1 00:00:00,080 --> 00:00:13,040 Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene 2 00:00:13,480 --> 00:00:17,560 Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment, 3 00:00:18,000 --> 00:00:23,520 Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 4 00:00:23,600 --> 00:00:33,720 Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg. I'm 5 00:00:33,800 --> 00:00:35,919 Speaker 1: very pleased to say that we can welcome in New 6 00:00:36,000 --> 00:00:38,920 Speaker 1: York in our studio Steve Eisman, famous of course for 7 00:00:38,960 --> 00:00:42,960 Speaker 1: his successful bet against subprime mortgages, featured in a book 8 00:00:43,000 --> 00:00:45,680 Speaker 1: you will know well, Michael Lewis's book The Big Short, 9 00:00:46,000 --> 00:00:49,600 Speaker 1: and now a portfolio manager at new Berger Berman Group. Steve. 10 00:00:49,640 --> 00:00:51,360 Speaker 1: Good morning to you, sir, and thank you very much 11 00:00:51,360 --> 00:00:53,800 Speaker 1: for joining us. Glad to be here. I was looking 12 00:00:53,840 --> 00:00:57,080 Speaker 1: at your Oxford Union appearance, which I'm sure was an honor, 13 00:00:57,280 --> 00:00:59,400 Speaker 1: and I want to start with that. And the quote 14 00:00:59,440 --> 00:01:01,200 Speaker 1: is a follows. If you had gone and said to 15 00:01:01,280 --> 00:01:05,399 Speaker 1: executives pre crisis, the entire paradigm of your career is wrong. 16 00:01:05,480 --> 00:01:08,559 Speaker 1: The response was, listen, kid, I made fifty million dollars 17 00:01:08,640 --> 00:01:12,640 Speaker 1: last year. What did you make? What's different between now 18 00:01:12,920 --> 00:01:18,080 Speaker 1: and then? There's a lot there's a lot different. Um, 19 00:01:18,120 --> 00:01:22,160 Speaker 1: you know, I would say that the the gestalt. If 20 00:01:22,160 --> 00:01:25,720 Speaker 1: I could use that word on Bloomberg of the regular 21 00:01:25,800 --> 00:01:29,920 Speaker 1: Tory world crisis, I think you can say that. Can 22 00:01:29,959 --> 00:01:34,440 Speaker 1: you can say that right pre crisis was we trust 23 00:01:34,480 --> 00:01:37,680 Speaker 1: you by the regulators, and so essentially we had in 24 00:01:37,840 --> 00:01:41,960 Speaker 1: a world that had the trappings of regulation, but in 25 00:01:42,000 --> 00:01:46,360 Speaker 1: reality we had a completely deregulated financial services sector. And 26 00:01:46,440 --> 00:01:50,720 Speaker 1: today the difference is that the industry is extremely heavily regulated, 27 00:01:50,760 --> 00:01:52,600 Speaker 1: and even though there's it's going to be a major 28 00:01:52,680 --> 00:01:54,680 Speaker 1: change in the Trump administration, is still gonna be a 29 00:01:54,760 --> 00:01:57,960 Speaker 1: very heavily regulated industry. Something you've said is that leverage 30 00:01:57,960 --> 00:02:01,280 Speaker 1: made people look like they were gene assists. Yes, is 31 00:02:01,280 --> 00:02:05,680 Speaker 1: that happening now? Um, it's too early. Um, you're going 32 00:02:05,760 --> 00:02:07,800 Speaker 1: to see leverage go up and returns are going to 33 00:02:07,880 --> 00:02:10,160 Speaker 1: go up, and so firms are going to feel better 34 00:02:10,160 --> 00:02:12,840 Speaker 1: and they'll think they're they'll they'll think they're a lot smarter. 35 00:02:13,520 --> 00:02:15,840 Speaker 1: But it's you know, it's just math. You know, the 36 00:02:15,880 --> 00:02:18,280 Speaker 1: more leverage you can put on, the more the higher 37 00:02:18,320 --> 00:02:20,639 Speaker 1: are we well, Steve, it raises the question you say 38 00:02:20,639 --> 00:02:22,200 Speaker 1: it's too early. A lot of people trying to work 39 00:02:22,200 --> 00:02:24,720 Speaker 1: out where the cycle we actually are. Do you see 40 00:02:24,760 --> 00:02:28,120 Speaker 1: any signs of like cycle behavior. No, they don't. I 41 00:02:28,200 --> 00:02:31,880 Speaker 1: really don't. I look for them every day. Credit quality 42 00:02:31,960 --> 00:02:35,560 Speaker 1: is still superior. In fact, some areas that people were 43 00:02:35,600 --> 00:02:38,440 Speaker 1: concerned about, like me, they've gotten better. You know sometime, 44 00:02:38,520 --> 00:02:42,079 Speaker 1: auto credit quality seems to have started to get a 45 00:02:42,120 --> 00:02:46,320 Speaker 1: little bit better. Credit card industry, which saw some higher 46 00:02:46,320 --> 00:02:48,519 Speaker 1: delinquencies and higher losses. I think those are going to 47 00:02:48,560 --> 00:02:50,400 Speaker 1: start to go down. So are The answer that question 48 00:02:50,480 --> 00:02:52,639 Speaker 1: is now, how forensic have you been at the moment, Steve? 49 00:02:52,720 --> 00:02:54,560 Speaker 1: I mean, many people know you as the person that 50 00:02:54,720 --> 00:02:58,520 Speaker 1: really undressed and stripped back these collateralized dead obligations and 51 00:02:58,600 --> 00:03:01,919 Speaker 1: looked at how messy some of these individual things actually were. 52 00:03:02,280 --> 00:03:04,200 Speaker 1: Are you getting that forensic at the moment? Are you 53 00:03:04,280 --> 00:03:06,280 Speaker 1: still that forensic in your day to day work. I'm 54 00:03:06,280 --> 00:03:09,800 Speaker 1: always forensic. You go through securitization data every single month. 55 00:03:09,880 --> 00:03:13,760 Speaker 1: That's that's kind of like my bible. And there's just 56 00:03:14,000 --> 00:03:16,919 Speaker 1: no signs of stress there are. So when people talk 57 00:03:16,960 --> 00:03:20,320 Speaker 1: about the books for subprime autos and they're saying the 58 00:03:20,440 --> 00:03:23,760 Speaker 1: debt loads are piling up there, there's something to worry about. 59 00:03:23,760 --> 00:03:26,520 Speaker 1: His students that could say whatever they want, But we'll 60 00:03:26,560 --> 00:03:29,360 Speaker 1: come to student loans in a second, please, you know, 61 00:03:29,400 --> 00:03:31,760 Speaker 1: with respect to everything else other than the student loans, 62 00:03:32,080 --> 00:03:35,800 Speaker 1: the credit data is excellent. Steve Iceman with us on 63 00:03:36,040 --> 00:03:38,160 Speaker 1: what is going up? Talk about a vector from the 64 00:03:38,160 --> 00:03:41,600 Speaker 1: lower left of the upper right student loans. How do 65 00:03:41,640 --> 00:03:46,040 Speaker 1: you get forensic on student loans? Um? Well, let's make 66 00:03:46,120 --> 00:03:49,120 Speaker 1: something very clear. The student loan problem is not a 67 00:03:49,200 --> 00:03:53,200 Speaker 1: financial services sector problem. It's not a systemic problem the 68 00:03:53,280 --> 00:03:58,840 Speaker 1: United States government problem. Most of all student loans and 69 00:03:58,920 --> 00:04:02,840 Speaker 1: United States are government gar inteed, So you know, whatever 70 00:04:02,880 --> 00:04:05,920 Speaker 1: problems show up, that's a taxpayer problem. That is a problem. 71 00:04:05,920 --> 00:04:08,520 Speaker 1: It's going to be dispersed throughout the US economy. But 72 00:04:08,600 --> 00:04:12,120 Speaker 1: it is not a financial system systemic issue. Is it 73 00:04:12,160 --> 00:04:14,800 Speaker 1: a problem for the next generation stave or is it 74 00:04:14,880 --> 00:04:18,760 Speaker 1: a problem we need to get ready to deal with imminently? Um, 75 00:04:18,800 --> 00:04:22,520 Speaker 1: It's a problem that exists right now, you know. Um. 76 00:04:22,839 --> 00:04:26,640 Speaker 1: I it's terrible that people graduate from college and grad 77 00:04:26,680 --> 00:04:28,840 Speaker 1: school with as much dead as they have. It affects 78 00:04:28,839 --> 00:04:32,160 Speaker 1: the housing market to a certainly a significant degree. It 79 00:04:32,160 --> 00:04:34,440 Speaker 1: affects people for the rest of their lives. I think 80 00:04:34,440 --> 00:04:37,000 Speaker 1: the current system of the way we finance higher education 81 00:04:37,080 --> 00:04:41,720 Speaker 1: is appalling. How would you change it? Well, that's a 82 00:04:41,720 --> 00:04:44,479 Speaker 1: long story. I look, I make I think there's we 83 00:04:44,560 --> 00:04:50,039 Speaker 1: need to make community colleges, if not free, at least 84 00:04:50,040 --> 00:04:53,000 Speaker 1: heavily subsidized by the government. A lot of state universities 85 00:04:53,000 --> 00:04:55,240 Speaker 1: should be much more heavily subsidized. I mean, what people 86 00:04:55,279 --> 00:04:58,240 Speaker 1: pay for education is it is ridiculous. I have to 87 00:04:58,880 --> 00:05:00,800 Speaker 1: I have twin girls who are in school right now 88 00:05:00,920 --> 00:05:04,400 Speaker 1: that what it costs to go to university is insane. 89 00:05:05,279 --> 00:05:09,800 Speaker 1: Within that is within the debate on education and financing 90 00:05:09,920 --> 00:05:13,760 Speaker 1: is also education is the underpinning for the future of 91 00:05:13,920 --> 00:05:17,360 Speaker 1: America that has to fold into investment. Are the kids today, 92 00:05:17,400 --> 00:05:19,920 Speaker 1: the people you know, I'm gonna say thirty five and 93 00:05:20,000 --> 00:05:22,800 Speaker 1: under where they've really not known anything except post crisis 94 00:05:22,880 --> 00:05:27,680 Speaker 1: nominal rates and such. Are they as educated about volatility? 95 00:05:27,920 --> 00:05:31,520 Speaker 1: Is they should? Absolutely not. There's an entire generation of 96 00:05:31,560 --> 00:05:34,280 Speaker 1: people who now work on Wall Street who have no 97 00:05:34,360 --> 00:05:36,840 Speaker 1: idea what volatility is. How do we teach it to them? 98 00:05:36,839 --> 00:05:42,320 Speaker 1: Just experience enjoying school? The hard knocks, Well, it's it's 99 00:05:42,360 --> 00:05:45,080 Speaker 1: called watching the bid walk away. And we don't really 100 00:05:45,080 --> 00:05:47,000 Speaker 1: haven't seen that in a while now, we have not. 101 00:05:47,080 --> 00:05:48,600 Speaker 1: We haven't seen that in a very very long time. 102 00:05:48,800 --> 00:05:51,160 Speaker 1: Do you see any opportunities in the equity market. Did 103 00:05:51,200 --> 00:05:54,279 Speaker 1: you stay un far more fixed on fixed income and 104 00:05:54,400 --> 00:05:56,640 Speaker 1: debt instruments, So I don't do anything in fixed income. 105 00:05:56,640 --> 00:05:58,640 Speaker 1: I don't see I don't see much of opportunities and 106 00:05:58,680 --> 00:06:01,080 Speaker 1: fixed income until it rates going up. I think all 107 00:06:01,120 --> 00:06:05,360 Speaker 1: the opportunities are in the equity markets. Long and short. Okay, 108 00:06:05,360 --> 00:06:08,400 Speaker 1: what do you want? Give us some categories of lawns 109 00:06:08,640 --> 00:06:11,160 Speaker 1: right now that you find attractive. Does that fold over 110 00:06:11,200 --> 00:06:16,080 Speaker 1: to banks? The biggest capital allocation is financials, mostly banks. 111 00:06:16,279 --> 00:06:21,279 Speaker 1: My second largest capital allocation is tech. UM and my 112 00:06:23,040 --> 00:06:27,039 Speaker 1: shorts are well. We could talk about well. I imagine 113 00:06:27,040 --> 00:06:29,680 Speaker 1: most people that's the first thing they asked you, Steve, 114 00:06:29,960 --> 00:06:32,040 Speaker 1: what are you sure? Well my shorts? I mean, I've 115 00:06:32,080 --> 00:06:34,360 Speaker 1: in public about this. Um the only bank that I'm 116 00:06:34,400 --> 00:06:37,120 Speaker 1: short as well as Fargo give me the wine. UM. 117 00:06:37,360 --> 00:06:40,400 Speaker 1: I think Wells Fargo is going obviously is going through 118 00:06:40,400 --> 00:06:43,360 Speaker 1: a torrential change in its culture. You know, Wells Fargo 119 00:06:43,440 --> 00:06:47,240 Speaker 1: historically has been a bank that out earns on an 120 00:06:47,240 --> 00:06:50,360 Speaker 1: are we and r away basis other banks, and given 121 00:06:50,560 --> 00:06:54,600 Speaker 1: the regulatory environment for Wells Fargo, the change in the culture, UM, 122 00:06:54,920 --> 00:06:56,760 Speaker 1: Wells Fargo is just going to come a normal bank 123 00:06:57,240 --> 00:07:00,680 Speaker 1: in terms of its profitability. A normal bank perform one 124 00:07:00,720 --> 00:07:04,320 Speaker 1: in this environment, though, and when it can't grow. Interesting, 125 00:07:04,480 --> 00:07:08,440 Speaker 1: and that they are not allowed to grow. And you know, 126 00:07:08,520 --> 00:07:12,960 Speaker 1: the CEO, after the FED capped them two weeks ago, 127 00:07:13,120 --> 00:07:14,960 Speaker 1: got on on a conference call and said this was 128 00:07:15,000 --> 00:07:17,200 Speaker 1: only going to impact their earnings by about two to four. 129 00:07:19,040 --> 00:07:21,800 Speaker 1: I don't know how he could have said that, because no, 130 00:07:21,800 --> 00:07:25,240 Speaker 1: no bank that I know of has had the regulators 131 00:07:25,280 --> 00:07:27,880 Speaker 1: capped their assets when the bank is healthy. So it's 132 00:07:27,920 --> 00:07:31,760 Speaker 1: impossible to know what that's going to mean. But Steve, 133 00:07:31,880 --> 00:07:33,200 Speaker 1: let me be clear here. Did you put the short 134 00:07:33,240 --> 00:07:35,880 Speaker 1: on before the Federal Reserve made that move or afterwards? 135 00:07:36,320 --> 00:07:41,120 Speaker 1: I put the short on last summer interesting, very very 136 00:07:41,120 --> 00:07:44,840 Speaker 1: early on, then well after the scandal had obviously broken, 137 00:07:45,080 --> 00:07:47,920 Speaker 1: but before the regulators really did anything. Let's do this. 138 00:07:48,040 --> 00:07:52,679 Speaker 1: Someone's either calling. It's either Sunderland calling John Ferrell, probably 139 00:07:52,720 --> 00:07:56,440 Speaker 1: my wife, it's one of your kids. I think it's 140 00:07:56,480 --> 00:08:00,000 Speaker 1: my wife. It's her, it's her tone, that's her tone, 141 00:08:00,080 --> 00:08:03,200 Speaker 1: Mrs Eisman. He'll be with you in a moment, Steve 142 00:08:03,200 --> 00:08:05,240 Speaker 1: Eisman with us, and we will continue thrilled it. All 143 00:08:05,280 --> 00:08:07,880 Speaker 1: of you of Global Wall Street are listening this morning 144 00:08:07,920 --> 00:08:25,920 Speaker 1: to Mr Jerome Snyder with a snow up pim Coast 145 00:08:25,960 --> 00:08:28,440 Speaker 1: with a short term paper. By short we mean short. 146 00:08:28,640 --> 00:08:31,000 Speaker 1: I want you to explain to the retail audience why 147 00:08:31,080 --> 00:08:34,559 Speaker 1: pros look at one year, six months and three months 148 00:08:34,520 --> 00:08:37,200 Speaker 1: of paper. Well, quite honestly, you know, when you look 149 00:08:37,200 --> 00:08:39,080 Speaker 1: at the front end of the tebow curve, a couple 150 00:08:39,080 --> 00:08:42,320 Speaker 1: of things have happened. We've had over five billion dollars 151 00:08:42,320 --> 00:08:45,520 Speaker 1: of new tebill supply come onto the market uh two 152 00:08:45,640 --> 00:08:48,200 Speaker 1: or fifty billion over the past month alone, uh in 153 00:08:48,200 --> 00:08:50,800 Speaker 1: in this year projected, which is a profound amount just 154 00:08:50,800 --> 00:08:52,679 Speaker 1: simply because we have to absorb it. Well, why why 155 00:08:52,800 --> 00:08:55,360 Speaker 1: is that important? Was there a problem? And absorber again? Well, 156 00:08:55,600 --> 00:08:59,200 Speaker 1: there's actually has been actually a dearth of paper in 157 00:08:59,200 --> 00:09:01,840 Speaker 1: that short term space and as a result, front end 158 00:09:01,880 --> 00:09:03,839 Speaker 1: yields have been anemic for many years. So one of 159 00:09:03,880 --> 00:09:06,400 Speaker 1: the profound things, Tom, is that, you know, we finally 160 00:09:06,400 --> 00:09:08,520 Speaker 1: have the one year T bill rate above two percent. 161 00:09:08,679 --> 00:09:11,880 Speaker 1: So it's actually pretty interesting. The entire flat, entire curve, 162 00:09:11,920 --> 00:09:14,160 Speaker 1: as we all point to the two Stens curve, as 163 00:09:14,200 --> 00:09:15,960 Speaker 1: you know, move from you know, a hundred basis points 164 00:09:15,960 --> 00:09:18,280 Speaker 1: to eighty basis points to the low low forties or 165 00:09:18,320 --> 00:09:21,319 Speaker 1: mid forties too, back about sixty basis points. That's one 166 00:09:21,400 --> 00:09:23,920 Speaker 1: aspect of it. But just recognize the fact that front 167 00:09:23,960 --> 00:09:27,080 Speaker 1: in yields have actually increased, and that flatness has actually 168 00:09:27,120 --> 00:09:31,040 Speaker 1: allowed some sabers at least in part, to participate in 169 00:09:31,080 --> 00:09:33,480 Speaker 1: that upward drift of yields and to incorporate them. So 170 00:09:33,840 --> 00:09:36,840 Speaker 1: T bills, short term bond funds, things like that that 171 00:09:36,920 --> 00:09:40,280 Speaker 1: can really adapt to uh, the higher yields and embrace 172 00:09:40,360 --> 00:09:43,679 Speaker 1: them have actually been beneficiaries of this rising rate environment. 173 00:09:43,760 --> 00:09:45,280 Speaker 1: So I just want to frame what's happening in the 174 00:09:45,360 --> 00:09:47,120 Speaker 1: United States for America at the moment, because I think 175 00:09:47,120 --> 00:09:50,360 Speaker 1: it's really important for savers at the moment. Deposit baits 176 00:09:50,360 --> 00:09:52,960 Speaker 1: and the jargon incredibly love. What that basically means is 177 00:09:53,000 --> 00:09:55,040 Speaker 1: that the federal reserve interest rates are going up and 178 00:09:55,080 --> 00:09:58,080 Speaker 1: the banks aren't pace passing it onto that deposit base. Now, 179 00:09:58,200 --> 00:10:01,560 Speaker 1: I'm trying to understand why everyone doesn't know about the 180 00:10:01,559 --> 00:10:03,319 Speaker 1: fact that one month TA bills and now one and 181 00:10:03,360 --> 00:10:06,000 Speaker 1: a half percent, and why we haven't got this flood 182 00:10:06,000 --> 00:10:10,480 Speaker 1: of deposits coming from these banks into tabills. Why isn't 183 00:10:10,520 --> 00:10:12,800 Speaker 1: that happening, Why aren't people waking up to the fact 184 00:10:13,080 --> 00:10:14,760 Speaker 1: that you can now get one and a half percent 185 00:10:15,040 --> 00:10:17,079 Speaker 1: in a one month TA bill when you are getting 186 00:10:17,120 --> 00:10:19,360 Speaker 1: basis points. What was your bank account? Well, what was 187 00:10:19,360 --> 00:10:21,960 Speaker 1: the last time a bank said to you, Hey, I 188 00:10:21,960 --> 00:10:24,719 Speaker 1: actually wanted They're not going to right, So let's just 189 00:10:24,760 --> 00:10:27,040 Speaker 1: put the logic behind this. Banks don't necessarily want to 190 00:10:27,080 --> 00:10:30,280 Speaker 1: pay more for deposits than they want to. Similarly, there's 191 00:10:30,320 --> 00:10:33,439 Speaker 1: been structural changes over the past few years. We've seen 192 00:10:33,480 --> 00:10:37,320 Speaker 1: a restounding response to money market fund reform, a story 193 00:10:37,360 --> 00:10:39,880 Speaker 1: that's more than five years old. Happened in two thousand 194 00:10:39,840 --> 00:10:42,440 Speaker 1: and sixteen. But as rates have increased during this rate 195 00:10:42,480 --> 00:10:46,400 Speaker 1: hiking cycle, yields and money market funds have remained rather anemic. Mean, 196 00:10:46,480 --> 00:10:49,760 Speaker 1: they haven't recalibrated as high as benchmark rates. Still, the 197 00:10:49,760 --> 00:10:53,560 Speaker 1: average money market fund yields about one point three percent 198 00:10:53,640 --> 00:10:57,040 Speaker 1: after fees, which is pretty small. Deposits at the same time, 199 00:10:57,080 --> 00:11:01,440 Speaker 1: while they've beta has actually increased slightly, hasn't as increased 200 00:11:01,480 --> 00:11:04,280 Speaker 1: to the point that we've seen in previous rate hiking cycles. 201 00:11:04,360 --> 00:11:07,120 Speaker 1: So long story short is, savers are earning a little 202 00:11:07,160 --> 00:11:08,679 Speaker 1: bit more than they woul did probably a year or 203 00:11:08,679 --> 00:11:11,040 Speaker 1: two ago, but not much more so. The key to 204 00:11:11,080 --> 00:11:14,160 Speaker 1: success in capital preservation, the key to success in earning income, 205 00:11:14,400 --> 00:11:17,360 Speaker 1: and the key to success in avoiding volatility in overall 206 00:11:17,400 --> 00:11:20,520 Speaker 1: portfolios is finding ways that can adapt and embrace to 207 00:11:20,640 --> 00:11:23,360 Speaker 1: earn those higher yields. One year tebows are one way 208 00:11:23,360 --> 00:11:25,880 Speaker 1: to do it. Still fairly conservative in that regard, but 209 00:11:25,920 --> 00:11:28,560 Speaker 1: we can actually look to points of the yield curve 210 00:11:28,600 --> 00:11:31,000 Speaker 1: in the front end the zero to two year space specifically, 211 00:11:31,000 --> 00:11:33,920 Speaker 1: and zero to two your corporates which are relatively safe 212 00:11:34,040 --> 00:11:36,720 Speaker 1: offer yields of about two point five to three percent 213 00:11:36,760 --> 00:11:39,640 Speaker 1: in some cases and have benefited actually from a structural 214 00:11:39,640 --> 00:11:43,520 Speaker 1: widening that we've seen in spreads over the past four 215 00:11:43,559 --> 00:11:45,680 Speaker 1: weeks or so. So I'm gonna pull a page from 216 00:11:45,760 --> 00:11:48,120 Speaker 1: the two thousand eight playbooks, so if you will so, 217 00:11:48,360 --> 00:11:51,240 Speaker 1: libral o I s the library versus the spread of 218 00:11:51,280 --> 00:11:54,719 Speaker 1: overnight index swaps, which is rebo effectively are are five 219 00:11:54,760 --> 00:11:58,840 Speaker 1: funds rate effectively has moved from basically ten basis points 220 00:11:58,840 --> 00:12:01,120 Speaker 1: at the end of last year that spread to about 221 00:12:01,160 --> 00:12:03,719 Speaker 1: forty basis points. In two thousand and eight would have 222 00:12:03,720 --> 00:12:06,400 Speaker 1: been saying, holy cow, this is a systemic event. Let's 223 00:12:06,400 --> 00:12:09,640 Speaker 1: pay attention to it. Now, we're actually saying there's really 224 00:12:09,640 --> 00:12:11,480 Speaker 1: no systemic issue here. We would have heard about it 225 00:12:11,480 --> 00:12:13,720 Speaker 1: from Jerome Pale, who loves to talk about regulation and 226 00:12:13,720 --> 00:12:16,839 Speaker 1: systemic issues. But the reality is is that that's not 227 00:12:16,920 --> 00:12:19,400 Speaker 1: necessarily the case right now. So it's an opportunity. So 228 00:12:19,440 --> 00:12:21,800 Speaker 1: we we actually published a blog piece yesterday on pimco 229 00:12:21,960 --> 00:12:24,959 Speaker 1: dot com two applies to this point. But it's really 230 00:12:25,160 --> 00:12:29,319 Speaker 1: recognized that this is an opportunity to embrace these higher yields, 231 00:12:29,400 --> 00:12:31,600 Speaker 1: higher spreads in the front of the curve, propelled by 232 00:12:31,679 --> 00:12:33,760 Speaker 1: as you mentioned, higher yields and T bills and things 233 00:12:33,840 --> 00:12:36,800 Speaker 1: like that, Tom. But at the same time, look, let's 234 00:12:36,800 --> 00:12:39,160 Speaker 1: look at the entire composition and recognize that the entire 235 00:12:39,240 --> 00:12:41,880 Speaker 1: yield curve is relatively flat and take advantage of it. John, 236 00:12:41,920 --> 00:12:48,880 Speaker 1: I'm I'm tearing up literally library. Oh yes, we haven't 237 00:12:48,920 --> 00:12:53,200 Speaker 1: mentioned it a decade. It was like gospel over a 238 00:12:53,240 --> 00:12:56,000 Speaker 1: decade ago. I've just brought up the chart from a 239 00:12:56,080 --> 00:12:59,240 Speaker 1: decade ago, and I'll freshen it up and from Bluebird 240 00:12:59,320 --> 00:13:02,000 Speaker 1: Radio you'll see it first time. I can't talk to 241 00:13:02,080 --> 00:13:05,440 Speaker 1: John you, so so my question doesn't wait wait, wait, 242 00:13:05,559 --> 00:13:08,680 Speaker 1: does anybody care about libr o I s you care? 243 00:13:08,880 --> 00:13:10,760 Speaker 1: You care? If you are a saver and want to 244 00:13:10,840 --> 00:13:14,240 Speaker 1: embrace these higher yields and find ways that have capital 245 00:13:14,280 --> 00:13:18,079 Speaker 1: preservation and utilize this structural widening to do that. That's 246 00:13:18,080 --> 00:13:21,200 Speaker 1: why you care. Don't sell on the alarm and break 247 00:13:21,280 --> 00:13:24,240 Speaker 1: and break the firebox yet so dry as you speak 248 00:13:24,280 --> 00:13:27,640 Speaker 1: to the other Portfonio managers at PIMCO, are you seeing 249 00:13:27,640 --> 00:13:31,120 Speaker 1: a situation evolved where short rates starts compete for capital 250 00:13:31,600 --> 00:13:34,920 Speaker 1: elsewhere in things like investment right in things like high 251 00:13:34,960 --> 00:13:37,520 Speaker 1: yield Is that happening? Well, what you actually see is 252 00:13:37,559 --> 00:13:40,920 Speaker 1: that um, we no longer are are the of the 253 00:13:40,960 --> 00:13:43,959 Speaker 1: opinion that front and rates are undervalued. Let's say so 254 00:13:44,040 --> 00:13:46,000 Speaker 1: at this point in time to year notes right or 255 00:13:46,040 --> 00:13:48,360 Speaker 1: at two point two six is pretty welfair value for 256 00:13:48,400 --> 00:13:50,640 Speaker 1: at least three rate hikes over this year and so 257 00:13:50,679 --> 00:13:53,280 Speaker 1: forth and so on. The risk to us that we 258 00:13:53,320 --> 00:13:55,840 Speaker 1: think is that the propensity that we have additional hikes 259 00:13:55,840 --> 00:13:57,800 Speaker 1: that the market has now been put on guard for, 260 00:13:58,120 --> 00:14:00,920 Speaker 1: in part by Palace testimony yesterday day of what happens 261 00:14:00,920 --> 00:14:03,360 Speaker 1: in two thousand, nineteen and twenty and beyond. And so 262 00:14:03,400 --> 00:14:05,719 Speaker 1: if you can see continued growth, things that are in 263 00:14:05,760 --> 00:14:08,440 Speaker 1: the five year the tenure sector perhaps are a little 264 00:14:08,440 --> 00:14:11,760 Speaker 1: bit underpriced or grossly mispriced if you see actually growth 265 00:14:12,000 --> 00:14:14,600 Speaker 1: and further tightenings that need to occur over that horizon. 266 00:14:14,640 --> 00:14:16,240 Speaker 1: So that's really the debate at this point in time 267 00:14:16,440 --> 00:14:18,640 Speaker 1: in terms of crowding out, It really becomes in terms 268 00:14:18,640 --> 00:14:22,280 Speaker 1: of what's your target horizon, what's your what's your notion 269 00:14:22,320 --> 00:14:25,440 Speaker 1: for volatility? Again, all volatilities and fixed income actually are 270 00:14:26,080 --> 00:14:29,760 Speaker 1: resoundingly low compared to what we've seen inequities and things 271 00:14:29,800 --> 00:14:32,040 Speaker 1: like that in the response function. Even to past testimony 272 00:14:32,160 --> 00:14:36,400 Speaker 1: yesterday in in rates fall until getting lankish was was 273 00:14:36,520 --> 00:14:39,280 Speaker 1: none basically, So we have to basically do it as 274 00:14:39,560 --> 00:14:42,880 Speaker 1: as not necessarily crowding out, but really trying to find 275 00:14:43,240 --> 00:14:45,480 Speaker 1: utilize the front end as a way to meet objective 276 00:14:45,560 --> 00:14:50,480 Speaker 1: just for sheer optionality and more importantly flexibility for the future. 277 00:14:50,600 --> 00:14:53,320 Speaker 1: People who want to incorporate the front end are utilizing 278 00:14:53,360 --> 00:14:56,600 Speaker 1: as a holding place for reducing volatility and flexibility for 279 00:14:56,640 --> 00:14:59,560 Speaker 1: future allocations. They might want to other outsets as they recalibrate. 280 00:14:59,600 --> 00:15:02,120 Speaker 1: You mentioned chaman Pal. Do you think he was overly 281 00:15:02,160 --> 00:15:05,800 Speaker 1: optimistic in his first semi annual testimony. No, I think 282 00:15:05,800 --> 00:15:07,480 Speaker 1: he was trying to be balanced. Actually, what he was 283 00:15:07,520 --> 00:15:09,640 Speaker 1: doing was flexing his muscle to demonstrate that he has 284 00:15:09,680 --> 00:15:12,680 Speaker 1: that optionality, the same optionality that that you know that 285 00:15:12,840 --> 00:15:15,600 Speaker 1: Yelling had, a Bernanke had and everything else, but at 286 00:15:15,600 --> 00:15:18,480 Speaker 1: the same time recognized the fact that he is a 287 00:15:18,520 --> 00:15:20,240 Speaker 1: voice of one at this point in time and hasn't 288 00:15:20,280 --> 00:15:23,120 Speaker 1: had a proper caucus to represent everybody, and seeing the 289 00:15:23,200 --> 00:15:26,280 Speaker 1: SCP dots as they evolved. I just took the average 290 00:15:26,400 --> 00:15:28,960 Speaker 1: of library oh I asked through the crisis, back when 291 00:15:29,040 --> 00:15:31,960 Speaker 1: I was quoting it every twelve minutes. Thank you, folks 292 00:15:32,000 --> 00:15:35,320 Speaker 1: for those that listen, uh long ago and far away, 293 00:15:35,680 --> 00:15:39,200 Speaker 1: the average library ois spread was point eight five or 294 00:15:39,240 --> 00:15:42,680 Speaker 1: nowhere near that. No, nowhere near that. As we moved 295 00:15:42,760 --> 00:15:46,720 Speaker 1: towards that, does just schrom Snyder start paying attention more, 296 00:15:47,000 --> 00:15:49,160 Speaker 1: I doubt will move towards that. I just think it's 297 00:15:49,160 --> 00:15:51,440 Speaker 1: it's just worth highlighting that that there's been a pretty 298 00:15:51,480 --> 00:15:53,760 Speaker 1: dramatic jump since the end of the year, um and 299 00:15:53,800 --> 00:15:55,880 Speaker 1: it's something worthy to take advantage of. And again, the 300 00:15:55,960 --> 00:15:58,680 Speaker 1: reasons are very different time this time around. Right, That's 301 00:15:58,680 --> 00:16:01,640 Speaker 1: the key point is the mill you is different. What's 302 00:16:01,680 --> 00:16:05,760 Speaker 1: the key confidence maker? As we see Library O I 303 00:16:05,920 --> 00:16:08,960 Speaker 1: s go from dead flat up to point four zero 304 00:16:09,080 --> 00:16:11,960 Speaker 1: three three confidence maker is that we don't see any 305 00:16:11,960 --> 00:16:14,800 Speaker 1: structural weakness in the financial system at this time around 306 00:16:14,920 --> 00:16:17,840 Speaker 1: is simply recalibration of understanding where the financing costs and 307 00:16:17,840 --> 00:16:21,800 Speaker 1: the ability to under the ability to obtain financing within 308 00:16:21,840 --> 00:16:24,760 Speaker 1: the markets is what the critical. So we've spend an 309 00:16:24,800 --> 00:16:26,600 Speaker 1: inordinate amount of time of the past few weeks, me 310 00:16:26,640 --> 00:16:29,080 Speaker 1: and my and the short term desk team at PIMCO, 311 00:16:29,480 --> 00:16:32,200 Speaker 1: and and when you talk to the participants, whether they're 312 00:16:32,400 --> 00:16:35,840 Speaker 1: domestic banks, banks, they all sort of point the finger 313 00:16:35,920 --> 00:16:38,920 Speaker 1: at different things, and so there's probably twenty different variables 314 00:16:38,920 --> 00:16:40,880 Speaker 1: no matter what periodical you say, no matter what they 315 00:16:40,880 --> 00:16:43,440 Speaker 1: pointed to, whether they say is this bank needs funding, 316 00:16:43,560 --> 00:16:45,760 Speaker 1: or it's it's the weakness in the dollar, or it's 317 00:16:46,080 --> 00:16:49,920 Speaker 1: the people Japanese your end, or whatever the excuses, the 318 00:16:49,960 --> 00:16:52,360 Speaker 1: point is that all these things are coming together and 319 00:16:52,400 --> 00:16:55,200 Speaker 1: there is no single weakness per se that we say 320 00:16:55,360 --> 00:16:57,640 Speaker 1: into this is critical. Running out of time in two 321 00:16:57,680 --> 00:17:01,280 Speaker 1: thousand and eighteen is library ois the litmus paper that 322 00:17:01,440 --> 00:17:05,040 Speaker 1: commercial paper used to be ages ago. Uh, they're very 323 00:17:05,080 --> 00:17:07,920 Speaker 1: related and we're gonna see funding spreads wide and specifically 324 00:17:07,960 --> 00:17:11,280 Speaker 1: with regard to some financial institutions as a result, But 325 00:17:11,359 --> 00:17:13,639 Speaker 1: don't lose sleep over it. Look to utilize it as 326 00:17:13,640 --> 00:17:16,280 Speaker 1: an opportunity at this point in time, because the fundamental 327 00:17:16,320 --> 00:17:18,879 Speaker 1: situation is entirely different than two thousand eight. John was 328 00:17:18,880 --> 00:17:20,840 Speaker 1: that in English? It was I think it did a 329 00:17:20,880 --> 00:17:26,080 Speaker 1: great this is great. I'm gonna put the chart up. 330 00:17:26,119 --> 00:17:28,280 Speaker 1: Blue Wood Radio will see it first. I think we 331 00:17:28,359 --> 00:17:32,439 Speaker 1: have to start clos I didn't mean to bring out 332 00:17:32,440 --> 00:17:34,840 Speaker 1: an old book, but actually what sick is John, I 333 00:17:34,920 --> 00:17:40,000 Speaker 1: was wearing this bow tie in two thousand eight. I 334 00:17:40,000 --> 00:17:43,679 Speaker 1: can believe that. Jorm Schneider, thank you as always for 335 00:17:43,720 --> 00:17:47,040 Speaker 1: the clinic. On a blast from the past, libra O, 336 00:17:47,200 --> 00:18:03,240 Speaker 1: I s we need to stalk China, and we do that. 337 00:18:03,280 --> 00:18:06,280 Speaker 1: Of course. Of Ambassador Hass to the Council on Foreign Relations, 338 00:18:06,560 --> 00:18:09,800 Speaker 1: he has a luxury of a terrific China team, including 339 00:18:09,840 --> 00:18:13,520 Speaker 1: Elizabeth Economy. His even greater luxury is to have a 340 00:18:13,560 --> 00:18:17,600 Speaker 1: book review from John Faroe. John, you are raving about 341 00:18:17,720 --> 00:18:20,720 Speaker 1: Richard Hass A World in Disarray. Well, I just have 342 00:18:20,800 --> 00:18:23,120 Speaker 1: to say, for anyone that hasn't read A World in Disarray, 343 00:18:23,160 --> 00:18:26,000 Speaker 1: if even if you have a deep knowledge of foreign policy, 344 00:18:26,119 --> 00:18:27,879 Speaker 1: it will add something to your life and even if 345 00:18:27,920 --> 00:18:29,840 Speaker 1: you don't, in fact, particularly if you don't, we'll give 346 00:18:29,840 --> 00:18:32,639 Speaker 1: you the back history some really important topics that we 347 00:18:32,720 --> 00:18:36,240 Speaker 1: explore at the moment, whether it's North Korea, China, et cetera. 348 00:18:36,400 --> 00:18:38,640 Speaker 1: So please do pick it up and give it a read. 349 00:18:38,680 --> 00:18:40,919 Speaker 1: And I'm really pleased to say that Richard Hass joins us. 350 00:18:41,000 --> 00:18:42,760 Speaker 1: Now I'm Richard. It's always great to catsh up with 351 00:18:42,760 --> 00:18:45,960 Speaker 1: you and get your insight. Once again, China front and center. 352 00:18:46,040 --> 00:18:47,960 Speaker 1: Can we just take a step back and get your 353 00:18:48,000 --> 00:18:52,520 Speaker 1: thoughts on the idea that is President She forever. First 354 00:18:52,520 --> 00:18:55,760 Speaker 1: of all, thank you for that generous introduction. Look, the 355 00:18:55,760 --> 00:18:59,439 Speaker 1: news from China on one level isn't surprising given the 356 00:18:59,480 --> 00:19:03,520 Speaker 1: anti option campaign, the amount of enemies that President She 357 00:19:03,680 --> 00:19:06,000 Speaker 1: has made. The idea that he would one way or 358 00:19:06,040 --> 00:19:09,600 Speaker 1: another key effective power after his second term ended in 359 00:19:09,680 --> 00:19:12,639 Speaker 1: five years, we kind of figured that would happen. There 360 00:19:12,720 --> 00:19:15,320 Speaker 1: was a precedent for that when Doom Shao King stepped down. 361 00:19:15,840 --> 00:19:19,280 Speaker 1: He basically was the power behind the scene through the 362 00:19:19,440 --> 00:19:22,480 Speaker 1: this funny title and the Bridge Association. I used to 363 00:19:22,560 --> 00:19:24,800 Speaker 1: kid that I thought Juan Thing would become the first 364 00:19:24,880 --> 00:19:28,399 Speaker 1: violin and the People's Orchestra. What surprised me was that 365 00:19:28,520 --> 00:19:30,560 Speaker 1: it was done now with five years to go in 366 00:19:30,640 --> 00:19:33,600 Speaker 1: his second term, and it was done so explicitly and 367 00:19:33,680 --> 00:19:36,439 Speaker 1: done through the idea of changing or just ignoring the 368 00:19:36,480 --> 00:19:41,280 Speaker 1: constitutional UH term limit. And that suggests to me that 369 00:19:41,320 --> 00:19:43,800 Speaker 1: this is a pre emptive strike. This is a pre 370 00:19:43,800 --> 00:19:46,640 Speaker 1: emptive strike by Sijan thing that he's sending the message 371 00:19:46,920 --> 00:19:49,760 Speaker 1: he's not just going to be there for five years, 372 00:19:49,960 --> 00:19:52,800 Speaker 1: he's going to be there for ten, fifteen, whatever. And 373 00:19:52,800 --> 00:19:55,320 Speaker 1: it also says to me that there must be significant 374 00:19:55,359 --> 00:19:58,159 Speaker 1: domestic pushback that he felt the need to do this 375 00:19:58,240 --> 00:20:01,280 Speaker 1: pre emptively. Ambassador, we are the honor not only of 376 00:20:01,400 --> 00:20:04,160 Speaker 1: you today, but speaking with Stephen Saying out of Oxford, 377 00:20:04,160 --> 00:20:07,480 Speaker 1: with the University of London UH in their um the 378 00:20:07,680 --> 00:20:10,119 Speaker 1: s O a s Chinese Institute as well, and he 379 00:20:10,200 --> 00:20:14,439 Speaker 1: spoke of the nuances domestically but also abroad. Was this 380 00:20:14,520 --> 00:20:22,439 Speaker 1: a preemptive strike against theories such as Ross Navarro? I 381 00:20:22,480 --> 00:20:24,399 Speaker 1: think it's much more to do with domestic that's the 382 00:20:24,480 --> 00:20:29,119 Speaker 1: Chinese priority. It's take a step back the fact that 383 00:20:29,160 --> 00:20:31,919 Speaker 1: you have this thing called the Communist Party, that's this 384 00:20:32,080 --> 00:20:35,760 Speaker 1: layer of governance between the citizen rate the economy. On 385 00:20:35,760 --> 00:20:38,920 Speaker 1: one hand, and the government on the other it's it's 386 00:20:38,960 --> 00:20:42,040 Speaker 1: what ninety million people who are members of the Communist Party, 387 00:20:42,080 --> 00:20:45,040 Speaker 1: This whole thing is an artificial construct. It says to 388 00:20:45,119 --> 00:20:48,080 Speaker 1: me the Chinese leadership does not take for granted as 389 00:20:48,119 --> 00:20:53,560 Speaker 1: a given the cohesion of the country politically, socially, even territorially. 390 00:20:53,840 --> 00:20:56,639 Speaker 1: But I think this suggests is a tougher line on Taiwan, 391 00:20:57,600 --> 00:20:59,800 Speaker 1: on other issues that would be seen to threaten the 392 00:20:59,800 --> 00:21:04,400 Speaker 1: and hegrity of Chinese territory, a continuing crackdown on descent, 393 00:21:04,800 --> 00:21:09,520 Speaker 1: greater role in overseeing the quote unquote private uh sector, 394 00:21:09,800 --> 00:21:12,800 Speaker 1: possibly a slightly more nationalist line in their in their 395 00:21:12,840 --> 00:21:15,600 Speaker 1: foreign policy behavior. Just in terms of the relationship between 396 00:21:15,600 --> 00:21:17,399 Speaker 1: the United States and China at the moment, there is 397 00:21:17,440 --> 00:21:20,800 Speaker 1: a conversation at the moment about tariffs being introduced. There 398 00:21:20,880 --> 00:21:24,040 Speaker 1: is also a conversation from the Treasury Secretary Stephen Manu 399 00:21:24,119 --> 00:21:27,160 Speaker 1: Chin that maybe the President the United States is keen 400 00:21:27,200 --> 00:21:28,600 Speaker 1: to return and have a look at t p P 401 00:21:29,160 --> 00:21:31,240 Speaker 1: once again. Would you like to see more of the 402 00:21:31,280 --> 00:21:33,960 Speaker 1: latter instead of the former to address the economic part 403 00:21:34,000 --> 00:21:38,359 Speaker 1: of China. Absolutely getting the United States decision in the 404 00:21:38,359 --> 00:21:41,120 Speaker 1: first week of this presidency to get out of TPP, 405 00:21:41,840 --> 00:21:45,520 Speaker 1: made no sense economically, it made no sense strategically, and 406 00:21:45,560 --> 00:21:49,560 Speaker 1: it was basically a nice wrapped gift among others for China. 407 00:21:49,960 --> 00:21:52,880 Speaker 1: China has any number of initiatives from One Belt, One 408 00:21:52,960 --> 00:21:57,280 Speaker 1: Road to the Infrastructure Investment Bank. This is uh this, 409 00:21:57,280 --> 00:22:01,240 Speaker 1: this is a signature error on the part of this administration. 410 00:22:01,520 --> 00:22:04,160 Speaker 1: And if they're willing to revisit it and basically say, look, 411 00:22:04,200 --> 00:22:06,760 Speaker 1: we'd be prepared to go into TPP if there were 412 00:22:06,800 --> 00:22:09,639 Speaker 1: some changes made. Ultimately, it's not only good for the 413 00:22:09,760 --> 00:22:13,200 Speaker 1: our trading partners. We want China integrated in the region, 414 00:22:13,240 --> 00:22:15,280 Speaker 1: but on our terms, we want a race to the top, 415 00:22:15,600 --> 00:22:17,880 Speaker 1: not a race to the bottom. Richard has many say 416 00:22:17,920 --> 00:22:19,680 Speaker 1: you should be in the White House, you should be 417 00:22:19,760 --> 00:22:24,080 Speaker 1: assisting at State. Are we anywhere removed from the loyalty 418 00:22:24,200 --> 00:22:28,200 Speaker 1: president or is it business as usual for the selecting 419 00:22:28,280 --> 00:22:32,040 Speaker 1: of people to serve America a tree time. I thought 420 00:22:32,080 --> 00:22:34,919 Speaker 1: you were a friend before that question. Uh No. I 421 00:22:34,920 --> 00:22:37,719 Speaker 1: think that's the larger issue that the Jared Kushner issue raises. 422 00:22:38,240 --> 00:22:41,320 Speaker 1: The dis administration has not availed itself of so much 423 00:22:41,359 --> 00:22:44,400 Speaker 1: has experienced talent, and whether it's getting rid of people 424 00:22:44,440 --> 00:22:48,560 Speaker 1: at the State Department or essentially saying any Republican hand 425 00:22:48,600 --> 00:22:51,960 Speaker 1: who signed any of these letters critical of candidate, it's 426 00:22:52,000 --> 00:22:55,080 Speaker 1: like original sin and you can't get over it. That's 427 00:22:55,280 --> 00:22:58,120 Speaker 1: that to me, makes no sense. Given the inbox they inherited, 428 00:22:58,440 --> 00:23:01,280 Speaker 1: given the inbox they've now created, they need the best 429 00:23:01,320 --> 00:23:04,520 Speaker 1: in the brightest and they simply don't have it. Richard House, 430 00:23:04,760 --> 00:23:07,080 Speaker 1: the president of the Council on Foreign Relations and the 431 00:23:07,160 --> 00:23:09,960 Speaker 1: author of a must reader world in disarrays, fantastic to 432 00:23:10,000 --> 00:23:11,760 Speaker 1: catch out with the Richard. We always appreciate your time. 433 00:23:11,800 --> 00:23:15,000 Speaker 1: Thank you very much. Tom. This issue of China in 434 00:23:15,040 --> 00:23:17,399 Speaker 1: the United States certainly not going away. I think this 435 00:23:17,440 --> 00:23:19,480 Speaker 1: week is actually quite important because there is going to 436 00:23:19,520 --> 00:23:23,080 Speaker 1: be a key representative of the president of China, meaning 437 00:23:23,080 --> 00:23:26,200 Speaker 1: with some key representatives on the economic side of President 438 00:23:26,240 --> 00:23:28,479 Speaker 1: Donald Trump. And I think it's really interesting that throwing 439 00:23:28,520 --> 00:23:30,560 Speaker 1: into the mix, they've opened the door once again to 440 00:23:30,640 --> 00:23:32,560 Speaker 1: t P P and let me be clear, when they 441 00:23:32,600 --> 00:23:35,400 Speaker 1: pulled away from TPP the happiest people in the room 442 00:23:35,440 --> 00:23:50,040 Speaker 1: with China, I'm gonna get right to it quickly here. 443 00:23:50,119 --> 00:23:53,159 Speaker 1: Not much market response so far, tenure you'll comes in 444 00:23:53,240 --> 00:23:56,919 Speaker 1: a basis point. Mike Mayo with us with Will's Fargo. 445 00:23:57,040 --> 00:23:59,119 Speaker 1: Are you enjoying Wells Fargo? And then they get a 446 00:23:59,119 --> 00:24:02,520 Speaker 1: great time you brought in here. This is one of 447 00:24:02,560 --> 00:24:06,600 Speaker 1: these TV things, folks. It sounds great on radio. Take two. 448 00:24:06,880 --> 00:24:10,040 Speaker 1: You went to the JP Morgan investors meeting yesterday and 449 00:24:10,119 --> 00:24:13,639 Speaker 1: you say, seen three from Mr Diamond is Scale? What 450 00:24:13,760 --> 00:24:18,920 Speaker 1: did you what did you learn about scale yesterday in Fortress? Diamond? Well, 451 00:24:19,000 --> 00:24:21,560 Speaker 1: if we had to sum up the annual investor Day 452 00:24:21,600 --> 00:24:25,600 Speaker 1: by JP Morgan, which was yesterday at their headquarters, it 453 00:24:25,640 --> 00:24:28,960 Speaker 1: would be we are JP Morgan. Hear us roar. I 454 00:24:29,000 --> 00:24:32,520 Speaker 1: mean the JP Morigan is expanding in with bankers and 455 00:24:32,600 --> 00:24:36,600 Speaker 1: branches and bots, and in new markets and in capital 456 00:24:36,640 --> 00:24:39,600 Speaker 1: markets and investment banking. And they said they will defend 457 00:24:39,680 --> 00:24:44,040 Speaker 1: their turf. Jamie Diamond, the CEO said, if there's upstarts 458 00:24:44,119 --> 00:24:47,040 Speaker 1: new competitors, they'll spend a billion dollars, they'll spend five 459 00:24:47,080 --> 00:24:49,960 Speaker 1: billion dollars. They'll spend whatever it takes to preserve the 460 00:24:50,000 --> 00:24:53,400 Speaker 1: long term franchise value. Is the long term profitability there 461 00:24:53,480 --> 00:24:56,560 Speaker 1: or is that confidence from a one off of tax legislation. 462 00:24:57,880 --> 00:25:01,160 Speaker 1: We forecast JP Morgan to earn inns to increase by 463 00:25:01,280 --> 00:25:04,480 Speaker 1: fifty percent over the next three years. So this is 464 00:25:04,560 --> 00:25:07,800 Speaker 1: more than just the benefits from taxes. We see this 465 00:25:07,960 --> 00:25:13,960 Speaker 1: as a twenty five year progress from national banking that 466 00:25:14,040 --> 00:25:16,680 Speaker 1: was first allowed in the mid nineteen nineties. You're seeing 467 00:25:17,320 --> 00:25:20,280 Speaker 1: the benefits a scale more than ever before in the 468 00:25:20,280 --> 00:25:22,639 Speaker 1: banking industry, and JP Morgan is showing some of that. 469 00:25:22,760 --> 00:25:25,439 Speaker 1: What did you ask them at the invest today, Well, 470 00:25:25,640 --> 00:25:30,040 Speaker 1: my question was, you know the sunshining, you're happy, you're 471 00:25:30,040 --> 00:25:34,919 Speaker 1: building a new seventies story skyscraper replacing your headquarters. Basically, 472 00:25:35,080 --> 00:25:38,160 Speaker 1: is this the sign of a top Uh. They said 473 00:25:38,400 --> 00:25:40,600 Speaker 1: they'll do whatever it takes for the long term health 474 00:25:40,600 --> 00:25:43,680 Speaker 1: of the company. Jamie Diving, the CEO, said to be frank. 475 00:25:43,880 --> 00:25:45,679 Speaker 1: He doesn't want to change his office. He doesn't want 476 00:25:45,720 --> 00:25:49,440 Speaker 1: to move, and they aren't in locations fortune other locations 477 00:25:49,880 --> 00:25:52,920 Speaker 1: around the city. So it probably will become more efficient. 478 00:25:52,960 --> 00:25:54,840 Speaker 1: But you have to ask the question, you've been around 479 00:25:54,880 --> 00:25:56,479 Speaker 1: the street a long time. Is this the most confident 480 00:25:56,480 --> 00:25:59,200 Speaker 1: you've seen J P. Mugen since the crisis? I think 481 00:25:59,200 --> 00:26:02,200 Speaker 1: this is the most confident I've ever seen JP Morgan. 482 00:26:02,320 --> 00:26:06,440 Speaker 1: So back to that director's board that even before the crisis, 483 00:26:06,440 --> 00:26:09,240 Speaker 1: this is the this is confident you've seen them full stop, 484 00:26:09,280 --> 00:26:13,720 Speaker 1: period absolutely. I mean before JP Morgan bought Bank One 485 00:26:13,760 --> 00:26:16,760 Speaker 1: and Jamie Diamond, this was a hodgepodge of what we 486 00:26:16,800 --> 00:26:20,320 Speaker 1: called money center banks, remember Chasing Chemical and Manny Handy 487 00:26:20,400 --> 00:26:25,359 Speaker 1: and Legacy JP Morgan. Then Jamie Diamond took over JP 488 00:26:25,480 --> 00:26:29,240 Speaker 1: Morgan and built up JP Morgan through the financial crisis. 489 00:26:29,400 --> 00:26:32,280 Speaker 1: But now you're seeing the benefits of scale without the 490 00:26:32,280 --> 00:26:36,680 Speaker 1: distraction of system integrations of financial crisis, new regulation, so 491 00:26:36,840 --> 00:26:39,399 Speaker 1: you're seeing these benefits more than ever before, both in 492 00:26:39,480 --> 00:26:42,520 Speaker 1: retail banking and in capital markets. It really was, you know, 493 00:26:42,640 --> 00:26:45,640 Speaker 1: quite amazing, and that's why we had to ask the question, 494 00:26:46,040 --> 00:26:49,800 Speaker 1: you know, what makes you nervous, Mike Mayo Take four? 495 00:26:52,520 --> 00:26:57,080 Speaker 1: Is that what you wanted to do? Cinema, we gotta 496 00:26:57,200 --> 00:26:59,320 Speaker 1: tell me you're killing me this morning. That was brilliant, 497 00:27:01,119 --> 00:27:05,440 Speaker 1: no idea. What you were doing is the optimism justified 498 00:27:05,560 --> 00:27:07,639 Speaker 1: from what you see and one of the risks that 499 00:27:07,720 --> 00:27:10,680 Speaker 1: this tax builds, as Holmes point that this tax bill 500 00:27:11,080 --> 00:27:15,800 Speaker 1: just gets competed away. Well, that's a great question. First 501 00:27:15,800 --> 00:27:20,560 Speaker 1: of all, um, we see both structural and cyxical benefits 502 00:27:20,560 --> 00:27:23,119 Speaker 1: to the banking industry. The balance sheets and JP Morgan's 503 00:27:23,160 --> 00:27:26,960 Speaker 1: balance sheet is the strongest that has been in a generation. Um. 504 00:27:27,000 --> 00:27:30,000 Speaker 1: In addition, you have the benefits of the tax reductions, 505 00:27:30,000 --> 00:27:32,359 Speaker 1: which certainly helped the banking industry. And some of that 506 00:27:32,400 --> 00:27:35,000 Speaker 1: money will be put to employees, some two communities, but 507 00:27:35,080 --> 00:27:38,600 Speaker 1: some to shareholders. And the bottom line, what happened to 508 00:27:38,680 --> 00:27:40,480 Speaker 1: your interest rate? You know at the start of the 509 00:27:40,560 --> 00:27:43,280 Speaker 1: year nothing if you're you have a loan, so it 510 00:27:43,320 --> 00:27:45,440 Speaker 1: takes a few years for this to be competed away. 511 00:27:45,480 --> 00:27:48,359 Speaker 1: It will be passed on gradually, but not at the start. 512 00:27:48,359 --> 00:27:50,560 Speaker 1: Here where are the other j people? Morgans? You are 513 00:27:50,560 --> 00:27:53,360 Speaker 1: a harsh critic of governance and Bank of America. There's 514 00:27:53,400 --> 00:27:55,400 Speaker 1: all the challenges at your bank, which I know you're 515 00:27:55,400 --> 00:27:58,840 Speaker 1: not going to speak about, but across regional banks, across 516 00:27:58,880 --> 00:28:03,239 Speaker 1: two big defens to the single word that matters on this, 517 00:28:03,400 --> 00:28:08,720 Speaker 1: Mike Mayo, take five scale. Where's the scale going to 518 00:28:08,800 --> 00:28:12,719 Speaker 1: be for everybody besides JP Morgan. Well, that's a big question. 519 00:28:12,760 --> 00:28:15,639 Speaker 1: That's a message that came out from the conference yesterday. Thomas. 520 00:28:15,680 --> 00:28:17,840 Speaker 1: You know, I've covered the banking industry for thirty years. 521 00:28:17,960 --> 00:28:20,159 Speaker 1: We've got a lot of research on JP Morgan. But 522 00:28:20,320 --> 00:28:24,080 Speaker 1: walking out of that room yesterday, it tilted the debate 523 00:28:24,160 --> 00:28:26,439 Speaker 1: more in JP Morgan's favor. When you're talking about it 524 00:28:26,600 --> 00:28:29,879 Speaker 1: a new fintech startup, you're talking about a mid sized 525 00:28:29,920 --> 00:28:34,040 Speaker 1: bank dethroning JP Morgan. They're saying, it's not too easy. 526 00:28:34,080 --> 00:28:36,920 Speaker 1: We have big data, we have computer power. They increased 527 00:28:36,920 --> 00:28:41,520 Speaker 1: their technology spending by to eleven billion dollars every year. 528 00:28:41,760 --> 00:28:44,320 Speaker 1: How do the smaller players compete against that? So there 529 00:28:44,400 --> 00:28:47,480 Speaker 1: is a question about more consolidation in the banking industry. 530 00:28:47,520 --> 00:28:50,920 Speaker 1: Is to predicting that definitely. Okay, Mike Mayo will thank 531 00:28:50,920 --> 00:28:54,520 Speaker 1: you so much. John. I'm completely depressed Mike Mayo, and 532 00:28:54,560 --> 00:28:57,080 Speaker 1: I like at the beginning a million years ago when 533 00:28:57,080 --> 00:28:59,360 Speaker 1: he was like nobody in the industry were like, who 534 00:28:59,360 --> 00:29:02,760 Speaker 1: the hell is this? Kidded CSFB. And the problem is, 535 00:29:02,960 --> 00:29:05,480 Speaker 1: thirty years on, John Tucker, I look like a fossil. 536 00:29:05,840 --> 00:29:09,040 Speaker 1: In thirty years on Mike Mayo's cutting chisel. It looks 537 00:29:09,080 --> 00:29:11,080 Speaker 1: like he's thirty nine. He's still looking good and he's 538 00:29:11,080 --> 00:29:12,960 Speaker 1: still going around with props. And I'm looking forward to 539 00:29:13,040 --> 00:29:16,800 Speaker 1: him taking that prop from Bloomberg Radio to Bloomberg TV blog. 540 00:29:17,000 --> 00:29:20,320 Speaker 1: Mike Mayo. Al Right, my Mayo with a target of 541 00:29:20,440 --> 00:29:23,520 Speaker 1: one thirty on JP Morgan one thirty with a stock 542 00:29:23,560 --> 00:29:32,560 Speaker 1: already at an all time high of one. Thanks for 543 00:29:32,640 --> 00:29:37,040 Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to 544 00:29:37,200 --> 00:29:42,920 Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. 545 00:29:43,480 --> 00:29:46,840 Speaker 1: I'm on Twitter at Tom Keane before the podcast. You 546 00:29:46,840 --> 00:29:50,240 Speaker 1: can always catch us worldwide. I'm Bloomberg Radio