Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Remember JP Morgan CEO Jamie Diamond spoke with the APEX
Speaker 2: CEO summit in Lima this week and he noted about
Speaker 2: how many banks are seeing the opportunity and deregulation that
Speaker 2: could happen under a second Trump administration and how excited
Speaker 2: those bankers are for that moment.
Speaker 1: Whether you voted for Trump or or Joe Biden. You
Speaker 1: know a lot of bankers they're like dancing in the
Speaker 1: street because you know, they've had successive years and years
Speaker 1: of regulations, a lot of stemy credit, you know, and
Speaker 1: you could have kept the banks equally safe but had
Speaker 1: them do more credit, and so like just give an example,
Speaker 1: the average bank in America. I think the number is
Speaker 1: used to have one hundred dollars of deposits and hundred
Speaker 1: dollars loans, and now it's one hundred dollars of deposits
Speaker 1: as sixty five dollars loans.
Speaker 2: We're going to talk about the banks, the Trump economic policy,
Speaker 2: and more with Guggenheim Securities co chair Jim Milstein, who
Speaker 2: was a Treasury Department's Chief for struct String Officer under
Speaker 2: President Barack Obama. In the wake of the two thousand
Speaker 2: and eight financial crisis. A great person to talk about regulation.
Speaker 2: But I've got to ask, as Jamie Diamond says, are
Speaker 2: your bankers dancing in the streets?
Speaker 3: Well, I think you know, you saw the rally after
Speaker 3: the election and the equity markets. That's getting a little
Speaker 3: more muted now as reality sets in. But yeah, I
Speaker 3: think there's a general expectation that the M and A
Speaker 3: environment will open up. The financing markets have been incredibly strong,
Speaker 3: so you know, I think there's there's no lack of
Speaker 3: credit availability. I was satting what Jamie says about the banks.
Speaker 3: You know, the private credit markets have boomed in the
Speaker 3: last ten years, so credit availability remains very strong. You
Speaker 3: can see that in the tight spreads in the high
Speaker 3: yield market and in the investment grade market. So but yes,
Speaker 3: on the M and A side, I think there's a
Speaker 3: sense am most investment bankers that there should be a
Speaker 3: freer regulatory environment to try and get deals done.
Speaker 2: Probably one of the clearest trades you have seen is
Speaker 2: in the financial system in the banks. You'ven seen investors
Speaker 2: pour a lot of money in the banks thinking that
Speaker 2: not only that Basil three might not be as strong
Speaker 2: as it would have otherwise been. But you think about
Speaker 2: even Shared Brown not in the Senate Banking Committee anymore,
Speaker 2: for example, or the SEC facing some change under a
Speaker 2: Trump administration, How significant, Jim, might the rollbacks in regulation
Speaker 2: be for the financial industry.
Speaker 3: Yeah, so it depends who first, It depends who's in
Speaker 3: the seats. We still don't know who's going to be
Speaker 3: at occ the FDIC, the FHFA, the CFPB, the Treasury Department.
Speaker 3: These are all still open seats, and the people matter, right,
Speaker 3: that's first and foremost. The second thing is is the regulator,
Speaker 3: particularly with regard to the banks. The regulatory system is
Speaker 3: quite complex, with overlapping jurisdiction of different agencies. So to
Speaker 3: actually have a relaxation of you know, the regulatory constraints
Speaker 3: under which they currently operate, there has to be coordination
Speaker 3: among various federal agencies and so it takes time.
Speaker 4: It'll take time.
Speaker 2: Do you think that there is a paradigm shift going on?
Speaker 2: You think about just a whole generation of bankers that
Speaker 2: were not working in the two thousand and eight run up.
Speaker 2: They don't remember what it looked like, the froth under
Speaker 2: the surface. Do you think that deregulation could create that
Speaker 2: froth again.
Speaker 3: Well, it may be true in the financial institutions that
Speaker 3: there are few of us left to were there and
Speaker 3: went through that trauma, but it's not true in the
Speaker 3: regulatory community. Now there could be a wholesale slaughter of
Speaker 3: regulators at all levels under the Trump administration.
Speaker 4: I doubt it.
Speaker 3: And as a result, the regulatory institutions have fed the
Speaker 3: Treasury Department the occ you know, a deep institutional memory.
Speaker 3: So I think there's still the experience of that crisis
Speaker 3: is it's muted now over time, but I think people
Speaker 3: understand that we don't we don't want to get so
Speaker 3: deregulated as to create risks of that kind of crisis again.
Speaker 2: Now, let's switch gears a little bit, go over from
Speaker 2: the tempering of regulation to the trade and tariff policies
Speaker 2: that have been put forward. When you think about the
Speaker 2: entirety of what has been proposed during the campaign, do
Speaker 2: you expect moves that drastic into next year?
Speaker 4: Look, we don't.
Speaker 3: You know, we've had campaign proposals, and how which ones
Speaker 3: of those turn into real policy and legislation, you know,
Speaker 3: still remains an open question. But you know, the president
Speaker 3: elek has made a commitment to use tariffs as a
Speaker 3: negotiating tool to bring I think to bring tariff barriers
Speaker 3: that we face down. But there are strategics, you know,
Speaker 3: the China relationship is entirely different. That's a I think
Speaker 3: a strategic choice to use tariffs to try to onshore
Speaker 3: critical industries back to the United States, critical defense industries
Speaker 3: back to the United States.
Speaker 4: So, you know, I.
Speaker 3: Expect on the tariffs that you know, President Trump will
Speaker 3: use them vis vis the rest of the world, Europe
Speaker 3: and our other allies. He'll use those in a way
Speaker 3: to try to create reciprocity, better reciprocity with China.
Speaker 4: I think it's a totally different story.
Speaker 3: I think there's a using tariffs as part of a
Speaker 3: strategic agenda to improve our defense capacities.
Speaker 2: What do you make of the impact for investors. I
Speaker 2: had this conversation earlier this week with City Group CEO
Speaker 2: Jane Fraser. She made the point that yes, you could
Speaker 2: worry about inflation, but that productivity could fill in some
Speaker 2: of that gap, that it might not be as big
Speaker 2: of a problem as a lot of people had initially
Speaker 2: pointed out.
Speaker 4: What do you make of that argument?
Speaker 3: Well, I think that's what we're seeing right now right,
Speaker 3: I mean, notwithstanding sort of the campaign rhetoric, the economy
Speaker 3: is incredibly strong. It's growing above trend. Productivity is the
Speaker 3: highest it's been in tw ten years. So we've had
Speaker 3: a real surge of productivity. We have low unemployment. You know,
Speaker 3: I think the b and yet inflation kind of remains sticky,
Speaker 3: particularly in the housing market, which takes time for rents
Speaker 3: to roll over in the way the Fed calculates UH
Speaker 3: house price inflation. But I think most Americans experience UH
Speaker 3: housing as a real constraint on their cost of living.
Speaker 3: And so you know, I think the inflation risk remains strong.
Speaker 3: Both I in prospect for what the Trump administration may
Speaker 3: do on tariffs, on on deportation, which will create constraints
Speaker 3: in the labor market. And with regard to the federal deficits,
Speaker 3: you know, trum Trump's a big spender, and he ran
Speaker 3: up deficits during his first term, putting aside COVID, which
Speaker 3: you know, was a bipartisan effort that result in a
Speaker 3: huge increase in deficits.
Speaker 4: And the deficits are coming down, but they're still huge.
Speaker 3: You know, we're still running a six percent of GDP deficit,
Speaker 3: which is unprecedented in peacetime. So the fiscal space that
Speaker 3: the new administration has to maneuver is much more constrained
Speaker 3: than it was when he took office in twenty seventeen.
Speaker 2: You have seen the tenure really react to this idea.
Speaker 2: You've seen it hovering around four point five percent. What
Speaker 2: would you warrant investors about where.
Speaker 4: It could go?
Speaker 3: Yeah, I think the I don't think it's going to
Speaker 3: go down much because of the Treasury Apartment to fund
Speaker 3: to refund the outstanding debt, which has a relatively short
Speaker 3: maturity profile, and to fund the deficits this year, Department
Speaker 3: is going to have to do eight trillion dollars of financing.
Speaker 4: So pity the new Treasury secretary.
Speaker 3: The first job is going to be to figure out
Speaker 3: is he selling coupons, is he selling bills? What's he
Speaker 3: doing to try to moderate the impact of the deficit,
Speaker 3: and let alone what deficit incremental deficits the Trump administration
Speaker 3: might create from, you know, tax cuts.
Speaker 4: So I do.
Speaker 3: Think I don't doubt the depth of the treasury market,
Speaker 3: but it's a question of the price the Treasury Department
Speaker 3: will have to pay for long term for treasuries when
Speaker 3: they're issuing eight trillion dollars of it this year. And
Speaker 3: you know, as important as short term rates are, which
Speaker 3: the Fed controls, you know, real money investors look to
Speaker 3: the tenure as their benchmark. And so you know, a
Speaker 3: higher a tenure that stays where it is or gets
Speaker 3: higher because of the clearing pricequired to sell eight trillion
Speaker 3: dollars worth of debt. You know that's going to affect
Speaker 3: equity valuations for sure.
Speaker 2: At what point does the bond market say no more?
Speaker 4: I think we're a long way from that.
Speaker 3: I think it's about price and creating a positive slope
Speaker 3: in the curve so people can borrow short to fund long,
Speaker 3: which is you know how many you know hedge funds
Speaker 3: play in the treasury market, and they're an important factor
Speaker 3: in the head treasury market. So I don't think it's
Speaker 3: a question now of no mass. I think it's really
Speaker 3: a question of price. But the federal government, you know,
Speaker 3: has been running persistent deficits that have been growing for
Speaker 3: twenty years.
Speaker 2: That's what I was going to ask you. You and
Speaker 2: I have talked a lot about the deficit and the
Speaker 2: idea of it getting bigger. It's been financed, right, I mean,
Speaker 2: at what point does this become a problem. How do
Speaker 2: you reframe the problem going into next year thinking about
Speaker 2: those tax cuts.
Speaker 4: Yeah, so problem.
Speaker 3: Well, look, since the financial crisis, the federal debt to
Speaker 3: GDP ratio has gone from like fifty percent to one
Speaker 3: hundred and twenty percent. So we're growing the debt faster
Speaker 3: than we're growing the economy.
Speaker 4: So the debt is and there are arguments among.
Speaker 3: You know, more sophisticated people than I that the overhang
Speaker 3: of debt becomes a constraint on growth, in part because
Speaker 3: the interest burden that the federal government. You know, we're
Speaker 3: now spending trillion dollars on interest. It's becoming the largest
Speaker 3: part of the federal budget. And when you think about what,
Speaker 3: you know, the federal government does. We have a we
Speaker 3: have a mixed economy. The government constitutes about twenty to
Speaker 3: twenty five percent of GDP. Federal spending does, and that
Speaker 3: federal spending can have a huge impact on whether the
Speaker 3: economy grows or not. You know, I believe that the
Speaker 3: Biden administration doesn't get enough credit for the public investments
Speaker 3: it's made through the infrastruct Bill, the Chipsack, the Energy
Speaker 3: Transition build so called IRA. You know that spurred a
Speaker 3: huge amount of private investments side by side the public,
Speaker 3: and that private investment has driven productivity increases and economic growth.
Speaker 3: But you know, as the deficit grows and the debt
Speaker 3: ratio increases, it starts to really crowd out the public
Speaker 3: investments that the government can make and private investment.
Speaker 4: So I want to.
Speaker 2: Switch gears here a little bit because your expertise, as
Speaker 2: of course, in bankruptcies kind of leads me into doomsday
Speaker 2: conversations with you sometimes. But when you think about AI
Speaker 2: and the productivity boom that a lot of people are expecting,
Speaker 2: I'm actually wondering about just the opposite. If you think
Speaker 2: about how AI is changing industries, is it going to
Speaker 2: create a different type of bankruptcy wave for companies that
Speaker 2: can't keep up well.
Speaker 3: I think the challenge of AI across first and foremost
Speaker 3: across our end, across law accounting. I think those are
Speaker 3: the areas where you're going to see the most dramatic changes,
Speaker 3: because those are the areas where productivity is stalled over
Speaker 3: the last twenty years. It's really it's hard to make
Speaker 3: a banker more productive, but AI will do that. It's
Speaker 3: hard to make a lawyer more productive.
Speaker 4: But AI will do that.
Speaker 3: So I think you can see a huge transformation in
Speaker 3: the professional services business very quickly.
Speaker 4: I think it's already having an impact.
Speaker 2: How is AI going to make a banker more productive?
Speaker 3: Well, there's a lot of work that that's behind the
Speaker 3: deal maker, that goes to the evaluation of strategy, tactics
Speaker 3: and valuation, and a lot of that valuation work can
Speaker 3: be done with these large language models. And the same
Speaker 3: thing is true in the law and in accounting, so
Speaker 3: I think. But going back to your question about the
Speaker 3: transformation required, I think businesses across the board are gonna
Speaker 3: have to pivot and take advantage of these new tools,
Speaker 3: and if they don't, they're gonna find themselves on the
Speaker 3: wrong end of the stick in competition with the people
Speaker 3: who do.
Speaker 4: And I think this is a very transformative technology.
Speaker 3: The productivity impacts of it will be will probably lag,
Speaker 3: but there will be substantial.
Speaker 2: Jim, we have to leave it there. It's so great
Speaker 2: to see you here in studio. That is Jim Millstein,
Speaker 2: of course, Goggenheim Securities co Chair