Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom keene Jailey.
Speaker 1: We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. A
Speaker 1: massive amount of attention being paid to the US tenure
Speaker 1: Treasury as it flirts with that three percent level, a
Speaker 1: level we haven't seen in more than four years. This
Speaker 1: doesn't have to be bad news for risk assets. In
Speaker 1: when yields searched through three pc, the equity market delivered
Speaker 1: one of its best years of the ball markets so far,
Speaker 1: with a gain of almost thirty percent. So why could
Speaker 1: it be different this time around? I want to bring
Speaker 1: in Vince Reinhardt b and Y Mellon, chief economist and
Speaker 1: chief in investment strategist, and it's always great to catch
Speaker 1: up with you. Just walk me through that. What it
Speaker 1: could be different this time around? We actually don't say
Speaker 1: that in my household. This time is never different. I
Speaker 1: think I think the story is is the Fed raising
Speaker 1: rates and seen as raising rates for the right reason,
Speaker 1: i e. The economy has got momentum, the equilibrium, real
Speaker 1: federal funds rate is rising. Think about it. Think how
Speaker 1: you describe the last six FED actions. When you consider
Speaker 1: the policy renormalizations last year and into this year. They
Speaker 1: got good press, they said Fed confident about the expansion
Speaker 1: and raising rates and and renormalizing policy, still keeping an
Speaker 1: accommodative in that environment, equity market can do pretty well.
Speaker 1: The difference this time around, though, if there is a
Speaker 1: key difference, I would say, looking back at verses now,
Speaker 1: is that back then, Vince, the two year note was
Speaker 1: fifty basis points and now it's two and a half
Speaker 1: UM and two and a half is pretty much where
Speaker 1: we started the year on the tenure. That's what we
Speaker 1: have seen, an aggressive repricing at the front end of
Speaker 1: the curve. Could that be what sort of spouse out
Speaker 1: a different story for risk assets this time around? Well,
Speaker 1: the reality is we're walking up a path of FED tightening,
Speaker 1: and so we're a hundred twenty five basis point higher
Speaker 1: on the funds rate. In that environment, the yield curve
Speaker 1: is gonna flatten. Is not necessarily threatening to economic expansions.
Speaker 1: In fact, it says that people think the FED will
Speaker 1: be slow to raise rates, not particularly fast. It doesn't
Speaker 1: have to meet impending doom. And I don't think many
Speaker 1: people on this program think that. In fact, the last
Speaker 1: time we have an inversion on the yield curve pre crisis,
Speaker 1: it was a couple of years before things really rolled over.
Speaker 1: So it doesn't have to mean anything immediately bad is
Speaker 1: going to happen. I think the story for me, Vince,
Speaker 1: is something that could happen in markets where the front
Speaker 1: end of treasuries gets attractive enough that it competes for
Speaker 1: capital in a more significant way with things like equities
Speaker 1: and credit as well, whether it's investment grade or high yield.
Speaker 1: Do you see that story kind of materializing. Well, we're
Speaker 1: seeing that in money more gets. That's part of the
Speaker 1: reason library spreads are so wide, right ted spread or
Speaker 1: library oh I s uh. Those spreads have widened a
Speaker 1: bit in part because if you're a corporate treasurer and
Speaker 1: you see a nice, safe, risk free short rate as
Speaker 1: high as it is in such a long time, why
Speaker 1: do you want to take on risk? Uh? And so
Speaker 1: if it can happen at the front end, it can
Speaker 1: happen for for out maturities. But we're not there yet,
Speaker 1: and and so I just wonder what this means for
Speaker 1: financial conditions because for so many years the Federal Reserve
Speaker 1: has been able to hike interest rights now very slowly,
Speaker 1: very gradually, and financial conditions haven't tightened until really recently.
Speaker 1: Does that put the brakes on the Federal? Is that
Speaker 1: what the Fed ultimately wants to see. They want to
Speaker 1: see higher right interest rates and and some high conditions
Speaker 1: along with it. That's the desired policy outcome. Right, you
Speaker 1: can't slow the economy unless you've tightened financial conditions. And
Speaker 1: if you think the economy has no resource slack and
Speaker 1: is growing faster than the potential you want and modestly
Speaker 1: slow the expansion of aggregate demand, you do it by
Speaker 1: tightening financial conditions. Listening to Bill Dudley last week, that's
Speaker 1: what he was talking about. We have noted three quarters
Speaker 1: of an average I believe it's three point one percent
Speaker 1: or two point nine percent economic growth. Do you model
Speaker 1: it b n y melon A sustained three g d
Speaker 1: p Uh No, Because in the in the long run,
Speaker 1: we're anchored by the growth of aggregate supply. We have
Speaker 1: an aging population not increasing that fast, and for some
Speaker 1: reason in another we're not adding much to power work
Speaker 1: in the long run. Uh. Sure, I think that that's
Speaker 1: because that maps directly on what they think the equal
Speaker 1: abrim real federal funds. Right, long run growth is the
Speaker 1: attractor to everything, and we talk about the cyclical behavior
Speaker 1: of the economy relative to that trend within this is
Speaker 1: it my conversation at the i m F with the
Speaker 1: head of Treasury for Norway they lowered their target rate
Speaker 1: from an oil and duced two point five down to
Speaker 1: the conventional two percent. Is there any constituency, given that
Speaker 1: attractor of lower potential growth to bring the rate under
Speaker 1: two percent? Is there any research vision that we ought
Speaker 1: to go to one point eight percent target rate on inflation? Actually,
Speaker 1: the most of the research would say in terms of inflation,
Speaker 1: you'd go the other way, because when you lower potential
Speaker 1: output growth, you're probably lowering the equal broom real rate.
Speaker 1: And the lower the equal Broom real rate, the closer
Speaker 1: that zero bound phenomenally. So in fact, this should be
Speaker 1: an argument for raising for Goose. So it's it's chair
Speaker 1: and Paul the new ultimate Dove. I don't see him
Speaker 1: going there because two percent has been locked in the
Speaker 1: central bank discussion since when the FED talked about quantifying
Speaker 1: the inflation call. It might I point out this excuse me,
Speaker 1: this time is different, John, we got trillion dollar deficits.
Speaker 1: I mean, there was this book a couple of years ago,
Speaker 1: roll goffin what was her name? I believe, I believe
Speaker 1: we were described as Reinhardt. And there's some there's some
Speaker 1: research since the Carmens that what they say, that's going
Speaker 1: to be the part of the conversation, and that's about
Speaker 1: financial depression, governments with big debt like inflation. So we
Speaker 1: may lation not because of j. Pale. I don't want
Speaker 1: to get you in trouble at home or out in
Speaker 1: that beautiful porch you've got. But the basic idea your
Speaker 1: Vince Reinhardt is Carmen Reinhardt and Ken Rogoff said when
Speaker 1: the deficits get to a point, things change? Did they change?
Speaker 1: With the T word? Are we at a point? And
Speaker 1: not speaking for Carmen Reinhart, but Vince Reinhardt's work, what's
Speaker 1: a trillion dollar deficit mean? Do you? Okay? Another favorite
Speaker 1: factory about out of the world economic outlook, if you
Speaker 1: look across advanced economies at their debt level in in
Speaker 1: two thousand seven, the ones with big debt were the
Speaker 1: ones that perform much more poorly. That is a problem
Speaker 1: deficits or a problem that will be pushing up on
Speaker 1: interest rates over the medium and longer term. That will
Speaker 1: be a scene anchor on the value of the dollar,
Speaker 1: and it will create the incentive for a little bit
Speaker 1: more inflation. Well, let's talk about the dollar just quickly.
Speaker 1: Vin some the dollar rebounding over the last five days,
Speaker 1: a bit of a pause in today's session. What do
Speaker 1: you make of that? Because a lot of people's investment
Speaker 1: decisions have been sort of being on the premise, particularly
Speaker 1: the M for anyone that's getting that exposure to the
Speaker 1: M currencies, on the idea that at the best the
Speaker 1: dollar is going to get weak and at worst the
Speaker 1: dollar is going to be stable. It could be a
Speaker 1: real pain trade if we get an unwind if that
Speaker 1: position and what what do you see happening? Yeah? I
Speaker 1: think you're right. It does feel like a crowded trade,
Speaker 1: isn't it. And the problem is you could be right
Speaker 1: in the medium and longer term and have your head
Speaker 1: handed in before that. We we view this as as
Speaker 1: as just the different forces near term, medium term, medium term.
Speaker 1: The list is pretty daunting about why you want to
Speaker 1: hold dollar assets, I e. Current accounts, the budget defice.
Speaker 1: It's big dad an attitude. Uh, that is basically contrary
Speaker 1: to internationalism. We're ruining their safety nassat value. That's probably
Speaker 1: why you have a medium to longer term view of
Speaker 1: the dollar depreciate. Before that the Fed is kind of
Speaker 1: tighten more than people think that that tends to appreciate.
Speaker 1: It been great to have you with us. Thank you
Speaker 1: very much for joining us. B M. Y Mellon Chief
Speaker 1: Economists and Chief investment Strategists. Tom big theme in Europe
Speaker 1: at the moment has been disappointing economic data, and that
Speaker 1: disappointing economic data continues with the German business confidence and
Speaker 1: umber coming through this morning the EFO and it extends
Speaker 1: its drop over the last several months and through the
Speaker 1: year after peaking at the back end of To Talk Europe.
Speaker 1: Gabby Santos, Gabrielle Santos, JP, Morgan Asset Management, Doble Market Strategist,
Speaker 1: joining us around a table in New York. Gabriella always
Speaker 1: grab a catch up with you. You've just been to Europe,
Speaker 1: so walk me through your vacation and whether you see
Speaker 1: and improving European economy because it's not coming through in
Speaker 1: the data at the moment, we do see it very
Speaker 1: much in improving European economy. It was interesting to see
Speaker 1: that the dynamism, the energy, the enthusiasm I was just
Speaker 1: in Portugal last week. Um. But to your point, it
Speaker 1: has been a disappointing first quarter for European data, and
Speaker 1: I would separate that into two factors. The first is
Speaker 1: the survey data, things like the p M I, which
Speaker 1: have moderated significantly over the first quarter, but those have
Speaker 1: been signaling growth that was that was just not realistic.
Speaker 1: Right three and a half percent g d P was
Speaker 1: being signaled. That was not going to happen, unfortunately, So
Speaker 1: the survey data has moderated back to reality. And then
Speaker 1: the second pieces, the hard data has disappointed as well.
Speaker 1: So we do think that first quarter GDP is going
Speaker 1: to come in closer to one and a half, but
Speaker 1: we think that's due to probably temporary factors, which was
Speaker 1: the weather, the intense flu season, and that's likely to
Speaker 1: revert already in the second quarter. Just in terms of
Speaker 1: had a bond market is capturing capturing this story, Gabriella,
Speaker 1: we have this front end story two year buns versus
Speaker 1: two year treasuries the spread is now north the three
Speaker 1: hundred basis points. It is so so wide. I think
Speaker 1: that's a record wide, a new one as well that's
Speaker 1: been delivered over the last week. How much longer can
Speaker 1: we keep this divergence between what is happening with the
Speaker 1: ECP in Europe and the Eurozone economy and the Federal
Speaker 1: Reserve in the United States and the US economy, Well,
Speaker 1: I think they're they're marching to the beat of their
Speaker 1: own drums. Right. The US certainly has a lot of
Speaker 1: confidence on both the growth as well as the inflation outlook,
Speaker 1: and so it's going to keep its trapped for four
Speaker 1: rate HIGs this year, are probably even for next year
Speaker 1: as well, um and even probably some further rate HIGs
Speaker 1: as it continues winding down its balance sheet. Meanwhile, it
Speaker 1: doesn't seem like President drugs in any rush, especially after
Speaker 1: the soft patch in the data that we're speaking of
Speaker 1: in the first quarter, He's probably gonna want some conform
Speaker 1: me shin that that was probably a bit temporary grid.
Speaker 1: And that's kind of what I'm thinking about the moment
Speaker 1: when the treasuries can continue to slow grind high with yelds,
Speaker 1: and whether the European bond market can remain anchored. Do
Speaker 1: you already see a bond mark at a global bond market?
Speaker 1: Whet the US treasury market can almost decouple from everything, counsel,
Speaker 1: It's not actually likely. Well, I think what's interesting is
Speaker 1: not necessarily the two year yield um and that gap,
Speaker 1: but perhaps the tenure yield. Right. So, last week, as
Speaker 1: a tenure yield started marching higher higher in the US,
Speaker 1: it did so around the world as well. Right, So
Speaker 1: there was something that was common, which was this idea
Speaker 1: of higher oil prices, higher inflation um, as well as
Speaker 1: confirmation that probably the soft passion of first quarter growth
Speaker 1: was temporary. How do you deal with the bias that
Speaker 1: we're JP Morgan, we're genormous and we saw that clearly
Speaker 1: seriously in Mr Diamond's letter. People forget the scope and
Speaker 1: scale the company, and that institutional and client urge to
Speaker 1: only own the top two companies worldwide. There's this man
Speaker 1: sub urge comfort in big. How do you fight that
Speaker 1: every day at JP Morgan to actually look at mid
Speaker 1: caps well, comfort in big and also comfort in just
Speaker 1: one's uh area of comfort? Shall we say? There's there's
Speaker 1: always this very intense home bias, right, rather we talk
Speaker 1: depending on whether we talk about equities or fixed income.
Speaker 1: So that's something we talk a lot about, not just
Speaker 1: size of companies, but also geography as well, and I
Speaker 1: think that's becoming ever more important, especially for our US clients, right,
Speaker 1: which were in this environment where the US was the
Speaker 1: only house in the block. It was okay, you can
Speaker 1: get away with having a home bias. Probably not so
Speaker 1: if we fast forward the next ten years, that's probably
Speaker 1: not going to get you to your goals. You have
Speaker 1: to have some Europe, you have to have some Japan,
Speaker 1: you have to have some in well. One quick question,
Speaker 1: do you have to have cash? I think cash is
Speaker 1: becoming much more of an alternative now than it's been.
Speaker 1: Perfect year, yields are higher, right, it's it's kind of
Speaker 1: broadening your opportunity set beyond just equities and fixed income.
Speaker 1: You can add cash, and you can add commodities. Right,
Speaker 1: So your your opportunity set has become a little bit
Speaker 1: broader this year and over the next few years. Santos,
Speaker 1: thank you so much a champion Morgan Asset Management. John,
Speaker 1: I want you to bring in one of the best
Speaker 1: people we have on foreign exchange, Elsa Lignos RBC Capital Markets. Yeah,
Speaker 1: they glob ahead of FX strategy, joining us out of London.
Speaker 1: After a brief rally in the dollar that stretched to
Speaker 1: about five straight days, a real retracement of an ugly
Speaker 1: seventeen a tiny retracement of a massive move lower last year. ALSA,
Speaker 1: What do you make of the move in the dollar
Speaker 1: we've seen over the last week and how sustainable could
Speaker 1: it be. It's interesting because it's come along a backdrop
Speaker 1: of higher yields but also lower equities UM. And that's
Speaker 1: something we've done quite a bit of work on in
Speaker 1: the past and looked at what happens in that kind
Speaker 1: of quite unusual environment where you see a twin bond
Speaker 1: and exerty sell off UM, and actually it turns out
Speaker 1: to be a pretty strong environment for the U. S. Dollar.
Speaker 1: That's not to say this necessarily gonna last. We saw
Speaker 1: something similar in February and it reversed, but if it
Speaker 1: does continue, then it should be a pretty good environment
Speaker 1: for the dollar going forward. So also, correlation and causation
Speaker 1: obviously two very different things, and the correlation between yields
Speaker 1: and the dollar over the last week had many people
Speaker 1: scratching their heads and wondering whether rate differentials are starting
Speaker 1: to matter again. Was it that or was it just
Speaker 1: pure risk a version that was driving a bill into
Speaker 1: the dollar. It's hard to put it down to risk
Speaker 1: a version when you look at the performance of dollar yen,
Speaker 1: or even dollar Swiss for that matter. Good point, So
Speaker 1: it does seem to be something more US dollar specific.
Speaker 1: So can rate differentials be the deciding factor as we
Speaker 1: go forward from here? Because if you look at the
Speaker 1: spread at the front end between Europe and the United
Speaker 1: States are so it's such a yes that you're a
Speaker 1: dollar should be a whole lot lower than it is
Speaker 1: right now exactly, And and that's broken down for some
Speaker 1: time and has had a lot of people scratching their heads,
Speaker 1: Which is why I think it's interesting that this move
Speaker 1: appears to have been driven more by the back end. Um.
Speaker 1: This doesn't seem to be a kind of traditional vanilla
Speaker 1: rate differential story. Um, it does seem to be a
Speaker 1: little bit more about the kind of bond equity interaction.
Speaker 1: Is the dollar so big, so dominant that flows don't matter?
Speaker 1: Elso I bring this up with the backdrop of a
Speaker 1: week Swiss franc which a lot of people will say,
Speaker 1: are Russians moving money around and sits in and I
Speaker 1: get that, But can the dollar move and flows or
Speaker 1: is the dollar dynamic all about rate differentials? Absolutely, the
Speaker 1: dollar can move on flows, I know. I think we
Speaker 1: saw that most vividly in January, where we had a
Speaker 1: huge dollar move um and a lot of people were
Speaker 1: scratching their heads. I mean, I heard any number of
Speaker 1: reasons for why the dollar was so weak in January,
Speaker 1: but not many of that must stacked up by evidence.
Speaker 1: So you know, there are certainly times when people pile
Speaker 1: into a position, whether that's long dollars or short dollars um,
Speaker 1: and you get this huge outside moves that go well
Speaker 1: beyond what rate differentials a learned would suggest. But that
Speaker 1: doesn't tend to last. And we've seen that since February
Speaker 1: the dollar has actually been relatively stavor So what is
Speaker 1: your I want to be clear here before we go
Speaker 1: through the rest of this. What is the RBC call
Speaker 1: and dollar? So if you look at our forecast, we
Speaker 1: actually have some dollar strength into year end, not a
Speaker 1: huge amount, but our year end forecast for year a dollar,
Speaker 1: for example, is one eighteen UM. That's probably a lot
Speaker 1: weaker than many in the market would have it. Um
Speaker 1: and but this selective. You know, we we don't have
Speaker 1: dollars stronger across the board by any means. Yeah, I mean,
Speaker 1: and that describes against the ambiguity out there. Is there
Speaker 1: a trade right now? Or is the street flat? I mean,
Speaker 1: what's the bet and dollar right now? It's been fairly
Speaker 1: mixed it too. Recently, we've you've seen some evidence if
Speaker 1: you look at tourn Over and estimates of ton Over,
Speaker 1: we've seen evidence of investors getting more interested in relative
Speaker 1: value trades. To be honest, Um, so we've seen euroene
Speaker 1: pick up from kind of late January. More recently, there
Speaker 1: was a lot of interest in the cart crosses and
Speaker 1: sterling crosses. I think that reflects the fact that people
Speaker 1: have kind of given up a little bit on the
Speaker 1: US dollar and started looking for value alting. Yeah, I mean,
Speaker 1: I see that, John. I can't put it out the
Speaker 1: way grabs on the screen. But Bloomberg has got a
Speaker 1: high falutint series called O V d V which shows
Speaker 1: me the bets on any given currency pair, and it's
Speaker 1: remarkable how symmetric and even eurodollar is right now. That's
Speaker 1: so if we do get a recovery in the US dollar,
Speaker 1: is sustainable one and this continues. Where are we going
Speaker 1: to see the most pain? Oh, it has to be
Speaker 1: an emerging market. I mean that's really been one place
Speaker 1: where you know, you just have to look at dollar
Speaker 1: max for example, to see the pain that can be
Speaker 1: caused in just a few short days. Um, you know,
Speaker 1: dollar max was just trying to lower and lower and
Speaker 1: lower through librwery March makes one of the best performances
Speaker 1: year to date, and in the space of three or
Speaker 1: four five days at all reverses. So you know, I
Speaker 1: think that's where you've got to be most cautious, the
Speaker 1: highly positioned em currencies. Yeah, and speaking to a lot
Speaker 1: of fixed income investors that want to play the e
Speaker 1: M local currency story and they want the effects exposure,
Speaker 1: there seems to be this real comfort taking the effects
Speaker 1: exposure in emerging markets alside. So I just wonder what
Speaker 1: are you advising clients around the MFFX now and has
Speaker 1: it changed over the last few weeks so a that time,
Speaker 1: strategists has actually been quite cautious on a lot of
Speaker 1: these currencies since the start of the year. Um, you
Speaker 1: have a lot of political risk coming up, both in
Speaker 1: Brazil and in Mexico with elections coming up this year.
Speaker 1: The problem with these currencies is that they're very expensive
Speaker 1: to short. You know, like you mentioned, fixed income investors
Speaker 1: take the currency risk because if you were too short,
Speaker 1: if you were to hedge the currency, you would be
Speaker 1: left with very little or any yield pick up at all.
Speaker 1: So UM, I think it pays to just be a
Speaker 1: little bit more careful with these very very heavily positioned
Speaker 1: DM currencies like max, and perhaps look for opportunities in
Speaker 1: areas which are less positioned, like Asia or email. To
Speaker 1: John's point, how do you play oil? I mean, we're
Speaker 1: whatever price, sure you want to call all of a sudden,
Speaker 1: seventy five dollars on Brent crude is a that's a
Speaker 1: hello quote we get to eighty, you know, essentially nobody
Speaker 1: called that, but ELSA. How do you play long oil?
Speaker 1: So one that we like, it might be a little
Speaker 1: obscure is long KNOCKI stocky two scandy currencies one against
Speaker 1: the other. Um Norwegian corona obviously exposed to oil. Swedish
Speaker 1: corona UM clearly not. And it's also a central bank play.
Speaker 1: So you know, they're all trades out there. I means, oh,
Speaker 1: use an email Sarah from Cincinnati. John Ferrell emails in
Speaker 1: a nacky stocky and and soca. She says she's g
Speaker 1: she says, you know she's quick. I'm looking at it. Okay.
Speaker 1: So so you're your based on your basic idea here
Speaker 1: is to go long Stockholm on there or about longslo.
Speaker 1: You're going longslow long slow shorts dot com. Yeah, yeah, Okay.
Speaker 1: Eliza MARTHINUSI joining us now Bloomberg's managing editor for finance
Speaker 1: in Europe and joining us on the phone. Really great
Speaker 1: to have you, Eliza, and just walk me through what
Speaker 1: we've learned about the new CEO and how the management
Speaker 1: is slightly taking shape at Deutsche Bank. Yes, John, I
Speaker 1: guess what's interesting about disappointment is that it's another Deutsche
Speaker 1: Bank Lifa, much like the new CEO as Christian serving
Speaker 1: and you know, principally with exposure to the domestic businesses.
Speaker 1: So there seems to be a bit of a pattern
Speaker 1: emerging in terms of the new leadership. Now, so what
Speaker 1: next for this bank? Because every single morning, whenever there's
Speaker 1: a Deutsche Bank story, it's usually the most read story
Speaker 1: on the Bloomberg And guess what it is again? As
Speaker 1: Deutsche Bank considers cuts to the Investment Bank and the
Speaker 1: presence in the United States. Eliza, where is this going
Speaker 1: and what are they looking at more specifically for their
Speaker 1: next move? Well, I guess what we're hearing now is
Speaker 1: that this project Columbo, which we have reporting about for
Speaker 1: a few weeks, is gathering pace. And so this review
Speaker 1: the Investment Bank and a closer analysis of where it
Speaker 1: is that they're making money and where it is that
Speaker 1: they perhaps ought to be treating is now coming to
Speaker 1: an end. And the picture that's emerging is that the
Speaker 1: US equities business use cash business is perhaps one where
Speaker 1: you know they will be retreating. As I was just
Speaker 1: talking to Anthony, and Sparta's at least Sparta's like in
Speaker 1: the alps of New Jersey. It's sort of outside New
Speaker 1: York City. Farther moved from Sparta by the way to
Speaker 1: the flat lands of New Jersey. He's now in the
Speaker 1: pine barrens. Something like that. You got read by John mcpheez.
Speaker 1: How many bodies are there in for Deutsche Bank in
Speaker 1: New York, I mean, how many people do they actually
Speaker 1: when we say at cash equity and all that, how
Speaker 1: many bodies are involved? Well, what we know from from
Speaker 1: some of The analysis that Toby Anus have done is
Speaker 1: that they include employee about ten thousand if I'm not mistaken.
Speaker 1: Really yes, but of course not all those will be
Speaker 1: in the equities business, and not all of those will
Speaker 1: be in the cash equities business. Um, what is that's jargon?
Speaker 1: Excuse me, time for a jargon alert with Eliza martin
Speaker 1: Newsy what's cash equities? What does that mean? So that
Speaker 1: is the trading of plain vanilla shares as opposed to
Speaker 1: the dating in, for example, derivatives that might be based
Speaker 1: on equities. It's like stuck, like IBM, you know whatever
Speaker 1: the trading do they do that from London? Then? I mean,
Speaker 1: what I don't understand is are they going to get
Speaker 1: out of the equity business? How can you do that? Well,
Speaker 1: we have seen players, you know, other banks that have
Speaker 1: retreated from the trading of stocks and certain regions. That
Speaker 1: is not unheard of, I mean. But the question that
Speaker 1: will remain is how much of the other business you're
Speaker 1: able to maintain. You can no longer go to client
Speaker 1: and say I can offer equity trading across the world precisely.
Speaker 1: What is the track record of other banks that have
Speaker 1: said we're getting out of this business because it's a
Speaker 1: it's a money loser. What's the track record? What we
Speaker 1: don't have as a clear track record of someone with
Speaker 1: such a presence pulling back. So, I mean, we've seen
Speaker 1: it in smaller players, but we don't have the track
Speaker 1: record with you know, a leading global farm pulling out
Speaker 1: of the bigger equity market. What do you see in
Speaker 1: earnings coming up? We've seen Banker and he's coming out.
Speaker 1: What is the state of the the EU banking the
Speaker 1: command your attention? So what we're expecting, based on what
Speaker 1: the analysts has been crunching, is that there will be
Speaker 1: an even wider split between the Europeans and the U
Speaker 1: S firms particular errors such as equity trading. Um. What
Speaker 1: we've seen so far is that you know, ub asked
Speaker 1: that reported yesterday did a little bit better than people expecting.
Speaker 1: Having said that, they did so by ramping up the
Speaker 1: risk taking their equity business. So one of the key matches,
Speaker 1: they're the value at risk more than doubled for equity trading.
Speaker 1: So it seems that the you know, they're trying to
Speaker 1: find ways to maintain that market shire Lisa, thank you
Speaker 1: so much at Lisa Martin News you're running all of
Speaker 1: our EU bank coverage. Just fabulous. It is wonderful to
Speaker 1: have with us. Now Michael Mayo of Wells Fargo Securities,
Speaker 1: and we're going to rip up the script here and
Speaker 1: do something a little different. Michael Mayo, I think this
Speaker 1: is great to walk through the gossip of a bank
Speaker 1: and in this case City Group, But I really want
Speaker 1: to outline who these people are in their paths to
Speaker 1: this moment, and of course looking at all the speculation
Speaker 1: of what Gary Cohne may do or not do. Let's
Speaker 1: begin with one of the great gentlemen of the business,
Speaker 1: which is Michael O'Neill. I first knew him like a
Speaker 1: Bank of Hawaii. He goes back to Continental Illinois, who
Speaker 1: was the present chairman of City Group, And what did
Speaker 1: he do for Mr Corbett in the bank? Well, just
Speaker 1: to put perspective on this, Tom, I am in Chicago
Speaker 1: for City Groups annual meeting. I go there to ask questions.
Speaker 1: It's the only chance one a year chance to ask
Speaker 1: questions board members. When their answers uh they can be
Speaker 1: held publicly accountable to So. Mike O'Neill was one of
Speaker 1: the grandfathers of bank restructuring. He was a master at
Speaker 1: ensuring adequate capital allocation. He was actually the chief nancial
Speaker 1: officer at Legacy Bank America, as you said, Bank of Hawaii,
Speaker 1: he was the CEO, and he's been chairman for most
Speaker 1: of this decade at City Group. So he's overseen an
Speaker 1: effort by City Group to not have the situation like
Speaker 1: they had during the financial crisis, you know, for the
Speaker 1: next generation. And so the de risking at City Group
Speaker 1: has been excellent. Uh. They've discarded some inefficient businesses and
Speaker 1: City Group is on a much stronger foundation, you know,
Speaker 1: facilitated by him, certainly implemented by the management. A chairman
Speaker 1: drives the board. Would you suggest within the speculation and
Speaker 1: that he pushed out Mr pandit years ago, you know, Tom,
Speaker 1: I think I was on your show some of those times,
Speaker 1: and you know it was my view that City Group
Speaker 1: needed a new CEO, and it was also the view
Speaker 1: of many investors that City Group needed a new CEO
Speaker 1: at the time. And so I think, you know, Mic O'Neil,
Speaker 1: chairman of City Group, you know, listen to the thoughts
Speaker 1: of investors and made up the town of mind parts
Speaker 1: for us what a chairman does versus an operating executives
Speaker 1: such as Mr Corbett Mike Mayo. I spend time with
Speaker 1: Mr Corbett at Davos on a panel. He is the
Speaker 1: buoyant football player from Harvard and folks I should point
Speaker 1: out that Mr Corbett is actually the real deal. He's
Speaker 1: not some kid that happened to play football. He was,
Speaker 1: by all acclaim, actually really really good. What's that relationship
Speaker 1: between a chairman and an operating bank officer handling two
Speaker 1: forty people. Well, Tom, I'd like to point out this
Speaker 1: is an exception among the large bank. City Group has
Speaker 1: a separate chairman, as you say, Mike O'Neill versus the
Speaker 1: CEO Mike Corebat. And this is a big issue of governments,
Speaker 1: not just for banks, but for all corporations. Do you
Speaker 1: need a chairman? What the chairman does? It's an extra
Speaker 1: check and balance on behalf of investors to ensure that
Speaker 1: the company is pursuing sustainable growth. Certainly City Group is
Speaker 1: the poster chopped. What can go wrong? You saw that
Speaker 1: over the last Well it's for the twenty year anniversary
Speaker 1: at just April six of the creation of City Group
Speaker 1: in its current form, and the stock is down. So
Speaker 1: if any bank, if any firm needs an extra set
Speaker 1: of eyes, it probably would be City Group. And the
Speaker 1: role of the chairman is to ensure the strategy is adequate,
Speaker 1: to ensure there's good succession plans, and to ensure that
Speaker 1: you're not taking excessive short term risk to get management
Speaker 1: paid that comes back and bite you later on. Can
Speaker 1: Jamie Diamond do both jobs? Well, look, that's best in class.
Speaker 1: JP Morgan is best in class among the global bold
Speaker 1: bracket banks, and so you know it's working. Look a
Speaker 1: question for governance though, is can at work not only
Speaker 1: under Jamie Diamond? And it is, But can it work
Speaker 1: under the next CEO at JP Morgan or Bank America
Speaker 1: or any of the other large banks. Let's turn to
Speaker 1: Gary Cone. Do you believe the speculation that he could
Speaker 1: be asked or assume the duties of chairman of City Group. Well,
Speaker 1: Mike O'Neil, chairman of City Group, has mandatory retirement at
Speaker 1: the end of this year. That will be my first
Speaker 1: question I asked at today's annual meeting at City Group.
Speaker 1: So one option is to promote my corbette chairman. Another
Speaker 1: option is to find somebody on the outside. Gary Cone
Speaker 1: seems available. There's other people the ex CEO of US
Speaker 1: Bancorps Richard Davis, Harvey Schwartz. But it's, you know, it's
Speaker 1: the board's imperative to do their homework, to look at
Speaker 1: the talent out there and see if they could benefit
Speaker 1: by somebody else. So why not Gary Cone or someone
Speaker 1: else like that to be chairman as city group? I'd
Speaker 1: like to hear their thoughts on And this is what
Speaker 1: I wanted to get to folks with that historic walks
Speaker 1: through we just did. We got the time this morning
Speaker 1: to do this right with Mike Mayo at the meeting
Speaker 1: in Chicago. Mike was fascinating. And I say this with
Speaker 1: a immense respect for Gary Khones public service to the nation.
Speaker 1: How do you move from the operating hands on goldman
Speaker 1: sacks guy two chairman duties? Does everybody do that? Or
Speaker 1: or is that too much of a hurdle for Mr
Speaker 1: Khane to do? I mean they got to start somewhere.
Speaker 1: They all started as a tough operating officer like Mr kohone,
Speaker 1: So is he eminently qualified to be chairman like well one?
Speaker 1: That thing I have Tom is, you know, we published
Speaker 1: our questions for the meeting today and asked large institutional investors.
Speaker 1: These are the largest owners of City Group in the
Speaker 1: other banks. What other questions do you have? What are
Speaker 1: your thoughts about some of our ideas And one of
Speaker 1: the ideas was, you know what about someone like Gary
Speaker 1: Cohen as chairman? And I'd say the feedback that we've
Speaker 1: gotten has been good. So the large investors do this
Speaker 1: as their day job. I think that which could be
Speaker 1: a positive addition. Now, having said that, we heard nothing
Speaker 1: about Gary Cohn and his intentions, but that's one of
Speaker 1: several people that seemed to makes sense the charts that
Speaker 1: I do my you know, my normalized charts on the
Speaker 1: banks back to two thousand seven two eight. Lehman, uh moment,
Speaker 1: Come on, they've lagged, they've lagged, they've lagged. Is there
Speaker 1: an urgency for City Group to really jump start share
Speaker 1: older return or is this going to be a long
Speaker 1: slug still from Mr Corbett, Well, look, that's one reason
Speaker 1: why I'm here in Chicago, Tom, I mean, I'm here
Speaker 1: for this purpose. City Group has made great progress. They
Speaker 1: now have double digit return on equity, return on tangible equity.
Speaker 1: That's first time since before this nancial crisis. Their risk
Speaker 1: is significantly less and the stock while it's underperformed this year,
Speaker 1: it did outperform last year. Having said that City Group
Speaker 1: has worst in class returns and worst in class stock
Speaker 1: price valuation. So if that's the case, what is the
Speaker 1: stock market saying. We think the stock market banking is
Speaker 1: City Group needs to up the intensity to another degree
Speaker 1: and you know, hold managements feet to the fire, and
Speaker 1: that partly is the role of a chairman. A couple
Speaker 1: of more questions here, Mike Mayon have got to go
Speaker 1: tangential to the idea of European bank walking away from
Speaker 1: the quote unquote cash equities business in New York. I
Speaker 1: have no idea how you walk away from the equity
Speaker 1: business in a given geography and maintain the further banking relationship.
Speaker 1: Can any bank, including deuts your bank, can they do that? Well? Tom,
Speaker 1: when I was on your show a few weeks ago,
Speaker 1: you know, I mentioned Goliath is winning David versus Goliath,
Speaker 1: and Goliath is winning in capital markets and to the
Speaker 1: large five banks are really outpacing the next five largest,
Speaker 1: which are Europeans. And so the European banks, whether it's
Speaker 1: Deutsche Bank, Barclay's um or Credit Sweeze had single digit
Speaker 1: r o E. So the way you walk away is
Speaker 1: if you have very low returns. That's a tough way
Speaker 1: to keep feeding a value destroying business. And that's in contrast,
Speaker 1: frankly to City Group's current returns which are double digit
Speaker 1: off the gate Morgan Bank, and so the larger US
Speaker 1: capital market banks are winning versus the European bank. Michael
Speaker 1: Mayo hugely valuable. Thank you for your time us in
Speaker 1: Chicago for the City Group meeting. He is with Wells Fargo.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keane before
Speaker 1: the podcast. You can always catch us worldwide. I'm Bloomberg
Speaker 1: Radio s