1 00:00:02,529 --> 00:00:05,370 Speaker 1: Bloomberg Audio Studios. Podcasts. 2 00:00:05,690 --> 00:00:06,210 Speaker 2: Radio. 3 00:00:06,660 --> 00:00:07,040 Speaker 3: News. 4 00:00:12,520 --> 00:00:16,660 Speaker 1: This is the Bloomberg Surveillance Podcast. Catch us live weekdays 5 00:00:16,730 --> 00:00:20,230 Speaker 1: at 7 a.m. Eastern on Apple CarPlay or Android Auto 6 00:00:20,290 --> 00:00:23,870 Speaker 1: with the Bloomberg Business app. Listen on demand wherever you 7 00:00:23,910 --> 00:00:27,000 Speaker 1: get your podcasts or watch us live on YouTube. 8 00:00:27,640 --> 00:00:30,690 Speaker 4: This is wonderful. From England, Matthew King joins us. 9 00:00:30,760 --> 00:00:34,840 Speaker 5: Matt King is founder of Satori Insights. Truly iconic at 10 00:00:34,880 --> 00:00:38,600 Speaker 5: Citigroup over the years and thinking about the big picture. 11 00:00:38,740 --> 00:00:41,809 Speaker 5: I love the single sentence, Matt King, in your note, 12 00:00:41,970 --> 00:00:44,050 Speaker 5: which is what so many people are thinking. 13 00:00:44,610 --> 00:00:46,490 Speaker 4: Why hasn't anything broken? 14 00:00:47,150 --> 00:00:50,330 Speaker 5: Why does this just continue on if so many are 15 00:00:50,409 --> 00:00:51,630 Speaker 5: afeard of the future? 16 00:00:53,870 --> 00:00:55,290 Speaker 6: Thanks very much for having me. I think there's lots 17 00:00:55,310 --> 00:00:56,710 Speaker 6: of ways we could tackle that. And one of them 18 00:00:56,750 --> 00:01:01,320 Speaker 6: is earnings. But I think there's something important about how 19 00:01:01,520 --> 00:01:06,700 Speaker 6: deficits have been financed and about how that is changing, 20 00:01:06,740 --> 00:01:08,200 Speaker 6: which is also part of the explanation. 21 00:01:08,260 --> 00:01:09,979 Speaker 4: And it, too, kind of points to. 22 00:01:11,720 --> 00:01:15,060 Speaker 6: I'm getting closer to things breaking, but not being at 23 00:01:15,100 --> 00:01:18,360 Speaker 6: that point yet. In the near term, you've got bond 24 00:01:18,380 --> 00:01:20,959 Speaker 6: yields backing up and lots of people like to say, oh, 25 00:01:20,980 --> 00:01:23,399 Speaker 6: it's growth that's driving it because it's the real yield 26 00:01:23,459 --> 00:01:27,000 Speaker 6: moving and not inflation break-evens and not oil prices. And 27 00:01:27,020 --> 00:01:29,360 Speaker 6: I don't really think that's the whole story. 28 00:01:29,400 --> 00:01:30,420 Speaker 4: It is the real. 29 00:01:30,220 --> 00:01:34,120 Speaker 6: Yield, but it's actually more about who's doing the borrowing 30 00:01:34,140 --> 00:01:37,250 Speaker 6: and their desire to borrow that keeps pushing these yields up. 31 00:01:37,600 --> 00:01:39,399 Speaker 6: And we're getting closer to the point where that causes 32 00:01:39,459 --> 00:01:41,399 Speaker 6: money to rotate out of equities and back into cash. 33 00:01:41,680 --> 00:01:42,740 Speaker 6: But we haven't got there yet. 34 00:01:43,860 --> 00:01:46,200 Speaker 7: Matt, how important is the rate of change here? I mean, 35 00:01:46,250 --> 00:01:48,710 Speaker 7: it's been fast at times and then it's been more 36 00:01:48,750 --> 00:01:52,650 Speaker 7: of a grind and acceptance of either higher growth or 37 00:01:52,670 --> 00:01:55,590 Speaker 7: a tighter policy path. What do we think there for 38 00:01:55,610 --> 00:01:56,450 Speaker 7: the US specific? 39 00:01:58,810 --> 00:02:00,450 Speaker 6: Some people like to say it's the level, but you 40 00:02:00,470 --> 00:02:02,930 Speaker 6: look back through history and there hasn't been a consistent 41 00:02:02,950 --> 00:02:05,410 Speaker 6: level where markets break. Some people like to say it's 42 00:02:05,430 --> 00:02:07,970 Speaker 6: the rate of change, and that's been more important since 43 00:02:08,010 --> 00:02:12,040 Speaker 6: about 1997 or so. But there, too, it's not really consistent. 44 00:02:12,540 --> 00:02:14,460 Speaker 6: What I would say, and even when you start looking 45 00:02:14,500 --> 00:02:17,580 Speaker 6: at real yields rather than nominal yields, again, it's not 46 00:02:17,750 --> 00:02:21,650 Speaker 6: as simple as that. For me, it's this combination of 47 00:02:21,730 --> 00:02:26,010 Speaker 6: the higher real yield sucking money back out of equities 48 00:02:26,070 --> 00:02:30,020 Speaker 6: and risk, and into cash and money market funds. And 49 00:02:30,040 --> 00:02:32,190 Speaker 6: we're getting closer to that point. And even recently, you 50 00:02:32,210 --> 00:02:33,770 Speaker 6: can see it's kind of just tech equities that are 51 00:02:33,790 --> 00:02:34,410 Speaker 6: driving things. 52 00:02:35,120 --> 00:02:36,200 Speaker 4: But we're not at that point yet. 53 00:02:36,260 --> 00:02:38,920 Speaker 6: And that's a mixture of the earnings continuing to be strong, 54 00:02:39,380 --> 00:02:41,840 Speaker 6: but also people who are having been educated to buy 55 00:02:41,940 --> 00:02:46,310 Speaker 6: on dips over the last couple of decades. But it's 56 00:02:46,389 --> 00:02:50,510 Speaker 6: also about how the deficits have been financed, especially in 57 00:02:50,550 --> 00:02:54,570 Speaker 6: the US up until recently. And there's even an argument 58 00:02:54,710 --> 00:02:57,610 Speaker 6: that my presentation goes into about how the US in 59 00:02:57,650 --> 00:03:02,090 Speaker 6: particular has kind of been self-financed almost. So whereas countries 60 00:03:02,150 --> 00:03:04,410 Speaker 6: like France are having to rely much more on foreigners, 61 00:03:04,710 --> 00:03:06,430 Speaker 6: to fund their deficits. And that's a lot of the 62 00:03:06,470 --> 00:03:09,510 Speaker 6: reason why the markets have become more yield sensitive, or 63 00:03:09,530 --> 00:03:11,170 Speaker 6: the buyers have become more yield sensitive, and therefore, the 64 00:03:11,190 --> 00:03:14,120 Speaker 6: yields have been backing up. In the US, there's been 65 00:03:14,160 --> 00:03:18,560 Speaker 6: this much more subtle mechanism that combines money market funds 66 00:03:18,620 --> 00:03:21,280 Speaker 6: on the one hand, and then hedge funds and repo 67 00:03:21,340 --> 00:03:23,640 Speaker 6: on the other. And that's coming under a little bit 68 00:03:23,660 --> 00:03:26,600 Speaker 6: of pressure, but it's been very effective up until now. 69 00:03:26,940 --> 00:03:28,660 Speaker 6: And that, in turn, is one of the reasons why 70 00:03:28,680 --> 00:03:30,799 Speaker 6: I like to joke that I used to think that 71 00:03:30,860 --> 00:03:32,919 Speaker 6: hundreds of billions was a lot of money. And these days, suddenly, 72 00:03:32,960 --> 00:03:36,420 Speaker 6: everything is in trillions. And we're getting closer to the 73 00:03:36,440 --> 00:03:38,500 Speaker 6: point where that comes under pressure and things like basis 74 00:03:38,540 --> 00:03:41,119 Speaker 6: trades are reduced. But till now, we still haven't got there. 75 00:03:41,720 --> 00:03:44,880 Speaker 7: So we're looking a little more collateral heavy cash light again, 76 00:03:44,900 --> 00:03:47,600 Speaker 7: the repo market to your point there. How does that 77 00:03:47,620 --> 00:03:49,840 Speaker 7: kind of liquidity backdrop? And if it's just more on 78 00:03:49,860 --> 00:03:51,740 Speaker 7: the hedge fund side, so be it. But how's that 79 00:03:51,760 --> 00:03:53,740 Speaker 7: going to be affecting sort of rate volatility then? And 80 00:03:53,840 --> 00:03:55,640 Speaker 7: is this really something that can come up out of 81 00:03:55,680 --> 00:03:57,480 Speaker 7: nowhere like we sort of saw at the end of 82 00:03:57,480 --> 00:03:59,160 Speaker 7: 25 a little bit in October, November period? 83 00:04:01,240 --> 00:04:05,250 Speaker 6: Basically, I would say, yes, it is. And mechanisms like 84 00:04:05,270 --> 00:04:09,029 Speaker 6: the SRF provide a degree of protection. But what we 85 00:04:09,190 --> 00:04:13,230 Speaker 6: see is all of the repo numbers getting larger and larger. 86 00:04:13,590 --> 00:04:15,670 Speaker 6: And that does point, as you say, to exactly this 87 00:04:15,730 --> 00:04:19,990 Speaker 6: risk of kind of liquidity shocks. And everything ends up correlated. 88 00:04:20,730 --> 00:04:23,250 Speaker 5: This is really important, folks. What you heard was a 89 00:04:23,330 --> 00:04:26,570 Speaker 5: jargon-laced Michael Ball. John Tucker, I think the Tito's and 90 00:04:26,610 --> 00:04:29,150 Speaker 5: Tang is working in right now. I mean, he had 91 00:04:29,190 --> 00:04:31,300 Speaker 5: like six jargon items in that question. 92 00:04:31,950 --> 00:04:35,810 Speaker 4: To Matt King. Matt King, I'm finishing up the Wigglesworth, 93 00:04:35,870 --> 00:04:37,230 Speaker 4: which is my book of the fall. 94 00:04:37,830 --> 00:04:41,100 Speaker 5: I can't say enough about the arc from Venice over 95 00:04:41,130 --> 00:04:43,660 Speaker 5: to Milken and on to the modern day that Robin 96 00:04:43,700 --> 00:04:46,320 Speaker 5: Wigglesworth does in his book. I'll have much more on 97 00:04:46,360 --> 00:04:49,300 Speaker 5: that in the coming days. But Matt King, when we 98 00:04:49,339 --> 00:04:54,550 Speaker 5: talk about the repo market, we're talking about trillions of dollars. 99 00:04:54,970 --> 00:04:57,150 Speaker 5: And I'm going to combine your repo and money market 100 00:04:57,230 --> 00:05:01,590 Speaker 5: fund like a lead weight there. What is the difference now, 101 00:05:01,670 --> 00:05:05,890 Speaker 5: as you say, that we're talking about a ginormous mass 102 00:05:05,950 --> 00:05:10,339 Speaker 5: of money, which is hinging together all this modern finance? 103 00:05:10,760 --> 00:05:14,000 Speaker 5: What does that signal, the sheer magnitude of it? 104 00:05:16,339 --> 00:05:18,900 Speaker 6: It's, crudely, it signals. 105 00:05:20,820 --> 00:05:26,229 Speaker 6: Bubble-driven processes, or it's kind of reminiscent of 2008, not 106 00:05:26,270 --> 00:05:29,810 Speaker 6: in the immediate or the magnitude of those risks, but 107 00:05:30,070 --> 00:05:32,990 Speaker 6: let's say risks being pushed into the tails. So you're 108 00:05:33,050 --> 00:05:38,790 Speaker 6: right that all of these volumes have doubled just since 109 00:05:38,790 --> 00:05:41,330 Speaker 6: 2020 or so. We're up to $ 7 trillion in terms 110 00:05:41,380 --> 00:05:44,740 Speaker 6: of the repo understandings. And while that's going on, it 111 00:05:44,820 --> 00:05:50,040 Speaker 6: does lubricate markets. It does help with financing trades with 112 00:05:50,600 --> 00:05:53,850 Speaker 6: both the basis trade treasuries and also equity financing trades 113 00:05:54,130 --> 00:05:59,330 Speaker 6: but there's also a vulnerability that comes as part of that. 114 00:05:59,650 --> 00:06:05,190 Speaker 5: I think the public instinctively understands that vulnerability how is 115 00:06:05,230 --> 00:06:09,300 Speaker 5: that usually expressed how do we see it coming. 116 00:06:11,760 --> 00:06:14,120 Speaker 6: I think the usual rule with both bubbles and with 117 00:06:14,160 --> 00:06:16,420 Speaker 6: these sorts of vulnerabilities is you tend not to see 118 00:06:16,460 --> 00:06:16,980 Speaker 6: them coming. 119 00:06:17,060 --> 00:06:17,390 Speaker 4: Thank you. 120 00:06:17,440 --> 00:06:20,770 Speaker 6: Precisely because everything looks great while the valuations are going up. 121 00:06:21,089 --> 00:06:23,229 Speaker 6: And then as the numbers come down, you realize just 122 00:06:23,270 --> 00:06:26,470 Speaker 6: how important money creation, even if it's through repo, was 123 00:06:26,550 --> 00:06:27,510 Speaker 6: in driving that process. 124 00:06:27,589 --> 00:06:27,770 Speaker 5: Right. 125 00:06:28,850 --> 00:06:32,420 Speaker 6: In that sense, we monitor it, but the risk has 126 00:06:32,440 --> 00:06:34,719 Speaker 6: been pushed into the tails. A lot of what bothers 127 00:06:34,760 --> 00:06:37,940 Speaker 6: me is you're starting to get a bit more in 128 00:06:37,960 --> 00:06:41,900 Speaker 6: terms of bond volatility, but day-to-day volatility in things like 129 00:06:41,960 --> 00:06:47,109 Speaker 6: equities remains really very low. And yet- the tail risks 130 00:06:47,190 --> 00:06:49,089 Speaker 6: are rising and you begin to see signs of stress 131 00:06:49,350 --> 00:06:51,910 Speaker 6: spreading out from bonds into credit and through into other markets. 132 00:06:51,990 --> 00:06:54,930 Speaker 5: What a terrific window into the dynamics here right now 133 00:06:54,970 --> 00:06:56,840 Speaker 5: that the pros are looking at. We'll have much more 134 00:06:56,900 --> 00:07:00,180 Speaker 5: on that hour. Matt King, thank you so much. Just wonderful, 135 00:07:00,240 --> 00:07:02,580 Speaker 5: wonderful with Satari Investments. 136 00:07:04,260 --> 00:07:04,880 Speaker 4: Stay with us. 137 00:07:05,180 --> 00:07:08,410 Speaker 8: More from Bloomberg Surveillance coming up after this. 138 00:07:15,650 --> 00:07:19,260 Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live 139 00:07:19,340 --> 00:07:21,420 Speaker 1: weekday afternoons from 7 to 10 a.m. 140 00:07:21,460 --> 00:07:21,860 Speaker 4: Eastern. 141 00:07:21,960 --> 00:07:25,260 Speaker 1: Listen on Apple CarPlay and Android Auto with the Bloomberg 142 00:07:25,280 --> 00:07:27,800 Speaker 1: Business app or watch us live on YouTube. 143 00:07:28,200 --> 00:07:30,770 Speaker 5: Let's jump right away to the expertise of Ken Leon. 144 00:07:30,830 --> 00:07:33,570 Speaker 5: Our first look at the banker and he's Ken Leon. 145 00:07:33,970 --> 00:07:38,510 Speaker 5: How important are the conference calls, the view forward for 146 00:07:38,530 --> 00:07:39,390 Speaker 5: the major banks? 147 00:07:40,610 --> 00:07:43,130 Speaker 2: Well, it's great to be with you, Tom, and they're 148 00:07:43,390 --> 00:07:47,690 Speaker 2: very important because we're at a very high level as 149 00:07:47,710 --> 00:07:51,940 Speaker 2: it relates to risk and reward. The bank stocks have 150 00:07:52,010 --> 00:07:57,080 Speaker 2: pulled back. The valuations seem more reasonable than they did 151 00:07:57,160 --> 00:08:00,780 Speaker 2: before they started to correct in the middle of August. 152 00:08:01,900 --> 00:08:07,080 Speaker 2: We see opportunities clearly related to the capital markets and 153 00:08:07,120 --> 00:08:11,950 Speaker 2: investment banking and Interest rates, Tom, we are at a 154 00:08:12,010 --> 00:08:17,110 Speaker 2: level that we have not seen working together over two decades. 155 00:08:17,230 --> 00:08:20,810 Speaker 2: And the opportunity, of course, is can the banks still 156 00:08:20,870 --> 00:08:24,620 Speaker 2: generate strong earnings, to your question, for the third quarter? 157 00:08:24,690 --> 00:08:29,619 Speaker 2: And importantly, directionally give for the fourth quarter confidence about 158 00:08:29,660 --> 00:08:33,620 Speaker 2: their ability to continue to deliver strong performance. 159 00:08:33,760 --> 00:08:34,480 Speaker 4: Also, what we just. 160 00:08:34,400 --> 00:08:36,819 Speaker 5: Talked to Matt King about, and of course, Larry McDonald, 161 00:08:36,840 --> 00:08:42,160 Speaker 5: the 9 o'clock hour, VAR, folks, V-A-R, is a measurement 162 00:08:42,220 --> 00:08:44,740 Speaker 5: of the risk taken by the banks. Do you expect 163 00:08:44,780 --> 00:08:49,239 Speaker 5: to see expanded or contracting VAR as the banks look 164 00:08:49,260 --> 00:08:50,120 Speaker 5: at the mess we're in? 165 00:08:51,610 --> 00:08:53,130 Speaker 9: It's a great question for people. 166 00:08:53,150 --> 00:08:57,050 Speaker 2: We're talking about where you're putting more capital to risk, 167 00:08:57,150 --> 00:09:01,750 Speaker 2: particularly across the trading desk or principal trading as you. 168 00:09:01,670 --> 00:09:03,300 Speaker 9: Were speaking about derivatives. 169 00:09:04,760 --> 00:09:08,360 Speaker 2: Banks generally are very conservative in terms of this area. 170 00:09:08,820 --> 00:09:12,760 Speaker 2: What they are striving to do is give durable, recurring 171 00:09:13,220 --> 00:09:20,590 Speaker 2: fee income that generates stable earnings and drives higher earnings multiples. 172 00:09:21,090 --> 00:09:24,410 Speaker 2: That is the book, whether you're Goldman Sachs, JP Morgan, 173 00:09:24,690 --> 00:09:26,090 Speaker 2: or any of the large banks. 174 00:09:26,570 --> 00:09:28,100 Speaker 5: I look at this at Michael Ball. I need to 175 00:09:28,140 --> 00:09:30,420 Speaker 5: jump in here. I just look at the JP Morgan chart. 176 00:09:30,760 --> 00:09:33,320 Speaker 5: And on a weekly basis, it's really elegant. It's just 177 00:09:33,380 --> 00:09:37,699 Speaker 5: moved back to the long-term moving average. It hasn't given way. 178 00:09:37,720 --> 00:09:38,350 Speaker 10: No, I know. 179 00:09:38,380 --> 00:09:40,349 Speaker 7: It's been an orderly kind of pullback as the rate 180 00:09:40,370 --> 00:09:42,530 Speaker 7: sensitivity and the credit concerns picked up. But I don't 181 00:09:42,550 --> 00:09:44,430 Speaker 7: think we're going to see that validate in the earnings. 182 00:09:44,470 --> 00:09:46,110 Speaker 7: And actually, I'm just going to switch gears some of 183 00:09:46,130 --> 00:09:47,830 Speaker 7: the information that I always look for here. 184 00:09:47,910 --> 00:09:50,339 Speaker 4: Oh, John Tucker, is Michael Ball allowed to switch gears? 185 00:09:51,260 --> 00:09:53,780 Speaker 4: I believe he just did. Okay, thank you. Continue. 186 00:09:53,840 --> 00:09:55,780 Speaker 7: Well, the insight into the consumer is always great. And 187 00:09:55,800 --> 00:09:59,850 Speaker 7: I remember specifically Q2, the Bank of America's CFO saying 188 00:09:59,870 --> 00:10:02,340 Speaker 7: there was no K economy and a lot of traders 189 00:10:02,380 --> 00:10:04,300 Speaker 7: and PMs picking up on that. And that being sort 190 00:10:04,320 --> 00:10:06,500 Speaker 7: of the turning point of earnings breadth for that whole quarter. 191 00:10:06,520 --> 00:10:08,670 Speaker 7: I mean, do we need to actually hear something like 192 00:10:08,710 --> 00:10:10,770 Speaker 7: this again? Because look, the credit card data, the higher 193 00:10:10,809 --> 00:10:13,910 Speaker 7: frequency touchpoint still looks strong, although we have consumer confidence 194 00:10:13,950 --> 00:10:14,729 Speaker 7: and some worries there. 195 00:10:16,790 --> 00:10:18,679 Speaker 2: So I think you know, we're in the kind of 196 00:10:18,720 --> 00:10:24,230 Speaker 2: the neutral zone for credit quality. We're seeing clearly no 197 00:10:24,760 --> 00:10:29,089 Speaker 2: significant increases of loan loss provisions. But the other issue 198 00:10:29,309 --> 00:10:33,350 Speaker 2: really relates to what rates deposit risk. The question whether 199 00:10:33,410 --> 00:10:37,930 Speaker 2: banks can or will provide competitive rates, because by just 200 00:10:38,050 --> 00:10:41,330 Speaker 2: using your phone, you could be moving money even overnight, 201 00:10:41,710 --> 00:10:44,650 Speaker 2: as some of the large banks do. So I think 202 00:10:44,690 --> 00:10:48,689 Speaker 2: we're in an environment where consumers are much smarter of 203 00:10:49,030 --> 00:10:53,620 Speaker 2: how they try to get higher interest earnings. And I 204 00:10:53,700 --> 00:10:57,600 Speaker 2: don't see a risk for the large banks on credit 205 00:10:57,660 --> 00:10:58,880 Speaker 2: quality in the third quarter. 206 00:10:59,160 --> 00:11:02,540 Speaker 5: With us, Ken Leon of CFRA, providing all their global 207 00:11:02,600 --> 00:11:06,660 Speaker 5: research leadership as well. Ken Leon, definitive for over three 208 00:11:06,700 --> 00:11:10,700 Speaker 5: decades of looking at the securities analysis of banks. Our 209 00:11:10,740 --> 00:11:12,480 Speaker 5: Michael Ball with Ken Leon. 210 00:11:13,100 --> 00:11:14,100 Speaker 9: I think you make a good point there. 211 00:11:14,120 --> 00:11:17,120 Speaker 7: That's interesting because everyone's talking about this muse, agentic AI 212 00:11:17,160 --> 00:11:20,510 Speaker 7: adoption of finding cheaper pricing, but obviously will also affect 213 00:11:20,550 --> 00:11:23,610 Speaker 7: how consumers see their saving rates and their money markets 214 00:11:23,650 --> 00:11:25,230 Speaker 7: and all their options there. Are they going to have 215 00:11:25,250 --> 00:11:26,829 Speaker 7: to acknowledge this sum of management? Are they going to 216 00:11:26,850 --> 00:11:31,200 Speaker 7: have their own competition there? There is competition. 217 00:11:31,340 --> 00:11:35,060 Speaker 2: And we're seeing, you know, we talk about the shadow 218 00:11:35,940 --> 00:11:41,199 Speaker 2: bank market, you know, just opportunities where you have other choices. 219 00:11:41,590 --> 00:11:45,320 Speaker 2: And With AI capabilities, the agility of some of the 220 00:11:45,380 --> 00:11:50,280 Speaker 2: new startups, hopefully these become great companies that go public after. 221 00:11:50,100 --> 00:11:53,180 Speaker 9: Anthropic, like Stripe, Ramp, Plan. 222 00:11:53,840 --> 00:11:57,730 Speaker 2: All these give you just great opportunities for capturing higher 223 00:11:57,770 --> 00:11:59,930 Speaker 2: CD rates or just moving money around. 224 00:12:03,030 --> 00:12:03,290 Speaker 9: All right. 225 00:12:03,320 --> 00:12:05,079 Speaker 7: Well, that's kind of where my eyes are as well, 226 00:12:05,120 --> 00:12:07,479 Speaker 7: because that competition obviously is going to affect the margins. 227 00:12:07,520 --> 00:12:09,840 Speaker 7: And it's interesting that everyone has their sort of eyes on, 228 00:12:09,940 --> 00:12:12,580 Speaker 7: you know, maybe IPOs coming off and M & A falling. 229 00:12:12,640 --> 00:12:14,140 Speaker 7: But it seems like that's going to be the core 230 00:12:14,200 --> 00:12:17,020 Speaker 7: on top of obviously a flatter curve, which hits the banks, 231 00:12:17,080 --> 00:12:17,400 Speaker 7: as you know. 232 00:12:18,820 --> 00:12:22,640 Speaker 2: They are, you know, margins, you know, with efficiencies. The 233 00:12:22,679 --> 00:12:28,110 Speaker 2: banks have clearly have a chance possibly for headcount reductions 234 00:12:28,179 --> 00:12:30,830 Speaker 2: as they get more efficient. You know, you break up 235 00:12:30,910 --> 00:12:32,770 Speaker 2: the picture of a bank in terms of the front, 236 00:12:32,970 --> 00:12:35,770 Speaker 2: the middle office and back office. A lot of this 237 00:12:35,850 --> 00:12:39,630 Speaker 2: is happening more in the back office, but we're even 238 00:12:39,730 --> 00:12:43,790 Speaker 2: seeing this For many out there with your financial advisor, 239 00:12:44,090 --> 00:12:47,990 Speaker 2: they are using AI agents to help and better understanding 240 00:12:48,530 --> 00:12:51,610 Speaker 2: your financial objectives and your portfolios. 241 00:12:51,710 --> 00:12:54,380 Speaker 9: So, you know, we're in a new world today. 242 00:12:54,679 --> 00:12:56,440 Speaker 4: Ken Leon, thank you so much. We're in a new 243 00:12:56,480 --> 00:12:57,040 Speaker 4: world with you. 244 00:12:57,080 --> 00:12:59,640 Speaker 5: Thank you so much for this first look at the 245 00:12:59,679 --> 00:13:00,900 Speaker 5: bank earnings to be seen. 246 00:13:02,860 --> 00:13:03,480 Speaker 4: Stay with us. 247 00:13:03,780 --> 00:13:07,010 Speaker 8: More from Bloomberg Surveillance coming up after this. 248 00:13:14,260 --> 00:13:17,870 Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live 249 00:13:17,950 --> 00:13:21,130 Speaker 1: weekday afternoons from 7 to 10 a.m. Eastern. Listen on 250 00:13:21,230 --> 00:13:24,850 Speaker 1: Apple CarPlay and Android Auto with the Bloomberg Business app 251 00:13:24,870 --> 00:13:26,410 Speaker 1: or watch us live on YouTube. 252 00:13:26,929 --> 00:13:29,620 Speaker 5: Without question, our conversation of the day for so many 253 00:13:29,670 --> 00:13:35,260 Speaker 5: people who frame out caution given these odd and booming times. 254 00:13:35,460 --> 00:13:39,920 Speaker 5: Lawrence McDonald years ago held court at various and sundry firms. 255 00:13:39,960 --> 00:13:43,069 Speaker 5: He enjoyed the collapse of Lehman Brothers. He's written any 256 00:13:43,110 --> 00:13:47,070 Speaker 5: number of books and writes a religiously read bear traps report. 257 00:13:48,110 --> 00:13:50,800 Speaker 5: What's great about him is he filters in the short 258 00:13:50,840 --> 00:13:55,020 Speaker 5: term paper market into great caution about this odd bull 259 00:13:55,059 --> 00:13:58,260 Speaker 5: market we're living in. His essay of I'm going to 260 00:13:58,300 --> 00:14:01,209 Speaker 5: think three or four years ago on the mass of 261 00:14:01,300 --> 00:14:05,360 Speaker 5: money out there. was absolutely definitive. He joins us in 262 00:14:05,390 --> 00:14:08,290 Speaker 5: studio this morning. So I was just saying to Michael Ball, 263 00:14:08,340 --> 00:14:11,380 Speaker 5: I got $ 8 trillion in money market funds, $ 20 trillion 264 00:14:11,420 --> 00:14:15,640 Speaker 5: in the repo market, and everything's fine. There's a lot 265 00:14:15,679 --> 00:14:19,460 Speaker 5: of people besides you who go, really? The way you 266 00:14:19,480 --> 00:14:22,760 Speaker 5: perceive $ 20 trillion, is everything fine? 267 00:14:23,360 --> 00:14:26,380 Speaker 3: Well, we talk about this in both of our books. 268 00:14:27,400 --> 00:14:31,220 Speaker 3: And one of my favorite indicators is the last saloon. 269 00:14:32,500 --> 00:14:33,620 Speaker 3: The convertible bond market. 270 00:14:34,680 --> 00:14:38,270 Speaker 4: Which Robin Wigglesworth nails in his new book. Right, in 271 00:14:38,290 --> 00:14:38,730 Speaker 4: his new book. 272 00:14:38,990 --> 00:14:39,170 Speaker 9: Yeah. 273 00:14:39,370 --> 00:14:45,300 Speaker 3: And so whenever you see a proliferation of serial convertible issuers, 274 00:14:45,780 --> 00:14:48,880 Speaker 3: that's a sign that the high yield market has shut 275 00:14:48,900 --> 00:14:53,710 Speaker 3: these guys off. Coreweave. the Neil clouds, right? So if 276 00:14:53,750 --> 00:14:57,210 Speaker 3: the high yield market is saying no mass, it's an indication. 277 00:14:57,630 --> 00:14:59,540 Speaker 3: And every time this has happened where we've had a 278 00:14:59,620 --> 00:15:02,320 Speaker 3: fast proliferation, think of fourth quarter. 279 00:15:02,380 --> 00:15:03,400 Speaker 4: Is it happening right now? 280 00:15:03,420 --> 00:15:04,160 Speaker 3: It's happening right now. 281 00:15:04,180 --> 00:15:05,460 Speaker 4: Okay. 282 00:15:05,500 --> 00:15:07,320 Speaker 5: I'm going to cut you off because this is two 283 00:15:07,380 --> 00:15:11,050 Speaker 5: important folks. Jim Chanos on Bloomberg Money with me and 284 00:15:11,110 --> 00:15:17,979 Speaker 5: Scarlett Fu said exactly the same thing. AI, Claude, AI, 285 00:15:18,060 --> 00:15:22,540 Speaker 5: what's the other one's called? JetGPT and the rest. Chanos 286 00:15:22,720 --> 00:15:25,240 Speaker 5: and McDonald are looking at NeoCloud. 287 00:15:25,380 --> 00:15:26,100 Speaker 4: Discuss that. 288 00:15:26,580 --> 00:15:26,820 Speaker 5: Right. 289 00:15:26,900 --> 00:15:31,350 Speaker 3: Because the financing mechanism of these banks and bank lending, 290 00:15:31,370 --> 00:15:34,290 Speaker 3: think of the Metas and the oracles and all that 291 00:15:34,350 --> 00:15:38,150 Speaker 3: bank financing off balance sheet the neocloud public bonds are 292 00:15:38,210 --> 00:15:41,130 Speaker 3: kind of a good leading indicator on that because That's 293 00:15:41,480 --> 00:15:45,140 Speaker 3: they're accessing not the bank lending their exit accessing public 294 00:15:45,200 --> 00:15:47,820 Speaker 3: markets So if that's tightening then it's a sign that 295 00:15:47,860 --> 00:15:50,020 Speaker 3: we may move upstream with a credit problem. 296 00:15:50,300 --> 00:15:52,520 Speaker 7: So Larry smells a little bit like just an asset 297 00:15:52,540 --> 00:15:55,040 Speaker 7: liability Duration mismatch again. 298 00:15:55,060 --> 00:15:56,480 Speaker 9: We're all writing for the profitability. 299 00:15:56,520 --> 00:16:00,010 Speaker 7: It's highly uncertain and Overall, though, is this just exacerbated 300 00:16:00,030 --> 00:16:02,590 Speaker 7: by now, the size of this leverage still being unknown? 301 00:16:02,990 --> 00:16:05,090 Speaker 7: Every week I come in, there's just a bigger number. 302 00:16:05,770 --> 00:16:08,590 Speaker 3: Well, tonight we're doing a dinner at the Harvard Club. 303 00:16:08,990 --> 00:16:12,360 Speaker 3: Lee Robinson's in town. You would love Lee. He's been 304 00:16:12,410 --> 00:16:15,380 Speaker 3: really bullish in recent years. And what he's seen, what 305 00:16:15,440 --> 00:16:18,560 Speaker 3: I'm seeing, is big family offices are starting to buy 306 00:16:18,660 --> 00:16:21,560 Speaker 3: tail risk funds. So we're doing an event there tonight. 307 00:16:21,600 --> 00:16:25,340 Speaker 4: He's speaking. What does that translate, buying a tail risk fund? 308 00:16:25,700 --> 00:16:26,980 Speaker 4: Think of the big shorts. 309 00:16:27,670 --> 00:16:30,250 Speaker 3: You can buy credit default swaps on companies that are 310 00:16:30,270 --> 00:16:32,220 Speaker 3: exposed to credit, like, say, MetLife. 311 00:16:32,530 --> 00:16:32,820 Speaker 4: Right. 312 00:16:33,180 --> 00:16:36,900 Speaker 3: Or any one of these large insurance companies. And you 313 00:16:36,980 --> 00:16:39,340 Speaker 3: burn carry, so you might lose 10% a year, 20% 314 00:16:39,340 --> 00:16:41,140 Speaker 3: a year, depending on how much leverage. 315 00:16:41,160 --> 00:16:41,560 Speaker 5: But if we blow. 316 00:16:45,760 --> 00:16:49,340 Speaker 3: As George Jefferson used to say, this is the big one, Elizabeth. 317 00:16:49,780 --> 00:16:52,730 Speaker 3: You'll make 800%. Okay, I get that. 318 00:16:52,770 --> 00:16:54,070 Speaker 4: But to the doom crew. 319 00:16:54,090 --> 00:16:55,550 Speaker 11: That was Fred Sanford, by the way. 320 00:16:55,830 --> 00:16:56,510 Speaker 3: Oh, thank you. 321 00:16:56,570 --> 00:16:56,830 Speaker 5: Sorry. 322 00:16:57,330 --> 00:16:57,810 Speaker 4: Correction. 323 00:16:58,230 --> 00:17:02,030 Speaker 5: Surveillance culture reporter, John Tucker, with a correction. 324 00:17:02,390 --> 00:17:04,629 Speaker 4: Larry, but the point is, and I am going to 325 00:17:04,690 --> 00:17:05,810 Speaker 4: say this for the Bulls. 326 00:17:06,190 --> 00:17:08,780 Speaker 5: I got a lovely note from Doug Cassier, who's on 327 00:17:08,820 --> 00:17:10,879 Speaker 5: a short list to take over management of the New 328 00:17:10,900 --> 00:17:11,520 Speaker 5: York Yankees. 329 00:17:12,690 --> 00:17:16,850 Speaker 4: The basic idea here is crying wolf in the night. 330 00:17:17,490 --> 00:17:22,430 Speaker 5: When's the when of the caution that so many people fear? 331 00:17:22,510 --> 00:17:23,760 Speaker 4: How do you know when it's coming? 332 00:17:23,840 --> 00:17:26,440 Speaker 3: Okay, so let's say we're by no means are we 333 00:17:26,560 --> 00:17:29,020 Speaker 3: the bear traps, but we're not perma bears. We actually think. 334 00:17:29,950 --> 00:17:33,629 Speaker 3: The relationship between the index and the Nikes and the 335 00:17:33,730 --> 00:17:37,360 Speaker 3: Lulus and the Harley Davids, the market's already crashed internally. 336 00:17:37,690 --> 00:17:41,800 Speaker 3: This is a 1987 crash. There's 40 names in the 337 00:17:41,940 --> 00:17:45,540 Speaker 3: S & P, 50 world-class brands, world-class brands that are 338 00:17:45,580 --> 00:17:49,859 Speaker 3: all down 30% to 70%. And so to me, this 339 00:17:49,940 --> 00:17:53,940 Speaker 3: setup is they're pinning the index. And, Tom, this is 340 00:17:53,960 --> 00:17:56,659 Speaker 3: the most important part. When you have a year where 341 00:17:56,680 --> 00:17:58,929 Speaker 3: the index is up a lot, And the internals in 342 00:17:58,950 --> 00:18:02,150 Speaker 3: the market are poor. If you go long of Basquiat 343 00:18:02,170 --> 00:18:06,100 Speaker 3: names in the fourth quarter, between now and, say, June, 344 00:18:06,400 --> 00:18:09,119 Speaker 3: you'll get much better performance from that group. And I 345 00:18:09,200 --> 00:18:12,460 Speaker 3: think this is part of the whole passive indexing. And 346 00:18:12,480 --> 00:18:14,800 Speaker 3: they're creating more dysfunctions year in and year out. 347 00:18:15,240 --> 00:18:16,960 Speaker 7: So Larry, just to piggyback that too, there's also a 348 00:18:17,040 --> 00:18:20,500 Speaker 7: thought that there's just a structural change with vol selling, 349 00:18:20,540 --> 00:18:22,700 Speaker 7: whether it's to capture the premium or whether it's just 350 00:18:22,740 --> 00:18:26,040 Speaker 7: zero DTE, then the systemic community is still being relatively long, 351 00:18:26,060 --> 00:18:28,699 Speaker 7: which is also stabilizing realized vol. How much of that 352 00:18:28,790 --> 00:18:31,350 Speaker 7: market structure now is making this index grind higher? Well, 353 00:18:31,390 --> 00:18:33,030 Speaker 7: to your point, it's just carnage underneath. 354 00:18:33,410 --> 00:18:34,169 Speaker 4: So think about it. 355 00:18:34,150 --> 00:18:38,390 Speaker 3: 10 years ago, multi-stripe hedge funds, the amount of pods 356 00:18:38,430 --> 00:18:41,550 Speaker 3: was probably 30% of where they are now. And the 357 00:18:41,590 --> 00:18:45,130 Speaker 3: thing about these pods is they have very, very strict 358 00:18:45,390 --> 00:18:47,940 Speaker 3: risk controls. So they have those types of trades on there. 359 00:18:48,000 --> 00:18:50,379 Speaker 3: They're also, they're long in their index, they're short on 360 00:18:50,420 --> 00:18:52,420 Speaker 3: their line, right? And they're all in the same trade. 361 00:18:52,440 --> 00:18:54,340 Speaker 3: And what happens is if something happens, like we had 362 00:18:54,359 --> 00:18:57,060 Speaker 3: in June, the one or two gets carted out and 363 00:18:57,080 --> 00:18:59,199 Speaker 3: the 40 or 50 of them get carted out. And 364 00:18:59,220 --> 00:19:01,909 Speaker 3: so that creates this opportunity in volatility. 365 00:19:02,090 --> 00:19:05,510 Speaker 5: An ample conversation, a real treat on Columbus Day, Lawrence McDonald. 366 00:19:06,010 --> 00:19:08,490 Speaker 5: Founder of Bear Traps Report is with us here. Look 367 00:19:08,510 --> 00:19:11,610 Speaker 5: for his books out. Is a movie coming out Memorial 368 00:19:11,650 --> 00:19:14,389 Speaker 5: Day next year? How to Listen When Markets Speak? 369 00:19:16,990 --> 00:19:19,410 Speaker 3: The only movie I had, I was in the Academy 370 00:19:19,430 --> 00:19:22,490 Speaker 3: Award movie called Inside Job about the financial crisis. 371 00:19:22,710 --> 00:19:26,170 Speaker 5: I'm going to play off the Wigglesworth book and I'll 372 00:19:26,230 --> 00:19:28,180 Speaker 5: much more later this week on Robbins. 373 00:19:28,600 --> 00:19:31,520 Speaker 4: Just tour de force, a required read. There's a point 374 00:19:31,680 --> 00:19:32,159 Speaker 4: in there. 375 00:19:32,890 --> 00:19:36,730 Speaker 5: Well, Jeff Immelt of GE calls the Secretary of Treasury, Mr. 376 00:19:36,790 --> 00:19:39,550 Speaker 4: Paulson, and says, Houston, we have a problem. 377 00:19:40,590 --> 00:19:43,270 Speaker 5: Do you worry about that now, or are we just 378 00:19:43,490 --> 00:19:47,230 Speaker 5: so fat and happy we're not to a GE capital 379 00:19:47,310 --> 00:19:47,970 Speaker 5: challenge yet? 380 00:19:48,450 --> 00:19:51,800 Speaker 3: Well, I'm hearing that behind the scenes, the Fed's playing tough. Now, 381 00:19:51,820 --> 00:19:57,170 Speaker 3: we have CPI Wednesday. And that's already a 0.6 month 382 00:19:57,230 --> 00:19:59,139 Speaker 3: over month, which is a crazy number if you analyze it. 383 00:19:59,580 --> 00:20:01,520 Speaker 3: But I hear behind the scenes the Fed's a lot 384 00:20:01,560 --> 00:20:04,399 Speaker 3: more concerned about credit and underlying weaknesses. 385 00:20:04,420 --> 00:20:08,180 Speaker 4: So they're out there looking like they weren't in 2007. Oh, yeah. 386 00:20:08,220 --> 00:20:11,230 Speaker 3: Well, remember, Warsh was actually, I think, on the Fed 387 00:20:11,250 --> 00:20:14,410 Speaker 3: board in the spring of 2008. So he was sitting 388 00:20:14,450 --> 00:20:16,150 Speaker 3: on the deck of the Titanic at the time. 389 00:20:17,070 --> 00:20:19,850 Speaker 4: Okay, but the bottom line is we had lessons learned 390 00:20:19,869 --> 00:20:19,980 Speaker 4: in 07-08. 391 00:20:21,710 --> 00:20:24,629 Speaker 5: Are you saying, as business as usual, greed wins, I 392 00:20:24,650 --> 00:20:27,310 Speaker 5: got to make a little bit extra yield, so I'm 393 00:20:27,330 --> 00:20:27,990 Speaker 5: going to do this? 394 00:20:28,530 --> 00:20:33,679 Speaker 4: Silliness, is that still where we are, where greed pervades? Yeah, J.P. 395 00:20:33,700 --> 00:20:37,320 Speaker 3: Morgan, 1907, he said, there's nothing in this world which 396 00:20:37,359 --> 00:20:42,100 Speaker 3: will so violently distort a man's judgment more than the 397 00:20:42,200 --> 00:20:44,150 Speaker 3: sight of his neighbor getting rich. 398 00:20:44,910 --> 00:20:45,190 Speaker 1: Right? 399 00:20:45,410 --> 00:20:45,530 Speaker 9: Yeah. 400 00:20:46,119 --> 00:20:49,369 Speaker 7: One of the challenges here is that the actual driver 401 00:20:49,530 --> 00:20:53,109 Speaker 7: of final domestic demand is really inelastic to where rates 402 00:20:53,230 --> 00:20:55,230 Speaker 7: are and to hence where policy can move. And then 403 00:20:55,330 --> 00:20:57,179 Speaker 7: to your point, the Fed's in this weird position where 404 00:20:57,200 --> 00:21:00,080 Speaker 7: they're punishing Main Street and the CapEx drive is really 405 00:21:00,140 --> 00:21:03,659 Speaker 7: pushing up the notional... Nominal GDP number that we are 406 00:21:03,720 --> 00:21:06,340 Speaker 7: impressed with so I guess like where do we see then? 407 00:21:06,420 --> 00:21:08,560 Speaker 7: How like is this gonna be about these 13 three 408 00:21:08,600 --> 00:21:10,600 Speaker 7: facility guy? You know, let's take this play this out. 409 00:21:10,619 --> 00:21:12,639 Speaker 7: We get a 10 50 percent correction the SBX We 410 00:21:12,660 --> 00:21:15,160 Speaker 7: got credit markets really starting to bleed. There's a lot 411 00:21:15,200 --> 00:21:17,670 Speaker 7: more pressure I mean, there's nothing really about cutting rates 412 00:21:17,730 --> 00:21:19,689 Speaker 7: here I get right the primary thing but we're gonna 413 00:21:19,710 --> 00:21:20,890 Speaker 7: have to roll out some stuff. 414 00:21:20,830 --> 00:21:22,750 Speaker 3: The stat of the week I think is the Fed 415 00:21:22,790 --> 00:21:25,750 Speaker 3: has never hiked rates or started a hiking cycle I 416 00:21:25,790 --> 00:21:31,000 Speaker 3: should say with McDonald's and Home Depot in 30 to 35% drawdowns. 417 00:21:31,240 --> 00:21:35,439 Speaker 3: That gets to your point. So the consumer financial conditions 418 00:21:36,160 --> 00:21:41,580 Speaker 3: is like really tight, whereas corporate slash data center, a 419 00:21:41,619 --> 00:21:44,580 Speaker 3: lot of areas is wide open, except on the core weave. 420 00:21:45,100 --> 00:21:47,399 Speaker 3: So that's what I mean. I'm seeing guys, like if 421 00:21:47,420 --> 00:21:50,140 Speaker 3: you had to bet right now, Tom, which comes first, 422 00:21:50,140 --> 00:21:51,640 Speaker 3: 75 bips of hikes or 75 bips of cuts? 423 00:21:51,660 --> 00:21:52,060 Speaker 1: Mm-hmm. 424 00:21:54,380 --> 00:21:56,840 Speaker 3: I'm seeing lots of more and more guys in our 425 00:21:56,859 --> 00:21:59,920 Speaker 3: Bloomberg chat betting on the cuts. In other words, cumulative. 426 00:22:00,160 --> 00:22:04,389 Speaker 3: What would come first? 75 bips of hikes or 75 427 00:22:04,390 --> 00:22:06,010 Speaker 3: bips of cuts? I'm on the cut side. 428 00:22:06,510 --> 00:22:09,469 Speaker 5: I want to shift gears here. JP Morgan out with 429 00:22:09,510 --> 00:22:11,970 Speaker 5: a fabulous 50 pages on. 430 00:22:12,050 --> 00:22:13,209 Speaker 4: This AI moment. 431 00:22:13,250 --> 00:22:17,909 Speaker 5: We're living in the back of five appendices on the railroads, 432 00:22:17,930 --> 00:22:22,410 Speaker 5: the interstate highways, standard oil breaking up, and I believe 433 00:22:22,430 --> 00:22:25,530 Speaker 5: it was 19. 11 off the top of my head, 434 00:22:25,550 --> 00:22:29,350 Speaker 5: the fiber optics that we all lived as well. Larry, 435 00:22:29,430 --> 00:22:35,109 Speaker 5: your thoughts on the great bond financing on-balance sheet and 436 00:22:35,330 --> 00:22:40,409 Speaker 5: off-balance sheet of AI. I'm sorry, there's ghosts there of 437 00:22:40,490 --> 00:22:42,250 Speaker 5: another time and place, isn't there? 438 00:22:42,310 --> 00:22:45,230 Speaker 3: Tom, it's such a game. What happened was, and I 439 00:22:45,270 --> 00:22:48,510 Speaker 3: was at a Silicon Valley dinner, and what happens is 440 00:22:49,090 --> 00:22:52,840 Speaker 3: the free cash flow burn, I'm saying meta, was so 441 00:22:53,060 --> 00:22:56,580 Speaker 3: significant a year ago, the projection, that they started, they've 442 00:22:56,619 --> 00:23:00,920 Speaker 3: taken the off-balance sheet financing from $ 35 billion to $ 600 443 00:23:00,440 --> 00:23:02,920 Speaker 3: because you know what that does? It protects their free 444 00:23:02,940 --> 00:23:07,770 Speaker 3: cash flow. And it's AA rated, right? Full recourse lending. 445 00:23:07,990 --> 00:23:10,510 Speaker 3: So they can go to the banks against their cash 446 00:23:10,550 --> 00:23:14,700 Speaker 3: flow from Instagram, Facebook, which is juicy. And they can 447 00:23:14,820 --> 00:23:18,160 Speaker 3: finance these projects, but at the end of the day, 448 00:23:18,200 --> 00:23:19,970 Speaker 3: they're doing an off-balance sheet, and they're doing it because 449 00:23:20,010 --> 00:23:22,510 Speaker 3: they don't want to just... They're trying to protect the 450 00:23:22,530 --> 00:23:25,110 Speaker 3: free cash flow destruction, or what I call incineration. 451 00:23:25,570 --> 00:23:28,270 Speaker 7: So Larry, as you get more of a CLO turn 452 00:23:28,310 --> 00:23:30,929 Speaker 7: to this whole saga, where are you thinking about the 453 00:23:30,950 --> 00:23:33,290 Speaker 7: depreciation of these assets? I still never get a clear 454 00:23:33,390 --> 00:23:35,109 Speaker 7: answer on how these chips are going to hold value 455 00:23:35,150 --> 00:23:37,080 Speaker 7: on more than a couple-year time frame because it's moving 456 00:23:37,119 --> 00:23:37,619 Speaker 7: so fast. 457 00:23:38,260 --> 00:23:38,460 Speaker 5: Right. 458 00:23:38,740 --> 00:23:40,260 Speaker 3: That's where I listen to Chanos. 459 00:23:40,300 --> 00:23:40,480 Speaker 5: I mean. 460 00:23:41,859 --> 00:23:43,820 Speaker 3: If you listen to Chanos and Burry, they're both saying 461 00:23:43,840 --> 00:23:46,580 Speaker 3: the same thing, that this is a depreciation game that 462 00:23:46,619 --> 00:23:48,340 Speaker 3: they can get away with for, right now they've been 463 00:23:48,359 --> 00:23:50,200 Speaker 3: getting away with it for probably five or six quarters, 464 00:23:50,240 --> 00:23:54,400 Speaker 3: seven quarters. But then each quarter that goes on, it's like, 465 00:23:54,720 --> 00:23:55,310 Speaker 3: where's the beef? 466 00:23:55,810 --> 00:23:58,530 Speaker 7: And more and more competition from overseas. China's obviously making 467 00:23:58,570 --> 00:24:01,230 Speaker 7: great inroads there with the production of chips. And now 468 00:24:01,250 --> 00:24:02,689 Speaker 7: we have to think about the memory side of this 469 00:24:02,730 --> 00:24:04,530 Speaker 7: as well, which is picking up. So again, it doesn't 470 00:24:04,590 --> 00:24:08,159 Speaker 7: seem like these are going to be as pristine as collateral, 471 00:24:08,280 --> 00:24:09,760 Speaker 7: maybe a couple years out, and we have to start 472 00:24:09,780 --> 00:24:10,260 Speaker 7: pricing that. 473 00:24:10,320 --> 00:24:12,889 Speaker 3: And think of this. A billionaire investor said this to 474 00:24:12,970 --> 00:24:17,520 Speaker 3: us in the chat. Meta was a world-class oligopoly, right? 475 00:24:17,960 --> 00:24:20,350 Speaker 3: They've taken, they're burning the cash, and they're creating products 476 00:24:20,380 --> 00:24:20,919 Speaker 3: like Muse. 477 00:24:21,270 --> 00:24:21,620 Speaker 4: Guess what? 478 00:24:22,190 --> 00:24:24,330 Speaker 3: Amazon's going to have a Muse. Apple's got, there's going 479 00:24:24,350 --> 00:24:27,790 Speaker 3: to be seven Muses. And so they're burning cash, and 480 00:24:27,810 --> 00:24:30,610 Speaker 3: they're actually creating products that have no barriers to entry. 481 00:24:30,630 --> 00:24:32,050 Speaker 4: This is brilliant. In the J.P. 482 00:24:32,070 --> 00:24:34,710 Speaker 5: Morgan essay, Gerard goes, thank you so much for being 483 00:24:34,750 --> 00:24:36,130 Speaker 5: with us the other day. 484 00:24:36,250 --> 00:24:37,300 Speaker 4: There's a headline out. 485 00:24:37,630 --> 00:24:39,780 Speaker 5: John Tucker, I need you to discuss this since you're 486 00:24:39,820 --> 00:24:44,119 Speaker 5: surveillance fast food correspondent. Starbucks says it's not buying Chipotle 487 00:24:44,180 --> 00:24:45,080 Speaker 5: Mexican Grill. 488 00:24:45,119 --> 00:24:46,560 Speaker 4: Yeah. It's a sigh of relief. 489 00:24:46,820 --> 00:24:49,960 Speaker 11: CNBC first reported it, but we just got in touch 490 00:24:49,980 --> 00:24:53,420 Speaker 11: with one of the spokespeople there. Yeah, they say Starbucks 491 00:24:53,480 --> 00:24:56,460 Speaker 11: is not buying Chipotle. You'll recall Thursday of last week, 492 00:24:56,510 --> 00:24:59,850 Speaker 11: the Financial Times did report that Starbucks had been working 493 00:24:59,910 --> 00:25:00,409 Speaker 11: with advisors. 494 00:25:00,430 --> 00:25:01,390 Speaker 4: I saw tears in your eyes. 495 00:25:01,650 --> 00:25:05,150 Speaker 11: On a takeover proposal. Yeah, I was looking for, like, 496 00:25:05,330 --> 00:25:07,850 Speaker 11: I don't know, a burrito-flavored coffee. 497 00:25:09,550 --> 00:25:10,530 Speaker 4: That is disgusting. 498 00:25:12,060 --> 00:25:12,500 Speaker 11: But no. 499 00:25:12,520 --> 00:25:13,920 Speaker 4: Did you know that Mrs. 500 00:25:13,960 --> 00:25:17,370 Speaker 5: Keene got me pumpkin spice coffee for home? 501 00:25:18,010 --> 00:25:20,909 Speaker 4: Oh, yeah. I just refused. Will you just protest? I'm 502 00:25:20,930 --> 00:25:23,230 Speaker 4: not doing it, Mrs. Keene. No way. 503 00:25:23,270 --> 00:25:26,590 Speaker 5: John Tucker, thank you for that update on Starbucks and Chipotle. 504 00:25:26,609 --> 00:25:31,189 Speaker 5: We're with Larry McDonald here on the moment. And the 505 00:25:31,230 --> 00:25:34,580 Speaker 5: Jared Gross piece, George Gatch and the crew at J.P. 506 00:25:34,619 --> 00:25:40,420 Speaker 5: Morgan Asset Management, they make clear they don't know Who's 507 00:25:40,460 --> 00:25:42,899 Speaker 5: going to fail or who's going to win? To me, 508 00:25:42,960 --> 00:25:46,240 Speaker 5: it's not an analog to 07, 08, where we had 509 00:25:46,260 --> 00:25:49,060 Speaker 5: these immovable forces that we all knew, like Bear Stearns 510 00:25:49,140 --> 00:25:53,970 Speaker 5: and Lehman and that. It's hugely dynamic now. If you're 511 00:25:54,230 --> 00:25:58,590 Speaker 5: in a retirement plan, if, Larry, you have to participate 512 00:25:59,210 --> 00:26:01,949 Speaker 5: in this equity market, how do you do it if 513 00:26:02,010 --> 00:26:05,070 Speaker 5: you have somewhat of the fear that you articulate. 514 00:26:05,160 --> 00:26:09,629 Speaker 3: So think about this. Three years ago, SpaceX, Anthropic, and 515 00:26:09,690 --> 00:26:15,990 Speaker 3: OpenAI were worth $ 360 billion. Now it's $ 5. 1 trillion. Now, oh, 516 00:26:16,030 --> 00:26:19,240 Speaker 3: by the way, those markup and assets are in the 517 00:26:19,420 --> 00:26:23,780 Speaker 3: S & P 500 earnings from the hyperscalers, Meta, and 518 00:26:23,820 --> 00:26:27,219 Speaker 3: all these companies, and Oracle, and more so Microsoft. So 519 00:26:27,240 --> 00:26:30,320 Speaker 3: they're marking up all these positions. So you really have... 520 00:26:30,920 --> 00:26:36,610 Speaker 3: like a one-time event potentially that's really distorting the true 521 00:26:36,670 --> 00:26:40,750 Speaker 3: earning power of the S & P. And guess what? Tom, 522 00:26:41,109 --> 00:26:45,490 Speaker 3: I think it should be a fiduciary liability slash violation 523 00:26:46,030 --> 00:26:49,369 Speaker 3: if you put a 75 or 70-year-old person's money in 524 00:26:49,390 --> 00:26:53,700 Speaker 3: the S & P, $ 120, 000 of that is in two 525 00:26:53,760 --> 00:26:56,379 Speaker 3: stocks now, right? It would be meta. I'm sorry, it 526 00:26:56,400 --> 00:27:04,940 Speaker 3: would be NVIDIA and Apple, $ 130, 000. And after OpenAI gets 527 00:27:04,960 --> 00:27:10,030 Speaker 3: in and these IPOs come in, then 50% of the NASDAQ, 55% 528 00:27:10,030 --> 00:27:11,450 Speaker 3: is going to be AI. 529 00:27:11,869 --> 00:27:14,210 Speaker 5: Larry, thank you so much. Larry McDonald with us today, 530 00:27:14,230 --> 00:27:17,410 Speaker 5: the Bear Traps report here. Just a lot to digest 531 00:27:17,430 --> 00:27:20,020 Speaker 5: there as well. Larry, thank you so much. 532 00:27:21,880 --> 00:27:22,500 Speaker 4: Stay with us. 533 00:27:22,800 --> 00:27:26,020 Speaker 8: More from Bloomberg Surveillance coming up after this. 534 00:27:33,290 --> 00:27:36,869 Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live 535 00:27:36,950 --> 00:27:40,129 Speaker 1: weekday afternoons from 7 to 10 a.m. Eastern. Listen on 536 00:27:40,250 --> 00:27:43,510 Speaker 1: Apple CarPlay and Android Auto with the Bloomberg Business app 537 00:27:43,710 --> 00:27:45,430 Speaker 1: or watch us live on YouTube. 538 00:27:45,859 --> 00:27:47,880 Speaker 4: We love, love, love. 539 00:27:47,680 --> 00:27:50,939 Speaker 5: To talk to housing economists in the trenches of the 540 00:27:51,000 --> 00:27:55,020 Speaker 5: housing market. Selma Hepp is wonderful at cotality on that, 541 00:27:55,060 --> 00:28:00,460 Speaker 5: the chief economist. Selma, what do we actually do? What 542 00:28:00,540 --> 00:28:07,699 Speaker 5: is our behavior today? In a new bank rate 30 years, 7.51%. 543 00:28:07,700 --> 00:28:12,220 Speaker 5: Not like Fed talk or yield talk. What do people 544 00:28:12,550 --> 00:28:13,109 Speaker 5: actually do? 545 00:28:15,340 --> 00:28:20,520 Speaker 10: Well, they stopped buying homes, for one. Really high borrowing 546 00:28:20,619 --> 00:28:24,919 Speaker 10: rates and overall lack of affordability out there in the 547 00:28:24,960 --> 00:28:28,879 Speaker 10: housing market is really stalling housing market activity. When you 548 00:28:28,920 --> 00:28:31,949 Speaker 10: look at where home sales are today, they continue to 549 00:28:31,990 --> 00:28:33,830 Speaker 10: be at some of the lowest levels we've seen recently. 550 00:28:34,350 --> 00:28:39,930 Speaker 10: especially adjusted for population growth over the last decades. So 551 00:28:39,950 --> 00:28:43,390 Speaker 10: we are in a really low turnover environment for the 552 00:28:43,430 --> 00:28:47,300 Speaker 10: housing market, and there's really no signals that things are 553 00:28:47,320 --> 00:28:50,410 Speaker 10: going to improve. Now, a lot of the forecasts for 2027, 554 00:28:50,400 --> 00:28:55,780 Speaker 10: for example, had home sales gradually improving and, you know, 555 00:28:55,860 --> 00:28:58,720 Speaker 10: improvement through the rest of the decade. But, you know, 556 00:28:58,770 --> 00:29:01,670 Speaker 10: we're looking at a different environment now with hire for longer. 557 00:29:01,690 --> 00:29:07,260 Speaker 5: Okay, but if I have to sell, what percentage price 558 00:29:07,410 --> 00:29:09,080 Speaker 5: am I reducing the home? 559 00:29:09,680 --> 00:29:11,360 Speaker 4: Does Cotality have that number? 560 00:29:12,110 --> 00:29:13,450 Speaker 3: Yeah, no, we do. We do. 561 00:29:13,570 --> 00:29:16,830 Speaker 10: So the average price reduction out there is about 3% 562 00:29:16,830 --> 00:29:22,000 Speaker 10: to 5%. And honestly, that's not that much further away 563 00:29:22,080 --> 00:29:25,820 Speaker 10: from where we are historically. This is typically, you know, 564 00:29:25,840 --> 00:29:28,760 Speaker 10: when you look at where a list price is versus 565 00:29:28,840 --> 00:29:31,740 Speaker 10: sale price, it does come a little bit below that 566 00:29:31,770 --> 00:29:36,050 Speaker 10: list price on average. So even before we went through 567 00:29:36,070 --> 00:29:39,670 Speaker 10: this surge in the housing market during the pandemic in 568 00:29:39,710 --> 00:29:43,860 Speaker 10: that 2012 to 2019 period, home prices were selling at 569 00:29:43,900 --> 00:29:46,770 Speaker 10: that 3% to 5% discount. So we are still in 570 00:29:46,810 --> 00:29:50,770 Speaker 10: that range. And really, it depends where inventory is. So 571 00:29:50,790 --> 00:29:54,310 Speaker 10: it's about individual markets. So some markets where there is 572 00:29:54,350 --> 00:29:57,340 Speaker 10: no inventory, homes still sell over the asking price. 573 00:29:58,150 --> 00:30:00,770 Speaker 7: So, someone to that point, you know, it seems like 574 00:30:00,790 --> 00:30:03,930 Speaker 7: then we don't really have a national sort of situation. 575 00:30:03,990 --> 00:30:05,160 Speaker 4: It's still very regional. 576 00:30:05,200 --> 00:30:07,220 Speaker 7: Is there like a clearing price you have in mind 577 00:30:07,840 --> 00:30:09,480 Speaker 7: for the mortgage rate that will start to get this 578 00:30:09,540 --> 00:30:11,959 Speaker 7: sort of price discovery back on as we like unleash 579 00:30:12,180 --> 00:30:15,080 Speaker 7: pent-up mobility? Or are you generally thinking it's always just 580 00:30:15,100 --> 00:30:17,330 Speaker 7: going to be more regional because of what we had post-COVID? 581 00:30:18,190 --> 00:30:21,280 Speaker 10: Well, honestly, you know, when we had rates coming to 582 00:30:21,320 --> 00:30:24,700 Speaker 10: low sixes or even when it dropped below six right 583 00:30:24,720 --> 00:30:29,420 Speaker 10: before the Middle East situation, we did have unleashing in 584 00:30:29,500 --> 00:30:33,140 Speaker 10: many markets. We had stronger demand, even in the markets 585 00:30:33,160 --> 00:30:35,360 Speaker 10: that were really weak over the last couple of years. 586 00:30:35,680 --> 00:30:36,640 Speaker 3: They were coming back. 587 00:30:36,680 --> 00:30:38,520 Speaker 10: I mean, think about over the last couple of years, 588 00:30:38,820 --> 00:30:41,720 Speaker 10: we've been talking a lot about weakness in Florida and Texas. 589 00:30:42,060 --> 00:30:45,700 Speaker 10: Those markets were actually coming back when mortgage rates came 590 00:30:45,960 --> 00:30:48,640 Speaker 10: at six and below. So I think that is that 591 00:30:48,700 --> 00:30:54,190 Speaker 10: psychological barrier for people. It's definitely not 7%. 592 00:30:54,190 --> 00:30:56,310 Speaker 7: So some of the prior guests were talking about how people, 593 00:30:56,390 --> 00:30:58,590 Speaker 7: maybe the baby boomer generation, starting to sell some of 594 00:30:58,630 --> 00:31:01,950 Speaker 7: their equity holders. Are we seeing any increasing turning to 595 00:31:01,970 --> 00:31:04,350 Speaker 7: the HELOCs and sort of trying to cash out on that? 596 00:31:04,390 --> 00:31:05,870 Speaker 7: Or is the trend basically being more stable? 597 00:31:07,560 --> 00:31:11,620 Speaker 10: Well, we have seen increases in HELOCs and home equity credits. 598 00:31:12,500 --> 00:31:13,620 Speaker 3: You know, we are at. 599 00:31:13,580 --> 00:31:16,720 Speaker 10: Some of the highest levels, we are at highest levels 600 00:31:16,760 --> 00:31:18,459 Speaker 10: of equity that people ever had. I mean, we were 601 00:31:18,480 --> 00:31:20,880 Speaker 10: a little bit higher a couple of years ago before 602 00:31:20,940 --> 00:31:24,090 Speaker 10: some of these price resets. But, you know, people on 603 00:31:24,150 --> 00:31:27,150 Speaker 10: average have about $ 310, 000 in equity. 604 00:31:27,590 --> 00:31:28,570 Speaker 4: Markets like New. 605 00:31:28,470 --> 00:31:33,770 Speaker 10: York, you know, California, Washington state have is as much 606 00:31:33,830 --> 00:31:37,920 Speaker 10: as $ 600, 000 to $ 800, 000. So people have a lot of equity. 607 00:31:38,000 --> 00:31:42,260 Speaker 10: And because of that lack of ability or mobility to 608 00:31:42,320 --> 00:31:45,360 Speaker 10: go somewhere else, they are investing in their homes. So 609 00:31:45,480 --> 00:31:48,240 Speaker 10: we're seeing increases in tapping into the equity. 610 00:31:49,060 --> 00:31:52,870 Speaker 4: On average, unfortunately, only about. 611 00:31:52,370 --> 00:31:55,910 Speaker 10: 2% of that equity has actually been tapped into because 612 00:31:55,990 --> 00:31:58,850 Speaker 10: people are still worried about very high borrowing costs. 613 00:31:59,110 --> 00:32:01,190 Speaker 4: We're in your head. We got to go, but we're 614 00:32:01,230 --> 00:32:02,130 Speaker 4: in your head, Salma. 615 00:32:03,140 --> 00:32:08,520 Speaker 5: Is the mortgage rate where it becomes painful or price moves, etc. 616 00:32:08,530 --> 00:32:08,910 Speaker 4: Is it 7.75? 617 00:32:08,890 --> 00:32:09,030 Speaker 5: Is it 8%? 618 00:32:09,030 --> 00:32:11,330 Speaker 4: Or is it some silly number higher? 619 00:32:15,750 --> 00:32:18,730 Speaker 10: Well, you know, when we reached 8%, I want to 620 00:32:18,790 --> 00:32:22,850 Speaker 10: say that was in 2024, we did see more significant 621 00:32:22,890 --> 00:32:26,520 Speaker 10: slowdown in home prices. We are seeing some slowing right now, 622 00:32:26,620 --> 00:32:29,800 Speaker 10: but at the national level, we're still positive, right? But 623 00:32:29,840 --> 00:32:33,120 Speaker 10: I think 8% is the point at which more markets 624 00:32:33,200 --> 00:32:34,580 Speaker 10: start to deteriorate. 625 00:32:34,600 --> 00:32:34,719 Speaker 5: Okay. 626 00:32:35,180 --> 00:32:37,760 Speaker 4: Salma, thank you so much. Salma, with totality. 627 00:32:38,080 --> 00:32:43,010 Speaker 1: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, 628 00:32:43,130 --> 00:32:47,390 Speaker 1: and anywhere else you get your podcasts. Listen live each weekday, 629 00:32:47,390 --> 00:32:52,830 Speaker 1: 7 to 10 a.m. Eastern, on Bloomberg.com, the iHeartRadio app, TuneIn, 630 00:32:53,150 --> 00:32:56,209 Speaker 1: and the Bloomberg Business app. You can also watch us 631 00:32:56,290 --> 00:33:00,310 Speaker 1: live every weekday on YouTube and always on the Bloomberg Terminal. 632 00:33:03,770 --> 00:33:04,370 Speaker 4: Thank you.