WEBVTT - Brean's Tchir Says Deutsche Bank Not a Systemic Risk (Audio)

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<v Speaker 1>Global business news twenty four hours a day at Bloomberg

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<v Speaker 1>This is a Bloomberg Business Flag, Tom Bloomberg World Handquarters.

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<v Speaker 1>I'm Charlie Pellett. That dal the SMP NZ stack all

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<v Speaker 1>declining right now. With the SMP down seven tenths of

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<v Speaker 1>one percent, banks are retreating amid growing concern that Deutsche

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<v Speaker 1>Bank's woes will spread to the global financial sector. Shares

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<v Speaker 1>of Deutsche Bank they're down six point seven percent now

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<v Speaker 1>at eleven forty eight. NEZ stacked down forty one, a

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<v Speaker 1>drop there of eight tenths of one percent down, Industrials

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<v Speaker 1>down one fifty eight, a decline there of nine tenths

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<v Speaker 1>of one percent. The tenure of four thirty seconds yield

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<v Speaker 1>one point five six percent, Gold up to thirty then

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<v Speaker 1>scaining two tenths of one percent of thirteen twenty one

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<v Speaker 1>and crude oil West Texas Intermediate advancing one point four

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<v Speaker 1>percent now up sixty five cents of arrel forty seven

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<v Speaker 1>seventy one On w T I, I'm Charlie Pellet. That's

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<v Speaker 1>a blue Bread business flash. Thank you very much, Charlie Pellett.

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<v Speaker 1>It's time now, for the e t F Report. It's

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<v Speaker 1>brought to you by Withem, Smith and Brown c P,

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<v Speaker 1>a s audit, tax and advisory services helping you and

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<v Speaker 1>your business be in a position of strength. Experience the

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<v Speaker 1>within way by visiting Withem dot com. Let's go to

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<v Speaker 1>Catherine Cowdery for our Exchange Traded Funds report. Smart beta

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<v Speaker 1>and factor e t s are becoming increasingly popular among

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<v Speaker 1>institutional investors. The latest foot see Russell survey of global

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<v Speaker 1>institutional asset owners shows seventy two percent of those who

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<v Speaker 1>responded are implementing or actively evaluating smart data indexes. That's

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<v Speaker 1>up from just last year. Ralph Agatha, Managing director of

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<v Speaker 1>research for foot See Russell North America, on how these

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<v Speaker 1>institutional investors are putting smart data and factor e t

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<v Speaker 1>s to work. In the low return environment now, a

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<v Speaker 1>lot of institutions are trying to to boost those returns,

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<v Speaker 1>and so looking at smart beta or factor products enables

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<v Speaker 1>them to actually maybe add something to that. Agathe are

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<v Speaker 1>on the most popular smart beta and factor e t

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<v Speaker 1>s among institutional investors this year. If you you look

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<v Speaker 1>at what's actually in place now where acid owners have

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<v Speaker 1>actually made investments, it does tend to be in low volatility,

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<v Speaker 1>value strategies, fundamentally weighted strategies. But when we ask questions

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<v Speaker 1>about what's being evaluated potentially for future use, you now

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<v Speaker 1>are seeing an increase in multi factor strategies. Agathur says

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<v Speaker 1>smart beta and factor et s can potentially replace hedge funds.

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<v Speaker 1>That's your Bloomberg ETF report. I'm Catherine Cowdery. You're listening

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<v Speaker 1>to Taking Stock with Kathleen Hays and Pim Fox on

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<v Speaker 1>Bloomberg Radio. After the central role that big banks played

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<v Speaker 1>in the last financial crisis, people could understandably nervous one

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<v Speaker 1>of the world's biggest banks finds itself with its stock

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<v Speaker 1>falling and people wondering about the future of the bank.

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<v Speaker 1>Will Deutsche Bank's problems rise to the level we saw

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<v Speaker 1>just some seven eight years ago. Peter Cheer joins us,

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<v Speaker 1>now a head of Macro stress a g at Breen

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<v Speaker 1>Capital here in our New York studio. So you watched

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<v Speaker 1>all the signals so closely, Peter, you watched stocks, you

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<v Speaker 1>watched derrivatives, the market. Is it really all that concerned yet? No?

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<v Speaker 1>I don't think it's that concerned. I think today was

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<v Speaker 1>one of those examples where we saw a headline hit

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<v Speaker 1>about collateral issues or people pullying some collateral out of

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<v Speaker 1>Deutsche Bank in terms of their prime brokerage business, and

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<v Speaker 1>that led to us all off in markets. I think

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<v Speaker 1>that was very quickly, you know, stopped and changed. And

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<v Speaker 1>when I look at this right now, I don't think

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<v Speaker 1>there's a systemic risk being posed by Deutsche Bank. Peter Scherer,

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<v Speaker 1>Let's put Deutsche Bank just to the side. Per minute,

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<v Speaker 1>you make any money less quarter this quarter, we've been

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<v Speaker 1>doing okay. One of the things we caught early on

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<v Speaker 1>was we shifted a lot of our investments to live

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<v Speaker 1>ard based, so we took advantage of this rise on

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<v Speaker 1>live or, we shifted to leverage loans, we shifted out

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<v Speaker 1>of high yield, so we've been a little bit more

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<v Speaker 1>on the conservative side and we've pushed away from the

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<v Speaker 1>yield based investment. Why did the liveboard rate move in

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<v Speaker 1>your favor? You know, I think there were two things

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<v Speaker 1>going on. One, there's all this regulation that's going into

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<v Speaker 1>full effect on the teenth of October, which means money

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<v Speaker 1>markets have less ability to you know, invest in anything

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<v Speaker 1>other than T bills. So there's a cost that's been

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<v Speaker 1>associated with that. I think the other part is ICE itself.

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<v Speaker 1>So ICE actually controls live or now and how it's

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<v Speaker 1>calculated in intercontinental exchange. Yes, um, And so what they've

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<v Speaker 1>been trying to do is make it more of a

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<v Speaker 1>market based benchmark rather than just banks submitting where they

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<v Speaker 1>want to. It's still is in that process, but as

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<v Speaker 1>it shifts, I think that will have a permanent fact

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<v Speaker 1>to make live or higher. It's a good thing for everyone, right,

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<v Speaker 1>No one wants to go through another round of lawsuits

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<v Speaker 1>associated with live or. Everyone wants to say that it's

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<v Speaker 1>a clean, very fair and market you know, neutral index.

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<v Speaker 1>And as that occurs, I think that's pushed live or

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<v Speaker 1>higher to get rid of some of the artificial lowness

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<v Speaker 1>of it. But of course, let's don't have library be

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<v Speaker 1>a problem. Let's don't have big banks get themselves in

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<v Speaker 1>trouble and have to pay millions of dollars of fines.

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<v Speaker 1>And of course that's one of the reasons why Deutsche

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<v Speaker 1>Bunk is under pressure and people are concerned. Why did

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<v Speaker 1>you just say that this is not anywhere near rising

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<v Speaker 1>to the level of systemic risk. So I think a

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<v Speaker 1>couple of things, first and foremost, any for all banks

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<v Speaker 1>we've seen a big pull back in terms of these

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<v Speaker 1>bilateral swap trades. A lot of that counterparty risk that

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<v Speaker 1>was extremely prevalent in two thousand and seven, two thousand

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<v Speaker 1>and eight, even in two thousand and ten eleven when

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<v Speaker 1>the European banking crisis was in turmoil, has been pulled back.

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<v Speaker 1>It's not exchange traded, so I think it's much better managed.

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<v Speaker 1>There's fewer potential surprises from that sort of a situation arising.

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<v Speaker 1>Then beyond that, I think the reality is that no

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<v Speaker 1>regulator will allow another Leman type moment. So we already

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<v Speaker 1>have the ECB steps in. They've already provided a lot

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<v Speaker 1>of funding to banks. They will provide more funding to banks.

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<v Speaker 1>No bank will get into trouble because they can't fund

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<v Speaker 1>themselves overnight or short term, because the central banks will

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<v Speaker 1>provide for that. And then I think the governments at

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<v Speaker 1>some level, they may extract a big pound of flesh

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<v Speaker 1>to do so, but at some level they will step

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<v Speaker 1>in to protect the institutions in the systemic risk. No

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<v Speaker 1>one wants to even test another Leman type moment. All right,

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<v Speaker 1>how just been trying to get this live ard number

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<v Speaker 1>for you, so you can just we can put it

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<v Speaker 1>into some kind of a context here, because you know,

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<v Speaker 1>taking a look at what's going on right now in

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<v Speaker 1>the bond market, you gotta you know you got buying right,

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<v Speaker 1>I mean you got buying at the long end, the

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<v Speaker 1>short end, I mean the thirty year is up nine

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<v Speaker 1>thirty seconds to point to seven. You take a look

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<v Speaker 1>at the tenure, we're talking about one point five five

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<v Speaker 1>also a bid higher four thirty seconds now looking at

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<v Speaker 1>liboru the fixes what one year live or at one

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<v Speaker 1>point five five right, So you're almost the same as

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<v Speaker 1>where you are on the tenure. So we've been looking

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<v Speaker 1>to get people into one year live or type of paper.

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<v Speaker 1>A lot of its home equity related and where you

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<v Speaker 1>get that pick up and you give up and you

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<v Speaker 1>don't have to take the interest rate risk. At the

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<v Speaker 1>same time, I think, from a personal standpoint, anyone out

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<v Speaker 1>there who has a home equity line of credit of

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<v Speaker 1>any form or any sort of arm should be looking

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<v Speaker 1>what it's benchmarks against. And if it is against libor,

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<v Speaker 1>you're now paying much more than maybe if you roll

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<v Speaker 1>this into fixed or some other or things. So I

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<v Speaker 1>think from a personal level, you're supposed to be checking, look,

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<v Speaker 1>is your home echory loan tied to live or if so,

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<v Speaker 1>maybe you want to re examine whether floating is the

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<v Speaker 1>right sense or whether you want to move to a

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<v Speaker 1>different floating rate benchmark. Of course, rates at a lot

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<v Speaker 1>of global forces that determine broadly where rates are heading

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<v Speaker 1>central banks. But I'm particularly interested in your thoughts on

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<v Speaker 1>OPEC because you, like others, are maybe a bit skeptical

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<v Speaker 1>of where that's going. Yes, I think they had to

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<v Speaker 1>announce some sort of plan. I think they felt the

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<v Speaker 1>pressure to announce a plan because they wanted to control

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<v Speaker 1>this recent slide again that we're seeing in oil. I'm

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<v Speaker 1>sure also they wanted to detract a little bit from

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<v Speaker 1>the fact that, you know, the U S was embroiled

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<v Speaker 1>in legislation that would allow victims to sue Saudi Arabia.

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<v Speaker 1>So I can't believe that it's a coincidence that they

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<v Speaker 1>announced this plan at the same time that's coming out.

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<v Speaker 1>Will they live up to these standards might don't I

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<v Speaker 1>doubt it over time, right, I think their whole goal

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<v Speaker 1>is to keep oil supported, and my view from a

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<v Speaker 1>macroeconomic standpoint has been that oil will somewhere be in

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<v Speaker 1>that forty to fifty five dollar range this year, and

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<v Speaker 1>I think this just adds to that support. Maybe you'll

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<v Speaker 1>trade up a little bit more. But as soon as

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<v Speaker 1>it gets higher, it gets closer to fifty, we'll see

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<v Speaker 1>selling pressure come in. We'll see cheating within the OPEC nations.

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<v Speaker 1>I think as it gets down to forty, supply comes

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<v Speaker 1>off the US and the OPEC members can say the

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<v Speaker 1>right things to push it back. Trades you wish you

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<v Speaker 1>had made during the quarter. You know, I was too

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<v Speaker 1>pessimistic on the treasury market. I did not think the

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<v Speaker 1>treasury market would rally to these new levels we backed

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<v Speaker 1>up to, you know. You know, I think I'm seeing

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<v Speaker 1>signs that the central banks are pulling back a little

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<v Speaker 1>bit from KIWI, that maybe even the Bank of Japan's

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<v Speaker 1>hinting at pulling back from KWI or seeing what way,

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<v Speaker 1>like they're not buying something that they might buy less

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<v Speaker 1>of or just stay the same amount in a world

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<v Speaker 1>where everyone's been conditioned to see more and more buying,

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<v Speaker 1>and I thought, we're seeing a little bit of signs

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<v Speaker 1>of inflation, a little bit more hockey fed. So that's

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<v Speaker 1>one thing I've definitely missed is what was the October fourteenth,

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<v Speaker 1>the note that you want to offer, just in terms

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<v Speaker 1>of because we've been talking about that on taking stock

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<v Speaker 1>for a while. It has to do with money market

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<v Speaker 1>funds that many people treat as if they are bank accounts,

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<v Speaker 1>but they are not by any means bank accounts. They

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<v Speaker 1>are not by any means bank accounts. Having said that,

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<v Speaker 1>so this is all about breaking the buck, and there's

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<v Speaker 1>all sorts of rules now to ensure that money market

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<v Speaker 1>funds can have some else variations and value. I have

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<v Speaker 1>not done the work. I saw some good work. I'll

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<v Speaker 1>try and dig back up. But someone showed to me

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<v Speaker 1>that the worst money market fund during the time the

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<v Speaker 1>crisis would have had a price of like spot nine seven,

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<v Speaker 1>so it would have lost maybe three cents on a

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<v Speaker 1>market market basis, and that's back when you were getting

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<v Speaker 1>four percent yields, so it's probably less than three weeks

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<v Speaker 1>or a month's worth of interest. So some of this, again,

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<v Speaker 1>I think we're trying to fix problems that were never

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<v Speaker 1>as big of a problem, and I am concerned that

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<v Speaker 1>the solutions are going to cause new problems that we're

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<v Speaker 1>not going to be prepared for. How about another date

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<v Speaker 1>coming up November eight. There's a lot of analysis being

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<v Speaker 1>done in notes that saying you know, you better be ready,

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<v Speaker 1>put your head down, getting a very defensive position because

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<v Speaker 1>there could be a lot of volatility. And I think

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<v Speaker 1>people don't just mean stock depending on who gets elected,

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<v Speaker 1>you know, I think that's a risk. I think we

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<v Speaker 1>see that every election cycle, traditionally VIX actually rises coming

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<v Speaker 1>into October of or sorry into during October of election cycles.

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<v Speaker 1>There's a part of me that wants to be a

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<v Speaker 1>little bit more optimistic here that we are more likely

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<v Speaker 1>to get a surprise. And as a Canadian, I actually

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<v Speaker 1>don't vote um, so I'm not opinionated in terms of that.

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<v Speaker 1>I would like to see if the Democrats win a

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<v Speaker 1>little bit pullback on the rhetoric towards regulation. I think

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<v Speaker 1>we actually do need less regulation both in our industry

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<v Speaker 1>and across the board, and I would like to see

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<v Speaker 1>that to be the surprise there. And ultimately, you know,

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<v Speaker 1>there's that old joke about the scorpion the frog, and

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<v Speaker 1>the scorpion stings the frog while giving them a ride across.

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<v Speaker 1>That's what course scorpions do, they staying. While Donald Trump

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<v Speaker 1>is a builder, ultimately the thing that he knows how

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<v Speaker 1>to do is borrow money and build, so I think

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<v Speaker 1>we'd be Some people will actually be surprised by his

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<v Speaker 1>ability to get infrastructure spending going all right, thank very much.

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<v Speaker 1>Peter Cheer. He is the head of macro strategy at

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<v Speaker 1>Bring Capital. We're going to take you through to the close.

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<v Speaker 1>Next on taking stock and this is Bloomberg. H