WEBVTT - Guggenheim Securities Co-Chairman Jim Millstein Talks

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Remember JP Morgan CEO Jamie Diamond spoke with the APEX

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<v Speaker 2>CEO summit in Lima this week and he noted about

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<v Speaker 2>how many banks are seeing the opportunity and deregulation that

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<v Speaker 2>could happen under a second Trump administration and how excited

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<v Speaker 2>those bankers are for that moment.

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<v Speaker 1>Whether you voted for Trump or or Joe Biden. You

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<v Speaker 1>know a lot of bankers they're like dancing in the

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<v Speaker 1>street because you know, they've had successive years and years

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<v Speaker 1>of regulations, a lot of stemy credit, you know, and

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<v Speaker 1>you could have kept the banks equally safe but had

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<v Speaker 1>them do more credit, and so like just give an example,

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<v Speaker 1>the average bank in America. I think the number is

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<v Speaker 1>used to have one hundred dollars of deposits and hundred

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<v Speaker 1>dollars loans, and now it's one hundred dollars of deposits

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<v Speaker 1>as sixty five dollars loans.

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<v Speaker 2>We're going to talk about the banks, the Trump economic policy,

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<v Speaker 2>and more with Guggenheim Securities co chair Jim Milstein, who

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<v Speaker 2>was a Treasury Department's Chief for struct String Officer under

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<v Speaker 2>President Barack Obama. In the wake of the two thousand

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<v Speaker 2>and eight financial crisis. A great person to talk about regulation.

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<v Speaker 2>But I've got to ask, as Jamie Diamond says, are

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<v Speaker 2>your bankers dancing in the streets?

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<v Speaker 3>Well, I think you know, you saw the rally after

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<v Speaker 3>the election and the equity markets. That's getting a little

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<v Speaker 3>more muted now as reality sets in. But yeah, I

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<v Speaker 3>think there's a general expectation that the M and A

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<v Speaker 3>environment will open up. The financing markets have been incredibly strong,

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<v Speaker 3>so you know, I think there's there's no lack of

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<v Speaker 3>credit availability. I was satting what Jamie says about the banks.

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<v Speaker 3>You know, the private credit markets have boomed in the

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<v Speaker 3>last ten years, so credit availability remains very strong. You

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<v Speaker 3>can see that in the tight spreads in the high

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<v Speaker 3>yield market and in the investment grade market. So but yes,

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<v Speaker 3>on the M and A side, I think there's a

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<v Speaker 3>sense am most investment bankers that there should be a

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<v Speaker 3>freer regulatory environment to try and get deals done.

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<v Speaker 2>Probably one of the clearest trades you have seen is

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<v Speaker 2>in the financial system in the banks. You'ven seen investors

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<v Speaker 2>pour a lot of money in the banks thinking that

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<v Speaker 2>not only that Basil three might not be as strong

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<v Speaker 2>as it would have otherwise been. But you think about

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<v Speaker 2>even Shared Brown not in the Senate Banking Committee anymore,

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<v Speaker 2>for example, or the SEC facing some change under a

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<v Speaker 2>Trump administration, How significant, Jim, might the rollbacks in regulation

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<v Speaker 2>be for the financial industry.

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<v Speaker 3>Yeah, so it depends who first, It depends who's in

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<v Speaker 3>the seats. We still don't know who's going to be

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<v Speaker 3>at occ the FDIC, the FHFA, the CFPB, the Treasury Department.

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<v Speaker 3>These are all still open seats, and the people matter, right,

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<v Speaker 3>that's first and foremost. The second thing is is the regulator,

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<v Speaker 3>particularly with regard to the banks. The regulatory system is

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<v Speaker 3>quite complex, with overlapping jurisdiction of different agencies. So to

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<v Speaker 3>actually have a relaxation of you know, the regulatory constraints

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<v Speaker 3>under which they currently operate, there has to be coordination

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<v Speaker 3>among various federal agencies and so it takes time.

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<v Speaker 4>It'll take time.

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<v Speaker 2>Do you think that there is a paradigm shift going on?

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<v Speaker 2>You think about just a whole generation of bankers that

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<v Speaker 2>were not working in the two thousand and eight run up.

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<v Speaker 2>They don't remember what it looked like, the froth under

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<v Speaker 2>the surface. Do you think that deregulation could create that

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<v Speaker 2>froth again.

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<v Speaker 3>Well, it may be true in the financial institutions that

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<v Speaker 3>there are few of us left to were there and

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<v Speaker 3>went through that trauma, but it's not true in the

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<v Speaker 3>regulatory community. Now there could be a wholesale slaughter of

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<v Speaker 3>regulators at all levels under the Trump administration.

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<v Speaker 4>I doubt it.

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<v Speaker 3>And as a result, the regulatory institutions have fed the

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<v Speaker 3>Treasury Department the occ you know, a deep institutional memory.

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<v Speaker 3>So I think there's still the experience of that crisis

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<v Speaker 3>is it's muted now over time, but I think people

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<v Speaker 3>understand that we don't we don't want to get so

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<v Speaker 3>deregulated as to create risks of that kind of crisis again.

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<v Speaker 2>Now, let's switch gears a little bit, go over from

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<v Speaker 2>the tempering of regulation to the trade and tariff policies

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<v Speaker 2>that have been put forward. When you think about the

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<v Speaker 2>entirety of what has been proposed during the campaign, do

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<v Speaker 2>you expect moves that drastic into next year?

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<v Speaker 4>Look, we don't.

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<v Speaker 3>You know, we've had campaign proposals, and how which ones

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<v Speaker 3>of those turn into real policy and legislation, you know,

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<v Speaker 3>still remains an open question. But you know, the president

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<v Speaker 3>elek has made a commitment to use tariffs as a

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<v Speaker 3>negotiating tool to bring I think to bring tariff barriers

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<v Speaker 3>that we face down. But there are strategics, you know,

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<v Speaker 3>the China relationship is entirely different. That's a I think

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<v Speaker 3>a strategic choice to use tariffs to try to onshore

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<v Speaker 3>critical industries back to the United States, critical defense industries

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<v Speaker 3>back to the United States.

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<v Speaker 4>So, you know, I.

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<v Speaker 3>Expect on the tariffs that you know, President Trump will

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<v Speaker 3>use them vis vis the rest of the world, Europe

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<v Speaker 3>and our other allies. He'll use those in a way

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<v Speaker 3>to try to create reciprocity, better reciprocity with China.

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<v Speaker 4>I think it's a totally different story.

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<v Speaker 3>I think there's a using tariffs as part of a

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<v Speaker 3>strategic agenda to improve our defense capacities.

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<v Speaker 2>What do you make of the impact for investors. I

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<v Speaker 2>had this conversation earlier this week with City Group CEO

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<v Speaker 2>Jane Fraser. She made the point that yes, you could

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<v Speaker 2>worry about inflation, but that productivity could fill in some

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<v Speaker 2>of that gap, that it might not be as big

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<v Speaker 2>of a problem as a lot of people had initially

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<v Speaker 2>pointed out.

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<v Speaker 4>What do you make of that argument?

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<v Speaker 3>Well, I think that's what we're seeing right now right,

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<v Speaker 3>I mean, notwithstanding sort of the campaign rhetoric, the economy

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<v Speaker 3>is incredibly strong. It's growing above trend. Productivity is the

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<v Speaker 3>highest it's been in tw ten years. So we've had

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<v Speaker 3>a real surge of productivity. We have low unemployment. You know,

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<v Speaker 3>I think the b and yet inflation kind of remains sticky,

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<v Speaker 3>particularly in the housing market, which takes time for rents

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<v Speaker 3>to roll over in the way the Fed calculates UH

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<v Speaker 3>house price inflation. But I think most Americans experience UH

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<v Speaker 3>housing as a real constraint on their cost of living.

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<v Speaker 3>And so you know, I think the inflation risk remains strong.

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<v Speaker 3>Both I in prospect for what the Trump administration may

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<v Speaker 3>do on tariffs, on on deportation, which will create constraints

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<v Speaker 3>in the labor market. And with regard to the federal deficits,

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<v Speaker 3>you know, trum Trump's a big spender, and he ran

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<v Speaker 3>up deficits during his first term, putting aside COVID, which

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<v Speaker 3>you know, was a bipartisan effort that result in a

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<v Speaker 3>huge increase in deficits.

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<v Speaker 4>And the deficits are coming down, but they're still huge.

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<v Speaker 3>You know, we're still running a six percent of GDP deficit,

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<v Speaker 3>which is unprecedented in peacetime. So the fiscal space that

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<v Speaker 3>the new administration has to maneuver is much more constrained

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<v Speaker 3>than it was when he took office in twenty seventeen.

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<v Speaker 2>You have seen the tenure really react to this idea.

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<v Speaker 2>You've seen it hovering around four point five percent. What

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<v Speaker 2>would you warrant investors about where.

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<v Speaker 4>It could go?

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<v Speaker 3>Yeah, I think the I don't think it's going to

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<v Speaker 3>go down much because of the Treasury Apartment to fund

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<v Speaker 3>to refund the outstanding debt, which has a relatively short

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<v Speaker 3>maturity profile, and to fund the deficits this year, Department

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<v Speaker 3>is going to have to do eight trillion dollars of financing.

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<v Speaker 4>So pity the new Treasury secretary.

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<v Speaker 3>The first job is going to be to figure out

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<v Speaker 3>is he selling coupons, is he selling bills? What's he

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<v Speaker 3>doing to try to moderate the impact of the deficit,

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<v Speaker 3>and let alone what deficit incremental deficits the Trump administration

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<v Speaker 3>might create from, you know, tax cuts.

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<v Speaker 4>So I do.

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<v Speaker 3>Think I don't doubt the depth of the treasury market,

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<v Speaker 3>but it's a question of the price the Treasury Department

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<v Speaker 3>will have to pay for long term for treasuries when

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<v Speaker 3>they're issuing eight trillion dollars of it this year. And

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<v Speaker 3>you know, as important as short term rates are, which

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<v Speaker 3>the Fed controls, you know, real money investors look to

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<v Speaker 3>the tenure as their benchmark. And so you know, a

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<v Speaker 3>higher a tenure that stays where it is or gets

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<v Speaker 3>higher because of the clearing pricequired to sell eight trillion

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<v Speaker 3>dollars worth of debt. You know that's going to affect

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<v Speaker 3>equity valuations for sure.

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<v Speaker 2>At what point does the bond market say no more?

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<v Speaker 4>I think we're a long way from that.

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<v Speaker 3>I think it's about price and creating a positive slope

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<v Speaker 3>in the curve so people can borrow short to fund long,

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<v Speaker 3>which is you know how many you know hedge funds

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<v Speaker 3>play in the treasury market, and they're an important factor

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<v Speaker 3>in the head treasury market. So I don't think it's

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<v Speaker 3>a question now of no mass. I think it's really

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<v Speaker 3>a question of price. But the federal government, you know,

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<v Speaker 3>has been running persistent deficits that have been growing for

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<v Speaker 3>twenty years.

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<v Speaker 2>That's what I was going to ask you. You and

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<v Speaker 2>I have talked a lot about the deficit and the

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<v Speaker 2>idea of it getting bigger. It's been financed, right, I mean,

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<v Speaker 2>at what point does this become a problem. How do

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<v Speaker 2>you reframe the problem going into next year thinking about

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<v Speaker 2>those tax cuts.

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<v Speaker 4>Yeah, so problem.

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<v Speaker 3>Well, look, since the financial crisis, the federal debt to

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<v Speaker 3>GDP ratio has gone from like fifty percent to one

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<v Speaker 3>hundred and twenty percent. So we're growing the debt faster

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<v Speaker 3>than we're growing the economy.

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<v Speaker 4>So the debt is and there are arguments among.

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<v Speaker 3>You know, more sophisticated people than I that the overhang

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<v Speaker 3>of debt becomes a constraint on growth, in part because

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<v Speaker 3>the interest burden that the federal government. You know, we're

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<v Speaker 3>now spending trillion dollars on interest. It's becoming the largest

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<v Speaker 3>part of the federal budget. And when you think about what,

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<v Speaker 3>you know, the federal government does. We have a we

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<v Speaker 3>have a mixed economy. The government constitutes about twenty to

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<v Speaker 3>twenty five percent of GDP. Federal spending does, and that

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<v Speaker 3>federal spending can have a huge impact on whether the

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<v Speaker 3>economy grows or not. You know, I believe that the

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<v Speaker 3>Biden administration doesn't get enough credit for the public investments

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<v Speaker 3>it's made through the infrastruct Bill, the Chipsack, the Energy

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<v Speaker 3>Transition build so called IRA. You know that spurred a

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<v Speaker 3>huge amount of private investments side by side the public,

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<v Speaker 3>and that private investment has driven productivity increases and economic growth.

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<v Speaker 3>But you know, as the deficit grows and the debt

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<v Speaker 3>ratio increases, it starts to really crowd out the public

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<v Speaker 3>investments that the government can make and private investment.

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<v Speaker 4>So I want to.

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<v Speaker 2>Switch gears here a little bit because your expertise, as

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<v Speaker 2>of course, in bankruptcies kind of leads me into doomsday

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<v Speaker 2>conversations with you sometimes. But when you think about AI

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<v Speaker 2>and the productivity boom that a lot of people are expecting,

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<v Speaker 2>I'm actually wondering about just the opposite. If you think

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<v Speaker 2>about how AI is changing industries, is it going to

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<v Speaker 2>create a different type of bankruptcy wave for companies that

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<v Speaker 2>can't keep up well.

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<v Speaker 3>I think the challenge of AI across first and foremost

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<v Speaker 3>across our end, across law accounting. I think those are

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<v Speaker 3>the areas where you're going to see the most dramatic changes,

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<v Speaker 3>because those are the areas where productivity is stalled over

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<v Speaker 3>the last twenty years. It's really it's hard to make

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<v Speaker 3>a banker more productive, but AI will do that. It's

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<v Speaker 3>hard to make a lawyer more productive.

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<v Speaker 4>But AI will do that.

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<v Speaker 3>So I think you can see a huge transformation in

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<v Speaker 3>the professional services business very quickly.

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<v Speaker 4>I think it's already having an impact.

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<v Speaker 2>How is AI going to make a banker more productive?

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<v Speaker 3>Well, there's a lot of work that that's behind the

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<v Speaker 3>deal maker, that goes to the evaluation of strategy, tactics

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<v Speaker 3>and valuation, and a lot of that valuation work can

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<v Speaker 3>be done with these large language models. And the same

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<v Speaker 3>thing is true in the law and in accounting, so

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<v Speaker 3>I think. But going back to your question about the

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<v Speaker 3>transformation required, I think businesses across the board are gonna

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<v Speaker 3>have to pivot and take advantage of these new tools,

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<v Speaker 3>and if they don't, they're gonna find themselves on the

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<v Speaker 3>wrong end of the stick in competition with the people

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<v Speaker 3>who do.

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<v Speaker 4>And I think this is a very transformative technology.

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<v Speaker 3>The productivity impacts of it will be will probably lag,

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<v Speaker 3>but there will be substantial.

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<v Speaker 2>Jim, we have to leave it there. It's so great

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<v Speaker 2>to see you here in studio. That is Jim Millstein,

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<v Speaker 2>of course, Goggenheim Securities co Chair