1 00:00:10,039 --> 00:00:13,720 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always 2 00:00:14,000 --> 00:00:17,560 Speaker 1: with Michael McKee. Daily we bring you insight from the 3 00:00:17,560 --> 00:00:22,760 Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg 4 00:00:22,840 --> 00:00:27,280 Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course 5 00:00:27,720 --> 00:00:33,240 Speaker 1: on the Bloomberg The ins and outs of Brexit, whether 6 00:00:33,320 --> 00:00:36,720 Speaker 1: it is happening, not happening, what's happening? Uh, The huge 7 00:00:36,760 --> 00:00:39,040 Speaker 1: story of the day, certainly in the United Kingdom and 8 00:00:39,080 --> 00:00:41,760 Speaker 1: for much of Europe. But in the US today, everybody's 9 00:00:41,760 --> 00:00:45,600 Speaker 1: talking about the banks. The second round of FED stress 10 00:00:45,680 --> 00:00:50,000 Speaker 1: tests out yesterday, and it's a little bit like Lake Wobegon, 11 00:00:50,280 --> 00:00:54,160 Speaker 1: where all the men are pretty and all the women 12 00:00:54,200 --> 00:00:58,520 Speaker 1: are strong and the children above average. Everybody passed in 13 00:00:58,560 --> 00:01:02,480 Speaker 1: the US this time. A couple of foreign banks didn't 14 00:01:02,560 --> 00:01:05,080 Speaker 1: quite get there. We're gonna talk about that now with 15 00:01:05,120 --> 00:01:09,360 Speaker 1: Brad Hints, because of course he is the man, the CEO, uh, 16 00:01:09,800 --> 00:01:13,240 Speaker 1: the I'm sorry Stern Business School finance professor, not CEO 17 00:01:13,319 --> 00:01:16,640 Speaker 1: of Stern Business School, of course, but the former CFO 18 00:01:16,800 --> 00:01:19,920 Speaker 1: what I meant to say, of several banks and longtime 19 00:01:19,959 --> 00:01:25,080 Speaker 1: bank analyst. He joined US now and Brad um Yeah, 20 00:01:25,160 --> 00:01:27,320 Speaker 1: obviously the bank's got to be happy. But the FED 21 00:01:27,400 --> 00:01:30,080 Speaker 1: has to be happy too, because they did set a 22 00:01:30,200 --> 00:01:35,160 Speaker 1: rather tough bar, rather high bar in the adverse stress scenario, 23 00:01:35,560 --> 00:01:39,240 Speaker 1: and basically everybody cleared it in terms of capital adequacy. Well, 24 00:01:39,240 --> 00:01:41,480 Speaker 1: that's exactly right. So if we think of the stress test, 25 00:01:41,560 --> 00:01:45,160 Speaker 1: the stress test is a Swiss army knife that the 26 00:01:45,160 --> 00:01:47,160 Speaker 1: FED uses, right, And one of the users of the 27 00:01:47,240 --> 00:01:50,200 Speaker 1: uses of the Swiss army knife is public relations. So 28 00:01:50,240 --> 00:01:53,320 Speaker 1: in the midst of Brexit, the FED is able to 29 00:01:53,320 --> 00:01:56,400 Speaker 1: say US banks are solid, and that help works well 30 00:01:56,440 --> 00:01:58,559 Speaker 1: with the press, and it works well with the public, 31 00:01:58,600 --> 00:02:00,720 Speaker 1: and it works well on Capitol Hill and you know, 32 00:02:00,800 --> 00:02:03,440 Speaker 1: and yes, they stressed the banks and they did well. 33 00:02:03,960 --> 00:02:06,240 Speaker 1: The banks have been getting much better at taking this test, 34 00:02:06,280 --> 00:02:08,400 Speaker 1: and part of that is they reversed engineered a lot 35 00:02:08,440 --> 00:02:10,680 Speaker 1: of the FED. Well, there's a good question. Is it 36 00:02:10,760 --> 00:02:13,799 Speaker 1: that they're getting better at meeting the FEDS requirement or 37 00:02:13,840 --> 00:02:16,240 Speaker 1: they're getting better at knowing how to take the test? 38 00:02:16,840 --> 00:02:19,440 Speaker 1: What's a combination of both, right? I mean, we can 39 00:02:19,480 --> 00:02:23,000 Speaker 1: we can mathematically look at the at the balance sheets. 40 00:02:23,200 --> 00:02:26,280 Speaker 1: The banks are just much stronger than they've been in years. 41 00:02:26,560 --> 00:02:28,600 Speaker 1: But on the other hand, if you take this test 42 00:02:28,720 --> 00:02:30,640 Speaker 1: over a period of time, despite the fact that the 43 00:02:30,639 --> 00:02:33,399 Speaker 1: scenarios change all the time, you're just going to get better. 44 00:02:33,440 --> 00:02:35,720 Speaker 1: You're going to know how the FED models are going 45 00:02:35,760 --> 00:02:37,760 Speaker 1: to work. And if you see your internal models are 46 00:02:37,760 --> 00:02:39,800 Speaker 1: different than the FED models, you're gonna do everything you 47 00:02:39,840 --> 00:02:42,399 Speaker 1: can to get them together so that so that when 48 00:02:42,440 --> 00:02:44,400 Speaker 1: you say the answer, you're gonna be close to what 49 00:02:44,480 --> 00:02:47,320 Speaker 1: the professor tells you is the real answer. And and 50 00:02:47,360 --> 00:02:49,560 Speaker 1: that's what we're seeing, bright hands, when when when you 51 00:02:49,639 --> 00:02:52,680 Speaker 1: look at these banks, one of the ideas and you're 52 00:02:52,680 --> 00:02:55,720 Speaker 1: not doing by hold cell anymore, but we're hearing from 53 00:02:55,760 --> 00:02:58,560 Speaker 1: a lot of people in the street that a great 54 00:02:59,320 --> 00:03:02,920 Speaker 1: cash flow awaits. Is this the day or you have 55 00:03:03,040 --> 00:03:07,320 Speaker 1: more confidence that these banks will have ample cash flow 56 00:03:07,880 --> 00:03:12,079 Speaker 1: to move to shareholders through dividend growth and share buy 57 00:03:12,120 --> 00:03:16,960 Speaker 1: back where they get beyond being quasa utilities, Well, Tom, 58 00:03:17,000 --> 00:03:20,200 Speaker 1: you've got you know, you've got banks that are proposing 59 00:03:20,919 --> 00:03:25,880 Speaker 1: combined payout ratios of near a hundred percent. So in essence, 60 00:03:26,080 --> 00:03:28,040 Speaker 1: your buy backs and your dividends are going to pay 61 00:03:28,080 --> 00:03:30,840 Speaker 1: out everything that you're earned. So you know what that'll 62 00:03:30,880 --> 00:03:33,360 Speaker 1: do is that is again, if we think about it, 63 00:03:33,400 --> 00:03:36,200 Speaker 1: from an equity point of view, it's reducing the discount 64 00:03:36,280 --> 00:03:38,080 Speaker 1: because you know, here we have a group of banks 65 00:03:38,120 --> 00:03:40,040 Speaker 1: that are out beating their cost of capital, that are 66 00:03:40,200 --> 00:03:44,600 Speaker 1: generating unacceptable returns. But if you can get high dividends 67 00:03:44,600 --> 00:03:47,120 Speaker 1: off of them, that that you you may find that 68 00:03:47,280 --> 00:03:50,600 Speaker 1: still an acceptable investment. On the other hand, if you're 69 00:03:50,640 --> 00:03:53,240 Speaker 1: paying out more than a hundred percent of what you've got, 70 00:03:53,320 --> 00:03:55,800 Speaker 1: or you don't have a lot of growth, and so 71 00:03:55,880 --> 00:03:59,680 Speaker 1: you know, unfortunately, we have an industry that's still in transition, 72 00:04:00,000 --> 00:04:02,200 Speaker 1: in a long transition. Now right we're in the eighth 73 00:04:02,360 --> 00:04:06,320 Speaker 1: year of the transition you know, from them from the crisis. 74 00:04:06,320 --> 00:04:09,480 Speaker 1: But will they trans will they transition over the next 75 00:04:09,560 --> 00:04:15,920 Speaker 1: eighteen months to two years to cash flow generators they 76 00:04:15,960 --> 00:04:19,599 Speaker 1: give it back to shareholders. That's the thesis of exactly, 77 00:04:19,640 --> 00:04:22,080 Speaker 1: and that is that's what you're seeing with distresses. Distresses 78 00:04:22,320 --> 00:04:25,280 Speaker 1: allows them to to to return more capital. You can 79 00:04:25,360 --> 00:04:27,599 Speaker 1: prove that you can you can live through a very 80 00:04:28,000 --> 00:04:31,960 Speaker 1: very difficult scenario, and you can you can execute your 81 00:04:32,160 --> 00:04:34,640 Speaker 1: your your capital proposals. All of them are asking to 82 00:04:34,880 --> 00:04:37,479 Speaker 1: to give back more capital, I don't you know. Unfortunately, 83 00:04:37,520 --> 00:04:39,720 Speaker 1: that leads us in the direction of a utility. You know, 84 00:04:40,960 --> 00:04:44,479 Speaker 1: they pay back. They don't generate great returns, but they 85 00:04:44,520 --> 00:04:49,040 Speaker 1: do pay off. Are the banks handicapped in anyway by 86 00:04:49,080 --> 00:04:52,960 Speaker 1: the efforts that they have made to meet the requirements 87 00:04:53,000 --> 00:04:55,800 Speaker 1: of the test? Are they making fewer loans because of 88 00:04:56,080 --> 00:05:01,920 Speaker 1: that or making less money because of that? Yes, their 89 00:05:02,000 --> 00:05:06,400 Speaker 1: stress test c CAR is UH is the binding constraint 90 00:05:06,560 --> 00:05:08,960 Speaker 1: on the banks. And you've you've had JP Morgan's say that, 91 00:05:09,120 --> 00:05:13,480 Speaker 1: Morgan Stanley Goldman say that if the the the analogy 92 00:05:13,839 --> 00:05:17,479 Speaker 1: I've used in the past is that the stress test 93 00:05:17,720 --> 00:05:20,440 Speaker 1: is like one of those invisible fences that people put 94 00:05:20,520 --> 00:05:24,400 Speaker 1: up for their dog, and and and then each night 95 00:05:25,040 --> 00:05:33,640 Speaker 1: they never worked well, keep you in the studio, like 96 00:05:36,920 --> 00:05:40,040 Speaker 1: you know, each each year the FED goes and it 97 00:05:40,160 --> 00:05:42,560 Speaker 1: digs up the invisible fence and it moves it around 98 00:05:42,800 --> 00:05:45,520 Speaker 1: so that the poor banks who are out in the 99 00:05:45,600 --> 00:05:48,320 Speaker 1: backyard really don't know where they're going to get shocked 100 00:05:48,680 --> 00:05:51,279 Speaker 1: and and and unfortunately what that means is you don't 101 00:05:51,320 --> 00:05:54,279 Speaker 1: go anywhere near the stress test. So you're always maintaining 102 00:05:54,320 --> 00:05:56,480 Speaker 1: surplus capital that pulls down your r o E s. 103 00:05:56,680 --> 00:05:59,720 Speaker 1: You're always maintaining surplus liquidity that pulls down your r 104 00:05:59,760 --> 00:06:01,520 Speaker 1: o I want to get this in bread. I think 105 00:06:01,560 --> 00:06:04,600 Speaker 1: it's too important for our global Wall Street audience. We 106 00:06:04,720 --> 00:06:09,640 Speaker 1: talked earlier about the idea away from tangible book value 107 00:06:09,680 --> 00:06:11,800 Speaker 1: of the European banks, and the share price is just 108 00:06:11,880 --> 00:06:15,880 Speaker 1: getting so low, the behavioral idea of debt versus equity 109 00:06:16,000 --> 00:06:19,160 Speaker 1: Madiglian and Miller and the rest of it. Forget about 110 00:06:19,200 --> 00:06:22,160 Speaker 1: the theory about it. There's a point where the thing 111 00:06:22,360 --> 00:06:27,720 Speaker 1: breaks is tangible book value comes down and down and down. 112 00:06:28,160 --> 00:06:31,920 Speaker 1: We're seeing tangible books in European banks where there's almost 113 00:06:31,920 --> 00:06:35,360 Speaker 1: an accelerative force of lack of confidence. How do you 114 00:06:35,400 --> 00:06:37,320 Speaker 1: know when you get there? Or do you just not 115 00:06:37,480 --> 00:06:40,440 Speaker 1: be able to predict a drop in confidence in a 116 00:06:40,520 --> 00:06:44,040 Speaker 1: banking system? Well, we don't have a funding or problem 117 00:06:44,120 --> 00:06:46,400 Speaker 1: going on right now that I've heard. I heard that before. 118 00:06:46,520 --> 00:06:48,920 Speaker 1: Leaning okay, well all right, but you know, do you 119 00:06:48,960 --> 00:06:50,960 Speaker 1: see the government? Do you do? You do you see 120 00:06:51,040 --> 00:06:53,760 Speaker 1: corporate bonds trading and equity trains? We still have a liquid, 121 00:06:53,839 --> 00:06:56,040 Speaker 1: liquid market, so we're not we're not. We don't have 122 00:06:56,160 --> 00:06:58,599 Speaker 1: that kind of a crisis yet. But you're asking, you're 123 00:06:58,600 --> 00:07:01,680 Speaker 1: asking a question, is there a price that banks have value? 124 00:07:01,760 --> 00:07:04,080 Speaker 1: Of course they are, you know, deutsch is not going away. 125 00:07:04,360 --> 00:07:07,799 Speaker 1: UBS is not going away. Barclays is not going away. 126 00:07:08,200 --> 00:07:12,680 Speaker 1: Um And and you can as an equity analyst, I 127 00:07:12,840 --> 00:07:17,840 Speaker 1: remember an analysis that I'm sure the portfolio managers are 128 00:07:17,880 --> 00:07:22,440 Speaker 1: doing today. The analysis is, as you drop below in 129 00:07:22,600 --> 00:07:25,480 Speaker 1: lower and lower levels of price to tangible book, your 130 00:07:25,720 --> 00:07:29,480 Speaker 1: beta the volatility on a down movement is less than 131 00:07:29,560 --> 00:07:32,640 Speaker 1: the beta on the upside because you know, because the 132 00:07:32,680 --> 00:07:35,560 Speaker 1: banks are nearing a liquidation value, no matter how you 133 00:07:35,680 --> 00:07:38,640 Speaker 1: what kind of of owners assumptions you in, there at 134 00:07:38,640 --> 00:07:41,400 Speaker 1: a liquidation value. So so it says that the bank 135 00:07:41,440 --> 00:07:45,440 Speaker 1: has become one way trades at some point where you know, I, 136 00:07:46,160 --> 00:07:48,080 Speaker 1: we have to be close to this, but you know 137 00:07:48,280 --> 00:07:50,480 Speaker 1: that's that's a call of an equity analyst that has 138 00:07:50,520 --> 00:07:53,600 Speaker 1: to make. It's very difficult. On the Bloomberg just a 139 00:07:53,680 --> 00:07:58,040 Speaker 1: quick look, and there's many book values Deutsche Bank zero 140 00:07:58,240 --> 00:08:04,040 Speaker 1: point to eight. That's stunning, that number, and that's and 141 00:08:04,120 --> 00:08:08,080 Speaker 1: that says they will never make money again. JP Morgan 142 00:08:08,560 --> 00:08:12,360 Speaker 1: had operating income before the crisis, which is massively expanded 143 00:08:12,680 --> 00:08:15,240 Speaker 1: within all the U S banking workout. And there's a 144 00:08:15,280 --> 00:08:18,520 Speaker 1: presumption by many analysts that they will distribute cash flow 145 00:08:18,560 --> 00:08:23,080 Speaker 1: to shareholders this morning, I can own a five point 146 00:08:23,240 --> 00:08:27,640 Speaker 1: seven percent yield on BNP Perry Box with some currency 147 00:08:27,720 --> 00:08:32,240 Speaker 1: issues with the Euro. It's extraordinary how they are differently 148 00:08:32,440 --> 00:08:39,080 Speaker 1: structured than our banks to be high dividend cash machines. Granted, 149 00:08:39,200 --> 00:08:42,640 Speaker 1: with not all that much growth. JP Morgan has a growth. 150 00:08:43,000 --> 00:08:46,120 Speaker 1: BNP Paribot is not at the growth but BMP Perry 151 00:08:46,160 --> 00:08:51,640 Speaker 1: Bots got that massive coupon. Which do I want? Philosophically, 152 00:08:54,480 --> 00:08:57,439 Speaker 1: I'm trying to ask in a professorial way. Sure they 153 00:08:59,280 --> 00:09:04,480 Speaker 1: BNP Perry is. It is smaller on the capital market side, 154 00:09:04,520 --> 00:09:06,760 Speaker 1: There's no question about that, and that's probably one of 155 00:09:06,800 --> 00:09:09,880 Speaker 1: the very good things. And JPM is the leading is 156 00:09:11,040 --> 00:09:13,839 Speaker 1: conventional wisdom is JPM is one of the winners out 157 00:09:13,880 --> 00:09:16,559 Speaker 1: of the out of the crisis. So, I mean what 158 00:09:16,679 --> 00:09:19,400 Speaker 1: you're you're really buying two different things, right, You're buying 159 00:09:19,720 --> 00:09:23,400 Speaker 1: your You're buying a BNP Perry BA with the the 160 00:09:23,640 --> 00:09:28,280 Speaker 1: idea that it it The commercial banking business fundamentally is 161 00:09:28,320 --> 00:09:31,640 Speaker 1: a good business, and a capital markets business can't drag 162 00:09:31,679 --> 00:09:33,679 Speaker 1: it down too far? Right? I mean that that that 163 00:09:34,200 --> 00:09:37,280 Speaker 1: and JPM. You're betting that Jamie will be the winner 164 00:09:37,320 --> 00:09:39,719 Speaker 1: of the war of attrition. So I mean you you 165 00:09:40,400 --> 00:09:44,640 Speaker 1: you're they're not totally comparable, right, I mean b MP 166 00:09:44,760 --> 00:09:47,040 Speaker 1: Perry bad is not attempting to be the global capital 167 00:09:47,120 --> 00:09:49,400 Speaker 1: markets bank anymore. Well what about if I bar bill 168 00:09:50,080 --> 00:09:53,280 Speaker 1: by equal amounts of both, and I believe out of 169 00:09:53,320 --> 00:09:55,360 Speaker 1: the box I generate a four and a half from 170 00:09:55,400 --> 00:09:58,920 Speaker 1: more coupon. I've got a cash flow machine in Paris, 171 00:09:59,280 --> 00:10:01,559 Speaker 1: and I got Mr Diamond running around with his head 172 00:10:01,640 --> 00:10:04,880 Speaker 1: cut off being fortress Diamond. Well, Tom, you're heading back 173 00:10:04,920 --> 00:10:06,840 Speaker 1: to the idea of is there a price that banks 174 00:10:06,920 --> 00:10:10,040 Speaker 1: look look attraductive? Yeah? There there there always is. I 175 00:10:10,080 --> 00:10:12,640 Speaker 1: mean it's it's you know, it's as an academic, you know, 176 00:10:12,720 --> 00:10:15,240 Speaker 1: you talk about cost of you know, cost of capital, 177 00:10:15,280 --> 00:10:17,719 Speaker 1: you talk about r o e s. But as a 178 00:10:17,800 --> 00:10:20,480 Speaker 1: portfolio manager, one looks at it and say, you know, 179 00:10:20,559 --> 00:10:22,400 Speaker 1: I can hold my nose and buy some Can we 180 00:10:22,520 --> 00:10:25,240 Speaker 1: start a rumor this morning that JP Morgan will buy 181 00:10:25,320 --> 00:10:29,160 Speaker 1: BMP Perry. Body would that work? Right after the FED 182 00:10:29,240 --> 00:10:33,920 Speaker 1: stress tests? Right, somebody asked oland will have a stress 183 00:10:34,120 --> 00:10:36,959 Speaker 1: Somebody asked me what the what the major takeaway I 184 00:10:37,080 --> 00:10:39,240 Speaker 1: had from the stress test was that I thought about 185 00:10:39,360 --> 00:10:41,640 Speaker 1: from it? I thought, you know, given the size of 186 00:10:41,720 --> 00:10:45,000 Speaker 1: the projected losses that could happen. You know that the 187 00:10:45,120 --> 00:10:48,760 Speaker 1: FEDS academic exercise in how much each bank could lose. 188 00:10:49,840 --> 00:10:52,680 Speaker 1: Damie Morgan is just a goliath. I mean the amount 189 00:10:52,679 --> 00:10:55,160 Speaker 1: of money they could lose is higher than the GDP 190 00:10:55,320 --> 00:10:57,959 Speaker 1: of a lot of countries. And if you, if you 191 00:10:58,000 --> 00:10:59,800 Speaker 1: think about it, what we've done is we've made the 192 00:11:00,000 --> 00:11:02,840 Speaker 1: credit of the bank spectacular. I mean, these are boy, 193 00:11:03,200 --> 00:11:05,120 Speaker 1: everybody should own the bonds of the banks. You know 194 00:11:05,200 --> 00:11:09,160 Speaker 1: they're there there their bulletproof you. Good morning, Chris Whalen, 195 00:11:09,840 --> 00:11:13,280 Speaker 1: way off front. We shouldn't we We should ask about 196 00:11:13,320 --> 00:11:16,079 Speaker 1: the other foreign banks, not BMP PARRYBO which was not 197 00:11:16,160 --> 00:11:20,200 Speaker 1: stress tested, but the ones on the list the stress 198 00:11:20,240 --> 00:11:23,520 Speaker 1: tests aren't as comparable to them. And most of these 199 00:11:23,559 --> 00:11:26,200 Speaker 1: are our smaller U S subsidiaries. And we we made 200 00:11:26,240 --> 00:11:28,600 Speaker 1: the point this morning that this is not Deutsche Bank 201 00:11:28,760 --> 00:11:32,559 Speaker 1: that failed. Is a tiny little part of a smaller 202 00:11:32,920 --> 00:11:36,319 Speaker 1: US part of Deutsche Bank. That's all going to change 203 00:11:36,679 --> 00:11:40,240 Speaker 1: in a week, well Friday, when they all become their 204 00:11:40,280 --> 00:11:43,960 Speaker 1: own holding companies. How does that affect what the foreign 205 00:11:44,000 --> 00:11:46,960 Speaker 1: banks can do, will do and are and what they 206 00:11:47,040 --> 00:11:50,959 Speaker 1: need to do regulatory as you you're well aware you're 207 00:11:50,960 --> 00:11:54,160 Speaker 1: going to end up having to capitalize these u S subsidiaries. 208 00:11:54,800 --> 00:11:59,880 Speaker 1: I uh I, I need to do a true can 209 00:12:00,080 --> 00:12:04,880 Speaker 1: fashion on the here, which is I remember as a 210 00:12:05,240 --> 00:12:09,000 Speaker 1: corporate treasurer and as a CFO, having subsidiaries with negative 211 00:12:09,040 --> 00:12:13,160 Speaker 1: equity in them, negative equity in order to allow your 212 00:12:13,600 --> 00:12:16,679 Speaker 1: the the double leverage of the company, the equity of 213 00:12:16,720 --> 00:12:18,559 Speaker 1: the holding company compared to the equity of all the 214 00:12:18,640 --> 00:12:21,800 Speaker 1: subs to look very good. And you wouldn't want to 215 00:12:21,880 --> 00:12:27,599 Speaker 1: load which bank that now? Now, of course, I you 216 00:12:27,640 --> 00:12:30,720 Speaker 1: know I have found religion and I don't do that anymore. 217 00:12:32,760 --> 00:12:35,679 Speaker 1: It's uh, did tests tell you anything about the form 218 00:12:35,720 --> 00:12:40,319 Speaker 1: banks that we should even take away from this? Um? Well, 219 00:12:41,040 --> 00:12:42,599 Speaker 1: remember the stress tests are done for a lot of 220 00:12:42,640 --> 00:12:44,760 Speaker 1: the reasons, right, They're done for the pr reasons. They're 221 00:12:44,800 --> 00:12:46,559 Speaker 1: done for you know, good stress tests. I mean, so 222 00:12:46,679 --> 00:12:49,360 Speaker 1: fundamentally these are solid tests. But you know they're also 223 00:12:49,440 --> 00:12:52,240 Speaker 1: done to pop bubbles. So the Federal Reserve has a 224 00:12:52,320 --> 00:12:56,720 Speaker 1: wonderful um ability to if they don't like something, they 225 00:12:56,760 --> 00:12:59,160 Speaker 1: can stress it. And if you're a bank and they 226 00:12:59,200 --> 00:13:01,480 Speaker 1: see a bubble developping, essentially they can use as a 227 00:13:01,640 --> 00:13:05,000 Speaker 1: macro economic tool too. So I mean, that's why the 228 00:13:05,320 --> 00:13:08,640 Speaker 1: stress tests are the binding constraint for for for all 229 00:13:08,679 --> 00:13:10,880 Speaker 1: of the banks, right we you know, the FED could 230 00:13:10,920 --> 00:13:13,920 Speaker 1: be making it could be trying to to run an 231 00:13:13,960 --> 00:13:17,520 Speaker 1: economic issue of trying to solve an economic issue for 232 00:13:17,640 --> 00:13:20,400 Speaker 1: the for the country in advance of it turning into 233 00:13:20,440 --> 00:13:23,400 Speaker 1: a crisis, and the cost would be lower returns on 234 00:13:23,480 --> 00:13:26,599 Speaker 1: the banks. And so you know, unfortunately, se CAR is 235 00:13:27,280 --> 00:13:30,599 Speaker 1: very costly for the banks. It pushes down the r 236 00:13:30,640 --> 00:13:33,839 Speaker 1: o E s, makes it very difficult to find the 237 00:13:34,000 --> 00:13:37,040 Speaker 1: optimal mix of businesses because you never know what the 238 00:13:37,120 --> 00:13:40,040 Speaker 1: stress is going to be. Thirty seconds, what will the 239 00:13:40,160 --> 00:13:44,120 Speaker 1: American regionals do? We've been too big to fail this morning? 240 00:13:44,360 --> 00:13:46,400 Speaker 1: What are the banks just below them? To P and 241 00:13:46,520 --> 00:13:49,440 Speaker 1: C in the rest of them? So there, that's where 242 00:13:49,440 --> 00:13:52,600 Speaker 1: the M and A is gonna happen. Right You're arguing 243 00:13:52,640 --> 00:13:54,719 Speaker 1: that the number of banks is going to shrink. Yes, 244 00:13:54,880 --> 00:13:56,880 Speaker 1: the number of banks is going to shrink, but but 245 00:13:57,240 --> 00:14:00,400 Speaker 1: they can't allow the larger banks to to it bigger. 246 00:14:00,720 --> 00:14:03,480 Speaker 1: So the regional's merge and make for a new you know, 247 00:14:04,000 --> 00:14:09,439 Speaker 1: we we have a new somebody, some someone in that 248 00:14:09,559 --> 00:14:13,000 Speaker 1: group is is an n CNB of the old days 249 00:14:13,040 --> 00:14:18,360 Speaker 1: that becomes a nation financial and Buffalo one of the 250 00:14:18,440 --> 00:14:20,320 Speaker 1: best banks in the world. They could be the next 251 00:14:20,640 --> 00:14:35,600 Speaker 1: BMP Perryo bred Hands. Thank you so much. Chris Ruski 252 00:14:35,760 --> 00:14:38,160 Speaker 1: is for this though he's pack Tokey. It's a good 253 00:14:38,200 --> 00:14:41,240 Speaker 1: person to talk to you right now about EIST. Do 254 00:14:41,280 --> 00:14:43,920 Speaker 1: you have an opinion on jobless claims? I mean, we're 255 00:14:44,000 --> 00:14:48,600 Speaker 1: clearly not seeing problems in the labor market. Yeah, I mean, 256 00:14:48,680 --> 00:14:50,920 Speaker 1: they don't have a lot of informational value. I know 257 00:14:51,720 --> 00:14:55,119 Speaker 1: Federal Reserve has had lectures down there, the policy officials 258 00:14:56,400 --> 00:14:59,320 Speaker 1: pushing back on the idea that it's a leading indicator 259 00:14:59,400 --> 00:15:03,080 Speaker 1: of the econom me initial unemployment claims. But at this point, 260 00:15:03,160 --> 00:15:05,680 Speaker 1: you know, it's very sensitive and at this point it 261 00:15:05,720 --> 00:15:09,640 Speaker 1: can only tell us what's you know, going wrong. And 262 00:15:09,840 --> 00:15:14,120 Speaker 1: this morning with claims up just a little bit off 263 00:15:14,320 --> 00:15:19,640 Speaker 1: the well, the lowest level of claims since the nineteen seventies, 264 00:15:21,040 --> 00:15:25,080 Speaker 1: two thousands, so we're only twenty above that. I know, 265 00:15:25,760 --> 00:15:28,600 Speaker 1: it sounds like a lot of people applying for unemployment 266 00:15:28,680 --> 00:15:31,760 Speaker 1: because they've been laid off in just one week. But 267 00:15:31,920 --> 00:15:36,240 Speaker 1: it's actually good times for the economy anyway. Nothing going 268 00:15:36,320 --> 00:15:38,400 Speaker 1: wrong yet. I mean, I think it's a fair thing 269 00:15:38,640 --> 00:15:42,120 Speaker 1: that you know, Brexit is alarmed people in a way 270 00:15:42,240 --> 00:15:46,400 Speaker 1: I haven't seen since really the Lehman shock in two 271 00:15:46,480 --> 00:15:49,600 Speaker 1: thousand and eight. I think people went a little overboard 272 00:15:49,600 --> 00:15:52,880 Speaker 1: about what those risks from Brexit mean here for the US. 273 00:15:53,080 --> 00:15:55,760 Speaker 1: But you know, so it's a fair game. We want 274 00:15:55,760 --> 00:15:58,080 Speaker 1: to see if companies are concerned enough not just to 275 00:15:58,160 --> 00:16:03,240 Speaker 1: cut production but to you know, layoff workers. And nothing's happening, 276 00:16:03,320 --> 00:16:08,440 Speaker 1: although it's only been one week. Arguably he might be interested. 277 00:16:08,520 --> 00:16:12,280 Speaker 1: I went to my economist club meeting yesterday, the Forecasters Club, 278 00:16:12,920 --> 00:16:15,720 Speaker 1: which I'm going to be president of next year. Thank you. 279 00:16:19,600 --> 00:16:22,160 Speaker 1: I hope your hope your convention is better than the 280 00:16:22,240 --> 00:16:25,800 Speaker 1: one in Cleveland. Now we we we went around the 281 00:16:25,840 --> 00:16:28,960 Speaker 1: table about what Brexit means for the US. It's just 282 00:16:29,200 --> 00:16:33,560 Speaker 1: US economists, although there's European Bank economist as well. Anyway, 283 00:16:33,960 --> 00:16:36,800 Speaker 1: too said nothing. Too said it was going to drag 284 00:16:36,880 --> 00:16:40,200 Speaker 1: GDP point one or point two percentage point one said 285 00:16:40,280 --> 00:16:42,840 Speaker 1: zero point to five is zero point five percent drag 286 00:16:42,920 --> 00:16:46,040 Speaker 1: on GDP. So you know, not that much of an 287 00:16:46,080 --> 00:16:48,920 Speaker 1: impact on GDP anyway. But one of the things is 288 00:16:49,040 --> 00:16:52,360 Speaker 1: nuanced your very quickly, Chris Rupkey, is the idea from 289 00:16:52,680 --> 00:16:56,360 Speaker 1: UH Sir Howard Davies today that he shared your optimism, 290 00:16:56,800 --> 00:16:58,600 Speaker 1: but he said, look, you've got a one time move 291 00:16:58,680 --> 00:17:02,640 Speaker 1: in Sterling. I mean, it's got to help British exports, right, 292 00:17:03,920 --> 00:17:06,320 Speaker 1: I don't know. I mean, yeah, it's been what it's 293 00:17:06,960 --> 00:17:11,720 Speaker 1: at this point, it's what move from a dollar fifty? 294 00:17:12,440 --> 00:17:14,720 Speaker 1: I don't know if that changes. I guess that's going 295 00:17:14,800 --> 00:17:17,639 Speaker 1: to have an impact. Yeah, but I mean some of 296 00:17:17,720 --> 00:17:22,200 Speaker 1: the companies in Europe have already complained about the change 297 00:17:22,240 --> 00:17:26,400 Speaker 1: in the exchange rate. I mean it's it's not yet, 298 00:17:26,520 --> 00:17:30,680 Speaker 1: but yeah, it could have an impact. Christier, I want 299 00:17:30,720 --> 00:17:32,680 Speaker 1: to talk about the economic data. We get to July 300 00:17:32,880 --> 00:17:37,080 Speaker 1: eight in the labor report. I believe the last labor report, Mike, 301 00:17:37,119 --> 00:17:41,040 Speaker 1: would you call it a little shaky and there's a 302 00:17:41,119 --> 00:17:44,480 Speaker 1: lot of there's a lot of optimism to two point 303 00:17:44,560 --> 00:17:48,439 Speaker 1: five or better g d P. How do you dovetail 304 00:17:48,840 --> 00:17:52,960 Speaker 1: a shaky labor report with a better US economic growth? 305 00:17:53,520 --> 00:17:56,560 Speaker 1: Which one? Which one's got the trend? Right? I always 306 00:17:56,600 --> 00:17:59,480 Speaker 1: look on the bright side of life. It's whatever the 307 00:17:59,680 --> 00:18:02,920 Speaker 1: data the stronger day to take that one. Yeah, it's 308 00:18:02,920 --> 00:18:07,680 Speaker 1: a little weird, isn't it. Uh, Real real consumer expenditures 309 00:18:07,800 --> 00:18:10,440 Speaker 1: yesterday we got it for May. I mean, it looks 310 00:18:10,560 --> 00:18:13,760 Speaker 1: like consumers shot the lights out in the second quarter 311 00:18:14,359 --> 00:18:18,680 Speaker 1: April through May. It's running four You know, we talked 312 00:18:18,680 --> 00:18:23,040 Speaker 1: about a two percent GDP world where that's kind of 313 00:18:23,200 --> 00:18:25,520 Speaker 1: subpar in most people's minds, but here you have the 314 00:18:25,560 --> 00:18:30,000 Speaker 1: consumer roaring out at four percent. It's quite odd. I 315 00:18:30,119 --> 00:18:34,920 Speaker 1: think what I finally detected in Janet Yellen's testimony, though, 316 00:18:35,640 --> 00:18:38,119 Speaker 1: was that she was starting to warn off people a 317 00:18:38,240 --> 00:18:42,560 Speaker 1: little about what the slowdown and payroll jobs actually mean. 318 00:18:43,119 --> 00:18:45,119 Speaker 1: I mean, they go back and forth on of it, 319 00:18:45,480 --> 00:18:47,800 Speaker 1: on this some of their some of the FETE governors 320 00:18:47,840 --> 00:18:50,199 Speaker 1: are worried about what it means. But you know, at 321 00:18:50,280 --> 00:18:53,280 Speaker 1: some point, we're at full employment. You know, unemployment rates 322 00:18:53,320 --> 00:18:55,639 Speaker 1: four point seven percent. It's not just because people are 323 00:18:55,720 --> 00:18:58,600 Speaker 1: dropping out of the labor force. I don't see people 324 00:18:58,760 --> 00:19:01,760 Speaker 1: panhandling in the street to New York. Well maybe I do, 325 00:19:01,960 --> 00:19:04,040 Speaker 1: but you know, I mean, we're at full employment. So 326 00:19:04,160 --> 00:19:07,320 Speaker 1: the idea here is that jobs are gonna slow, right, 327 00:19:07,400 --> 00:19:10,600 Speaker 1: It's gonna run like a hundred and seventy thousand on 328 00:19:10,840 --> 00:19:13,040 Speaker 1: average for the rest of the year something like that. 329 00:19:13,320 --> 00:19:17,399 Speaker 1: I mean, you know, last month's number thirty thousand, plus 330 00:19:17,880 --> 00:19:20,760 Speaker 1: you know it was weak, but I don't think you 331 00:19:20,840 --> 00:19:23,399 Speaker 1: want to think that the economy is going downhill like 332 00:19:23,600 --> 00:19:26,719 Speaker 1: recession like sort of stuff. What do you think our 333 00:19:26,800 --> 00:19:29,520 Speaker 1: growth rate in the second quarter is going to be? Well, 334 00:19:29,600 --> 00:19:31,200 Speaker 1: I guess I had to pump it up a little 335 00:19:32,240 --> 00:19:36,159 Speaker 1: after foal consumers spending, and we kind of have two 336 00:19:36,240 --> 00:19:40,840 Speaker 1: economies right now where business investments suffering a little. Although 337 00:19:40,920 --> 00:19:45,199 Speaker 1: exports came back that was good, but business investments slowing, 338 00:19:45,280 --> 00:19:47,800 Speaker 1: so I don't know, something near three point oh maybe 339 00:19:47,880 --> 00:19:52,560 Speaker 1: barely touching foint. Well, I had two point six, so uh, 340 00:19:52,680 --> 00:19:55,240 Speaker 1: consumption was strong. We'll see what happens with some of 341 00:19:55,280 --> 00:19:57,879 Speaker 1: the durable goods data later on. As I said, it 342 00:19:57,920 --> 00:20:02,280 Speaker 1: looks like exports are finally at least stabilizing and won't 343 00:20:02,320 --> 00:20:06,200 Speaker 1: be a drag that the strong dollar impact and slower 344 00:20:06,240 --> 00:20:09,760 Speaker 1: world growth that was supposedly bringing down our exports, and 345 00:20:10,200 --> 00:20:12,560 Speaker 1: they did come down quite a bit. It looks like 346 00:20:12,800 --> 00:20:16,000 Speaker 1: we're kind of leveling off there after a decline. So 347 00:20:16,119 --> 00:20:20,800 Speaker 1: that's good news. Pretty brexit of course as of today, yes, 348 00:20:21,960 --> 00:20:25,760 Speaker 1: well this is actually yesterday. The last night fed GDP 349 00:20:25,880 --> 00:20:29,720 Speaker 1: now is two point seven, so you're you're in the ballpark. There. Yeah. 350 00:20:29,760 --> 00:20:31,919 Speaker 1: But you know one interesting thing I just put up 351 00:20:31,960 --> 00:20:36,600 Speaker 1: on the Bloomberg Professional Service. Uh well really well with 352 00:20:36,720 --> 00:20:40,240 Speaker 1: these plugs and m u f G. Of course, you know, 353 00:20:40,520 --> 00:20:43,280 Speaker 1: go team m u f G. Anyway, I put up 354 00:20:44,200 --> 00:20:49,760 Speaker 1: the Dow Jones stock Index GP graph price monthly GPM 355 00:20:50,560 --> 00:20:55,240 Speaker 1: for the down industrials. I mean, put that up. Where 356 00:20:55,359 --> 00:20:58,960 Speaker 1: is the financial market turmoil here in the US that 357 00:20:59,119 --> 00:21:02,600 Speaker 1: there's nothing going on? This is not a stock market 358 00:21:02,760 --> 00:21:06,840 Speaker 1: crisis from Brexit. I mean, it's come back. I think 359 00:21:06,880 --> 00:21:10,399 Speaker 1: people are exaggerating this problem in that for the for 360 00:21:10,520 --> 00:21:13,920 Speaker 1: the US markets at this point anyway, prices have not 361 00:21:14,080 --> 00:21:16,760 Speaker 1: come down year to date. The Dow is up one 362 00:21:16,840 --> 00:21:20,200 Speaker 1: and a half percent. I mean, how is that a crisis? Well, 363 00:21:20,240 --> 00:21:23,360 Speaker 1: it's not, I suppose, is what a lot of people 364 00:21:23,440 --> 00:21:25,800 Speaker 1: after the last couple of years would say. Yeah, I 365 00:21:26,160 --> 00:21:29,280 Speaker 1: guess so. Actually I was noticing as well. You look 366 00:21:29,320 --> 00:21:31,840 Speaker 1: at some of the central bank policies where they keep 367 00:21:31,920 --> 00:21:35,119 Speaker 1: pushing and pushing and pushing. I think Drogg is going 368 00:21:35,240 --> 00:21:39,600 Speaker 1: before the German Parliament in September. I believe anyway, if 369 00:21:39,640 --> 00:21:41,600 Speaker 1: you look at you know what's going on in Germany. 370 00:21:41,760 --> 00:21:44,639 Speaker 1: Very strong economy, but their stock markets down ten percent 371 00:21:44,680 --> 00:21:47,080 Speaker 1: and they've got negative rates. I mean, how do you 372 00:21:47,160 --> 00:21:50,480 Speaker 1: explain that to the the people? I don't know. It's 373 00:21:51,280 --> 00:21:55,320 Speaker 1: an interesting time. Chris Ruski, thanks so much, greatly appreciative. 374 00:21:55,359 --> 00:22:23,879 Speaker 1: Thank you to Akill. It's appreciating and of course, a 375 00:22:23,960 --> 00:22:28,560 Speaker 1: grateful debt getting you ready for the fourth of July weekend. 376 00:22:28,640 --> 00:22:30,359 Speaker 1: We got to get ready with a grateful dead and 377 00:22:30,480 --> 00:22:32,280 Speaker 1: for that we need to go to the official surveillance 378 00:22:32,359 --> 00:22:36,000 Speaker 1: dead ed Douglas Cass of Sea Breeze Partners, good morning, sir, 379 00:22:36,800 --> 00:22:39,440 Speaker 1: Professor Keene. I thought you were more of a mellow 380 00:22:40,080 --> 00:22:43,080 Speaker 1: Crosby Stills, Nash and guy. But when I heard head's 381 00:22:43,080 --> 00:22:46,680 Speaker 1: all empty, heads all spinning, I was thinking Strugar of Magnolia. 382 00:22:47,040 --> 00:22:49,560 Speaker 1: I have a great honor of Steven Stills, and you know, 383 00:22:49,640 --> 00:22:52,480 Speaker 1: I'll listen to my Yo yo ma at the time, 384 00:22:53,359 --> 00:22:55,920 Speaker 1: but it really talks about remember the dead. They were 385 00:22:55,960 --> 00:23:00,120 Speaker 1: priced to perfection. You couldn't get tickets, and then then 386 00:23:00,200 --> 00:23:04,000 Speaker 1: the the C prices collapsed. Yeah, and the C prices 387 00:23:04,040 --> 00:23:06,160 Speaker 1: collapsed and they went on to do other things. Remind 388 00:23:06,280 --> 00:23:09,320 Speaker 1: me of the overseas bond market. Are you are you 389 00:23:09,480 --> 00:23:12,400 Speaker 1: gonna say? Doug Cass of Sabers partners. Are you gonna 390 00:23:12,440 --> 00:23:16,280 Speaker 1: say that Brexit is an exogertous shock that will unhinge 391 00:23:16,560 --> 00:23:19,359 Speaker 1: the equity markets after what we've seen the last three 392 00:23:19,440 --> 00:23:23,280 Speaker 1: days of recovery, I'm going to say that that Friday's 393 00:23:23,359 --> 00:23:27,440 Speaker 1: vote will likely lead to an unraveling of the EU, 394 00:23:28,440 --> 00:23:30,960 Speaker 1: that it will lead to a dampening of global economic 395 00:23:31,040 --> 00:23:34,040 Speaker 1: and profit growth. And I think that Brexit is far 396 00:23:34,119 --> 00:23:37,800 Speaker 1: more corrosive than we saw from say, the Greek crisis 397 00:23:37,960 --> 00:23:42,719 Speaker 1: and other economic, political, and geopolitical issues that have emerged 398 00:23:42,720 --> 00:23:46,280 Speaker 1: in recent years. John Michael Twaite, editor in chief of 399 00:23:46,320 --> 00:23:50,760 Speaker 1: Bloomberg News. Michael mckeot with a really cautious say lovely, 400 00:23:50,840 --> 00:23:55,760 Speaker 1: lovely essay today, somewhat alluding to Mr Cass's words. Well, 401 00:23:55,840 --> 00:23:59,280 Speaker 1: he's wondering if the period we just saw in Great 402 00:23:59,320 --> 00:24:04,280 Speaker 1: Britain was the exception rather than the rule. But when 403 00:24:04,359 --> 00:24:08,080 Speaker 1: you say unraveling of the EU, to what that would 404 00:24:08,119 --> 00:24:11,280 Speaker 1: be the bottom line question? I mean, do you say 405 00:24:11,359 --> 00:24:13,440 Speaker 1: we go all the way back to the mid twentieth 406 00:24:13,520 --> 00:24:18,840 Speaker 1: century or the European community it's going to be Um, 407 00:24:19,119 --> 00:24:21,320 Speaker 1: We're gonna it's going to lead to just simply a 408 00:24:21,440 --> 00:24:24,240 Speaker 1: great deal of uncertainty. Many people are saying, for example, 409 00:24:24,760 --> 00:24:27,840 Speaker 1: that this won't be imposed for several years, and I 410 00:24:27,960 --> 00:24:30,960 Speaker 1: take the contrary and view that the longer you wait, 411 00:24:31,040 --> 00:24:35,600 Speaker 1: the more uncertainty. UM. I recently wrote in the Street 412 00:24:35,680 --> 00:24:39,200 Speaker 1: that um that the movie The Big Chill is is 413 00:24:39,280 --> 00:24:43,160 Speaker 1: kind of a metaphor for last week's Brexit vote. Basically, 414 00:24:43,359 --> 00:24:47,639 Speaker 1: the voters in England decided to abandon the Union. And 415 00:24:47,760 --> 00:24:51,359 Speaker 1: this follows decades of cohesion in Europe and and abroad. 416 00:24:51,359 --> 00:24:54,840 Speaker 1: A trend of globalization that flourished back in the nine 417 00:24:55,080 --> 00:24:57,680 Speaker 1: nineties and the early two thousand and led us to 418 00:24:57,760 --> 00:25:01,000 Speaker 1: all this great global trade. And it was born out 419 00:25:01,040 --> 00:25:03,560 Speaker 1: of the ashes of World War two, and it's been 420 00:25:03,600 --> 00:25:06,320 Speaker 1: a pillar of global disorder. And it's sort of like 421 00:25:06,440 --> 00:25:09,600 Speaker 1: the characters in The Big Big Chill. In the nineties sixties, 422 00:25:09,640 --> 00:25:12,800 Speaker 1: everything was cool then they were chilled and mellow. But 423 00:25:13,200 --> 00:25:17,359 Speaker 1: just in Analyx committed suicide in the seventies and in 424 00:25:17,440 --> 00:25:20,639 Speaker 1: the eighties, the film's characters confronted all this violent change. 425 00:25:20,960 --> 00:25:23,360 Speaker 1: So I think the world order that the you represent 426 00:25:23,480 --> 00:25:26,359 Speaker 1: suddenly facing a major, major upheaval. But then take that 427 00:25:26,680 --> 00:25:31,679 Speaker 1: over to major multinationals in Europe, if they are multi nationals. 428 00:25:32,040 --> 00:25:35,680 Speaker 1: Are they within your caution or are they discreet and 429 00:25:36,000 --> 00:25:41,879 Speaker 1: separate you can work remove from those from that turbulence. Now, 430 00:25:41,960 --> 00:25:44,480 Speaker 1: I think it's going to lead to UH a great 431 00:25:44,520 --> 00:25:47,280 Speaker 1: deal of problems for let's say, for example, the europe 432 00:25:47,640 --> 00:25:51,280 Speaker 1: European bank industry. You and I and like discussed UM. 433 00:25:52,440 --> 00:25:54,960 Speaker 1: My view that the Deutsche Bank about two weeks ago 434 00:25:55,080 --> 00:25:58,320 Speaker 1: on your program is UM is the greatest risk to 435 00:25:59,119 --> 00:26:03,080 Speaker 1: contagion systemic failure. It's even greater than a I G 436 00:26:03,400 --> 00:26:06,920 Speaker 1: was in two thousand six. UM. So I think that 437 00:26:07,200 --> 00:26:09,880 Speaker 1: you know, the European banks are now in more, more 438 00:26:09,920 --> 00:26:12,600 Speaker 1: and more trouble. I think the prospect for lower for 439 00:26:12,720 --> 00:26:16,440 Speaker 1: longer will threaten their already punk profits. And you know 440 00:26:16,520 --> 00:26:20,280 Speaker 1: they're exposed more than ever to poor management, ridiculously high leverage, 441 00:26:20,640 --> 00:26:24,639 Speaker 1: opaque derivatives, crappy reporting. And I think as it relates 442 00:26:24,640 --> 00:26:28,400 Speaker 1: to multinationals, I think that UM, the flight to safety 443 00:26:28,480 --> 00:26:30,359 Speaker 1: that we've seen in the lower interest rates is going 444 00:26:30,400 --> 00:26:32,639 Speaker 1: to result in the strengthening in the green backs of 445 00:26:32,720 --> 00:26:38,800 Speaker 1: the multinationals will face UM, you know, big currency headwinds 446 00:26:39,160 --> 00:26:42,000 Speaker 1: in front of them. So with a rising percentage of 447 00:26:42,119 --> 00:26:48,040 Speaker 1: SMP profits based upon EU and and and overseas geographies. 448 00:26:48,359 --> 00:26:51,359 Speaker 1: This is going to be problematic. Do you see the 449 00:26:51,440 --> 00:26:53,440 Speaker 1: euro going away? We have had a couple of people 450 00:26:53,480 --> 00:26:56,280 Speaker 1: on the program this week. That's the question whether it 451 00:26:56,359 --> 00:26:59,960 Speaker 1: can stand. You know something, when I'm not a specialist 452 00:27:00,040 --> 00:27:02,159 Speaker 1: on an area like currencies, I really don't talk much 453 00:27:02,200 --> 00:27:06,240 Speaker 1: about it. Well, I'm more like Jeff Spaccoli and Fast 454 00:27:06,240 --> 00:27:10,280 Speaker 1: Times at Bridgewood. Hi Hi when he says to Mr Hanna, 455 00:27:10,280 --> 00:27:13,000 Speaker 1: I simply don't know. Well, I mean, I'm not asking 456 00:27:13,040 --> 00:27:16,040 Speaker 1: about the value. I'm just talking about the existence of it. Yeah, 457 00:27:16,080 --> 00:27:19,040 Speaker 1: I think that that it's that it's clearly in jeopardy. 458 00:27:19,440 --> 00:27:21,760 Speaker 1: And I think that correlations are now moving to one 459 00:27:21,840 --> 00:27:24,960 Speaker 1: and we're very leverage system. And you know, I just 460 00:27:25,080 --> 00:27:26,879 Speaker 1: think that if we look at the second half of 461 00:27:27,520 --> 00:27:31,119 Speaker 1: two thousand sixteen at the markets, it will depend importantly 462 00:27:31,440 --> 00:27:35,000 Speaker 1: on how Brexit progresses, on how the bond market and 463 00:27:35,320 --> 00:27:39,560 Speaker 1: how bank stocks. You know, three these banks, Brexit and bonds, 464 00:27:39,960 --> 00:27:42,040 Speaker 1: and I think we lead to a big church jo 465 00:27:42,080 --> 00:27:44,840 Speaker 1: invoke the dead broke down Palace. Well, speaking of broke 466 00:27:44,880 --> 00:27:49,480 Speaker 1: down Palace, we're talking about the political and economic situation 467 00:27:49,560 --> 00:27:52,920 Speaker 1: in Europe. But things almost seem as bad or worse 468 00:27:53,040 --> 00:27:56,879 Speaker 1: here in politics, Dug, how much of that are you 469 00:27:57,040 --> 00:28:00,359 Speaker 1: concerned about in terms of its impact on the markets. 470 00:28:00,400 --> 00:28:02,760 Speaker 1: It doesn't seem to be worrying Wall Street a whole lot. 471 00:28:02,800 --> 00:28:06,080 Speaker 1: At the moment. There is this general view that gridlock 472 00:28:06,240 --> 00:28:12,680 Speaker 1: is a positive. But given the uh impotency of UM 473 00:28:13,119 --> 00:28:18,520 Speaker 1: monetary policy at a zero level UM and reduced effectiveness 474 00:28:18,960 --> 00:28:21,760 Speaker 1: at best, and maybe it's value destructive because of the 475 00:28:21,800 --> 00:28:28,320 Speaker 1: paradox of thrift and disadvantaging savings. I'm concerned that with 476 00:28:28,520 --> 00:28:32,920 Speaker 1: president with Hillary Clinton likely to win in kind of 477 00:28:32,960 --> 00:28:36,960 Speaker 1: a dramatic fashion moving the Senate over to the Democrats, 478 00:28:37,280 --> 00:28:41,240 Speaker 1: but because of the large lead of Republican UM in 479 00:28:41,480 --> 00:28:46,680 Speaker 1: House incumbents over Democratic incumbent's not likely to change the 480 00:28:46,920 --> 00:28:50,120 Speaker 1: majority rule of Republicans in the House that we're going 481 00:28:50,160 --> 00:28:52,640 Speaker 1: to have gridlock. And that's exactly what we don't need. 482 00:28:52,760 --> 00:28:56,080 Speaker 1: We need. We don't need more gridlock and physical inert 483 00:28:56,520 --> 00:28:59,160 Speaker 1: So I think that will be market unfriendly. But you 484 00:28:59,200 --> 00:29:02,840 Speaker 1: wouldn't see that the alternative is possible and there would 485 00:29:02,840 --> 00:29:06,440 Speaker 1: be some sort of fiscal activity to stimulate the economy. No, 486 00:29:06,560 --> 00:29:09,800 Speaker 1: I know, not under the appearance of grid luck, more 487 00:29:09,880 --> 00:29:14,600 Speaker 1: grid luck and just severe partisanship, which seems to get 488 00:29:14,680 --> 00:29:17,600 Speaker 1: worse by the day and will obviously as we move 489 00:29:17,680 --> 00:29:20,680 Speaker 1: closer to the election. Doug, I want to push back. 490 00:29:20,960 --> 00:29:25,360 Speaker 1: We've got a lousy first quarter consensus is on a 491 00:29:25,440 --> 00:29:29,840 Speaker 1: relative basis good if on an absolute basis, saggy, it's 492 00:29:29,880 --> 00:29:33,960 Speaker 1: not mourning in America, but it's better and the number 493 00:29:34,000 --> 00:29:36,040 Speaker 1: one thing, and you and I have seen this over decades. 494 00:29:36,160 --> 00:29:41,560 Speaker 1: Corporations have a wonderful ability to adapt. So if cash 495 00:29:41,680 --> 00:29:45,640 Speaker 1: flows are more resilient, earnings more resilient, are you just 496 00:29:45,760 --> 00:29:49,920 Speaker 1: suggesting that we see a compression in multiples, seen an 497 00:29:49,960 --> 00:29:54,960 Speaker 1: expansion of multiples in a dramatic manner, certainly over the 498 00:29:55,080 --> 00:29:59,200 Speaker 1: last two or three years. To look back Tom maybe 499 00:29:59,320 --> 00:30:04,000 Speaker 1: eighteen months twenty months ago, UM earnings estimates for the SMP. 500 00:30:04,200 --> 00:30:07,280 Speaker 1: This year we're probably twenty dollars a share higher than 501 00:30:07,280 --> 00:30:10,000 Speaker 1: where they're gonna come in. So we've obviously seen an 502 00:30:10,040 --> 00:30:15,040 Speaker 1: expansion of multiples UM. But UM, you know, I don't 503 00:30:15,120 --> 00:30:19,600 Speaker 1: I don't believe in this relative value concept that, for example, 504 00:30:19,640 --> 00:30:22,360 Speaker 1: that corporations are going to be able to prosper in 505 00:30:22,440 --> 00:30:25,320 Speaker 1: the low top line environment, just like I don't believe 506 00:30:25,920 --> 00:30:29,160 Speaker 1: in the notion that the US will be an oasis prosperity. 507 00:30:29,240 --> 00:30:32,640 Speaker 1: I don't believe that in the notion that stocks are 508 00:30:33,440 --> 00:30:37,840 Speaker 1: because they're cheap relative bonds means that there's value in stocks, 509 00:30:38,000 --> 00:30:42,239 Speaker 1: or that bonds bonds are cheap. Uh, the ten year 510 00:30:42,280 --> 00:30:46,320 Speaker 1: is cheap at one yield versus the ten year German 511 00:30:46,400 --> 00:30:50,800 Speaker 1: bond at negative twelve basis points. It's like saying, you know, uh, 512 00:30:51,120 --> 00:30:53,960 Speaker 1: Alexander Rodriguez of the New York Yankees, who was hitting 513 00:30:54,000 --> 00:30:56,920 Speaker 1: to twenty is a value to the Yankees because Mark 514 00:30:57,000 --> 00:31:01,240 Speaker 1: Tchera has an even worse batting average of one. Or 515 00:31:01,400 --> 00:31:03,479 Speaker 1: to put it in your home base in the Boston 516 00:31:03,520 --> 00:31:05,800 Speaker 1: Red Sox, you send it your left field to hold 517 00:31:05,880 --> 00:31:08,480 Speaker 1: is batting two thirty five, but fastquaes you catch is 518 00:31:08,480 --> 00:31:11,360 Speaker 1: batting too ten and holds not providing much value to 519 00:31:11,440 --> 00:31:14,760 Speaker 1: the team. Did you see how ruthless he is? You know, 520 00:31:14,880 --> 00:31:19,360 Speaker 1: I get the Red Sox just how I was going to, 521 00:31:19,560 --> 00:31:23,080 Speaker 1: but I did. They're just they're doing the third week 522 00:31:23,160 --> 00:31:25,760 Speaker 1: of April in June. That's how I would put it. 523 00:31:25,960 --> 00:31:29,040 Speaker 1: A duck kiss on gold. Then, I mean, if we 524 00:31:29,160 --> 00:31:32,600 Speaker 1: have a cautious you have equities, do you find value 525 00:31:32,760 --> 00:31:37,200 Speaker 1: in gold or in commodities as general statement. I think 526 00:31:37,240 --> 00:31:39,680 Speaker 1: it was I don't know, it was your or Mike 527 00:31:39,760 --> 00:31:44,560 Speaker 1: who said they don't know that. Mike said, right, I 528 00:31:45,000 --> 00:31:47,400 Speaker 1: feel the same way. I think that gold is like religion. 529 00:31:47,680 --> 00:31:49,800 Speaker 1: Either you believe in God or you don't. Either you 530 00:31:49,880 --> 00:31:52,600 Speaker 1: believe in gold or you don't. I can't, I can't 531 00:31:52,720 --> 00:31:56,000 Speaker 1: value as an analyst, as a fundamental analyst, what the 532 00:31:56,080 --> 00:32:00,440 Speaker 1: intrinsic value of gold is self? Gold was too half example, 533 00:32:00,760 --> 00:32:03,720 Speaker 1: I don't know if I'm getting value by doubling down, Well, 534 00:32:03,760 --> 00:32:06,719 Speaker 1: it's it's uh, why by it? Because it's going up. 535 00:32:07,240 --> 00:32:09,480 Speaker 1: That seems to be the only rationale, which means then 536 00:32:09,480 --> 00:32:12,320 Speaker 1: you've got to be a market timer. We've seen like this, 537 00:32:12,720 --> 00:32:15,840 Speaker 1: this transformation over history. You know, I always asked myself, 538 00:32:15,880 --> 00:32:18,640 Speaker 1: who is the dominant investor these days? When I started 539 00:32:18,680 --> 00:32:21,080 Speaker 1: in the business in the early seventies, it was the 540 00:32:21,120 --> 00:32:23,920 Speaker 1: bank trust departments and they won decision stocks. But today 541 00:32:23,960 --> 00:32:28,600 Speaker 1: it's the machines and al goes who allocate um their 542 00:32:28,640 --> 00:32:34,040 Speaker 1: portfolio based upon risk, not asset class. And that's why 543 00:32:34,080 --> 00:32:36,560 Speaker 1: the market has no memory from day to day. That's 544 00:32:36,560 --> 00:32:39,600 Speaker 1: why market moves are exaggerated over the short term. That's 545 00:32:39,600 --> 00:32:43,120 Speaker 1: why buyers live higher and sellers live lower in our 546 00:32:43,200 --> 00:32:45,520 Speaker 1: brave new investment world. So I think what this does 547 00:32:46,080 --> 00:32:49,680 Speaker 1: is that it renders charts and technical analysis less valuable. 548 00:32:49,800 --> 00:32:53,440 Speaker 1: It ruins the charts um it exaggerates stuff like, look 549 00:32:53,600 --> 00:32:57,680 Speaker 1: on Friday and Monday, stocks drop, the VIX exploded, the 550 00:32:57,800 --> 00:33:04,600 Speaker 1: machines were sellers Tuesday and wednes the stock sort I strongly, strongly, 551 00:33:04,720 --> 00:33:07,200 Speaker 1: Doug agree with that the action of the VIX correlated 552 00:33:07,200 --> 00:33:10,520 Speaker 1: to the equities recently has been odd. To say, Doug Cass, 553 00:33:10,560 --> 00:33:12,680 Speaker 1: thank you so much with Sea Breeze. Thanks for having 554 00:33:12,760 --> 00:33:19,000 Speaker 1: me always our great pleasure. Thanks for listening to the 555 00:33:19,040 --> 00:33:25,080 Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud, 556 00:33:25,440 --> 00:33:29,400 Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at 557 00:33:29,440 --> 00:33:34,200 Speaker 1: Tom Keane. Michael McKee is at Economy Before the podcast. 558 00:33:34,320 --> 00:33:37,800 Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio