Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always
Speaker 1: with Michael McKee. Daily we bring you insight from the
Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg
Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course
Speaker 1: on the Bloomberg The ins and outs of Brexit, whether
Speaker 1: it is happening, not happening, what's happening? Uh, The huge
Speaker 1: story of the day, certainly in the United Kingdom and
Speaker 1: for much of Europe. But in the US today, everybody's
Speaker 1: talking about the banks. The second round of FED stress
Speaker 1: tests out yesterday, and it's a little bit like Lake Wobegon,
Speaker 1: where all the men are pretty and all the women
Speaker 1: are strong and the children above average. Everybody passed in
Speaker 1: the US this time. A couple of foreign banks didn't
Speaker 1: quite get there. We're gonna talk about that now with
Speaker 1: Brad Hints, because of course he is the man, the CEO, uh,
Speaker 1: the I'm sorry Stern Business School finance professor, not CEO
Speaker 1: of Stern Business School, of course, but the former CFO
Speaker 1: what I meant to say, of several banks and longtime
Speaker 1: bank analyst. He joined US now and Brad um Yeah,
Speaker 1: obviously the bank's got to be happy. But the FED
Speaker 1: has to be happy too, because they did set a
Speaker 1: rather tough bar, rather high bar in the adverse stress scenario,
Speaker 1: and basically everybody cleared it in terms of capital adequacy. Well,
Speaker 1: that's exactly right. So if we think of the stress test,
Speaker 1: the stress test is a Swiss army knife that the
Speaker 1: FED uses, right, And one of the users of the
Speaker 1: uses of the Swiss army knife is public relations. So
Speaker 1: in the midst of Brexit, the FED is able to
Speaker 1: say US banks are solid, and that help works well
Speaker 1: with the press, and it works well with the public,
Speaker 1: and it works well on Capitol Hill and you know,
Speaker 1: and yes, they stressed the banks and they did well.
Speaker 1: The banks have been getting much better at taking this test,
Speaker 1: and part of that is they reversed engineered a lot
Speaker 1: of the FED. Well, there's a good question. Is it
Speaker 1: that they're getting better at meeting the FEDS requirement or
Speaker 1: they're getting better at knowing how to take the test?
Speaker 1: What's a combination of both, right? I mean, we can
Speaker 1: we can mathematically look at the at the balance sheets.
Speaker 1: The banks are just much stronger than they've been in years.
Speaker 1: But on the other hand, if you take this test
Speaker 1: over a period of time, despite the fact that the
Speaker 1: scenarios change all the time, you're just going to get better.
Speaker 1: You're going to know how the FED models are going
Speaker 1: to work. And if you see your internal models are
Speaker 1: different than the FED models, you're gonna do everything you
Speaker 1: can to get them together so that so that when
Speaker 1: you say the answer, you're gonna be close to what
Speaker 1: the professor tells you is the real answer. And and
Speaker 1: that's what we're seeing, bright hands, when when when you
Speaker 1: look at these banks, one of the ideas and you're
Speaker 1: not doing by hold cell anymore, but we're hearing from
Speaker 1: a lot of people in the street that a great
Speaker 1: cash flow awaits. Is this the day or you have
Speaker 1: more confidence that these banks will have ample cash flow
Speaker 1: to move to shareholders through dividend growth and share buy
Speaker 1: back where they get beyond being quasa utilities, Well, Tom,
Speaker 1: you've got you know, you've got banks that are proposing
Speaker 1: combined payout ratios of near a hundred percent. So in essence,
Speaker 1: your buy backs and your dividends are going to pay
Speaker 1: out everything that you're earned. So you know what that'll
Speaker 1: do is that is again, if we think about it,
Speaker 1: from an equity point of view, it's reducing the discount
Speaker 1: because you know, here we have a group of banks
Speaker 1: that are out beating their cost of capital, that are
Speaker 1: generating unacceptable returns. But if you can get high dividends
Speaker 1: off of them, that that you you may find that
Speaker 1: still an acceptable investment. On the other hand, if you're
Speaker 1: paying out more than a hundred percent of what you've got,
Speaker 1: or you don't have a lot of growth, and so
Speaker 1: you know, unfortunately, we have an industry that's still in transition,
Speaker 1: in a long transition. Now right we're in the eighth
Speaker 1: year of the transition you know, from them from the crisis.
Speaker 1: But will they trans will they transition over the next
Speaker 1: eighteen months to two years to cash flow generators they
Speaker 1: give it back to shareholders. That's the thesis of exactly,
Speaker 1: and that is that's what you're seeing with distresses. Distresses
Speaker 1: allows them to to to return more capital. You can
Speaker 1: prove that you can you can live through a very
Speaker 1: very difficult scenario, and you can you can execute your
Speaker 1: your your capital proposals. All of them are asking to
Speaker 1: to give back more capital, I don't you know. Unfortunately,
Speaker 1: that leads us in the direction of a utility. You know,
Speaker 1: they pay back. They don't generate great returns, but they
Speaker 1: do pay off. Are the banks handicapped in anyway by
Speaker 1: the efforts that they have made to meet the requirements
Speaker 1: of the test? Are they making fewer loans because of
Speaker 1: that or making less money because of that? Yes, their
Speaker 1: stress test c CAR is UH is the binding constraint
Speaker 1: on the banks. And you've you've had JP Morgan's say that,
Speaker 1: Morgan Stanley Goldman say that if the the the analogy
Speaker 1: I've used in the past is that the stress test
Speaker 1: is like one of those invisible fences that people put
Speaker 1: up for their dog, and and and then each night
Speaker 1: they never worked well, keep you in the studio, like
Speaker 1: you know, each each year the FED goes and it
Speaker 1: digs up the invisible fence and it moves it around
Speaker 1: so that the poor banks who are out in the
Speaker 1: backyard really don't know where they're going to get shocked
Speaker 1: and and and unfortunately what that means is you don't
Speaker 1: go anywhere near the stress test. So you're always maintaining
Speaker 1: surplus capital that pulls down your r o E s.
Speaker 1: You're always maintaining surplus liquidity that pulls down your r
Speaker 1: o I want to get this in bread. I think
Speaker 1: it's too important for our global Wall Street audience. We
Speaker 1: talked earlier about the idea away from tangible book value
Speaker 1: of the European banks, and the share price is just
Speaker 1: getting so low, the behavioral idea of debt versus equity
Speaker 1: Madiglian and Miller and the rest of it. Forget about
Speaker 1: the theory about it. There's a point where the thing
Speaker 1: breaks is tangible book value comes down and down and down.
Speaker 1: We're seeing tangible books in European banks where there's almost
Speaker 1: an accelerative force of lack of confidence. How do you
Speaker 1: know when you get there? Or do you just not
Speaker 1: be able to predict a drop in confidence in a
Speaker 1: banking system? Well, we don't have a funding or problem
Speaker 1: going on right now that I've heard. I heard that before.
Speaker 1: Leaning okay, well all right, but you know, do you
Speaker 1: see the government? Do you do? You do you see
Speaker 1: corporate bonds trading and equity trains? We still have a liquid,
Speaker 1: liquid market, so we're not we're not. We don't have
Speaker 1: that kind of a crisis yet. But you're asking, you're
Speaker 1: asking a question, is there a price that banks have value?
Speaker 1: Of course they are, you know, deutsch is not going away.
Speaker 1: UBS is not going away. Barclays is not going away.
Speaker 1: Um And and you can as an equity analyst, I
Speaker 1: remember an analysis that I'm sure the portfolio managers are
Speaker 1: doing today. The analysis is, as you drop below in
Speaker 1: lower and lower levels of price to tangible book, your
Speaker 1: beta the volatility on a down movement is less than
Speaker 1: the beta on the upside because you know, because the
Speaker 1: banks are nearing a liquidation value, no matter how you
Speaker 1: what kind of of owners assumptions you in, there at
Speaker 1: a liquidation value. So so it says that the bank
Speaker 1: has become one way trades at some point where you know, I,
Speaker 1: we have to be close to this, but you know
Speaker 1: that's that's a call of an equity analyst that has
Speaker 1: to make. It's very difficult. On the Bloomberg just a
Speaker 1: quick look, and there's many book values Deutsche Bank zero
Speaker 1: point to eight. That's stunning, that number, and that's and
Speaker 1: that says they will never make money again. JP Morgan
Speaker 1: had operating income before the crisis, which is massively expanded
Speaker 1: within all the U S banking workout. And there's a
Speaker 1: presumption by many analysts that they will distribute cash flow
Speaker 1: to shareholders this morning, I can own a five point
Speaker 1: seven percent yield on BNP Perry Box with some currency
Speaker 1: issues with the Euro. It's extraordinary how they are differently
Speaker 1: structured than our banks to be high dividend cash machines. Granted,
Speaker 1: with not all that much growth. JP Morgan has a growth.
Speaker 1: BNP Paribot is not at the growth but BMP Perry
Speaker 1: Bots got that massive coupon. Which do I want? Philosophically,
Speaker 1: I'm trying to ask in a professorial way. Sure they
Speaker 1: BNP Perry is. It is smaller on the capital market side,
Speaker 1: There's no question about that, and that's probably one of
Speaker 1: the very good things. And JPM is the leading is
Speaker 1: conventional wisdom is JPM is one of the winners out
Speaker 1: of the out of the crisis. So, I mean what
Speaker 1: you're you're really buying two different things, right, You're buying
Speaker 1: your You're buying a BNP Perry BA with the the
Speaker 1: idea that it it The commercial banking business fundamentally is
Speaker 1: a good business, and a capital markets business can't drag
Speaker 1: it down too far? Right? I mean that that that
Speaker 1: and JPM. You're betting that Jamie will be the winner
Speaker 1: of the war of attrition. So I mean you you
Speaker 1: you're they're not totally comparable, right, I mean b MP
Speaker 1: Perry bad is not attempting to be the global capital
Speaker 1: markets bank anymore. Well what about if I bar bill
Speaker 1: by equal amounts of both, and I believe out of
Speaker 1: the box I generate a four and a half from
Speaker 1: more coupon. I've got a cash flow machine in Paris,
Speaker 1: and I got Mr Diamond running around with his head
Speaker 1: cut off being fortress Diamond. Well, Tom, you're heading back
Speaker 1: to the idea of is there a price that banks
Speaker 1: look look attraductive? Yeah? There there there always is. I
Speaker 1: mean it's it's you know, it's as an academic, you know,
Speaker 1: you talk about cost of you know, cost of capital,
Speaker 1: you talk about r o e s. But as a
Speaker 1: portfolio manager, one looks at it and say, you know,
Speaker 1: I can hold my nose and buy some Can we
Speaker 1: start a rumor this morning that JP Morgan will buy
Speaker 1: BMP Perry. Body would that work? Right after the FED
Speaker 1: stress tests? Right, somebody asked oland will have a stress
Speaker 1: Somebody asked me what the what the major takeaway I
Speaker 1: had from the stress test was that I thought about
Speaker 1: from it? I thought, you know, given the size of
Speaker 1: the projected losses that could happen. You know that the
Speaker 1: FEDS academic exercise in how much each bank could lose.
Speaker 1: Damie Morgan is just a goliath. I mean the amount
Speaker 1: of money they could lose is higher than the GDP
Speaker 1: of a lot of countries. And if you, if you
Speaker 1: think about it, what we've done is we've made the
Speaker 1: credit of the bank spectacular. I mean, these are boy,
Speaker 1: everybody should own the bonds of the banks. You know
Speaker 1: they're there there their bulletproof you. Good morning, Chris Whalen,
Speaker 1: way off front. We shouldn't we We should ask about
Speaker 1: the other foreign banks, not BMP PARRYBO which was not
Speaker 1: stress tested, but the ones on the list the stress
Speaker 1: tests aren't as comparable to them. And most of these
Speaker 1: are our smaller U S subsidiaries. And we we made
Speaker 1: the point this morning that this is not Deutsche Bank
Speaker 1: that failed. Is a tiny little part of a smaller
Speaker 1: US part of Deutsche Bank. That's all going to change
Speaker 1: in a week, well Friday, when they all become their
Speaker 1: own holding companies. How does that affect what the foreign
Speaker 1: banks can do, will do and are and what they
Speaker 1: need to do regulatory as you you're well aware you're
Speaker 1: going to end up having to capitalize these u S subsidiaries.
Speaker 1: I uh I, I need to do a true can
Speaker 1: fashion on the here, which is I remember as a
Speaker 1: corporate treasurer and as a CFO, having subsidiaries with negative
Speaker 1: equity in them, negative equity in order to allow your
Speaker 1: the the double leverage of the company, the equity of
Speaker 1: the holding company compared to the equity of all the
Speaker 1: subs to look very good. And you wouldn't want to
Speaker 1: load which bank that now? Now, of course, I you
Speaker 1: know I have found religion and I don't do that anymore.
Speaker 1: It's uh, did tests tell you anything about the form
Speaker 1: banks that we should even take away from this? Um? Well,
Speaker 1: remember the stress tests are done for a lot of
Speaker 1: the reasons, right, They're done for the pr reasons. They're
Speaker 1: done for you know, good stress tests. I mean, so
Speaker 1: fundamentally these are solid tests. But you know they're also
Speaker 1: done to pop bubbles. So the Federal Reserve has a
Speaker 1: wonderful um ability to if they don't like something, they
Speaker 1: can stress it. And if you're a bank and they
Speaker 1: see a bubble developping, essentially they can use as a
Speaker 1: macro economic tool too. So I mean, that's why the
Speaker 1: stress tests are the binding constraint for for for all
Speaker 1: of the banks, right we you know, the FED could
Speaker 1: be making it could be trying to to run an
Speaker 1: economic issue of trying to solve an economic issue for
Speaker 1: the for the country in advance of it turning into
Speaker 1: a crisis, and the cost would be lower returns on
Speaker 1: the banks. And so you know, unfortunately, se CAR is
Speaker 1: very costly for the banks. It pushes down the r
Speaker 1: o E s, makes it very difficult to find the
Speaker 1: optimal mix of businesses because you never know what the
Speaker 1: stress is going to be. Thirty seconds, what will the
Speaker 1: American regionals do? We've been too big to fail this morning?
Speaker 1: What are the banks just below them? To P and
Speaker 1: C in the rest of them? So there, that's where
Speaker 1: the M and A is gonna happen. Right You're arguing
Speaker 1: that the number of banks is going to shrink. Yes,
Speaker 1: the number of banks is going to shrink, but but
Speaker 1: they can't allow the larger banks to to it bigger.
Speaker 1: So the regional's merge and make for a new you know,
Speaker 1: we we have a new somebody, some someone in that
Speaker 1: group is is an n CNB of the old days
Speaker 1: that becomes a nation financial and Buffalo one of the
Speaker 1: best banks in the world. They could be the next
Speaker 1: BMP Perryo bred Hands. Thank you so much. Chris Ruski
Speaker 1: is for this though he's pack Tokey. It's a good
Speaker 1: person to talk to you right now about EIST. Do
Speaker 1: you have an opinion on jobless claims? I mean, we're
Speaker 1: clearly not seeing problems in the labor market. Yeah, I mean,
Speaker 1: they don't have a lot of informational value. I know
Speaker 1: Federal Reserve has had lectures down there, the policy officials
Speaker 1: pushing back on the idea that it's a leading indicator
Speaker 1: of the econom me initial unemployment claims. But at this point,
Speaker 1: you know, it's very sensitive and at this point it
Speaker 1: can only tell us what's you know, going wrong. And
Speaker 1: this morning with claims up just a little bit off
Speaker 1: the well, the lowest level of claims since the nineteen seventies,
Speaker 1: two thousands, so we're only twenty above that. I know,
Speaker 1: it sounds like a lot of people applying for unemployment
Speaker 1: because they've been laid off in just one week. But
Speaker 1: it's actually good times for the economy anyway. Nothing going
Speaker 1: wrong yet. I mean, I think it's a fair thing
Speaker 1: that you know, Brexit is alarmed people in a way
Speaker 1: I haven't seen since really the Lehman shock in two
Speaker 1: thousand and eight. I think people went a little overboard
Speaker 1: about what those risks from Brexit mean here for the US.
Speaker 1: But you know, so it's a fair game. We want
Speaker 1: to see if companies are concerned enough not just to
Speaker 1: cut production but to you know, layoff workers. And nothing's happening,
Speaker 1: although it's only been one week. Arguably he might be interested.
Speaker 1: I went to my economist club meeting yesterday, the Forecasters Club,
Speaker 1: which I'm going to be president of next year. Thank you.
Speaker 1: I hope your hope your convention is better than the
Speaker 1: one in Cleveland. Now we we we went around the
Speaker 1: table about what Brexit means for the US. It's just
Speaker 1: US economists, although there's European Bank economist as well. Anyway,
Speaker 1: too said nothing. Too said it was going to drag
Speaker 1: GDP point one or point two percentage point one said
Speaker 1: zero point to five is zero point five percent drag
Speaker 1: on GDP. So you know, not that much of an
Speaker 1: impact on GDP anyway. But one of the things is
Speaker 1: nuanced your very quickly, Chris Rupkey, is the idea from
Speaker 1: UH Sir Howard Davies today that he shared your optimism,
Speaker 1: but he said, look, you've got a one time move
Speaker 1: in Sterling. I mean, it's got to help British exports, right,
Speaker 1: I don't know. I mean, yeah, it's been what it's
Speaker 1: at this point, it's what move from a dollar fifty?
Speaker 1: I don't know if that changes. I guess that's going
Speaker 1: to have an impact. Yeah, but I mean some of
Speaker 1: the companies in Europe have already complained about the change
Speaker 1: in the exchange rate. I mean it's it's not yet,
Speaker 1: but yeah, it could have an impact. Christier, I want
Speaker 1: to talk about the economic data. We get to July
Speaker 1: eight in the labor report. I believe the last labor report, Mike,
Speaker 1: would you call it a little shaky and there's a
Speaker 1: lot of there's a lot of optimism to two point
Speaker 1: five or better g d P. How do you dovetail
Speaker 1: a shaky labor report with a better US economic growth?
Speaker 1: Which one? Which one's got the trend? Right? I always
Speaker 1: look on the bright side of life. It's whatever the
Speaker 1: data the stronger day to take that one. Yeah, it's
Speaker 1: a little weird, isn't it. Uh, Real real consumer expenditures
Speaker 1: yesterday we got it for May. I mean, it looks
Speaker 1: like consumers shot the lights out in the second quarter
Speaker 1: April through May. It's running four You know, we talked
Speaker 1: about a two percent GDP world where that's kind of
Speaker 1: subpar in most people's minds, but here you have the
Speaker 1: consumer roaring out at four percent. It's quite odd. I
Speaker 1: think what I finally detected in Janet Yellen's testimony, though,
Speaker 1: was that she was starting to warn off people a
Speaker 1: little about what the slowdown and payroll jobs actually mean.
Speaker 1: I mean, they go back and forth on of it,
Speaker 1: on this some of their some of the FETE governors
Speaker 1: are worried about what it means. But you know, at
Speaker 1: some point, we're at full employment. You know, unemployment rates
Speaker 1: four point seven percent. It's not just because people are
Speaker 1: dropping out of the labor force. I don't see people
Speaker 1: panhandling in the street to New York. Well maybe I do,
Speaker 1: but you know, I mean, we're at full employment. So
Speaker 1: the idea here is that jobs are gonna slow, right,
Speaker 1: It's gonna run like a hundred and seventy thousand on
Speaker 1: average for the rest of the year something like that.
Speaker 1: I mean, you know, last month's number thirty thousand, plus
Speaker 1: you know it was weak, but I don't think you
Speaker 1: want to think that the economy is going downhill like
Speaker 1: recession like sort of stuff. What do you think our
Speaker 1: growth rate in the second quarter is going to be? Well,
Speaker 1: I guess I had to pump it up a little
Speaker 1: after foal consumers spending, and we kind of have two
Speaker 1: economies right now where business investments suffering a little. Although
Speaker 1: exports came back that was good, but business investments slowing,
Speaker 1: so I don't know, something near three point oh maybe
Speaker 1: barely touching foint. Well, I had two point six, so uh,
Speaker 1: consumption was strong. We'll see what happens with some of
Speaker 1: the durable goods data later on. As I said, it
Speaker 1: looks like exports are finally at least stabilizing and won't
Speaker 1: be a drag that the strong dollar impact and slower
Speaker 1: world growth that was supposedly bringing down our exports, and
Speaker 1: they did come down quite a bit. It looks like
Speaker 1: we're kind of leveling off there after a decline. So
Speaker 1: that's good news. Pretty brexit of course as of today, yes,
Speaker 1: well this is actually yesterday. The last night fed GDP
Speaker 1: now is two point seven, so you're you're in the ballpark. There. Yeah.
Speaker 1: But you know one interesting thing I just put up
Speaker 1: on the Bloomberg Professional Service. Uh well really well with
Speaker 1: these plugs and m u f G. Of course, you know,
Speaker 1: go team m u f G. Anyway, I put up
Speaker 1: the Dow Jones stock Index GP graph price monthly GPM
Speaker 1: for the down industrials. I mean, put that up. Where
Speaker 1: is the financial market turmoil here in the US that
Speaker 1: there's nothing going on? This is not a stock market
Speaker 1: crisis from Brexit. I mean, it's come back. I think
Speaker 1: people are exaggerating this problem in that for the for
Speaker 1: the US markets at this point anyway, prices have not
Speaker 1: come down year to date. The Dow is up one
Speaker 1: and a half percent. I mean, how is that a crisis? Well,
Speaker 1: it's not, I suppose, is what a lot of people
Speaker 1: after the last couple of years would say. Yeah, I
Speaker 1: guess so. Actually I was noticing as well. You look
Speaker 1: at some of the central bank policies where they keep
Speaker 1: pushing and pushing and pushing. I think Drogg is going
Speaker 1: before the German Parliament in September. I believe anyway, if
Speaker 1: you look at you know what's going on in Germany.
Speaker 1: Very strong economy, but their stock markets down ten percent
Speaker 1: and they've got negative rates. I mean, how do you
Speaker 1: explain that to the the people? I don't know. It's
Speaker 1: an interesting time. Chris Ruski, thanks so much, greatly appreciative.
Speaker 1: Thank you to Akill. It's appreciating and of course, a
Speaker 1: grateful debt getting you ready for the fourth of July weekend.
Speaker 1: We got to get ready with a grateful dead and
Speaker 1: for that we need to go to the official surveillance
Speaker 1: dead ed Douglas Cass of Sea Breeze Partners, good morning, sir,
Speaker 1: Professor Keene. I thought you were more of a mellow
Speaker 1: Crosby Stills, Nash and guy. But when I heard head's
Speaker 1: all empty, heads all spinning, I was thinking Strugar of Magnolia.
Speaker 1: I have a great honor of Steven Stills, and you know,
Speaker 1: I'll listen to my Yo yo ma at the time,
Speaker 1: but it really talks about remember the dead. They were
Speaker 1: priced to perfection. You couldn't get tickets, and then then
Speaker 1: the the C prices collapsed. Yeah, and the C prices
Speaker 1: collapsed and they went on to do other things. Remind
Speaker 1: me of the overseas bond market. Are you are you
Speaker 1: gonna say? Doug Cass of Sabers partners. Are you gonna
Speaker 1: say that Brexit is an exogertous shock that will unhinge
Speaker 1: the equity markets after what we've seen the last three
Speaker 1: days of recovery, I'm going to say that that Friday's
Speaker 1: vote will likely lead to an unraveling of the EU,
Speaker 1: that it will lead to a dampening of global economic
Speaker 1: and profit growth. And I think that Brexit is far
Speaker 1: more corrosive than we saw from say, the Greek crisis
Speaker 1: and other economic, political, and geopolitical issues that have emerged
Speaker 1: in recent years. John Michael Twaite, editor in chief of
Speaker 1: Bloomberg News. Michael mckeot with a really cautious say lovely,
Speaker 1: lovely essay today, somewhat alluding to Mr Cass's words. Well,
Speaker 1: he's wondering if the period we just saw in Great
Speaker 1: Britain was the exception rather than the rule. But when
Speaker 1: you say unraveling of the EU, to what that would
Speaker 1: be the bottom line question? I mean, do you say
Speaker 1: we go all the way back to the mid twentieth
Speaker 1: century or the European community it's going to be Um,
Speaker 1: We're gonna it's going to lead to just simply a
Speaker 1: great deal of uncertainty. Many people are saying, for example,
Speaker 1: that this won't be imposed for several years, and I
Speaker 1: take the contrary and view that the longer you wait,
Speaker 1: the more uncertainty. UM. I recently wrote in the Street
Speaker 1: that um that the movie The Big Chill is is
Speaker 1: kind of a metaphor for last week's Brexit vote. Basically,
Speaker 1: the voters in England decided to abandon the Union. And
Speaker 1: this follows decades of cohesion in Europe and and abroad.
Speaker 1: A trend of globalization that flourished back in the nine
Speaker 1: nineties and the early two thousand and led us to
Speaker 1: all this great global trade. And it was born out
Speaker 1: of the ashes of World War two, and it's been
Speaker 1: a pillar of global disorder. And it's sort of like
Speaker 1: the characters in The Big Big Chill. In the nineties sixties,
Speaker 1: everything was cool then they were chilled and mellow. But
Speaker 1: just in Analyx committed suicide in the seventies and in
Speaker 1: the eighties, the film's characters confronted all this violent change.
Speaker 1: So I think the world order that the you represent
Speaker 1: suddenly facing a major, major upheaval. But then take that
Speaker 1: over to major multinationals in Europe, if they are multi nationals.
Speaker 1: Are they within your caution or are they discreet and
Speaker 1: separate you can work remove from those from that turbulence. Now,
Speaker 1: I think it's going to lead to UH a great
Speaker 1: deal of problems for let's say, for example, the europe
Speaker 1: European bank industry. You and I and like discussed UM.
Speaker 1: My view that the Deutsche Bank about two weeks ago
Speaker 1: on your program is UM is the greatest risk to
Speaker 1: contagion systemic failure. It's even greater than a I G
Speaker 1: was in two thousand six. UM. So I think that
Speaker 1: you know, the European banks are now in more, more
Speaker 1: and more trouble. I think the prospect for lower for
Speaker 1: longer will threaten their already punk profits. And you know
Speaker 1: they're exposed more than ever to poor management, ridiculously high leverage,
Speaker 1: opaque derivatives, crappy reporting. And I think as it relates
Speaker 1: to multinationals, I think that UM, the flight to safety
Speaker 1: that we've seen in the lower interest rates is going
Speaker 1: to result in the strengthening in the green backs of
Speaker 1: the multinationals will face UM, you know, big currency headwinds
Speaker 1: in front of them. So with a rising percentage of
Speaker 1: SMP profits based upon EU and and and overseas geographies.
Speaker 1: This is going to be problematic. Do you see the
Speaker 1: euro going away? We have had a couple of people
Speaker 1: on the program this week. That's the question whether it
Speaker 1: can stand. You know something, when I'm not a specialist
Speaker 1: on an area like currencies, I really don't talk much
Speaker 1: about it. Well, I'm more like Jeff Spaccoli and Fast
Speaker 1: Times at Bridgewood. Hi Hi when he says to Mr Hanna,
Speaker 1: I simply don't know. Well, I mean, I'm not asking
Speaker 1: about the value. I'm just talking about the existence of it. Yeah,
Speaker 1: I think that that it's that it's clearly in jeopardy.
Speaker 1: And I think that correlations are now moving to one
Speaker 1: and we're very leverage system. And you know, I just
Speaker 1: think that if we look at the second half of
Speaker 1: two thousand sixteen at the markets, it will depend importantly
Speaker 1: on how Brexit progresses, on how the bond market and
Speaker 1: how bank stocks. You know, three these banks, Brexit and bonds,
Speaker 1: and I think we lead to a big church jo
Speaker 1: invoke the dead broke down Palace. Well, speaking of broke
Speaker 1: down Palace, we're talking about the political and economic situation
Speaker 1: in Europe. But things almost seem as bad or worse
Speaker 1: here in politics, Dug, how much of that are you
Speaker 1: concerned about in terms of its impact on the markets.
Speaker 1: It doesn't seem to be worrying Wall Street a whole lot.
Speaker 1: At the moment. There is this general view that gridlock
Speaker 1: is a positive. But given the uh impotency of UM
Speaker 1: monetary policy at a zero level UM and reduced effectiveness
Speaker 1: at best, and maybe it's value destructive because of the
Speaker 1: paradox of thrift and disadvantaging savings. I'm concerned that with
Speaker 1: president with Hillary Clinton likely to win in kind of
Speaker 1: a dramatic fashion moving the Senate over to the Democrats,
Speaker 1: but because of the large lead of Republican UM in
Speaker 1: House incumbents over Democratic incumbent's not likely to change the
Speaker 1: majority rule of Republicans in the House that we're going
Speaker 1: to have gridlock. And that's exactly what we don't need.
Speaker 1: We need. We don't need more gridlock and physical inert
Speaker 1: So I think that will be market unfriendly. But you
Speaker 1: wouldn't see that the alternative is possible and there would
Speaker 1: be some sort of fiscal activity to stimulate the economy. No,
Speaker 1: I know, not under the appearance of grid luck, more
Speaker 1: grid luck and just severe partisanship, which seems to get
Speaker 1: worse by the day and will obviously as we move
Speaker 1: closer to the election. Doug, I want to push back.
Speaker 1: We've got a lousy first quarter consensus is on a
Speaker 1: relative basis good if on an absolute basis, saggy, it's
Speaker 1: not mourning in America, but it's better and the number
Speaker 1: one thing, and you and I have seen this over decades.
Speaker 1: Corporations have a wonderful ability to adapt. So if cash
Speaker 1: flows are more resilient, earnings more resilient, are you just
Speaker 1: suggesting that we see a compression in multiples, seen an
Speaker 1: expansion of multiples in a dramatic manner, certainly over the
Speaker 1: last two or three years. To look back Tom maybe
Speaker 1: eighteen months twenty months ago, UM earnings estimates for the SMP.
Speaker 1: This year we're probably twenty dollars a share higher than
Speaker 1: where they're gonna come in. So we've obviously seen an
Speaker 1: expansion of multiples UM. But UM, you know, I don't
Speaker 1: I don't believe in this relative value concept that, for example,
Speaker 1: that corporations are going to be able to prosper in
Speaker 1: the low top line environment, just like I don't believe
Speaker 1: in the notion that the US will be an oasis prosperity.
Speaker 1: I don't believe that in the notion that stocks are
Speaker 1: because they're cheap relative bonds means that there's value in stocks,
Speaker 1: or that bonds bonds are cheap. Uh, the ten year
Speaker 1: is cheap at one yield versus the ten year German
Speaker 1: bond at negative twelve basis points. It's like saying, you know, uh,
Speaker 1: Alexander Rodriguez of the New York Yankees, who was hitting
Speaker 1: to twenty is a value to the Yankees because Mark
Speaker 1: Tchera has an even worse batting average of one. Or
Speaker 1: to put it in your home base in the Boston
Speaker 1: Red Sox, you send it your left field to hold
Speaker 1: is batting two thirty five, but fastquaes you catch is
Speaker 1: batting too ten and holds not providing much value to
Speaker 1: the team. Did you see how ruthless he is? You know,
Speaker 1: I get the Red Sox just how I was going to,
Speaker 1: but I did. They're just they're doing the third week
Speaker 1: of April in June. That's how I would put it.
Speaker 1: A duck kiss on gold. Then, I mean, if we
Speaker 1: have a cautious you have equities, do you find value
Speaker 1: in gold or in commodities as general statement. I think
Speaker 1: it was I don't know, it was your or Mike
Speaker 1: who said they don't know that. Mike said, right, I
Speaker 1: feel the same way. I think that gold is like religion.
Speaker 1: Either you believe in God or you don't. Either you
Speaker 1: believe in gold or you don't. I can't, I can't
Speaker 1: value as an analyst, as a fundamental analyst, what the
Speaker 1: intrinsic value of gold is self? Gold was too half example,
Speaker 1: I don't know if I'm getting value by doubling down, Well,
Speaker 1: it's it's uh, why by it? Because it's going up.
Speaker 1: That seems to be the only rationale, which means then
Speaker 1: you've got to be a market timer. We've seen like this,
Speaker 1: this transformation over history. You know, I always asked myself,
Speaker 1: who is the dominant investor these days? When I started
Speaker 1: in the business in the early seventies, it was the
Speaker 1: bank trust departments and they won decision stocks. But today
Speaker 1: it's the machines and al goes who allocate um their
Speaker 1: portfolio based upon risk, not asset class. And that's why
Speaker 1: the market has no memory from day to day. That's
Speaker 1: why market moves are exaggerated over the short term. That's
Speaker 1: why buyers live higher and sellers live lower in our
Speaker 1: brave new investment world. So I think what this does
Speaker 1: is that it renders charts and technical analysis less valuable.
Speaker 1: It ruins the charts um it exaggerates stuff like, look
Speaker 1: on Friday and Monday, stocks drop, the VIX exploded, the
Speaker 1: machines were sellers Tuesday and wednes the stock sort I strongly, strongly,
Speaker 1: Doug agree with that the action of the VIX correlated
Speaker 1: to the equities recently has been odd. To say, Doug Cass,
Speaker 1: thank you so much with Sea Breeze. Thanks for having
Speaker 1: me always our great pleasure. Thanks for listening to the
Speaker 1: Bloomberg Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud,
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Speaker 1: Tom Keane. Michael McKee is at Economy Before the podcast.
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio