WEBVTT - A Deep Dive Into Oil Demand 0:00:00.800 --> 0:00:04.040 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 0:00:04.040 --> 0:00:06.920 my co host Matt Miller. Every business day, we bring 0:00:06.960 --> 0:00:11.520 you interviews from CEOs, market pros, and Bloomberg experts, along 0:00:11.560 --> 0:00:15.600 with essential market moving news. Find the Bloomberg Markets Podcast 0:00:15.640 --> 0:00:18.479 on Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:22.919 at Bloomberg dot com slash podcast. John was just mentioning oil, Matt. 0:00:22.960 --> 0:00:25.520 I'm looking at Brent crude here, sixty seven dollars sixty 0:00:25.600 --> 0:00:29.960 four cents a barrel, up about one point eight four plus. 0:00:30.120 --> 0:00:32.040 You know I also mentioned earlier, Matt, that article I 0:00:32.080 --> 0:00:35.360 saw on Bloomberg terminal four dollars a gallon, UH to 0:00:35.400 --> 0:00:37.520 fill up your car if you live in the state 0:00:37.560 --> 0:00:41.239 of California. Energy pushing higher. Let's get behind the drivers 0:00:41.280 --> 0:00:44.360 of this crucial commodity. We do that the Virginia Regina 0:00:44.440 --> 0:00:48.879 mayor Global Energy head for KPMG Regina, thanks so much 0:00:48.920 --> 0:00:51.599 for joining us here. We're seeing energy prices move up, 0:00:51.640 --> 0:00:55.720 oil move higher. Is this simply a demand play here? 0:00:55.920 --> 0:00:58.000 As more and more vaccines get into arms on a 0:00:58.040 --> 0:01:01.120 global basis, the expectation is that the demand for oil 0:01:01.120 --> 0:01:05.360 will be rising as well. Clearly it is a big 0:01:05.800 --> 0:01:07.840 A big part of the story is demand and how 0:01:07.920 --> 0:01:12.560 quickly demand has recovered. You know, prices are incredible and 0:01:12.680 --> 0:01:15.120 very buoyant, but I like to take people back to 0:01:15.240 --> 0:01:18.240 where were we one year ago this month, when w 0:01:18.360 --> 0:01:21.680 t I settled in negative territory, and now look at 0:01:21.680 --> 0:01:24.040 where we are, and I think there's still upward momentum 0:01:24.640 --> 0:01:28.600 because we're seeing some potential supply disruptions and it's still 0:01:28.600 --> 0:01:30.800 a question of how quickly opec plus is going to 0:01:30.840 --> 0:01:34.200 bring back those surplus barrels into the market. And in addition, 0:01:34.680 --> 0:01:38.399 the world seems to have worked through the billion plus 0:01:38.560 --> 0:01:42.720 supply overhang that we predicted a year ago, so I'm excited. 0:01:42.800 --> 0:01:45.640 It's very buoyant. I wouldn't have predicted these fundamentals even 0:01:45.680 --> 0:01:49.560 six months ago, but the industry is quite quite favorable. 0:01:50.560 --> 0:01:56.280 How much of cramp on demand is the tragedy that 0:01:56.280 --> 0:02:02.680 we're seeing play out in India truly a tragic event um, 0:02:03.720 --> 0:02:07.200 and and that will have an impact on global demand. 0:02:07.520 --> 0:02:11.359 But I think the the overall global demand story from 0:02:11.480 --> 0:02:16.000 places like the US and China are overcoming the tragedy 0:02:16.040 --> 0:02:18.040 that we're seeing in India as well as you know, 0:02:18.040 --> 0:02:20.800 the challenges that we're seeing in other strong fuels markets 0:02:20.840 --> 0:02:23.840 like Brazil. The market seems to be very bullish that 0:02:23.919 --> 0:02:27.440 demand will continue to increase. We've got summer driving season 0:02:27.520 --> 0:02:30.800 coming up, We've got summer vacation season coming up. People 0:02:30.840 --> 0:02:32.640 are trying to countries are trying to look at ways 0:02:32.639 --> 0:02:34.840 that they can open up their borders. So even my 0:02:34.880 --> 0:02:38.760 refining clients that were pretty pessimistic about gasoline demand return 0:02:39.040 --> 0:02:42.520 and jet fuel demand return are are actually quite optimistic 0:02:42.520 --> 0:02:47.560 as they look into and definitely into alright, Regina. So 0:02:48.080 --> 0:02:51.800 the demand side seems pretty solid improving. Let's talk about 0:02:51.800 --> 0:02:55.680 the supply side here. Talk to us about OPEC plus 0:02:55.800 --> 0:02:59.200 and the pressure on some of those key members of 0:02:59.200 --> 0:03:04.640 OPEC plus start ramping up production. Yeah, so it's interesting 0:03:04.680 --> 0:03:07.280 that OPEC plus decided not to have the meeting that 0:03:07.320 --> 0:03:09.320 they were going to have today. I think that shows 0:03:09.320 --> 0:03:12.000 that they're very confident in their strategy and they're very 0:03:12.000 --> 0:03:15.200 confident in the commitment that they have and a part 0:03:15.200 --> 0:03:20.079 of the members to retain the cuts and slowly trickle 0:03:20.160 --> 0:03:23.720 those barrels back into the market. Um, there is still 0:03:23.800 --> 0:03:26.079 even after the two million barrels per day come back 0:03:26.120 --> 0:03:28.200 into the market, that they've committed will come back by 0:03:28.200 --> 0:03:30.680 the end of July. There's still six million barrels per 0:03:30.760 --> 0:03:33.200 day that they're still sitting on, So that is the 0:03:33.280 --> 0:03:37.640 governor against a huge price spike, and how they trickle 0:03:37.760 --> 0:03:41.600 that back will be will be interesting. The sixty range 0:03:41.640 --> 0:03:44.680 that we're in now is not enough to balance the 0:03:44.680 --> 0:03:47.000 budgets of all of those OPEC plus nations, but it 0:03:47.200 --> 0:03:50.119 is a nice buffer that's building on their financial reserves. 0:03:50.280 --> 0:03:52.200 But I could see them trying to push it to 0:03:52.240 --> 0:03:54.680 see can we get Brent over the seventy dollar mark 0:03:54.880 --> 0:03:59.120 before we start more actively putting those withheld barrels back 0:03:59.160 --> 0:04:02.000 into the market. What do OPEC nations need to balance 0:04:02.040 --> 0:04:07.040 the budget? The most estimates are that it's in the 0:04:07.080 --> 0:04:10.400 eighties UM for most of the countries. So I but 0:04:10.480 --> 0:04:13.280 I don't think the world can survive that. I think 0:04:13.280 --> 0:04:15.920 there will be a lot of pressure on the OPEC 0:04:15.960 --> 0:04:19.080 plus countries. You already saw it a couple of months 0:04:19.120 --> 0:04:22.760 ago with calls from the Biden administration into Saudi Arabia 0:04:22.800 --> 0:04:25.080 as well as calls from the Indian government into Saudi 0:04:25.120 --> 0:04:28.560 Arabia that we can't have crude oil price be too hot. 0:04:28.839 --> 0:04:31.919 You mentioned that it's four dollars per gallon in California. 0:04:32.080 --> 0:04:34.960 The average retail price for gasoline in the US right 0:04:34.960 --> 0:04:38.240 now is almost three dollars, and that's for all grades 0:04:38.760 --> 0:04:41.240 in all markets. So I think we're sort of at 0:04:41.279 --> 0:04:44.320 that tipping point. Seventy for Brent might be as high 0:04:44.400 --> 0:04:47.640 as people feel comfortable. Um, but I think they're really 0:04:47.760 --> 0:04:51.359 enjoying threading the needle by keeping things relatively stable in 0:04:51.360 --> 0:04:53.800 the high sixties, which makes them more comfortable with their 0:04:53.839 --> 0:04:56.240 board looking position. Three dollars a gallon would be a 0:04:56.320 --> 0:04:58.560 dream come true for me here in Berlin. I would 0:04:58.600 --> 0:05:01.440 drive so much if I had three dollars per game. 0:05:01.560 --> 0:05:06.160 What is it's it's it's about seven and change, I 0:05:06.200 --> 0:05:09.120 think right, it's um, I mean I tank up with 0:05:09.160 --> 0:05:11.960 shell V power, of course, because I care about my engine. 0:05:13.320 --> 0:05:17.480 All right, all right, So let's talk about the shale patch. 0:05:18.279 --> 0:05:19.920 Are we gonna start to see some of these share 0:05:19.960 --> 0:05:23.279 patch producers ramping up production and maybe mucking up the 0:05:23.279 --> 0:05:27.159 works a little bit? I don't think so. And you know, 0:05:27.279 --> 0:05:31.280 you never say never with the with US exuberants around 0:05:31.440 --> 0:05:33.599 oil production, right that's in our d n A and 0:05:33.640 --> 0:05:35.880 I sit in Texas and I definitely don't pay as 0:05:35.960 --> 0:05:38.840 much as you do for your kathleen, um, but they 0:05:38.839 --> 0:05:43.240 are making commitments to their shareholders that the the returns 0:05:43.320 --> 0:05:45.760 above some of you even said above forty dollars per 0:05:45.800 --> 0:05:48.479 barrel will be returned in terms of dividend growth to 0:05:48.560 --> 0:05:51.480 their shareholders. That could be a very strong message if 0:05:51.480 --> 0:05:53.920 we take those profits and instead of funneling it all 0:05:53.920 --> 0:05:56.800 into captics, we pay down debt and we return that 0:05:56.880 --> 0:05:59.920 cash to the shareholders in the form of dividends. That's 0:06:00.000 --> 0:06:02.320 a story that all of the large ones have told 0:06:02.360 --> 0:06:05.760 to the marketplace, and I expect them to hold to that. 0:06:06.480 --> 0:06:09.200 And I think OPEC plus will be watching rig counts 0:06:09.200 --> 0:06:12.120 and US activity. Rick counts have had held very stable, 0:06:12.800 --> 0:06:15.960 so most predictions are we might get to twelve million 0:06:15.960 --> 0:06:19.159 barrels per day by the end of but I don't 0:06:19.160 --> 0:06:21.400 think we'll see the thirteen million barrels per day or 0:06:21.480 --> 0:06:24.240 higher and the exuberance that we saw in the shale 0:06:24.279 --> 0:06:26.599 patch to quote mark up the works as you put it. 0:06:27.000 --> 0:06:28.680 By the way, I sit in Berlin, which is why 0:06:28.720 --> 0:06:32.120 my gas prices are so high. Um, Regina, let me 0:06:32.120 --> 0:06:34.120 just ask you quickly. We only got thirty seconds here. 0:06:34.440 --> 0:06:38.920 But having noted that, does the electric vehicle push do 0:06:39.080 --> 0:06:43.159 anything to hurt demand in the near term. Not in 0:06:43.200 --> 0:06:48.360 the near term. It only degrades about two um uh 0:06:49.120 --> 0:06:53.200 gallons of total fuel, and so we only see maybe 0:06:53.200 --> 0:06:57.080 a million two a couple million barrels per day coming 0:06:57.080 --> 0:07:00.080 off in the next five years from v penetration, and 0:07:00.360 --> 0:07:03.839 so it's just a drop in the proverbial bucket. I see, 0:07:03.880 --> 0:07:05.520 all right, Well that's what I thought, but I just 0:07:05.520 --> 0:07:08.040 wanted to get it confirmed by the experts. There are 0:07:08.400 --> 0:07:11.720 a bunch of electric vehicles whizzing around here, but obviously 0:07:11.760 --> 0:07:16.080 it's not even close to um the majority, not not 0:07:16.160 --> 0:07:19.800 even close to half. When I'm in California, I see 0:07:19.840 --> 0:07:23.040 a lot more than really much more prevalent. Well, maybe 0:07:23.200 --> 0:07:27.640 California is the future. Man, Regina, thanks very much for 0:07:27.720 --> 0:07:32.160 joining us. Regina Mayor, their global energy head at KPMG 0:07:32.520 --> 0:07:36.880 talking to us about UM, this commodity price, the games, 0:07:37.200 --> 0:07:40.560 maybe transitory. We're waiting for FED chair J. Powell. This 0:07:40.800 --> 0:07:47.320 is Bloomberg. Let's bring in now Stephen Kine. He is 0:07:47.400 --> 0:07:51.240 the group managing director and a portfolio manager at tc W. 0:07:52.000 --> 0:07:54.600 They have about two hundred fifty three billion dollars in 0:07:54.720 --> 0:07:57.960 assets under management. I know Paul when he was working 0:07:58.480 --> 0:08:01.320 in the finance sector. You must a musty when you 0:08:01.360 --> 0:08:04.040 go to stop out there every time he was on 0:08:04.080 --> 0:08:07.600 the on the best coast. Stephen, UM, big day today, 0:08:07.680 --> 0:08:09.720 right because we had kicked off the day with news 0:08:09.720 --> 0:08:13.920 about the Biden tax plan, which is very big, and 0:08:14.040 --> 0:08:18.920 we're gonna finish the session with the Fed. Um. These 0:08:18.960 --> 0:08:23.240 two pillars to me seem key for your business. What 0:08:23.280 --> 0:08:27.160 do you make of the current environment? Uh? Well, what 0:08:27.280 --> 0:08:30.000 I would say, I think you're you're dead on. As 0:08:30.000 --> 0:08:33.120 a matter of fact, I think the bigger point as 0:08:33.120 --> 0:08:35.640 we think about the markets in general is the markets 0:08:35.640 --> 0:08:39.000 are always affected by fiscal and monetary policy. But I 0:08:39.040 --> 0:08:42.480 think given the degree of involvement of the government currently 0:08:42.800 --> 0:08:45.800 not only in the uh COVID era, but as we 0:08:45.880 --> 0:08:48.640 move forward and the degree of involvement by the FED, 0:08:48.679 --> 0:08:50.439 I don't think the capital markets have ever been as 0:08:50.679 --> 0:08:55.360 as driven and influenced um by my policy right now. 0:08:55.440 --> 0:08:59.559 So UM, in terms of today and what's going on. Um, 0:09:00.040 --> 0:09:02.240 you know, I don't think there's much to talk about 0:09:02.240 --> 0:09:04.080 in terms of the FED. I think it's it's going 0:09:04.120 --> 0:09:06.520 to be a bit of a snoozer. I wouldn't hold 0:09:06.840 --> 0:09:09.000 your breath for anything significant out of the Fed. The 0:09:09.040 --> 0:09:12.720 Fed is extremely duvish. They've changed their framework, as they've 0:09:12.800 --> 0:09:16.200 articulated uh numerous times to be outcome driven and not 0:09:16.320 --> 0:09:20.760 outlook out uh look driven. And therefore, given that inflation 0:09:20.840 --> 0:09:23.200 is running far below the two plus percent that they're 0:09:23.200 --> 0:09:27.760 looking to see for a stain period and unemployment it's six, um, 0:09:27.800 --> 0:09:30.200 it would be shocking to see the Fed do anything 0:09:30.240 --> 0:09:33.840 but maybe tweak the language on on the current you know, 0:09:33.880 --> 0:09:38.560 statements around the current economic environment. UM. On the fiscal side, um, yeah, 0:09:38.559 --> 0:09:41.600 this is developing. It seems to be one big package 0:09:41.640 --> 0:09:45.360 after another. What's changing now is those packages are now 0:09:45.400 --> 0:09:50.560 being balanced to some degree with potential tax increases. And 0:09:50.600 --> 0:09:53.400 we'll just have to see how things go. But if 0:09:53.400 --> 0:09:56.520 it goes in this direction, uh, not to get to 0:09:56.920 --> 0:10:01.960 uh uh you know uh loud about this, but you know, 0:10:02.000 --> 0:10:05.640 we could be entering an era bigger government um, and 0:10:05.800 --> 0:10:07.920 you know that could have bigger implications for for the 0:10:07.920 --> 0:10:11.680 economy long term. Alright, So, given where we are in 0:10:11.920 --> 0:10:14.679 the cycle here, Stephen, we have this reopening trade, if 0:10:14.679 --> 0:10:17.280 you will, We have in a comminent date of federal reserve. 0:10:17.320 --> 0:10:20.760 We have fiscal stimulus, perhaps partially offset by taxes. What 0:10:20.800 --> 0:10:23.800 are some of the sectors that TCW is looking at, 0:10:23.840 --> 0:10:27.000 know and your unconstrained fund do you do top down 0:10:27.040 --> 0:10:30.280 but also a lot of bottoms up work as well? Yeah? Yeah, 0:10:30.360 --> 0:10:34.040 So kind of the good news bad news for UM 0:10:34.120 --> 0:10:37.120 for the credit sectors is that the good news is 0:10:37.160 --> 0:10:41.040 we do have significant fundamental tail winds in terms of 0:10:41.040 --> 0:10:44.600 strong economic growth and good operating leverage for businesses. There's 0:10:44.600 --> 0:10:46.560 gonna be a lot of good earnings and cash flow 0:10:46.559 --> 0:10:49.400 and all those good things that tend to support risk taking. 0:10:49.880 --> 0:10:53.440 The bad news is that's already in the markets. Spreads 0:10:53.480 --> 0:10:56.520 are extremely tight. The the overall yield and the high 0:10:56.559 --> 0:11:00.679 yield market is just under four percent, So you're really 0:11:00.720 --> 0:11:04.200 not getting paid, uh for for taking a ton of risks. 0:11:04.240 --> 0:11:08.400 So as we look at sectors UM, we are up 0:11:08.400 --> 0:11:12.160 in quality just due to the value and UM. One 0:11:12.160 --> 0:11:14.760 of the sectors that we think offers probably the best 0:11:14.880 --> 0:11:18.560 risk return is the highest quality sector outside of treasuries, 0:11:18.559 --> 0:11:22.000 which is agency mortgage backed securities. And the reason for 0:11:22.040 --> 0:11:25.040 that is that it's a FED controlled asset. UM they're 0:11:25.040 --> 0:11:27.960 buying forty billion a month and therefore really controlling the 0:11:28.000 --> 0:11:31.880 price and the spread. And then the second reason, and 0:11:31.960 --> 0:11:34.120 what makes them really attractive to us is to buy 0:11:34.120 --> 0:11:37.559 them in the forward or tb a market where, due 0:11:37.640 --> 0:11:39.240 to the fact that the Fed's buying up all the 0:11:39.280 --> 0:11:44.800 net supply of production of agency mortgages, the financing rate 0:11:45.200 --> 0:11:48.800 to to not own the mortgages but roll them forward 0:11:48.840 --> 0:11:51.839 in the forward market is extremely attractive. It's it's minus 0:11:51.880 --> 0:11:54.319 seventy basis points, so you're picking up one and a 0:11:54.400 --> 0:11:57.160 half to two percent spread to treasuries for a risk 0:11:57.240 --> 0:12:00.880 free credit, risk free asset that is controlled by the FED. 0:12:00.960 --> 0:12:03.360 That's you know, double the spread that you get from 0:12:03.360 --> 0:12:06.000 investment great corporate bond. So we'd start there and then 0:12:06.440 --> 0:12:08.640 from there we would, uh, you know, go to other 0:12:08.679 --> 0:12:11.960 areas of the securitized market where you can stay relatively 0:12:12.040 --> 0:12:14.680 high in quality, double A, triple A in the non 0:12:14.720 --> 0:12:19.640 agency mortgage market, in the CLO market collateralized loan obligation UM, 0:12:19.679 --> 0:12:22.400 and you can get spreads in the mid one, you know, 0:12:22.440 --> 0:12:24.720 far better than you can do in the corporate bond 0:12:24.720 --> 0:12:31.240 market with uh, you know, with reasonable volatility. When is 0:12:31.360 --> 0:12:34.640 the FED I'm going to be interesting, you know, we 0:12:34.720 --> 0:12:37.559 we had UM some people start to talk about talking 0:12:37.600 --> 0:12:41.560 about tapering and expecting that to happen towards the end 0:12:41.600 --> 0:12:44.360 of this year. Does that time frame make sense to you? 0:12:44.360 --> 0:12:47.040 You know, I think it's I think it depends on 0:12:47.559 --> 0:12:50.600 what happens in the economy and with inflation. UM. People 0:12:50.640 --> 0:12:54.920 tend to be focusing on the the Jackson Hole meeting 0:12:55.080 --> 0:12:58.200 or time period is when they might start to introduce it, 0:12:58.200 --> 0:13:00.600 and certainly that's it's good. At time frame is any, 0:13:00.600 --> 0:13:02.200 but it really sort of depends on how things go. 0:13:02.320 --> 0:13:06.160 I think the FED is if the mark financial conditions 0:13:06.200 --> 0:13:09.400 stay loose, UM, I think the Fed will probably sit 0:13:09.440 --> 0:13:11.319 on its hands as long as it wants. If things 0:13:11.960 --> 0:13:15.160 start to get volatile at the market starts to um 0:13:15.679 --> 0:13:18.559 worry about inflation more than today, you could you could 0:13:18.559 --> 0:13:21.920 see the Fed move that time frame up a little bit. Hey, Steven, 0:13:21.920 --> 0:13:24.440 thanks so much for joining us. We really appreciate getting 0:13:24.480 --> 0:13:27.840 your insights and thoughts there. Stephen Kane, Group Managing Director, 0:13:27.920 --> 0:13:34.040 Portfolio manager at t c W. As more and more 0:13:34.120 --> 0:13:36.520 people in this country get vaccinated, we're starting to see 0:13:36.520 --> 0:13:40.240 economic activity pick up the reopening trade, if you will. 0:13:40.280 --> 0:13:42.760 We're starting to see that in the economic data. Are 0:13:42.800 --> 0:13:45.320 we seeing it on Main Street America? Let's check in 0:13:45.360 --> 0:13:47.640 with Don McCree. He is vice chairman and the head 0:13:47.640 --> 0:13:50.680 of Commercial Banking for Citizens Financial Group that's the New 0:13:50.760 --> 0:13:53.640 York Stock Exchange listed financial services company onto the CIBIL 0:13:53.720 --> 0:13:56.640 cf G. Don thanks so much for joining us here. 0:13:56.640 --> 0:13:59.120 I'd love to get a feeling from you as you 0:13:59.160 --> 0:14:02.680 talk to your clients, the businesses, the small emit sized 0:14:02.720 --> 0:14:06.120 businesses that you guys deal with. Are they investing in 0:14:06.160 --> 0:14:08.680 their businesses? Are they seeing a pickup in business activity? 0:14:09.800 --> 0:14:11.520 You know, it couldn't be here fall it's a tuck 0:14:11.559 --> 0:14:15.600 you again. UM. We we're definitely seeing indications across the 0:14:15.600 --> 0:14:18.800 board of of companies coming out of their dormancy stage, 0:14:18.800 --> 0:14:21.360 at the stage as I would call it UM, not 0:14:21.360 --> 0:14:24.320 not huge amounts of investment going on, but beginning to 0:14:24.680 --> 0:14:26.160 see it in the form of a little bit more 0:14:26.200 --> 0:14:28.880 loan growth than we had seen before UM and certainly 0:14:28.920 --> 0:14:31.440 seeing it in terms of the results of companies. Results 0:14:31.440 --> 0:14:34.960 are generally coming in broadly much stronger than we expected 0:14:35.000 --> 0:14:38.560 as as revenue lines recover UM and companies begin to 0:14:38.600 --> 0:14:40.720 get back to business. And of course it's it's at 0:14:40.760 --> 0:14:44.280 different speeds in different parts of the country UM, with 0:14:44.280 --> 0:14:46.560 with some of the southern states opening more quickly through 0:14:46.600 --> 0:14:49.400 the outdoor activity UM in the Northern States, but we're 0:14:49.400 --> 0:14:52.400 seeing it up north. Also, what kind of loan demand 0:14:52.640 --> 0:14:55.400 are you seeing and what kind of loan demand do 0:14:55.480 --> 0:14:59.200 you forecast throughout the year. Loan loan demand on the 0:14:59.240 --> 0:15:02.040 commercial side, that's been relatively muted, and I think part 0:15:02.120 --> 0:15:06.000 of that is due to the significant securities issue instead 0:15:06.000 --> 0:15:09.040 of taken place over the last year or so. Companies 0:15:09.080 --> 0:15:13.040 are pretty flushed with liquidity, particularly the midsized companies UM, 0:15:13.040 --> 0:15:15.360 and there's lots of deposits sitting in the banking system. 0:15:15.400 --> 0:15:17.720 So what I would expect is to see some of 0:15:17.760 --> 0:15:21.000 that excess liquidity burned down before we begin to see 0:15:21.000 --> 0:15:24.360 loan demand. What our what our base cases is really 0:15:24.400 --> 0:15:26.440 the second half of the year, we expect to see 0:15:26.960 --> 0:15:29.640 UH loan growth on the On the commercial side, we 0:15:29.720 --> 0:15:35.520 are seeing quite significant transactional activity, both in support of 0:15:35.520 --> 0:15:37.840 of M and A and then other corporate events that 0:15:37.880 --> 0:15:41.320 are beginning to materialize. So really record activity in the 0:15:41.360 --> 0:15:45.520 syndicated loan markets and continued record activity in the in 0:15:45.560 --> 0:15:48.040 the bond markets. Don I'd love to get a sense 0:15:48.040 --> 0:15:50.880 of kind of maybe the credit quality out there. It's 0:15:50.880 --> 0:15:55.600 been obviously a very difficult period for corporate America. What's 0:15:55.640 --> 0:15:58.120 the credit quality of your portfolio right here? Are you 0:15:58.200 --> 0:16:02.240 seeing any cracks in there? Uh? It feels good. It 0:16:02.280 --> 0:16:04.040 feels a lot better than it felt a year ago. 0:16:04.680 --> 0:16:07.520 And you saw most banks including US released reserves in 0:16:07.560 --> 0:16:10.680 the first quarter, and that's an indication that the credit 0:16:10.760 --> 0:16:13.760 is improving across the board. We still have a ways 0:16:13.800 --> 0:16:16.280 to go and things like you know, service businesses like 0:16:16.360 --> 0:16:19.440 hotels and restaurants who were only beginning to recover as 0:16:19.480 --> 0:16:22.960 the vaccines, uh take take hold across the country. But 0:16:23.320 --> 0:16:27.120 we're seeing every indicator of credit is improving. And you know, 0:16:27.160 --> 0:16:29.680 we had you know, billions and billions on watch a 0:16:29.760 --> 0:16:33.120 year ago and that's down by about seventy in terms 0:16:33.120 --> 0:16:36.120 of a total amount of credit that we're we're still 0:16:36.200 --> 0:16:40.400 working through the back ends of the pandemic risks. What 0:16:40.440 --> 0:16:42.760 are your net interest margins look like? And what can 0:16:42.840 --> 0:16:46.480 you do in a in an environment like this? You know, 0:16:46.560 --> 0:16:49.760 we we were very deliberate around how we price credit. 0:16:49.800 --> 0:16:52.000 Our Our net interest margin actually held up well in 0:16:52.040 --> 0:16:55.600 the first quarter um as we as we achieved slightly 0:16:55.640 --> 0:16:59.120 better spreads on our lending than we expected to by 0:16:59.200 --> 0:17:01.840 being disciplined, really because we were able to lower our 0:17:02.120 --> 0:17:05.639 deposit costs aggressively UM and with the with the amount 0:17:05.640 --> 0:17:07.960 of liquidity that's in the system, both on the consumer 0:17:08.000 --> 0:17:11.000 side and on the commercial side. UM, there's just a 0:17:11.119 --> 0:17:15.720 very attractive deposit UH costs to financial institutions right now. 0:17:15.960 --> 0:17:17.639 You know that could compress a little bit as we 0:17:17.680 --> 0:17:20.960 go forward, but we're very focused on maintaining that interest margin. 0:17:21.000 --> 0:17:22.919 And of course, if you see a little bit of 0:17:22.960 --> 0:17:25.240 uptick in the tenure like we're seeing over the last 0:17:25.240 --> 0:17:27.280 couple of weeks, that helps a little bit in terms 0:17:27.280 --> 0:17:32.240 of doing interest margining DON in your business in the 0:17:32.359 --> 0:17:35.639 commercial banking business, are you guys looking for M and 0:17:35.680 --> 0:17:39.040 A opportunities to grow? Is that something that's in UH 0:17:39.040 --> 0:17:41.320 in the space that you compete in. Is that something 0:17:41.359 --> 0:17:44.960 you're looking to do with the strategic vision going forward. Yes, 0:17:45.040 --> 0:17:47.560 so so a couple of different things. We we actually 0:17:47.760 --> 0:17:51.080 have acquired three merger and acquisition firms over the last 0:17:51.080 --> 0:17:54.320 three years. UM. Our M and A activity for our 0:17:54.359 --> 0:17:57.880 clients is at record levels right now. UM. It's it's 0:17:57.960 --> 0:18:02.760 really concentrated in changes ownership, where private companies are selling 0:18:02.800 --> 0:18:06.520 themselves to take advantage of what has relatively attracted multiples 0:18:06.560 --> 0:18:10.560 and very very attractive financing markets. So the macros on 0:18:10.760 --> 0:18:13.359 the on the client side are quite good and on 0:18:13.440 --> 0:18:15.760 the M and A side are quite good. Right now 0:18:16.359 --> 0:18:19.200 for us, we're really focused on, you know, small add 0:18:19.200 --> 0:18:22.600 ons to the portfolio like we've been doing. We're constantly 0:18:22.640 --> 0:18:25.040 looking and what we really try to do is is 0:18:25.080 --> 0:18:28.560 build industry expertise by bringing on corporate finance and M 0:18:28.560 --> 0:18:31.320 and A expertise that we can differentiate with our clients 0:18:31.400 --> 0:18:34.080 versus competition. Don, what about clients who want to avoid 0:18:34.119 --> 0:18:38.000 the step up basis changes? I mean, Um, these tax 0:18:38.320 --> 0:18:41.840 plan changes are significant. Must be significant to your wealthy 0:18:41.840 --> 0:18:45.520 clients and institutions. Yeah, they you know, the their their 0:18:45.600 --> 0:18:48.480 their proposals at this point, so there will see where 0:18:48.480 --> 0:18:51.119 they land. But I would expect some some form of 0:18:51.160 --> 0:18:54.720 increases of taxes. It's definitely accelerating things on the M 0:18:54.720 --> 0:18:56.959 and A side. So if we were, if we were 0:18:57.000 --> 0:18:59.800 in a robust market before the proposals that came out 0:18:59.840 --> 0:19:03.600 of the administration, I think people are looking to UM too. 0:19:03.760 --> 0:19:06.200 If if they're sellers, they're looking to sell their companies 0:19:06.280 --> 0:19:10.080 probably within the calendar year of two thousand one. Don, 0:19:10.119 --> 0:19:12.679 thanks so much, great to get your insight you have 0:19:13.040 --> 0:19:15.119 a really unique point of view that I think is 0:19:15.119 --> 0:19:18.800 helpful for everybody looking at this market. Don McCree is 0:19:18.880 --> 0:19:21.680 the vice chair and the head of commercial banking at 0:19:21.720 --> 0:19:29.560 Citizens Financial Group. Really a policy day today in addition 0:19:29.600 --> 0:19:31.399 to earnings, Matt, you know, we've got the Federal Reserve 0:19:31.440 --> 0:19:33.520 it too was John was just mentioning, which Bloomberg will 0:19:33.520 --> 0:19:36.800 bring you as well as President Biden's speech at nine 0:19:36.800 --> 0:19:39.680 pm Wall Street time again Walls, Bloomberg will be bringing 0:19:39.720 --> 0:19:42.960 that to you. So a lot of policy initiatives here 0:19:43.000 --> 0:19:45.720 that are likely to have a, you know, pretty significant 0:19:45.720 --> 0:19:49.800 impact on this economic recovery as this reopening begins to 0:19:49.880 --> 0:19:53.440 really accelerate here in the US. Yeah. Absolutely. Let's check 0:19:53.440 --> 0:19:55.960 in right now with someone who knows a little bit 0:19:56.000 --> 0:20:00.600 more about, um, the policy and effects. Casey Matthews joins 0:20:00.640 --> 0:20:03.840 US Chief Investment Officer at U m B on what 0:20:03.880 --> 0:20:06.359 we could get from these tax changes. In Casey, I 0:20:06.400 --> 0:20:10.040 want to start first with the with the arguments, Um, 0:20:10.080 --> 0:20:13.560 if this had happened ten years ago, you would have 0:20:13.600 --> 0:20:17.760 heard freshwater economists go absolutely nuts with the jump in 0:20:18.160 --> 0:20:20.600 a capital gains tax, even if it is for people 0:20:20.640 --> 0:20:22.280 who are in more than a million dollars a year. 0:20:22.720 --> 0:20:25.400 But as it is, it doesn't seem like there are 0:20:25.440 --> 0:20:28.720 any more freshwater economists with any cloud. At least all 0:20:28.760 --> 0:20:33.400 of the economists who have influenced these days are um 0:20:33.440 --> 0:20:37.800 of the salt water variety or more um Kynesian. So 0:20:38.880 --> 0:20:43.520 where is the pushback on this? Well, good morning, you know, 0:20:43.720 --> 0:20:49.159 I don't think there's much pushback because our takeaway is 0:20:49.880 --> 0:20:55.320 taxes don't drive economic activity. There's all kinds of data 0:20:55.320 --> 0:20:57.440 out there. Even though every cycle, you know, you talk 0:20:57.480 --> 0:21:01.320 about your years ago, every economic cycle, every potential tax 0:21:01.359 --> 0:21:06.200 policy change has its own set of nuances. But yeah, 0:21:06.200 --> 0:21:11.000 we know and economists know that. One the academic research 0:21:11.080 --> 0:21:14.840 says tax policy doesn't drive economic activity, and we can 0:21:15.080 --> 0:21:18.359 use the fiscal multiplier to prove that. And that is 0:21:18.400 --> 0:21:21.840 the bang for the buck that each government, that the 0:21:21.880 --> 0:21:26.200 government spends for stimulus, what happens if they spend a dollar, 0:21:26.280 --> 0:21:29.160 do we get more than a dollar of economic activity? 0:21:29.480 --> 0:21:32.880 And the data shows us that low and behold direct 0:21:32.920 --> 0:21:36.480 purchases of goods and services has the highest potential the 0:21:36.480 --> 0:21:40.240 biggest bang for its buck to stimulate the economy. The 0:21:40.400 --> 0:21:45.560 lowest initiative would be corporate tax cuts and tax cuts 0:21:45.600 --> 0:21:50.640 for um, high way earners. So this stuff doesn't impact 0:21:50.920 --> 0:21:53.280 economic activity at all. It's not a catalyst, it's not 0:21:53.320 --> 0:21:58.480 a driver. All right, Casey, how much do you think, uh, 0:21:58.520 --> 0:22:02.679 these tax increases, the post tax increases are economically based 0:22:02.680 --> 0:22:06.280 i e. To pay in part for President Biden's fiscal 0:22:06.359 --> 0:22:10.480 stimulus plans. And how much is maybe social i e. 0:22:11.000 --> 0:22:15.119 Trying to deal with the income inequality, wealth inequality, the 0:22:15.119 --> 0:22:20.200 redistribution type of issue. How do you think about that? Well, 0:22:20.240 --> 0:22:22.400 I would go back and look at the empirical evidence 0:22:22.560 --> 0:22:25.480 that we've seen tax policy changes before, and some of 0:22:25.520 --> 0:22:28.720 these things just um. I think it was Mark Twain 0:22:28.800 --> 0:22:31.639