WEBVTT - Surveillance: Dollar Centrality Up Since 2008, Mallaby Says 0:00:09.840 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm term Keene Jay Lee. 0:00:13.960 --> 0:00:17.560 We bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.520 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:32.839 Bloomberg dot Com, and of course on the Bloomberg Some 0:00:32.920 --> 0:00:35.120 of the top news in the world of global economics 0:00:35.159 --> 0:00:37.800 now and global finance, investors may be ignoring the risk 0:00:37.880 --> 0:00:41.400 that financial conditions could tighten sharply and send tremors through 0:00:41.440 --> 0:00:44.560 the global economy. This all according to the International Monetary Fund, 0:00:44.800 --> 0:00:48.479 who want that overall market participants appear complacent about the 0:00:48.600 --> 0:00:52.239 risk of a sharp tightening of financial conditions, jointing us 0:00:52.240 --> 0:00:54.000 to discuss I please to say this morning in our 0:00:54.040 --> 0:00:57.160 studio here in New York is Sebastia Malaby, CFR, Senior 0:00:57.200 --> 0:01:00.440 Fellow for International Economics. Good morning to Sebastia, and great 0:01:00.440 --> 0:01:01.880 to be with you. So let's get to that line 0:01:02.000 --> 0:01:03.640 from the i m F. Do you think investors are 0:01:03.680 --> 0:01:06.800 under appreciating the risk that financial conditions could tighten and 0:01:06.840 --> 0:01:08.800 what that could mean for the global economy? But if 0:01:08.800 --> 0:01:10.920 we focus on the US, I don't think that's true 0:01:11.040 --> 0:01:13.200 right now, because when you've got growth at four percent, 0:01:13.800 --> 0:01:17.399 that can mask a lot of financial fragility. But if 0:01:17.440 --> 0:01:20.440 you project forward and you say, okay, this fiscal stimulus 0:01:20.520 --> 0:01:22.640 from the tax cat in December is going to be 0:01:22.680 --> 0:01:26.280 wearing off next year and into twenty by which time 0:01:26.319 --> 0:01:28.800 the Fed world have hiked a little bit more, and 0:01:28.840 --> 0:01:31.880 you've got a very fragile corporate credit situation. It's that 0:01:31.959 --> 0:01:37.839 interaction between the likely growth slowdown in and a highly 0:01:37.920 --> 0:01:41.920 leveraged corporate credit picture. That's what worries me. Even if 0:01:41.920 --> 0:01:45.919 you didn't get a recession in because of the wearing 0:01:45.920 --> 0:01:47.600 off of the fiscal stimulus, and you just had a 0:01:47.600 --> 0:01:50.320 growth recession in other words, growth down at one percent, 0:01:50.400 --> 0:01:53.240 that's enough to start kicking the fault rates up and 0:01:53.240 --> 0:01:57.280 and and and credit could react. It's almost none austerity. 0:01:57.400 --> 0:02:00.480 Let's review this. I think this is important. Back eight years, 0:02:00.800 --> 0:02:05.600 what we learned about British austerity or Germanic austerity or 0:02:05.640 --> 0:02:09.960 austerity austerity. What was the lesson learned? Well, first of all, 0:02:10.000 --> 0:02:15.520 it produced populism small detail, which is quite a big 0:02:15.560 --> 0:02:20.120 detail um. And second of all, it didn't really drive 0:02:20.440 --> 0:02:24.600 debt to GDP down much um. And so it's a struggle. 0:02:24.639 --> 0:02:30.440 You really need growth to be generated by productivity changes, 0:02:30.480 --> 0:02:32.920 which means technology and so forth, and we don't have 0:02:32.960 --> 0:02:35.560 a magic one for that. Um. So I think those 0:02:35.560 --> 0:02:38.560 are some of the lessons. The trend, overwhelmingly for developed 0:02:38.880 --> 0:02:41.760 economies has been for debt to GDP to climb throughout 0:02:42.080 --> 0:02:44.640 the last ten years. Sebastian, I just wanted to what 0:02:44.760 --> 0:02:47.920 extent this sort of curtails some of our abilities to 0:02:47.960 --> 0:02:50.240 sort of respond to the next downturn, whether it be 0:02:50.320 --> 0:02:53.839 financial or economic across Europe. In the United States, yeah, 0:02:53.840 --> 0:02:56.160 I think that's a profound issue that last time around, 0:02:56.200 --> 0:03:00.480 in two thousand and eight, there was enormous ammunition to respond, 0:03:00.560 --> 0:03:02.760 both in terms of fiscal stimulus and in terms of 0:03:03.080 --> 0:03:06.639 enormous monetary intervention. If you think about the next time, 0:03:06.720 --> 0:03:08.840 there are different constraints in Europe in the US, but 0:03:08.880 --> 0:03:11.880 they're big in both cases. In Europe, the issue is 0:03:11.919 --> 0:03:14.640 that you might have a different central bank chief, not 0:03:14.680 --> 0:03:17.560 Marry a draggy but somebody more kind of a Northern 0:03:17.600 --> 0:03:21.600 European cautious persuasion could be ends vitamin of Germany, could 0:03:21.600 --> 0:03:24.280 be somebody else. Um. And secondly, on the other side 0:03:24.320 --> 0:03:26.600 of the table from the central bank in Europe, there 0:03:26.680 --> 0:03:29.720 might not be Maria Monty, who was a responsible, technocratic 0:03:29.760 --> 0:03:32.280 Italian leader. There might be the kind of populous leaders 0:03:32.280 --> 0:03:33.960 that you have right now in Italy, and that would 0:03:34.040 --> 0:03:36.360 change the equation Sebaston when you think about the constraints. Though, 0:03:36.360 --> 0:03:38.080 at least here in the United States, there is some 0:03:38.480 --> 0:03:41.720 spere capacity and monetary policy to respond to a financial 0:03:41.880 --> 0:03:44.280 or economic downturn. In Europe that does not exist, both 0:03:44.320 --> 0:03:48.000 in fiscal both in monetary policy. And also I think 0:03:48.040 --> 0:03:50.120 something that doesn't get a lot of discussion is the 0:03:50.160 --> 0:03:53.240 regulatory response. In two thousand and two thousand and nine, 0:03:53.240 --> 0:03:55.640 it was every country for themselves bail out the banks. 0:03:55.920 --> 0:03:57.680 It's gonna be very different if we have a banking 0:03:57.720 --> 0:04:00.480 crisis in Europe again. The ability see if some of 0:04:00.480 --> 0:04:02.600 these countries to actually do what they did last time. 0:04:03.000 --> 0:04:04.680 It's just not going to be there, is it. Yeah, 0:04:04.680 --> 0:04:07.440 And that's fundamentally why I worry more about Europe and 0:04:07.480 --> 0:04:10.520 particularly a flash point like Italy, than I do about 0:04:10.560 --> 0:04:12.600 the US. I mean, in the US, there's a legitimate 0:04:12.640 --> 0:04:16.120 debate about the way that the Dodd Frank reforms curtailed 0:04:16.160 --> 0:04:19.200 the FEDS ability to act as lender of last resort. 0:04:19.760 --> 0:04:24.320 But hopefully a big dose of monetary easing combined with 0:04:24.800 --> 0:04:27.880 further fiscal stimulus, if you really had to do it 0:04:27.920 --> 0:04:29.680 is something that US can get away with it. Because 0:04:29.680 --> 0:04:33.120 of the dollars reserve currency status in the world, you 0:04:33.160 --> 0:04:35.880 can assue more. Dad. I mean, that's a really important 0:04:35.920 --> 0:04:38.360 point in my conversation with Mada re Guard. This came 0:04:38.440 --> 0:04:41.880 up the part of Asia to finally move the exorbitant 0:04:41.920 --> 0:04:45.400 privilege over to China. I mean, that's a backstory in 0:04:45.480 --> 0:04:47.960 Bali as well. But through all of the Sebastian and 0:04:48.000 --> 0:04:51.440 frankly through all of your writings, we go back as 0:04:51.440 --> 0:04:54.360 you started staying in this idea. There is something special 0:04:54.720 --> 0:04:57.839 the dollars ascended. Do you see any change in that? No, 0:04:58.000 --> 0:05:00.760 I see absolutely zero post a fact of changing that. 0:05:00.800 --> 0:05:04.120 I think the dollars centrality in the global system has 0:05:04.160 --> 0:05:07.400 gone up, not down since two and and this is 0:05:07.440 --> 0:05:11.080 so important. From Barry I, Canna Berkeley, and from Joseph Harvard, 0:05:11.320 --> 0:05:13.520 they agree with Mr Mallaby. But there is a real 0:05:13.560 --> 0:05:18.800 debate about this now, debate about they're just saying no 0:05:18.839 --> 0:05:21.280 where right. Dalio is weighed in on that debate as 0:05:21.320 --> 0:05:23.679 well quite recently as well. Sebastian and I just wonder 0:05:24.040 --> 0:05:28.200 whether the deficit actually matters. With this in mind, if 0:05:28.240 --> 0:05:30.760 we go from five percent to ten percent here in 0:05:30.760 --> 0:05:35.200 the United States, do we just assume it keeps getting funded. Yes, 0:05:35.240 --> 0:05:37.039 I think we do. I mean the reason is that 0:05:38.240 --> 0:05:41.400 we ran an experiment in two tho eight, two thousand 0:05:41.480 --> 0:05:43.760 nine where the Chinese Central Bank governor put on the 0:05:43.800 --> 0:05:46.359 website a sort of declaration of trying to make the 0:05:46.360 --> 0:05:48.839 remand b international, trying to make the reman be a 0:05:48.880 --> 0:05:52.000 global currency. You know, ten years later, has the dollar 0:05:52.080 --> 0:05:54.599 been dethroned. No, it's actually more dominant. Why is it 0:05:54.640 --> 0:05:59.120 more dominant. It's because fundamentally, countries around the world, and 0:05:59.240 --> 0:06:03.960 especially corprates, want to issue debt in dollars. And if 0:06:04.040 --> 0:06:07.120 your corporate sector has lots of dollar debt, the central 0:06:07.120 --> 0:06:11.280 bank needs to protect itself by having dollar reserves. And 0:06:11.320 --> 0:06:14.400 that isn't changing. And so central banks will hold dollars, 0:06:14.560 --> 0:06:18.360 and private wealth managers will hold dollars because the markets 0:06:18.400 --> 0:06:20.520 are deep and liquid and they have rule of law, 0:06:20.960 --> 0:06:23.320 and because that's what the liabilities in. So if you're 0:06:23.320 --> 0:06:26.040 trying to cover against a run on your banks or 0:06:26.040 --> 0:06:29.479 on your corporates, you need dollars as your safeguard. Look 0:06:29.480 --> 0:06:33.119 at the use of dollar swaps after the two eight crisis. 0:06:33.160 --> 0:06:36.840 Everybody was screaming for dollars. So I think people are 0:06:36.839 --> 0:06:39.840 going to want to hold dollars and that gives enormous 0:06:39.960 --> 0:06:42.680 rope with which the US can continue to kind of 0:06:42.680 --> 0:06:45.760 hang itself and strangle itself in terms of budget deficits. 0:06:45.880 --> 0:06:48.160 Is that more true in a period of risk aversion? 0:06:48.200 --> 0:06:50.880 We're still going to see this situation where it becomes 0:06:50.920 --> 0:06:54.080 by treasuries, by the US dollar when we go through 0:06:54.120 --> 0:06:56.760 a sustained period of risk aversion. Well, I mean that's 0:06:56.800 --> 0:06:59.279 exactly the paradox. You know, the US can create a 0:06:59.320 --> 0:07:02.120 financial cry, this a No. Eight and everybody's response is 0:07:02.160 --> 0:07:04.560 they want to hold more donnas. And I don't think 0:07:04.560 --> 0:07:06.120 that's going away. I think the U s can be 0:07:06.160 --> 0:07:09.720 irresponsible to create, uh, you know, some kind of panic 0:07:10.000 --> 0:07:12.440 and the response would be we want the US currency. 0:07:12.480 --> 0:07:15.040 It's ironic, but it's the truth. Special Malloby, thank you 0:07:15.120 --> 0:07:17.760 so much, And I really can't say enough about a 0:07:17.840 --> 0:07:21.600 careful read of Mr Maloby's article in The Atlantic Magazine 0:07:22.080 --> 0:07:25.360 on growth in the latest Nobel Prize, roner Paul Rohmer 0:07:25.920 --> 0:07:40.280 of Stanford Quieter Markets today, we really like you can 0:07:40.280 --> 0:07:43.400 almost truncate back the data checks Brazilian Royle three point 0:07:43.440 --> 0:07:46.040 seven one yet to trade a day around that election, 0:07:46.400 --> 0:07:49.800 and John, I would suggest we've been exceptionally Asian centric 0:07:49.840 --> 0:07:53.080 today with Bali, I m f all the China news 0:07:53.160 --> 0:07:56.040 and of course the guests we've had Lord Patton, the 0:07:56.080 --> 0:07:59.040 former governor of Hong Kong, and s Aston Mallaby and such. 0:07:59.440 --> 0:08:04.119 You know it Europe and there's I'm sorry and the 0:08:04.160 --> 0:08:07.360 crush of the news flow. There's a lot going on 0:08:07.520 --> 0:08:10.160 in Europe right now and I'm sorry all centers back 0:08:10.520 --> 0:08:14.280 to this turmoil over populism, migration and such. I thought 0:08:14.360 --> 0:08:19.920 the comments from Matteo Salveni were absolutely amazing, like like 0:08:20.240 --> 0:08:25.240 essentially essentially essentially telling the market here's the line in 0:08:25.280 --> 0:08:29.360 the sand. It's four basis points over Germany and we 0:08:29.400 --> 0:08:31.640 don't think you're going there, which I just think is 0:08:31.640 --> 0:08:34.240 staggering that it's the one oh one of how not 0:08:34.360 --> 0:08:38.160 to communicate the financial markets at a time when you 0:08:38.200 --> 0:08:40.720 are going through some serious stress. Um. I want to 0:08:40.720 --> 0:08:43.640 bring a class Fistess and Pantheon macro Economics chief euros 0:08:43.679 --> 0:08:46.680 Own economists to weigh in class, what did you think 0:08:46.840 --> 0:08:49.080 of those remarks from the deputy Prime Minister in Italy. 0:08:50.240 --> 0:08:52.040 Oh look, Jonathan, I mean, you have the nail, and 0:08:52.240 --> 0:08:54.559 I completely agree. This is really really bad. I mean, 0:08:54.920 --> 0:08:58.920 right now Italian politicians are picking fights with everyone. And 0:08:59.000 --> 0:09:01.640 so even though you know, I could sit here and say, look, 0:09:01.760 --> 0:09:03.240 we could sit here and talk about you know, you 0:09:03.240 --> 0:09:05.520 have a current count surplus, you have a primary surplus. 0:09:05.520 --> 0:09:07.400 This is not two thousand twelve. It's not that the 0:09:07.480 --> 0:09:10.880 macroeconomics are much better, but I mean, at the moment, seriously, 0:09:10.920 --> 0:09:12.520 with this kind of comments coming out, you know, the 0:09:12.559 --> 0:09:15.520 market is just going to poinst them over and over again, 0:09:15.720 --> 0:09:20.160 and and it's not clear to me how and how 0:09:20.200 --> 0:09:23.720 and why they step back. I mean, he also said 0:09:23.760 --> 0:09:26.000 something like, well, when we hit four hundred basis points, 0:09:26.040 --> 0:09:28.959 you know we're going to take actions. Oh who the 0:09:29.000 --> 0:09:31.280 easy beat? Now, this is we're in a very bad 0:09:31.320 --> 0:09:33.360 equilibrium at the moment. I think we're going to snap 0:09:33.400 --> 0:09:37.080 out of it eventually, but at the moment, it's it's difficult. 0:09:37.280 --> 0:09:39.720 It's difficult. Let's talk about what four hundred basis points 0:09:39.760 --> 0:09:43.240 actually is. It's Greece. That's where Greece trades fo hundred 0:09:43.240 --> 0:09:45.680 basis points over Germany. And do you think you could 0:09:45.679 --> 0:09:49.480 get that bad class before it gets better? Well, I mean, 0:09:49.760 --> 0:09:52.559 I think you know once I think, I mean, I 0:09:52.640 --> 0:09:54.400 think we have to we have to go with with 0:09:54.440 --> 0:09:56.920 the with the sort of the tenor of of of 0:09:57.000 --> 0:09:58.959 your first comment, namely that once you give a market 0:09:59.040 --> 0:10:01.080 something to aim for, they might get there. Now, I 0:10:01.120 --> 0:10:04.959 think that's a massive miss pricing Italian bondy's currently bondmarket 0:10:04.960 --> 0:10:07.080 is currently are miss priced. I mean two yr yield 0:10:07.080 --> 0:10:10.600 shouldn't be above one percent um and and certainly I 0:10:10.600 --> 0:10:13.200 don't think ten yea yields should be should be as 0:10:13.240 --> 0:10:16.000 high as they are. But it's it's almost like they're 0:10:16.040 --> 0:10:18.640 welcoming in, right politicians. Is that if we're in a 0:10:18.679 --> 0:10:21.839 situation now where where the more they push and the 0:10:22.280 --> 0:10:25.679 more they think that it boasted their domestic political capital. 0:10:25.760 --> 0:10:28.040 So it's like they like, it's like they welcome. Right. 0:10:28.160 --> 0:10:31.679 That is not a good idea. We had a wonderful 0:10:31.720 --> 0:10:36.520 magesterial conversation yesterday with Janice Vera Facus who's got an 0:10:36.559 --> 0:10:41.199 acquaintance with crisis in real time and particularly negotiating with Germany, 0:10:41.280 --> 0:10:45.120 the Netherlands and France, the other core countries and one 0:10:45.160 --> 0:10:47.560 of our basic themes was Greece has got to be 0:10:47.559 --> 0:10:51.480 different than Italy. And he was fascinating about how Italy 0:10:51.520 --> 0:10:56.520 could mess this up from a pantheon economics basis, do 0:10:56.640 --> 0:11:00.640 they have the structure in Italy not to mess this 0:11:00.920 --> 0:11:06.960 up the institutional linkages of politics, economics, society in their 0:11:07.040 --> 0:11:12.360 banking system is Italy not Greece. Um No, Italy is 0:11:12.400 --> 0:11:14.240 not great, And I think and sometimes mess of our 0:11:14.320 --> 0:11:16.960 funck is he He was right when he said that 0:11:17.040 --> 0:11:19.120 what they should do is to use the fact that 0:11:19.200 --> 0:11:22.080 Italy is the third biggest economy in eurosine so they 0:11:22.280 --> 0:11:25.120 pull some weight in terms of the rules. But obviously 0:11:25.120 --> 0:11:28.240 they've jettisoned all that by now. So now, unfortunately, we 0:11:28.280 --> 0:11:30.920 are in equilibrium where you know, you play tis chat 0:11:30.960 --> 0:11:33.120 with the with the Commission. The e c B had 0:11:33.160 --> 0:11:35.720 already abandoned you because you know they can't help you. 0:11:35.800 --> 0:11:38.920 So now there's a risk that you know, this escalates. 0:11:38.960 --> 0:11:41.679 I mean, what I will say about Italy is that 0:11:41.920 --> 0:11:44.400 you know, the macro economics are just much better, right, 0:11:44.440 --> 0:11:46.800 I mean, it's like this is not we should not 0:11:47.280 --> 0:11:50.960 this is not a stable equilibrium from a macro economic perspective. 0:11:51.000 --> 0:11:53.360 We should not get here right, two point four percent 0:11:53.440 --> 0:11:56.040 in two thousand nineteen, you have a primary surplus at 0:11:56.040 --> 0:11:59.600 one point five If you are growing and unemployment is falling, 0:12:00.000 --> 0:12:03.000 your external accounts are and surplos. I mean they should 0:12:03.000 --> 0:12:05.240 not be as bad. But I mean, once we're in 0:12:05.240 --> 0:12:08.320 this overshooting environment, you know who knows right, so and 0:12:08.360 --> 0:12:09.800 then and the next year to dou will be the 0:12:09.880 --> 0:12:11.920 rating aggies. They will come in and some of them 0:12:11.920 --> 0:12:15.440 will jump ready to be. It's so frustrating from the 0:12:15.480 --> 0:12:18.720 outside looking again when you see the European officials and 0:12:18.760 --> 0:12:23.640 the Italian government essentially arguing over tens of basis points. Literally, 0:12:23.640 --> 0:12:26.000 I have fifty basis points at a budget deficit and 0:12:26.040 --> 0:12:29.000 probably not even This is what the argument essentially comes 0:12:29.000 --> 0:12:32.679 down to, Klaus, And they're risking another crisis for it. 0:12:32.720 --> 0:12:35.400 Is it worth it? Yeah? Yeah, no, no, it's not 0:12:35.440 --> 0:12:37.559 worth it. And you know, some of the blame has 0:12:37.600 --> 0:12:40.040 to have to put be at the EU as well. 0:12:40.080 --> 0:12:42.640 I mean, it's odd, right that every time we have 0:12:42.720 --> 0:12:46.120 one of these negotiations between a southern European country and 0:12:46.160 --> 0:12:48.520 the EU, it always ends up like this, and there's 0:12:48.520 --> 0:12:50.760 no reason. And by the way, the Italian people will 0:12:50.760 --> 0:12:53.040 pay right because I mean, let's just let's go run 0:12:53.080 --> 0:12:55.640 through the economic year. This will start to hurt next 0:12:55.720 --> 0:12:57.480 year with a lag like you have two year yeards 0:12:57.880 --> 0:13:01.679 one Rachel will go up with a lack banquets bankalown rate. 0:13:01.720 --> 0:13:03.360 Of course they will. This is like, this is just 0:13:03.400 --> 0:13:05.240 one of one. We know this, but the first half 0:13:05.280 --> 0:13:08.440 of next year Italy. Italy could be close to recession 0:13:08.480 --> 0:13:10.800 if this continues, because it growth is al really very low. 0:13:10.840 --> 0:13:13.360 I mean, it's just amount of time before just make 0:13:13.440 --> 0:13:17.000 that conclusion. So how does Mr Drug respond to this? 0:13:17.080 --> 0:13:19.320 We have an historic headlined out of the Bloomberg that 0:13:19.320 --> 0:13:22.160 they're going to keep rates where they are until I 0:13:22.200 --> 0:13:24.959 don't know, on the edge of freezing over I guess 0:13:25.120 --> 0:13:28.760 late summer of next year. Can that be derailed by 0:13:28.800 --> 0:13:34.240 this tumult in Italy? No? Uh well the rates maybe 0:13:34.320 --> 0:13:36.760 not chewy, but yeah, I'm fair of the rates next 0:13:36.840 --> 0:13:40.400 year obviously, yes, I mean in some sense if Italy falls, 0:13:40.480 --> 0:13:43.160 really if the Italian economy retakes a knock on the 0:13:43.160 --> 0:13:45.480 basis of this, this is obviously going to feedback through 0:13:45.559 --> 0:13:47.880 to the Ecbach reaction function. Growth going to be lower. 0:13:47.880 --> 0:13:50.280 So yeah, that that that could be through. But then 0:13:50.280 --> 0:13:51.960 again we're playing for time here, you know. We we 0:13:51.960 --> 0:13:54.480 don't have to have that discussion until at some point 0:13:54.559 --> 0:13:56.560 in the first half of next year, but not a 0:13:56.640 --> 0:13:59.839 queys ending. And at the moment, the ECB has been 0:14:00.000 --> 0:14:02.640 paced into a corner, as it did with Greece, in 0:14:02.679 --> 0:14:05.560 the sense that when you have a faceoff like this 0:14:05.679 --> 0:14:08.240 between the EU and and and a government needs to 0:14:08.320 --> 0:14:11.199 be just have to kick back from So I think 0:14:11.200 --> 0:14:12.920 some people would also argue that the e CP have 0:14:12.960 --> 0:14:14.880 put themselves in a corner, and they did it several 0:14:14.920 --> 0:14:18.160 years ago, unto John Claudritie, when they were responsible to 0:14:18.240 --> 0:14:21.880 some extent to introduce read denomination risk into this market 0:14:21.880 --> 0:14:25.000 because they didn't behave like a normal central bank. Are 0:14:25.000 --> 0:14:27.080 they going to continue to behave like a normal central 0:14:27.120 --> 0:14:31.520 bank now? Well, I mean I think I know, I 0:14:31.640 --> 0:14:34.840 see your point. I mean that that that big, that 0:14:34.840 --> 0:14:36.760 that that that great high. But I mean what the 0:14:36.760 --> 0:14:39.160 ECB can do right, What we can do is the 0:14:39.160 --> 0:14:42.000 ECB can help the Talian bond market if there's an 0:14:42.000 --> 0:14:44.920 actual miss pricing. But if that miss pricing because Italy 0:14:45.480 --> 0:14:47.920 is flirting with the idea of leaving the Eurozone, or 0:14:47.960 --> 0:14:51.840 if markets believe that that's true, I mean you're you're gone. 0:14:52.000 --> 0:14:54.000 I mean, then you don't have the ECB anymore by 0:14:54.040 --> 0:14:57.280 definition when you leave the Eurozone. So one, the fact 0:14:57.320 --> 0:14:59.680 that we still have this debate, which is incredible to me, 0:15:00.080 --> 0:15:02.320 that just means that that the e g B is 0:15:02.600 --> 0:15:04.920 really just I mean, listen, the e g B should 0:15:04.960 --> 0:15:07.120 come in hard on Italian two years, you'll say. In 0:15:07.120 --> 0:15:09.960 my views, they should just smack that down. It is 0:15:10.400 --> 0:15:14.840 a violation of the e CBS forward guidance. Yeah, it has. 0:15:15.040 --> 0:15:18.040 The Italian two yields has no business being one point. 0:15:18.720 --> 0:15:22.120 But there are two Eurozone happened crisis hangovers. Class as 0:15:22.120 --> 0:15:24.440 you know, there are two Eurozone crisis hangovers that still 0:15:24.480 --> 0:15:26.800 exist today, and one is to do move between the 0:15:26.840 --> 0:15:29.000 banks and the sovereigns hasn't gone away. You see it 0:15:29.000 --> 0:15:31.840 in Italy. The other for me is that Italian peripheries, 0:15:32.040 --> 0:15:35.600 and just peripheries in general, sovereign debt in Spain and Italy, Portugal, 0:15:35.640 --> 0:15:39.600 Greece still trades like credit. And to what degree when 0:15:39.600 --> 0:15:43.440 it trades like credit, does that curtail the populist ability 0:15:43.520 --> 0:15:45.960 to really take this fight and have this fight for 0:15:45.960 --> 0:15:49.680 a sustained period of time. Oh no, it does in 0:15:49.880 --> 0:15:53.000 some sense that that again really is a really good point. 0:15:53.480 --> 0:15:56.120 The fact that the bonds trade like credit obviously in 0:15:56.160 --> 0:15:59.000 some sense empowers the EU and empowers the EP. Just 0:15:59.120 --> 0:16:00.800 all right, let them run. Oh yeah, we'll see how 0:16:00.800 --> 0:16:02.480 far they get, because at the end of the day 0:16:03.080 --> 0:16:05.960 they end up with having to pay the pride. And 0:16:06.000 --> 0:16:07.640 I mean, I'm very clear in my base case. If 0:16:07.640 --> 0:16:10.040 we start to see growth slowing and bank loan and 0:16:10.160 --> 0:16:12.880 variable mortgage rates time to go up. Let's see how 0:16:12.880 --> 0:16:14.640 the balls do and the first time make year for 0:16:14.720 --> 0:16:17.960 Salvenia and Demo Claus. Thank you so much. Close Festal 0:16:18.000 --> 0:16:30.840 with Pantheon. Really good update there with us right now 0:16:31.480 --> 0:16:35.680 a gentleman that certainly within banking and finance and banking 0:16:35.880 --> 0:16:40.520 legislation needs little introduction. Michael Mayo as this week as 0:16:40.520 --> 0:16:43.520 wells Fargo as well. Before we get the banking earnings 0:16:43.600 --> 0:16:48.840 and all that. H ARE four one zero five is 0:16:48.880 --> 0:16:52.880 an attempt to bring Mike Mayo sensibility to Washington. What 0:16:53.200 --> 0:16:56.760 is it and is it gonna work? So this is 0:16:57.680 --> 0:17:02.200 HR four zero one five the Core Governance Reform Act, 0:17:03.320 --> 0:17:06.479 also known as the Mayo Act. Well it's the Anti 0:17:06.520 --> 0:17:10.840 Mayo Act. This is the Corporate Governance reform. Having covered 0:17:11.080 --> 0:17:14.439 the banking industry for the last three decades, seeing the 0:17:14.480 --> 0:17:16.920 abuses that have taken place. As you know, Tom, I've 0:17:16.920 --> 0:17:21.880 written about this in my book. You've been fired over this, 0:17:22.200 --> 0:17:26.400 continue exactly and you know I testified to Congress over this. 0:17:26.760 --> 0:17:30.520 So if you hear Corporate Governance Reform Act, I have 0:17:30.920 --> 0:17:33.040 great ideas for this. But what this act would do, 0:17:33.119 --> 0:17:37.640 it's it's cracking down on those advisors that advise shareholders 0:17:37.680 --> 0:17:43.080 on how to vote and so the so it's proxy advisors, 0:17:43.480 --> 0:17:47.040 it's Institutional Shareholder Services, Glass, Louis Egan, Jones, a couple 0:17:47.080 --> 0:17:50.240 other small ones, and what they do is they advise 0:17:50.320 --> 0:17:55.000 shareholders to vote when the main questions for every annual meeting. 0:17:55.840 --> 0:18:00.200 And now the um you know, the this bill as 0:18:00.200 --> 0:18:02.760 we're going to crack down these proxy advisors. We're gonna 0:18:02.760 --> 0:18:05.320 make because that's what the big banks want. Right. Well, 0:18:05.359 --> 0:18:07.600 I'm not I'm not saying big banks or other banks. 0:18:07.640 --> 0:18:10.360 I'm just saying for me, as someone who represents shareholders, 0:18:10.720 --> 0:18:12.720 I've done that for the banks, and this applies to 0:18:12.760 --> 0:18:16.919 all industries. What this would require is that the proxy advisors, 0:18:16.960 --> 0:18:19.879 before they publish their research, they'd have to show that 0:18:20.000 --> 0:18:22.920 research to the companies, and the companies could say, hey, 0:18:23.000 --> 0:18:26.000 this isn't quite right. The companies still agree, then the 0:18:26.040 --> 0:18:29.840 company view would be listed alongside the views of the projects. 0:18:29.840 --> 0:18:33.120 Come to the chases. This act good for Jamie Diamond. Well, 0:18:33.160 --> 0:18:35.440 you know, I say I change it around. I say, 0:18:35.600 --> 0:18:39.360 does this pass the city group test that? Well, by 0:18:39.440 --> 0:18:42.200 by that, I mean so if a proxy advisor wants 0:18:42.240 --> 0:18:46.840 to conduct research talking about city groups pay, then they'd 0:18:46.840 --> 0:18:48.240 have to check with City Group. If they want to 0:18:48.280 --> 0:18:51.120 conduct research saying we should separate the CEO and chairman job, 0:18:51.359 --> 0:18:53.199 they'd have to show that to the city group. If 0:18:53.200 --> 0:18:56.320 they say we want to have a shareholder value committee 0:18:56.320 --> 0:18:59.880 to get these are already shareholder proposals that they're giving 0:19:00.040 --> 0:19:03.480 recommendations on. So if they want to give recommendations that 0:19:03.600 --> 0:19:06.000 they have to show their research. So for City Group, 0:19:06.080 --> 0:19:09.640 for the last two decades, the CEOs over two decades 0:19:09.640 --> 0:19:14.159 have gotten paid for um, sorry, I've gotten paid an 0:19:14.160 --> 0:19:16.959 average of twenty million dollars a year, four million dollars 0:19:17.200 --> 0:19:19.840 while the stock's gone down, While the stock's gone down 0:19:19.880 --> 0:19:22.520 by at a time when the SMP has got up 0:19:22.520 --> 0:19:25.879 two to threefold. So you know, if if I assess 0:19:26.000 --> 0:19:28.600 or Glasslows wants to write about the pay at City Group, 0:19:28.840 --> 0:19:32.480 they'd have to show that research to City Group before 0:19:32.520 --> 0:19:36.200 doing this. This is the anti Mike Mayo by all means, 0:19:36.680 --> 0:19:39.800 Ferre scrim over times in England gave him a lot 0:19:39.800 --> 0:19:41.120 of time. Has gone a bit of a rant, didn't 0:19:41.119 --> 0:19:44.359 we It's okay, it's as a friend of Oz, he 0:19:44.400 --> 0:19:47.680 can do that. But you know, if I'm ad Egan Jones, 0:19:47.720 --> 0:19:49.840 do I need to show my research at whatever bank 0:19:49.960 --> 0:19:52.000 before my imagine we can we talk about the earnings 0:19:52.000 --> 0:19:54.119 that come this week. A bit of a rant now 0:19:54.160 --> 0:19:56.280 about some of what is going gone down in Washington 0:19:56.359 --> 0:20:00.000 day see with the regulation still bullish City City Group. 0:20:00.000 --> 0:20:03.200 It is our number one idea you have. I think 0:20:03.240 --> 0:20:05.359 that the main course for City and all the banks 0:20:05.359 --> 0:20:07.880 should be decent. I mean you have good cause control, 0:20:08.000 --> 0:20:11.640 good credit, good cath return. If there's a concern out there, 0:20:11.720 --> 0:20:14.720 it's that you don't get that dessert, the extras of 0:20:15.000 --> 0:20:18.360 you know, extra margin increase, extra long growth, extra capital markets, 0:20:18.440 --> 0:20:22.280 the extra animal spirits that should come after the tax cuts. 0:20:22.480 --> 0:20:25.040 I prefer having a little bit less revenues today and 0:20:25.200 --> 0:20:27.679 much more sustainable growth. In a way, it's the the 0:20:27.760 --> 0:20:31.520 opposite before the financial crisis from people celebrated revenue growth 0:20:31.640 --> 0:20:33.639 only for banks get hurt later. Now you have a 0:20:33.640 --> 0:20:36.280 little bit less revenue growth, but it's sustainable. You'll really 0:20:36.320 --> 0:20:39.199 bullish on the structural story for banks in America. Can 0:20:39.280 --> 0:20:40.879 you just build on that framework, because we've got a 0:20:40.920 --> 0:20:42.159 bit of time with you this morning, and then we 0:20:42.160 --> 0:20:44.520 can get deeper into some of the stuff you concerned about. 0:20:44.560 --> 0:20:46.840 Just why is the structural story for banks right now 0:20:47.440 --> 0:20:49.840 so favorable for the longer term with a much longer 0:20:49.880 --> 0:20:52.280 time a rising here. Well, I appreciate that question. There's 0:20:52.320 --> 0:20:54.760 too much short termism. And so when we look at 0:20:54.760 --> 0:20:58.080 the banks, despite you know, to be some cyclical softness, 0:20:58.119 --> 0:21:01.600 you have um the cost uxture at banks. If you're 0:21:01.640 --> 0:21:04.440 reaching a twenty five year structural breakout for the benefits 0:21:04.440 --> 0:21:08.399 of scale. It was when US banks were first allowed 0:21:08.440 --> 0:21:10.520 to expand nationally. You're seeing the benefit of that. There 0:21:10.560 --> 0:21:15.119 was the scale. Now you're seeing a structural reduction in risk. 0:21:15.359 --> 0:21:17.680 That doesn't mean loan losses aren't going higher. That doesn't 0:21:17.720 --> 0:21:20.840