WEBVTT - Surveillance: Big Bank Earnings With Bianco 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily 0:00:13.960 --> 0:00:17.560 we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:27.440 Bloomberg dot Com, and of course on the Bloomberg. George 0:00:27.520 --> 0:00:31.240 Rusnack joins us right now. George, it's real simple. I 0:00:31.360 --> 0:00:35.559 looked at the UK two year yield today and I 0:00:35.560 --> 0:00:38.760 couldn't go la rhythmic because it's a negative yield. But 0:00:38.880 --> 0:00:42.440 the math is real simple. It is a persistent trend. 0:00:42.960 --> 0:00:46.239 How grinding is this bond market? And does it Does 0:00:46.280 --> 0:00:49.720 it indicate for you that the US tenure yield could 0:00:49.720 --> 0:00:53.320 grind ever lower, it could grind glower here We've been 0:00:53.360 --> 0:00:55.360 in a range here for quite a while, Tom, So 0:00:55.600 --> 0:00:59.120 since June five, where he hit roughly eighty nine basis points. 0:00:59.160 --> 0:01:01.760 We've been sort of this sixty seventy five basis point 0:01:01.840 --> 0:01:04.360 range for the last month or so. We think it's 0:01:04.360 --> 0:01:06.760 going to probably stay in that range. Unfortunately, over the 0:01:06.840 --> 0:01:08.840 longer term, we do think it might trend a little 0:01:08.880 --> 0:01:11.240 bit higher. And a little bit higher is only ten 0:01:11.319 --> 0:01:14.560 twenty basis points, but quite frankly, Tom a ten basis 0:01:14.600 --> 0:01:17.560 point move higher in tenure rates is a negative one 0:01:18.400 --> 0:01:21.320 return for investors here. So that's the challenge that investors 0:01:21.319 --> 0:01:23.760 are facing right now, is that they're just really with 0:01:24.200 --> 0:01:27.240 yields so low they actually just a small backup and 0:01:27.319 --> 0:01:30.839 cause a pretty significant negative yield and negative return for clients. 0:01:30.840 --> 0:01:32.640 But George has been fascinating to see what happens at 0:01:32.640 --> 0:01:34.080 the front end. But of course the front end is 0:01:34.160 --> 0:01:37.560 high persensitive to expectations about the policy right. What's been 0:01:37.560 --> 0:01:39.840 more interesting for me, it's what's happening down the longer nd. 0:01:39.840 --> 0:01:42.200 But Michael JP. Morgan thinks that here in the United 0:01:42.240 --> 0:01:45.640 States we can converge down towards the policy right on 0:01:45.680 --> 0:01:48.240 a ten year maturity in the treasury market and to 0:01:48.280 --> 0:01:49.920 be clear, but not far off those levels. Do you 0:01:49.920 --> 0:01:53.520 think that can happen, George, it's feasible, John. We don't 0:01:53.560 --> 0:01:56.040 think necessarily that's going to happen. That's not our base 0:01:56.080 --> 0:01:59.880 case scenario. It's feasible, though, And certainly what's happening here domestically, 0:02:00.040 --> 0:02:03.120 we're catching up to international what we're seeing overseas in 0:02:03.160 --> 0:02:06.320 Europe and Japan, and that's that's actually not a good 0:02:06.360 --> 0:02:08.320 thing for US. So we actually like the fact that 0:02:08.360 --> 0:02:11.079 the yolkerve is actually widened a little bit and more 0:02:11.080 --> 0:02:13.280 specifically a steep in a little bit. That's something that's 0:02:13.280 --> 0:02:15.600 a healthy thing for the economy. That is part of 0:02:15.600 --> 0:02:18.880 our base case forecast that continues. And again though, I 0:02:18.919 --> 0:02:20.840 think the key here is that it's going to be gradual. 0:02:20.840 --> 0:02:23.440 And I think the other key of why that's potentially 0:02:23.480 --> 0:02:25.519 gonna happen, John, is the idea of the issuance that's 0:02:25.560 --> 0:02:28.800 coming out. That was well absorbed last week, last last 0:02:28.800 --> 0:02:31.320 week's issuance, but going forward, it for means to be 0:02:31.360 --> 0:02:33.320 seen if that's going to happen, and the Feds actually 0:02:33.320 --> 0:02:35.680 gonna have to step in here from quantity of easing 0:02:35.720 --> 0:02:38.640 perspective to pick up on that, to stave off any 0:02:38.720 --> 0:02:41.239 kind of great tantrum that you could get if you 0:02:41.280 --> 0:02:43.440 don't see if you don't see them stepping again, George, 0:02:43.440 --> 0:02:46.640 Typically when benchmark government yields are this low, that is 0:02:46.720 --> 0:02:49.000 negative for the economy. Certainly we see a lot of 0:02:49.400 --> 0:02:52.680 dark clouds out there for the economic recovery, and yet 0:02:52.680 --> 0:02:54.720 a lot of people going further into risk with a 0:02:54.760 --> 0:02:58.359 preference even increasingly for high yield over investment grade. Why 0:02:58.440 --> 0:03:01.120 is this a good time to take credit risk at 0:03:01.120 --> 0:03:04.200 a time of so much skepticism about the recovery being 0:03:04.240 --> 0:03:07.720 expressed in government debt markets. It's a great question, Lisa, 0:03:07.720 --> 0:03:09.799 and we're actually in that camp as well. Believe it 0:03:09.880 --> 0:03:12.320 or not, we've been stepping into high yield a little bit. 0:03:12.320 --> 0:03:14.840 We're neutral on it overall. Right now, we're looking for 0:03:14.840 --> 0:03:17.440 opportunities to take on credit risk. And the reason why 0:03:17.639 --> 0:03:20.680 is right now you're actually getting compensated to take that risk. 0:03:21.000 --> 0:03:23.600 So in the past you had such tight spreads, there 0:03:23.600 --> 0:03:26.119 were no opportunities to do that. Even if the fall 0:03:26.200 --> 0:03:28.320 rates pick up just a little bit. Here you're getting 0:03:28.320 --> 0:03:30.840 compensated six and a half percent type yields and high 0:03:30.919 --> 0:03:34.160 yields you're looking at a five any type of spread. Historically, 0:03:34.200 --> 0:03:37.040 that's a good opportunity to get into that, even if 0:03:37.040 --> 0:03:39.520 it seems like a challenging time to get into it. 0:03:39.800 --> 0:03:42.840 We think over the long haul, those returns will offset 0:03:42.880 --> 0:03:45.040 any kind of volatility that you're gonna see, any kind 0:03:45.040 --> 0:03:47.000 of defaults that you're gonna see. We think it's a 0:03:47.000 --> 0:03:51.360 good opportunity. Investment grade corporates, HI corporates preferred to step 0:03:51.400 --> 0:03:54.200 into that risk. We think from an income perspective, there's 0:03:54.240 --> 0:03:56.360 just such a dearth of income out there that you're 0:03:56.360 --> 0:03:58.280 gonna see a lot of demand coming into that and 0:03:58.320 --> 0:04:00.920 that's going to support those levels despite some of the 0:04:01.000 --> 0:04:03.640 challenges that they might see financially, the spread you're saying 0:04:03.760 --> 0:04:07.000 sufficient to absorb the bankruptcies and the losses that are expected. 0:04:07.120 --> 0:04:10.119 Right now, we're seeing the highest default rate among US 0:04:10.240 --> 0:04:13.160 high yield debt in ten years, with it expected to 0:04:13.160 --> 0:04:16.320 go even higher. What kind of default rate is your 0:04:16.440 --> 0:04:20.080 analysis pricing in to make the five point eight percentage 0:04:20.080 --> 0:04:24.880 point yield cushion worth it? Right now, default rates are 0:04:24.960 --> 0:04:27.240 roughly between five and eight percent. Even if you go 0:04:27.360 --> 0:04:29.479 up to that eight percent level, we still think it 0:04:29.560 --> 0:04:32.320 makes sense to stay within high yield right now. You 0:04:32.400 --> 0:04:34.080 have to leg in. You have to be in there 0:04:34.080 --> 0:04:36.920 over the long term, and you're getting compensated. Look if 0:04:36.920 --> 0:04:38.960 you look at where else you go on the market, 0:04:39.000 --> 0:04:41.000 and this is a challenge that every client is facing 0:04:41.080 --> 0:04:44.239 right now. Pre COVID for fixed income, you could count 0:04:44.240 --> 0:04:46.480 on getting two things. You could get down count on 0:04:46.520 --> 0:04:49.760 getting good income and an offset to your risk portfolio 0:04:49.920 --> 0:04:52.360 going forward. You do not have to choose one or 0:04:52.400 --> 0:04:54.400 the other. You're gonna have to choose either the income 0:04:54.440 --> 0:04:56.760 component you're not going to get the risk off set, 0:04:57.240 --> 0:04:59.360 or you're gonna have to choose the risk offset, which 0:04:59.360 --> 0:05:02.920 is Treasury agencies, Asset Act mortgages, but you're not going 0:05:02.960 --> 0:05:05.320 to get the income. We actually think going for the 0:05:05.360 --> 0:05:07.839 income right here is making sense, and we think that 0:05:08.000 --> 0:05:09.920 actually more and more investors are going to be doing 0:05:09.920 --> 0:05:12.320 that and will support the high yield market. George, the 0:05:12.400 --> 0:05:16.640 backdrop here is a new statistic, and Greg Valier published 0:05:16.640 --> 0:05:19.480 it today, but many others have talked about it as well. 0:05:20.040 --> 0:05:23.240 It's all a lot of bond analysis. Again. What appears 0:05:23.279 --> 0:05:27.919 to be four trillion dollars of national debt, that's the 0:05:27.920 --> 0:05:32.039 new statistic, not to trillion, not three trillion, four four 0:05:32.279 --> 0:05:36.120 four trillion. What do you say to Wells Fargo clients 0:05:36.440 --> 0:05:40.160 who say, wait a minute, there's four trillion dollars out there. 0:05:40.400 --> 0:05:44.200 That's a number we've never perceived. It's scary, Tom. The 0:05:44.200 --> 0:05:46.359 amount of debt that we're taking on is very significant. 0:05:46.360 --> 0:05:48.600 The amount of stimulus that you're seeing in the marketplace 0:05:48.960 --> 0:05:50.920 is something that we haven't really seen before the two 0:05:50.960 --> 0:05:54.640 thousand and eight crisis. You saw roughly three trillion dollars 0:05:54.680 --> 0:05:59.320 in in fiscal stimulus. Over a two year time frame, 0:05:59.440 --> 0:06:02.920 you're gonna see two trillion dollars over a period in 0:06:02.960 --> 0:06:05.920 this so six times as much in stimulus. And you're right, 0:06:06.040 --> 0:06:08.240 that's a huge debt burden and that's going to cause 0:06:08.360 --> 0:06:10.960 challenges for us for time to come. But the reality 0:06:11.040 --> 0:06:13.080 is we need it. We need it right now. When 0:06:13.080 --> 0:06:15.040 you stop the economy, when you slow it down as 0:06:15.080 --> 0:06:17.800 significantly as you do, and you have the pandemic, you 0:06:18.000 --> 0:06:20.160 this is the time to be adding the fiscal stimulus. 0:06:20.200 --> 0:06:22.440 So we're doing the right thing both on the fiscal 0:06:22.520 --> 0:06:25.680 side and the monetary side. It's scary over the long term, 0:06:25.920 --> 0:06:27.680 but for the short term we really need that to 0:06:27.760 --> 0:06:30.200 jump start the economy, and over the long term we're 0:06:30.200 --> 0:06:32.279 gonna have to work for ways to pay that down. 0:06:32.360 --> 0:06:34.160 Well over a long term, I mean, can we do 0:06:34.200 --> 0:06:36.479 this with stability? I mean not only stability in the 0:06:36.520 --> 0:06:39.359 bond world, your world, but also Scott Rens world, the 0:06:39.360 --> 0:06:41.760 equity world as well. Do you see this as a 0:06:41.839 --> 0:06:47.600 stable processor. We're gonna have some volatility out there. Yeah, 0:06:47.640 --> 0:06:50.919 we do think more of the volatility Again, resilience is 0:06:50.920 --> 0:06:53.320 one of the key themes that we've talked about. Yeah, 0:06:53.400 --> 0:06:56.880 that's what we've talked about over both over our midyear 0:06:57.080 --> 0:06:59.760 and the idea that you know, yes there's a path back, 0:07:00.080 --> 0:07:02.400 that path might be quite a bumpy one, and so 0:07:02.440 --> 0:07:05.240 you're gonna see that within the stock market. Obviously, though 0:07:05.640 --> 0:07:08.040 we do still see sort of a neutral positioning. We're 0:07:08.160 --> 0:07:10.800 slightly favorite towards equities. We do think there's some good 0:07:10.800 --> 0:07:13.400 growth out there and are roughly forecasting about a three 0:07:13.400 --> 0:07:15.800 percent growth now and your end, Georgia gotta wrap up 0:07:15.840 --> 0:07:19.240 this conversation with a question that basically addressed the only 0:07:19.280 --> 0:07:21.640 thing that I think people like Lisa Branvits, Marco McKay 0:07:21.640 --> 0:07:25.560 and Molly Smith would be following, which is waste management 0:07:25.880 --> 0:07:28.480 debt bought by the Federal Reserve three million dollars worth 0:07:28.680 --> 0:07:30.559 at about a hundred and five cents on the dollar. 0:07:30.960 --> 0:07:33.440 It's just been redeemed a hundred of one cents. That's 0:07:33.440 --> 0:07:36.640 a loss for the Federal Reserve, the Central Bank loss 0:07:36.640 --> 0:07:41.160 says matter. I think right now, in the short term, 0:07:41.520 --> 0:07:44.400 they need to support stability, they need to support liquidity 0:07:44.440 --> 0:07:47.720 within the marketplace, and they're gonna have some losses. Unfortunately. 0:07:47.800 --> 0:07:50.080 Over the long term, I think they'll be in good shape. 0:07:50.280 --> 0:07:52.080 But I think you're right. Over the short term, there's 0:07:52.080 --> 0:07:54.400 gonna be some bumpings there, John, and they're gonna have 0:07:54.440 --> 0:07:57.560 to absorb that in order to get back to more liquid, 0:07:57.640 --> 0:08:00.520 well well operating market. And point frankly, they've done a 0:08:00.560 --> 0:08:02.840 good job of the short term. Yeah. We think of 0:08:02.840 --> 0:08:05.560 the long term things will pan out fine. Of last 0:08:05.600 --> 0:08:07.720 FAGA private bank, Joch always tried to catch up the other. 0:08:10.760 --> 0:08:14.800 David Bianco is going this family's dysfunctional. Mr Bianco's with 0:08:14.880 --> 0:08:19.240 the DWS America's and he joins us now with investment perspective. 0:08:19.560 --> 0:08:24.240 David Bianco Benjamin Bernanke's core theory was the financial system 0:08:24.280 --> 0:08:28.680 in any crisis must stay sound. Is the American financial 0:08:28.720 --> 0:08:33.600 system sound today? Yes, Tom Corning, it is sound. Um, 0:08:33.679 --> 0:08:37.200 there are challenges, but it's sound. And last recession, the 0:08:37.240 --> 0:08:41.160 banks for very much the patient. This time they are 0:08:41.559 --> 0:08:44.840 a medic. They are responding to the crisis. They're helping 0:08:44.880 --> 0:08:49.400 facilitate many federal programs. They are still providing credit. Uh, 0:08:49.440 --> 0:08:52.079 their earnings are under a lot of pressure. And although 0:08:52.080 --> 0:08:55.320 they're not the yeppie center of this recession in terms 0:08:55.360 --> 0:08:58.520 of being part of the cause, UH, they are still 0:08:59.520 --> 0:09:01.839 suffering quite a bit. Of the brunt and the low 0:09:01.920 --> 0:09:04.320 lost provisions which we saw in the first quarter and 0:09:04.640 --> 0:09:07.920 where will be more to come that is hitting the 0:09:08.240 --> 0:09:12.040 earnings as you see this morning. The big banks are 0:09:12.120 --> 0:09:15.240 getting through it in part because of fees from other 0:09:15.520 --> 0:09:18.400 capital markets oriented businesses that they have. But it's not 0:09:18.520 --> 0:09:22.160 easy for these big banks. They are making their contribution 0:09:22.320 --> 0:09:25.679 to UH to absorbing the costs of this pandemic of 0:09:26.040 --> 0:09:29.160 that society suffering. But it's good to be a big bank. 0:09:29.600 --> 0:09:31.679 And I think as the earning season goes on, you'll 0:09:31.679 --> 0:09:34.640 see if the challenges to smaller banks that are more 0:09:34.679 --> 0:09:38.840 dependent on that typical that interest income margin, that's even tougher, 0:09:38.880 --> 0:09:42.000 and it's gonna stay tough in this zero interest rate 0:09:42.080 --> 0:09:44.319 environment as far as the I can see. The implication 0:09:44.360 --> 0:09:47.640 in your comments perhaps is consolidation, if not in actual 0:09:47.800 --> 0:09:51.440 purchases of smaller banks in market share And is this 0:09:51.440 --> 0:09:53.920 this mean from your perspective, you want to buy the 0:09:54.000 --> 0:09:55.920 JP Morgan's of the world. You want to buy the 0:09:55.960 --> 0:09:59.120 strongest US banks right now given their beaten up valuations 0:09:59.120 --> 0:10:01.680 and given the scope for their consolidation of market share 0:10:01.720 --> 0:10:05.760 going forward. Within the bank's biggest is best um. A 0:10:05.840 --> 0:10:08.679 lot of people are moving the debate to should they 0:10:08.679 --> 0:10:13.679 own big banks versus um super cap tech. I think 0:10:13.679 --> 0:10:16.199 the portfolio should have at least equal weights, probably in 0:10:16.320 --> 0:10:18.360 both at this stage, to bring a little bit more 0:10:18.400 --> 0:10:21.680 balance between this growth first value dynamic that's been so 0:10:21.840 --> 0:10:26.720 extreme consolidation amongst things. The regulators would have to approve it, 0:10:26.840 --> 0:10:29.599 endorse it. Hopefully we don't have too much of that 0:10:29.640 --> 0:10:33.880 activity going on in voluntarily, because there will be some 0:10:33.920 --> 0:10:37.640 smarts that will have a very tough time should this 0:10:38.880 --> 0:10:42.559 challenge economy spell into one, and that's a real possibility, 0:10:42.880 --> 0:10:45.439 and the regulators are certainly asking the banks to consider 0:10:45.480 --> 0:10:48.199 that outlook. David Bianco, one of the hallmarks of your 0:10:48.240 --> 0:10:51.280 research for years is a bigger, broader perspective. You've got 0:10:51.280 --> 0:10:54.920 to overlay onto all of this talk of America and 0:10:55.000 --> 0:10:59.160 call it developed world markets China. Where do we stand 0:10:59.160 --> 0:11:02.000 out with this mentioned to China and how will that 0:11:02.120 --> 0:11:07.160 impinge on markets ADWS. We've been pretty bullish on China 0:11:07.240 --> 0:11:12.079 for quite some time. We recognize the country as its challenges, 0:11:12.200 --> 0:11:17.760 return on capital UM, many other types of UH progress 0:11:17.760 --> 0:11:20.120 that is making, as becoming a not just a heloped 0:11:20.160 --> 0:11:23.640 country but a leader in the world economy. UM there's 0:11:23.640 --> 0:11:25.880 this tension between the United States and China, which is 0:11:25.920 --> 0:11:30.200 an understatement which begs the question, should US investors be 0:11:30.320 --> 0:11:34.080 investing in China. We monitor this, but our answers yes. 0:11:34.160 --> 0:11:37.360 Our answer is whether it be investing in a currency 0:11:37.480 --> 0:11:39.000 that looks like it's going to be one of the 0:11:39.000 --> 0:11:43.640 world's more important currencies over the long term, in in companies, 0:11:43.960 --> 0:11:46.360 h and an economy that we think is an important 0:11:46.400 --> 0:11:48.640 part of the global economy for the longest time. We 0:11:48.679 --> 0:11:52.640 would simply argue, just go by China tech tech stocks. 0:11:52.720 --> 0:11:56.559 This rise of Eastern tech, not just the Western tech companies. 0:11:56.800 --> 0:11:59.920 These Eastern tech companies, you know who they are, their beheaming, 0:12:00.200 --> 0:12:03.679 They've performed just as well as our being of tech names. 0:12:04.160 --> 0:12:07.319 But at a time like this where the China economy 0:12:07.640 --> 0:12:11.760 is bouncing better since the virus and showing signs of 0:12:12.040 --> 0:12:14.600 its ability to grow, maybe at a slower piece, but grow. 0:12:15.240 --> 0:12:18.520 If you're looking for value stocks beyond technology, we would 0:12:18.520 --> 0:12:21.640 point you in the direction of China, maybe first their 0:12:21.679 --> 0:12:25.480 consumer and their healthcare stocks. Dare I say that even 0:12:25.520 --> 0:12:29.480 their financials, they're they're banks. I wouldn't make it a 0:12:29.520 --> 0:12:31.640 big part of the portfolio, but I think the currency 0:12:32.000 --> 0:12:34.520 and the interest rate environment in Asia being better than 0:12:34.559 --> 0:12:38.319 in the Western world. Chinese stocks belong in the portfolio. 0:12:38.679 --> 0:12:40.679 But I think what people struggle with is every single 0:12:40.679 --> 0:12:43.520 morning we could write the same headline, tensions rising between 0:12:43.520 --> 0:12:45.960 the United States and China. It's almost become a joke, 0:12:46.360 --> 0:12:48.480 except it Isn't You see the news out of the 0:12:48.559 --> 0:12:51.480 UK this morning, essentially kicking out Huawei. Over the next 0:12:51.480 --> 0:12:53.640 several years, towards the back end of the decade, you 0:12:53.679 --> 0:12:55.880 see what's happening in the South China Sea once again, 0:12:55.920 --> 0:12:58.120 that's become an issue, a much bigger issue in the 0:12:58.200 --> 0:13:00.880 last twenty four hours, David, No one knows what to 0:13:01.000 --> 0:13:05.240 do with that story anymore. What do you do with it? Well, 0:13:05.280 --> 0:13:07.960 a lot of these big macro pictures, we try to 0:13:07.960 --> 0:13:10.760 think about how to invest through them, around them, trying 0:13:10.760 --> 0:13:14.520 to keep perspective about what really matters to the stocks. 0:13:15.120 --> 0:13:17.440 Are you comfortable with the currency, are you comfortable with 0:13:17.480 --> 0:13:20.640 the business? Are you comfortable with the valuation? Uh and 0:13:20.640 --> 0:13:24.320 And in those simple questions, we are. And that's why 0:13:25.200 --> 0:13:27.120 China stocks are in the portfolio. And I think as 0:13:27.120 --> 0:13:29.880 time goes on, as people think about maybe ms C 0:13:30.000 --> 0:13:32.560 I EVA being a crucial part of the of an 0:13:32.559 --> 0:13:35.360 equity portfolio. I think Asia ex Japan is going to 0:13:35.440 --> 0:13:39.440 become an equally important and strategic weight in in in 0:13:39.760 --> 0:13:43.439 U S investors equity portfolios. But but look, as you said, John, 0:13:43.520 --> 0:13:45.640 unfortunately it's not a joke. It is real. There's a 0:13:45.640 --> 0:13:49.480 lot of tension between the US and China about the 0:13:49.480 --> 0:13:52.720 way the world should be a run and and and 0:13:52.800 --> 0:13:58.840 elements of of individualism and the country surrounding China. And look, 0:13:59.520 --> 0:14:02.400 this is this is something that won't go away. Most 0:14:02.559 --> 0:14:06.720 the US election issue. I think the United States, both 0:14:06.760 --> 0:14:09.679 sides of the aisle see the tension with China and 0:14:09.880 --> 0:14:12.360 and I have different ideas about how to deal with it. 0:14:12.800 --> 0:14:15.240 But this tension between the U S and China is real. 0:14:15.640 --> 0:14:18.800 It's not going away. As long as it doesn't expode. 0:14:19.040 --> 0:14:21.800 I do think it's investable for for U S investors. 0:14:21.920 --> 0:14:29.080 Devin Bianca of DWS Investments learning season a full swing 0:14:29.080 --> 0:14:31.560 and it's amazing on Gerard Kiss and the RBC Capital 0:14:31.600 --> 0:14:34.880 Markets really like Mr Mayo saying this is as bad 0:14:34.920 --> 0:14:38.440 as it gets, and he was quite forceful about better 0:14:38.440 --> 0:14:42.400 time to come, particularly looking out past two and three quarters. 0:14:42.720 --> 0:14:45.520 Someone to discuss this and provide broad market perspective is 0:14:45.600 --> 0:14:49.720 Gina Martin Adams. She is Bloomberg Intelligence chief equity strategist. 0:14:49.960 --> 0:14:52.520 But what she's really in charge of his courage more 0:14:52.560 --> 0:14:55.520 than anyone I know. She's never gone to cash. She's 0:14:55.600 --> 0:14:58.760 always participating in the market and that has been a 0:14:58.800 --> 0:15:02.200 good and good, h better than good outcome for Geno 0:15:02.240 --> 0:15:04.960 Martin Adams. If you have confidence to be in the 0:15:05.000 --> 0:15:08.000 markets right now, can you have confidence to be in 0:15:08.040 --> 0:15:12.800 the financial sector and the too big to fail banks specifically? Yeah, 0:15:12.840 --> 0:15:16.440 I think it largely depends upon your outlook for revenue growth. 0:15:16.440 --> 0:15:19.520 I mean, frankly, these are extremely discounted stocks at large. 0:15:19.520 --> 0:15:22.520 The financial sector when you look at the history has 0:15:22.560 --> 0:15:25.240 been training at an incredible discount for most of this year. 0:15:25.360 --> 0:15:29.360 Even though they bounced back significantly from March to early June, 0:15:29.920 --> 0:15:31.800 this is a group that's still training between one and 0:15:31.920 --> 0:15:35.960 happen to standard deviations below five year average. So you've 0:15:35.960 --> 0:15:38.080 got a discount available to you. It's really just a 0:15:38.200 --> 0:15:40.720 question of where do you think things are going to head, 0:15:40.800 --> 0:15:43.240 because in order for this group to outperform, it's got 0:15:43.240 --> 0:15:45.560 to get better revenue growth. That's been the sticking point 0:15:45.640 --> 0:15:48.760 throughout the cycle. Everybody focuses on the yield curve. But 0:15:48.840 --> 0:15:51.760 the reality is, when you look at the factors driving financials, 0:15:52.240 --> 0:15:55.120 it's that lack of revenue growth that's been incredibly important. 0:15:55.160 --> 0:15:57.960 So you've got to get some economic visibility, I think, 0:15:58.040 --> 0:16:00.200 to feel a little better about your investment Opportunit many 0:16:00.200 --> 0:16:02.080 in this space, and I went right to the revenue 0:16:02.080 --> 0:16:05.080 growth headlines folks that you see coming across the bloomberg, 0:16:05.160 --> 0:16:07.800 and it's real simple geno that has to get fixed. 0:16:07.800 --> 0:16:10.680 And the way it gets fixed is cost cutting. Forget 0:16:10.720 --> 0:16:14.600 about aggregate demand, forget about yield curve. Dynamics is one 0:16:14.640 --> 0:16:17.120 of their ways here, one of the factors to a 0:16:17.200 --> 0:16:21.480 better outcome. All these banks are going to start cutting costs. Yeah, 0:16:21.520 --> 0:16:23.840 they have. They really have no choice because revenue has 0:16:23.840 --> 0:16:26.160 been somewhat paltry. I mean they've got you've got JP 0:16:26.240 --> 0:16:28.680 Morgan and City out this morning talking about trading revenues 0:16:28.680 --> 0:16:32.920 extraordinarily strong. That certainly has been an offset to what's 0:16:32.920 --> 0:16:36.120 happening with the consumer books and the loans in general. 0:16:36.320 --> 0:16:38.600 But that is that big portion of sort of their 0:16:38.640 --> 0:16:41.760 core lending operations is a moss as a massive drag 0:16:42.280 --> 0:16:45.080 the result of slow growth. There is going to be 0:16:45.160 --> 0:16:47.680 that they have to cut costs to maintain some degree 0:16:47.680 --> 0:16:51.040 of margin stability, because that's what's going to drive earnings 0:16:51.080 --> 0:16:53.840 growth in the shorter term. Um. You know, the other 0:16:53.840 --> 0:16:55.760 thing that they've got to contend with is the yield curve. 0:16:55.800 --> 0:16:57.560 When we look at the history of the yield curve, 0:16:57.600 --> 0:17:00.920 it does have some predictive power or for obviously not 0:17:01.080 --> 0:17:04.080 interest margin and margin at large. For the financial space, 0:17:04.600 --> 0:17:07.399 the yield curve stepening out of the markets low this 0:17:07.480 --> 0:17:10.520 year has been about half as much as you usually 0:17:10.600 --> 0:17:14.040 get following recession loads and stocks. So it's been a 0:17:14.160 --> 0:17:16.800 really really slow time for the yield curve and that's 0:17:16.800 --> 0:17:19.280 going to restrain growth in this space as well. So 0:17:19.720 --> 0:17:22.119 absolutely they're going to have to cut costs or right 0:17:22.200 --> 0:17:26.600 size operations with a slower growth environment and also contend 0:17:26.640 --> 0:17:28.720 with what's happening in the macro. Do you know it's 0:17:28.720 --> 0:17:30.479 important that you say that they need to have some 0:17:30.560 --> 0:17:34.159 visibility into the economy to gain conviction about bank stocks. 0:17:34.240 --> 0:17:35.879 Is to give you a sense one of the supports 0:17:35.920 --> 0:17:39.240 to profitability has been investment banking revenues, and we have 0:17:39.320 --> 0:17:41.959 JP Morgan CFO coming out and saying that they do 0:17:42.040 --> 0:17:44.960 not expect investment banking fees to be as high in 0:17:45.000 --> 0:17:47.920 the next quarter, given the fact that we are expecting 0:17:47.920 --> 0:17:50.960 a decline in debt issuance. Gina. Just broadening out to 0:17:51.080 --> 0:17:53.399 the rest of the market, there was a story today 0:17:53.680 --> 0:17:56.919 Bank of America Managers Fund Manager survey came out for 0:17:56.920 --> 0:18:00.880 the month of July showing that people believe seventy percent 0:18:01.000 --> 0:18:04.280 of all respondents believe that tech is the most crowded trade. 0:18:04.520 --> 0:18:08.160 It is a record for the survey. Do you agree? Oh? Yeah, 0:18:08.280 --> 0:18:10.840 Tech has absolutely the most crowded trade. There's no doubt 0:18:10.880 --> 0:18:13.840 about it. It's been between tech, some of the select 0:18:13.880 --> 0:18:18.600 consumer discretionary names such as Amazon, as well as communications services, 0:18:19.200 --> 0:18:21.920 and then healthcare. Those are kind of the only spaces 0:18:21.960 --> 0:18:24.440 and investors have been really willing to put longer term 0:18:24.480 --> 0:18:27.960 capital to work over the course of the last several months. 0:18:28.000 --> 0:18:30.840 They're just sort of hiding in what is more defensive 0:18:31.640 --> 0:18:34.000 stocks at this point in time, and defense is a 0:18:34.080 --> 0:18:37.320 very different tone and characteristic than it was, say a 0:18:37.400 --> 0:18:40.640 year ago. It's not utilities in real estate consumer stables 0:18:40.640 --> 0:18:46.040 so much as the technology, healthcare, communication services groups that 0:18:46.200 --> 0:18:51.240 actually do have relatively stable growth prospects and even more 0:18:51.240 --> 0:18:55.120 more so stable growth prospects, not only but growth possibilities 0:18:55.160 --> 0:18:59.320 into that combination has been sort of the the ideal 0:18:59.359 --> 0:19:01.640 space for people who are willing to take a chance 0:19:01.680 --> 0:19:04.159 in equities to put capital to work. Now, is that 0:19:04.240 --> 0:19:07.560 going to be the winner longer term? If we do 0:19:07.680 --> 0:19:10.400 see economic recovery, what you should see is some catch 0:19:10.480 --> 0:19:15.520 up in these lower valuation stocks, high cyclical groups, higher risk, 0:19:15.720 --> 0:19:18.640 higher beta groups that no one really wants to own, 0:19:18.720 --> 0:19:21.640 like the financials and the industrials, the rest of consumer 0:19:21.680 --> 0:19:25.520 discretionary maybe even some energy and material stocks, which you know, 0:19:25.640 --> 0:19:29.159 frankly that's just been so volatile, but it is high value. 0:19:29.200 --> 0:19:32.439 I mean, it's their extraordinary discounts available in this space. 0:19:32.560 --> 0:19:35.480 If you can find that economic visibility catch up is 0:19:35.480 --> 0:19:38.080 not the same thing as tech selling off. Do you 0:19:38.119 --> 0:19:41.119 see tech as being overvalued and poised for a fall 0:19:41.520 --> 0:19:44.960 or just poised for an underperformance relative to other parts 0:19:45.200 --> 0:19:48.560 of the market. Yeah. Most of the time, what you 0:19:48.680 --> 0:19:52.520 see in economic recovery is still participation. You get participation 0:19:52.640 --> 0:19:55.840 from all groups, but you see the cyclical stocks lead 0:19:56.359 --> 0:19:59.639 the recovery. You see the catch up story. So we 0:20:00.000 --> 0:20:03.879 sudn't see an outright decline in tech valuations that said, 0:20:04.359 --> 0:20:07.240 there has been so much crowding and select names and 0:20:07.280 --> 0:20:10.960 select portions of tech, think software and some of the 0:20:11.000 --> 0:20:15.800 services groups, even some of the communications stucks where investors 0:20:15.840 --> 0:20:18.240 have hidden a tremendous amount of capital. You may see 0:20:18.240 --> 0:20:20.680 a modest rotation out of those groups in order to 0:20:20.680 --> 0:20:23.720 put that capital to work in other cyclicals. But in 0:20:23.760 --> 0:20:26.800 general it should be a catch ap, not necessarily a 0:20:26.840 --> 0:20:30.400 massive sell off, even though valuations do look somewhat extended, 0:20:30.840 --> 0:20:33.000 and that is that's a big if. I mean I 0:20:33.080 --> 0:20:35.400 say if very carefully, because I don't have a ton 0:20:35.440 --> 0:20:37.639 of conviction that we're going to have this rip roaring 0:20:37.680 --> 0:20:40.600 economy developing into the second half of this year and 0:20:40.600 --> 0:20:44.520 into one. So even in our sector scorecard, we're still 0:20:44.600 --> 0:20:47.960 hiding in those defensive groups. We've got a technology and 0:20:48.040 --> 0:20:51.000 communication services and healthcare right up at the top as well. 0:20:51.200 --> 0:20:53.200 I'm not sure how many people actually have high levels 0:20:53.200 --> 0:20:56.080 of conviction about anything right now. Gina, fantastic to catch 0:20:56.119 --> 0:20:57.879 on with you as always, Jena Martin Adams. There a 0:20:57.920 --> 0:21:05.520 Bloomberg Intelligence the chief equity strategists right now on the charts. 0:21:05.520 --> 0:21:08.040 He is just exquisite at the trends of the market. 0:21:08.119 --> 0:21:12.040