Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and a Marie Hordern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
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Speaker 2: Bloomberg Terminal and the Bloomberg Business App. Joining usna's Tiffany
Speaker 2: Wilding of Himco. Tiffany, Welcome to the program. It's there
Speaker 2: a stagflationary light mix coming together here on the data
Speaker 2: that you see.
Speaker 3: Yeah, so I think we're getting what we expected on inflation.
Speaker 3: We're getting some pass through of tariffs. It looks like
Speaker 3: it's predominantly the firming categories are in goods, and otherwise
Speaker 3: things look at a little bit better. I think the
Speaker 3: more concerning news from the data this morning is the
Speaker 3: jumping claims. It's been relatively contained despite the labor market,
Speaker 3: you know, really slowing to a halt over the last
Speaker 3: year and now the jump today looks a little bit
Speaker 3: more concerning, like we're moving out of of just a
Speaker 3: period of you know, very little activity or very little
Speaker 3: hiring or firing, you know, to potentially some more separations.
Speaker 3: And that's certainly that's going to be super concerning. I
Speaker 3: think for the Federal Reserve, you know, I agree with
Speaker 3: Mike McKee. I think over all the data this morning,
Speaker 3: I think confirms a twenty five basis point cut. There's
Speaker 3: probably going to be discussion around fifty, although that's not
Speaker 3: our base case, you know, and I think there's there's
Speaker 3: reasons if you continue to see this kind of momentum
Speaker 3: on the labor market, you know, to get several more
Speaker 3: cuts in the back half of the year.
Speaker 1: Tiffany, What I find interesting about the market reaction is
Speaker 1: that yes, so picking up on this idea that claims
Speaker 1: came in the wrong kind of upside surprises. John was
Speaker 1: saying that the trailing average is picking up at a remarkable,
Speaker 1: alarming speed, but that longer term, we're seeing the tenure
Speaker 1: yield now break below four percent for the first time
Speaker 1: this year. I mean, we're looking at a tenure that
Speaker 1: is also responding. Are you changing your longer term trajectory
Speaker 1: for US growth prospects and the heels some of these
Speaker 1: labor market revisions and the sort of negativity that we're
Speaker 1: seeing from the claims.
Speaker 3: Well, you know, I think that you know, just the
Speaker 3: fact that the US treasury market continues to be a
Speaker 3: hedge for for macroeconomic risks, for riskier asset volatility, you know,
Speaker 3: I think is why you're seeing movements, you know, in
Speaker 3: the longer end of the interest rate curve. You know,
Speaker 3: I think when when we look at you know, sort
Speaker 3: of valuations, you know, we think kind of intermediate sector
Speaker 3: looks attractive here, does still provide risk you know against
Speaker 3: downside protection, you know, And it's something that you know
Speaker 3: that we've we've been very focused on. So it's not
Speaker 3: surprising necessarily to me that you're seeing it in longer
Speaker 3: data and interest rates. You know. I mean, I think
Speaker 3: I think overall on the you know, on the economy side,
Speaker 3: you know, we are really entering this kind of period
Speaker 3: of weakness, potential weakness. You know, we'll see some fiscal
Speaker 3: supports that are offsetting the tariff effects, but they don't
Speaker 3: kick in until you know, the beginning of twenty twenty six,
Speaker 3: you know, call it February March, when when consumers are
Speaker 3: starting to get really big refunds from retroactive tax cuts.
Speaker 3: But until then, we're really kind of in this period
Speaker 3: of weakness. And to us, the question is some of
Speaker 3: these smaller and mid sized businesses that are really having
Speaker 3: to shoulder the effects of tariffs, maybe they're not getting
Speaker 3: as much benefit from the one big beautiful bill tax cuts.
Speaker 3: You know, can they really hold on here without firing people?
Speaker 3: You know, and it seems like, you know, maybe there's
Speaker 3: there's more concern around that, you know, as as we
Speaker 3: as we're as we're watching the data.
Speaker 2: Tiffany wild think of PIMCO. Definitely great to catch up
Speaker 2: with you, and you've got to catch up with clients too,
Speaker 2: So thanks for making sign for us this morning. Let's
Speaker 2: move in the bond market. This data is good for bonds,
Speaker 2: it's questionable for equities. Equity is just about unchanged. We'll
Speaker 2: see if this move sticks. But at the front end
Speaker 2: of the curve we're down six basis points, and as
Speaker 2: Lisa pointed out, we're down across the curve and this
Speaker 2: is largely because of the way the Federal Reserve chairs
Speaker 2: set things up coming into September. He basically told us
Speaker 2: the following that you could have one off effect on inflation,
Speaker 2: but not all at once, and the labor market data
Speaker 2: was concerning him, Which is why we're seeing yields down
Speaker 2: this morning, because there's a much more emphasis on what
Speaker 2: we're seeing on claims.
Speaker 1: And it seems like the idea that you're seeing a
Speaker 1: pickup in layoffs, to Tiffany's point, raises the question of
Speaker 1: how companies are adapting to some of the higher input costs.
Speaker 1: I was looking at some of the specifics here in
Speaker 1: the CPI print. Airline fare is up five point nine
Speaker 1: percent on the monthly basis, So again it talks about
Speaker 1: the K shaped economy and how the FED is trying
Speaker 1: to cater to people who cannot afford to pay that
Speaker 1: those who can are.
Speaker 2: David Kelly of JP Milgan Asset Management standing by David,
Speaker 2: you've been looking at the data. Just when your first
Speaker 2: reaction please, I.
Speaker 4: Think, both of regard to the CPI and with regard
Speaker 4: to the claims, everyone should sort of take a deep
Speaker 4: breath and not overreact to them on claims. Key thing
Speaker 4: to think about is last week was a week that
Speaker 4: contained a Monday bank holiday or a Monday a bank
Speaker 4: holiday called in the UK, but a Monday holiday labor day.
Speaker 4: The unemployment claims data are notoriously bad in a week
Speaker 4: that contains a public holiday. They've just had never figured
Speaker 4: out how to seasonal adjust that properly. So I think
Speaker 4: that's an overshoot on claims, and I would not be
Speaker 4: surprised to see that number come down next week. Now,
Speaker 4: it still fits into a mosaic of a slowing labor market.
Speaker 4: I don't deny that I think the economy is gradually
Speaker 4: grinding into a halt here, but I think that overstates
Speaker 4: the deterioration in the labor market. And then similarly on
Speaker 4: the on inflation, these numbers are very close to in
Speaker 4: line with what we thought. The big surprises were probably
Speaker 4: an increase in motor vehicle repair costs two point four
Speaker 4: percent month over month, and then as East was just saying,
Speaker 4: a five point nine percent increase in airline fairs. But
Speaker 4: remember they felt very sharply over the course of the
Speaker 4: summer as the airline travel was down. Now it's picking up
Speaker 4: again in this case shaped economy, So overall the economy
Speaker 4: is still moving forward slowly. Inflation's gradually going up. The
Speaker 4: economy is gradually slowing down. That's what That's what we
Speaker 4: thought tariffs are going to do. It's going to slow
Speaker 4: growth and it's going to add to inflation. But I
Speaker 4: don't think it's nearly as dramatic as either of these
Speaker 4: numbers suggest this morning.
Speaker 2: Well, David, let's just stay on the labor market story,
Speaker 2: because that seems to feel that the market is moving on,
Speaker 2: at least initially. Do you think the claims data maybe
Speaker 2: overstates the weakness. Do you think they step down in
Speaker 2: payrolls growth overstates the weakness too.
Speaker 1: No.
Speaker 4: I mean we saw the big down revision yesterday that
Speaker 4: or earlier this week. That was not a surprise. No,
Speaker 4: I mean there's there's weakness that The thing is, as j.
Speaker 4: Pallace pointed out, it's a very curious kind of labor
Speaker 4: market because we're having a huge reduction in labor supply
Speaker 4: at the same time. So this does not speak of significant,
Speaker 4: you know, labor markers weakness. I mean, it's still a
Speaker 4: tight marker. It's still hard to find good people. But
Speaker 4: I do think it's it reflects the fact that people
Speaker 4: that businesses don't want.
Speaker 5: To hire here.
Speaker 4: I don't think there's a huge ongoing jump in layoffs,
Speaker 4: but it's getting harder and hard to find a job
Speaker 4: because businesses are just frozen because they don't know what
Speaker 4: the playing field is going to be with regard to
Speaker 4: tariff's going forward. And I think that is, you know,
Speaker 4: that's the biggest thing that I think.
Speaker 5: People are ignoring here, David.
Speaker 2: A lot of people are hoping that things pick up
Speaker 2: in twenty twenty six, that the growth story gets better
Speaker 2: fueled by the right cuts we're about to see. Speaking
Speaker 2: of things, maybe that we underappreciate something you've been talking
Speaker 2: about for a while, this tax bill, the kind of
Speaker 2: stimulatory effect it might have in twenty six. Could you
Speaker 2: just sort of outline that for us this morning.
Speaker 4: Absolutely really important. All these new tax cuts, getting rid
Speaker 4: of the tax on tips over time, increases, standard deduction
Speaker 4: and so forth, the sole tax break, all of them
Speaker 4: were made retroactive to January one, twenty twenty five, but
Speaker 4: the irs is not changed. With holding schedules, that means
Speaker 4: that there's going to be basically a full year's worth
Speaker 4: of refunds on all of those tax breaks kick in
Speaker 4: in the first few weeks of twenty twenty six, or
Speaker 4: first few months or twenty twenty six. That is the
Speaker 4: equivalent of big stimulus checks last year. The average incompact
Speaker 4: three fund is about thirty two hundred dollars. This next
Speaker 4: year in twenty twenty six, we think it's going to
Speaker 4: be over four thousand dollars, seventy percent of households receiving that.
Speaker 4: That is like one big stimulus check, one big lump
Speaker 4: of sugar put into the economy early next year, so
Speaker 4: we can get to the first quarter without slipping into recession.
Speaker 4: There is you know, there'll be some stimulus there, but
Speaker 4: I do think that between now and then the economy
Speaker 4: is going to be slowing in the fourth quarter.
Speaker 2: Stay with us, mul Bloomberg Surveillance coming up after this,
Speaker 2: let's tand to tack Oracle shares hiring the free market
Speaker 2: after gaining the most since nineteen ninety two. On an
Speaker 2: aggressive outlook, vadimas AzaC of the global head of Digital
Speaker 2: Infrastructure at KKR right in the following we're living through
Speaker 2: the largest build out since the Interstate Highway system, a
Speaker 2: ten to fifteen trillion dollar wave to rewire the global
Speaker 2: economy around power, compute, and activity. Vatama joins es now
Speaker 2: for Marko Monitor, Good morning, it's going to see you.
Speaker 2: Thanks for being here. Let's talk about these demand numbers.
Speaker 2: The demand we're seeing is real. Yes, yeah, there is
Speaker 2: still this conversation about a monster misallocation of resources coming together.
Speaker 2: What do you stand on there?
Speaker 6: It is a really the right question to ask. We
Speaker 6: don't see it, honestly. I think if you look at
Speaker 6: the fundamental spent relative to any other indicators from a
Speaker 6: bubble stand perspective, right, I mean, often comparisons and drawn
Speaker 6: to the dot com bubble and you know, other housing bubble,
Speaker 6: et cetera, it doesn't appear so and all of that
Speaker 6: compute that is ultimately being procured is getting consumed and deployed.
Speaker 6: I think the question that you're sort of leading into
Speaker 6: is is there ultimately a business case for AI to
Speaker 6: be made? And I think there are a lot of
Speaker 6: great data points that would suggest, you know, adoption is increasing,
Speaker 6: use cases are increasing, is enabling it? Tromento, There's amount
Speaker 6: across the economy and society generally speaking, but there isn't
Speaker 6: the killer app so to speak, that would suggest that
Speaker 6: the ROI may be justifiable.
Speaker 2: I think the issue for many people as well who
Speaker 2: experienced the dot com bubble, the bust, and the boom
Speaker 2: that followed. Really afterwards, it took a long time to
Speaker 2: find out who the winners were. And to begin with,
Speaker 2: you had to have everyone throwing money at the wall.
Speaker 5: To see what sticks.
Speaker 2: And if we go through this process now there are
Speaker 2: risks involved in that. How do you navigate some of
Speaker 2: those risks at the moment it is?
Speaker 6: It is again another excellent question which you would expect
Speaker 6: on a morning show from you guys. But I think
Speaker 6: you know, our approach at KKR has really been pretty
Speaker 6: simple on discipline, right. I think we focus. We clearly
Speaker 6: are one of the leaders in digital infrastructure and in
Speaker 6: the power ecosystem totality about sixty five billion dollars of
Speaker 6: capital that we've invested in that. Over the last few years,
Speaker 6: we have seen the convergence of those two mega themes,
Speaker 6: which is really interesting. I think we talked about this
Speaker 6: on the previous show, and I think it's now really applicable.
Speaker 6: You're seeing data centers are no longer about rex, it's
Speaker 6: about watts and megawatts of power compute right, They're AI factories,
Speaker 6: And I think that convergence is really in place. So
Speaker 6: I think for us so we've been focusing on core
Speaker 6: and core plus markets for most of our compute. This
Speaker 6: is where ultimately data is being generated and processed by users.
Speaker 6: We focus on high quality customers. We do not chase
Speaker 6: yield on very speculative business models. I think we focus
Speaker 6: on fungibility in the use of these assets. It may
Speaker 6: have been enterprise five years ago, today it's cloud, tomorrow, AI,
Speaker 6: whatever may come next. And we ultimately are not making
Speaker 6: bets on field of dreams sites. It's really trying to
Speaker 6: focus on things that if there is a contract high
Speaker 6: quality counterparty, we start building and deploying capital against that
Speaker 6: that Maybe all of that seems logical, but I'm not
Speaker 6: sure that's universally adopted in the industry, and I think
Speaker 6: we differentiate ourselves in that approach.
Speaker 1: I guess one of the fears in John was alluding
Speaker 1: to it is this idea that everyone gets incredibly leveraged
Speaker 1: to a couple of key names and makes really big
Speaker 1: bets for a long term development at a time where
Speaker 1: we don't have a great deal of visibility into how
Speaker 1: this is going to be adapted, how this is going
Speaker 1: to be really transforming the economy, and frankly, the way
Speaker 1: that we live our everyday lives. So how do you
Speaker 1: hedge that concentration risk at a time where what you
Speaker 1: offer is the balance sheet to really deploy to these
Speaker 1: big blue chip players.
Speaker 6: Yeah, I think you're right. It is almost a Barbell strategy.
Speaker 6: I think if you look at the market and if
Speaker 6: you look at the performance and the haves and have nots,
Speaker 6: it's been sort of that Barbell view. And certainly the
Speaker 6: mag seven are such an incredible driver of the growth.
Speaker 6: Thirty percent of the US spent on AI is driven
Speaker 6: by those three names. Seven hundred billion dollar capex thirty
Speaker 6: five percent a year over year. That's, by the way,
Speaker 6: seven hundred billion is equivalent to the entire spend for
Speaker 6: the fiber buildout in the nineties and we're now spending
Speaker 6: that on an annual basis, which is sort of incredible
Speaker 6: to think about the quantum of dollars. And so I
Speaker 6: think if you look at that, certainly needed the Meg seven,
Speaker 6: all of those names, pristine balance sheets, incredibly free cash
Speaker 6: flow generative.
Speaker 7: Right.
Speaker 6: I think we are looking at certainly trading multiples and
Speaker 6: p racials and spend, but they're not overspending relative to
Speaker 6: the free cash flow that they're generating from either their
Speaker 6: existing core businesses or the convergence of AI integrated within
Speaker 6: their sort of existing business models. So you're right, you
Speaker 6: have a customer concentration, but the customer concentration is in
Speaker 6: fact with the highest quality names that you probably want
Speaker 6: to do if you're investing in infrastructure.
Speaker 1: From our point of view, where's the concentration investment when
Speaker 1: it comes to data centers versus energy production? And this
Speaker 1: is another sort of key question at a time where
Speaker 1: people are building data centers as quickly as they can
Speaker 1: with a question around deep seek and whether we can
Speaker 1: do this more efficiently with smaller data centers and less energy,
Speaker 1: and then we don't have the energy to actually fuel
Speaker 1: those data centers that are getting built.
Speaker 5: So where do you sort of stack up on sort of.
Speaker 1: The dissonance between the development of those.
Speaker 6: And this is why it's such a wonderful time to
Speaker 6: really be alive and doing what we're doing. And certainly,
Speaker 6: you know, an infrastructure investor wouldn't think about being in
Speaker 6: sort of such a growth industry, but it's really incredible.
Speaker 6: I think if you look at a couple of stats,
Speaker 6: we certainly have had stagnated sort of demand growth in
Speaker 6: the US and the power industry for the best twenty years.
Speaker 6: That is now a massive inflection point. Globally, the expectation
Speaker 6: is that data centers will consume something like ten percent
Speaker 6: of global power in the next ten years. By the way,
Speaker 6: that's equivalent to India by two thousand and thirty. So
Speaker 6: if data centers were a country will be third after
Speaker 6: China and US. So certainly power consumption is increasing. There
Speaker 6: are a couple of dueling factors. You do have efficiency
Speaker 6: which is certainly driven by chip manufacturings by algorithms, which
Speaker 6: is incredible. That's ultimately driving the cost of the delivery
Speaker 6: of the compute. So just in eighteen months, if you
Speaker 6: think about the tokens which are being used for I
Speaker 6: think of it, you know, Training for America we talked
Speaker 6: about earlier, it's calories for AI. Token price has gone
Speaker 6: has decreased two hundred eighty x over the last eighteen months,
Speaker 6: which means the adoption is increasing. If you look at
Speaker 6: about token usage has increased four and a half thousand percent,
Speaker 6: So certainly usage is increasing. I think if you just
Speaker 6: go back to your question, I think most of the
Speaker 6: capital today is being spent on data centers, and then
Speaker 6: there is an increased capex being put in grid and
Speaker 6: certainly power generations. So we're starting to see that trend
Speaker 6: line actually converging. But in terms of growth on an
Speaker 6: adjusted basis, it's really been those two that are probably
Speaker 6: the biggest drivers of the.
Speaker 8: Capex is deregulation and getting rid of some of the
Speaker 8: red tape. What comes when when you have to make
Speaker 8: these AI data centers actually keeping up though with that
Speaker 8: capex fend you're.
Speaker 6: Seeing is it is really interesting because sort of from
Speaker 6: a policy perspective, there's two dueling factors that are.
Speaker 5: The collision course.
Speaker 6: One is when the AI race globally, and the second
Speaker 6: is protect the rate payers, which you know in the
Speaker 6: US over the last five years we've seen about twenty
Speaker 6: five percent increase in power price. And I think there
Speaker 6: are a couple of things that are happening and including
Speaker 6: I think elimination of some of the red tape and
Speaker 6: streamlining of approvals, and I think those are great things
Speaker 6: by the administration to help enable the build out of
Speaker 6: this infrastructure. You can just turn power on overnight. It's
Speaker 6: a four or five year cycle to build this infrastructure,
Speaker 6: and I think that is a great step towards that.
Speaker 6: Now we're even cutting through the red tape that is
Speaker 6: helping solve things three four or five years from now.
Speaker 6: We have a gap in the next twenty four to
Speaker 6: thirty six months. So what can be done. I think
Speaker 6: we can optimize the grid. There is dynamic line rating,
Speaker 6: there's investment in superconducting cables which minimizes the loss. There
Speaker 6: is sort of a There are all sorts of innovative
Speaker 6: solutions like the one we just deployed in Texas, where
Speaker 6: you collocate a data center with a power plant. You
Speaker 6: have a way to effectively augment and draw electrons from
Speaker 6: the power plant. You have a way to support the
Speaker 6: grid in cases of emergency. I think innovative solutions like
Speaker 6: that will help bridge us into the next phase when
Speaker 6: we see this massive development cycle of most likely natural
Speaker 6: gas power plants, and of course at some point we'll
Speaker 6: talk about nuclear and nuclear will be five ten years
Speaker 6: from now. I think that's the long game. From a
Speaker 6: carbon carbon efficiency and just a general efficiency of power generation.
Speaker 1: There's a feeling on Wallstreet right now. They're scared of this.
Speaker 1: They're saying, maybe it's gotten over its skis you travel
Speaker 1: to Silicon Valley and there's just absolute object euphoria. Can
Speaker 1: you bridge that gap the idea that everyone's trying to
Speaker 1: poke holes over in New York and in San Francisco,
Speaker 1: people are just running around saying we can't invest enough.
Speaker 6: It's yeah, it is interesting. I do spend time on
Speaker 6: the West Coast quite frequently, and it's incredibly energizing when
Speaker 6: I'm there and coming back and you sort of have
Speaker 6: this wet blanket put a new in terms of all
Speaker 6: the skepticism. But I do think that there is a
Speaker 6: bridge there. I think there is now. I think a
Speaker 6: bridge and understanding of certainly, I think the technology mindset
Speaker 6: of you know, move fast and break things has to
Speaker 6: come and somehow be bridged in terms of building of
Speaker 6: this infrastructure, which is really a very different investment cycle,
Speaker 6: very different risk cycle, and a very different cost of
Speaker 6: capital cycle. And so I do think that we're helping
Speaker 6: bridge that gap and saying this is incredibly obviously exciting,
Speaker 6: but you have to obviously capitalize as.
Speaker 5: An efficient way. And by the way, the quantum of.
Speaker 6: Dollars that we're just discussing, whether it's ten or fifteen
Speaker 6: trillion dollars, the annual spend requires all sorts of different innovative,
Speaker 6: creative and sort of a holistic solutions to help build
Speaker 6: out this infrastructure. I mean, Oracles earnings yesterday, which we
Speaker 6: touched on earlier this morning, were just terrific. It's incredible
Speaker 6: to see that. So you have a half a trillion
Speaker 6: dollars of backlog, and then the news this morning that's
Speaker 6: another three hundred billion of backlog. The numbers are starting
Speaker 6: to sort of seem silly. We're moving from billions to trillions.
Speaker 6: And you know, that amount of infrastructure will require many
Speaker 6: many gigouts of power, many many gigouts of compute. And
Speaker 6: that's why you see, you know, or power companies move
Speaker 6: up on the news. You see the chip manufacturers move
Speaker 6: up on the news, you see data centers move up
Speaker 6: on the news. Because it just suggests that we're still
Speaker 6: in a very early evenings of that investment cycle that
Speaker 6: is taking place.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: Let's turn to Thomas Show of KPW, a Stifel company,
Speaker 2: for more. Tom, welcome to the program.
Speaker 5: Good good morning, good morning.
Speaker 2: Before we talk about this, let's just talk about what
Speaker 2: day it is you were headquartered in the World Trade
Speaker 2: Center lost sixty seven people that day. I want to
Speaker 2: spend a few moments with you just to think about
Speaker 2: what that day still means to you today, and how
Speaker 2: we ensure that this generation that's now coming on to
Speaker 2: Wall Street who weren't alive that day hadn't been born,
Speaker 2: how we make sure they don't forget either.
Speaker 7: Correct, thank you. Yes, we think it's very important to
Speaker 7: not forget. We said that day we were never going
Speaker 7: to forget, and there have been a lot of big
Speaker 7: pieces to what never forget means, because never forget means
Speaker 7: different things to different people. One of the things that
Speaker 7: we're doing is making sure that nine to eleven isn't
Speaker 7: defined just by the people who flew airplanes into our building. Instead,
Speaker 7: I'm working with a group nine to eleven Day dot org,
Speaker 7: which is a group that KBW helped found to think
Speaker 7: about the resilience and the goodwill and the rebuild and
Speaker 7: honor the victims of that attack with that spirit. So
Speaker 7: we worked with Congress and in two thousand and nine
Speaker 7: we got Congress to pass a law making nine to
Speaker 7: eleven a national day of service. And we think today
Speaker 7: they're going to be thirty three million Americans who participate
Speaker 7: in the Day of service to remember the victims of
Speaker 7: nine to eleven and to remember the resilience and to
Speaker 7: remember the goodwill that it took to rebuild. There is
Speaker 7: one service project in particular that we support. We're going
Speaker 7: to be in twenty four cities in America today. We're
Speaker 7: going to pack close to nine million meals for those
Speaker 7: who are food insecure. We have over eight hundred corporate customers,
Speaker 7: it's our corporate partners. In this next year, our aim
Speaker 7: is to try to double that for the twenty fifth
Speaker 7: recognition and anniversary of nine to eleven. To continue to
Speaker 7: talk about what it took for America to.
Speaker 5: Rebuild after the attack.
Speaker 7: So you don't end up with nine to eleven being
Speaker 7: two paragraphs in a history book.
Speaker 5: We're not going to let that happen.
Speaker 2: You'll contribute in to a lasting legacy and making sure
Speaker 2: it's a positive one. So I think we're all right
Speaker 2: behind you, sir, and thank you for being with us
Speaker 2: today to talk about it. We need to talk about
Speaker 2: the broader business world too, need to talk about what's
Speaker 2: happening with banking activity. Things are bouncing back and you
Speaker 2: can see that and hear it in the words of
Speaker 2: Jane Fraser of City, you seeing that too.
Speaker 7: So I've been a guest on your show many times
Speaker 7: over the last couple of years. The factors that were
Speaker 7: headwinds are now tailwinds. I'm about as optimistic on the
Speaker 7: fundamentals of the banking sector and financial services in general
Speaker 7: as I've been in several years. There's revenue growth, there's
Speaker 7: earnings share growth. We're looking for ten percent this year
Speaker 7: and next. The economy is okay enough, So that's all
Speaker 7: very bullish.
Speaker 5: And then there's the other stuff.
Speaker 7: Which is, rather than regulatory attention slowing down financial services,
Speaker 7: it's now resetting to where it typically is, which is
Speaker 7: one that's more supportive of growth. So the consolidation is
Speaker 7: going to restart in the industry, and the other things.
Speaker 7: I heard you talking earlier about how the market's at
Speaker 7: an all time high six straight days. I think in
Speaker 7: the NASDAC of records, the reality is you don't have
Speaker 7: the downside risk and the valuation for the financials.
Speaker 5: While the stocks have done well, they're still well.
Speaker 7: Far away from their historic norms. There still is a
Speaker 7: lot of valuation upside in the financials. And my experience
Speaker 7: is is that when earning's estimates are going up, profitability
Speaker 7: is improving, the stocks tend to do well.
Speaker 5: So a lot to unpack there.
Speaker 1: I want to just hone in on the idea of
Speaker 1: the mergers and acquisitions we have seen some of those
Speaker 1: announced in recent days, the PNC one coming just a
Speaker 1: couple of days ago. Where are we in this process?
Speaker 1: How much more of that do you see in six months?
Speaker 7: So my opinion is we are approaching the endgame. There
Speaker 7: are one hundred and forty banks in America north of
Speaker 7: ten billion in assets. Ninety six percent of the banks
Speaker 7: in America are below ten billion, our community banks ninety
Speaker 7: six percent of any numbers almost all of it.
Speaker 5: There are very few banks above ten billion.
Speaker 7: And I think the bigger banks are beginning to think
Speaker 7: about what the endgame's going to look like, and they're
Speaker 7: being very strategic and thinking about these acquisitions. In the
Speaker 7: previous administration, it had an antim and a bias and
Speaker 7: wouldn't even give an answer to bank merger applications unless
Speaker 7: they were forced to. Now the administration's gone back to
Speaker 7: what historically had been the case, and they will give
Speaker 7: you an answer to a merger application. That's all the
Speaker 7: industry needed to restart the consolidation wave and where it's
Speaker 7: underway right now.
Speaker 1: So what does it look like in the end? Is
Speaker 1: it just a couple of sort of the megas and
Speaker 1: then this sort of media megas, anyone else.
Speaker 7: To take the funnel real quickly? Remember the non banks
Speaker 7: we were talking You were talking about Larna earlier. Financial
Speaker 7: banks used to be half of the SMP five hundred
Speaker 7: waiting in financials.
Speaker 5: Now they are a quarter of it.
Speaker 7: We think Areas is going to get added to the
Speaker 7: s and P five hundred next. That's a very big,
Speaker 7: eighty billion dollar market cap company. So banks are a
Speaker 7: smaller piece of the financial services industry. They're competing with Klarna.
Speaker 7: They need to have the scale and the capacity to
Speaker 7: do that. Otherwise the industry will evolve with four really
Speaker 7: big banks and then a lot of other ones that
Speaker 7: are much smaller. The best thing to do for the economy,
Speaker 7: in our opinion, is to allow these regional champions to
Speaker 7: get the scale to compete with the big four banks
Speaker 7: and then compete with non banks. And I think our
Speaker 7: economy and main street America will be better served if
Speaker 7: that happens.
Speaker 1: She's incredibly optimistic about bank stocks right now? How hinged
Speaker 1: is that to a reacceleration underlying economy versus a secular shift.
Speaker 7: Let me talk to you about the one thing that
Speaker 7: can stop it. The one thing that can stop it
Speaker 7: is credit quality. So this past week was the Barkley's
Speaker 7: Conference in New York. It was the last big channel
Speaker 7: check we get for the quarter. Everybody's saying the same thing.
Speaker 7: Credit quality continues to remain pristine. The industry is over
Speaker 7: earning on credit at the moment. It shouldn't always be
Speaker 7: this way, so there will be a moment where credit
Speaker 7: costs go up. That shouldn't be the surprise. The surprise
Speaker 7: is for how long it's been essentially zero. So as
Speaker 7: long as as we have a solid enough economy, then
Speaker 7: I think the bull story is very much intact.
Speaker 5: Usually, if we.
Speaker 7: Get a credit cycle, investors tend to sell bank stocks
Speaker 7: first and ask questions later. So the fact of the
Speaker 7: matter is we don't see a credit cycle on the
Speaker 7: horizon in the banking sector. So our view is that
Speaker 7: that is what's necessary. And one point nine percent GDP
Speaker 7: growth is good enough to keep the fundamental story in play.
Speaker 7: And actually the banks are talking about accelerating loan growth,
Speaker 7: which is a positive part of the story.
Speaker 2: Can you just remind everyone, it's my favorite stat of yours.
Speaker 2: Just remind us all of the top ten mortgage providers
Speaker 2: in this country now and how many banks are in
Speaker 2: the top ten compared to say, a decade plus so.
Speaker 7: Pre global financial crisis, eight of the top ten mortgage
Speaker 7: originators were banks. Today three of the top ten are
Speaker 7: banks now. The question along that line, John, is did
Speaker 7: banks forget how to make mortgages? They're all primarily founded
Speaker 7: to make mortgages, and that is regulation. Because the response
Speaker 7: to every crisis is regulate the banks, which tied their hands,
Speaker 7: which is why the non banks have so much market share.
Speaker 7: The right thing to do is to take the foot
Speaker 7: off the banks, let them compete with the non banks.
Speaker 7: And I think you can do it without putting too
Speaker 7: much risk in the system because the risk has just
Speaker 7: gone elsewhere, and it's gone out side the supervisory umbrella.
Speaker 7: And when we get the next cycle, we're going to
Speaker 7: find out if we were better off.
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