Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: with David Gura. Daily we bring you insight from the
Speaker 1: best of economics, finance, investment, and international relations. Find Bloomberg
Speaker 1: Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course,
Speaker 1: on the Bloomberg Doug Bando is not removed from our
Speaker 1: debate on international relations. He's with the libertarian Cato Institute.
Speaker 1: I'm gonna call him a conservative. Doug, you had a
Speaker 1: tour of duty with President Ronald Reagan. Let me start
Speaker 1: with the what if? What would Reagan do? I think
Speaker 1: Regan would be tough, but he wouldn't talk the way
Speaker 1: that President Trump has done. He'd recognized it as a superpower.
Speaker 1: We don't have to ratchet up the pressure. He'd make
Speaker 1: very clear any attack on the America's America would be
Speaker 1: responded to. But I think he'd also looked for negotiation.
Speaker 1: I think he'd looked for that back door channel. He
Speaker 1: did that with the Soviets. You know, regular is a
Speaker 1: man who understood you had to be tough, but you
Speaker 1: have to look for diplomatic solutions. We have to have
Speaker 1: both those possibilities and also suggested he had a respect
Speaker 1: for the intelligence community. Chosan Hung has without question the
Speaker 1: read of the Morning. It is a link the article
Speaker 1: on the leader of North Korea in the New York Times.
Speaker 1: It is a spectacular read of his Pulitzer Prize winning
Speaker 1: history in Korea. Doug, do we know who this guy
Speaker 1: is and his President Trump have a clue who he's
Speaker 1: up against? I'm skeptical of the President does. I mean,
Speaker 1: at least his reputation as somebody who doesn't particularly like
Speaker 1: to be briefed and particularly doesn't like to have long briefings.
Speaker 1: So my guess is that he's responding much more kind
Speaker 1: of out of his gut in many ways. I think
Speaker 1: there are certain similarities, oddly enough, between Kim Jong Hoon
Speaker 1: and President Trump and the they respond more emotional, more impulsive,
Speaker 1: and that that that's the reason that's caused for concern.
Speaker 1: I don't think either man wants war, but you get
Speaker 1: a couple of guys kind of being tough against one another,
Speaker 1: things could spire a lot of control. The question here
Speaker 1: about Reagan's rhetoric. We talked so much about his sweeping rhetoric,
Speaker 1: his ability to give a speech that would galvanize the
Speaker 1: the the American people. Uh. Compare the speeches. He gave
Speaker 1: his appreciation for rhetoric to what we're hearing from from
Speaker 1: President Trump. I look at look at the tweets. I
Speaker 1: certainly I'm still focused on that fire and fury line.
Speaker 1: How much of that was was Reagan himself? How much
Speaker 1: of that was a very closely coordinated communications team. Well,
Speaker 1: it's both. I mean Reagan had a very good sense.
Speaker 1: I mean he understood, for example, you know, joke calling
Speaker 1: the evil Empire. He was trying to reach you, Soviets,
Speaker 1: he was trying to reach especially Eastern Europeans. He had
Speaker 1: an audience in mind, but under Gorbitsav At one point
Speaker 1: he was asked, do you still consider the Soviet an
Speaker 1: evil empire? And he basically said that was in the past.
Speaker 1: I'm looking forward, you know. And he had a communications
Speaker 1: team would monitor things. Very concerned about dealing with the Soviets,
Speaker 1: but Reagan was quite willing to buck them when he
Speaker 1: thought it was necessary, being prepared to make a deal.
Speaker 1: But he was prepared to be tougher as well. And
Speaker 1: for example, the Berlin Wall, the line, you know, Mr
Speaker 1: Gorbachev tear down this wall, Reagan kept putting that in
Speaker 1: when staff members were taking it out. His view was,
Speaker 1: this is a clarion call we've got to make. But
Speaker 1: compare that, I think to President Trump. Reagan had a
Speaker 1: specific objective there in terms of who he was trying
Speaker 1: to reach in a way that I think President Trump
Speaker 1: is kind of blustering. I think that's the difference. Doug.
Speaker 1: I draw a line here between what you've written what
Speaker 1: Ambassador Susan Rice writes in the New York Times this morning.
Speaker 1: You've said, there's plenty of evidence that the leader North
Speaker 1: Korea is ruthless and cruel, but none that he's blind
Speaker 1: or suicidal. She writes, by most as sentiments, he's vicious
Speaker 1: and impetuous, but not irrational. Does the rhetoric that we
Speaker 1: hear here match the risk? Well, I think illogically there
Speaker 1: should not be much of her risk. That is the
Speaker 1: northers response got a weakness. They're scared. I mean, they
Speaker 1: point to Afghani stand, they point to a rock. Frankly,
Speaker 1: they point to Libya where the dictator made a deal,
Speaker 1: gave up these nukes and missiles, and look what happened
Speaker 1: to him. So this bluster, I think covers that up.
Speaker 1: You know, they don't want to start a war, they
Speaker 1: want to keep America out. On the other hand, if
Speaker 1: you start calling one on one with the United States
Speaker 1: you start talking about dropping missiles near American possessions, I
Speaker 1: think they've kind of underestimated Americans. You're willingness to put
Speaker 1: up with this stuff, David Girl bring back the esteemed
Speaker 1: uh Mr Bando Cato. But I'm trying to put in
Speaker 1: scope and scale North Korea, which is difficult with the data.
Speaker 1: But the economy of North Korea is on first order,
Speaker 1: two percent the size of New York City's economy. And
Speaker 1: that's just some back of the envelope, back of the
Speaker 1: bow time math. It maybe fo but my quick math
Speaker 1: is two percent the size of the New York City
Speaker 1: economy and greater New York Tug Bando, senior fellow with
Speaker 1: the Kato wins Too, former special assistant to a President
Speaker 1: Ronald Ring and Doug As. I understand you were in
Speaker 1: North Korea rather recently, and just give us a sense
Speaker 1: of how that visit has has shaped your sense of
Speaker 1: this conflict in particular. Sure, and if you're thinking about comparisons,
Speaker 1: it's about the economy of Anchorage. I mean that's the
Speaker 1: economy North Korea. Thank you, you're welcome. I was I
Speaker 1: was there twenty five years ago, so I had a
Speaker 1: point of comparison. I mean, kiel Young has more money
Speaker 1: today than it did twenty five years ago. The countryside
Speaker 1: remains desperately poor. As you pointed out, it's got about
Speaker 1: five percent of the economy of South Korea. I mean,
Speaker 1: you know, you compare Soul, South Korea, and you know
Speaker 1: Kyong Young. I mean, there's no comparison, at least today.
Speaker 1: There's some private cars in North and Killing Young. There's
Speaker 1: cell phones. They're not supposed to reach outside of the country,
Speaker 1: but they are there. If fashionists come to Pyongyang, women
Speaker 1: dressed nice, minister pretty plain, you know, so it's you
Speaker 1: can see a little bit of economic life there that
Speaker 1: Kim Jong un clearly wants economic development. His father, I think,
Speaker 1: viewed it as being destabilizing and frankly didn't care very much.
Speaker 1: But it were means desperately far behind the US. I
Speaker 1: mean desperately far behind South Korea. That's one of the
Speaker 1: things that fuels this kind of rabid nationalism and the bluster.
Speaker 1: All they have to do is look south. I mean,
Speaker 1: any North Korean who visits another country, almost any other
Speaker 1: country knows how far behind they are. We talk a
Speaker 1: lot about the trade relationship between North Korea and China,
Speaker 1: given given the focus of that relationship as we talk
Speaker 1: about sanctions at the UN Security Council, and we certainly
Speaker 1: hear the present talking about Chinese and the need for
Speaker 1: China to do more. How does that play out when
Speaker 1: you're on the ground there. How evident is the is
Speaker 1: that trading relationship. It's actually not very evident at all.
Speaker 1: What's interesting is despite the trading relationship, the relations between
Speaker 1: the two governments is not good. You know that. I
Speaker 1: mean tradition. The North Koreans are very independent. They don't
Speaker 1: want to be a province of China. Back in the fifties,
Speaker 1: the dictator took out kind of the pro China faction
Speaker 1: within the North Korean Communist Party, to the consternation of
Speaker 1: the Chinese. You know, what you find is a lot
Speaker 1: of dismissiveness and complaints about China in their media. And
Speaker 1: what was striking. I went to the war museum, they
Speaker 1: call it the Victorious Fatherland War Museum, and basically you
Speaker 1: would think that Kim Il sung won the war on
Speaker 1: his own you wouldn't be aware that somewhere along the
Speaker 1: line a few hundred thousand Chinese troops showed up. I mean,
Speaker 1: this museum presents this is almost entirely a victory of
Speaker 1: the North Koreans. I mean, China is not even mentioned.
Speaker 1: That kind of thing irritates the Chinese, especially because the
Speaker 1: son of the dictator, Mause Dung died in North Korea.
Speaker 1: You know, I was buried there. I mean, it's a
Speaker 1: very strange relationship, and that that economic side, they don't
Speaker 1: advertise that there the Chinese are involved. They buy minerals
Speaker 1: until recently, call and other stuff, you know, but they
Speaker 1: don't highlight that. Doug I returned to this op ed
Speaker 1: in The Times this morning by Susan Rice from a
Speaker 1: national security advisor. She she writes about preventative war, a
Speaker 1: phrase that we've heard a few times here over these
Speaker 1: last couple of weeks, and she writes that would result
Speaker 1: in hundreds of thousands, if not millions, of casualties metropolitan
Speaker 1: souls twenty six million people are only thirty five miles
Speaker 1: from the border, within easy range of the North missiles
Speaker 1: and artillery. She also notes twenty three thou United States
Speaker 1: troops plus their families live between Seoul and the demilitarized Zone,
Speaker 1: and total at least two thousand Americans reside in South Korea.
Speaker 1: Give us your sense of of the calculus policy makers
Speaker 1: in the Pentagon are going through right now. Of course,
Speaker 1: we had Secretary Maddis on the West coast last evening
Speaker 1: talking to reporters about this, talking solemnly about all the
Speaker 1: preparation that he's been doing, because indeed that is a
Speaker 1: huge component of of his job. What's happening in the
Speaker 1: policy planning department at the Defense Department right now, Well,
Speaker 1: my sense is that, I mean Maddis is until recently
Speaker 1: has talked about how diplomacies deans. So this is not
Speaker 1: a guy looking towards some kind of preventative war. I
Speaker 1: mean he understands the seriousness of it. I mean Matdis
Speaker 1: is a very serious guy and understands the costs of war.
Speaker 1: I think that his statements, though tough, I think in
Speaker 1: many ways you're trying to calm things down a bit
Speaker 1: by making it very clear that you know, we would
Speaker 1: retaliate against anything we're capable of doing it. The North
Speaker 1: had better not act. I don't think that he expects
Speaker 1: North Korea to do so again. I don't think people
Speaker 1: have seen North Korea as being suicidal. I like to
Speaker 1: tell people Kim Jong Oon, like his father and grandfather,
Speaker 1: wants his virgins in this life, not the next. This
Speaker 1: is not a guy who's thinking of wouldn't it be
Speaker 1: wonderful to go out in a bit of glory. He
Speaker 1: wants to preserve the regime. So I think they're looking
Speaker 1: at particularly the questions of mistake. They're worried about escalation.
Speaker 1: I mean, if you wanted to try to take out
Speaker 1: nuclear sights as they're a way you could convince the
Speaker 1: North Koreans it was not the beginning of regime change.
Speaker 1: To me, that's the biggest problem. If the North Koreans
Speaker 1: merely thought you were taking out, say their missile, they
Speaker 1: might decide it's not worth starting a war. But if
Speaker 1: they're convinced this is merely a prelude to an all
Speaker 1: out American attack all Iraq, then I think the lesson
Speaker 1: they learned is you don't wait for the US. You go.
Speaker 1: You started. What you know, if they do a missile
Speaker 1: or whatever they do, I don't want to sound like
Speaker 1: a no ballistics or whatever it's called. And they point
Speaker 1: the things self you know, usually they pointed east if
Speaker 1: you will, in the vicinity of Japan with a capital J.
Speaker 1: What would you expect would be anyone's response if they
Speaker 1: change the vector of that missile launch and pointed selfish
Speaker 1: in the vicinity of Guam, and I mean a thousand
Speaker 1: miles of Guam. But what would be the vector change
Speaker 1: that we would see. Well, my guess is that they've
Speaker 1: monitored very closely. What they try to do is get
Speaker 1: a sense does this look like another test that's going
Speaker 1: to land the ways away or do you actually think
Speaker 1: there's a possibility this could hit. I mean again, one
Speaker 1: missile being shot off. It's almost impossible to imagine that
Speaker 1: would be an attack on Guam because that would be
Speaker 1: the craziest thing imaginable, very unlikely, but still, I mean,
Speaker 1: at the Pentagon, you have to watch that stuff. So
Speaker 1: I think that's what they would look at. And then
Speaker 1: they decide that they think they could take it down.
Speaker 1: The question they do have a sad battery there, you know,
Speaker 1: an anti missile battery. They have to decide could they
Speaker 1: take it out in the terminal phases is coming down
Speaker 1: and if they thought it was coming too close they
Speaker 1: might try that. There's been a lot of criticism of
Speaker 1: previous administrations for not having done more. Eli Lake a
Speaker 1: columnst for bloom Review, writting about that this week that
Speaker 1: you know, there was opportunity in the past before North
Speaker 1: Korea got to where it is today, miniaturizing a nuclear weapon,
Speaker 1: testing these intercontinental ballistic missiles. Take us back to when
Speaker 1: you were in the Reagan White House. To what degree
Speaker 1: was North Korea then on the radar? Oh, it really
Speaker 1: wasn't at all. I mean, the Soviet Union was the
Speaker 1: big issue. I mean, we were still dealing in the
Speaker 1: early days with the Soviet Union as the evil Empire.
Speaker 1: We had bression of you know, I mean the the
Speaker 1: the kind of general secretaries. You got Andropov, who is
Speaker 1: a former KGB chief. You know, so the US is
Speaker 1: worried about a real chance nuclear exchange with the real
Speaker 1: nuclear power. If we weren't even talking about nuclear weapons
Speaker 1: for North Korea, then it was a very small subset
Speaker 1: that it became kind of the bigger issue. In the
Speaker 1: Soviet Union went away, it's China went away. They're kind
Speaker 1: of left is the real bad guys. I've never asked
Speaker 1: this question because it's never gone through my puny little brain.
Speaker 1: My experience of so called nuclear is either movies, cinema, Hollywood.
Speaker 1: I guess we dropped two bombs on Japan a few
Speaker 1: years ago. Have we ever done a supposed modern nuclear exchange?
Speaker 1: Is this like to the military people? Is this all
Speaker 1: as new as it is for us? Oh? Yeah, because
Speaker 1: I mean certainly our nuclear weapons and the hydrogen bombs
Speaker 1: are far more powerful. I mean what you find is
Speaker 1: people occasionally say this warhead has the power of say
Speaker 1: ten of the bombs that were dropped on near Hiroshima
Speaker 1: or something. I mean, we are in a different world
Speaker 1: the father than of multiple nukes falling. We have merved warheads.
Speaker 1: We have multiple warheads on a missile. I mean, you know,
Speaker 1: we have miniaturized, we have tactical We're in such a
Speaker 1: vastly different world here that you know, the US has
Speaker 1: a quite an arsenal. I mean North Koreans we think
Speaker 1: might have about twenty maybe nuclear warheads of you know,
Speaker 1: we have no idea really how how they could to
Speaker 1: be toployed and presented. The US has a vast arsenal.
Speaker 1: You get into a nuclear it's change, and you know
Speaker 1: the North can do some harm the U S can
Speaker 1: wipe out the North without any question. Great to speak
Speaker 1: to you, very valid briefly this morn. Yeah, Doug Band
Speaker 1: from Anchorage. That's very good. That parallel useful as well.
Speaker 1: Doug banda senior fell at the Cato Institute, former special
Speaker 1: assistant to presidents around Reagan on our phone lines. Always
Speaker 1: good on a Friday to speak to Jeffrey Rosenberg. He
Speaker 1: synthesizes the financial and the mathiness of what we do
Speaker 1: with where do I get some yield? Among other great services.
Speaker 1: He writes a note for black Rock with uncommonly smart charts. Jeffrey,
Speaker 1: if we get inflation today in twenty eight minutes, if
Speaker 1: we get another inflation report comes September and then we
Speaker 1: staggered was September twenty FED meeting? Do any of those
Speaker 1: inflation port reports really matter? Yeah? Thanks Tom. You know
Speaker 1: they do matter because the FED is telling a narrative
Speaker 1: of transitory weakness. So the inflation prints that come in
Speaker 1: inform the markets expectations as well as the FEDS and
Speaker 1: the FMC members expectations just to whether or not that
Speaker 1: story actually playing out, and so to the extent that
Speaker 1: we don't get big disappointments in today's print, and that's
Speaker 1: going to hold up the expectation that transitory story works,
Speaker 1: and that's about keeping the December rate hike in play.
Speaker 1: September in the balance sheet is about growth. The rate
Speaker 1: hikes are about infltation. I mean within this and I
Speaker 1: don't believe I've ever asked this question. Let's try it out,
Speaker 1: David and Mr Rosenberg h the idea, do you know
Speaker 1: ahead of the certitude of a CPI report or is
Speaker 1: it like the jobs report where we sort of go
Speaker 1: into it blind. Well, we we go into it with
Speaker 1: a out of expectations, and we do a tremendous amount
Speaker 1: of analysis within our within our sorry, within our inflation team,
Speaker 1: and looking at the components, analyzing trends in pricing and
Speaker 1: building up bottoms up forecasts, and so there are just
Speaker 1: like there is in the case of the payroll report,
Speaker 1: and in some sense, because roll and payroll volatility has
Speaker 1: been so low, the inflation prints have actually taken on
Speaker 1: as great or even great or important. So there's a
Speaker 1: lot of expectations around a point two point one eight
Speaker 1: in terms of the number today. So you have built
Speaker 1: into the market same kind of dynamic of expectations and
Speaker 1: then disappointment or um excitement over the you know, the
Speaker 1: number that we're gonna get a few minutes. How does
Speaker 1: this relate to the PPI numbers that we got yesterday?
Speaker 1: And they compliment one another, what do they tell you about?
Speaker 1: Rosenberger has no idea how smart that question is, given
Speaker 1: the worship for PPI numbers twenty and thirty years ago.
Speaker 1: You know, there is a little bit um. They're they're
Speaker 1: very different in terms of components in the short run, right,
Speaker 1: so when we're talking about the short run market expectations
Speaker 1: and short run movements, there's not a tremendous amount of correlation.
Speaker 1: What you do have is you have it's feeding into
Speaker 1: the narrative. And again Tom, back to your comments about
Speaker 1: comparing it to to pay roll employment, it's kind of
Speaker 1: like initial jobless claims or a DP. It feeds into
Speaker 1: the narrative around the data over longer periods of time
Speaker 1: that are really kind of outside the day to day
Speaker 1: market movements. There's there's obviously connection between purchasing purchase prices UH,
Speaker 1: producer prices and and and consumer prices, but in the
Speaker 1: in the short run UM, it really has a very
Speaker 1: different set of drivers. There's overlap, but but there's a
Speaker 1: there's a very different set of near term drivers. What's
Speaker 1: your sense of how wetted this feed is to to
Speaker 1: raising rates again this year? In other words, are they
Speaker 1: on a tract that necessitates that or is there really
Speaker 1: some flexibility or chance here of reversal in light of
Speaker 1: these data and others. So you know, this is where
Speaker 1: the market gets a lot of cross currents because it's
Speaker 1: a diverse group of people that we hear from. And
Speaker 1: so it's a committee and there's a committee day based
Speaker 1: decisions and there's a spectrum of viewpoints. But what the
Speaker 1: central message of the committee is that we should get
Speaker 1: on with normalization, that the goals of the Fed have
Speaker 1: mainly been achieved, and that they want to move on
Speaker 1: with normalization at a gradual and predictable pace to not
Speaker 1: unlind financial market conditions that would unlind the benefits of
Speaker 1: what the accumulated benefits of normal of of accommodation have
Speaker 1: given the economy. But they want to get on with
Speaker 1: normalization because they don't want to overheat. And part of
Speaker 1: the payroll story is these unemployment rates are real. Every
Speaker 1: measure of the labor markets is pointing to the potential
Speaker 1: that we are or are on track to an overheating economy,
Speaker 1: and that's classic business cycle overheating that eventually becomes the
Speaker 1: roots of your next procession, and they want to avoid that,
Speaker 1: so they want to get on with it without disrupting
Speaker 1: banana market. T want to rip up the script here.
Speaker 1: We trust Jeff Rosenberg enough to be very adept at
Speaker 1: going outside every min and actually commenting on the state
Speaker 1: of our world. Punham Gyle, Jeff Rosenberg and Bloomberg Intelligence
Speaker 1: just reported and publish a scathing note on J. C.
Speaker 1: Penny and the idea of a stock going from thirty
Speaker 1: to ten, migrating eight, cratering to five, and enjoying three
Speaker 1: dollars and nine cents this morning. Help us with what
Speaker 1: you observe of the disruption as you mentioned of Amazon,
Speaker 1: we we are when you look at yael C plus
Speaker 1: I plus G plus n X, do you really have
Speaker 1: a handle on consumption as you see something like J. C.
Speaker 1: Penny blow up an Amazon prosper so well to so
Speaker 1: to put it into today's you know, ten minute fifteen
Speaker 1: minute attention span, uh conversation. This this is about the
Speaker 1: impact of technology on inflation. It's about the tech on pricing,
Speaker 1: So you J C. Penny, the retailer's Amazon, what is that? All?
Speaker 1: Part of technology is the dominant force in our era,
Speaker 1: right the technology curve has gone vertical, the tremendous dramatic changes,
Speaker 1: the second machine age, everything that we've seen, even in
Speaker 1: the last five to seven years, the incredible acceleration and
Speaker 1: the macro implication of technology is technology is disinflationary. And
Speaker 1: that's the challenge, and it's a huge challenge. Back to
Speaker 1: our earlier conversation to the FED, which is still operating
Speaker 1: with nineteen sixties technology of Phillips curves that anticipate that
Speaker 1: there's a trade off between unemployment and broad based price inflation.
Speaker 1: But in the technology we're we may not see that
Speaker 1: to the same degree. So it's a huge impact, you know, Jeff.
Speaker 1: One of the high points yesterday was our conversation with
Speaker 1: a very distinguished Brigadier General Mr. Kimmitt, who has not
Speaker 1: only given public service to the nation, but he's had
Speaker 1: the ability to get up in front of a mic
Speaker 1: at the State Department and be the smooth guys a
Speaker 1: C F A, etcetera. And I said to him, I said,
Speaker 1: why did you get your c f A. And he said,
Speaker 1: because they went to Harvard Business School and didn't learn anything.
Speaker 1: And I mentioned Temper, I mentioned Cardigi Mellon where you went.
Speaker 1: I mean, does the underlying mathematics of m I T.
Speaker 1: Sloan Cardigi Melon. You know some of the great public
Speaker 1: schools that we've got, Penn State as a rigorous economics program,
Speaker 1: and on and on Michigan where Diane Swunk went. Does
Speaker 1: the mathematics of the sixties even work now in a
Speaker 1: in a in a in a bimodal American world. So so,
Speaker 1: one of the things that you know, quantitative tools give
Speaker 1: us is they give us a rigorous way of thinking.
Speaker 1: They of us a systematic way of thinking that allows
Speaker 1: us to test the logic and our understanding. But there's
Speaker 1: limits to those tools, and they are best fault of
Speaker 1: these tools. And when we listen to our policymakers who
Speaker 1: are very um wedded to these tools, it's interesting to
Speaker 1: see the debate about how much reliance is there, Like,
Speaker 1: for example, the estimation of our star. There have been
Speaker 1: five papers in the last five months written on this
Speaker 1: and they come to very different conclusions. And it highlights
Speaker 1: that in many of these areas the application of rigor
Speaker 1: hard science to what is essentially a social science doesn't
Speaker 1: always work, uh as well as the rigor of the
Speaker 1: models would like us to believe. And so there's a
Speaker 1: place for judgment, and there's a place for human understanding.
Speaker 1: And that's the important balance that that we should get
Speaker 1: out of, you know, using our tool Kain, and I
Speaker 1: think we hear that from from many of our policymakers,
Speaker 1: and and when we lose sight of that, and and
Speaker 1: we get two wedded to a dogmatic view of the
Speaker 1: world and loose sight of the balance, and that things
Speaker 1: can fail. Uh, you can, you know, really see things
Speaker 1: come unraveled. So I think that's an important, you know,
Speaker 1: sort of balancing point to the quantitative tool kit. And
Speaker 1: the point about inflation is is to sort of highlight
Speaker 1: that you have structural change. So if I fit a
Speaker 1: bunch of historical data and it worked in the past,
Speaker 1: I gotta understand how the structure of the economy is
Speaker 1: changing and what these influences are that might challenge that
Speaker 1: happening in the future. Jeffrey Rosenberg with us, and we
Speaker 1: have a luxury with an adept and quite festile Mr
Speaker 1: Rosenberg to change the script. Jeff Rosenberg in the equity market,
Speaker 1: the VIX eleven twelve, and then we have a jump
Speaker 1: condition to seventeen. What does a jump condition in the VIX?
Speaker 1: I mean, still below the long term average of twenty,
Speaker 1: but what does that reset towards a little more angst
Speaker 1: than the VIX signal? Well, Tom, it's a really really
Speaker 1: interesting conversation and an important conversation. You know, what that
Speaker 1: jump says to me is there has been a very
Speaker 1: very large build up over a number of years of
Speaker 1: people selling volatility. That that seems kind of a strange concept.
Speaker 1: How do you sell volatility? But one of the new developments.
Speaker 1: You know, every financial cycle is sort of characterized by
Speaker 1: some new development something we had really never seen before
Speaker 1: and so don't really know how to ausit, track it,
Speaker 1: understand it. It's the confluence of, you know, some very
Speaker 1: unique characteristics of this cycle and what is the productive
Speaker 1: characteristic of this cycle. It has been a perverse and
Speaker 1: persistent lack of income, zero interest rates, negative interest rates,
Speaker 1: and so one of the strategies that has been incredibly
Speaker 1: successful has been to generate income through selling options, selling volatility,
Speaker 1: and it's been was successful that the sizes have gotten
Speaker 1: bigger and bigger and bigger. So when you see a
Speaker 1: relatively small move triggered by the stuff we're talking about
Speaker 1: in the in the tweets and the geopolitical risk, that
Speaker 1: small trigger results in a much larger reaction in and
Speaker 1: that larger reaction should be telling you something. It's telling
Speaker 1: you something about the build up of these positions in
Speaker 1: the market and the vulnerability that build up creates to
Speaker 1: a very small geopolitical risk in this case, but to
Speaker 1: any small spark. And it's a very kind of important
Speaker 1: data point to to keep an eye on today and
Speaker 1: Monday and Tuesday, and as we roll forward into the fall.
Speaker 1: You have a noe doubt on on on bank loans,
Speaker 1: looking at bonds and bank loans and concert with with
Speaker 1: each other. Uh, give us, give us your your sense,
Speaker 1: your take on on the degree to which bank loans
Speaker 1: should be considered at this point. Well, thank you for
Speaker 1: mentioning the note. Let me I hate I know you guys. Hey,
Speaker 1: when I do shameless plugs shaming is we we have
Speaker 1: a noe doubt. It's my fixing theme strategists publication. I
Speaker 1: do it monthly, It's on our website. But the notice
Speaker 1: is not just about bank loans. And and it's interesting, David.
Speaker 1: You know, every media person who's read my note talks
Speaker 1: about bank loans. And the whole point of putting out
Speaker 1: the piece is that it's the title of the pieces.
Speaker 1: Float like a butterfly. And so when I say floating rate,
Speaker 1: you say bank loans, I say floating rate, you say
Speaker 1: bank loans. Right, But there's more to the floating rate
Speaker 1: universe than just bank loans. And one of the critical
Speaker 1: things that I'm highlighting here, going back to the earlier
Speaker 1: part of our conversation about what inflation means for keeping
Speaker 1: the feed on its path, is that very quietly here,
Speaker 1: the FED has been raising interest rates and raising the
Speaker 1: attractiveness of achieving income results by taking less risks. And
Speaker 1: I just talked about is people are taking huge, inordinate
Speaker 1: amounts of risk to generate into selling volatility. You can
Speaker 1: do it in the front end of the yield curve,
Speaker 1: and it's still lower yielding than taking out a lot
Speaker 1: of risk. But the reduction and risk for what's becoming
Speaker 1: more attractive something investors should be taking a lot. Okay,
Speaker 1: And I love the idea, and you write it much
Speaker 1: more than floating paper the idea than from Stanley Fisher
Speaker 1: is the Openers Economic Club of New York speech a
Speaker 1: year and a half ago, the Ultra Accommodator speech, folks
Speaker 1: is Jeff Rosenberg to your point on floating and bait
Speaker 1: change behavior. He talked about the percent change from a
Speaker 1: low interest rate level. How much should we wait percent
Speaker 1: change from a given unit of of of yield versus
Speaker 1: the absolute change back to what's supposedly normal, So you know,
Speaker 1: the percent changes get very large. I don't think it's
Speaker 1: the percent change, though that matters here time. I think
Speaker 1: what it is is it's more of a bit of
Speaker 1: a tipping point argument, meaning that when you're at zero
Speaker 1: interest rates, you will do anything for income, and that's
Speaker 1: what we've been in. When you're at negative interest rates,
Speaker 1: you'll you'll do even more to reach for income. But
Speaker 1: when you start to bring interest rates back from zero,
Speaker 1: the first it's not worth it, The first fifty not
Speaker 1: worth it. But we could be looking at very shortly
Speaker 1: here a hundred and twenty five, hundred and fifty, a
Speaker 1: hundred seventy five, and slowly and quietly the fundamental backdrop
Speaker 1: that has dominated the last eight or nine years of
Speaker 1: zero interest rates is no longer there and that kind
Speaker 1: of development has been happening. And I highlighted in this
Speaker 1: figure the flattening of yield between high risk yield which
Speaker 1: you're going down in yield and low risk yield which
Speaker 1: is going up and yield that's unsustainable. You can't have
Speaker 1: this going on wherever. We're out of time. I got
Speaker 1: twenty seconds. Does that lead to instabilities? By definition, if
Speaker 1: you have that conflation of yield, does it lead to
Speaker 1: unstable outcomes? It doesn't, It doesn't have to it. People's
Speaker 1: portfolio are relatively balanced and the recognition of that yield
Speaker 1: shift and people are paying attention, which is the point
Speaker 1: of my pay look at some of this lower risk
Speaker 1: ill This stuff is actually attractive to be balancing. This
Speaker 1: is we gotta go. This is way to euclidean. Dr Rosenberg,
Speaker 1: thank you so much. At black Rock. Coming up, we
Speaker 1: do more geometry. This is Bloomberg, a little bit of
Speaker 1: move in the bond market, lower yields by just a
Speaker 1: basis point of shift, if you would. I'm in here
Speaker 1: looking at the many lines of data, David guru before
Speaker 1: you bring in our steam guest, and I'm trying to
Speaker 1: figure out what's transitory and what's not it's transitory that
Speaker 1: the Chicago Cubs are in. First place that I would
Speaker 1: say is is probably tobacco. I've got a negative. I
Speaker 1: think I've got a negative. The waiting on tobacco is
Speaker 1: less than one percent, and it is a negative statistic.
Speaker 1: For the second month in a row, we went positive
Speaker 1: point for positive point five, a huge jump whatever that
Speaker 1: anomally is positive point one. And then last month we
Speaker 1: went negative zero point four and now we're negative zero
Speaker 1: point one. If tobacco's transitory and I don't even know
Speaker 1: somewhere and here's wireless cell phones, will have to look
Speaker 1: for that as well, transitory transitory. Uh. Diane Spak joins
Speaker 1: us now. She's the founder of DS Economics. He joins
Speaker 1: us on our phone line sponsored by Spectrum Enterprise. Your
Speaker 1: nation might provide her of scalable fiber network services and
Speaker 1: managed cloud solutions. And Diane, let me just start by
Speaker 1: asking you, sir, of what you're looking at beneath the
Speaker 1: headline numbers here. I know you flagged shelter is something
Speaker 1: you're gonna be paying particularly close attention to. Here it
Speaker 1: looks like shelter up here point one percent. Give me
Speaker 1: a sense of what you're looking for this morning. Well, actually,
Speaker 1: one of the interesting things is, as Tom has already
Speaker 1: point in it out there is the issue of the
Speaker 1: increase in UH cell phone the cell phone cellfire continued
Speaker 1: to fall, and that's something that's supposed to be a
Speaker 1: one off, but now it's we're several months into that
Speaker 1: one off. Yeahs a multiple on that tobacco issue that
Speaker 1: you mentioned, that's important. It came off of a surge
Speaker 1: in taxas in California and California so that's a large
Speaker 1: state that that's why we saw that fall off there.
Speaker 1: But of course this is more bad news for the
Speaker 1: FED even if we keep looking at these one off incidences.
Speaker 1: At the end of the day, the Federal Reserve is
Speaker 1: dealing with inflation. That's too cool. This is you know,
Speaker 1: the porridge is too cool. Goldilocks is not quite here yet.
Speaker 1: She's not happy with sitting at this, you know, at
Speaker 1: this particular place at the table, and neither is the FET.
Speaker 1: And I think that's the real issue is didn't expect
Speaker 1: this to make or break the FETs decision. I think
Speaker 1: what we're going to see is the data we see
Speaker 1: from September and October, which is going to come out. Um,
Speaker 1: that's the September and October inflation data that comes out
Speaker 1: before the January, the December mean and in January. Um, Dad,
Speaker 1: the data is going to determine whether or not we
Speaker 1: get a turn of the year move and turned to
Speaker 1: your rate hike. Um. So we're still a little bit
Speaker 1: always there. But you got to see a pickup, a
Speaker 1: couple of tents of a pickup in now time, folks,
Speaker 1: we sell the advantage of the Bloomberg terminal. David, I
Speaker 1: just brought up with a great search engine search. Thank
Speaker 1: you Thomas Seconda for that gift and David Timborelli, among others.
Speaker 1: The log chart of wireless cell phone Diana, I'm gonna
Speaker 1: put this out on Twitter so you can see it.
Speaker 1: And as Diane correctly states, as always we get that
Speaker 1: from Dr Swank the vectors in the ugly yelling direction.
Speaker 1: Let me do that when I put that out right now, folks, Uh, Diane,
Speaker 1: pay so close attention to to what FED policymakers are saying.
Speaker 1: We've alluded to the transitory comment that the FED chair
Speaker 1: made a few months ago. Now. We heard from Jim
Speaker 1: Buller earlier this week, our colleague Kathleen Hayes sat down
Speaker 1: with him in St. Louis for an interview, and his
Speaker 1: pessimism about a rise in inflation was reeled and think
Speaker 1: we'd see much change here by by the end of
Speaker 1: the year. What's your sense of how much unanimity there
Speaker 1: is among FED policymakers on the issue of the transitory
Speaker 1: nature of the so called transitory nature of inflationary headwinds.
Speaker 1: I think there was a lot of hope that they
Speaker 1: were transitory, and I think what you're seeing is that
Speaker 1: shift over to if it's transitory or not it's been
Speaker 1: it's being becoming too long. It certainly is too long
Speaker 1: and has already postponed to September rate hike. I frankly
Speaker 1: thought we never had a September rate hike in there.
Speaker 1: But the next determinators do we have enough for December
Speaker 1: rate hike? And what's a real challenge for the SEED
Speaker 1: is even though many of them believe this is transitory
Speaker 1: and it could work out by next year and their
Speaker 1: medium term outlook is still fine, what they're concerned about
Speaker 1: is that without inflation, it's hard to have the cover
Speaker 1: they need to raise rates against the backdrop of additional
Speaker 1: financial easing. You know, who would have thought some you know,
Speaker 1: some kinds of access to credit would be much easier
Speaker 1: to get today than it was when the FED started
Speaker 1: raising rates. And so this is still highly accomminative FED,
Speaker 1: but it's even more so, you know, a credit market
Speaker 1: that's beginning to finally loosen up, which we you know,
Speaker 1: would expect normally, but there's been nothing normal about this recovery.
Speaker 1: Let me let me put a question to you that
Speaker 1: I put to Jeff Rosenberg just a moment ago, and
Speaker 1: that is how you regard the CPN numbers in concert
Speaker 1: with the PPI numbers. What does one tell you about
Speaker 1: the other? If anything, Well, you know they're they're related, Um,
Speaker 1: they are a different waiting. The pc numbers are really
Speaker 1: important and the PPI the PPI numbers are sort of
Speaker 1: a pipeline number. They've redone them, so our history on
Speaker 1: them isn't as good in terms of how much they
Speaker 1: really give us in terms of a leite time in
Speaker 1: terms of overall pipeline inflation, and how much that's actually
Speaker 1: translated into what consumers spend. I think it's important to
Speaker 1: note too, is this division we're really seen, is it's
Speaker 1: more structural and it's really reminiscent of the late ninety nineties.
Speaker 1: We had Walmart back then hit critical mass in hit
Speaker 1: in rural areas and really brought down prices. Now we're
Speaker 1: having Amazon phenomena. They're very similar in terms of pricing.
Speaker 1: Do you hear a dog in the bat reacting to
Speaker 1: the latest one? I think that's that's that's Maynard Kane's
Speaker 1: Maynard kin be good. I'm doing this from home today.
Speaker 1: You asked me to be honest. Family. That's okay. I
Speaker 1: gotta face for radio because I had I watched myself carefully. Thankfully,
Speaker 1: everything's benign, but I have to get Okay. We'll continue
Speaker 1: with Diane swunk in our dog Maynard Keynes this morning.
Speaker 1: Just that's what you've been thinking about. More broadly, here
Speaker 1: we can talk a bit more about these inflation reads. Uh,
Speaker 1: if you want, but I just want to when you
Speaker 1: look at the economy generally, what's what's giving you the
Speaker 1: most pause, the greatest concern at this point. Well, clearly
Speaker 1: it's policy uncertainty, and we're seeing that pick up globally
Speaker 1: as well as in the United States. Many people that
Speaker 1: were betting on tax reform, health care reform, and the
Speaker 1: whole broad spectrum of the agenda. Are now putting a
Speaker 1: lot of projects on the shelf that they thought that
Speaker 1: they would be moving on this year because of that
Speaker 1: uncertainty and that dappen's growth, and so that's something I'm
Speaker 1: very concerned about going forward. Also, looking at these inflation numbers,
Speaker 1: I do think, you know, the core number is held
Speaker 1: at one point seven percent. We did see you asked
Speaker 1: me earlier about the relationship between the p p I
Speaker 1: and the cp You know, really interesting is that we
Speaker 1: saw a surge in accommodation costs in the p p I.
Speaker 1: We did not see that the opposite happened in the
Speaker 1: July accommodations portions for the CPI, And so you really
Speaker 1: are seeing some disconnect there. That could be squeezing margins,
Speaker 1: That could be Airbnb providing a lot of competition for
Speaker 1: these accommodations, more narrowing margins. I mean, all of the
Speaker 1: above is a little bit rough, and it gets to
Speaker 1: how much um pricing power do we have any even
Speaker 1: what is a tight labor market economy, and it's still
Speaker 1: very limited for the Federal Reserve. You know, one more
Speaker 1: rate hike. I think they'd like to squeeze in this year,
Speaker 1: but it's going to be difficult for them. They're really
Speaker 1: concerned about easing financial conditions. At the other end of
Speaker 1: the spectrum, they're also worried about the fact that there
Speaker 1: is a lot of uncertainty. We're now talking about an
Speaker 1: expansion that we're eight years into and you're starting to
Speaker 1: see some things that are very similar to the nines
Speaker 1: and those that that seems almost impossible. But there is
Speaker 1: some tight labor market conditions where some produce there's and
Speaker 1: some service providers in particular saying we don't have enough
Speaker 1: qualified individuals, either low skilled or high skilled to fill
Speaker 1: the jobs and we're having to curb what we do.
Speaker 1: We haven't heard that since and that's something to be
Speaker 1: concerned about, especially when we talk about pulling back further
Speaker 1: on immigration as well. That's a big concern among whether
Speaker 1: they're large, medium, or small manufacturers and um service providers
Speaker 1: out there. We're really seeing people having a hard time
Speaker 1: finding workers that they once thought were easy to find.
Speaker 1: Help me with the role that energy is playing right
Speaker 1: now in the in the US economy. We see oil
Speaker 1: here hovering around forty bucks a barrel w t I
Speaker 1: barrel what's the role that energy is playing. Well, you know,
Speaker 1: the interesting thing is that we've gotten so efficient. That's
Speaker 1: one of the places we've seen extraordinary productivity games. We
Speaker 1: can produce oil in this price range now and we're
Speaker 1: a world player. That is amazing. We are still adding
Speaker 1: jobs in the oil industry. It's about eight thousand or
Speaker 1: point five percent of the total labor force um a month.
Speaker 1: So it's not a big sector. You know, we have
Speaker 1: to keep that in mind. But it has spillover effects
Speaker 1: that have yet to come through in terms of investment.
Speaker 1: When you're running at these prices different than a hundred
Speaker 1: bucks per barrel and you're investing like crazy, we don't
Speaker 1: have all those spillover effects we'd like to see right now.
Speaker 1: Dan Dominiqunstam always brilliant at Deutsche Bank the other day
Speaker 1: suggests lower inflation, but yet a circuitous positive of real
Speaker 1: economic growth. So better real GDP combined with lower inflation
Speaker 1: and a mix it at you denominal g d P.
Speaker 1: The center tendency of that is you've got to have
Speaker 1: investment at some point. You are hardwired. I can't begin
Speaker 1: to convey how unique miss Swank is. Besides, she has
Speaker 1: Chicago cub tickets, which is the basic idea. Diane. You
Speaker 1: are hardwired into investment decisions. When do they turn on
Speaker 1: the investment switch? You know, we really just haven't seen
Speaker 1: it yet. Outside of oil sector, which is coming act
Speaker 1: a little bit but clearly not booming. It's really very tepid.
Speaker 1: And like I said, I'm talking to companies that were
Speaker 1: ready to go this year with corporate tax reform on
Speaker 1: what they thought would be an expansion for them to
Speaker 1: be able to do something. What what is holding it back?
Speaker 1: Don't give me this Washington malarkey. It's more than that. Why,
Speaker 1: you're right, it's also a slow economy. What's been interesting, too,
Speaker 1: is that you are starting to see some manufacturers talk
Speaker 1: about more automation because they're literally running out of workers.
Speaker 1: And many of these small towns it's a very small
Speaker 1: labor pool, and they moved out to these rural areas
Speaker 1: because it was che high quality. Now they can't paint
Speaker 1: the picture. You're in Chicago and I know you're on
Speaker 1: the Magic Mile there with prod and all the other stores. Diane,
Speaker 1: you go, you go west of Chicago X number of
Speaker 1: miles described that small factory. Well, you know, It's interesting
Speaker 1: because actually they're they're further than that. A lot of
Speaker 1: the factories of the companies that I'm talking to are
Speaker 1: in northern Wisconsin. There in northern Michigan. They're very far
Speaker 1: from urban centers. Unlike the Amazon um places we're seeing
Speaker 1: the million square feet in Kenosha, right outside of Chicago
Speaker 1: to get our you know, to get our Amazon deliveries
Speaker 1: really quickly. These are factories that are actually much further
Speaker 1: out and they're very very small towns which have um
Speaker 1: they've kepped the labor force. But then anyone else that
Speaker 1: they try to bring in, every single one of them
Speaker 1: says they have a hard time passing the drug tests.
Speaker 1: I just looked at the Quest drug passing data, and
Speaker 1: if you look at the map, they have a great
Speaker 1: interactive map, the highest drug um positive rates are in
Speaker 1: rural America. You don't it's complete flip flop from the
Speaker 1: past where you saw urban cores and a lot of
Speaker 1: drug uses. It's now very if you were the map
Speaker 1: runs hot on positive drug tests is in rural America,
Speaker 1: and that's where these factories moved to, and so they're
Speaker 1: having a hard time attracting I just the map, I
Speaker 1: just brought. Isn't it a great map. It's a terrific map.
Speaker 1: It's in It's in my monthly. Right up the darkest
Speaker 1: the dark or market David Garl. The darkest color is Brooklyn,
Speaker 1: New York. David Jump jump jump in here with it's
Speaker 1: great having you on. You give us. You know the
Speaker 1: guy up in northern Wisconsin, David. All I know is
Speaker 1: he's sitting in three rows down from David heroind Green
Speaker 1: Bay pack Well, and he might be already working at
Speaker 1: a factory and great. But one of the things we're
Speaker 1: going to see is that it was overtime hours go up.
Speaker 1: But again that happened in the because they can't find
Speaker 1: additional workers, so they run him over time and then
Speaker 1: you start getting fatigue and risks of accidents off the
Speaker 1: With that quest data, this is really interesting. You're expected
Speaker 1: to do the opioid stuff that's actually peaked off in
Speaker 1: the last two years. The biggest surge in drug US
Speaker 1: outside of the states that have legalized marijuana is cocaine.
Speaker 1: And that surprised me. And one of the main drivers
Speaker 1: of that is mandatory tests after an accident is cocaine.
Speaker 1: And that surprised me. And that's something that I think
Speaker 1: is important is you know, you're seeing positive drug tests
Speaker 1: after an accident, and that's not something anyone can afford.
Speaker 1: I'm great to speak with you is always thank you
Speaker 1: very much and for helping us take part. Those numbers
Speaker 1: there in real time, just got them acrossing the bloomberg
Speaker 1: and they're going right into Diane Swamp, the founder of
Speaker 1: DS Economics, joining us on our phone line. Michael Mayo
Speaker 1: is taking stagecoach lessons. He darkens the door at Wells
Speaker 1: Fargo after a story career of upsetting executives. What was
Speaker 1: it like when you met the senior manager at Wells Fargo?
Speaker 1: Did they was there silent? Is it like Game of
Speaker 1: Thrones where you go into that big room at King's
Speaker 1: Landing and you know you gotta watch your back? What
Speaker 1: was it like well at Wells Fargo Securities, the head
Speaker 1: of Research Global Research is Diane Shoemaker Creed, Yes, who's
Speaker 1: well known with the the industry. She's one of the
Speaker 1: top ranked women in banking. And you know, she said,
Speaker 1: we're a very collaborative firm, and I'd say, yesterday, you know,
Speaker 1: we came out with our launch of banks at Wells
Speaker 1: Fargo's securities and part of the launched I DEALT collaborated
Speaker 1: with about a dozen other analysts within research and so
Speaker 1: the collaboration is just fantastic. So regardless of my my
Speaker 1: career tom so far week six at well Fargus secure
Speaker 1: curity is so good. You've only insulted in California size
Speaker 1: group of people, Mike Mayo, your fiery and passion and
Speaker 1: let's get right to the house of Mr Corbett. People
Speaker 1: have been waiting and waiting, why now bank? So we
Speaker 1: expect City Group stock to double the next four to
Speaker 1: five years. That's partly because of what Michael Corbett, the
Speaker 1: CEO and City Group has done, and it's partly because
Speaker 1: of what we think they should do. What City Group
Speaker 1: has done is they've reduction reduced structural risk, permanent risk
Speaker 1: reduction at City Group to probably the lowest level that
Speaker 1: I've seen since the merger with Travelers. This and that
Speaker 1: you know through the stock beta you're going to see
Speaker 1: the big gest reduction the stock. They did, the biggest
Speaker 1: reduction and the cost of capital and the biggest reduction
Speaker 1: and risk premium for any bank stock around How much
Speaker 1: is City Group like Sandy Wilds City Group, is it
Speaker 1: completely moved on from the Wild years. It's so much
Speaker 1: moved on. Well. Number one, City Group can concentrate on
Speaker 1: being a large bank and optimizing what they have. No
Speaker 1: more big bank mergers. I'm not gonna you never say
Speaker 1: never with mergers, but the big mergers, the merger after merger.
Speaker 1: It took City Group, you know, like a decade and
Speaker 1: a half to integrate these acquisitions. Actually, City Group had
Speaker 1: something called Project Rainbow, which is creating one global consumer platform.
Speaker 1: They finally finished that last year, and that stems back
Speaker 1: from the early part of last decade with Sandy Wild's acquisitions.
Speaker 1: That's one. Number two would be the credit risk. City
Speaker 1: Group has a lot more prime lending and super prime lending,
Speaker 1: a whole lot less subprime lending. Now, some of that
Speaker 1: was put in the books after Sandy Wild left, for sure,
Speaker 1: but I'd say in terms of the credit risk, the
Speaker 1: overall risk profile of the firm, acquisitions risk is a
Speaker 1: lot less at City Group. And over the next five years,
Speaker 1: we expect City Group to buy back one third of
Speaker 1: its shares and the only thing that prevents them from
Speaker 1: doing that is messing up. So as long as they
Speaker 1: don't blow a big hole in their balance sheet as
Speaker 1: long as they don't you know, trip on the way
Speaker 1: to work. We think they can buy backstock, so you
Speaker 1: can legally front run the biggest buyer, City Group stock.
Speaker 1: That is, you can buy shares a City Group stock
Speaker 1: knowing that City Group are based on our forecast that
Speaker 1: they'll buy back one third of shares over five years.
Speaker 1: I've never seen anything like that before. So that's what
Speaker 1: they've done. Now, what they haven't done is they still
Speaker 1: haven't generated returns above the cost of capital. You still
Speaker 1: have single digit return on equity. What do they do
Speaker 1: get retail going? Well, some of this is in their plans.
Speaker 1: They had their first investor day in a decade a
Speaker 1: few weeks ago. And some of this will simply be
Speaker 1: a matter of time, getting a lot more efficient, getting
Speaker 1: a little bit more revenue growth. And some of that's
Speaker 1: the function of the major headwinds, you know, having you know,
Speaker 1: played out. I would digress, Mr Girl, They've got some
Speaker 1: really stiff comp I was just waiting for you to
Speaker 1: make a joke about how you saw Project Rainbow performed
Speaker 1: live back in nineteen whatever it was, Tom, you didn't do,
Speaker 1: And let me ask you about the comparison between Goldman
Speaker 1: Sachs and Morgan Stanley. How useful is that comparison today
Speaker 1: and what does it tell you about both of those banks? Well,
Speaker 1: I think it's very useful. We did a major change.
Speaker 1: I've been on your show in the past and we
Speaker 1: said Morgan Stanley was our top pick five years ago,
Speaker 1: and so for the first time in five years, we swapped.
Speaker 1: We now picked Goldman Sacks over Morgan Stanley. Even though
Speaker 1: Goldman Sacks is, you know, on their back. If I said,
Speaker 1: you know, terrible trading quarter, the heat is on calls
Speaker 1: for change in management, who would I be talking about.
Speaker 1: I'd be talking about Morgan Stanley, you know, mid two
Speaker 1: thousand and twelve, So role reversal here. I do think
Speaker 1: the heat is on Goldman Sacks. One third of the
Speaker 1: company rating has performed worst in classroom look at you
Speaker 1: every year comparisons. How on their backs are they at
Speaker 1: this point? I think the intensity of Goldman Sachs is
Speaker 1: probably greater than it's ever been since their I p O.
Speaker 1: When's the last time you heard the CEO and CFOs
Speaker 1: say publicly as they've done the last month that you know,
Speaker 1: we've we have not executed. So if the CEO saying
Speaker 1: you're not executing. I think there's a lot of vacations
Speaker 1: getting to happen, a lot of vacation of getting cancer
Speaker 1: at Goldman Sachs. This but I agree with this, but
Speaker 1: not just Goldman Sachs. David, I would agree this is
Speaker 1: one of those years in the street where you're just
Speaker 1: going Are we going away for eight days? I don't
Speaker 1: think so. There's a lot of that going on. Davids.
Speaker 1: One more question. I want to come back and ask
Speaker 1: him more general questions and ask him what's what's Morgan
Speaker 1: Stanley's focus right now? Is it on growth at this point? Well, look,
Speaker 1: James Gorman was underappreciated five years ago. He agreed transformed
Speaker 1: Morgan Stanley's business mix as much as any large bank.
Speaker 1: I mean you look at wealth management, investment management, that
Speaker 1: went from one third to one half. So you know,
Speaker 1: he was, you know, skating where the puck is going
Speaker 1: to be, using their way in Gretzky analogy, and they
Speaker 1: benefited through that for the last five years. However, I
Speaker 1: went to the annual meeting that was almost up and
Speaker 1: purchase New York. It was a rainy day and I
Speaker 1: asked almost all of the questions. But my key question
Speaker 1: was you achieved the savings with the brokerge integration with
Speaker 1: Smith Barney, you refinanced your high cost debt back from
Speaker 1: you know, earlier this decade, you achieved a lot of
Speaker 1: the project streamline expense saving, you redemployed the access deposits
Speaker 1: and others. You've done a lot of yourself help. What's next?
Speaker 1: And they said to some degree, their their growth is
Speaker 1: a function of the economy. So I'd like to see
Speaker 1: Morgan Stanley better define the next stage of their evolution.
Speaker 1: You know, it's all fine, but from my standpoint, they're
Speaker 1: a victim of their success when it comes to the
Speaker 1: stock price, at least relative to Goldman Sacks and since
Speaker 1: Goldman Sachs when public, Goldman has shown about twice as
Speaker 1: fast organic revenue growth with about half as much earnings risks,
Speaker 1: and they're cheaper. Made a lot of headline that year
Speaker 1: ago in governance in Bank of America? Are you choosing
Speaker 1: to review Bank of American? Mr Moynihan's efforts. Look, we
Speaker 1: think that Bank America stock has upside over the next
Speaker 1: three years. We think this is the stage for national
Speaker 1: banking that they got distracted the nineties because they didn't integrate.
Speaker 1: That's just not got the move they got. They got
Speaker 1: distracted by financial crisis. They're growing organic deposits. We still
Speaker 1: think the Border Bank America should hold management more accountable,
Speaker 1: but we think man will get the job done anyway.
Speaker 1: We're gonna come back with Mike Mayo. A couple of
Speaker 1: moments with Mr Mayo. Here he is with Wells Fargo
Speaker 1: security screen on the screen up thirty nine three and
Speaker 1: the VIX comes in fifteen point one seven and some
Speaker 1: real volatility of the VIX, some nice tense of a
Speaker 1: percentage point moves. It has an elasticity that I haven't
Speaker 1: seen in weeks and weeks, and of course much of
Speaker 1: that wrapped around the knock on effects of our geo politics.
Speaker 1: M H. Thanks for listening to the Bloomberg Surveillance podcast.
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Speaker 1: David Guras at David Gura. Before the podcast, you can
Speaker 1: always catch us World one. I'm Bloomberg Radio