WEBVTT - German Banking Market Needs to Be Restructured, Herro Says 0:00:00.120 --> 0:00:02.920 Brought you by Bank of America, Mary Lynch. Investing in 0:00:03.000 --> 0:00:07.840 local communities, economies and a sustainable future. That's the power 0:00:08.080 --> 0:00:12.360 of global connections, Mary Lynch, Pierce Fenner and Smith Incorporated 0:00:12.760 --> 0:00:27.400 Member s I p C. Welcome to the Bloomberg Surveillance Podcast. 0:00:27.840 --> 0:00:31.520 I'm Tom Keene with David Gura. Daily we bring you 0:00:31.560 --> 0:00:36.600 insight from the best in economics, finance, investment, and international relations. 0:00:37.000 --> 0:00:41.600 Find Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and 0:00:41.680 --> 0:00:49.159 of course on the Bloomberg Device left which joins us 0:00:49.159 --> 0:00:51.720 now in our Bloomberg eleven three studio, se City Groups, 0:00:51.840 --> 0:00:54.920 Chief US Equity STRTUS. Great to have you with this here. 0:00:55.000 --> 0:00:56.560 Let's pick up the pieces a little bit after what 0:00:56.600 --> 0:00:59.920 we saw last week in Washington. We're wondering about animals, 0:01:00.000 --> 0:01:02.920 earths and degree to which they are fueled by stimulated 0:01:02.960 --> 0:01:05.840 by what's going on in Washington or perhaps not. What 0:01:05.880 --> 0:01:07.360 did you make of what happened last week at the 0:01:07.360 --> 0:01:11.399 conclusion of the debate eight day debate over healthcare reform 0:01:11.400 --> 0:01:15.360 in Washington. There's so many different people, you know, pinting 0:01:15.360 --> 0:01:17.399 on this, and and I guess my sense is that 0:01:17.560 --> 0:01:21.240 people got either too excited or too depressed around it. Um. 0:01:21.480 --> 0:01:25.480 We wrote something overnight saying that just like on November 0:01:25.640 --> 0:01:27.560 ninth or tenth, and you know, people were saying the 0:01:27.560 --> 0:01:30.399 Democratic Party was done for and you know, stick a 0:01:30.400 --> 0:01:33.160 fork in it. Um that the same thing is kind 0:01:33.160 --> 0:01:35.360 of being written kind of the obituaries or of the 0:01:35.360 --> 0:01:38.240 Republicans now over the weekend, given the failure of the 0:01:38.520 --> 0:01:41.160 of the repeal deal. UM. I think both of these 0:01:41.160 --> 0:01:45.240 are highly exaggerated. Both parties have um splits and factions, 0:01:45.319 --> 0:01:47.680 and you know, there were even comments that that I 0:01:47.720 --> 0:01:50.520 thought were pretty well found that the negotiations were kind 0:01:50.520 --> 0:01:53.080 of going on between the different size of the Republican 0:01:53.120 --> 0:01:56.080 Party around the repeal deal. And then once they put 0:01:56.120 --> 0:01:58.560 in this kind of deadline we're voting on Friday, you know, 0:01:58.920 --> 0:02:01.560 take it or leave it. This kind of hardened positions 0:02:01.600 --> 0:02:04.120 as opposed to the compromise. So you can walk away 0:02:04.160 --> 0:02:07.520 and say, hey, the Freedom Caucus has kind of burnished 0:02:07.520 --> 0:02:11.080 its conservative credentials and might be more willing to compromise 0:02:11.120 --> 0:02:14.760 in the future. Endeavor or that's it. They've they've it's worked, 0:02:14.840 --> 0:02:16.960 and they're going to continue to be that hard I 0:02:17.000 --> 0:02:18.919 think time will tell. I think these these kind of 0:02:18.919 --> 0:02:23.200 off the cuff responses and are more I don't know 0:02:23.200 --> 0:02:26.560 if the right word is filtered by partisanship, and therefore 0:02:26.600 --> 0:02:29.400 each side kind of hammers away at it. I still 0:02:29.440 --> 0:02:32.480 believe the Republicans have to deliver on a number of 0:02:32.520 --> 0:02:35.799 their promises before they go to mid terms, otherwise they're 0:02:35.800 --> 0:02:38.080 going to be slaughtered. Um and and they kind of 0:02:38.120 --> 0:02:40.560 know that. I mean they've been telling people, for example, 0:02:40.560 --> 0:02:43.720 in Obamacare Affordable Care Act, that's been a horrible deal 0:02:43.760 --> 0:02:46.520 for seven years, um and then you do nothing to 0:02:46.600 --> 0:02:50.320 address it and we'll let it explode. I don't think 0:02:50.320 --> 0:02:53.720 that sells well in Peoria. Fold this into to your 0:02:53.840 --> 0:02:55.800 your world the equity space. We've been told by so 0:02:55.840 --> 0:02:58.280 many people here that the Trump trade really had very 0:02:58.280 --> 0:03:00.240 little to do with with Trump, the things that had 0:03:00.240 --> 0:03:03.160 begun to to move before he was elected. After we 0:03:03.200 --> 0:03:05.360 saw that happen on Friday, did that change anything? Saying 0:03:05.360 --> 0:03:07.560 the health care sector? Where your your prospects for it? 0:03:07.600 --> 0:03:09.799 For the equities markets? Way forward? So as I agree 0:03:09.800 --> 0:03:12.720 that much of the the activity was already starting before 0:03:12.960 --> 0:03:16.119 for example, uh tenure break evens it started to turn 0:03:16.120 --> 0:03:19.399 in February of last year, um, not February of this year. 0:03:19.760 --> 0:03:22.120 So UM, it's it's hard for people to kind of 0:03:22.160 --> 0:03:24.320 get their heads around that this started twelve months ago 0:03:24.400 --> 0:03:27.800 or thirteen months ago. UM. But there's more than that. 0:03:27.840 --> 0:03:29.680 There's a lot of other piece of evidence that that 0:03:29.840 --> 0:03:34.480 suggests things were improving before the president was elected. UM. 0:03:35.080 --> 0:03:38.080 I do find the the you know, the reactions and 0:03:38.200 --> 0:03:42.400 markets very again kind of off the cuff. UM. It's 0:03:42.400 --> 0:03:45.160 not what I would call real investing. It's trading around 0:03:45.480 --> 0:03:48.120 kind of a news headline. UM. My job is to 0:03:48.200 --> 0:03:49.880 kind of figure out what's going to likely play out 0:03:49.880 --> 0:03:52.440 three or six nine months from now, not what's gonna happen, 0:03:52.800 --> 0:03:55.400 you know, tomorrow morning at that the that the opening 0:03:55.400 --> 0:03:57.920 of trading. UM. And I don't think a lot of 0:03:57.960 --> 0:04:01.120 investors make money on the shoot from the hip type 0:04:01.800 --> 0:04:05.320 uh decisions. Within you know, a week or two, they 0:04:05.360 --> 0:04:07.640 find themselves on the losing end of that transaction. So 0:04:08.080 --> 0:04:11.760 I I get frustrated a little bit by it because 0:04:11.760 --> 0:04:13.440 I think people are spending way too much time on 0:04:13.480 --> 0:04:15.720 it instead of trying to think about it. And what 0:04:15.760 --> 0:04:17.760 we've seen really in the last two weeks talking to 0:04:17.760 --> 0:04:21.640 the institutional investors is this extraordinarily my opic kind of 0:04:21.640 --> 0:04:24.320 what happened in the last week, Will it continue next week? 0:04:24.360 --> 0:04:28.120 And it's stuff that I just get really annoyed at. 0:04:28.680 --> 0:04:30.640 Maybe it's I take it to personally, I don't know. 0:04:32.600 --> 0:04:34.800 On blue gray with the left bach of of sitting here, 0:04:34.839 --> 0:04:37.160 how worried should we be about a flatter yield curve 0:04:37.200 --> 0:04:41.440 at this point? Look, I think people were resisting any 0:04:41.520 --> 0:04:45.480 form of it steepening too, So UM investors are reacting 0:04:45.520 --> 0:04:47.200 to it, and they should. It has impact on the 0:04:47.240 --> 0:04:50.000 financials and how they trade UM, given that the curve 0:04:50.200 --> 0:04:54.480 determines often that that that net interest margin opportunity UM. 0:04:54.839 --> 0:04:57.440 I've heard people, for example, the financials worry more about 0:04:57.920 --> 0:05:02.080 UM the commercial industrial loan growth having decelerating UM. And 0:05:02.160 --> 0:05:04.760 I think it's interesting to note again the miss on 0:05:04.800 --> 0:05:07.600 the fundamental story. The Senior Loan Officer survey from the 0:05:07.600 --> 0:05:09.960 Federal Reserve Board on C and I lending tends to 0:05:10.040 --> 0:05:13.839 lead actual business loans by six quarters, so that that 0:05:13.960 --> 0:05:18.080 deceleration that you're seeing currently is reflective more of the 0:05:18.240 --> 0:05:23.000 very tight financial conditions we were seeing in late UH 0:05:23.080 --> 0:05:26.200 when the credit markets were distorted by energy and that's 0:05:26.279 --> 0:05:28.120 kind of now reversed, and we should see by the 0:05:28.200 --> 0:05:31.039 end of the year improving lending activities. So again it's 0:05:31.080 --> 0:05:33.440 this very myopic to look at what the last data 0:05:33.480 --> 0:05:36.800 point is, don't look about where we're headed. So that's 0:05:36.839 --> 0:05:38.400 the same thing going on in the curve. This is 0:05:38.400 --> 0:05:40.320 really important. It has been written up by any number 0:05:40.320 --> 0:05:42.680 of people, Ambrose, Evans, Pritchard and the Telegraph doing a 0:05:42.680 --> 0:05:45.600 great treatment Tobias. Let's get smarter here and we can 0:05:45.600 --> 0:05:49.080 do this with you because of your securities research background. 0:05:49.200 --> 0:05:53.480 Help me here with what C and eye loans actually are? 0:05:53.920 --> 0:05:57.880 Are they the car loan for David's new Bentley? So 0:05:57.880 --> 0:06:00.200 so the FED breaks out there lending Sir of a 0:06:00.480 --> 0:06:02.240 in three different areas. They look at it in the 0:06:02.240 --> 0:06:06.120 consumer loans, real estate loans, and commercial industrial loans, which 0:06:06.120 --> 0:06:09.440 are business corporate loans. So you know, when we talk 0:06:09.480 --> 0:06:12.920 about the credit card, or we talked about the autois, 0:06:12.960 --> 0:06:15.120 that's consumer loans. When we talk about you know, real 0:06:15.200 --> 0:06:18.160 estate development, it's obvious it's real estate. When we talk 0:06:18.200 --> 0:06:20.960 about business loans with the IBM s of the world 0:06:21.000 --> 0:06:24.320 do or what Caterpillar does that, that's that's the kind 0:06:24.360 --> 0:06:26.839 of thing we're dealing with. How does the CNI loan 0:06:27.040 --> 0:06:29.480 roll over end if we have a three months moving 0:06:29.600 --> 0:06:32.920 average of CNI loans rolling over, which is a chart 0:06:33.000 --> 0:06:37.320 that's ubiquitous now in research. How does it terminate? What 0:06:37.440 --> 0:06:40.720 where do you see the long growth step in so well, 0:06:41.080 --> 0:06:44.640 so it's usually used as a proxy for business activity. Right. 0:06:44.839 --> 0:06:48.159 If companies are boring money to invest, that's great, um 0:06:48.680 --> 0:06:50.760 And when they're not, there must be something wrong. And 0:06:50.800 --> 0:06:52.880 that's why I think everybody's so focused on this business 0:06:52.960 --> 0:06:57.320 lending growth rate slowing. But again that's a lagging of roll. 0:06:57.560 --> 0:07:01.240 It's a lagging indicator for those uh our credit if 0:07:01.240 --> 0:07:05.919 credit standards easing or tightening, and they started easing around 0:07:06.000 --> 0:07:08.080 May of last year, which means by the end of 0:07:08.120 --> 0:07:11.240 this year, given that six quarter lag, we should see 0:07:11.240 --> 0:07:13.960 that we're going soft duns. You're telling me the soft 0:07:14.040 --> 0:07:18.720 data n f IB statistics is more indicative future animal 0:07:18.800 --> 0:07:22.120 spirit only we're going soft dun. It's like the Montreal 0:07:22.240 --> 0:07:24.760 I'm not going soft dust. I just know that that. 0:07:25.000 --> 0:07:27.960 I just know from my experience of thirty years that 0:07:28.080 --> 0:07:30.800 were and looking at data going back years, that this 0:07:30.800 --> 0:07:34.920 stuff always leads business activity. And you're supposed to look 0:07:34.960 --> 0:07:37.800 at the lead indicators, not the lagging indicators. Lagging looking 0:07:37.800 --> 0:07:39.800 backwards doesn't really help you. I don't know anybody who's 0:07:39.880 --> 0:07:43.840 driven successfully by only watching through the review mirror. Can 0:07:43.880 --> 0:07:46.040 we bring us over to an important thing that everybody 0:07:46.080 --> 0:07:49.080 will understand is p K suban a leading or lagging 0:07:49.120 --> 0:07:53.760 indicator for the Montreal is a lacking indicator for national 0:07:53.760 --> 0:07:56.600 predators is a leading indicator. Okay, there we go the 0:07:56.720 --> 0:07:58.840 proper David, did you get that there was a huge 0:07:58.920 --> 0:08:02.480 trade to this summer pek su band? What a great 0:08:02.480 --> 0:08:07.480 response You've got. Nobody in your listening world who actually 0:08:07.480 --> 0:08:09.800 has a clue, who peeks say good morning to all 0:08:09.840 --> 0:08:12.680 of your listening in Canada, and particularly Don CHERRYO, we 0:08:12.720 --> 0:08:16.040 know tunes in every morning, but come on my fashion, 0:08:16.200 --> 0:08:19.800 my fashion model. Yeah yeah, And and Shay Webber went 0:08:19.920 --> 0:08:23.600 over to the Mantra Canadians And it's an example of 0:08:23.640 --> 0:08:26.040 that bet, that big bet David, you've got to take 0:08:26.360 --> 0:08:29.040 like you wonder his business going to take a big bet? 0:08:29.040 --> 0:08:31.560 And Mr Trump love that tics. Let me ask you 0:08:31.600 --> 0:08:34.280 just about the compliment there of soft data and hard data? 0:08:34.280 --> 0:08:35.839 How do you look at them in concert with each other? 0:08:35.840 --> 0:08:39.200 And there is there a disconnect between the two, not really, um, 0:08:39.600 --> 0:08:44.200 I think the the because the lead lag factors. They 0:08:44.240 --> 0:08:48.160 aren't disconnected, they just don't happen simultaneously. UM. And I 0:08:48.160 --> 0:08:51.800 think investors tend to walk in with a particular perspective 0:08:51.840 --> 0:08:54.120 and then they choose the data they want to look at. 0:08:54.640 --> 0:08:57.920 Um it's I look again, I need to figure out 0:08:57.960 --> 0:08:59.960 where I think the world will be in the future 0:09:00.080 --> 0:09:02.200 or not where it is right the second that helps 0:09:02.240 --> 0:09:05.080 me for trading today, but it has nothing to do 0:09:05.120 --> 0:09:08.480 with my investment profile over the next six twelve months. UM. 0:09:08.600 --> 0:09:10.960 So I always look at the leading indicators, even if 0:09:10.960 --> 0:09:14.360 it's soft data. Is is I'm not going soft. I'm 0:09:14.400 --> 0:09:16.600 looking at as the lead indicator for the hard data 0:09:17.120 --> 0:09:19.720 is not certainly not his slap shot. I don't want 0:09:19.720 --> 0:09:21.120 to stand in front of a hundred eight mile per 0:09:21.200 --> 0:09:26.679 hour shot. Um. But the the the notion of you know, 0:09:27.040 --> 0:09:30.640 every time the n f I be hiring intentions has improved, 0:09:30.880 --> 0:09:35.080 twelve months later, the unemployment rate has improved. UM. Every 0:09:35.120 --> 0:09:38.040 time CFO serving from Duke University said they're going to 0:09:38.120 --> 0:09:41.599 spend twelve months later, spending occurs. Every time I s 0:09:41.720 --> 0:09:43.480 M New Order Index is going up three to six 0:09:43.559 --> 0:09:47.760 months later, industrial production is going up. So it's really 0:09:47.800 --> 0:09:50.360 hard to walk away from that and say, now, let's 0:09:50.360 --> 0:09:53.520 ignore this tobias left covicuitous. Let's pin you down on 0:09:53.559 --> 0:09:55.959 the bull call. Where are we twelve months from now? 0:09:56.040 --> 0:09:59.480 Are you more than enthusiastic about equities? So we have 0:09:59.559 --> 0:10:03.480 a year and target the SMP five. We don't have 0:10:03.520 --> 0:10:08.280 a twelve month specifically target UM. And you know, I 0:10:08.320 --> 0:10:12.000 could see an overshoot beyond that if investors really got 0:10:12.040 --> 0:10:14.199 behind us. UM. There's a lot of cash stile in 0:10:14.240 --> 0:10:17.280 the sidelines. Investors haven't truly committed, and as a result, 0:10:17.880 --> 0:10:20.520 you could get the overshoot. It's it's not our forecast, 0:10:20.600 --> 0:10:24.360 but there's reason to believe that investors have just not 0:10:24.480 --> 0:10:27.240 gotten there are panicky four you models still stuck in 0:10:27.280 --> 0:10:31.640 neutral territory. We don't see the four investors generally speaking. 0:10:31.679 --> 0:10:33.920 But when I visit and I've talked about the hundred 0:10:33.960 --> 0:10:37.120 and sixty investors in the last four weeks, UM, you know, 0:10:37.120 --> 0:10:39.320 sitting in front of them, chatting with them around the world, 0:10:39.520 --> 0:10:41.719 and I just don't see. You know, I think I 0:10:41.800 --> 0:10:46.480 found five bulls, that's it now, and then found I 0:10:46.720 --> 0:10:48.080 want to I don't want to suggest I found a 0:10:48.120 --> 0:10:50.440 hundred bears on the other side of it, UM, but 0:10:50.480 --> 0:10:51.920 I don't think people are. I don't think they have 0:10:51.960 --> 0:10:55.320 great conviction either way. So it's more they're they're they're 0:10:55.360 --> 0:10:58.240 frustrated they missed the run. They're kind of happy that 0:10:58.280 --> 0:11:00.720 the reflation trade is kind of weakening because they weren't 0:11:00.720 --> 0:11:04.120 positioned there. And actually the biggest pain they might suffer 0:11:04.200 --> 0:11:06.480 is if the market ran ten percent, because they're not 0:11:06.559 --> 0:11:09.319 ready for You mentioned energy a few moments ago. We're 0:11:09.320 --> 0:11:11.920 talking about sectories, So what do you anticipate. We'll see 0:11:11.920 --> 0:11:14.520 their energy and materials going forward. So on the energy, 0:11:14.640 --> 0:11:16.640 we break that out of materials in the US, just 0:11:17.080 --> 0:11:19.880 for people to understand, the SMP five hunded material sector 0:11:20.240 --> 0:11:22.840 is really chemicals. So when you think of material's, attend 0:11:22.880 --> 0:11:24.880 to think of medals and mining. That's true if you're 0:11:24.880 --> 0:11:27.560 looking at Asia, if you're looking at Europe, Latin America. 0:11:27.640 --> 0:11:29.320 But in the US it's really chemical. So we have 0:11:29.320 --> 0:11:31.760 a different, you know, it's slightly different animal in that 0:11:31.800 --> 0:11:36.240 regard um energy, we've we've we've and I know Tom's 0:11:36.280 --> 0:11:39.520 had had Morrison. Um, he's just great as a commodity 0:11:39.559 --> 0:11:41.840 research guy. He's still looking for sixty two dollar loyal 0:11:41.840 --> 0:11:44.240 at the end of the year. On that basis you 0:11:44.520 --> 0:11:46.360 really do want to own energy and take advantage of 0:11:46.360 --> 0:11:49.520 the pullback here that we've seen. UM. We had anticipated 0:11:49.520 --> 0:11:51.560 there would be some weakness in the first quarter and 0:11:51.559 --> 0:11:54.840 then we'd see strengthening through the balance of the year. UM. 0:11:54.880 --> 0:11:57.360 You know, the Saudis have vested interest here and getting 0:11:57.360 --> 0:11:59.840 prices up, that Russians have an interest in getting it up, 0:11:59.840 --> 0:12:04.080 and we might see some you know, shale cost development inflation, 0:12:04.520 --> 0:12:07.440 as you've got to bring people together here to to 0:12:07.480 --> 0:12:11.520 develop these new fields. UM. But they were laid off 0:12:11.520 --> 0:12:13.360 the last two years and they've got to be brought back, 0:12:13.400 --> 0:12:16.280 and probably some higher costs to doing this than maybe 0:12:16.280 --> 0:12:18.880 some people are anticipating right now. How about the forecast 0:12:18.920 --> 0:12:22.199 for the dollar and dollar strength's that affect them? So 0:12:22.240 --> 0:12:25.840 our guys are fairly neutral on the dollar. UM. I 0:12:25.880 --> 0:12:29.240 think they had better expectations going into the year than 0:12:29.280 --> 0:12:31.920 what we've seen play out. UM. And part of that 0:12:32.160 --> 0:12:34.400 I would say this, I'm not an f X expert 0:12:34.440 --> 0:12:36.760 by any by any measure, but the thing I would watch, 0:12:36.840 --> 0:12:39.319 for example, in dollar euro is more about the spread 0:12:39.360 --> 0:12:42.720 between the tenure bund and the tenure treasury as opposed 0:12:42.760 --> 0:12:45.959 to just looking at the tenure treasury and a vacuum 0:12:46.000 --> 0:12:50.000 as if the yield you know, has no competition around 0:12:50.040 --> 0:12:52.679 the world. And if you go back, let's say summertime 0:12:52.840 --> 0:12:56.720 of of UM last last year, you were looking at 0:12:56.760 --> 0:12:59.600 a one point three six one three seven tenure yield, 0:12:59.720 --> 0:13:02.400 but are looking on minus point for bund yield over 0:13:02.440 --> 0:13:05.439 the same time your timeframe. That's changed as well. As 0:13:05.480 --> 0:13:08.120 we've gone up, so has the BUN yield. So I 0:13:08.160 --> 0:13:11.400 think people forget that at times its dividend growth a 0:13:11.520 --> 0:13:15.719 proxy for yield. Help help all of our listeners with this. 0:13:15.800 --> 0:13:19.440 They're addicted to dividend growth. It's worked like a charm. 0:13:19.559 --> 0:13:22.200 But you and I know the party ends one day, doesn't, 0:13:22.520 --> 0:13:25.360 so dividend growth. Look, we spent thirty five years in 0:13:25.400 --> 0:13:27.960 a bond bull market, so at some point the bond 0:13:28.000 --> 0:13:30.800 bull market ends and the dividends bond bull market ended. 0:13:31.200 --> 0:13:35.760 Our senses, yes, but if you if you think in 0:13:35.800 --> 0:13:38.240 those terms, loss of the work done on Wall Street 0:13:38.240 --> 0:13:40.480 over the last thirty years has been in this kind 0:13:40.480 --> 0:13:43.360 of nice declining interest rate backdrop, and if that were 0:13:43.400 --> 0:13:46.600 to change, then many of the analyses done it's probably 0:13:47.040 --> 0:13:49.199 going to not be as benign as they thought it 0:13:49.240 --> 0:13:52.160 would be. So you know, it made sense to look 0:13:52.200 --> 0:13:55.120 for income growth when you had no alternatives, and dividends 0:13:55.120 --> 0:13:57.360 are one of the ways to generate it. But I 0:13:57.440 --> 0:14:00.160 was talking to our read analyst UM after it and 0:14:00.200 --> 0:14:02.040 just said, you know, the resector has been the worst 0:14:02.040 --> 0:14:04.880 performing sector since it became a sector. And part of 0:14:04.880 --> 0:14:08.560 the reason is UM that yields have shifted from that 0:14:08.600 --> 0:14:11.160 one point three six one point three seven low last summer, 0:14:11.480 --> 0:14:14.320 and there is competition for income. Let's bring this full circle. 0:14:14.760 --> 0:14:16.679 You are frustrated with those who have that myopic view 0:14:16.679 --> 0:14:18.240 of the markets right now, what do you say to them? 0:14:18.280 --> 0:14:19.960 What should they be looking at? What are you looking at? 0:14:20.120 --> 0:14:22.520 What's your vote of encouragement to them? So we look 0:14:22.560 --> 0:14:24.120 at a lobriety of things. We look at what are 0:14:24.120 --> 0:14:26.560 the early indicators of earnings growth? And and I know 0:14:26.640 --> 0:14:29.040 this surprises so many people, and we showed them the 0:14:29.080 --> 0:14:32.040 tightest fit that we're going to find with earnings growth 0:14:32.080 --> 0:14:37.800 is industrial production. And that shocks people. In of um 0:14:37.840 --> 0:14:40.760 of the economy is tied to industrial activity, but it 0:14:40.880 --> 0:14:43.520 is the most cyclical components. So who I describe it 0:14:43.600 --> 0:14:46.200 is you don't buy ten boxes of detergent when the 0:14:46.200 --> 0:14:48.800 economy is good. In one when it's bad, right as 0:14:48.840 --> 0:14:51.080 you need to launch your clothing. So you know what 0:14:51.080 --> 0:14:54.880 what vacillates is industrial activity and that has every indication 0:14:54.920 --> 0:14:57.920 of getting better. David, you didn't bring in full circle. Sorry. 0:14:58.200 --> 0:15:01.480 Anthony from New Jersey sends in a photo of p 0:15:01.680 --> 0:15:05.000 K Suba and doing a Don Cherry invitation. I'm gonna 0:15:05.040 --> 0:15:07.640 put this out on Twitter. Don even were the same 0:15:07.720 --> 0:15:10.800 quote code. I guess the next to night. But it's great, 0:15:11.000 --> 0:15:12.600 uh and we you know, shout out to all of 0:15:12.680 --> 0:15:17.400 Montreal and I did particularly for Montreal medicine. Uh in 0:15:17.520 --> 0:15:20.600 his tenure with the Canadians. And that's too much hockey 0:15:20.640 --> 0:15:24.160 for you. Good news. It will continue, Tobias Loveki, thank 0:15:24.160 --> 0:15:35.920 you so much. With City Group. This is Bloomberg brought 0:15:36.000 --> 0:15:39.600 you by Bank of America, Mary Lynch, dedicated to bringing 0:15:39.640 --> 0:15:43.360 our clients insights and solutions to meet the challenges of 0:15:43.360 --> 0:15:47.880 a transforming world. That's the power of global connections. Mary Lynch, 0:15:48.040 --> 0:15:56.480 Pierce Feeder and Smith Incorporated Member s I PC. It 0:15:56.600 --> 0:15:59.840 is now a great, great pleasure to bring back someone 0:15:59.840 --> 0:16:04.120 we talked to too many times, David Harrow of Harris Associates. 0:16:04.120 --> 0:16:06.160 And we'll do a little bit of politics here on 0:16:06.200 --> 0:16:09.360 the backside. David, what a great conversation earlier this morning 0:16:09.400 --> 0:16:14.160 with Kathy Matsui of Golden Sacks Equities in Tokyo and 0:16:14.320 --> 0:16:19.560 talking with her enthusiasm about obonomics and about the potential 0:16:19.720 --> 0:16:26.720 lift of dirt cheap Japanese big stocks. Are they dirt cheap? Um? 0:16:26.840 --> 0:16:31.160 They are cheap in price, But value just din't uh 0:16:31.640 --> 0:16:34.240 described or defined by price. You have to look at 0:16:34.280 --> 0:16:37.200 what you're getting for what you're paying. So if you 0:16:37.280 --> 0:16:41.320 look at low on the surface multiples for Japanese stocks, 0:16:41.320 --> 0:16:43.760 you have to compare it to low returns on equity 0:16:43.840 --> 0:16:46.960 and returns on capital, which when you add that to 0:16:47.160 --> 0:16:50.120 the formula, they don't look all that cheap. Some are. 0:16:50.600 --> 0:16:54.080 But the problem with Japanese companies in corporate Japan as 0:16:54.120 --> 0:16:58.120 their return structures are persistently low. And I thought you 0:16:58.200 --> 0:17:00.240 you'd be willing. You shouldn't be willing to pay any 0:17:00.280 --> 0:17:03.160 kind of a premium. In fact, you should pay a discount. 0:17:03.480 --> 0:17:07.040 They deserve their law valuations because of the low returns 0:17:07.040 --> 0:17:09.600 companies suffer from. In folks, I sort of knew where 0:17:09.600 --> 0:17:12.640 the answer was going, and I set Mr Harold up here, 0:17:13.280 --> 0:17:17.000 can they finally become more Anglo Saxon, Like, that's what 0:17:17.080 --> 0:17:20.280 I asked, miss Massou MASSOOI let me ask you as well, 0:17:20.560 --> 0:17:22.480 are they you know you talk about returns in r 0:17:22.520 --> 0:17:24.919 o E. Are they going to deploy more cash to 0:17:25.000 --> 0:17:28.480 a shareholder centric company or is it the same old 0:17:28.520 --> 0:17:31.880 same Hold? Oh, Tom, this has been you know, I've 0:17:31.880 --> 0:17:37.560 been doing a since and I first Brewers. One was 0:17:37.600 --> 0:17:39.640 that one of the Brewers go to the World Series. 0:17:39.680 --> 0:17:42.520 I wasn't undergraduate school, so I think that was like 0:17:42.600 --> 0:17:48.160 eight two anyway. Anyway, I mean, here is the problem 0:17:48.280 --> 0:17:52.879 that the Japanese managements and boards often do not view 0:17:53.480 --> 0:17:58.639 the shareholders as a very important constituent. And when you 0:17:58.680 --> 0:18:02.760 add to that the way these boards and managements are 0:18:02.800 --> 0:18:07.920 protected from hospital takeovers, you don't see activity. Even though 0:18:08.359 --> 0:18:12.560 when this GP if the big Japanese pension funds stated 0:18:12.560 --> 0:18:16.080 they're gonna start coming down hard on Japanese companies unless 0:18:16.119 --> 0:18:18.800 they earn an eight or nine percent return on equity, 0:18:18.800 --> 0:18:22.040 which is almost laughable because what's wrong with thirteen, fourteen 0:18:22.119 --> 0:18:26.240 or fifteen percent return on equity, especially given the nature 0:18:26.640 --> 0:18:31.280 of the inefficient balance sheets in corporate Japan. So this 0:18:31.359 --> 0:18:33.879 is a huge problem, and I would love to say 0:18:33.920 --> 0:18:38.560 that we're making huge progress. It's slowly going in the 0:18:38.680 --> 0:18:42.160 right direction, but it's ever so slowly, and it's not 0:18:42.359 --> 0:18:45.560 broad based at all. I mean, you just have companies 0:18:45.560 --> 0:18:53.040 that have of their market cap sitting in cash earning zero. 0:18:54.480 --> 0:18:57.879 That is value destructive in our view. And when you 0:18:57.960 --> 0:19:01.880 have these low returns drip even by poor capital allocation, 0:19:02.359 --> 0:19:06.160 and they're also not so good on expenses and profit margins, 0:19:06.720 --> 0:19:10.000 then you know you deserve these low prices. And I 0:19:10.040 --> 0:19:13.280 really don't know what's going to change it. I'm in 0:19:13.359 --> 0:19:15.640 Japan once or twice a year and you sit there 0:19:15.640 --> 0:19:18.320 and you're literally harp on these people and then not 0:19:18.520 --> 0:19:20.320 to go yeah yeah, yeah, yeah, thank you, thank you, 0:19:20.400 --> 0:19:23.600 thank you, and then they just turn around and do 0:19:23.640 --> 0:19:27.320 the other things. So I don't know. I I wish 0:19:27.359 --> 0:19:31.359 I would be seen better progress, but you know, it's 0:19:31.480 --> 0:19:38.480 it's frustrating, actually very frustrating. This is a remorseful data sad. 0:19:38.960 --> 0:19:41.320 Let me let me pivot to ask you. But I know, 0:19:41.520 --> 0:19:43.440 I know you're investing in emphasis now, and I wonder 0:19:43.480 --> 0:19:45.400 if that is if that is an outlie or company. 0:19:45.440 --> 0:19:47.639 Other words, when you look at the kind of opportunity, 0:19:47.720 --> 0:19:50.440 degree of opportunity in India. Is there a lot there 0:19:50.560 --> 0:19:53.560 or are you taking small steps in? Well, again, there 0:19:53.600 --> 0:19:56.639 are things happening there, but it's so pricey. It is 0:19:56.680 --> 0:20:01.200 so pricey. The government is trying to do the right things. Uh. 0:20:01.240 --> 0:20:04.320 Corporate India is pretty good. Uh. They have some good 0:20:04.320 --> 0:20:08.760 competitive advantages and certain things like what the business InFocus 0:20:08.480 --> 0:20:11.480 is in this outsourcing, which, by the way, the reason 0:20:11.520 --> 0:20:14.359 why prices are lowest. Persives questions about H one, b 0:20:14.480 --> 0:20:18.320 vs as, etcetera. That's a whole another story. But UM 0:20:18.720 --> 0:20:20.800 India is trying to do the right thing, and that 0:20:21.080 --> 0:20:24.960 is really have a more open economy and be have 0:20:25.080 --> 0:20:30.359 more liberal economic policies conventional historical liberal economic free market 0:20:30.400 --> 0:20:35.399 policies and and the UM government was helped there with 0:20:35.760 --> 0:20:39.320 another big election wins, so so hopefully you will start 0:20:39.359 --> 0:20:41.920 to see more of these policies. I mean GDP per 0:20:42.000 --> 0:20:45.600 head in India is still a fraction of that of China, 0:20:45.960 --> 0:20:48.520 and a lot of this is the result of their 0:20:48.520 --> 0:20:53.000 inability to drive through infrastructure projects and to get higher 0:20:53.000 --> 0:20:58.159 productivity in their economy based on simple things like Rhodes highways, plumbing, etcetera. 0:20:58.840 --> 0:21:03.000 I mean, there's a fascinating statistic about just the lack 0:21:03.040 --> 0:21:06.920 of plumbing in India as an example. So, and there's 0:21:06.960 --> 0:21:09.000 so much potential. You have a two to three hundred 0:21:09.080 --> 0:21:12.679 million people middle class there um, but then you do 0:21:12.800 --> 0:21:17.560 have this large, large lower class and large very low 0:21:17.680 --> 0:21:22.000 GDP perhead which they're they're trying to do something about. 0:21:22.480 --> 0:21:24.800 What's your advice to an investor who, like you, sees 0:21:24.880 --> 0:21:28.240 that opportunity in India maybe hasn't played in that market before. 0:21:28.280 --> 0:21:29.880 What are you looking at? What are you advising they 0:21:29.880 --> 0:21:32.560 look at before they get in, But you have to 0:21:32.560 --> 0:21:35.199 look at prices and what they're selling for because a 0:21:35.240 --> 0:21:39.840 lot of times the big picture euphoria just attracts money 0:21:39.880 --> 0:21:43.159 for that very reason without looking at the price you 0:21:43.240 --> 0:21:46.359 are paying. And then it becomes the momentum market, a 0:21:46.400 --> 0:21:49.600 market that just trades on headlines. And again that's just 0:21:49.680 --> 0:21:51.680 kind of counter to how we do things. It might 0:21:51.760 --> 0:21:54.520 work in the short term, is our view, but you know, 0:21:54.520 --> 0:21:56.840