cars. You know,
Speaker 1: you've got the issues with Iran UM and so all
Speaker 1: of that is uh tempering the growth in Europe more
Speaker 1: than it is helping the growth in the United States.
Speaker 1: Doctor man, time for one more question before we go
Speaker 1: to this important financial story away from your good word
Speaker 1: a good city group and and and that is the
Speaker 1: idea that maybe we've seen coordinated growth, combined growth ebbing.
Speaker 1: Do you observe that across your global mandate. Well, we've
Speaker 1: got it. We've got we've got the synchronized growth rate
Speaker 1: of the last two years continuing for this year. Uh,
Speaker 1: it could continue for next year. But there there are
Speaker 1: cracks in that synchronicity. UM. And that you know is
Speaker 1: coming from the trade rhetoric, and that possibly the trade war,
Speaker 1: but it is also coming from um financial market turbulence
Speaker 1: that is part of the normalization of monetary policy, and
Speaker 1: that has you know, we have to have the normalization
Speaker 1: of monetary policy. UH. It's been a very long time
Speaker 1: with very money and so that financial market turbulence and
Speaker 1: how it translates into the real economy is something that
Speaker 1: is going to be differential acrost countries. Dr Man, thank
Speaker 1: you so much, Katherine Man, and we're too rude with
Speaker 1: her today ahead of all of global economics for City Group,
Speaker 1: as we have to move on to breaking UH news.
Speaker 1: In course Kathy Man and there mentions the idea of turbulence,
Speaker 1: it is a good time to turn to Gerard Cassidy
Speaker 1: with decades of banking analysis, experience, experience with OURBC capital markets. UH.
Speaker 1: Jared Cassid, Jered Cassidy, wonderful to have you with us today.
Speaker 1: What does it signal to Deutsche Bank that they have
Speaker 1: become a problem bank? According to the U s f
Speaker 1: D I C is, this company has struggled with the
Speaker 1: sacraft process. As you know, that's the annual stress test
Speaker 1: that the banks have to go through and they've not
Speaker 1: been able to pass it for the last couple of years.
Speaker 1: So it's no big surprise this news leaked out. Normally,
Speaker 1: these ratings by the bank regulators. They are part of
Speaker 1: the rating system called CAMEL, which is an acronym and
Speaker 1: it's one trough five. If you're a four or five,
Speaker 1: you're a troubled bank, which is apparently what came out
Speaker 1: this morning, as you pointed out, with Deutsche Bank. So
Speaker 1: it means that this heavy lifting still to be done
Speaker 1: so that they get their internal house in order here
Speaker 1: in the United States, Jered, what does this mean to
Speaker 1: a bank to see the decline and shares? We have
Speaker 1: a ten percent decline off of the pre italy moment,
Speaker 1: there's a fact where the stock price is a stock price.
Speaker 1: Do institutions, including the boards of directors of a given bank,
Speaker 1: do they care when they see a stock drop like this,
Speaker 1: and particularly drop into the single digit area, Tom, I
Speaker 1: think they do. I mean they have to take notice
Speaker 1: of any big stock price the clients, and so we've
Speaker 1: seen deutger has struggled as you and I have noticed
Speaker 1: all the last many years, and this is just another
Speaker 1: challenge that they have to confront. And so the steep
Speaker 1: price decline, of course is troublesome. It's something that they
Speaker 1: have to address um possibly come out with the public
Speaker 1: statements to address it. So what's so important here? And
Speaker 1: I guess it goes back to the memories of another
Speaker 1: time and place not to be inflammatory, which is all
Speaker 1: slams in Gerard Cassidy to the short term paper market,
Speaker 1: pim Fox likes to talk about counter party risk and
Speaker 1: other ideas. Maybe it's commercial paper, short term paper. Come on, Jerry,
Speaker 1: it's all about trust. Where's the trust now on the
Speaker 1: desk of Deutsche Bank. No, No, you're right. There's certainly
Speaker 1: a confidence factor that you have to address. Certainly, this company,
Speaker 1: you know, consolidated, is well capitalized. This is nothing like
Speaker 1: what we saw. Yeah, but that's a distinction, Gerard Cassy,
Speaker 1: This is important. This is a distinction between liquidity and solvency.
Speaker 1: Discuss that, please, what's the difference for our audience between
Speaker 1: a given major banks liquidity and their solvency? No time,
Speaker 1: You're absolutely right. In fact, you know, the liquidity problem
Speaker 1: was why they eventually put UM meaning Brothers into the
Speaker 1: position and they ended up failing. But because of what
Speaker 1: we saw No. Seven oh eight, Deutscher and all the
Speaker 1: global banks have addressed the amount of liquidity they need
Speaker 1: to carry because of the new BOSSAL requirements. So all
Speaker 1: of our banks, even banks that are considered to be troubled,
Speaker 1: and with this troubling too, with what came out, it's
Speaker 1: in my view it looks like it's more the internal um,
Speaker 1: internal systems and the internal reporting have to be really improved.
Speaker 1: It's not in measure of not having liquidity or capital
Speaker 1: that I'm not. There's not really the issue. So there's
Speaker 1: plenty of aquidity here for any you know, for Douga
Speaker 1: Bank and again all our global banks because of what
Speaker 1: the regular is they've done past two thousand and eight
Speaker 1: and two thousand and nine. But then they go back
Speaker 1: to the stock price. If you're just joining us folks worldwide,
Speaker 1: we're wanted to bring a Gerard Cassidy RBC Capital Markets
Speaker 1: for a few more minutes, pre Italy ten point five
Speaker 1: zero euros and we're now down to nine point four
Speaker 1: four euros. We found a modest bid here to be
Speaker 1: retested in the coming excuse me, in the coming uh minutes,
Speaker 1: Gerard Cassidy, I want to go back to the stock price.
Speaker 1: Who's selling is this hedge funds? Is this speculators? Is
Speaker 1: this long only by side institutional clients who are either
Speaker 1: selling or they're being told by their general counsel to sell. Yes,
Speaker 1: it's tough to determine who the sellers are. Certainly it
Speaker 1: is we've seen, um the active traders, the hedge fund
Speaker 1: traders certainly will move very quickly on news like that.
Speaker 1: But again it's hard to really determine, you know, unless
Speaker 1: there's huge blocks going across and and the trading desks
Speaker 1: tell us you know that it was a long only,
Speaker 1: so it's really hard to determine who's telling. But again,
Speaker 1: as you know that this company is struggling with many issues,
Speaker 1: this is just more of the more recent ones, obviously
Speaker 1: this morning, but they are still wrestling with how do
Speaker 1: they downsize their capital markets business and in the number
Speaker 1: of employ years let go that is also reading on
Speaker 1: this story. Very valuable to direct cast Andy, Thank you
Speaker 1: so much with OURBC Capital Markets on short notice here. Yeah,
Speaker 1: thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene. Before
Speaker 1: the podcast, you can always catch us worldwide. I'm Bloomberg
Speaker 1: Radio