Speaker 1: You're listening to Bloomberg Business Week with Carol Masser and
Speaker 1: Jason Kelly on Bloomberg Radio. Well, this got our attention
Speaker 1: this week and has to do with Mike Mayo, well known,
Speaker 1: very well known to our Bloomberg audience, and rightfully so
Speaker 1: based on his calls and really summing up where we are,
Speaker 1: especially when crisis hits the financial industry or even a
Speaker 1: particular bank, and we know banks actually got a nice
Speaker 1: bounce today and really helped lead the market higher. Mike
Speaker 1: is analyst, managing director and head of large camp bank
Speaker 1: Research over at Wells Fargo Securities. Has covered banks for
Speaker 1: years and recently caught up with a Trump administration insider
Speaker 1: and came away with quite a headline for a Bloomberg story.
Speaker 1: Mike joining us on the phone in New York. Mike,
Speaker 1: thank you so much for joining us. Um. First of all,
Speaker 1: let's talk a bit about the markets, and then we'll
Speaker 1: get back to this meeting you had. The banks today
Speaker 1: certainly helped late lead stocks higher. What do you make
Speaker 1: of the sector, Does it make sense and what's the
Speaker 1: outlook generally speaking? Yeah, I think there's a misperception here
Speaker 1: that this is tooth thousand and eight. In two thousand eight,
Speaker 1: there was a banking crisis. Banks for the cause of
Speaker 1: the problem. Today banks are stronger than they've been in
Speaker 1: a generation, and they're part of the of the solution.
Speaker 1: So there's this recency bias as if it's still the
Speaker 1: global financial crisis, and that's not the case. There is earnings.
Speaker 1: There are earnings issues with banks. I mean, but it's
Speaker 1: it's it's our earnings hell in the first quarter. It's
Speaker 1: going to be earnings hell in the second quarter. Maybe
Speaker 1: for some more of this year's banks set aside reserves
Speaker 1: for problem loans as their borrowers have issues. But we
Speaker 1: would call this an income statement recession and not a
Speaker 1: balance sheet recession. And that's a world of difference versus
Speaker 1: a decade ago. And so I guess that one of
Speaker 1: the questions that we've been asking too very smart people
Speaker 1: like you, Mike about the banking system is so, did
Speaker 1: what we we collectively and what the government did and
Speaker 1: what ultimately the banks did maybe under dress coming out
Speaker 1: of the financial crisis? Did it work? You know, thank
Speaker 1: you regulators, thank you, thank you, thank you regulators. Yes,
Speaker 1: it worked in spades. I mean, you've had stress tests
Speaker 1: of banks for a situation like this. For almost a decade,
Speaker 1: the capital, which is the cushion to protect banks against losses,
Speaker 1: it's doubled. The most risky activities are no longer done
Speaker 1: by the banks themselves. They're done by other financial firms,
Speaker 1: but not within the banking industry itself. You have oversight
Speaker 1: by the regulators and boards and investors, and everyone's looking
Speaker 1: over their shoulders. So, yes, it worked, and this is
Speaker 1: the ultimate test to show that it will work. And
Speaker 1: we think, uh, this will be a tough situation. I mean,
Speaker 1: these are sobering times. We're expecting not a v recovery,
Speaker 1: but more of a deep view recovery. But even with that,
Speaker 1: we think banks can be a source of strength and
Speaker 1: stability to the rest of the economy. All right, So
Speaker 1: let's get to this story because it did catch our attention.
Speaker 1: We've been talking about a lot in the newsroom. Um,
Speaker 1: you had a meeting with Gary Cone. Tell us a
Speaker 1: little bit about that our conversation. Um, how that came
Speaker 1: to be and what you guys talked about. Well, I look,
Speaker 1: I I talked to Gary Cone. Um he's no longer
Speaker 1: part of the administration, to make that clear, but I
Speaker 1: just talked to him, like I talked to a lot
Speaker 1: of smart people to understand the world. And his view,
Speaker 1: which you know is in sync with with my view,
Speaker 1: is that Washington, d C. Has done a phenomenal job
Speaker 1: at getting on this problem very quickly. So you have Treasury,
Speaker 1: you have the FED, you have Congress identifying the issue
Speaker 1: quickly and really going with a bazuka to try to
Speaker 1: bridge the gap between the pre and the post virus economy.
Speaker 1: And they're going to go wave after wave after wave.
Speaker 1: You're seeing it every day, and if it's not enough,
Speaker 1: then um, you'll have more expansive fiscal and monetary policy
Speaker 1: to to make it right for the country. So you
Speaker 1: know the old adage don't fight the FED, Well, you know,
Speaker 1: take that and put it on steroids. And that's what
Speaker 1: you're looking at when you look at the government's CounterPunch
Speaker 1: to this one year pandemic event. So, Mike, we heard
Speaker 1: j Pal, I think pretty clearly reiterate uh yesterday that
Speaker 1: sort of balls in the court of lawmakers at this
Speaker 1: point that the next real serious stimulus needs to come
Speaker 1: from the fiscal side. Do you agree with that, and
Speaker 1: if so, what does it need to look like? Because
Speaker 1: that has become a pretty contentious debate between the parties. Well, look,
Speaker 1: I look at the economy from the lens of the
Speaker 1: largest banks, and banks will have problems. We expect loan
Speaker 1: losses to increase two to three times. The level of
Speaker 1: reserves for problem loans are the highest in history at
Speaker 1: this stage of a recession. So there is going to
Speaker 1: be pain for the banks. But what's interesting, and this
Speaker 1: is the success of Washington d C, is they've unclogged
Speaker 1: the plumbing of the financi tre markets. So the largest corporations, uh,
Speaker 1: you know, the Doubt Dirty or the SMP five hundred
Speaker 1: have access to borrowing in the capital markets, so they
Speaker 1: should be better off. Once you get down to smaller
Speaker 1: banks with smaller customers, that's where the bigger issues are
Speaker 1: going to be. And so it's a matter of the
Speaker 1: the execution of the ambitious programs you know, set in
Speaker 1: place by washingtond C. And by the way, this is
Speaker 1: these programs. Some of these have never been done before,
Speaker 1: and certainly never on a scale such as that we're seeing.
Speaker 1: How do things though, like more government spending that might
Speaker 1: lead to higher taxes that will ultimately fit into your
Speaker 1: outlook for the big banks. Well, actually, you know, the
Speaker 1: question is does the industry you know, die by fire,
Speaker 1: die by you know ice? Put it very simply, in
Speaker 1: other words, does the economy and two banks fall off
Speaker 1: because there's just no activity? No one can that Again
Speaker 1: the stimulus isn't enough or is it so much that
Speaker 1: things can get overheated. And I think the conclusion here
Speaker 1: is that it's more likely you're not you know, died,
Speaker 1: but you're going to uh, you know, go ahead and
Speaker 1: stimulate the economy so much that on the back end
Speaker 1: will be more concerned about the degree of stimulus UM
Speaker 1: And so under that scenario, you know, our strategy department
Speaker 1: at Wealth Farther Securities expect the ten year treasury yield
Speaker 1: to double by the end of the year UM and
Speaker 1: so that would be a steepening of the yield curve
Speaker 1: or a bear steepener as discussed by Mike Schumacher our
Speaker 1: interest rate strategies. If that's the case, by the way,
Speaker 1: UM expect bank stocks to go higher just on that
Speaker 1: factor alone, right right on higher rates. Hey, one last question,
Speaker 1: because we've heard from James Gorman and Morgan Stanley, you know,
Speaker 1: kind of blown away by how are seeing all of
Speaker 1: his workers at home and basically saying we're not gonna
Speaker 1: need as much real estate. So is do you anticipate
Speaker 1: that banks will be cutting costs and maybe and giving
Speaker 1: up on some of the real estate that they have. Well, first,
Speaker 1: I want to stress the gangs. I actually had. I
Speaker 1: spoke with the chief and answer officer of Mortgage Stanley
Speaker 1: just yesterday. Um, and they do talk about spending money,
Speaker 1: you know, to keep all employees employed and you know,
Speaker 1: serving customers and other banks are differing some payments for loans,
Speaker 1: the investments and employees and communities and customers. Is you know,
Speaker 1: really banks being part of the solution. What's interesting, though,
Speaker 1: is you're seeing a leap frog in digital change by
Speaker 1: like like by five to ten years as a result
Speaker 1: of the last two months. Absolutely, that means less real
Speaker 1: estate for the banks, more digital interactions, less rates of
Speaker 1: cash in society, and an acceleration of the digital changes
Speaker 1: that you saw before this crisis really take off during
Speaker 1: an after crisis. All Right, We're gonna leave it on
Speaker 1: that note. Mike, Ever, enough time, but so grateful that
Speaker 1: you did find some time for us on this Thursday.
Speaker 1: Mike Mayo, of course, over at Wells Fargo Securities, joining
Speaker 1: us on the phone in New York