Speaker 1: Brought you by Bank of America, Mary Lynch. Investing in
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Speaker 1: Member s I p C. Welcome to the Bloomberg Surveillance Podcast.
Speaker 1: I'm Tom Keene with David Gura. Daily we bring you
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and
Speaker 1: of course on the Bloomberg Device left which joins us
Speaker 1: now in our Bloomberg eleven three studio, se City Groups,
Speaker 1: Chief US Equity STRTUS. Great to have you with this here.
Speaker 1: Let's pick up the pieces a little bit after what
Speaker 1: we saw last week in Washington. We're wondering about animals,
Speaker 1: earths and degree to which they are fueled by stimulated
Speaker 1: by what's going on in Washington or perhaps not. What
Speaker 1: did you make of what happened last week at the
Speaker 1: conclusion of the debate eight day debate over healthcare reform
Speaker 1: in Washington. There's so many different people, you know, pinting
Speaker 1: on this, and and I guess my sense is that
Speaker 1: people got either too excited or too depressed around it. Um.
Speaker 1: We wrote something overnight saying that just like on November
Speaker 1: ninth or tenth, and you know, people were saying the
Speaker 1: Democratic Party was done for and you know, stick a
Speaker 1: fork in it. Um that the same thing is kind
Speaker 1: of being written kind of the obituaries or of the
Speaker 1: Republicans now over the weekend, given the failure of the
Speaker 1: of the repeal deal. UM. I think both of these
Speaker 1: are highly exaggerated. Both parties have um splits and factions,
Speaker 1: and you know, there were even comments that that I
Speaker 1: thought were pretty well found that the negotiations were kind
Speaker 1: of going on between the different size of the Republican
Speaker 1: Party around the repeal deal. And then once they put
Speaker 1: in this kind of deadline we're voting on Friday, you know,
Speaker 1: take it or leave it. This kind of hardened positions
Speaker 1: as opposed to the compromise. So you can walk away
Speaker 1: and say, hey, the Freedom Caucus has kind of burnished
Speaker 1: its conservative credentials and might be more willing to compromise
Speaker 1: in the future. Endeavor or that's it. They've they've it's worked,
Speaker 1: and they're going to continue to be that hard I
Speaker 1: think time will tell. I think these these kind of
Speaker 1: off the cuff responses and are more I don't know
Speaker 1: if the right word is filtered by partisanship, and therefore
Speaker 1: each side kind of hammers away at it. I still
Speaker 1: believe the Republicans have to deliver on a number of
Speaker 1: their promises before they go to mid terms, otherwise they're
Speaker 1: going to be slaughtered. Um and and they kind of
Speaker 1: know that. I mean they've been telling people, for example,
Speaker 1: in Obamacare Affordable Care Act, that's been a horrible deal
Speaker 1: for seven years, um and then you do nothing to
Speaker 1: address it and we'll let it explode. I don't think
Speaker 1: that sells well in Peoria. Fold this into to your
Speaker 1: your world the equity space. We've been told by so
Speaker 1: many people here that the Trump trade really had very
Speaker 1: little to do with with Trump, the things that had
Speaker 1: begun to to move before he was elected. After we
Speaker 1: saw that happen on Friday, did that change anything? Saying
Speaker 1: the health care sector? Where your your prospects for it?
Speaker 1: For the equities markets? Way forward? So as I agree
Speaker 1: that much of the the activity was already starting before
Speaker 1: for example, uh tenure break evens it started to turn
Speaker 1: in February of last year, um, not February of this year.
Speaker 1: So UM, it's it's hard for people to kind of
Speaker 1: get their heads around that this started twelve months ago
Speaker 1: or thirteen months ago. UM. But there's more than that.
Speaker 1: There's a lot of other piece of evidence that that
Speaker 1: suggests things were improving before the president was elected. UM.
Speaker 1: I do find the the you know, the reactions and
Speaker 1: markets very again kind of off the cuff. UM. It's
Speaker 1: not what I would call real investing. It's trading around
Speaker 1: kind of a news headline. UM. My job is to
Speaker 1: kind of figure out what's going to likely play out
Speaker 1: three or six nine months from now, not what's gonna happen,
Speaker 1: you know, tomorrow morning at that the that the opening
Speaker 1: of trading. UM. And I don't think a lot of
Speaker 1: investors make money on the shoot from the hip type
Speaker 1: uh decisions. Within you know, a week or two, they
Speaker 1: find themselves on the losing end of that transaction. So
Speaker 1: I I get frustrated a little bit by it because
Speaker 1: I think people are spending way too much time on
Speaker 1: it instead of trying to think about it. And what
Speaker 1: we've seen really in the last two weeks talking to
Speaker 1: the institutional investors is this extraordinarily my opic kind of
Speaker 1: what happened in the last week, Will it continue next week?
Speaker 1: And it's stuff that I just get really annoyed at.
Speaker 1: Maybe it's I take it to personally, I don't know.
Speaker 1: On blue gray with the left bach of of sitting here,
Speaker 1: how worried should we be about a flatter yield curve
Speaker 1: at this point? Look, I think people were resisting any
Speaker 1: form of it steepening too, So UM investors are reacting
Speaker 1: to it, and they should. It has impact on the
Speaker 1: financials and how they trade UM, given that the curve
Speaker 1: determines often that that that net interest margin opportunity UM.
Speaker 1: I've heard people, for example, the financials worry more about
Speaker 1: UM the commercial industrial loan growth having decelerating UM. And
Speaker 1: I think it's interesting to note again the miss on
Speaker 1: the fundamental story. The Senior Loan Officer survey from the
Speaker 1: Federal Reserve Board on C and I lending tends to
Speaker 1: lead actual business loans by six quarters, so that that
Speaker 1: deceleration that you're seeing currently is reflective more of the
Speaker 1: very tight financial conditions we were seeing in late UH
Speaker 1: when the credit markets were distorted by energy and that's
Speaker 1: kind of now reversed, and we should see by the
Speaker 1: end of the year improving lending activities. So again it's
Speaker 1: this very myopic to look at what the last data
Speaker 1: point is, don't look about where we're headed. So that's
Speaker 1: the same thing going on in the curve. This is
Speaker 1: really important. It has been written up by any number
Speaker 1: of people, Ambrose, Evans, Pritchard and the Telegraph doing a
Speaker 1: great treatment Tobias. Let's get smarter here and we can
Speaker 1: do this with you because of your securities research background.
Speaker 1: Help me here with what C and eye loans actually are?
Speaker 1: Are they the car loan for David's new Bentley? So
Speaker 1: so the FED breaks out there lending Sir of a
Speaker 1: in three different areas. They look at it in the
Speaker 1: consumer loans, real estate loans, and commercial industrial loans, which
Speaker 1: are business corporate loans. So you know, when we talk
Speaker 1: about the credit card, or we talked about the autois,
Speaker 1: that's consumer loans. When we talk about you know, real
Speaker 1: estate development, it's obvious it's real estate. When we talk
Speaker 1: about business loans with the IBM s of the world
Speaker 1: do or what Caterpillar does that, that's that's the kind
Speaker 1: of thing we're dealing with. How does the CNI loan
Speaker 1: roll over end if we have a three months moving
Speaker 1: average of CNI loans rolling over, which is a chart
Speaker 1: that's ubiquitous now in research. How does it terminate? What
Speaker 1: where do you see the long growth step in so well,
Speaker 1: so it's usually used as a proxy for business activity. Right.
Speaker 1: If companies are boring money to invest, that's great, um
Speaker 1: And when they're not, there must be something wrong. And
Speaker 1: that's why I think everybody's so focused on this business
Speaker 1: lending growth rate slowing. But again that's a lagging of roll.
Speaker 1: It's a lagging indicator for those uh our credit if
Speaker 1: credit standards easing or tightening, and they started easing around
Speaker 1: May of last year, which means by the end of
Speaker 1: this year, given that six quarter lag, we should see
Speaker 1: that we're going soft duns. You're telling me the soft
Speaker 1: data n f IB statistics is more indicative future animal
Speaker 1: spirit only we're going soft dun. It's like the Montreal
Speaker 1: I'm not going soft dust. I just know that that.
Speaker 1: I just know from my experience of thirty years that
Speaker 1: were and looking at data going back years, that this
Speaker 1: stuff always leads business activity. And you're supposed to look
Speaker 1: at the lead indicators, not the lagging indicators. Lagging looking
Speaker 1: backwards doesn't really help you. I don't know anybody who's
Speaker 1: driven successfully by only watching through the review mirror. Can
Speaker 1: we bring us over to an important thing that everybody
Speaker 1: will understand is p K suban a leading or lagging
Speaker 1: indicator for the Montreal is a lacking indicator for national
Speaker 1: predators is a leading indicator. Okay, there we go the
Speaker 1: proper David, did you get that there was a huge
Speaker 1: trade to this summer pek su band? What a great
Speaker 1: response You've got. Nobody in your listening world who actually
Speaker 1: has a clue, who peeks say good morning to all
Speaker 1: of your listening in Canada, and particularly Don CHERRYO, we
Speaker 1: know tunes in every morning, but come on my fashion,
Speaker 1: my fashion model. Yeah yeah, And and Shay Webber went
Speaker 1: over to the Mantra Canadians And it's an example of
Speaker 1: that bet, that big bet David, you've got to take
Speaker 1: like you wonder his business going to take a big bet?
Speaker 1: And Mr Trump love that tics. Let me ask you
Speaker 1: just about the compliment there of soft data and hard data?
Speaker 1: How do you look at them in concert with each other?
Speaker 1: And there is there a disconnect between the two, not really, um,
Speaker 1: I think the the because the lead lag factors. They
Speaker 1: aren't disconnected, they just don't happen simultaneously. UM. And I
Speaker 1: think investors tend to walk in with a particular perspective
Speaker 1: and then they choose the data they want to look at.
Speaker 1: Um it's I look again, I need to figure out
Speaker 1: where I think the world will be in the future
Speaker 1: or not where it is right the second that helps
Speaker 1: me for trading today, but it has nothing to do
Speaker 1: with my investment profile over the next six twelve months. UM.
Speaker 1: So I always look at the leading indicators, even if
Speaker 1: it's soft data. Is is I'm not going soft. I'm
Speaker 1: looking at as the lead indicator for the hard data
Speaker 1: is not certainly not his slap shot. I don't want
Speaker 1: to stand in front of a hundred eight mile per
Speaker 1: hour shot. Um. But the the the notion of you know,
Speaker 1: every time the n f I be hiring intentions has improved,
Speaker 1: twelve months later, the unemployment rate has improved. UM. Every
Speaker 1: time CFO serving from Duke University said they're going to
Speaker 1: spend twelve months later, spending occurs. Every time I s
Speaker 1: M New Order Index is going up three to six
Speaker 1: months later, industrial production is going up. So it's really
Speaker 1: hard to walk away from that and say, now, let's
Speaker 1: ignore this tobias left covicuitous. Let's pin you down on
Speaker 1: the bull call. Where are we twelve months from now?
Speaker 1: Are you more than enthusiastic about equities? So we have
Speaker 1: a year and target the SMP five. We don't have
Speaker 1: a twelve month specifically target UM. And you know, I
Speaker 1: could see an overshoot beyond that if investors really got
Speaker 1: behind us. UM. There's a lot of cash stile in
Speaker 1: the sidelines. Investors haven't truly committed, and as a result,
Speaker 1: you could get the overshoot. It's it's not our forecast,
Speaker 1: but there's reason to believe that investors have just not
Speaker 1: gotten there are panicky four you models still stuck in
Speaker 1: neutral territory. We don't see the four investors generally speaking.
Speaker 1: But when I visit and I've talked about the hundred
Speaker 1: and sixty investors in the last four weeks, UM, you know,
Speaker 1: sitting in front of them, chatting with them around the world,
Speaker 1: and I just don't see. You know, I think I
Speaker 1: found five bulls, that's it now, and then found I
Speaker 1: want to I don't want to suggest I found a
Speaker 1: hundred bears on the other side of it, UM, but
Speaker 1: I don't think people are. I don't think they have
Speaker 1: great conviction either way. So it's more they're they're they're
Speaker 1: frustrated they missed the run. They're kind of happy that
Speaker 1: the reflation trade is kind of weakening because they weren't
Speaker 1: positioned there. And actually the biggest pain they might suffer
Speaker 1: is if the market ran ten percent, because they're not
Speaker 1: ready for You mentioned energy a few moments ago. We're
Speaker 1: talking about sectories, So what do you anticipate. We'll see
Speaker 1: their energy and materials going forward. So on the energy,
Speaker 1: we break that out of materials in the US, just
Speaker 1: for people to understand, the SMP five hunded material sector
Speaker 1: is really chemicals. So when you think of material's, attend
Speaker 1: to think of medals and mining. That's true if you're
Speaker 1: looking at Asia, if you're looking at Europe, Latin America.
Speaker 1: But in the US it's really chemical. So we have
Speaker 1: a different, you know, it's slightly different animal in that
Speaker 1: regard um energy, we've we've we've and I know Tom's
Speaker 1: had had Morrison. Um, he's just great as a commodity
Speaker 1: research guy. He's still looking for sixty two dollar loyal
Speaker 1: at the end of the year. On that basis you
Speaker 1: really do want to own energy and take advantage of
Speaker 1: the pullback here that we've seen. UM. We had anticipated
Speaker 1: there would be some weakness in the first quarter and
Speaker 1: then we'd see strengthening through the balance of the year. UM.
Speaker 1: You know, the Saudis have vested interest here and getting
Speaker 1: prices up, that Russians have an interest in getting it up,
Speaker 1: and we might see some you know, shale cost development inflation,
Speaker 1: as you've got to bring people together here to to
Speaker 1: develop these new fields. UM. But they were laid off
Speaker 1: the last two years and they've got to be brought back,
Speaker 1: and probably some higher costs to doing this than maybe
Speaker 1: some people are anticipating right now. How about the forecast
Speaker 1: for the dollar and dollar strength's that affect them? So
Speaker 1: our guys are fairly neutral on the dollar. UM. I
Speaker 1: think they had better expectations going into the year than
Speaker 1: what we've seen play out. UM. And part of that
Speaker 1: I would say this, I'm not an f X expert
Speaker 1: by any by any measure, but the thing I would watch,
Speaker 1: for example, in dollar euro is more about the spread
Speaker 1: between the tenure bund and the tenure treasury as opposed
Speaker 1: to just looking at the tenure treasury and a vacuum
Speaker 1: as if the yield you know, has no competition around
Speaker 1: the world. And if you go back, let's say summertime
Speaker 1: of of UM last last year, you were looking at
Speaker 1: a one point three six one three seven tenure yield,
Speaker 1: but are looking on minus point for bund yield over
Speaker 1: the same time your timeframe. That's changed as well. As
Speaker 1: we've gone up, so has the BUN yield. So I
Speaker 1: think people forget that at times its dividend growth a
Speaker 1: proxy for yield. Help help all of our listeners with this.
Speaker 1: They're addicted to dividend growth. It's worked like a charm.
Speaker 1: But you and I know the party ends one day, doesn't,
Speaker 1: so dividend growth. Look, we spent thirty five years in
Speaker 1: a bond bull market, so at some point the bond
Speaker 1: bull market ends and the dividends bond bull market ended.
Speaker 1: Our senses, yes, but if you if you think in
Speaker 1: those terms, loss of the work done on Wall Street
Speaker 1: over the last thirty years has been in this kind
Speaker 1: of nice declining interest rate backdrop, and if that were
Speaker 1: to change, then many of the analyses done it's probably
Speaker 1: going to not be as benign as they thought it
Speaker 1: would be. So you know, it made sense to look
Speaker 1: for income growth when you had no alternatives, and dividends
Speaker 1: are one of the ways to generate it. But I
Speaker 1: was talking to our read analyst UM after it and
Speaker 1: just said, you know, the resector has been the worst
Speaker 1: performing sector since it became a sector. And part of
Speaker 1: the reason is UM that yields have shifted from that
Speaker 1: one point three six one point three seven low last summer,
Speaker 1: and there is competition for income. Let's bring this full circle.
Speaker 1: You are frustrated with those who have that myopic view
Speaker 1: of the markets right now, what do you say to them?
Speaker 1: What should they be looking at? What are you looking at?
Speaker 1: What's your vote of encouragement to them? So we look
Speaker 1: at a lobriety of things. We look at what are
Speaker 1: the early indicators of earnings growth? And and I know
Speaker 1: this surprises so many people, and we showed them the
Speaker 1: tightest fit that we're going to find with earnings growth
Speaker 1: is industrial production. And that shocks people. In of um
Speaker 1: of the economy is tied to industrial activity, but it
Speaker 1: is the most cyclical components. So who I describe it
Speaker 1: is you don't buy ten boxes of detergent when the
Speaker 1: economy is good. In one when it's bad, right as
Speaker 1: you need to launch your clothing. So you know what
Speaker 1: what vacillates is industrial activity and that has every indication
Speaker 1: of getting better. David, you didn't bring in full circle. Sorry.
Speaker 1: Anthony from New Jersey sends in a photo of p
Speaker 1: K Suba and doing a Don Cherry invitation. I'm gonna
Speaker 1: put this out on Twitter. Don even were the same
Speaker 1: quote code. I guess the next to night. But it's great,
Speaker 1: uh and we you know, shout out to all of
Speaker 1: Montreal and I did particularly for Montreal medicine. Uh in
Speaker 1: his tenure with the Canadians. And that's too much hockey
Speaker 1: for you. Good news. It will continue, Tobias Loveki, thank
Speaker 1: you so much. With City Group. This is Bloomberg brought
Speaker 1: you by Bank of America, Mary Lynch, dedicated to bringing
Speaker 1: our clients insights and solutions to meet the challenges of
Speaker 1: a transforming world. That's the power of global connections. Mary Lynch,
Speaker 1: Pierce Feeder and Smith Incorporated Member s I PC. It
Speaker 1: is now a great, great pleasure to bring back someone
Speaker 1: we talked to too many times, David Harrow of Harris Associates.
Speaker 1: And we'll do a little bit of politics here on
Speaker 1: the backside. David, what a great conversation earlier this morning
Speaker 1: with Kathy Matsui of Golden Sacks Equities in Tokyo and
Speaker 1: talking with her enthusiasm about obonomics and about the potential
Speaker 1: lift of dirt cheap Japanese big stocks. Are they dirt cheap? Um?
Speaker 1: They are cheap in price, But value just din't uh
Speaker 1: described or defined by price. You have to look at
Speaker 1: what you're getting for what you're paying. So if you
Speaker 1: look at low on the surface multiples for Japanese stocks,
Speaker 1: you have to compare it to low returns on equity
Speaker 1: and returns on capital, which when you add that to
Speaker 1: the formula, they don't look all that cheap. Some are.
Speaker 1: But the problem with Japanese companies in corporate Japan as
Speaker 1: their return structures are persistently low. And I thought you
Speaker 1: you'd be willing. You shouldn't be willing to pay any
Speaker 1: kind of a premium. In fact, you should pay a discount.
Speaker 1: They deserve their law valuations because of the low returns
Speaker 1: companies suffer from. In folks, I sort of knew where
Speaker 1: the answer was going, and I set Mr Harold up here,
Speaker 1: can they finally become more Anglo Saxon, Like, that's what
Speaker 1: I asked, miss Massou MASSOOI let me ask you as well,
Speaker 1: are they you know you talk about returns in r
Speaker 1: o E. Are they going to deploy more cash to
Speaker 1: a shareholder centric company or is it the same old
Speaker 1: same Hold? Oh, Tom, this has been you know, I've
Speaker 1: been doing a since and I first Brewers. One was
Speaker 1: that one of the Brewers go to the World Series.
Speaker 1: I wasn't undergraduate school, so I think that was like
Speaker 1: eight two anyway. Anyway, I mean, here is the problem
Speaker 1: that the Japanese managements and boards often do not view
Speaker 1: the shareholders as a very important constituent. And when you
Speaker 1: add to that the way these boards and managements are
Speaker 1: protected from hospital takeovers, you don't see activity. Even though
Speaker 1: when this GP if the big Japanese pension funds stated
Speaker 1: they're gonna start coming down hard on Japanese companies unless
Speaker 1: they earn an eight or nine percent return on equity,
Speaker 1: which is almost laughable because what's wrong with thirteen, fourteen
Speaker 1: or fifteen percent return on equity, especially given the nature
Speaker 1: of the inefficient balance sheets in corporate Japan. So this
Speaker 1: is a huge problem, and I would love to say
Speaker 1: that we're making huge progress. It's slowly going in the
Speaker 1: right direction, but it's ever so slowly, and it's not
Speaker 1: broad based at all. I mean, you just have companies
Speaker 1: that have of their market cap sitting in cash earning zero.
Speaker 1: That is value destructive in our view. And when you
Speaker 1: have these low returns drip even by poor capital allocation,
Speaker 1: and they're also not so good on expenses and profit margins,
Speaker 1: then you know you deserve these low prices. And I
Speaker 1: really don't know what's going to change it. I'm in
Speaker 1: Japan once or twice a year and you sit there
Speaker 1: and you're literally harp on these people and then not
Speaker 1: to go yeah yeah, yeah, yeah, thank you, thank you,
Speaker 1: thank you, and then they just turn around and do
Speaker 1: the other things. So I don't know. I I wish
Speaker 1: I would be seen better progress, but you know, it's
Speaker 1: it's frustrating, actually very frustrating. This is a remorseful data sad.
Speaker 1: Let me let me pivot to ask you. But I know,
Speaker 1: I know you're investing in emphasis now, and I wonder
Speaker 1: if that is if that is an outlie or company.
Speaker 1: Other words, when you look at the kind of opportunity,
Speaker 1: degree of opportunity in India. Is there a lot there
Speaker 1: or are you taking small steps in? Well, again, there
Speaker 1: are things happening there, but it's so pricey. It is
Speaker 1: so pricey. The government is trying to do the right things. Uh.
Speaker 1: Corporate India is pretty good. Uh. They have some good
Speaker 1: competitive advantages and certain things like what the business InFocus
Speaker 1: is in this outsourcing, which, by the way, the reason
Speaker 1: why prices are lowest. Persives questions about H one, b
Speaker 1: vs as, etcetera. That's a whole another story. But UM
Speaker 1: India is trying to do the right thing, and that
Speaker 1: is really have a more open economy and be have
Speaker 1: more liberal economic policies conventional historical liberal economic free market
Speaker 1: policies and and the UM government was helped there with
Speaker 1: another big election wins, so so hopefully you will start
Speaker 1: to see more of these policies. I mean GDP per
Speaker 1: head in India is still a fraction of that of China,
Speaker 1: and a lot of this is the result of their
Speaker 1: inability to drive through infrastructure projects and to get higher
Speaker 1: productivity in their economy based on simple things like Rhodes highways, plumbing, etcetera.
Speaker 1: I mean, there's a fascinating statistic about just the lack
Speaker 1: of plumbing in India as an example. So, and there's
Speaker 1: so much potential. You have a two to three hundred
Speaker 1: million people middle class there um, but then you do
Speaker 1: have this large, large lower class and large very low
Speaker 1: GDP perhead which they're they're trying to do something about.
Speaker 1: What's your advice to an investor who, like you, sees
Speaker 1: that opportunity in India maybe hasn't played in that market before.
Speaker 1: What are you looking at? What are you advising they
Speaker 1: look at before they get in, But you have to
Speaker 1: look at prices and what they're selling for because a
Speaker 1: lot of times the big picture euphoria just attracts money
Speaker 1: for that very reason without looking at the price you
Speaker 1: are paying. And then it becomes the momentum market, a
Speaker 1: market that just trades on headlines. And again that's just
Speaker 1: kind of counter to how we do things. It might
Speaker 1: work in the short term, is our view, but you know,
Speaker 1: in the medium and long term, you buy quality at
Speaker 1: a low price and you be patient. That's how you
Speaker 1: make money. And the problem with I think that the
Speaker 1: public is they just they see these big themes and
Speaker 1: they want to jump on them, and they do it
Speaker 1: irrespective of price paid. It's like getting out of train
Speaker 1: that's moving, but not knowing where that train's final destination is.
Speaker 1: Let's take the train up to Europe. And we've we've
Speaker 1: seen these capital raising schemes with Credit Swiss and Deutsche Bank.
Speaker 1: That's it. That's why he's still remorse today. It's dilution.
Speaker 1: I wanted to ask him about delusion. Let me let
Speaker 1: me get your perspective on that, David, if I could, well,
Speaker 1: in the case of Deutsche Bank, I think there's there
Speaker 1: was a very solid reason because of you know, relatively
Speaker 1: low capital ratios and and a bit of a patness
Speaker 1: in the whole Deutsche Bank situation, and I would say
Speaker 1: a lack of profitability in their core home banking market Germany.
Speaker 1: You know, I've said before on this show Germany is
Speaker 1: one of the worst markets to be a banker, and
Speaker 1: it's it's just hyper competitive, a low returns. They have
Speaker 1: these things called landa spank in which ruined prices and
Speaker 1: give loans to anyone, and you know you're not a
Speaker 1: good place. Do you own German shares? We don't own
Speaker 1: any We don't own any shares in German banks. And
Speaker 1: in fact, we looked at it into Italian Bank when
Speaker 1: any credit came around. You know, one of the problems
Speaker 1: we didn't invest in that bank. But they have a
Speaker 1: big presence in Germany, and they're big, huge presence in Germany.
Speaker 1: Doesn't make any money. You have all these assets deployed
Speaker 1: that make no money, and it's just it's a very
Speaker 1: difficult market that needs to be restructured. UM, So deut
Speaker 1: your bank. I think that there was a reason why
Speaker 1: they raised capital. Now, don't forget credit suite. On the
Speaker 1: other hand, they did have a capital race, a relatively
Speaker 1: small one a couple of years ago, um, about a
Speaker 1: year and a half ago when Mr Tim just started,
Speaker 1: a few months after he started. And I think there
Speaker 1: was as a result of the UM Swiss national banks
Speaker 1: changing capital requirements and a result of all find they
Speaker 1: had to pay. You saw the RMBS fine they had
Speaker 1: to pay. Um. There's a question of whether they have
Speaker 1: a strong enough capital position. From what we can't see here,
Speaker 1: it appears they appear to be in decent shape, especially
Speaker 1: if they continue to improve their earning stream, which they
Speaker 1: could then build upon capital. I mean, I would rather
Speaker 1: have them look at their dividend policy, for example, before
Speaker 1: they look at raising capital. Shareholders and see what happens
Speaker 1: in the next year or so in terms of earning.
Speaker 1: Should they should? Should? They? Should? They? Should? They just
Speaker 1: get through the pain and actually do M and A.
Speaker 1: I don't think there's a lot of M and A
Speaker 1: they should be doing right now that could be additive.
Speaker 1: There might be a little something here and there. As
Speaker 1: we know in Switzerland, a lot of these small private
Speaker 1: banks are suffering because of the inability to have the
Speaker 1: money to comply with new rules and regulations. Let to
Speaker 1: the state might make sense rolling up some private Let's
Speaker 1: come back and continue this discussion on credit Sweeze with
Speaker 1: David Harold Harris Associates on credit Sueeze, it's a smaller
Speaker 1: transaction than Deutsche Bank. Clearly they're not a comparative to
Speaker 1: Deutsche Bank, but one of the similarities is this desire
Speaker 1: to expense control if they expense to the bone or
Speaker 1: is there more to go from where you sit? I
Speaker 1: think this is the beauty of the new managements approach
Speaker 1: at credit suits. Is this to borrow what you happen
Speaker 1: East term kaison continuous improvement and and their business constantly
Speaker 1: looking for new ways to do business processes better and
Speaker 1: cheaper and by the way, this is how every business
Speaker 1: should function, and unfortunately people can just get a little complacent.
Speaker 1: And I think what what t JAM is doing is
Speaker 1: really putting a focus on being creative with with running
Speaker 1: the business and making sure that we're looking at new
Speaker 1: ways to do things at a lower cost space is
Speaker 1: so I think they will continually be pushing expenses down
Speaker 1: and productivity up. And whether that means doing creative things
Speaker 1: as far as outsourcing some back back office stuff or
Speaker 1: or doing it collectively with some of their peers. Uh,
Speaker 1: They're open to all these things. And I think this
Speaker 1: fresh look at things. You know, historically these investment makes
Speaker 1: it made so much money, they treated as if it
Speaker 1: were just you know, it was coming from the clouds.
Speaker 1: And now I think it's it's not that easy to
Speaker 1: earn money consistently, and so this expense management is a
Speaker 1: good way to help create a nuity like earning stream.
Speaker 1: One more question before David Gura gets to the politics
Speaker 1: of the moment. David Harrow helped me here with the
Speaker 1: gamesmanship of mergers where people talk about credit squeeze and
Speaker 1: Morgan Stanley mating or you can name any other peers
Speaker 1: that you want. I can't get Credit Squeeze to be
Speaker 1: in Peace size or Deutsche Bank size or maybe some
Speaker 1: of the UK bank size. Where do they fit in
Speaker 1: and who would they bolt onto to make a bigger bank? Yeah,
Speaker 1: I don't know if bigger's naturally better. I think what
Speaker 1: we want them to do first and foremost is to
Speaker 1: cement their strength and private wealth management, and the private
Speaker 1: bank is specifically with their franchise in Asia, and I
Speaker 1: believe they do have strong franchises within their investment bank
Speaker 1: and equities and fixed income and even in doing some deals,
Speaker 1: and so the two have to kind of work together,
Speaker 1: and especially in Asia where there is a stronger link
Speaker 1: between wealth management and investment bank with the rich wealthy
Speaker 1: family groups, the billionaire family groups with their businesses aligned
Speaker 1: with their family wealth. So I don't know if big
Speaker 1: is necessarily better. I think let's get better first and
Speaker 1: then look at size and scale, and I think there's
Speaker 1: still plenty of room to get better before you look
Speaker 1: at any kind of major m and a as I
Speaker 1: that some small emanate maybe in the works might make
Speaker 1: sense with some, especially the Swiss and the Swiss private
Speaker 1: banking sector. With this, in these smaller banks, we just
Speaker 1: don't have the funds that can beat anymore given today's
Speaker 1: compliance costs. We've talked an awful lot about what what
Speaker 1: happened with healthcare reform portends for taxi for let me
Speaker 1: just ask you about regulation instead. More in your your
Speaker 1: wheelhouse there when when you look at what might become
Speaker 1: of Dodd Frank, what do you see happening and how
Speaker 1: could that affect banks like a credit suite in Deutsche Bank.
Speaker 1: I think there will be changed. I mean clearly and clearly,
Speaker 1: and I think it was Robert Barrel and time. You
Speaker 1: probably remember this very good essay he wrote in the
Speaker 1: Wall Street Journal a year ago about the cost of regulation,
Speaker 1: and perhaps this is one of the reasons why the
Speaker 1: economic recovery was so weak post the O eight oh nine.
Speaker 1: I mean, it's the old pendulum story. The pendulum, the
Speaker 1: regulatory pendulum swung too swiftly to the wrong side, to
Speaker 1: the overregulation side. Good, transparent, easy to follow regulation is important,
Speaker 1: and it helps businesses can be able to conduct commerce.
Speaker 1: But when you have overly burdensome regulation that it's just
Speaker 1: layers and layers and pages and pages, it prohibits commerce.
Speaker 1: It prohibits people from taking risks because you don't know
Speaker 1: whether what you're going to ultimately do is going to
Speaker 1: be cost effective or if the regulator is going to
Speaker 1: regulate your profits away. And whether it be healthcare, whether
Speaker 1: it be energy, whether it be financial services. All the
Speaker 1: major sectors of our economy were bombarded by the previous
Speaker 1: administration and regulations that often, in my opinion, were senseless.
Speaker 1: No one looked at cost benefit analysis, no one looked at,
Speaker 1: you know, really what the impacts were. They just did
Speaker 1: it because, as our European chairman once told me, regulators
Speaker 1: do what they do. They like to regulate. David, we've
Speaker 1: run out of time. Help me here with speaking Ryan,
Speaker 1: you're with Wi consin. You know, the gentleman from Wisconsin. Uh,
Speaker 1: what does he need to do to write the ship.
Speaker 1: It's a setback, And what he needs to do is
Speaker 1: just find common ground with the people in his own caucus.
Speaker 1: This has always been a rambunctious caucus that he's had
Speaker 1: to deal with. Remember he kind of made a deal
Speaker 1: with him to get elected speaker to begin with. And
Speaker 1: I think you just have to find common ground. And
Speaker 1: you know, people can't forget that if everyone gives a little,
Speaker 1: no one has to give a lot, and this is
Speaker 1: what he has to push with that rambunctious, rowdy caucus.
Speaker 1: Now he has not enough time. David Harro, Let's do
Speaker 1: it again. David Harrow with Harris Associates UH this morning,
Speaker 1: particularly David Girl that the thoughts on Japan. Always a
Speaker 1: pleasure to be joined by Yakum Fels. He's the Global
Speaker 1: Economic advisor at PIMCO. He joins us now here on
Speaker 1: Bloomberg Experience. Great to have you with us, And I
Speaker 1: was taken by your latest March outlook here you're write
Speaker 1: about how there is a theme too Pimco's March two
Speaker 1: thou seventeen cyclical form that's scaling it back, and the
Speaker 1: inspiration for that, perhaps indirectly from the Fed chair Jenny Yell.
Speaker 1: And it's something that doesn't just extend to monetary policy.
Speaker 1: It's it's a broader theme. Yeah, that's right, David. So
Speaker 1: scaling back doesn't only refer to monetary policy. But we
Speaker 1: we also, you know, we looked at the risks that
Speaker 1: we talked about going into the year after our December forum,
Speaker 1: the left tail and the right tail risks. Back then
Speaker 1: we had talked about fat tales and we reassess them,
Speaker 1: and we said, hey, we think it's time to scale
Speaker 1: back a little bit some of those risks because we've
Speaker 1: learned some things over the first few months. You know,
Speaker 1: Trump didn't get aggressive on on protectionism, at least not yet,
Speaker 1: and he could have done so by executive order. So
Speaker 1: at the margin, we thought that is good news. UM. Also,
Speaker 1: it's unlikely that we get a huge, big fist could
Speaker 1: boost anytime soon, which could have led to an overheating
Speaker 1: of the economy and a very aggressive fat response. So
Speaker 1: in that sense, we thought it was time to scale
Speaker 1: back some of those left tail and right tail risks. UM.
Speaker 1: The same also applies to the China risk, where the
Speaker 1: focus really is on stability ahead of the nineteenth Party
Speaker 1: Congress in October of this year. UM. And so overall
Speaker 1: our assessment was, well, let's scale back these left and
Speaker 1: right tail risks a little bit. We've slightly increased our
Speaker 1: outlook for growth this year. But then here's the bad news.
Speaker 1: This means central banks like the FED, like the ECB
Speaker 1: will feel encouraged to scale back accommodation maybe a little
Speaker 1: bit earlier than previously expected. And I think that poses
Speaker 1: some risks for markets going forward. Politics in Washington is
Speaker 1: playing a much bigger role on our program for sure,
Speaker 1: And I imagine that you're quarterly four when you've got
Speaker 1: a Marie Slaughter there from New America and Ben Berniki
Speaker 1: of Brookings. There is a spirited debate about the change
Speaker 1: going on in Washington, d C. How much how much
Speaker 1: of your time we spent talking about what's changed? Well,
Speaker 1: we spent a lot of time on this UM. I
Speaker 1: would say about a quarter, maybe even a third of
Speaker 1: the forum of the economic forum we spent talking about
Speaker 1: the policy outlook. Yes, with Ben bernanke with and Marie Slaughter.
Speaker 1: Gordon Brown also weighed in with his perspective UM not
Speaker 1: only on the US politics, but also on European and
Speaker 1: in UK politics given Brexit. But then UM, at the
Speaker 1: end of the day, politics is only part of what
Speaker 1: drives markets. There's a lot of focus on it, but
Speaker 1: there are other things like central banks. Uh, there's China
Speaker 1: where we had a massive credit impulse last year, a
Speaker 1: positive credit impulse that really lifted all the global boats,
Speaker 1: not only Chinese financial markets but also global financial markets.
Speaker 1: There was a rebound in global trade that we've seen
Speaker 1: over the past six months, probably sparked by this credit impulse.
Speaker 1: So there's a lot more to talk about than just Washington.
Speaker 1: And I think, um, it is very dangerous to only
Speaker 1: watch the wheats um and only look at the political headlines.
Speaker 1: If you look at how markets have done, we've had
Speaker 1: amazingly low volatility despite all the political volatility coming out
Speaker 1: of Washington. You have come help us here, and I
Speaker 1: say this about the United States with your expertise and
Speaker 1: the continent of Europe. And I guess it's a form
Speaker 1: of eurosclerosis, but maybe without the negativity. Do our listeners
Speaker 1: in America do they need to get use to damp
Speaker 1: phenomenal g d P, dampen animal spirits in some American
Speaker 1: form of eurosclerosis. Well, Tommy, you could you could argue
Speaker 1: that this is actually what we have seen in this
Speaker 1: entire economic expansion, which is now in its eighth year.
Speaker 1: We've had very low nominal GDP growth, We've had very
Speaker 1: dampened animal spirits. So this is in a way the
Speaker 1: story of this economic expansion since the Great Financial Crisis.
Speaker 1: So we've had an American sclerosis for a long time,
Speaker 1: and we hear at PIMCO called it the new normal
Speaker 1: and the new neutral, And I think the big debate
Speaker 1: now is has been since the election, whether we can
Speaker 1: break out of the new normal, and we can break
Speaker 1: out of the new neutral and really move back to
Speaker 1: the old normal, higher growth, higher inflation, higher interest rates.
Speaker 1: That was a debate we had in at the December Forum.
Speaker 1: That was a debate we had again in March. But
Speaker 1: our conclusion is no. We think we are still in
Speaker 1: this new normal of low growth, low nominal growth, not
Speaker 1: quite as low as we had it in the last
Speaker 1: few years, but we're way We're far away from going
Speaker 1: back to the old normal. At this stage we spend
Speaker 1: all of our time and I'm hugely biased and wrong
Speaker 1: about this, folks. Is the basic idea of ken Europe
Speaker 1: become more Anglo Saxon, Let me flip it on its head,
Speaker 1: thinking of the great Conrad at an hour in the
Speaker 1: social fabric he established for Germany. Does the US need
Speaker 1: to become more continental European? I think what you've seen
Speaker 1: tom over the past and fifteen, maybe even twenty years,
Speaker 1: is that there has been a certain convergence between the US,
Speaker 1: or what you call the Anglo Saxon model and the
Speaker 1: continental European model. So you could argue the US has
Speaker 1: become a little bit more continental, right, We've built out
Speaker 1: the welfare state also here in the US with Obama Care, etcetera.
Speaker 1: UM and Europe had some market based, market oriented reforms
Speaker 1: at least in the early days of the euro back
Speaker 1: in the ninety nineties. Then sparked by the crisis a
Speaker 1: few years back, some countries in Europe, like Spain for example,
Speaker 1: also became more Anglo Saxon by making their labor markets
Speaker 1: more flexible, allowing more wage flexibility. And you know, Spain
Speaker 1: has been quite successful in regaining growth and regaining competitiveness.
Speaker 1: So I think there has been a convergence that has
Speaker 1: been going on for quite a while. David Gara and
Speaker 1: Tom Keene in New York, this is Bloomberg surveillance on
Speaker 1: bloom Burgardier with Yakum Fell's globe like an armic advisor
Speaker 1: at Pimcogne. You mentioned China a few moments ago. We
Speaker 1: had that meaning a couple of weeks back, and I
Speaker 1: wonder how cognizant the Chinese government is right now of
Speaker 1: its economic situation. Are we see more transparency here, we
Speaker 1: see more of a movement in that direction. Well, I
Speaker 1: think At the moment, we're moving in the other direction
Speaker 1: because the key focus of the Chinese authorities is really
Speaker 1: to ensure stability, both financial stability but also economic stability
Speaker 1: ahead of the Party Congress President. She wants to consolidate
Speaker 1: his power, so the last thing he needs is either
Speaker 1: disruptive markets or too sharp and economic slowdown. So what
Speaker 1: we've seen is they've clamped down on the capital outflows
Speaker 1: quite successfully, at least in the near term, and it
Speaker 1: shows up in a stabilization of the currency. That also
Speaker 1: helps to stabilize domestic financial markets because all the savings,
Speaker 1: the excess savings are bottled up in China, Chinese investors
Speaker 1: have no choice but to invest domestically, so this is
Speaker 1: supporting Chinese assets. And I think what we'll see in
Speaker 1: the economy is just a continuation of relatively decent grow
Speaker 1: It's slowing over the medium term, but they have the
Speaker 1: fiscal wherewithal to stabilize it at least until the end
Speaker 1: of this year. We are more worried about the medium
Speaker 1: and longer term outlook because there is a credible bubble
Speaker 1: credit bubble in the making, and eventually it will be
Speaker 1: very difficult to stop the capital outflows. But for now,
Speaker 1: the buzzword is really stability within any given moment. There's
Speaker 1: some back stories that are percolating, and one of them
Speaker 1: right now, YAKAM is loan demand from banks. See and
Speaker 1: I loans have rolled over. Some people are making a
Speaker 1: big deal about it, and others frankly or dismissing it. Folks,
Speaker 1: what's the spirit the dynamic that you see now in
Speaker 1: banking loans? Yeah, it's quite interesting, Tom, Yes, we have
Speaker 1: seen quite a significant slowdown and see ANI loans here
Speaker 1: in the US. What's behind this, Well, if you look
Speaker 1: at it in more detail, banks have lent less to
Speaker 1: companies for M and A activity. So what has happened
Speaker 1: is M and A activity has somewhat slowed down here
Speaker 1: in the US. We think this probably also reflects uncertainty
Speaker 1: about what exactly is going to happen in terms of
Speaker 1: tax reform. Also, you could argue that for many companies
Speaker 1: it just pays to wait and see what happens on
Speaker 1: tax reform before they put in place business investment. So
Speaker 1: we have this paradoxical situation where business confidence is up
Speaker 1: in the expectation of reforms, but companies don't actually invest
Speaker 1: a lot We have some cyclical rebound of investment in
Speaker 1: the energy sector, but that's related to the oil price.
Speaker 1: But otherwise we see caution and this is why we
Speaker 1: continue to think that three percent or even four percent
Speaker 1: growth anytime soon. It's just unachievable. Yeah, Fell thank you
Speaker 1: so much with PIMCO. Always a great Now you look
Speaker 1: forward to speaking here, particularly your next visit to New York.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on iTunes, SoundCloud, or whichever podcast platform
Speaker 1: you prefer. I'm out on Twitter at Tom Keene. David
Speaker 1: Gura is at David Gura. Before the podcast, you can
Speaker 1: always catch us worldwide. I'm Bloomberg Radio, brought you by
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