WEBVTT - Bloomberg Surveillance TV: June 24, 2024 0:00:02.440 --> 0:00:06.800 Bloomberg Audio Studios, Podcasts, radio News. 0:00:11.640 --> 0:00:15.440 This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along 0:00:15.480 --> 0:00:18.680 with Lisa Bromwitz and Amrie Hordern. Join us each day 0:00:18.720 --> 0:00:22.280 for insight from the best in markets, economics, and geopolitics 0:00:22.440 --> 0:00:24.920 from our global headquarters in New York City. We are 0:00:24.920 --> 0:00:27.680 live on Bloomberg Television weekday mornings from six to nine 0:00:27.720 --> 0:00:31.240 am Eastern. Subscribe to the podcast on Apple, Spotify or 0:00:31.320 --> 0:00:33.920 anywhere else you listen, and as always on the Bloomberg 0:00:34.040 --> 0:00:35.880 Terminal and the Bloomberg Business app. 0:00:36.280 --> 0:00:39.479 Sema Shah Prince Blast Management, writing this, the potential for 0:00:39.560 --> 0:00:42.559 further equity gains may be somewhat limited from here. With 0:00:42.640 --> 0:00:47.080 valuations so stretched, a soft economic landing is a necessary 0:00:47.159 --> 0:00:49.240 backdrop to support further gains. 0:00:49.400 --> 0:00:51.160 Sema joins us now, Seema, good. 0:00:51.000 --> 0:00:53.360 Morning, Welcome, good morning, great to be here, Great to 0:00:53.440 --> 0:00:56.920 have you. When you talk about stretched valuations, are you 0:00:57.040 --> 0:01:00.400 talking about the overall market or are you talking about 0:01:00.520 --> 0:01:01.280 in video. 0:01:01.600 --> 0:01:02.600 I'm talking about Nvidia. 0:01:03.320 --> 0:01:05.440 Okay, case if you look across a broad market actually 0:01:05.480 --> 0:01:06.360 doesn't look that stretch. 0:01:06.400 --> 0:01:07.880 We're really thinking about the pockets. 0:01:08.440 --> 0:01:10.520 It's difficult at this point though, to look across and 0:01:10.600 --> 0:01:12.440 say we need to have a broadening in the rally, 0:01:13.000 --> 0:01:15.319 but that broading in the rally can only take place 0:01:15.400 --> 0:01:17.200 if there's still a sturdy economic backdrop. 0:01:17.560 --> 0:01:18.760 Now we are generally. 0:01:18.600 --> 0:01:20.920 Quite positive on it, but we are hearing more and 0:01:20.959 --> 0:01:24.160 more clients actually really worried about the economic backdrop, real concerns. 0:01:24.200 --> 0:01:26.360 I need to creep into the point that actually, when 0:01:26.400 --> 0:01:28.680 we think about risks, or we're hearing about risks, we're 0:01:28.680 --> 0:01:30.759 hearing more about what's going to happen with a hard 0:01:30.840 --> 0:01:33.679 landing than with an acceleration. And that is a very 0:01:33.720 --> 0:01:36.240 very clear shift that we've noticed in the past few weeks. 0:01:36.000 --> 0:01:37.959 And that's something that a lot of people are talking about. 0:01:38.000 --> 0:01:41.440 Morgan Stanley came out over the weekend Mike Wilson, and 0:01:41.480 --> 0:01:43.920 he said he put their three scenarios that really counter 0:01:44.040 --> 0:01:47.039 this risk. One of them is overheating. Nobody thinks that's 0:01:47.080 --> 0:01:49.880 really good to happen. One is potential liquidity risk, and 0:01:49.920 --> 0:01:52.320 he talked about treasury auctions and some of the politics 0:01:52.320 --> 0:01:52.840 of the moment. 0:01:53.120 --> 0:01:56.000 He said that the base case in terms of what potentially. 0:01:55.480 --> 0:01:58.520 Disrupts this is to your point that hard landing scenario. 0:01:58.840 --> 0:02:00.920 How important is what we get on Friday in terms 0:02:00.960 --> 0:02:05.440 of personal income, personal spending core PCE to really inform 0:02:05.760 --> 0:02:08.120 how whether that's a more realistic base case. 0:02:08.400 --> 0:02:10.480 So it's definitely important because obviously we know the consumer 0:02:10.520 --> 0:02:12.800 has been the key driver for the US economy. But 0:02:12.880 --> 0:02:15.480 you said the buzzword before, which is bifurcation. Right, So 0:02:15.520 --> 0:02:18.200 you've got the really high income households which are essentially 0:02:18.240 --> 0:02:20.800 carrying the US economy. You've got the lower income households 0:02:20.840 --> 0:02:22.600 which are maybe seeing a couple of strains, but because 0:02:22.639 --> 0:02:26.079 the job market is still very strong, there's no major 0:02:26.160 --> 0:02:28.280 job losses that they can almost continue going. And as 0:02:28.320 --> 0:02:32.040 higher income households can carry the US economy, it's really 0:02:32.360 --> 0:02:34.120 to me it's about the labor market because if you 0:02:34.160 --> 0:02:36.880 start to see those job as claims increasing, if you 0:02:36.919 --> 0:02:40.360 start to sit translating to job losses, well, then the 0:02:40.360 --> 0:02:43.359 lower income consumers can no longer I should said, the 0:02:43.400 --> 0:02:45.680 high income consumers are no longer able to sustain the 0:02:45.760 --> 0:02:46.400 US economy. 0:02:46.440 --> 0:02:48.120 And we talk a lot about what the landing will 0:02:48.120 --> 0:02:50.600 look like, we rarely talk about what the lift off 0:02:50.760 --> 0:02:53.360 after that landing looks like. So for in this environment 0:02:53.400 --> 0:02:56.120 we get this soft landing, how important is it that 0:02:56.240 --> 0:02:59.120 growth is an anemic, that it can take off again 0:02:59.160 --> 0:03:01.320 for a more stained in longer term rally. 0:03:02.200 --> 0:03:03.920 So it is really important. But going to say it' 0:03:03.919 --> 0:03:04.720 something slightly different. 0:03:04.720 --> 0:03:06.840 So when I think about the landing, we think the 0:03:06.919 --> 0:03:08.400 fun you can get a soft landing up to Q 0:03:08.480 --> 0:03:11.080 one and Q two next year. But to the point 0:03:11.080 --> 0:03:13.040 that the FED starts to cut the people who are 0:03:13.040 --> 0:03:15.639 waiting on the sideline to buy a property, and if 0:03:15.639 --> 0:03:18.440 you don't have job losses, I worry about how, you know, 0:03:18.520 --> 0:03:20.120 how does the economy react to that? You could see 0:03:20.160 --> 0:03:23.640 another takeoff and then another acceleration. So actually, I think, 0:03:23.680 --> 0:03:25.520 to me, although I know that's not what people are 0:03:25.560 --> 0:03:28.160 necessarily talking about, although the acceleration is not key at 0:03:28.200 --> 0:03:30.120 the moment, maybe as you look to twenty twenty five, 0:03:30.639 --> 0:03:33.680 that is a theme that starts to return to the market. 0:03:33.720 --> 0:03:35.600 Now, I think that's such an excellent point, Semer, because 0:03:35.600 --> 0:03:37.720 it raises this question, is is the FED going to 0:03:37.760 --> 0:03:40.440 have the opposite intended fact when they start to cut 0:03:40.600 --> 0:03:42.560 that everyone rushes to the market and all of a sudden, 0:03:42.600 --> 0:03:46.040 housing prices go up. In how policy is usually transmissioned, 0:03:46.080 --> 0:03:47.400 isn't transmission. 0:03:46.880 --> 0:03:47.320 The way it is? 0:03:47.360 --> 0:03:49.560 So does that mean If the FED starts cutting, they 0:03:49.560 --> 0:03:52.200 need to start cutting aggressively in order to make sure 0:03:52.200 --> 0:03:54.600 that it is not a housing market that takes off 0:03:54.640 --> 0:03:56.920 like crazy, that there's some incentive for supply to come 0:03:56.920 --> 0:03:57.280 back in. 0:03:58.040 --> 0:04:00.000 I think they just actually be really careful how they cut. 0:04:00.080 --> 0:04:01.560 I mean, I do believe that they need to have 0:04:01.680 --> 0:04:04.440 all of the evidence in hand before they start those 0:04:04.760 --> 0:04:07.400 rate cuts. They need to be very clear that there 0:04:07.400 --> 0:04:09.040 is the softening in the economy. They need to see 0:04:09.040 --> 0:04:11.440 that the labor market is maybe not showing clear cracks, 0:04:11.720 --> 0:04:13.680 but there is a rebalancing taking place. 0:04:14.360 --> 0:04:17.200 Otherwise they risk almost of disrupting. 0:04:16.760 --> 0:04:18.320 The economy again, and then we've been back to the 0:04:18.360 --> 0:04:21.159 same place as we were a few years ago in 0:04:21.200 --> 0:04:22.320 about twelve months or time. 0:04:22.440 --> 0:04:24.440 When it comes to the housing markets, are potentially those 0:04:24.480 --> 0:04:27.040 individuals that maybe they've wanted to upgrade to more space, 0:04:27.040 --> 0:04:29.440 but they're sitting on a three percent mortgage. 0:04:29.760 --> 0:04:31.200 What if all those people. 0:04:30.920 --> 0:04:32.599 Come into the market and then actually you have so 0:04:32.680 --> 0:04:35.680 much supply that it dilutes pricing power. 0:04:36.200 --> 0:04:38.240 Wouldn't there be almost of goldilarks for the Fed? 0:04:38.720 --> 0:04:41.040 It would be But actually, I think although the supply 0:04:41.080 --> 0:04:44.320 has increased, the amount of people who are waiting those islens, 0:04:44.360 --> 0:04:46.960 as you said, have been enjoying those three percent mortgage rates, 0:04:47.760 --> 0:04:50.080 but scared to go to buy a new property once 0:04:50.080 --> 0:04:52.800 they come flooding into the market. I actually don't think 0:04:52.800 --> 0:04:55.640 that the supply is sufficient to stop the housing market 0:04:55.680 --> 0:04:57.680 from taking off again. So I think that that is 0:04:57.680 --> 0:04:59.320 one thing that the FED really needs to keep a 0:04:59.400 --> 0:05:02.400 very close eye in order to avoid this second wave 0:05:02.440 --> 0:05:03.919 of inflation, which you look at the moment there is 0:05:03.960 --> 0:05:06.560 absolutely really no sign of. But I think it is 0:05:06.600 --> 0:05:08.360 a risk that the Fed is very aware of, which 0:05:08.400 --> 0:05:10.080 is one of the reasons why they are so careful 0:05:10.360 --> 0:05:11.640 about the timing of those cuts. 0:05:11.680 --> 0:05:14.640 You talk about history suggest that long fed passes are 0:05:14.640 --> 0:05:17.200 good for stocks, But when you look back at history 0:05:17.240 --> 0:05:19.719 and in your research, has it always been this concentrated? 0:05:19.760 --> 0:05:20.360 I mean, I look at. 0:05:20.320 --> 0:05:22.719 Peter Cheer's note today, which is kind of how you 0:05:22.760 --> 0:05:26.040 started the show. Fragility in a one stock is a 0:05:26.080 --> 0:05:27.000 stark market. 0:05:27.160 --> 0:05:29.919 It's all about Navidia. Have we ever seen anything like that? 0:05:30.360 --> 0:05:32.520 I don't think we've seen anything quite like this in 0:05:32.520 --> 0:05:36.120 a way that the tech gains are quite fundamental. I mean, 0:05:36.160 --> 0:05:38.480 there's something fundamentally driving I wouldn't compare it to the 0:05:39.200 --> 0:05:41.200 dot com but also when I look across at tech, 0:05:41.240 --> 0:05:44.520 I think think that somewhat macroagnostic. I don't think theyn 0:05:44.560 --> 0:05:47.080 necessarily relying on what's happening in the macrospace. I don't 0:05:47.080 --> 0:05:49.680 think they necessarily reliant on the FED space. I think 0:05:49.680 --> 0:05:52.159 they actually create their own demand. At some point that 0:05:52.200 --> 0:05:55.000 party will stop. It doesn't look like it's anytime soon, 0:05:55.080 --> 0:05:56.680 but at some point it will stop. That I think 0:05:56.760 --> 0:05:58.479 is a very hard part to predict. 0:05:58.680 --> 0:06:00.400 So you sound kind of bearish, What are you doing? 0:06:01.680 --> 0:06:04.040 If I sound very probably, I don't need you. I 0:06:04.080 --> 0:06:06.120 think that we should actually be slightly risk on, but 0:06:06.200 --> 0:06:08.760 not as risk on as we were about six months ago. 0:06:09.120 --> 0:06:11.359 So we do have a slight overweight to equities, but 0:06:11.440 --> 0:06:13.120 that has been pulled back a little bit because, as 0:06:13.160 --> 0:06:14.880 I said, we think that the equity gain is quite 0:06:14.920 --> 0:06:17.000 limited from here. When you start to see that slight 0:06:17.080 --> 0:06:19.560 softening and the economic baddrop, and when there is so 0:06:19.680 --> 0:06:22.479 much concentration, that sentiment is starting to get a little 0:06:22.480 --> 0:06:24.880 bit impacted, where people are getting a bit worried about 0:06:24.880 --> 0:06:27.880 how much exposure they have to these very very these 0:06:27.960 --> 0:06:30.520 high stocks within fixed income, we actually think should be 0:06:30.560 --> 0:06:33.719 back to neutral investment grade is probably the area that 0:06:33.720 --> 0:06:36.040 you want to be focused on with slightly high quality. 0:06:36.000 --> 0:06:38.040 But duration doesn't look very attractive to us. 0:06:38.040 --> 0:06:40.440 So four twenty five, especially as you was talking before 0:06:40.440 --> 0:06:43.360 about the fiscal deficit, I don't see yields coming back 0:06:43.640 --> 0:06:45.839 down too far because that term primer is going to 0:06:45.920 --> 0:06:47.960 keep thinking about the deficit. 0:06:48.080 --> 0:06:50.880 So are you just hoovering up French bonds because there's 0:06:50.920 --> 0:06:51.720 extra premium there? 0:06:51.720 --> 0:06:55.159 I hear French bonds really scare me. And the reason 0:06:55.240 --> 0:06:57.920 is this, So there is a genuine reason I think 0:06:57.960 --> 0:07:01.320 investors should be concerned about it. The discussions that are 0:07:01.320 --> 0:07:04.000 going on could really change the deficit narrative over there, 0:07:04.640 --> 0:07:07.840 fiscal discipline out the window potentially. But also, if we're 0:07:07.839 --> 0:07:09.840 a US investor, you've been looking Europe in the last 0:07:09.840 --> 0:07:11.680 couple of months saying, wow, is this real? 0:07:11.720 --> 0:07:12.920 Can this really be sustained? 0:07:13.280 --> 0:07:15.840 This political disaster at the moment, which is starting to unfold, 0:07:16.160 --> 0:07:18.400 is going to scare investors again. It's going to be like, 0:07:18.440 --> 0:07:21.680 oh where are you again? European political basket case once more. 0:07:21.960 --> 0:07:23.400 And I think that is a concern. 0:07:23.680 --> 0:07:26.760 It's like that just leaves us back with the US, 0:07:26.040 --> 0:07:29.080 that is that all this is is this just American 0:07:29.080 --> 0:07:31.720 exceptionalism two point zero when you buy just not America 0:07:31.800 --> 0:07:33.800 just because it's good, but because Europe is scary. 0:07:34.240 --> 0:07:36.800 I think the use exception is very very key here. 0:07:36.960 --> 0:07:39.040 There are pockets around the world, So it's not like 0:07:39.080 --> 0:07:42.160 it's just US market. There's Sally as an overweight. Where 0:07:42.160 --> 0:07:43.600 are we going to be focused on? It is certainly 0:07:43.640 --> 0:07:44.080 the US. 0:07:44.480 --> 0:07:46.600 That's sort of the reason why as much as people 0:07:46.600 --> 0:07:49.720 want to complain about OI the actions and OI the deficit, 0:07:49.840 --> 0:07:53.320 you can't really do that because it's OI Europe. Sema Shah, 0:07:53.360 --> 0:07:55.400 thank you so much for being with us Shaw principle 0:07:55.440 --> 0:07:56.560 as the management. 0:08:06.040 --> 0:08:07.320 Joining US now, I'm. 0:08:07.160 --> 0:08:11.320 So pleased to say, is Tamashad, CEO of a Kbwstfel Company. 0:08:11.640 --> 0:08:14.120 Tom. A lot of people have been raising. 0:08:13.840 --> 0:08:16.800 This issue about whether we're fighting the wrong war and 0:08:16.840 --> 0:08:20.800 whether maybe some of what the regulators are targeting with 0:08:20.920 --> 0:08:24.080 banks is counterproductive for the current cycle. 0:08:24.560 --> 0:08:26.080 Do you think that that's going to be in focus 0:08:26.160 --> 0:08:26.880 later this week? 0:08:27.040 --> 0:08:28.880 Well, I think first of all, with the stress test, 0:08:29.080 --> 0:08:30.560 the first thing you're going to see is that the 0:08:30.600 --> 0:08:33.720 banks are in very very good shape. Remember the stress 0:08:33.760 --> 0:08:36.840 tests were set up to look at an adverse scenario 0:08:37.240 --> 0:08:40.160 to show the marketplace that they have plenty of capital 0:08:40.200 --> 0:08:43.600 to withstand that. And we think that the conversation is 0:08:43.640 --> 0:08:47.520 going to move away from that to individual company analysis quickly, 0:08:47.840 --> 0:08:51.080 which is actually a really positive statement about how the 0:08:51.120 --> 0:08:54.720 industry has been continuing to build capital. The other thing 0:08:54.800 --> 0:08:57.040 is the industry has not only been building capital for 0:08:57.080 --> 0:08:59.760 the stress test, but the industry's been building capital get 0:08:59.760 --> 0:09:03.640 ready or basle three endgame. So that's been the big story. 0:09:03.679 --> 0:09:06.120 So I think the first box to check is that 0:09:06.160 --> 0:09:08.280 the industry is going to come out it's being very 0:09:08.320 --> 0:09:11.480 well capitalized, and then they're going to be individual companies 0:09:11.480 --> 0:09:13.760 that are pivoting in one direction or another. 0:09:13.880 --> 0:09:15.080 So there's a lot to unpack. 0:09:15.320 --> 0:09:18.719 There's a question about which banks, let's start here, are 0:09:18.760 --> 0:09:21.160 really strong and resilient, right. I mean, it's one thing 0:09:21.200 --> 0:09:23.280 to say JP Morgan and Bank of American City Group 0:09:23.280 --> 0:09:25.080 pre are going to fail. I don't think anyone is 0:09:25.120 --> 0:09:27.920 saying that they're at risk of any kind of real 0:09:27.960 --> 0:09:29.040 potential turmoil. 0:09:29.120 --> 0:09:30.240 It's really the regionals. 0:09:30.400 --> 0:09:32.160 At what point do we get to the confidence there? 0:09:32.320 --> 0:09:35.120 So there are twenty three banks in this test that's 0:09:35.120 --> 0:09:37.560 coming on Wednesday, so they start to go down into 0:09:37.600 --> 0:09:41.840 the super regional category. I think for all twenty three banks, 0:09:42.000 --> 0:09:44.000 the market's going to say they have plenty of capital. 0:09:44.840 --> 0:09:47.560 I think for the regional banks, the regional banks are 0:09:47.600 --> 0:09:50.160 still in pretty good shape, except for the ones where 0:09:50.200 --> 0:09:54.400 there might be more concern around real estate exposure for example, 0:09:54.640 --> 0:09:58.960 and you're seeing a downturn in some of their results, 0:09:59.280 --> 0:10:03.040 but large and again, I think it's very narrow as 0:10:03.040 --> 0:10:06.720 to where the concern is. Just in preparation for coming today, 0:10:06.880 --> 0:10:09.600 I was interested about dividends. I went back and looked 0:10:09.600 --> 0:10:12.080 at that there are seventy four banks that are in 0:10:12.120 --> 0:10:15.160 the KEEF Bank Index or Regional Bank index. If you 0:10:15.160 --> 0:10:18.080 look at since the beginning of last year, five of 0:10:18.120 --> 0:10:22.600 them cut or eliminated their dividend. Meanwhile, fifty four of 0:10:22.640 --> 0:10:26.440 them raised their dividends over that period. The industry is 0:10:26.480 --> 0:10:30.200 actually in really, I think, pretty good shape for the 0:10:30.320 --> 0:10:32.560 challenges that we've had, and I think that the areas 0:10:32.559 --> 0:10:35.840 of concern are generally more narrow than you would think. 0:10:36.000 --> 0:10:39.640 And then remember last year's bank failure moment was really 0:10:39.679 --> 0:10:43.640 around a liquidity crisis, and what we realized is that 0:10:43.679 --> 0:10:46.480 some banks had gotten off sides in terms of their 0:10:46.520 --> 0:10:49.439 concentrations and their deposits. I don't think that that was 0:10:49.480 --> 0:10:50.640 a broad based. 0:10:50.360 --> 0:10:51.240 Trend even so. 0:10:51.360 --> 0:10:53.000 I mean every now and again you hear of another 0:10:53.040 --> 0:10:55.559 bank that maybe isn't hedged to interest rates. The latest 0:10:55.559 --> 0:10:57.160 one was a large bank out of Japan, I think 0:10:57.200 --> 0:11:01.000 their largest agricultural bank, who was basically position for rates 0:11:01.000 --> 0:11:03.839 coming lower. Obviously that hasn't happened yet. When you hear 0:11:03.920 --> 0:11:06.640 these incidents of pockets of stress, do you think that 0:11:06.679 --> 0:11:08.920 these are still the rare bank that have been hedged 0:11:08.960 --> 0:11:11.720 against the current rate environment, or if it's higher for longer, 0:11:12.000 --> 0:11:12.920 do we hear more of this? 0:11:13.120 --> 0:11:13.240 So? 0:11:13.440 --> 0:11:15.800 I think with the focus for this conversation right now 0:11:15.800 --> 0:11:19.199 being in the US, I'll go to our Bank America upgrade, 0:11:19.200 --> 0:11:23.199 which we did recently. We have earnings models by quarter 0:11:23.360 --> 0:11:26.600 for net interest income. I think just about all of 0:11:26.640 --> 0:11:29.439 the two hundred and twenty banks we follow, nearly all 0:11:29.760 --> 0:11:32.240 are going to hit a bottom on a quarterly basis, 0:11:32.559 --> 0:11:35.320 either last quarter or this quarter. That's the reason why 0:11:35.360 --> 0:11:38.560 we upgraded Bank America is the second quarter is the 0:11:38.600 --> 0:11:41.600 inflection point, and it gets better from here. So it's 0:11:41.640 --> 0:11:44.040 all a question of timing. Let me there's another point. 0:11:44.200 --> 0:11:48.200 The five month five year, three month, five year, you'll 0:11:48.240 --> 0:11:50.840 curve spread is the most important for banks. I know 0:11:50.920 --> 0:11:53.920 that that plenty of tensions on two tens, that's not 0:11:54.120 --> 0:11:57.600 the key for the banks. It's been sixty two years 0:11:57.960 --> 0:12:01.079 since we've seen the length of time for the inversion 0:12:01.120 --> 0:12:04.240 that we've had, so all things really kind of need 0:12:04.240 --> 0:12:06.520 to do is get a little bit less bad for 0:12:06.600 --> 0:12:09.200 these banks to do a little bit better. And I 0:12:09.240 --> 0:12:12.600 think that pivot is right here right now, and these 0:12:12.679 --> 0:12:15.520 banks have a lot of bad news in them. As 0:12:15.520 --> 0:12:18.079 long as we don't get a hard landing, I think 0:12:18.120 --> 0:12:21.280 you're going to see a continuing quarterly improvement over the 0:12:21.320 --> 0:12:24.760 next four or five quarters. And also too, there are 0:12:24.800 --> 0:12:27.839 specific types of banks like more than others. But this 0:12:27.920 --> 0:12:30.200 is a great opportunity if you can look longer term. 0:12:30.400 --> 0:12:32.120 We think, I know you want to stay in the US, 0:12:32.160 --> 0:12:34.000 but I have to take you to Europe, especially given 0:12:34.040 --> 0:12:35.280 we're going to get one of the first rounds of 0:12:35.320 --> 0:12:38.120 French voting on the thirtieth. You've had the likes of 0:12:38.200 --> 0:12:41.280 JP Morgan really be courted by mccraulan saying come move 0:12:41.320 --> 0:12:43.439 to Paris in a post Brexit world. And you've seen 0:12:43.520 --> 0:12:46.720 other US banks do something similar really building up operations 0:12:46.720 --> 0:12:50.199 and talent bases in Paris. If there is political volatility, 0:12:50.640 --> 0:12:51.360 what happens. 0:12:51.960 --> 0:12:54.600 So I think it's really the big picture of what's 0:12:54.640 --> 0:12:56.720 happening with the economy. One thing I would note is 0:12:56.720 --> 0:12:59.360 over the last twelve months, banks have been the leading 0:12:59.400 --> 0:13:02.600 group in Europe. Again, there was so much bad news 0:13:02.600 --> 0:13:05.040 in these stocks, and really what you need in Europe 0:13:05.520 --> 0:13:09.000 is he needed some improvement in the rates. Negative interest 0:13:09.080 --> 0:13:14.000 rates were certainly adversely affecting the banks. Our sense, as 0:13:14.040 --> 0:13:16.160 it all comes down to what the economy is doing, 0:13:16.200 --> 0:13:18.960 we still think there's upside for the banks because the 0:13:18.960 --> 0:13:21.959 banks have done a lot to stabilize themselves over the 0:13:22.080 --> 0:13:24.400 last several years, and many of those stocks still trade 0:13:24.400 --> 0:13:27.000 at sixty percent of book value. So we think that 0:13:27.040 --> 0:13:30.120 the bigger banks are stable in Europe, and it's a 0:13:30.200 --> 0:13:32.480 question now of what's happening in the economy. 0:13:33.400 --> 0:13:35.440 Does it consider we heard last week from the FED 0:13:35.520 --> 0:13:37.240 in terms of living wills of some of the US 0:13:37.320 --> 0:13:40.080 biggest banks finding some shortcomings when it comes to likes 0:13:40.080 --> 0:13:41.640 of Bank of America City. 0:13:42.200 --> 0:13:44.439 You know, you remember that teacher in college who was 0:13:44.440 --> 0:13:47.000 always a hard greater, who never really gave out the 0:13:47.120 --> 0:13:49.160 oh this is perfect. You're all done. You don't have 0:13:49.200 --> 0:13:52.000 to do anymore. I will imagine for the rest of 0:13:52.040 --> 0:13:54.760 my career, every year there will be more work to 0:13:54.800 --> 0:13:58.280 do on a living will. Okay, And if you look 0:13:58.320 --> 0:14:01.080 at the living wills, JP Morgan had work to do, 0:14:01.760 --> 0:14:05.160 City Group had work to do. Really, these living wills 0:14:05.160 --> 0:14:08.000 were evolving with the risks of the moment. And also 0:14:08.040 --> 0:14:11.400 I would say, given last year's bank failures, the FDIC 0:14:11.559 --> 0:14:15.200 has probably sharpened their pencil on these living wills, so 0:14:15.240 --> 0:14:17.680 I would view it as as a living, breathing thing. 0:14:18.040 --> 0:14:20.880 I didn't see our view on it is the banks 0:14:20.880 --> 0:14:23.000 are going to spend more money at preparing for them, 0:14:23.240 --> 0:14:27.200 but that there was nothing devastating or really significant in 0:14:27.280 --> 0:14:28.720 what we read in the results. 0:14:29.240 --> 0:14:31.520 To say, the reason why I started by asking you 0:14:31.640 --> 0:14:34.400 are we looking at the wrong risks is because in 0:14:34.440 --> 0:14:37.360 the past couple of years, first of all, the risks 0:14:37.360 --> 0:14:40.720 that I hear about what profitability opportunities do some of 0:14:40.760 --> 0:14:43.440 these smaller banks have when they're facing off with the 0:14:43.520 --> 0:14:45.400 rush of money into private capital. 0:14:45.880 --> 0:14:47.240 That's a big question at this point. 0:14:47.280 --> 0:14:50.360 Oh, there are some tectonic plates that are moving that 0:14:50.640 --> 0:14:52.040 if you want, you got to if you want to 0:14:52.040 --> 0:14:54.040 take a step back and not look at the snapshot 0:14:54.080 --> 0:14:57.000 and look at the movie. Yes, and really what it 0:14:57.000 --> 0:15:00.400 comes down to was funding and liquidity and deposits. Banks 0:15:00.520 --> 0:15:04.520 don't fail because of capital. Banks fail because there's a 0:15:04.600 --> 0:15:07.240 bank run, and there have been very few of them 0:15:07.280 --> 0:15:10.280 in the United States. So the capital's fine, but really, 0:15:10.320 --> 0:15:13.840 what's happening in the deposit base. I think the greatest 0:15:14.040 --> 0:15:17.720 missed opportunity from last year is there's not been FDIC 0:15:17.960 --> 0:15:21.560 deposit insurance reform because it puts too much pressure on 0:15:21.600 --> 0:15:24.600 the small banks and it's encouraging market share to move 0:15:24.680 --> 0:15:27.080 up gap to the banks that have proven that they're 0:15:27.120 --> 0:15:27.920 too big to fail. 0:15:28.160 --> 0:15:30.400 And it also yeah, so that's the biggest. 0:15:30.040 --> 0:15:33.000 And then number two is when it comes to stock selection. 0:15:34.080 --> 0:15:37.160 The way that regional banks, smaller community banks earn money 0:15:37.160 --> 0:15:40.400 in the biggest banks is very different. The smaller banks 0:15:40.440 --> 0:15:43.320 have more real estate and more spread income, they are 0:15:43.360 --> 0:15:47.120 going to be slower to rebound the bigger banks have. 0:15:47.480 --> 0:15:50.360 Bank America, amongst the biggest banks, has some of the 0:15:50.440 --> 0:15:53.920 least amount of commercial real estate exposure. These bigger banks 0:15:54.080 --> 0:15:57.000 have already made the shift away from that, and that's 0:15:57.040 --> 0:16:00.280 why we are leaning in heavier on these bigger banks 0:16:00.320 --> 0:16:02.520 for the stock ideas, we think it's going to take 0:16:02.520 --> 0:16:05.160 a little bit more time for the regional banks to 0:16:05.240 --> 0:16:06.440 turn There might be. 0:16:06.480 --> 0:16:09.440 Safety and even profitability in some of the bigger banks. 0:16:09.840 --> 0:16:12.760 There isn't so much of the classic market making. And 0:16:12.800 --> 0:16:15.400 this is the other risk that people talk about liquidity 0:16:15.480 --> 0:16:17.760 risk on another level, that they're not going to be 0:16:17.840 --> 0:16:22.040 able to shepherd this amount of bond auctions into the 0:16:22.080 --> 0:16:26.160 market and allow the trading to commence with the same 0:16:26.280 --> 0:16:29.480 kind of stability that has in the past. 0:16:29.880 --> 0:16:30.640 Does that keep you. 0:16:30.680 --> 0:16:31.160 Up at night? 0:16:31.480 --> 0:16:33.160 Now you're talking about the treasury market and. 0:16:33.160 --> 0:16:34.960 The treasury of particular, given the fact that the market 0:16:35.000 --> 0:16:37.000 has swollen to such a huge part, but it's also 0:16:37.040 --> 0:16:39.400 the credit market. I hear about this with public credit 0:16:39.440 --> 0:16:40.280 as well well. 0:16:40.560 --> 0:16:44.480 What I take out of that is passive investing is 0:16:44.520 --> 0:16:47.480 at the highest degree of our lifetime and growing more 0:16:47.600 --> 0:16:50.360 and in many ways it's changing the investment business. 0:16:50.800 --> 0:16:51.400 So there are so. 0:16:51.400 --> 0:16:54.960 Many of these indices and index driven funds that so 0:16:55.560 --> 0:16:58.440 much of that, and it's impacted the liquidity of a 0:16:58.480 --> 0:17:02.200 lot of the smaller company. So if you look at 0:17:02.240 --> 0:17:05.400 a typical mid cap stock, it may have thirty five 0:17:05.560 --> 0:17:09.280 forty percent of their shares owned by passive investors. And 0:17:09.359 --> 0:17:12.520 it's happening in the credit markets as well, so when 0:17:12.520 --> 0:17:15.439 you get to individual credits, so that's pushing more of 0:17:15.440 --> 0:17:18.359 the trading into private markets away from some of the 0:17:18.400 --> 0:17:21.439 public markets, and so I think that is going to 0:17:21.440 --> 0:17:24.000 have an impact. So the way in which companies raise 0:17:24.080 --> 0:17:29.160 capital is all still evolving because there's this big private 0:17:29.280 --> 0:17:31.359 market that's grown a lot in the last four or 0:17:31.359 --> 0:17:32.040 five years. 0:17:32.520 --> 0:17:34.760 Tamashad awesome to hear from you. Thank you so much 0:17:34.760 --> 0:17:35.440 for being with us. 0:17:35.560 --> 0:17:47.639 Yes, thanks, Tavi Should of KBW. 0:17:48.359 --> 0:17:50.320 Just to get a sense of how to frame the 0:17:50.320 --> 0:17:53.199 week ahead and the path of rates going forward. 0:17:53.400 --> 0:17:54.680 Joining us Stephanie. 0:17:54.359 --> 0:17:57.400 Ross of a Wolf Research, Morgan Stanley's Vishi Cheer but Tour. 0:17:57.920 --> 0:17:59.159