1 00:00:05,720 --> 00:00:13,800 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom keene Jailey. 2 00:00:13,960 --> 00:00:17,560 Speaker 1: We bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:33,920 Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. A 5 00:00:34,080 --> 00:00:37,000 Speaker 1: massive amount of attention being paid to the US tenure 6 00:00:37,040 --> 00:00:40,120 Speaker 1: Treasury as it flirts with that three percent level, a 7 00:00:40,280 --> 00:00:42,400 Speaker 1: level we haven't seen in more than four years. This 8 00:00:42,479 --> 00:00:45,040 Speaker 1: doesn't have to be bad news for risk assets. In 9 00:00:46,159 --> 00:00:49,200 Speaker 1: when yields searched through three pc, the equity market delivered 10 00:00:49,240 --> 00:00:51,280 Speaker 1: one of its best years of the ball markets so far, 11 00:00:51,600 --> 00:00:54,680 Speaker 1: with a gain of almost thirty percent. So why could 12 00:00:54,720 --> 00:00:56,720 Speaker 1: it be different this time around? I want to bring 13 00:00:56,720 --> 00:00:59,160 Speaker 1: in Vince Reinhardt b and Y Mellon, chief economist and 14 00:00:59,240 --> 00:01:02,040 Speaker 1: chief in investment strategist, and it's always great to catch 15 00:01:02,080 --> 00:01:03,360 Speaker 1: up with you. Just walk me through that. What it 16 00:01:03,400 --> 00:01:06,839 Speaker 1: could be different this time around? We actually don't say 17 00:01:06,840 --> 00:01:12,240 Speaker 1: that in my household. This time is never different. I 18 00:01:12,280 --> 00:01:15,160 Speaker 1: think I think the story is is the Fed raising 19 00:01:15,319 --> 00:01:17,679 Speaker 1: rates and seen as raising rates for the right reason, 20 00:01:17,880 --> 00:01:20,840 Speaker 1: i e. The economy has got momentum, the equilibrium, real 21 00:01:20,920 --> 00:01:24,400 Speaker 1: federal funds rate is rising. Think about it. Think how 22 00:01:24,520 --> 00:01:28,440 Speaker 1: you describe the last six FED actions. When you consider 23 00:01:28,680 --> 00:01:32,520 Speaker 1: the policy renormalizations last year and into this year. They 24 00:01:32,600 --> 00:01:36,240 Speaker 1: got good press, they said Fed confident about the expansion 25 00:01:36,480 --> 00:01:41,280 Speaker 1: and raising rates and and renormalizing policy, still keeping an 26 00:01:41,319 --> 00:01:45,280 Speaker 1: accommodative in that environment, equity market can do pretty well. 27 00:01:45,440 --> 00:01:47,760 Speaker 1: The difference this time around, though, if there is a 28 00:01:47,840 --> 00:01:51,000 Speaker 1: key difference, I would say, looking back at verses now, 29 00:01:51,120 --> 00:01:53,520 Speaker 1: is that back then, Vince, the two year note was 30 00:01:53,600 --> 00:01:55,600 Speaker 1: fifty basis points and now it's two and a half 31 00:01:55,960 --> 00:01:57,640 Speaker 1: UM and two and a half is pretty much where 32 00:01:57,640 --> 00:01:59,440 Speaker 1: we started the year on the tenure. That's what we 33 00:01:59,480 --> 00:02:02,080 Speaker 1: have seen, an aggressive repricing at the front end of 34 00:02:02,080 --> 00:02:04,760 Speaker 1: the curve. Could that be what sort of spouse out 35 00:02:04,760 --> 00:02:08,000 Speaker 1: a different story for risk assets this time around? Well, 36 00:02:08,040 --> 00:02:11,840 Speaker 1: the reality is we're walking up a path of FED tightening, 37 00:02:12,000 --> 00:02:14,760 Speaker 1: and so we're a hundred twenty five basis point higher 38 00:02:14,760 --> 00:02:17,919 Speaker 1: on the funds rate. In that environment, the yield curve 39 00:02:18,000 --> 00:02:22,679 Speaker 1: is gonna flatten. Is not necessarily threatening to economic expansions. 40 00:02:23,000 --> 00:02:26,080 Speaker 1: In fact, it says that people think the FED will 41 00:02:26,120 --> 00:02:29,720 Speaker 1: be slow to raise rates, not particularly fast. It doesn't 42 00:02:29,720 --> 00:02:31,440 Speaker 1: have to meet impending doom. And I don't think many 43 00:02:31,480 --> 00:02:33,880 Speaker 1: people on this program think that. In fact, the last 44 00:02:33,919 --> 00:02:36,920 Speaker 1: time we have an inversion on the yield curve pre crisis, 45 00:02:36,960 --> 00:02:39,200 Speaker 1: it was a couple of years before things really rolled over. 46 00:02:39,240 --> 00:02:41,440 Speaker 1: So it doesn't have to mean anything immediately bad is 47 00:02:41,440 --> 00:02:44,000 Speaker 1: going to happen. I think the story for me, Vince, 48 00:02:44,200 --> 00:02:47,239 Speaker 1: is something that could happen in markets where the front 49 00:02:47,320 --> 00:02:49,880 Speaker 1: end of treasuries gets attractive enough that it competes for 50 00:02:49,960 --> 00:02:53,160 Speaker 1: capital in a more significant way with things like equities 51 00:02:53,520 --> 00:02:56,560 Speaker 1: and credit as well, whether it's investment grade or high yield. 52 00:02:56,639 --> 00:02:59,000 Speaker 1: Do you see that story kind of materializing. Well, we're 53 00:02:59,000 --> 00:03:00,760 Speaker 1: seeing that in money more gets. That's part of the 54 00:03:00,800 --> 00:03:03,880 Speaker 1: reason library spreads are so wide, right ted spread or 55 00:03:04,000 --> 00:03:07,200 Speaker 1: library oh I s uh. Those spreads have widened a 56 00:03:07,200 --> 00:03:10,480 Speaker 1: bit in part because if you're a corporate treasurer and 57 00:03:10,560 --> 00:03:13,520 Speaker 1: you see a nice, safe, risk free short rate as 58 00:03:13,560 --> 00:03:17,679 Speaker 1: high as it is in such a long time, why 59 00:03:17,680 --> 00:03:20,040 Speaker 1: do you want to take on risk? Uh? And so 60 00:03:20,160 --> 00:03:21,760 Speaker 1: if it can happen at the front end, it can 61 00:03:21,800 --> 00:03:24,919 Speaker 1: happen for for out maturities. But we're not there yet, 62 00:03:25,000 --> 00:03:26,360 Speaker 1: and and so I just wonder what this means for 63 00:03:26,400 --> 00:03:29,000 Speaker 1: financial conditions because for so many years the Federal Reserve 64 00:03:29,080 --> 00:03:31,480 Speaker 1: has been able to hike interest rights now very slowly, 65 00:03:31,880 --> 00:03:35,640 Speaker 1: very gradually, and financial conditions haven't tightened until really recently. 66 00:03:36,040 --> 00:03:37,480 Speaker 1: Does that put the brakes on the Federal? Is that 67 00:03:37,480 --> 00:03:39,120 Speaker 1: what the Fed ultimately wants to see. They want to 68 00:03:39,120 --> 00:03:41,960 Speaker 1: see higher right interest rates and and some high conditions 69 00:03:41,960 --> 00:03:45,040 Speaker 1: along with it. That's the desired policy outcome. Right, you 70 00:03:45,080 --> 00:03:48,040 Speaker 1: can't slow the economy unless you've tightened financial conditions. And 71 00:03:48,080 --> 00:03:51,840 Speaker 1: if you think the economy has no resource slack and 72 00:03:52,280 --> 00:03:55,240 Speaker 1: is growing faster than the potential you want and modestly 73 00:03:55,360 --> 00:03:58,640 Speaker 1: slow the expansion of aggregate demand, you do it by 74 00:03:58,760 --> 00:04:02,200 Speaker 1: tightening financial conditions. Listening to Bill Dudley last week, that's 75 00:04:02,280 --> 00:04:05,800 Speaker 1: what he was talking about. We have noted three quarters 76 00:04:05,880 --> 00:04:08,360 Speaker 1: of an average I believe it's three point one percent 77 00:04:08,480 --> 00:04:12,160 Speaker 1: or two point nine percent economic growth. Do you model 78 00:04:12,240 --> 00:04:15,880 Speaker 1: it b n y melon A sustained three g d 79 00:04:16,040 --> 00:04:18,839 Speaker 1: p Uh No, Because in the in the long run, 80 00:04:18,880 --> 00:04:21,960 Speaker 1: we're anchored by the growth of aggregate supply. We have 81 00:04:22,040 --> 00:04:25,279 Speaker 1: an aging population not increasing that fast, and for some 82 00:04:25,360 --> 00:04:28,599 Speaker 1: reason in another we're not adding much to power work 83 00:04:28,640 --> 00:04:32,360 Speaker 1: in the long run. Uh. Sure, I think that that's 84 00:04:32,400 --> 00:04:34,559 Speaker 1: because that maps directly on what they think the equal 85 00:04:34,560 --> 00:04:38,120 Speaker 1: abrim real federal funds. Right, long run growth is the 86 00:04:38,200 --> 00:04:43,960 Speaker 1: attractor to everything, and we talk about the cyclical behavior 87 00:04:44,000 --> 00:04:47,120 Speaker 1: of the economy relative to that trend within this is 88 00:04:47,120 --> 00:04:50,000 Speaker 1: it my conversation at the i m F with the 89 00:04:50,200 --> 00:04:54,640 Speaker 1: head of Treasury for Norway they lowered their target rate 90 00:04:54,760 --> 00:04:58,240 Speaker 1: from an oil and duced two point five down to 91 00:04:58,279 --> 00:05:02,760 Speaker 1: the conventional two percent. Is there any constituency, given that 92 00:05:02,880 --> 00:05:07,279 Speaker 1: attractor of lower potential growth to bring the rate under 93 00:05:07,320 --> 00:05:11,280 Speaker 1: two percent? Is there any research vision that we ought 94 00:05:11,320 --> 00:05:16,839 Speaker 1: to go to one point eight percent target rate on inflation? Actually, 95 00:05:16,880 --> 00:05:19,400 Speaker 1: the most of the research would say in terms of inflation, 96 00:05:19,440 --> 00:05:22,480 Speaker 1: you'd go the other way, because when you lower potential 97 00:05:22,480 --> 00:05:25,599 Speaker 1: output growth, you're probably lowering the equal broom real rate. 98 00:05:26,040 --> 00:05:29,000 Speaker 1: And the lower the equal Broom real rate, the closer 99 00:05:29,080 --> 00:05:32,560 Speaker 1: that zero bound phenomenally. So in fact, this should be 100 00:05:32,600 --> 00:05:36,800 Speaker 1: an argument for raising for Goose. So it's it's chair 101 00:05:36,920 --> 00:05:40,960 Speaker 1: and Paul the new ultimate Dove. I don't see him 102 00:05:41,000 --> 00:05:44,640 Speaker 1: going there because two percent has been locked in the 103 00:05:44,680 --> 00:05:49,680 Speaker 1: central bank discussion since when the FED talked about quantifying 104 00:05:49,960 --> 00:05:52,640 Speaker 1: the inflation call. It might I point out this excuse me, 105 00:05:52,720 --> 00:05:55,800 Speaker 1: this time is different, John, we got trillion dollar deficits. 106 00:05:57,000 --> 00:05:58,720 Speaker 1: I mean, there was this book a couple of years ago, 107 00:05:59,440 --> 00:06:02,479 Speaker 1: roll goffin what was her name? I believe, I believe 108 00:06:02,480 --> 00:06:08,960 Speaker 1: we were described as Reinhardt. And there's some there's some 109 00:06:09,040 --> 00:06:12,320 Speaker 1: research since the Carmens that what they say, that's going 110 00:06:12,360 --> 00:06:14,679 Speaker 1: to be the part of the conversation, and that's about 111 00:06:14,720 --> 00:06:19,320 Speaker 1: financial depression, governments with big debt like inflation. So we 112 00:06:19,440 --> 00:06:23,800 Speaker 1: may lation not because of j. Pale. I don't want 113 00:06:23,800 --> 00:06:25,240 Speaker 1: to get you in trouble at home or out in 114 00:06:25,240 --> 00:06:28,320 Speaker 1: that beautiful porch you've got. But the basic idea your 115 00:06:28,440 --> 00:06:32,880 Speaker 1: Vince Reinhardt is Carmen Reinhardt and Ken Rogoff said when 116 00:06:32,920 --> 00:06:37,400 Speaker 1: the deficits get to a point, things change? Did they change? 117 00:06:37,400 --> 00:06:39,200 Speaker 1: With the T word? Are we at a point? And 118 00:06:39,360 --> 00:06:43,520 Speaker 1: not speaking for Carmen Reinhart, but Vince Reinhardt's work, what's 119 00:06:43,520 --> 00:06:47,279 Speaker 1: a trillion dollar deficit mean? Do you? Okay? Another favorite 120 00:06:47,279 --> 00:06:51,039 Speaker 1: factory about out of the world economic outlook, if you 121 00:06:51,040 --> 00:06:55,320 Speaker 1: look across advanced economies at their debt level in in 122 00:06:55,960 --> 00:06:59,159 Speaker 1: two thousand seven, the ones with big debt were the 123 00:06:59,200 --> 00:07:03,400 Speaker 1: ones that perform much more poorly. That is a problem 124 00:07:03,640 --> 00:07:06,240 Speaker 1: deficits or a problem that will be pushing up on 125 00:07:06,320 --> 00:07:09,680 Speaker 1: interest rates over the medium and longer term. That will 126 00:07:09,760 --> 00:07:11,800 Speaker 1: be a scene anchor on the value of the dollar, 127 00:07:12,240 --> 00:07:14,760 Speaker 1: and it will create the incentive for a little bit 128 00:07:14,760 --> 00:07:16,960 Speaker 1: more inflation. Well, let's talk about the dollar just quickly. 129 00:07:17,000 --> 00:07:19,800 Speaker 1: Vin some the dollar rebounding over the last five days, 130 00:07:19,840 --> 00:07:21,920 Speaker 1: a bit of a pause in today's session. What do 131 00:07:21,920 --> 00:07:23,640 Speaker 1: you make of that? Because a lot of people's investment 132 00:07:23,640 --> 00:07:26,560 Speaker 1: decisions have been sort of being on the premise, particularly 133 00:07:26,680 --> 00:07:28,880 Speaker 1: the M for anyone that's getting that exposure to the 134 00:07:29,000 --> 00:07:31,240 Speaker 1: M currencies, on the idea that at the best the 135 00:07:31,240 --> 00:07:32,640 Speaker 1: dollar is going to get weak and at worst the 136 00:07:32,680 --> 00:07:34,200 Speaker 1: dollar is going to be stable. It could be a 137 00:07:34,240 --> 00:07:36,040 Speaker 1: real pain trade if we get an unwind if that 138 00:07:36,080 --> 00:07:38,520 Speaker 1: position and what what do you see happening? Yeah? I 139 00:07:38,560 --> 00:07:40,600 Speaker 1: think you're right. It does feel like a crowded trade, 140 00:07:40,680 --> 00:07:43,040 Speaker 1: isn't it. And the problem is you could be right 141 00:07:43,080 --> 00:07:45,320 Speaker 1: in the medium and longer term and have your head 142 00:07:45,360 --> 00:07:48,720 Speaker 1: handed in before that. We we view this as as 143 00:07:48,960 --> 00:07:53,760 Speaker 1: as just the different forces near term, medium term, medium term. 144 00:07:53,840 --> 00:07:56,000 Speaker 1: The list is pretty daunting about why you want to 145 00:07:56,040 --> 00:07:59,960 Speaker 1: hold dollar assets, I e. Current accounts, the budget defice. 146 00:08:00,040 --> 00:08:05,040 Speaker 1: It's big dad an attitude. Uh, that is basically contrary 147 00:08:05,040 --> 00:08:10,440 Speaker 1: to internationalism. We're ruining their safety nassat value. That's probably 148 00:08:10,520 --> 00:08:12,840 Speaker 1: why you have a medium to longer term view of 149 00:08:12,840 --> 00:08:16,880 Speaker 1: the dollar depreciate. Before that the Fed is kind of 150 00:08:16,920 --> 00:08:20,120 Speaker 1: tighten more than people think that that tends to appreciate. 151 00:08:20,160 --> 00:08:21,440 Speaker 1: It been great to have you with us. Thank you 152 00:08:21,560 --> 00:08:23,440 Speaker 1: very much for joining us. B M. Y Mellon Chief 153 00:08:23,480 --> 00:08:40,400 Speaker 1: Economists and Chief investment Strategists. Tom big theme in Europe 154 00:08:40,440 --> 00:08:43,559 Speaker 1: at the moment has been disappointing economic data, and that 155 00:08:43,679 --> 00:08:46,719 Speaker 1: disappointing economic data continues with the German business confidence and 156 00:08:46,800 --> 00:08:50,280 Speaker 1: umber coming through this morning the EFO and it extends 157 00:08:50,480 --> 00:08:52,839 Speaker 1: its drop over the last several months and through the 158 00:08:52,920 --> 00:08:56,280 Speaker 1: year after peaking at the back end of To Talk Europe. 159 00:08:56,440 --> 00:09:00,920 Speaker 1: Gabby Santos, Gabrielle Santos, JP, Morgan Asset Management, Doble Market Strategist, 160 00:09:00,960 --> 00:09:03,679 Speaker 1: joining us around a table in New York. Gabriella always 161 00:09:03,720 --> 00:09:06,000 Speaker 1: grab a catch up with you. You've just been to Europe, 162 00:09:06,240 --> 00:09:08,720 Speaker 1: so walk me through your vacation and whether you see 163 00:09:09,040 --> 00:09:11,640 Speaker 1: and improving European economy because it's not coming through in 164 00:09:11,679 --> 00:09:14,120 Speaker 1: the data at the moment, we do see it very 165 00:09:14,200 --> 00:09:17,000 Speaker 1: much in improving European economy. It was interesting to see 166 00:09:17,080 --> 00:09:21,079 Speaker 1: that the dynamism, the energy, the enthusiasm I was just 167 00:09:21,200 --> 00:09:24,079 Speaker 1: in Portugal last week. Um. But to your point, it 168 00:09:24,160 --> 00:09:27,679 Speaker 1: has been a disappointing first quarter for European data, and 169 00:09:27,720 --> 00:09:30,120 Speaker 1: I would separate that into two factors. The first is 170 00:09:30,160 --> 00:09:33,280 Speaker 1: the survey data, things like the p M I, which 171 00:09:33,360 --> 00:09:36,280 Speaker 1: have moderated significantly over the first quarter, but those have 172 00:09:36,440 --> 00:09:40,239 Speaker 1: been signaling growth that was that was just not realistic. 173 00:09:40,559 --> 00:09:42,800 Speaker 1: Right three and a half percent g d P was 174 00:09:42,880 --> 00:09:46,319 Speaker 1: being signaled. That was not going to happen, unfortunately, So 175 00:09:46,440 --> 00:09:49,600 Speaker 1: the survey data has moderated back to reality. And then 176 00:09:49,640 --> 00:09:52,400 Speaker 1: the second pieces, the hard data has disappointed as well. 177 00:09:53,040 --> 00:09:55,040 Speaker 1: So we do think that first quarter GDP is going 178 00:09:55,080 --> 00:09:56,880 Speaker 1: to come in closer to one and a half, but 179 00:09:57,040 --> 00:10:00,280 Speaker 1: we think that's due to probably temporary factors, which was 180 00:10:00,360 --> 00:10:03,360 Speaker 1: the weather, the intense flu season, and that's likely to 181 00:10:03,440 --> 00:10:05,520 Speaker 1: revert already in the second quarter. Just in terms of 182 00:10:05,640 --> 00:10:08,400 Speaker 1: had a bond market is capturing capturing this story, Gabriella, 183 00:10:08,440 --> 00:10:10,720 Speaker 1: we have this front end story two year buns versus 184 00:10:10,760 --> 00:10:13,760 Speaker 1: two year treasuries the spread is now north the three 185 00:10:13,880 --> 00:10:17,319 Speaker 1: hundred basis points. It is so so wide. I think 186 00:10:17,360 --> 00:10:19,880 Speaker 1: that's a record wide, a new one as well that's 187 00:10:19,920 --> 00:10:22,360 Speaker 1: been delivered over the last week. How much longer can 188 00:10:22,400 --> 00:10:25,120 Speaker 1: we keep this divergence between what is happening with the 189 00:10:25,200 --> 00:10:27,920 Speaker 1: ECP in Europe and the Eurozone economy and the Federal 190 00:10:27,920 --> 00:10:30,839 Speaker 1: Reserve in the United States and the US economy, Well, 191 00:10:30,880 --> 00:10:32,600 Speaker 1: I think they're they're marching to the beat of their 192 00:10:32,640 --> 00:10:34,920 Speaker 1: own drums. Right. The US certainly has a lot of 193 00:10:35,040 --> 00:10:38,600 Speaker 1: confidence on both the growth as well as the inflation outlook, 194 00:10:38,600 --> 00:10:40,760 Speaker 1: and so it's going to keep its trapped for four 195 00:10:40,880 --> 00:10:43,160 Speaker 1: rate HIGs this year, are probably even for next year 196 00:10:43,200 --> 00:10:46,320 Speaker 1: as well, um and even probably some further rate HIGs 197 00:10:47,520 --> 00:10:50,400 Speaker 1: as it continues winding down its balance sheet. Meanwhile, it 198 00:10:50,440 --> 00:10:55,200 Speaker 1: doesn't seem like President drugs in any rush, especially after 199 00:10:55,360 --> 00:10:57,640 Speaker 1: the soft patch in the data that we're speaking of 200 00:10:57,679 --> 00:10:59,760 Speaker 1: in the first quarter, He's probably gonna want some conform 201 00:10:59,800 --> 00:11:02,720 Speaker 1: me shin that that was probably a bit temporary grid. 202 00:11:02,720 --> 00:11:04,199 Speaker 1: And that's kind of what I'm thinking about the moment 203 00:11:04,280 --> 00:11:07,240 Speaker 1: when the treasuries can continue to slow grind high with yelds, 204 00:11:07,280 --> 00:11:10,199 Speaker 1: and whether the European bond market can remain anchored. Do 205 00:11:10,240 --> 00:11:12,559 Speaker 1: you already see a bond mark at a global bond market? 206 00:11:12,640 --> 00:11:16,240 Speaker 1: Whet the US treasury market can almost decouple from everything, counsel, 207 00:11:16,240 --> 00:11:19,160 Speaker 1: It's not actually likely. Well, I think what's interesting is 208 00:11:19,400 --> 00:11:22,680 Speaker 1: not necessarily the two year yield um and that gap, 209 00:11:22,760 --> 00:11:26,439 Speaker 1: but perhaps the tenure yield. Right. So, last week, as 210 00:11:26,520 --> 00:11:29,640 Speaker 1: a tenure yield started marching higher higher in the US, 211 00:11:29,679 --> 00:11:32,000 Speaker 1: it did so around the world as well. Right, So 212 00:11:32,120 --> 00:11:35,400 Speaker 1: there was something that was common, which was this idea 213 00:11:35,520 --> 00:11:38,800 Speaker 1: of higher oil prices, higher inflation um, as well as 214 00:11:38,840 --> 00:11:41,400 Speaker 1: confirmation that probably the soft passion of first quarter growth 215 00:11:41,480 --> 00:11:44,400 Speaker 1: was temporary. How do you deal with the bias that 216 00:11:44,480 --> 00:11:47,520 Speaker 1: we're JP Morgan, we're genormous and we saw that clearly 217 00:11:47,600 --> 00:11:50,640 Speaker 1: seriously in Mr Diamond's letter. People forget the scope and 218 00:11:50,720 --> 00:11:56,280 Speaker 1: scale the company, and that institutional and client urge to 219 00:11:56,480 --> 00:11:59,800 Speaker 1: only own the top two companies worldwide. There's this man 220 00:12:00,080 --> 00:12:04,040 Speaker 1: sub urge comfort in big. How do you fight that 221 00:12:04,240 --> 00:12:06,800 Speaker 1: every day at JP Morgan to actually look at mid 222 00:12:06,880 --> 00:12:11,160 Speaker 1: caps well, comfort in big and also comfort in just 223 00:12:11,360 --> 00:12:14,720 Speaker 1: one's uh area of comfort? Shall we say? There's there's 224 00:12:14,760 --> 00:12:18,200 Speaker 1: always this very intense home bias, right, rather we talk 225 00:12:18,800 --> 00:12:21,080 Speaker 1: depending on whether we talk about equities or fixed income. 226 00:12:21,520 --> 00:12:23,360 Speaker 1: So that's something we talk a lot about, not just 227 00:12:23,520 --> 00:12:27,040 Speaker 1: size of companies, but also geography as well, and I 228 00:12:27,120 --> 00:12:30,920 Speaker 1: think that's becoming ever more important, especially for our US clients, right, 229 00:12:31,000 --> 00:12:33,520 Speaker 1: which were in this environment where the US was the 230 00:12:33,559 --> 00:12:36,000 Speaker 1: only house in the block. It was okay, you can 231 00:12:36,040 --> 00:12:38,319 Speaker 1: get away with having a home bias. Probably not so 232 00:12:38,520 --> 00:12:41,120 Speaker 1: if we fast forward the next ten years, that's probably 233 00:12:41,160 --> 00:12:43,319 Speaker 1: not going to get you to your goals. You have 234 00:12:43,440 --> 00:12:45,160 Speaker 1: to have some Europe, you have to have some Japan, 235 00:12:45,280 --> 00:12:47,320 Speaker 1: you have to have some in well. One quick question, 236 00:12:47,360 --> 00:12:50,400 Speaker 1: do you have to have cash? I think cash is 237 00:12:50,480 --> 00:12:53,800 Speaker 1: becoming much more of an alternative now than it's been. 238 00:12:53,840 --> 00:12:58,880 Speaker 1: Perfect year, yields are higher, right, it's it's kind of 239 00:12:58,920 --> 00:13:02,280 Speaker 1: broadening your opportunity set beyond just equities and fixed income. 240 00:13:02,600 --> 00:13:05,080 Speaker 1: You can add cash, and you can add commodities. Right, 241 00:13:05,120 --> 00:13:07,560 Speaker 1: So your your opportunity set has become a little bit 242 00:13:07,640 --> 00:13:11,360 Speaker 1: broader this year and over the next few years. Santos, 243 00:13:11,400 --> 00:13:25,199 Speaker 1: thank you so much a champion Morgan Asset Management. John, 244 00:13:25,320 --> 00:13:26,880 Speaker 1: I want you to bring in one of the best 245 00:13:27,000 --> 00:13:32,000 Speaker 1: people we have on foreign exchange, Elsa Lignos RBC Capital Markets. Yeah, 246 00:13:32,000 --> 00:13:34,360 Speaker 1: they glob ahead of FX strategy, joining us out of London. 247 00:13:34,440 --> 00:13:36,520 Speaker 1: After a brief rally in the dollar that stretched to 248 00:13:36,559 --> 00:13:40,040 Speaker 1: about five straight days, a real retracement of an ugly 249 00:13:40,920 --> 00:13:46,280 Speaker 1: seventeen a tiny retracement of a massive move lower last year. ALSA, 250 00:13:46,440 --> 00:13:47,720 Speaker 1: What do you make of the move in the dollar 251 00:13:47,760 --> 00:13:50,199 Speaker 1: we've seen over the last week and how sustainable could 252 00:13:50,200 --> 00:13:54,920 Speaker 1: it be. It's interesting because it's come along a backdrop 253 00:13:55,040 --> 00:13:59,080 Speaker 1: of higher yields but also lower equities UM. And that's 254 00:13:59,120 --> 00:14:01,360 Speaker 1: something we've done quite a bit of work on in 255 00:14:01,440 --> 00:14:05,079 Speaker 1: the past and looked at what happens in that kind 256 00:14:05,080 --> 00:14:07,240 Speaker 1: of quite unusual environment where you see a twin bond 257 00:14:07,280 --> 00:14:09,959 Speaker 1: and exerty sell off UM, and actually it turns out 258 00:14:10,000 --> 00:14:12,400 Speaker 1: to be a pretty strong environment for the U. S. Dollar. 259 00:14:13,080 --> 00:14:15,800 Speaker 1: That's not to say this necessarily gonna last. We saw 260 00:14:15,840 --> 00:14:19,480 Speaker 1: something similar in February and it reversed, but if it 261 00:14:19,600 --> 00:14:22,760 Speaker 1: does continue, then it should be a pretty good environment 262 00:14:22,800 --> 00:14:25,360 Speaker 1: for the dollar going forward. So also, correlation and causation 263 00:14:25,480 --> 00:14:28,920 Speaker 1: obviously two very different things, and the correlation between yields 264 00:14:29,360 --> 00:14:31,240 Speaker 1: and the dollar over the last week had many people 265 00:14:31,280 --> 00:14:34,040 Speaker 1: scratching their heads and wondering whether rate differentials are starting 266 00:14:34,080 --> 00:14:36,240 Speaker 1: to matter again. Was it that or was it just 267 00:14:36,360 --> 00:14:38,160 Speaker 1: pure risk a version that was driving a bill into 268 00:14:38,160 --> 00:14:41,520 Speaker 1: the dollar. It's hard to put it down to risk 269 00:14:41,560 --> 00:14:44,240 Speaker 1: a version when you look at the performance of dollar yen, 270 00:14:45,280 --> 00:14:47,400 Speaker 1: or even dollar Swiss for that matter. Good point, So 271 00:14:47,560 --> 00:14:50,240 Speaker 1: it does seem to be something more US dollar specific. 272 00:14:51,240 --> 00:14:54,760 Speaker 1: So can rate differentials be the deciding factor as we 273 00:14:54,840 --> 00:14:56,320 Speaker 1: go forward from here? Because if you look at the 274 00:14:56,320 --> 00:14:58,760 Speaker 1: spread at the front end between Europe and the United 275 00:14:58,840 --> 00:15:01,120 Speaker 1: States are so it's such a yes that you're a 276 00:15:01,200 --> 00:15:02,880 Speaker 1: dollar should be a whole lot lower than it is 277 00:15:03,040 --> 00:15:07,360 Speaker 1: right now exactly, And and that's broken down for some 278 00:15:07,520 --> 00:15:10,000 Speaker 1: time and has had a lot of people scratching their heads, 279 00:15:10,600 --> 00:15:12,480 Speaker 1: Which is why I think it's interesting that this move 280 00:15:12,600 --> 00:15:15,000 Speaker 1: appears to have been driven more by the back end. Um. 281 00:15:15,080 --> 00:15:18,040 Speaker 1: This doesn't seem to be a kind of traditional vanilla 282 00:15:18,600 --> 00:15:21,320 Speaker 1: rate differential story. Um, it does seem to be a 283 00:15:21,400 --> 00:15:24,320 Speaker 1: little bit more about the kind of bond equity interaction. 284 00:15:25,040 --> 00:15:28,520 Speaker 1: Is the dollar so big, so dominant that flows don't matter? 285 00:15:28,640 --> 00:15:30,480 Speaker 1: Elso I bring this up with the backdrop of a 286 00:15:30,560 --> 00:15:33,240 Speaker 1: week Swiss franc which a lot of people will say, 287 00:15:33,280 --> 00:15:35,560 Speaker 1: are Russians moving money around and sits in and I 288 00:15:35,680 --> 00:15:40,200 Speaker 1: get that, But can the dollar move and flows or 289 00:15:40,360 --> 00:15:45,720 Speaker 1: is the dollar dynamic all about rate differentials? Absolutely, the 290 00:15:45,800 --> 00:15:47,680 Speaker 1: dollar can move on flows, I know. I think we 291 00:15:47,800 --> 00:15:51,160 Speaker 1: saw that most vividly in January, where we had a 292 00:15:51,280 --> 00:15:54,080 Speaker 1: huge dollar move um and a lot of people were 293 00:15:54,080 --> 00:15:56,680 Speaker 1: scratching their heads. I mean, I heard any number of 294 00:15:56,720 --> 00:15:58,880 Speaker 1: reasons for why the dollar was so weak in January, 295 00:15:59,000 --> 00:16:01,560 Speaker 1: but not many of that must stacked up by evidence. 296 00:16:01,680 --> 00:16:05,080 Speaker 1: So you know, there are certainly times when people pile 297 00:16:05,160 --> 00:16:08,360 Speaker 1: into a position, whether that's long dollars or short dollars um, 298 00:16:08,480 --> 00:16:11,400 Speaker 1: and you get this huge outside moves that go well 299 00:16:11,480 --> 00:16:14,080 Speaker 1: beyond what rate differentials a learned would suggest. But that 300 00:16:14,440 --> 00:16:17,280 Speaker 1: doesn't tend to last. And we've seen that since February 301 00:16:17,440 --> 00:16:20,040 Speaker 1: the dollar has actually been relatively stavor So what is 302 00:16:20,080 --> 00:16:21,680 Speaker 1: your I want to be clear here before we go 303 00:16:21,880 --> 00:16:24,200 Speaker 1: through the rest of this. What is the RBC call 304 00:16:24,720 --> 00:16:28,880 Speaker 1: and dollar? So if you look at our forecast, we 305 00:16:29,000 --> 00:16:31,840 Speaker 1: actually have some dollar strength into year end, not a 306 00:16:31,960 --> 00:16:34,920 Speaker 1: huge amount, but our year end forecast for year a dollar, 307 00:16:35,000 --> 00:16:39,160 Speaker 1: for example, is one eighteen UM. That's probably a lot 308 00:16:39,240 --> 00:16:41,640 Speaker 1: weaker than many in the market would have it. Um 309 00:16:41,760 --> 00:16:43,880 Speaker 1: and but this selective. You know, we we don't have 310 00:16:44,040 --> 00:16:47,360 Speaker 1: dollars stronger across the board by any means. Yeah, I mean, 311 00:16:48,040 --> 00:16:50,760 Speaker 1: and that describes against the ambiguity out there. Is there 312 00:16:50,800 --> 00:16:53,400 Speaker 1: a trade right now? Or is the street flat? I mean, 313 00:16:53,480 --> 00:16:58,600 Speaker 1: what's the bet and dollar right now? It's been fairly 314 00:16:58,640 --> 00:17:01,280 Speaker 1: mixed it too. Recently, we've you've seen some evidence if 315 00:17:01,320 --> 00:17:03,800 Speaker 1: you look at tourn Over and estimates of ton Over, 316 00:17:03,880 --> 00:17:06,840 Speaker 1: we've seen evidence of investors getting more interested in relative 317 00:17:06,920 --> 00:17:10,840 Speaker 1: value trades. To be honest, Um, so we've seen euroene 318 00:17:10,880 --> 00:17:13,239 Speaker 1: pick up from kind of late January. More recently, there 319 00:17:13,280 --> 00:17:14,879 Speaker 1: was a lot of interest in the cart crosses and 320 00:17:14,960 --> 00:17:17,800 Speaker 1: sterling crosses. I think that reflects the fact that people 321 00:17:17,840 --> 00:17:19,320 Speaker 1: have kind of given up a little bit on the 322 00:17:19,440 --> 00:17:22,399 Speaker 1: US dollar and started looking for value alting. Yeah, I mean, 323 00:17:22,440 --> 00:17:24,639 Speaker 1: I see that, John. I can't put it out the 324 00:17:24,680 --> 00:17:26,800 Speaker 1: way grabs on the screen. But Bloomberg has got a 325 00:17:26,880 --> 00:17:30,439 Speaker 1: high falutint series called O V d V which shows 326 00:17:30,560 --> 00:17:33,320 Speaker 1: me the bets on any given currency pair, and it's 327 00:17:33,400 --> 00:17:37,520 Speaker 1: remarkable how symmetric and even eurodollar is right now. That's 328 00:17:37,520 --> 00:17:39,600 Speaker 1: so if we do get a recovery in the US dollar, 329 00:17:39,640 --> 00:17:41,800 Speaker 1: is sustainable one and this continues. Where are we going 330 00:17:41,840 --> 00:17:45,399 Speaker 1: to see the most pain? Oh, it has to be 331 00:17:45,440 --> 00:17:48,639 Speaker 1: an emerging market. I mean that's really been one place 332 00:17:48,800 --> 00:17:51,440 Speaker 1: where you know, you just have to look at dollar 333 00:17:51,520 --> 00:17:54,320 Speaker 1: max for example, to see the pain that can be 334 00:17:54,440 --> 00:17:57,080 Speaker 1: caused in just a few short days. Um, you know, 335 00:17:57,200 --> 00:17:59,320 Speaker 1: dollar max was just trying to lower and lower and 336 00:17:59,400 --> 00:18:02,720 Speaker 1: lower through librwery March makes one of the best performances 337 00:18:02,760 --> 00:18:04,520 Speaker 1: year to date, and in the space of three or 338 00:18:04,520 --> 00:18:07,320 Speaker 1: four five days at all reverses. So you know, I 339 00:18:07,440 --> 00:18:09,560 Speaker 1: think that's where you've got to be most cautious, the 340 00:18:09,720 --> 00:18:12,320 Speaker 1: highly positioned em currencies. Yeah, and speaking to a lot 341 00:18:12,359 --> 00:18:14,280 Speaker 1: of fixed income investors that want to play the e 342 00:18:14,480 --> 00:18:17,840 Speaker 1: M local currency story and they want the effects exposure, 343 00:18:17,880 --> 00:18:21,120 Speaker 1: there seems to be this real comfort taking the effects 344 00:18:21,160 --> 00:18:24,040 Speaker 1: exposure in emerging markets alside. So I just wonder what 345 00:18:24,119 --> 00:18:27,479 Speaker 1: are you advising clients around the MFFX now and has 346 00:18:27,520 --> 00:18:30,760 Speaker 1: it changed over the last few weeks so a that time, 347 00:18:30,800 --> 00:18:33,399 Speaker 1: strategists has actually been quite cautious on a lot of 348 00:18:33,480 --> 00:18:36,080 Speaker 1: these currencies since the start of the year. Um, you 349 00:18:36,160 --> 00:18:38,320 Speaker 1: have a lot of political risk coming up, both in 350 00:18:38,720 --> 00:18:41,280 Speaker 1: Brazil and in Mexico with elections coming up this year. 351 00:18:41,520 --> 00:18:43,800 Speaker 1: The problem with these currencies is that they're very expensive 352 00:18:43,880 --> 00:18:46,680 Speaker 1: to short. You know, like you mentioned, fixed income investors 353 00:18:47,000 --> 00:18:49,720 Speaker 1: take the currency risk because if you were too short, 354 00:18:50,080 --> 00:18:51,639 Speaker 1: if you were to hedge the currency, you would be 355 00:18:51,760 --> 00:18:54,960 Speaker 1: left with very little or any yield pick up at all. 356 00:18:55,400 --> 00:18:58,399 Speaker 1: So UM, I think it pays to just be a 357 00:18:58,480 --> 00:19:00,800 Speaker 1: little bit more careful with these very very heavily positioned 358 00:19:00,880 --> 00:19:04,159 Speaker 1: DM currencies like max, and perhaps look for opportunities in 359 00:19:04,240 --> 00:19:07,639 Speaker 1: areas which are less positioned, like Asia or email. To 360 00:19:07,760 --> 00:19:10,919 Speaker 1: John's point, how do you play oil? I mean, we're 361 00:19:11,080 --> 00:19:13,040 Speaker 1: whatever price, sure you want to call all of a sudden, 362 00:19:13,160 --> 00:19:15,760 Speaker 1: seventy five dollars on Brent crude is a that's a 363 00:19:15,880 --> 00:19:19,479 Speaker 1: hello quote we get to eighty, you know, essentially nobody 364 00:19:19,560 --> 00:19:22,840 Speaker 1: called that, but ELSA. How do you play long oil? 365 00:19:24,560 --> 00:19:26,520 Speaker 1: So one that we like, it might be a little 366 00:19:26,600 --> 00:19:30,240 Speaker 1: obscure is long KNOCKI stocky two scandy currencies one against 367 00:19:30,320 --> 00:19:33,760 Speaker 1: the other. Um Norwegian corona obviously exposed to oil. Swedish 368 00:19:33,800 --> 00:19:37,280 Speaker 1: corona UM clearly not. And it's also a central bank play. 369 00:19:37,359 --> 00:19:40,480 Speaker 1: So you know, they're all trades out there. I means, oh, 370 00:19:40,680 --> 00:19:44,040 Speaker 1: use an email Sarah from Cincinnati. John Ferrell emails in 371 00:19:44,520 --> 00:19:51,920 Speaker 1: a nacky stocky and and soca. She says she's g 372 00:19:52,359 --> 00:19:55,320 Speaker 1: she says, you know she's quick. I'm looking at it. Okay. 373 00:19:55,359 --> 00:19:57,800 Speaker 1: So so you're your based on your basic idea here 374 00:19:57,880 --> 00:20:02,600 Speaker 1: is to go long Stockholm on there or about longslo. 375 00:20:02,720 --> 00:20:06,439 Speaker 1: You're going longslow long slow shorts dot com. Yeah, yeah, Okay. 376 00:20:06,880 --> 00:20:09,960 Speaker 1: Eliza MARTHINUSI joining us now Bloomberg's managing editor for finance 377 00:20:10,040 --> 00:20:12,720 Speaker 1: in Europe and joining us on the phone. Really great 378 00:20:12,760 --> 00:20:15,080 Speaker 1: to have you, Eliza, and just walk me through what 379 00:20:15,200 --> 00:20:17,960 Speaker 1: we've learned about the new CEO and how the management 380 00:20:18,320 --> 00:20:21,920 Speaker 1: is slightly taking shape at Deutsche Bank. Yes, John, I 381 00:20:21,960 --> 00:20:26,119 Speaker 1: guess what's interesting about disappointment is that it's another Deutsche 382 00:20:26,119 --> 00:20:29,159 Speaker 1: Bank Lifa, much like the new CEO as Christian serving 383 00:20:29,680 --> 00:20:33,720 Speaker 1: and you know, principally with exposure to the domestic businesses. 384 00:20:33,880 --> 00:20:35,800 Speaker 1: So there seems to be a bit of a pattern 385 00:20:35,840 --> 00:20:38,639 Speaker 1: emerging in terms of the new leadership. Now, so what 386 00:20:38,840 --> 00:20:42,000 Speaker 1: next for this bank? Because every single morning, whenever there's 387 00:20:42,040 --> 00:20:44,240 Speaker 1: a Deutsche Bank story, it's usually the most read story 388 00:20:44,240 --> 00:20:47,000 Speaker 1: on the Bloomberg And guess what it is again? As 389 00:20:47,080 --> 00:20:50,280 Speaker 1: Deutsche Bank considers cuts to the Investment Bank and the 390 00:20:50,359 --> 00:20:52,720 Speaker 1: presence in the United States. Eliza, where is this going 391 00:20:52,760 --> 00:20:54,600 Speaker 1: and what are they looking at more specifically for their 392 00:20:54,640 --> 00:20:57,600 Speaker 1: next move? Well, I guess what we're hearing now is 393 00:20:57,640 --> 00:21:00,840 Speaker 1: that this project Columbo, which we have reporting about for 394 00:21:00,880 --> 00:21:03,919 Speaker 1: a few weeks, is gathering pace. And so this review 395 00:21:04,000 --> 00:21:07,320 Speaker 1: the Investment Bank and a closer analysis of where it 396 00:21:07,480 --> 00:21:09,040 Speaker 1: is that they're making money and where it is that 397 00:21:09,160 --> 00:21:12,399 Speaker 1: they perhaps ought to be treating is now coming to 398 00:21:12,480 --> 00:21:15,200 Speaker 1: an end. And the picture that's emerging is that the 399 00:21:15,400 --> 00:21:19,200 Speaker 1: US equities business use cash business is perhaps one where 400 00:21:19,280 --> 00:21:22,119 Speaker 1: you know they will be retreating. As I was just 401 00:21:22,280 --> 00:21:25,840 Speaker 1: talking to Anthony, and Sparta's at least Sparta's like in 402 00:21:25,920 --> 00:21:28,600 Speaker 1: the alps of New Jersey. It's sort of outside New 403 00:21:28,680 --> 00:21:32,520 Speaker 1: York City. Farther moved from Sparta by the way to 404 00:21:32,640 --> 00:21:34,800 Speaker 1: the flat lands of New Jersey. He's now in the 405 00:21:35,119 --> 00:21:40,000 Speaker 1: pine barrens. Something like that. You got read by John mcpheez. 406 00:21:40,440 --> 00:21:43,560 Speaker 1: How many bodies are there in for Deutsche Bank in 407 00:21:43,640 --> 00:21:45,439 Speaker 1: New York, I mean, how many people do they actually 408 00:21:45,440 --> 00:21:48,280 Speaker 1: when we say at cash equity and all that, how 409 00:21:48,359 --> 00:21:52,720 Speaker 1: many bodies are involved? Well, what we know from from 410 00:21:52,760 --> 00:21:54,720 Speaker 1: some of The analysis that Toby Anus have done is 411 00:21:54,800 --> 00:21:59,800 Speaker 1: that they include employee about ten thousand if I'm not mistaken. 412 00:22:00,080 --> 00:22:02,760 Speaker 1: Really yes, but of course not all those will be 413 00:22:02,800 --> 00:22:04,719 Speaker 1: in the equities business, and not all of those will 414 00:22:04,760 --> 00:22:09,320 Speaker 1: be in the cash equities business. Um, what is that's jargon? 415 00:22:09,480 --> 00:22:12,400 Speaker 1: Excuse me, time for a jargon alert with Eliza martin 416 00:22:12,440 --> 00:22:16,560 Speaker 1: Newsy what's cash equities? What does that mean? So that 417 00:22:16,720 --> 00:22:19,320 Speaker 1: is the trading of plain vanilla shares as opposed to 418 00:22:19,359 --> 00:22:21,840 Speaker 1: the dating in, for example, derivatives that might be based 419 00:22:21,880 --> 00:22:25,280 Speaker 1: on equities. It's like stuck, like IBM, you know whatever 420 00:22:26,000 --> 00:22:28,399 Speaker 1: the trading do they do that from London? Then? I mean, 421 00:22:28,520 --> 00:22:30,119 Speaker 1: what I don't understand is are they going to get 422 00:22:30,119 --> 00:22:33,160 Speaker 1: out of the equity business? How can you do that? Well, 423 00:22:33,200 --> 00:22:35,920 Speaker 1: we have seen players, you know, other banks that have 424 00:22:36,040 --> 00:22:39,280 Speaker 1: retreated from the trading of stocks and certain regions. That 425 00:22:39,480 --> 00:22:42,080 Speaker 1: is not unheard of, I mean. But the question that 426 00:22:42,240 --> 00:22:44,720 Speaker 1: will remain is how much of the other business you're 427 00:22:44,760 --> 00:22:47,720 Speaker 1: able to maintain. You can no longer go to client 428 00:22:47,760 --> 00:22:51,240 Speaker 1: and say I can offer equity trading across the world precisely. 429 00:22:51,400 --> 00:22:54,399 Speaker 1: What is the track record of other banks that have 430 00:22:55,119 --> 00:22:57,119 Speaker 1: said we're getting out of this business because it's a 431 00:22:57,240 --> 00:22:59,760 Speaker 1: it's a money loser. What's the track record? What we 432 00:23:00,000 --> 00:23:02,200 Speaker 1: don't have as a clear track record of someone with 433 00:23:02,520 --> 00:23:04,880 Speaker 1: such a presence pulling back. So, I mean, we've seen 434 00:23:04,920 --> 00:23:06,880 Speaker 1: it in smaller players, but we don't have the track 435 00:23:06,960 --> 00:23:09,760 Speaker 1: record with you know, a leading global farm pulling out 436 00:23:09,840 --> 00:23:12,320 Speaker 1: of the bigger equity market. What do you see in 437 00:23:12,359 --> 00:23:14,439 Speaker 1: earnings coming up? We've seen Banker and he's coming out. 438 00:23:14,480 --> 00:23:17,359 Speaker 1: What is the state of the the EU banking the 439 00:23:18,440 --> 00:23:22,040 Speaker 1: command your attention? So what we're expecting, based on what 440 00:23:22,200 --> 00:23:24,399 Speaker 1: the analysts has been crunching, is that there will be 441 00:23:24,520 --> 00:23:27,119 Speaker 1: an even wider split between the Europeans and the U 442 00:23:27,280 --> 00:23:31,320 Speaker 1: S firms particular errors such as equity trading. Um. What 443 00:23:31,440 --> 00:23:33,600 Speaker 1: we've seen so far is that you know, ub asked 444 00:23:33,640 --> 00:23:36,640 Speaker 1: that reported yesterday did a little bit better than people expecting. 445 00:23:37,280 --> 00:23:39,960 Speaker 1: Having said that, they did so by ramping up the 446 00:23:40,080 --> 00:23:43,040 Speaker 1: risk taking their equity business. So one of the key matches, 447 00:23:43,160 --> 00:23:46,879 Speaker 1: they're the value at risk more than doubled for equity trading. 448 00:23:47,320 --> 00:23:49,600 Speaker 1: So it seems that the you know, they're trying to 449 00:23:49,640 --> 00:23:52,760 Speaker 1: find ways to maintain that market shire Lisa, thank you 450 00:23:52,840 --> 00:23:54,520 Speaker 1: so much at Lisa Martin News you're running all of 451 00:23:54,520 --> 00:24:10,960 Speaker 1: our EU bank coverage. Just fabulous. It is wonderful to 452 00:24:11,000 --> 00:24:14,800 Speaker 1: have with us. Now Michael Mayo of Wells Fargo Securities, 453 00:24:15,119 --> 00:24:17,879 Speaker 1: and we're going to rip up the script here and 454 00:24:18,000 --> 00:24:20,000 Speaker 1: do something a little different. Michael Mayo, I think this 455 00:24:20,200 --> 00:24:24,000 Speaker 1: is great to walk through the gossip of a bank 456 00:24:24,320 --> 00:24:26,240 Speaker 1: and in this case City Group, But I really want 457 00:24:26,280 --> 00:24:29,800 Speaker 1: to outline who these people are in their paths to 458 00:24:29,880 --> 00:24:33,000 Speaker 1: this moment, and of course looking at all the speculation 459 00:24:33,080 --> 00:24:35,920 Speaker 1: of what Gary Cohne may do or not do. Let's 460 00:24:35,960 --> 00:24:38,800 Speaker 1: begin with one of the great gentlemen of the business, 461 00:24:39,000 --> 00:24:42,159 Speaker 1: which is Michael O'Neill. I first knew him like a 462 00:24:42,280 --> 00:24:45,480 Speaker 1: Bank of Hawaii. He goes back to Continental Illinois, who 463 00:24:45,600 --> 00:24:47,840 Speaker 1: was the present chairman of City Group, And what did 464 00:24:47,920 --> 00:24:51,960 Speaker 1: he do for Mr Corbett in the bank? Well, just 465 00:24:52,080 --> 00:24:54,680 Speaker 1: to put perspective on this, Tom, I am in Chicago 466 00:24:54,800 --> 00:24:57,960 Speaker 1: for City Groups annual meeting. I go there to ask questions. 467 00:24:58,359 --> 00:25:00,920 Speaker 1: It's the only chance one a year chance to ask 468 00:25:01,040 --> 00:25:05,480 Speaker 1: questions board members. When their answers uh they can be 469 00:25:05,560 --> 00:25:09,080 Speaker 1: held publicly accountable to So. Mike O'Neill was one of 470 00:25:09,119 --> 00:25:14,280 Speaker 1: the grandfathers of bank restructuring. He was a master at 471 00:25:14,880 --> 00:25:19,320 Speaker 1: ensuring adequate capital allocation. He was actually the chief nancial 472 00:25:19,320 --> 00:25:23,119 Speaker 1: officer at Legacy Bank America, as you said, Bank of Hawaii, 473 00:25:23,200 --> 00:25:26,120 Speaker 1: he was the CEO, and he's been chairman for most 474 00:25:26,160 --> 00:25:30,080 Speaker 1: of this decade at City Group. So he's overseen an 475 00:25:30,119 --> 00:25:33,560 Speaker 1: effort by City Group to not have the situation like 476 00:25:33,680 --> 00:25:36,520 Speaker 1: they had during the financial crisis, you know, for the 477 00:25:36,600 --> 00:25:39,920 Speaker 1: next generation. And so the de risking at City Group 478 00:25:40,040 --> 00:25:45,760 Speaker 1: has been excellent. Uh. They've discarded some inefficient businesses and 479 00:25:46,080 --> 00:25:49,520 Speaker 1: City Group is on a much stronger foundation, you know, 480 00:25:50,400 --> 00:25:53,760 Speaker 1: facilitated by him, certainly implemented by the management. A chairman 481 00:25:53,920 --> 00:25:57,159 Speaker 1: drives the board. Would you suggest within the speculation and 482 00:25:57,760 --> 00:26:02,400 Speaker 1: that he pushed out Mr pandit years ago, you know, Tom, 483 00:26:02,440 --> 00:26:04,600 Speaker 1: I think I was on your show some of those times, 484 00:26:04,840 --> 00:26:07,920 Speaker 1: and you know it was my view that City Group 485 00:26:08,000 --> 00:26:10,040 Speaker 1: needed a new CEO, and it was also the view 486 00:26:10,080 --> 00:26:13,520 Speaker 1: of many investors that City Group needed a new CEO 487 00:26:13,600 --> 00:26:16,280 Speaker 1: at the time. And so I think, you know, Mic O'Neil, 488 00:26:16,400 --> 00:26:20,240 Speaker 1: chairman of City Group, you know, listen to the thoughts 489 00:26:20,440 --> 00:26:23,520 Speaker 1: of investors and made up the town of mind parts 490 00:26:23,640 --> 00:26:27,160 Speaker 1: for us what a chairman does versus an operating executives 491 00:26:27,200 --> 00:26:30,119 Speaker 1: such as Mr Corbett Mike Mayo. I spend time with 492 00:26:30,280 --> 00:26:33,600 Speaker 1: Mr Corbett at Davos on a panel. He is the 493 00:26:33,680 --> 00:26:36,720 Speaker 1: buoyant football player from Harvard and folks I should point 494 00:26:36,760 --> 00:26:39,920 Speaker 1: out that Mr Corbett is actually the real deal. He's 495 00:26:39,960 --> 00:26:42,639 Speaker 1: not some kid that happened to play football. He was, 496 00:26:43,080 --> 00:26:48,040 Speaker 1: by all acclaim, actually really really good. What's that relationship 497 00:26:48,160 --> 00:26:51,959 Speaker 1: between a chairman and an operating bank officer handling two 498 00:26:52,400 --> 00:26:55,879 Speaker 1: forty people. Well, Tom, I'd like to point out this 499 00:26:56,080 --> 00:26:58,840 Speaker 1: is an exception among the large bank. City Group has 500 00:26:58,880 --> 00:27:02,119 Speaker 1: a separate chairman, as you say, Mike O'Neill versus the 501 00:27:02,359 --> 00:27:07,120 Speaker 1: CEO Mike Corebat. And this is a big issue of governments, 502 00:27:07,160 --> 00:27:09,440 Speaker 1: not just for banks, but for all corporations. Do you 503 00:27:09,520 --> 00:27:12,560 Speaker 1: need a chairman? What the chairman does? It's an extra 504 00:27:12,760 --> 00:27:17,680 Speaker 1: check and balance on behalf of investors to ensure that 505 00:27:17,840 --> 00:27:22,320 Speaker 1: the company is pursuing sustainable growth. Certainly City Group is 506 00:27:22,400 --> 00:27:25,359 Speaker 1: the poster chopped. What can go wrong? You saw that 507 00:27:25,520 --> 00:27:28,240 Speaker 1: over the last Well it's for the twenty year anniversary 508 00:27:28,320 --> 00:27:30,920 Speaker 1: at just April six of the creation of City Group 509 00:27:30,960 --> 00:27:33,440 Speaker 1: in its current form, and the stock is down. So 510 00:27:33,520 --> 00:27:36,160 Speaker 1: if any bank, if any firm needs an extra set 511 00:27:36,200 --> 00:27:39,000 Speaker 1: of eyes, it probably would be City Group. And the 512 00:27:39,119 --> 00:27:42,520 Speaker 1: role of the chairman is to ensure the strategy is adequate, 513 00:27:42,680 --> 00:27:46,119 Speaker 1: to ensure there's good succession plans, and to ensure that 514 00:27:46,280 --> 00:27:50,320 Speaker 1: you're not taking excessive short term risk to get management 515 00:27:50,359 --> 00:27:53,000 Speaker 1: paid that comes back and bite you later on. Can 516 00:27:53,160 --> 00:27:58,439 Speaker 1: Jamie Diamond do both jobs? Well, look, that's best in class. 517 00:27:59,080 --> 00:28:01,960 Speaker 1: JP Morgan is best in class among the global bold 518 00:28:02,000 --> 00:28:05,760 Speaker 1: bracket banks, and so you know it's working. Look a 519 00:28:05,880 --> 00:28:09,399 Speaker 1: question for governance though, is can at work not only 520 00:28:09,680 --> 00:28:12,480 Speaker 1: under Jamie Diamond? And it is, But can it work 521 00:28:12,840 --> 00:28:15,360 Speaker 1: under the next CEO at JP Morgan or Bank America 522 00:28:15,440 --> 00:28:17,960 Speaker 1: or any of the other large banks. Let's turn to 523 00:28:18,040 --> 00:28:20,640 Speaker 1: Gary Cone. Do you believe the speculation that he could 524 00:28:20,680 --> 00:28:25,200 Speaker 1: be asked or assume the duties of chairman of City Group. Well, 525 00:28:26,080 --> 00:28:29,280 Speaker 1: Mike O'Neil, chairman of City Group, has mandatory retirement at 526 00:28:29,320 --> 00:28:31,320 Speaker 1: the end of this year. That will be my first 527 00:28:31,400 --> 00:28:34,600 Speaker 1: question I asked at today's annual meeting at City Group. 528 00:28:34,680 --> 00:28:39,680 Speaker 1: So one option is to promote my corbette chairman. Another 529 00:28:39,720 --> 00:28:43,120 Speaker 1: option is to find somebody on the outside. Gary Cone 530 00:28:43,600 --> 00:28:46,920 Speaker 1: seems available. There's other people the ex CEO of US 531 00:28:46,960 --> 00:28:52,360 Speaker 1: Bancorps Richard Davis, Harvey Schwartz. But it's, you know, it's 532 00:28:52,400 --> 00:28:54,800 Speaker 1: the board's imperative to do their homework, to look at 533 00:28:54,840 --> 00:28:57,440 Speaker 1: the talent out there and see if they could benefit 534 00:28:57,480 --> 00:29:00,600 Speaker 1: by somebody else. So why not Gary Cone or someone 535 00:29:00,680 --> 00:29:03,160 Speaker 1: else like that to be chairman as city group? I'd 536 00:29:03,200 --> 00:29:04,640 Speaker 1: like to hear their thoughts on And this is what 537 00:29:04,720 --> 00:29:06,720 Speaker 1: I wanted to get to folks with that historic walks 538 00:29:06,720 --> 00:29:08,520 Speaker 1: through we just did. We got the time this morning 539 00:29:08,600 --> 00:29:10,760 Speaker 1: to do this right with Mike Mayo at the meeting 540 00:29:11,200 --> 00:29:14,080 Speaker 1: in Chicago. Mike was fascinating. And I say this with 541 00:29:14,200 --> 00:29:18,560 Speaker 1: a immense respect for Gary Khones public service to the nation. 542 00:29:19,480 --> 00:29:23,440 Speaker 1: How do you move from the operating hands on goldman 543 00:29:23,600 --> 00:29:29,040 Speaker 1: sacks guy two chairman duties? Does everybody do that? Or 544 00:29:29,520 --> 00:29:31,560 Speaker 1: or is that too much of a hurdle for Mr 545 00:29:31,680 --> 00:29:34,880 Speaker 1: Khane to do? I mean they got to start somewhere. 546 00:29:35,000 --> 00:29:38,800 Speaker 1: They all started as a tough operating officer like Mr kohone, 547 00:29:39,120 --> 00:29:43,960 Speaker 1: So is he eminently qualified to be chairman like well one? 548 00:29:44,000 --> 00:29:46,600 Speaker 1: That thing I have Tom is, you know, we published 549 00:29:46,680 --> 00:29:50,120 Speaker 1: our questions for the meeting today and asked large institutional investors. 550 00:29:50,200 --> 00:29:52,880 Speaker 1: These are the largest owners of City Group in the 551 00:29:52,920 --> 00:29:55,600 Speaker 1: other banks. What other questions do you have? What are 552 00:29:55,640 --> 00:29:57,600 Speaker 1: your thoughts about some of our ideas And one of 553 00:29:57,640 --> 00:29:59,960 Speaker 1: the ideas was, you know what about someone like Gary 554 00:30:00,040 --> 00:30:03,000 Speaker 1: Cohen as chairman? And I'd say the feedback that we've 555 00:30:03,040 --> 00:30:07,160 Speaker 1: gotten has been good. So the large investors do this 556 00:30:07,320 --> 00:30:09,400 Speaker 1: as their day job. I think that which could be 557 00:30:09,440 --> 00:30:11,960 Speaker 1: a positive addition. Now, having said that, we heard nothing 558 00:30:11,960 --> 00:30:15,080 Speaker 1: about Gary Cohn and his intentions, but that's one of 559 00:30:15,160 --> 00:30:18,400 Speaker 1: several people that seemed to makes sense the charts that 560 00:30:18,480 --> 00:30:21,000 Speaker 1: I do my you know, my normalized charts on the 561 00:30:21,080 --> 00:30:25,600 Speaker 1: banks back to two thousand seven two eight. Lehman, uh moment, 562 00:30:25,840 --> 00:30:28,880 Speaker 1: Come on, they've lagged, they've lagged, they've lagged. Is there 563 00:30:28,920 --> 00:30:32,720 Speaker 1: an urgency for City Group to really jump start share 564 00:30:32,760 --> 00:30:35,480 Speaker 1: older return or is this going to be a long 565 00:30:35,760 --> 00:30:39,560 Speaker 1: slug still from Mr Corbett, Well, look, that's one reason 566 00:30:39,560 --> 00:30:41,880 Speaker 1: why I'm here in Chicago, Tom, I mean, I'm here 567 00:30:42,120 --> 00:30:46,320 Speaker 1: for this purpose. City Group has made great progress. They 568 00:30:46,400 --> 00:30:50,719 Speaker 1: now have double digit return on equity, return on tangible equity. 569 00:30:50,760 --> 00:30:53,760 Speaker 1: That's first time since before this nancial crisis. Their risk 570 00:30:53,880 --> 00:30:57,360 Speaker 1: is significantly less and the stock while it's underperformed this year, 571 00:30:57,400 --> 00:31:00,000 Speaker 1: it did outperform last year. Having said that City Group 572 00:31:00,160 --> 00:31:04,480 Speaker 1: has worst in class returns and worst in class stock 573 00:31:04,520 --> 00:31:07,120 Speaker 1: price valuation. So if that's the case, what is the 574 00:31:07,160 --> 00:31:09,840 Speaker 1: stock market saying. We think the stock market banking is 575 00:31:10,160 --> 00:31:13,600 Speaker 1: City Group needs to up the intensity to another degree 576 00:31:14,400 --> 00:31:16,320 Speaker 1: and you know, hold managements feet to the fire, and 577 00:31:16,400 --> 00:31:18,520 Speaker 1: that partly is the role of a chairman. A couple 578 00:31:18,520 --> 00:31:20,200 Speaker 1: of more questions here, Mike Mayon have got to go 579 00:31:20,320 --> 00:31:24,200 Speaker 1: tangential to the idea of European bank walking away from 580 00:31:24,240 --> 00:31:27,760 Speaker 1: the quote unquote cash equities business in New York. I 581 00:31:27,920 --> 00:31:31,280 Speaker 1: have no idea how you walk away from the equity 582 00:31:31,360 --> 00:31:36,120 Speaker 1: business in a given geography and maintain the further banking relationship. 583 00:31:36,400 --> 00:31:40,520 Speaker 1: Can any bank, including deuts your bank, can they do that? Well? Tom, 584 00:31:40,680 --> 00:31:42,080 Speaker 1: when I was on your show a few weeks ago, 585 00:31:42,320 --> 00:31:45,960 Speaker 1: you know, I mentioned Goliath is winning David versus Goliath, 586 00:31:46,080 --> 00:31:49,800 Speaker 1: and Goliath is winning in capital markets and to the 587 00:31:49,880 --> 00:31:54,000 Speaker 1: large five banks are really outpacing the next five largest, 588 00:31:54,040 --> 00:31:56,880 Speaker 1: which are Europeans. And so the European banks, whether it's 589 00:31:56,880 --> 00:32:02,520 Speaker 1: Deutsche Bank, Barclay's um or Credit Sweeze had single digit 590 00:32:02,720 --> 00:32:04,800 Speaker 1: r o E. So the way you walk away is 591 00:32:05,240 --> 00:32:09,120 Speaker 1: if you have very low returns. That's a tough way 592 00:32:09,200 --> 00:32:12,200 Speaker 1: to keep feeding a value destroying business. And that's in contrast, 593 00:32:12,520 --> 00:32:15,760 Speaker 1: frankly to City Group's current returns which are double digit 594 00:32:15,800 --> 00:32:19,480 Speaker 1: off the gate Morgan Bank, and so the larger US 595 00:32:19,840 --> 00:32:24,360 Speaker 1: capital market banks are winning versus the European bank. Michael 596 00:32:24,400 --> 00:32:26,680 Speaker 1: Mayo hugely valuable. Thank you for your time us in 597 00:32:26,800 --> 00:32:30,000 Speaker 1: Chicago for the City Group meeting. He is with Wells Fargo. 598 00:32:36,440 --> 00:32:40,520 Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 599 00:32:40,680 --> 00:32:45,960 Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast 600 00:32:46,040 --> 00:32:50,280 Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before 601 00:32:50,320 --> 00:32:54,160 Speaker 1: the podcast. You can always catch us worldwide. 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