WEBVTT - Surveillance: The Case for Credit With Sheets 0:00:09.880 --> 0:00:13.800 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Daily 0:00:13.960 --> 0:00:17.560 we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.640 --> 0:00:27.560 Bloomberg dot Com, and of course on the Bloomberg Right now. 0:00:27.600 --> 0:00:31.040 On the markets, Lize Saunders joints with Charles Schwaber, Chief 0:00:31.080 --> 0:00:34.080 Investment Strategists and listne I've got up on the screen 0:00:34.120 --> 0:00:38.800 on SPX. You know down December of a few years ago, 0:00:39.360 --> 0:00:42.560 down twenty in the ugliness a year or so ago, 0:00:43.080 --> 0:00:45.320 and then you know in the recent pullback down nine 0:00:45.400 --> 0:00:48.159 or point nine percent, you have had the courage to 0:00:48.360 --> 0:00:52.720 stay in the market and participate. Justify that. How do 0:00:52.760 --> 0:00:55.920 you go through the process of staying in the market 0:00:56.000 --> 0:00:59.160 when we pull back, Well, it depends on what you 0:00:59.400 --> 0:01:02.440 mean by stay. What we have been espousing, which is 0:01:02.440 --> 0:01:06.520 not terribly unique versus any other quote normal time in 0:01:06.520 --> 0:01:10.480 the environment is not just stay, but be disciplined, particularly 0:01:10.480 --> 0:01:14.560 around things like periodic rebalancing. And specific to that, our 0:01:14.640 --> 0:01:18.280 message has been for investors that have historically done rebalancing 0:01:18.840 --> 0:01:20.720 on a calendar basis, they might do it on a 0:01:20.800 --> 0:01:23.920 quarterly basis. Or an annual basis, similar to what mutual 0:01:23.959 --> 0:01:27.280 funds do. They typically rebound for last week and each quarter. 0:01:27.800 --> 0:01:31.440 But to let volatility be your guide as to wander rebalance. 0:01:31.480 --> 0:01:34.920 I have your portfolio dictate a message around rebalancing. So 0:01:35.040 --> 0:01:37.319 you're sort of trimming into some of these big pops 0:01:37.319 --> 0:01:40.400 in the market. You're adding during periods of weakness. It's 0:01:40.440 --> 0:01:42.480 not all or nothing decision making, but it keeps you 0:01:42.640 --> 0:01:44.480 in gear and forces us, of course to do what 0:01:44.520 --> 0:01:46.960 we know we're supposed to, which is you know, ad 0:01:47.040 --> 0:01:50.400 low and trim high. So it's that rebalancing shift that 0:01:50.440 --> 0:01:54.160 we have been pushing this year. There's not just in 0:01:54.240 --> 0:01:56.040 terms of your approach the single names. What are you 0:01:56.080 --> 0:01:59.920 advising clients at the moment. So, of course I don't 0:02:00.040 --> 0:02:04.400 analyze individual stocks, but two investors who like to pick stocks. 0:02:04.440 --> 0:02:07.920 What we have been telling investors to focus on is 0:02:08.200 --> 0:02:13.040 factor more than either sector or style. And the factor 0:02:13.520 --> 0:02:18.400 that has been most consistently successful in this environment really 0:02:18.440 --> 0:02:22.639 throughout the entire year pre pandemic, you know, into the 0:02:22.639 --> 0:02:25.160 the bear market portion of this, and then since March 0:02:25.240 --> 0:02:29.600 twenty three low is balance sheet quality and even in 0:02:29.760 --> 0:02:34.359 sectors that have not been as dominant from a performance perspective. 0:02:34.440 --> 0:02:38.239 That quality factor has been leadership. So you can look 0:02:38.280 --> 0:02:41.840 for that quality basis, and I think factor in particular 0:02:41.919 --> 0:02:45.360 is more important than sector in this environment. So listen. 0:02:45.639 --> 0:02:49.080 Yesterday black Rock chief executive Larry Fink came out after 0:02:49.120 --> 0:02:51.440 they reported that their assets had surged to nearly eight 0:02:51.480 --> 0:02:54.560 trillion dollars, and he said, I believe we still have 0:02:54.680 --> 0:02:56.960 more to go on the upside. He was talking about equities. 0:02:57.000 --> 0:03:00.359 We have a strong conviction that the average investor still 0:03:00.480 --> 0:03:04.120 is underinvested. Some people say he's just talking his book. 0:03:04.240 --> 0:03:06.960 Do agree with him? Well, it depends on what you 0:03:06.960 --> 0:03:08.960 mean by the average investor. You can bring at the 0:03:09.000 --> 0:03:13.080 market and investors into cohorts. I think the you know, 0:03:13.120 --> 0:03:15.799 the cohort that's getting a lot of attention recently. I've 0:03:15.800 --> 0:03:18.960 been calling the newly minted day trader. I'm not sure 0:03:19.040 --> 0:03:22.520 there's a lot of liquidity left there, but they're trading 0:03:22.560 --> 0:03:27.480 fairly small amounts. If you look at other measures of sentiment. 0:03:27.600 --> 0:03:31.720 Certainly from an attitudinal standpoint, older investors they're a little 0:03:31.720 --> 0:03:34.840 bit more cautious. But when you look at money market 0:03:35.080 --> 0:03:38.440 UH funds and the amount in there sitting there is 0:03:38.560 --> 0:03:41.320 and sort of pseudo cash on the sidelines aren't necessarily 0:03:41.360 --> 0:03:45.240 like that term. Relative to overall market cap, it's a 0:03:45.320 --> 0:03:48.520 fairly low number, and cash and mutual funds is a 0:03:48.560 --> 0:03:51.520 fairly low number. Two. If you look over the long 0:03:51.640 --> 0:03:55.520 term at households exposure to equities, it's down a little 0:03:55.520 --> 0:03:58.280 bit off the recent peak, but in kind of the 0:03:58.360 --> 0:04:02.520 highest quintile historically. So I'm not so sure I buy 0:04:02.560 --> 0:04:06.320 the argument that there's just massive amounts of money um 0:04:06.480 --> 0:04:08.400 sitting there waiting to go into the market. I think 0:04:08.400 --> 0:04:11.200 it's a mixed bag. Listen, I want to go back 0:04:11.240 --> 0:04:12.760 to something you and I know well, which is the 0:04:12.760 --> 0:04:16.160 work of Stephen Ross at m I T on factor analysis. 0:04:16.200 --> 0:04:18.880 You've got to talk more about this. I want you 0:04:18.920 --> 0:04:22.000 to explain why so much of what we do day 0:04:22.040 --> 0:04:25.800 to day within investment firms and within the newly minted 0:04:26.240 --> 0:04:30.360 ignores factor analysis and what's going to be the the 0:04:30.360 --> 0:04:34.359 the variable at three in five years that drives Steven 0:04:34.440 --> 0:04:39.720 Ross's original world, well, the newly minted day traders, uh, 0:04:39.880 --> 0:04:44.000 the the data we have both anecdotally and then just 0:04:44.080 --> 0:04:48.400 looking at the activity among that cohort clearly is not 0:04:48.560 --> 0:04:54.480 focusing really on anything terribly fundamental be evaluation, UH factors, 0:04:54.680 --> 0:04:57.640 long term learning growth. I think it's it's purely a 0:04:57.760 --> 0:05:02.719 momentum play. That momentum can be in areas that may 0:05:02.880 --> 0:05:07.120 be justified by some fundamental certain tech type stocks, but 0:05:07.240 --> 0:05:10.760 also just purely gambling plays like some of the activity 0:05:10.800 --> 0:05:14.599 that we saw in areas like the bankruptcy stock. So 0:05:14.880 --> 0:05:17.719 I would I wouldn't sort of add that cohort in 0:05:18.480 --> 0:05:22.560 as making decisions based on any fundamental I think the 0:05:22.720 --> 0:05:25.240 reason why the quality factor and I and I agree. 0:05:25.279 --> 0:05:29.120 I think there will be increasing focus on factor based 0:05:29.160 --> 0:05:34.400 decision making um, not just because of the positive bias 0:05:34.440 --> 0:05:37.359 that's had in terms of performance in this environment, but 0:05:37.440 --> 0:05:40.919 the realization that there's so much diversity within sectors that 0:05:41.040 --> 0:05:45.480 making that blanket sector call is probably not the path 0:05:45.560 --> 0:05:49.919 toward long term investing success. That those factors around things 0:05:50.000 --> 0:05:54.240 like in this environment, quality I think supersede a more 0:05:54.279 --> 0:05:57.240 simplistic focus just on the sector level. Is that great 0:05:57.279 --> 0:05:59.480 to catch up this morning, Thanks for a time stone 0:05:59.480 --> 0:06:06.480 as that joh schwapwagon on this equity market right now. 0:06:06.480 --> 0:06:09.440 Instets joins us with Morgan Stanley. Always wonderful to have 0:06:09.520 --> 0:06:12.719 them on. Truly on the dynamics and correlations of the 0:06:12.760 --> 0:06:16.640 market inder sheets. Is the equity market alone year or 0:06:16.720 --> 0:06:19.680 is it other markets that adapting and adjusting to the 0:06:19.800 --> 0:06:25.000 expectation out there? Well, good morning and good to be 0:06:25.040 --> 0:06:27.240 with you. You know what I think is pretty fascinating 0:06:27.279 --> 0:06:29.240 about both the equity market, but but a lot of 0:06:29.279 --> 0:06:32.000 different markets is that you know that the headline levels 0:06:32.200 --> 0:06:35.000 speak to quite a bit of optimism. We're back near 0:06:35.040 --> 0:06:37.719 the highs and the SMP five um that that would 0:06:37.800 --> 0:06:41.919 clearly suggest a quite optimistic outlook on the economy and events. 0:06:42.360 --> 0:06:44.480 And yet I think across a lot of these markets 0:06:44.520 --> 0:06:46.279 you still have a lot of the kind of the 0:06:46.320 --> 0:06:50.839 micro relationships, the inner market relationships that reflect a lot 0:06:50.920 --> 0:06:54.200 of growth pessimism. Um Right, small caps still trade to 0:06:54.279 --> 0:06:57.440 historically large discount to large caps. Yields are still very low, 0:06:57.520 --> 0:07:00.279 the curve is still very flat on the race show 0:07:00.360 --> 0:07:04.839 between high yield and investment grade spreads is still pretty wide. 0:07:05.080 --> 0:07:06.880 Um And and all those things are are what you 0:07:06.920 --> 0:07:10.120 would expect if investors were less confident about growth, not 0:07:10.160 --> 0:07:13.880 more confident. So I do think it's a pretty nuanced picture. Yes, 0:07:14.280 --> 0:07:16.720 you know, the headline indusicries are high. It's it's easy 0:07:16.800 --> 0:07:19.120 to kind of read that as, oh, there's there's an 0:07:19.240 --> 0:07:21.800 enormous amount of growth optimism that's come into the market. 0:07:21.880 --> 0:07:24.880 But but actually, I think looking below the surface, what 0:07:25.040 --> 0:07:27.800 I think that would suggest is there's a lot more confidence. 0:07:27.840 --> 0:07:30.120 I think on there's a that that there's a lot 0:07:30.160 --> 0:07:32.560 of liquidity in the market, then there's a lot of 0:07:32.920 --> 0:07:37.320 confidence and high expectation that growth is going to rebound strongly. Andrew, 0:07:37.480 --> 0:07:39.280 I might have misheard you. Did you just say that 0:07:39.680 --> 0:07:44.200 spreads are still pretty wide? Yeah, so, I I know 0:07:44.240 --> 0:07:46.080 it might have sounded like a like a misquote. No, 0:07:46.160 --> 0:07:48.559 if if we look at, you know, the relationship between 0:07:48.640 --> 0:07:52.040 high yield and investment grade UM, you know that relationship 0:07:52.080 --> 0:07:55.040 is still pretty pretty elevated UM in the sense that 0:07:55.120 --> 0:07:57.960 high yield spreads have come in a lot less relative 0:07:58.080 --> 0:08:01.320 to too higher quality spreads. And even you know, within 0:08:01.400 --> 0:08:04.640 the high old market, you know, you still see pretty 0:08:04.680 --> 0:08:09.240 average levels of UM evaluation gaps between say kind of 0:08:09.240 --> 0:08:12.000 single BE credit and double B credit. So you know, 0:08:12.040 --> 0:08:15.400 our our view is has you know, is and remains 0:08:15.640 --> 0:08:18.240 pretty constructive on the credit space. You know, yes, it 0:08:18.360 --> 0:08:20.920 has rallied in. Yes, there's a lot less value than 0:08:21.000 --> 0:08:23.120 there was there over the summer but I think this 0:08:23.200 --> 0:08:25.920 is an asset class that rarely trades at the average, 0:08:25.920 --> 0:08:28.000 and I think we're in one of those phases where 0:08:28.000 --> 0:08:30.280 we're moving from spreads being kind of too wide to 0:08:30.440 --> 0:08:32.720 probably the next phase being they need to move to 0:08:32.760 --> 0:08:35.920 being too tight. All right, Andrew John Farrow is just 0:08:35.920 --> 0:08:38.000 setting me up because he wants me to ask you, 0:08:38.320 --> 0:08:41.720 I'm sure about the incredible amount of money that's poured 0:08:41.760 --> 0:08:44.480 into the triple C space and this question about whether 0:08:44.520 --> 0:08:47.240 we've seen the end of the bankruptcy cycle. In other words, 0:08:47.520 --> 0:08:50.920 are you saying that spreads are going to tighten because 0:08:50.960 --> 0:08:55.360 credit quality is perhaps under priced right now that basically 0:08:55.559 --> 0:08:57.840 investors aren't giving the benefit of the doubt the likes 0:08:57.880 --> 0:09:00.360 of Carnival at Delta and these other companies have yet 0:09:00.360 --> 0:09:02.840 to get back on board. Or you saying that liquidity 0:09:03.040 --> 0:09:05.680 will overcome all of those concerns and they won't be 0:09:05.679 --> 0:09:09.760 an issue for creditors. Yeah, So I think it's actually 0:09:09.760 --> 0:09:12.240 a little bit of a little bit between the two. 0:09:12.320 --> 0:09:15.040 I think actually it's a would be a pretty common, 0:09:15.200 --> 0:09:20.679 pretty normal credit cycle to see the market rally and 0:09:20.760 --> 0:09:25.080 improve ahead of kind of the ahead of the peak 0:09:25.120 --> 0:09:28.839 in the default rate, ahead of um the worst of 0:09:28.840 --> 0:09:30.960 of of the downgrade cycle. You know, we saw some 0:09:31.000 --> 0:09:34.040 of that in two thousand nine and ten, where where 0:09:34.040 --> 0:09:38.280 the market had had largely recovered in even as there 0:09:38.320 --> 0:09:40.480 were still quite a few downgrades to happen, even as 0:09:40.880 --> 0:09:43.480 you know, many companies did go on and default. That 0:09:43.600 --> 0:09:46.360 the credit market I think does have some some precedent 0:09:46.440 --> 0:09:49.440 of of moving well ahead of those factors. And so 0:09:49.880 --> 0:09:51.360 you know, I guess what I would see it more 0:09:51.400 --> 0:09:54.480 consistent with is that kind of that normal, that normal 0:09:54.520 --> 0:09:56.920 cycle that yes, you know you still will see down grades, 0:09:56.960 --> 0:09:59.520 you'll still see defaults, but that you know, the credit 0:09:59.520 --> 0:10:01.959 market is and I think a reasonable job of some 0:10:02.040 --> 0:10:05.360 differentiation there and that those those events won't be enough 0:10:05.440 --> 0:10:09.880 to derail the broader high yield market. Andrew is so 0:10:10.000 --> 0:10:12.320 constructive you make in Leasa depress. Can you just tell 0:10:12.360 --> 0:10:15.360 me what would make you bearish on a Sunday when 0:10:15.360 --> 0:10:17.840 you write that Sunday start and note that everyone wants 0:10:17.880 --> 0:10:20.800 to be on the distribution list for what makes Andrew 0:10:20.840 --> 0:10:23.640 sheets bearish? Thank you that note? When it comes out? 0:10:23.720 --> 0:10:27.640 What changes it? Yeah? Sure? So, so I do think 0:10:27.679 --> 0:10:30.760 the case for credit is better than than other asset classes. 0:10:30.800 --> 0:10:32.800 You know, we have we have less upside to our 0:10:32.840 --> 0:10:35.720 to our US equity targets, we have less upside to 0:10:35.720 --> 0:10:38.320 our emerging market equity targets. I think those are markets 0:10:38.360 --> 0:10:40.560 that we do think are are more fully valued than 0:10:40.600 --> 0:10:43.000 the credit market is, and and they do think if 0:10:43.000 --> 0:10:46.760 we kind of think through us, you know, election outcomes, 0:10:47.120 --> 0:10:48.960 and I think there's a lot of focus on you know, 0:10:49.000 --> 0:10:52.400 what's what's the immediate market reaction to different combinations. But 0:10:52.400 --> 0:10:56.599 but there are certainly combinations where you could uh inhibit 0:10:56.840 --> 0:10:59.520 further fiscal stimulus in the US, and I think that 0:10:59.559 --> 0:11:01.800 could be problematic. You know, if you if you had 0:11:01.840 --> 0:11:03.880 to ask me, you know, what's the broader scenario that 0:11:03.920 --> 0:11:07.120 would worry me most longer term. It's it's almost that 0:11:07.160 --> 0:11:08.959 we have a little bit of a groundhog day with 0:11:10.840 --> 0:11:12.960 where you know, back then, we were coming out of 0:11:12.960 --> 0:11:15.960 a recession, we were coming out of a really bad place. 0:11:16.360 --> 0:11:18.360 There was a lot of stimulus in the system, and 0:11:18.360 --> 0:11:20.720 then the stimulus just kind of stopped and the market 0:11:20.760 --> 0:11:25.560 focus shifted to balancing the budget, fiscal austerity, and those 0:11:25.600 --> 0:11:28.760 types of things really slowed down the recovery. And so 0:11:28.880 --> 0:11:31.199 my my concern would be that maybe you go through 0:11:31.280 --> 0:11:33.960 that again, that you've You've had this very sharp recovery 0:11:33.960 --> 0:11:37.000 off the loads, and in March and April um that 0:11:37.000 --> 0:11:39.760 that actually kind of policy makers take their their feet 0:11:39.800 --> 0:11:42.720 off the gas next year and the recovery isn't as 0:11:42.720 --> 0:11:46.040 as strong as we expect. Andrew right to catch up, 0:11:46.200 --> 0:11:49.120 Andrew Chase and Morgan Stanley, and congratulations on the call 0:11:49.240 --> 0:11:52.640 so far in twenty far more constructive than the consensus 0:11:52.679 --> 0:11:55.640 through this year for an economic recovery. Not just Andrew Chase, 0:11:55.720 --> 0:11:58.280 my Wilson on equities alon zetting around the economy and 0:11:58.320 --> 0:12:00.080 the United States. Chet and I are laid in the 0:12:00.120 --> 0:12:07.000 research Matt holmeback named the right side of things right 0:12:07.000 --> 0:12:10.520 now on the reality, which is, if you're a shareholder 0:12:10.600 --> 0:12:14.600 of Morgan Stanley and Goldman Sachs, guess what, it's been 0:12:14.640 --> 0:12:16.800 a lousy ten years. You're compared to a lot of 0:12:16.800 --> 0:12:20.200 other things out there, given all the challenges, it hasn't happened. 0:12:20.320 --> 0:12:24.560 The Fortress Gorman Okay, eight percent a year, maybe tenure return. 0:12:24.679 --> 0:12:29.240 Golden Sacks totally unacceptable under four percent return per year. 0:12:29.320 --> 0:12:32.719 Christian below holding Court at Credit Suites and particularly at 0:12:32.720 --> 0:12:36.680 Bernstein joins us now with Autonomous Research and their senior 0:12:37.040 --> 0:12:40.920 analyst Christian. You are long these guys and particularly long 0:12:41.040 --> 0:12:45.400 Golden Sacks. How do they do better than the terrible 0:12:45.480 --> 0:12:50.720 performance of the last ten years? Good good, good morning 0:12:50.800 --> 0:12:53.199 Tom Um trying to help you on Goldman. I thought 0:12:53.520 --> 0:12:59.560 help in the iPhone though one twelve UM on Goldman. Look, 0:12:59.640 --> 0:13:02.839 I think, UM, there are many differences this cycle versus 0:13:02.960 --> 0:13:07.000 last cycle UM in terms of business mix. UM, I 0:13:07.040 --> 0:13:12.000 think the lack of UM owner incremental regulation, which is 0:13:12.040 --> 0:13:14.640 generally how well managed the companies are left in a 0:13:14.679 --> 0:13:17.800 life cycle. So I do think there are there are 0:13:17.880 --> 0:13:22.880 better prospects for both the brokerage stocks, Goldman and Morgan UM. 0:13:22.920 --> 0:13:25.760 You know, headed forward and you've seen that somewhat this 0:13:25.840 --> 0:13:29.920 year in a recession, in a somewhat tough environment. For example, 0:13:29.960 --> 0:13:35.319 this morning Goldman putting up almost tc UM which which 0:13:35.360 --> 0:13:39.000 really was best in class relative to the other banks 0:13:39.000 --> 0:13:41.760 have reported so far. So so I do think, UM, 0:13:42.000 --> 0:13:44.600 you know, you know, knock on Wood at this time 0:13:44.720 --> 0:13:48.880 is somewhat different. You know, I look at this so 0:13:49.040 --> 0:13:51.640 this time it's different. It starts with management. The belief 0:13:51.679 --> 0:13:55.199 over ten years, going back to Bradhain's at Sanford Bernstein 0:13:55.679 --> 0:13:57.760 is you know they're really in it for themselves. They're 0:13:57.760 --> 0:14:02.520 really not doing it for the shareholders. What's changed. Well, 0:14:02.600 --> 0:14:06.840 today's results are a really good example of what has changed. Right. So, 0:14:06.960 --> 0:14:10.080 for example, a big part of the really strong results 0:14:10.240 --> 0:14:15.560 is discipline on compensation UM. And that speaks to a 0:14:15.679 --> 0:14:20.760 business that's a far more geared towards sort of platform 0:14:20.800 --> 0:14:26.160 businesses versus people's businesses, which allows far more operating leverage. 0:14:26.480 --> 0:14:30.040 Now clearly, um, um, this is still a talent business 0:14:30.080 --> 0:14:32.800 and you still have to pay up a performance and 0:14:32.920 --> 0:14:35.840 you still have to attract the very best. But what 0:14:35.960 --> 0:14:40.120 with the business makes and the focus on efficiency um, Again, 0:14:40.200 --> 0:14:45.400 like this morning, they can put up decent results Christian 0:14:45.880 --> 0:14:50.920 platform business versus people business and efficiency. It screams job cuts? 0:14:50.920 --> 0:14:52.800 How big are the job cuts be next year? On 0:14:52.800 --> 0:14:57.520 Wall Street? Yeah? No, look look I think, um, you know, 0:14:57.800 --> 0:15:01.480 I think broadly speaking the um. You know, just generally speaking, 0:15:01.480 --> 0:15:04.400 you've seen cuts on wall streets over the last decade 0:15:04.400 --> 0:15:08.760 for the most part. And as you see automation increase, UM, 0:15:08.880 --> 0:15:13.440 digitization increase, UM, electronic trading increase, there are problem that 0:15:13.520 --> 0:15:16.280 is probably still going to be UM. You know some 0:15:16.800 --> 0:15:21.720 uh some more cut. It is inevitable um. That said, Um, 0:15:21.760 --> 0:15:25.280 there are also opportunities that come come through using the 0:15:25.280 --> 0:15:28.480 likes of Golden sides, for example, recruits far heavily, far 0:15:28.560 --> 0:15:34.320 more heavily in engineering type disciplines and technology type disciplines 0:15:34.520 --> 0:15:37.440 versus what they would have traditionally, you know, ten fifteen 0:15:37.480 --> 0:15:40.600 years ago. So so I do think to your point 0:15:40.920 --> 0:15:45.240 that there will be some head count rationalization, but as 0:15:45.280 --> 0:15:47.400 I think there's a lot of opportunities in areas like 0:15:47.400 --> 0:15:50.600 like technology to bring on new talent which bank right 0:15:50.600 --> 0:15:53.120 now based on the earnings results that we've gotten so far, 0:15:53.360 --> 0:15:56.840 are you most impressed by Yeah? So so I look 0:15:56.840 --> 0:15:59.040 at the Goldman and Morgan, so um, it has to 0:15:59.040 --> 0:16:01.680 be golden, I would say, a so far and you know, 0:16:01.760 --> 0:16:06.080 again just just just looking at the returns today, um um, 0:16:06.120 --> 0:16:08.480 you know, you know, kind of speak to that, I 0:16:08.520 --> 0:16:11.720 would say, more broadly speaking, if I was kind of 0:16:11.720 --> 0:16:15.840 thinking about the more broad strategic direction of the companies. 0:16:16.520 --> 0:16:18.960 We really like Morgan Stanley. I think James Coming has 0:16:18.960 --> 0:16:21.640 done a really good job in changing the business mix. 0:16:22.080 --> 0:16:25.360 They'd be very um clever and way to use excess 0:16:25.400 --> 0:16:28.680 capital to really remix the business by by a knee trade. 0:16:28.720 --> 0:16:31.920 And you know, very recently eaten fans almost two thirds 0:16:31.920 --> 0:16:35.280 of that of Morgan Stanley will come from you know, 0:16:35.360 --> 0:16:39.400 capital l businesses like wealth and asset managed asset management. 0:16:39.880 --> 0:16:43.080 So so overall, I would say Morgan Stanley in terms 0:16:43.120 --> 0:16:46.760 of thinking about the long term and strategic direction, Morgan 0:16:46.800 --> 0:16:49.960 stand the stuff we we like the most Christian before 0:16:49.960 --> 0:16:51.920 we let you go. Just on the acquisition option, it's 0:16:51.960 --> 0:16:54.240 an option that's not available for many of the other 0:16:54.280 --> 0:16:56.640 big banks. It's an option that could be available to Goldman. 0:16:57.120 --> 0:17:01.240 Why do you think Goldman hasn't gone in that direction? Yeah, 0:17:01.320 --> 0:17:04.359 so you know, look I think, um, you know, again, 0:17:04.480 --> 0:17:07.720 Morgan Stanley, some of more bands strategically than go right, 0:17:07.840 --> 0:17:11.639 you know, a newer management team, um less in the 0:17:11.640 --> 0:17:15.399 way of capital flexibility. Um, you know. So so I 0:17:15.440 --> 0:17:19.080 do think there's somewhat behind strategically to Morgan Stanley. And 0:17:19.080 --> 0:17:20.720 and you know, you need to know where you want 0:17:20.760 --> 0:17:23.359 to go first and be very clear or your direction 0:17:23.440 --> 0:17:26.119 before you go out into deals. Um. But but but 0:17:26.200 --> 0:17:29.120 I do think they will be in the conversation for 0:17:29.119 --> 0:17:33.440 for acquisitions. Um, they're beginning to build capital now. And 0:17:33.440 --> 0:17:36.800 and you know they've always spoken to wealth management as 0:17:36.840 --> 0:17:40.680 a management and digital consumer banking as areas that would 0:17:40.680 --> 0:17:43.600 benefit from scale acquisitions. So so I do think Goldman 0:17:43.640 --> 0:17:48.479 will be in the conversation for equation going forward. Christian, 0:17:48.480 --> 0:17:50.000 looking forward to getting you back on the show soon. 0:17:50.200 --> 0:17:53.480 Look forward to Christine Bolo that autonomas research senior analysts 0:17:53.520 --> 0:17:59.399 on the banks right now. This is a joint Michael 0:17:59.400 --> 0:18:02.280 Ferrod him out of Boot Schools Chicago and New York 0:18:02.400 --> 0:18:06.000 University as a fed economist and joined a small bank 0:18:06.000 --> 0:18:09.199 in New York called JP Morgan. He wrote for Melman, 0:18:09.320 --> 0:18:12.320 he wrote for Kasman and the others, and within their 0:18:12.359 --> 0:18:17.639 weekly prospects defined in this Nation this odd phrase potential 0:18:17.680 --> 0:18:20.160 g d P. John and Lisa have a whole bunch 0:18:20.160 --> 0:18:23.919 of questions for Dr Feroli on where we are right now. Michael, 0:18:24.000 --> 0:18:26.720 I want to go back to your initial acclaim on 0:18:26.920 --> 0:18:31.160 potential g d P. Do you adjust that statistic because 0:18:31.200 --> 0:18:35.240 of the pandemic. So, I think that's an open question 0:18:35.400 --> 0:18:39.400 right now. Normally, a really bad recession would lead want 0:18:39.480 --> 0:18:42.320 to lower their estimate of trend GDP growth because there 0:18:42.320 --> 0:18:46.480 are longer run impacts from short run of that's like recessions. However, 0:18:47.240 --> 0:18:48.840 I think it's a little early to say right now 0:18:48.880 --> 0:18:52.000 because this recession was so short and the recovery so 0:18:52.040 --> 0:18:56.159 far has been robust and offense. I think it's an 0:18:56.200 --> 0:18:59.520 open question. So, for example, normally one would say that 0:18:59.640 --> 0:19:03.520 the slow down in capital spending after a recession would 0:19:03.600 --> 0:19:06.560 lead to slower productivity growth. Right now, it's not clear 0:19:06.600 --> 0:19:09.200 how much capital spending is actually slow, and we obviously 0:19:09.240 --> 0:19:11.879 had a bad second quarter but a good rebound in 0:19:11.880 --> 0:19:15.080 the third course. I think, um, the jury is still out. 0:19:15.480 --> 0:19:18.159 It's something we've we've been considering quite a bit, but 0:19:18.320 --> 0:19:20.600 right now we're leaving our estimate unchanged and wanting a 0:19:20.600 --> 0:19:24.520 half percent for for potential GDP growth. Michael, since an 0:19:24.560 --> 0:19:26.520 increasing number of people are saying the same thing that 0:19:26.600 --> 0:19:29.320 you are, that this economic recovery has been more robust 0:19:29.359 --> 0:19:32.439 than people had expected, and that the recession perhaps a 0:19:32.440 --> 0:19:35.080 bit shallower, does that mean that there is a greater 0:19:35.240 --> 0:19:38.399 chance of bigger inflationary pressure has given the amount of 0:19:38.400 --> 0:19:41.760 money that the federal government has thrown at this at 0:19:41.760 --> 0:19:44.480 the margin, yes, uh, you know, better growth should lead 0:19:44.520 --> 0:19:48.400 to better firm our inflation outcomes. It's still the case, however, 0:19:48.520 --> 0:19:52.119 that unemployment looks like it will be elevated for several 0:19:52.160 --> 0:19:55.679 quarters to come. So so while we may revise our 0:19:55.760 --> 0:19:58.960 views towards somewhat higher inflation. It's still going to be 0:19:59.000 --> 0:20:02.200 inflation that we've think will remain below the FATS two 0:20:02.240 --> 0:20:07.159 percent objective for for PC inflation at least, so directionally, 0:20:07.160 --> 0:20:08.719 I would agree with what you're saying, but I wouldn't 0:20:08.720 --> 0:20:10.600 want to take it too far and say that we're 0:20:10.920 --> 0:20:15.160 you know, we're looking at a big inflationary year to come. Michael, 0:20:15.200 --> 0:20:17.240 we talked about this before. I just wonder how polarized 0:20:17.280 --> 0:20:19.600 the conversation is with clients at the moment on this 0:20:19.680 --> 0:20:24.320 issue on inflation. Well, inflation has gotten interesting. So we 0:20:24.359 --> 0:20:28.440 obviously had a few uh week months around UH during 0:20:28.480 --> 0:20:30.840 the worst of the pandemic. We've had a few strong 0:20:30.880 --> 0:20:34.200 months since. A lot of that strength has been reversing. 0:20:34.240 --> 0:20:38.000 Some of the category is that we're week during the pandemic, 0:20:38.000 --> 0:20:41.359 but it has kept the discussion alive. I think it's 0:20:41.560 --> 0:20:44.399 um you know, my in my opain, I think we 0:20:44.440 --> 0:20:49.120 are in a disinflationary environment. And you know, as you say, 0:20:49.200 --> 0:20:52.960 the discussion, I'm sure it's polarizing as much as it 0:20:53.119 --> 0:20:56.040 was perhaps in two thousand and nine when we first 0:20:56.080 --> 0:20:59.640 were experimenting with expanding the fact balongy. But people definitely 0:21:00.520 --> 0:21:03.400 are interested in it, particularly given the central importance. Now 0:21:03.440 --> 0:21:07.960 it hasn't the prospects for a future federate. We caught 0:21:08.000 --> 0:21:10.120 up a Catherine Maunt of City yesterday and she brought 0:21:10.200 --> 0:21:12.360 up a series of issues. I love your thoughts on them. 0:21:12.400 --> 0:21:15.919 She was talking about the gap between consumers perception of inflation, 0:21:16.040 --> 0:21:21.399 statistical measures of inflation, and financial market pricing of inflation. Michael, 0:21:21.400 --> 0:21:23.840 how do those three different things? What's that spread look 0:21:23.920 --> 0:21:27.040 like at the moment? Right? So? I think financial market 0:21:27.160 --> 0:21:30.720 expectations are closer to what you're seeing in the actual 0:21:30.720 --> 0:21:34.800 statistical measures of inflation. Uh. I would say consumer perceptions 0:21:34.800 --> 0:21:37.280 of inflation are higher. I think one of the reasons 0:21:37.280 --> 0:21:41.280 for that is that consumers tend to UH put more 0:21:41.320 --> 0:21:44.640 weight on prices that are more salient. So, for example, 0:21:44.680 --> 0:21:48.840 food prices tend to seem to carry more weight in 0:21:48.920 --> 0:21:51.840 consumers perceptions than they do in the UH than they 0:21:51.880 --> 0:21:54.679 do in the actual baskets of goods and services, and 0:21:54.840 --> 0:21:58.159 food prices had been a little firm recently. Uh so 0:21:58.240 --> 0:22:00.399 I think that maybe one factor that is leading to 0:22:00.440 --> 0:22:05.640 that disconnect between consumer perceptions and either financial market expectations, 0:22:05.680 --> 0:22:09.720 which are renamed relatively depressed or uh, you know, the 0:22:09.720 --> 0:22:14.480 actual measures like core PC, which is also sub degree Michael, 0:22:14.520 --> 0:22:19.160 how does real estate play into our guestimate of new inflation? 0:22:19.440 --> 0:22:23.240 How do rents play in owners adjusted rent, et cetera. 0:22:23.400 --> 0:22:27.080 How does ownership of homes play in to our guestimate 0:22:27.240 --> 0:22:31.920 or reality of inflation in twelve or thirty six months. Yeah, 0:22:31.960 --> 0:22:35.919 this this is actually pretty interesting issue because both tenants 0:22:35.960 --> 0:22:38.760 rent and owners imputed rent, which is the rent people 0:22:38.800 --> 0:22:42.119 who own their homes would be paying hypothetically if they 0:22:42.119 --> 0:22:45.200 had to rent at those homes. Both of those has 0:22:45.359 --> 0:22:49.400 have accelerated very sharply in the past three months. Some 0:22:49.480 --> 0:22:51.840 of that may be due to a phenomena that is 0:22:51.840 --> 0:22:53.840 similar to what we saw in the early two thousands, 0:22:53.880 --> 0:22:56.480 which is when there's a very hot housing market and 0:22:56.480 --> 0:22:59.440 everyone's rushing to buy a house, what you see is 0:22:59.520 --> 0:23:02.919