Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Lee. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course, on the Bloomberg. I'm
Speaker 1: very pleased to say that we can welcome in New
Speaker 1: York in our studio Steve Eisman, famous of course for
Speaker 1: his successful bet against subprime mortgages, featured in a book
Speaker 1: you will know well, Michael Lewis's book The Big Short,
Speaker 1: and now a portfolio manager at new Berger Berman Group. Steve.
Speaker 1: Good morning to you, sir, and thank you very much
Speaker 1: for joining us. Glad to be here. I was looking
Speaker 1: at your Oxford Union appearance, which I'm sure was an honor,
Speaker 1: and I want to start with that. And the quote
Speaker 1: is a follows. If you had gone and said to
Speaker 1: executives pre crisis, the entire paradigm of your career is wrong.
Speaker 1: The response was, listen, kid, I made fifty million dollars
Speaker 1: last year. What did you make? What's different between now
Speaker 1: and then? There's a lot there's a lot different. Um,
Speaker 1: you know, I would say that the the gestalt. If
Speaker 1: I could use that word on Bloomberg of the regular
Speaker 1: Tory world crisis, I think you can say that. Can
Speaker 1: you can say that right pre crisis was we trust
Speaker 1: you by the regulators, and so essentially we had in
Speaker 1: a world that had the trappings of regulation, but in
Speaker 1: reality we had a completely deregulated financial services sector. And
Speaker 1: today the difference is that the industry is extremely heavily regulated,
Speaker 1: and even though there's it's going to be a major
Speaker 1: change in the Trump administration, is still gonna be a
Speaker 1: very heavily regulated industry. Something you've said is that leverage
Speaker 1: made people look like they were gene assists. Yes, is
Speaker 1: that happening now? Um, it's too early. Um, you're going
Speaker 1: to see leverage go up and returns are going to
Speaker 1: go up, and so firms are going to feel better
Speaker 1: and they'll think they're they'll they'll think they're a lot smarter.
Speaker 1: But it's you know, it's just math. You know, the
Speaker 1: more leverage you can put on, the more the higher
Speaker 1: are we well, Steve, it raises the question you say
Speaker 1: it's too early. A lot of people trying to work
Speaker 1: out where the cycle we actually are. Do you see
Speaker 1: any signs of like cycle behavior. No, they don't. I
Speaker 1: really don't. I look for them every day. Credit quality
Speaker 1: is still superior. In fact, some areas that people were
Speaker 1: concerned about, like me, they've gotten better. You know sometime,
Speaker 1: auto credit quality seems to have started to get a
Speaker 1: little bit better. Credit card industry, which saw some higher
Speaker 1: delinquencies and higher losses. I think those are going to
Speaker 1: start to go down. So are The answer that question
Speaker 1: is now, how forensic have you been at the moment, Steve?
Speaker 1: I mean, many people know you as the person that
Speaker 1: really undressed and stripped back these collateralized dead obligations and
Speaker 1: looked at how messy some of these individual things actually were.
Speaker 1: Are you getting that forensic at the moment? Are you
Speaker 1: still that forensic in your day to day work. I'm
Speaker 1: always forensic. You go through securitization data every single month.
Speaker 1: That's that's kind of like my bible. And there's just
Speaker 1: no signs of stress there are. So when people talk
Speaker 1: about the books for subprime autos and they're saying the
Speaker 1: debt loads are piling up there, there's something to worry about.
Speaker 1: His students that could say whatever they want, But we'll
Speaker 1: come to student loans in a second, please, you know,
Speaker 1: with respect to everything else other than the student loans,
Speaker 1: the credit data is excellent. Steve Iceman with us on
Speaker 1: what is going up? Talk about a vector from the
Speaker 1: lower left of the upper right student loans. How do
Speaker 1: you get forensic on student loans? Um? Well, let's make
Speaker 1: something very clear. The student loan problem is not a
Speaker 1: financial services sector problem. It's not a systemic problem the
Speaker 1: United States government problem. Most of all student loans and
Speaker 1: United States are government gar inteed, So you know, whatever
Speaker 1: problems show up, that's a taxpayer problem. That is a problem.
Speaker 1: It's going to be dispersed throughout the US economy. But
Speaker 1: it is not a financial system systemic issue. Is it
Speaker 1: a problem for the next generation stave or is it
Speaker 1: a problem we need to get ready to deal with imminently? Um,
Speaker 1: It's a problem that exists right now, you know. Um.
Speaker 1: I it's terrible that people graduate from college and grad
Speaker 1: school with as much dead as they have. It affects
Speaker 1: the housing market to a certainly a significant degree. It
Speaker 1: affects people for the rest of their lives. I think
Speaker 1: the current system of the way we finance higher education
Speaker 1: is appalling. How would you change it? Well, that's a
Speaker 1: long story. I look, I make I think there's we
Speaker 1: need to make community colleges, if not free, at least
Speaker 1: heavily subsidized by the government. A lot of state universities
Speaker 1: should be much more heavily subsidized. I mean, what people
Speaker 1: pay for education is it is ridiculous. I have to
Speaker 1: I have twin girls who are in school right now
Speaker 1: that what it costs to go to university is insane.
Speaker 1: Within that is within the debate on education and financing
Speaker 1: is also education is the underpinning for the future of
Speaker 1: America that has to fold into investment. Are the kids today,
Speaker 1: the people you know, I'm gonna say thirty five and
Speaker 1: under where they've really not known anything except post crisis
Speaker 1: nominal rates and such. Are they as educated about volatility?
Speaker 1: Is they should? Absolutely not. There's an entire generation of
Speaker 1: people who now work on Wall Street who have no
Speaker 1: idea what volatility is. How do we teach it to them?
Speaker 1: Just experience enjoying school? The hard knocks, Well, it's it's
Speaker 1: called watching the bid walk away. And we don't really
Speaker 1: haven't seen that in a while now, we have not.
Speaker 1: We haven't seen that in a very very long time.
Speaker 1: Do you see any opportunities in the equity market. Did
Speaker 1: you stay un far more fixed on fixed income and
Speaker 1: debt instruments, So I don't do anything in fixed income.
Speaker 1: I don't see I don't see much of opportunities and
Speaker 1: fixed income until it rates going up. I think all
Speaker 1: the opportunities are in the equity markets. Long and short. Okay,
Speaker 1: what do you want? Give us some categories of lawns
Speaker 1: right now that you find attractive. Does that fold over
Speaker 1: to banks? The biggest capital allocation is financials, mostly banks.
Speaker 1: My second largest capital allocation is tech. UM and my
Speaker 1: shorts are well. We could talk about well. I imagine
Speaker 1: most people that's the first thing they asked you, Steve,
Speaker 1: what are you sure? Well my shorts? I mean, I've
Speaker 1: in public about this. Um the only bank that I'm
Speaker 1: short as well as Fargo give me the wine. UM.
Speaker 1: I think Wells Fargo is going obviously is going through
Speaker 1: a torrential change in its culture. You know, Wells Fargo
Speaker 1: historically has been a bank that out earns on an
Speaker 1: are we and r away basis other banks, and given
Speaker 1: the regulatory environment for Wells Fargo, the change in the culture, UM,
Speaker 1: Wells Fargo is just going to come a normal bank
Speaker 1: in terms of its profitability. A normal bank perform one
Speaker 1: in this environment, though, and when it can't grow. Interesting,
Speaker 1: and that they are not allowed to grow. And you know,
Speaker 1: the CEO, after the FED capped them two weeks ago,
Speaker 1: got on on a conference call and said this was
Speaker 1: only going to impact their earnings by about two to four.
Speaker 1: I don't know how he could have said that, because no,
Speaker 1: no bank that I know of has had the regulators
Speaker 1: capped their assets when the bank is healthy. So it's
Speaker 1: impossible to know what that's going to mean. But Steve,
Speaker 1: let me be clear here. Did you put the short
Speaker 1: on before the Federal Reserve made that move or afterwards?
Speaker 1: I put the short on last summer interesting, very very
Speaker 1: early on, then well after the scandal had obviously broken,
Speaker 1: but before the regulators really did anything. Let's do this.
Speaker 1: Someone's either calling. It's either Sunderland calling John Ferrell, probably
Speaker 1: my wife, it's one of your kids. I think it's
Speaker 1: my wife. It's her, it's her tone, that's her tone,
Speaker 1: Mrs Eisman. He'll be with you in a moment, Steve
Speaker 1: Eisman with us, and we will continue thrilled it. All
Speaker 1: of you of Global Wall Street are listening this morning
Speaker 1: to Mr Jerome Snyder with a snow up pim Coast
Speaker 1: with a short term paper. By short we mean short.
Speaker 1: I want you to explain to the retail audience why
Speaker 1: pros look at one year, six months and three months
Speaker 1: of paper. Well, quite honestly, you know, when you look
Speaker 1: at the front end of the tebow curve, a couple
Speaker 1: of things have happened. We've had over five billion dollars
Speaker 1: of new tebill supply come onto the market uh two
Speaker 1: or fifty billion over the past month alone, uh in
Speaker 1: in this year projected, which is a profound amount just
Speaker 1: simply because we have to absorb it. Well, why why
Speaker 1: is that important? Was there a problem? And absorber again? Well,
Speaker 1: there's actually has been actually a dearth of paper in
Speaker 1: that short term space and as a result, front end
Speaker 1: yields have been anemic for many years. So one of
Speaker 1: the profound things, Tom, is that, you know, we finally
Speaker 1: have the one year T bill rate above two percent.
Speaker 1: So it's actually pretty interesting. The entire flat, entire curve,
Speaker 1: as we all point to the two Stens curve, as
Speaker 1: you know, move from you know, a hundred basis points
Speaker 1: to eighty basis points to the low low forties or
Speaker 1: mid forties too, back about sixty basis points. That's one
Speaker 1: aspect of it. But just recognize the fact that front
Speaker 1: in yields have actually increased, and that flatness has actually
Speaker 1: allowed some sabers at least in part, to participate in
Speaker 1: that upward drift of yields and to incorporate them. So
Speaker 1: T bills, short term bond funds, things like that that
Speaker 1: can really adapt to uh, the higher yields and embrace
Speaker 1: them have actually been beneficiaries of this rising rate environment.
Speaker 1: So I just want to frame what's happening in the
Speaker 1: United States for America at the moment, because I think
Speaker 1: it's really important for savers at the moment. Deposit baits
Speaker 1: and the jargon incredibly love. What that basically means is
Speaker 1: that the federal reserve interest rates are going up and
Speaker 1: the banks aren't pace passing it onto that deposit base. Now,
Speaker 1: I'm trying to understand why everyone doesn't know about the
Speaker 1: fact that one month TA bills and now one and
Speaker 1: a half percent, and why we haven't got this flood
Speaker 1: of deposits coming from these banks into tabills. Why isn't
Speaker 1: that happening, Why aren't people waking up to the fact
Speaker 1: that you can now get one and a half percent
Speaker 1: in a one month TA bill when you are getting
Speaker 1: basis points. What was your bank account? Well, what was
Speaker 1: the last time a bank said to you, Hey, I
Speaker 1: actually wanted They're not going to right, So let's just
Speaker 1: put the logic behind this. Banks don't necessarily want to
Speaker 1: pay more for deposits than they want to. Similarly, there's
Speaker 1: been structural changes over the past few years. We've seen
Speaker 1: a restounding response to money market fund reform, a story
Speaker 1: that's more than five years old. Happened in two thousand
Speaker 1: and sixteen. But as rates have increased during this rate
Speaker 1: hiking cycle, yields and money market funds have remained rather anemic. Mean,
Speaker 1: they haven't recalibrated as high as benchmark rates. Still, the
Speaker 1: average money market fund yields about one point three percent
Speaker 1: after fees, which is pretty small. Deposits at the same time,
Speaker 1: while they've beta has actually increased slightly, hasn't as increased
Speaker 1: to the point that we've seen in previous rate hiking cycles.
Speaker 1: So long story short is, savers are earning a little
Speaker 1: bit more than they woul did probably a year or
Speaker 1: two ago, but not much more so. The key to
Speaker 1: success in capital preservation, the key to success in earning income,
Speaker 1: and the key to success in avoiding volatility in overall
Speaker 1: portfolios is finding ways that can adapt and embrace to
Speaker 1: earn those higher yields. One year tebows are one way
Speaker 1: to do it. Still fairly conservative in that regard, but
Speaker 1: we can actually look to points of the yield curve
Speaker 1: in the front end the zero to two year space specifically,
Speaker 1: and zero to two your corporates which are relatively safe
Speaker 1: offer yields of about two point five to three percent
Speaker 1: in some cases and have benefited actually from a structural
Speaker 1: widening that we've seen in spreads over the past four
Speaker 1: weeks or so. So I'm gonna pull a page from
Speaker 1: the two thousand eight playbooks, so if you will so,
Speaker 1: libral o I s the library versus the spread of
Speaker 1: overnight index swaps, which is rebo effectively are are five
Speaker 1: funds rate effectively has moved from basically ten basis points
Speaker 1: at the end of last year that spread to about
Speaker 1: forty basis points. In two thousand and eight would have
Speaker 1: been saying, holy cow, this is a systemic event. Let's
Speaker 1: pay attention to it. Now, we're actually saying there's really
Speaker 1: no systemic issue here. We would have heard about it
Speaker 1: from Jerome Pale, who loves to talk about regulation and
Speaker 1: systemic issues. But the reality is is that that's not
Speaker 1: necessarily the case right now. So it's an opportunity. So
Speaker 1: we we actually published a blog piece yesterday on pimco
Speaker 1: dot com two applies to this point. But it's really
Speaker 1: recognized that this is an opportunity to embrace these higher yields,
Speaker 1: higher spreads in the front of the curve, propelled by
Speaker 1: as you mentioned, higher yields and T bills and things
Speaker 1: like that, Tom. But at the same time, look, let's
Speaker 1: look at the entire composition and recognize that the entire
Speaker 1: yield curve is relatively flat and take advantage of it. John,
Speaker 1: I'm I'm tearing up literally library. Oh yes, we haven't
Speaker 1: mentioned it a decade. It was like gospel over a
Speaker 1: decade ago. I've just brought up the chart from a
Speaker 1: decade ago, and I'll freshen it up and from Bluebird
Speaker 1: Radio you'll see it first time. I can't talk to
Speaker 1: John you, so so my question doesn't wait wait, wait,
Speaker 1: does anybody care about libr o I s you care?
Speaker 1: You care? If you are a saver and want to
Speaker 1: embrace these higher yields and find ways that have capital
Speaker 1: preservation and utilize this structural widening to do that. That's
Speaker 1: why you care. Don't sell on the alarm and break
Speaker 1: and break the firebox yet so dry as you speak
Speaker 1: to the other Portfonio managers at PIMCO, are you seeing
Speaker 1: a situation evolved where short rates starts compete for capital
Speaker 1: elsewhere in things like investment right in things like high
Speaker 1: yield Is that happening? Well, what you actually see is
Speaker 1: that um, we no longer are are the of the
Speaker 1: opinion that front and rates are undervalued. Let's say so
Speaker 1: at this point in time to year notes right or
Speaker 1: at two point two six is pretty welfair value for
Speaker 1: at least three rate hikes over this year and so
Speaker 1: forth and so on. The risk to us that we
Speaker 1: think is that the propensity that we have additional hikes
Speaker 1: that the market has now been put on guard for,
Speaker 1: in part by Palace testimony yesterday day of what happens
Speaker 1: in two thousand, nineteen and twenty and beyond. And so
Speaker 1: if you can see continued growth, things that are in
Speaker 1: the five year the tenure sector perhaps are a little
Speaker 1: bit underpriced or grossly mispriced if you see actually growth
Speaker 1: and further tightenings that need to occur over that horizon.
Speaker 1: So that's really the debate at this point in time
Speaker 1: in terms of crowding out, It really becomes in terms
Speaker 1: of what's your target horizon, what's your what's your notion
Speaker 1: for volatility? Again, all volatilities and fixed income actually are
Speaker 1: resoundingly low compared to what we've seen inequities and things
Speaker 1: like that in the response function. Even to past testimony
Speaker 1: yesterday in in rates fall until getting lankish was was
Speaker 1: none basically, So we have to basically do it as
Speaker 1: as not necessarily crowding out, but really trying to find
Speaker 1: utilize the front end as a way to meet objective
Speaker 1: just for sheer optionality and more importantly flexibility for the future.
Speaker 1: People who want to incorporate the front end are utilizing
Speaker 1: as a holding place for reducing volatility and flexibility for
Speaker 1: future allocations. They might want to other outsets as they recalibrate.
Speaker 1: You mentioned chaman Pal. Do you think he was overly
Speaker 1: optimistic in his first semi annual testimony. No, I think
Speaker 1: he was trying to be balanced. Actually, what he was
Speaker 1: doing was flexing his muscle to demonstrate that he has
Speaker 1: that optionality, the same optionality that that you know that
Speaker 1: Yelling had, a Bernanke had and everything else, but at
Speaker 1: the same time recognized the fact that he is a
Speaker 1: voice of one at this point in time and hasn't
Speaker 1: had a proper caucus to represent everybody, and seeing the
Speaker 1: SCP dots as they evolved. I just took the average
Speaker 1: of library oh I asked through the crisis, back when
Speaker 1: I was quoting it every twelve minutes. Thank you, folks
Speaker 1: for those that listen, uh long ago and far away,
Speaker 1: the average library ois spread was point eight five or
Speaker 1: nowhere near that. No, nowhere near that. As we moved
Speaker 1: towards that, does just schrom Snyder start paying attention more,
Speaker 1: I doubt will move towards that. I just think it's
Speaker 1: it's just worth highlighting that that there's been a pretty
Speaker 1: dramatic jump since the end of the year, um and
Speaker 1: it's something worthy to take advantage of. And again, the
Speaker 1: reasons are very different time this time around. Right, That's
Speaker 1: the key point is the mill you is different. What's
Speaker 1: the key confidence maker? As we see Library O I
Speaker 1: s go from dead flat up to point four zero
Speaker 1: three three confidence maker is that we don't see any
Speaker 1: structural weakness in the financial system at this time around
Speaker 1: is simply recalibration of understanding where the financing costs and
Speaker 1: the ability to under the ability to obtain financing within
Speaker 1: the markets is what the critical. So we've spend an
Speaker 1: inordinate amount of time of the past few weeks, me
Speaker 1: and my and the short term desk team at PIMCO,
Speaker 1: and and when you talk to the participants, whether they're
Speaker 1: domestic banks, banks, they all sort of point the finger
Speaker 1: at different things, and so there's probably twenty different variables
Speaker 1: no matter what periodical you say, no matter what they
Speaker 1: pointed to, whether they say is this bank needs funding,
Speaker 1: or it's it's the weakness in the dollar, or it's
Speaker 1: the people Japanese your end, or whatever the excuses, the
Speaker 1: point is that all these things are coming together and
Speaker 1: there is no single weakness per se that we say
Speaker 1: into this is critical. Running out of time in two
Speaker 1: thousand and eighteen is library ois the litmus paper that
Speaker 1: commercial paper used to be ages ago. Uh, they're very
Speaker 1: related and we're gonna see funding spreads wide and specifically
Speaker 1: with regard to some financial institutions as a result, But
Speaker 1: don't lose sleep over it. Look to utilize it as
Speaker 1: an opportunity at this point in time, because the fundamental
Speaker 1: situation is entirely different than two thousand eight. John was
Speaker 1: that in English? It was I think it did a
Speaker 1: great this is great. I'm gonna put the chart up.
Speaker 1: Blue Wood Radio will see it first. I think we
Speaker 1: have to start clos I didn't mean to bring out
Speaker 1: an old book, but actually what sick is John, I
Speaker 1: was wearing this bow tie in two thousand eight. I
Speaker 1: can believe that. Jorm Schneider, thank you as always for
Speaker 1: the clinic. On a blast from the past, libra O,
Speaker 1: I s we need to stalk China, and we do that.
Speaker 1: Of course. Of Ambassador Hass to the Council on Foreign Relations,
Speaker 1: he has a luxury of a terrific China team, including
Speaker 1: Elizabeth Economy. His even greater luxury is to have a
Speaker 1: book review from John Faroe. John, you are raving about
Speaker 1: Richard Hass A World in Disarray. Well, I just have
Speaker 1: to say, for anyone that hasn't read A World in Disarray,
Speaker 1: if even if you have a deep knowledge of foreign policy,
Speaker 1: it will add something to your life and even if
Speaker 1: you don't, in fact, particularly if you don't, we'll give
Speaker 1: you the back history some really important topics that we
Speaker 1: explore at the moment, whether it's North Korea, China, et cetera.
Speaker 1: So please do pick it up and give it a read.
Speaker 1: And I'm really pleased to say that Richard Hass joins us.
Speaker 1: Now I'm Richard. It's always great to catsh up with
Speaker 1: you and get your insight. Once again, China front and center.
Speaker 1: Can we just take a step back and get your
Speaker 1: thoughts on the idea that is President She forever. First
Speaker 1: of all, thank you for that generous introduction. Look, the
Speaker 1: news from China on one level isn't surprising given the
Speaker 1: anti option campaign, the amount of enemies that President She
Speaker 1: has made. The idea that he would one way or
Speaker 1: another key effective power after his second term ended in
Speaker 1: five years, we kind of figured that would happen. There
Speaker 1: was a precedent for that when Doom Shao King stepped down.
Speaker 1: He basically was the power behind the scene through the
Speaker 1: this funny title and the Bridge Association. I used to
Speaker 1: kid that I thought Juan Thing would become the first
Speaker 1: violin and the People's Orchestra. What surprised me was that
Speaker 1: it was done now with five years to go in
Speaker 1: his second term, and it was done so explicitly and
Speaker 1: done through the idea of changing or just ignoring the
Speaker 1: constitutional UH term limit. And that suggests to me that
Speaker 1: this is a pre emptive strike. This is a pre
Speaker 1: emptive strike by Sijan thing that he's sending the message
Speaker 1: he's not just going to be there for five years,
Speaker 1: he's going to be there for ten, fifteen, whatever. And
Speaker 1: it also says to me that there must be significant
Speaker 1: domestic pushback that he felt the need to do this
Speaker 1: pre emptively. Ambassador, we are the honor not only of
Speaker 1: you today, but speaking with Stephen Saying out of Oxford,
Speaker 1: with the University of London UH in their um the
Speaker 1: s O a s Chinese Institute as well, and he
Speaker 1: spoke of the nuances domestically but also abroad. Was this
Speaker 1: a preemptive strike against theories such as Ross Navarro? I
Speaker 1: think it's much more to do with domestic that's the
Speaker 1: Chinese priority. It's take a step back the fact that
Speaker 1: you have this thing called the Communist Party, that's this
Speaker 1: layer of governance between the citizen rate the economy. On
Speaker 1: one hand, and the government on the other it's it's
Speaker 1: what ninety million people who are members of the Communist Party,
Speaker 1: This whole thing is an artificial construct. It says to
Speaker 1: me the Chinese leadership does not take for granted as
Speaker 1: a given the cohesion of the country politically, socially, even territorially.
Speaker 1: But I think this suggests is a tougher line on Taiwan,
Speaker 1: on other issues that would be seen to threaten the
Speaker 1: and hegrity of Chinese territory, a continuing crackdown on descent,
Speaker 1: greater role in overseeing the quote unquote private uh sector,
Speaker 1: possibly a slightly more nationalist line in their in their
Speaker 1: foreign policy behavior. Just in terms of the relationship between
Speaker 1: the United States and China at the moment, there is
Speaker 1: a conversation at the moment about tariffs being introduced. There
Speaker 1: is also a conversation from the Treasury Secretary Stephen Manu
Speaker 1: Chin that maybe the President the United States is keen
Speaker 1: to return and have a look at t p P
Speaker 1: once again. Would you like to see more of the
Speaker 1: latter instead of the former to address the economic part
Speaker 1: of China. Absolutely getting the United States decision in the
Speaker 1: first week of this presidency to get out of TPP,
Speaker 1: made no sense economically, it made no sense strategically, and
Speaker 1: it was basically a nice wrapped gift among others for China.
Speaker 1: China has any number of initiatives from One Belt, One
Speaker 1: Road to the Infrastructure Investment Bank. This is uh this,
Speaker 1: this is a signature error on the part of this administration.
Speaker 1: And if they're willing to revisit it and basically say, look,
Speaker 1: we'd be prepared to go into TPP if there were
Speaker 1: some changes made. Ultimately, it's not only good for the
Speaker 1: our trading partners. We want China integrated in the region,
Speaker 1: but on our terms, we want a race to the top,
Speaker 1: not a race to the bottom. Richard has many say
Speaker 1: you should be in the White House, you should be
Speaker 1: assisting at State. Are we anywhere removed from the loyalty
Speaker 1: president or is it business as usual for the selecting
Speaker 1: of people to serve America a tree time. I thought
Speaker 1: you were a friend before that question. Uh No. I
Speaker 1: think that's the larger issue that the Jared Kushner issue raises.
Speaker 1: The dis administration has not availed itself of so much
Speaker 1: has experienced talent, and whether it's getting rid of people
Speaker 1: at the State Department or essentially saying any Republican hand
Speaker 1: who signed any of these letters critical of candidate, it's
Speaker 1: like original sin and you can't get over it. That's
Speaker 1: that to me, makes no sense. Given the inbox they inherited,
Speaker 1: given the inbox they've now created, they need the best
Speaker 1: in the brightest and they simply don't have it. Richard House,
Speaker 1: the president of the Council on Foreign Relations and the
Speaker 1: author of a must reader world in disarrays, fantastic to
Speaker 1: catch out with the Richard. We always appreciate your time.
Speaker 1: Thank you very much. Tom. This issue of China in
Speaker 1: the United States certainly not going away. I think this
Speaker 1: week is actually quite important because there is going to
Speaker 1: be a key representative of the president of China, meaning
Speaker 1: with some key representatives on the economic side of President
Speaker 1: Donald Trump. And I think it's really interesting that throwing
Speaker 1: into the mix, they've opened the door once again to
Speaker 1: t P P and let me be clear, when they
Speaker 1: pulled away from TPP the happiest people in the room
Speaker 1: with China, I'm gonna get right to it quickly here.
Speaker 1: Not much market response so far, tenure you'll comes in
Speaker 1: a basis point. Mike Mayo with us with Will's Fargo.
Speaker 1: Are you enjoying Wells Fargo? And then they get a
Speaker 1: great time you brought in here. This is one of
Speaker 1: these TV things, folks. It sounds great on radio. Take two.
Speaker 1: You went to the JP Morgan investors meeting yesterday and
Speaker 1: you say, seen three from Mr Diamond is Scale? What
Speaker 1: did you what did you learn about scale yesterday in Fortress? Diamond? Well,
Speaker 1: if we had to sum up the annual investor Day
Speaker 1: by JP Morgan, which was yesterday at their headquarters, it
Speaker 1: would be we are JP Morgan. Hear us roar. I
Speaker 1: mean the JP Morigan is expanding in with bankers and
Speaker 1: branches and bots, and in new markets and in capital
Speaker 1: markets and investment banking. And they said they will defend
Speaker 1: their turf. Jamie Diamond, the CEO said, if there's upstarts
Speaker 1: new competitors, they'll spend a billion dollars, they'll spend five
Speaker 1: billion dollars. They'll spend whatever it takes to preserve the
Speaker 1: long term franchise value. Is the long term profitability there
Speaker 1: or is that confidence from a one off of tax legislation.
Speaker 1: We forecast JP Morgan to earn inns to increase by
Speaker 1: fifty percent over the next three years. So this is
Speaker 1: more than just the benefits from taxes. We see this
Speaker 1: as a twenty five year progress from national banking that
Speaker 1: was first allowed in the mid nineteen nineties. You're seeing
Speaker 1: the benefits a scale more than ever before in the
Speaker 1: banking industry, and JP Morgan is showing some of that.
Speaker 1: What did you ask them at the invest today, Well,
Speaker 1: my question was, you know the sunshining, you're happy, you're
Speaker 1: building a new seventies story skyscraper replacing your headquarters. Basically,
Speaker 1: is this the sign of a top Uh. They said
Speaker 1: they'll do whatever it takes for the long term health
Speaker 1: of the company. Jamie Diving, the CEO, said to be frank.
Speaker 1: He doesn't want to change his office. He doesn't want
Speaker 1: to move, and they aren't in locations fortune other locations
Speaker 1: around the city. So it probably will become more efficient.
Speaker 1: But you have to ask the question, you've been around
Speaker 1: the street a long time. Is this the most confident
Speaker 1: you've seen J P. Mugen since the crisis? I think
Speaker 1: this is the most confident I've ever seen JP Morgan.
Speaker 1: So back to that director's board that even before the crisis,
Speaker 1: this is the this is confident you've seen them full stop,
Speaker 1: period absolutely. I mean before JP Morgan bought Bank One
Speaker 1: and Jamie Diamond, this was a hodgepodge of what we
Speaker 1: called money center banks, remember Chasing Chemical and Manny Handy
Speaker 1: and Legacy JP Morgan. Then Jamie Diamond took over JP
Speaker 1: Morgan and built up JP Morgan through the financial crisis.
Speaker 1: But now you're seeing the benefits of scale without the
Speaker 1: distraction of system integrations of financial crisis, new regulation, so
Speaker 1: you're seeing these benefits more than ever before, both in
Speaker 1: retail banking and in capital markets. It really was, you know,
Speaker 1: quite amazing, and that's why we had to ask the question,
Speaker 1: you know, what makes you nervous, Mike Mayo Take four?
Speaker 1: Is that what you wanted to do? Cinema, we gotta
Speaker 1: tell me you're killing me this morning. That was brilliant,
Speaker 1: no idea. What you were doing is the optimism justified
Speaker 1: from what you see and one of the risks that
Speaker 1: this tax builds, as Holmes point that this tax bill
Speaker 1: just gets competed away. Well, that's a great question. First
Speaker 1: of all, um, we see both structural and cyxical benefits
Speaker 1: to the banking industry. The balance sheets and JP Morgan's
Speaker 1: balance sheet is the strongest that has been in a generation. Um.
Speaker 1: In addition, you have the benefits of the tax reductions,
Speaker 1: which certainly helped the banking industry. And some of that
Speaker 1: money will be put to employees, some two communities, but
Speaker 1: some to shareholders. And the bottom line, what happened to
Speaker 1: your interest rate? You know at the start of the
Speaker 1: year nothing if you're you have a loan, so it
Speaker 1: takes a few years for this to be competed away.
Speaker 1: It will be passed on gradually, but not at the start.
Speaker 1: Here where are the other j people? Morgans? You are
Speaker 1: a harsh critic of governance and Bank of America. There's
Speaker 1: all the challenges at your bank, which I know you're
Speaker 1: not going to speak about, but across regional banks, across
Speaker 1: two big defens to the single word that matters on this,
Speaker 1: Mike Mayo, take five scale. Where's the scale going to
Speaker 1: be for everybody besides JP Morgan. Well, that's a big question.
Speaker 1: That's a message that came out from the conference yesterday. Thomas.
Speaker 1: You know, I've covered the banking industry for thirty years.
Speaker 1: We've got a lot of research on JP Morgan. But
Speaker 1: walking out of that room yesterday, it tilted the debate
Speaker 1: more in JP Morgan's favor. When you're talking about it
Speaker 1: a new fintech startup, you're talking about a mid sized
Speaker 1: bank dethroning JP Morgan. They're saying, it's not too easy.
Speaker 1: We have big data, we have computer power. They increased
Speaker 1: their technology spending by to eleven billion dollars every year.
Speaker 1: How do the smaller players compete against that? So there
Speaker 1: is a question about more consolidation in the banking industry.
Speaker 1: Is to predicting that definitely. Okay, Mike Mayo will thank
Speaker 1: you so much. John. I'm completely depressed Mike Mayo, and
Speaker 1: I like at the beginning a million years ago when
Speaker 1: he was like nobody in the industry were like, who
Speaker 1: the hell is this? Kidded CSFB. And the problem is,
Speaker 1: thirty years on, John Tucker, I look like a fossil.
Speaker 1: In thirty years on Mike Mayo's cutting chisel. It looks
Speaker 1: like he's thirty nine. He's still looking good and he's
Speaker 1: still going around with props. And I'm looking forward to
Speaker 1: him taking that prop from Bloomberg Radio to Bloomberg TV blog.
Speaker 1: Mike Mayo. Al Right, my Mayo with a target of
Speaker 1: one thirty on JP Morgan one thirty with a stock
Speaker 1: already at an all time high of one. Thanks for
Speaker 1: listening to the Bloomberg Surveillance podcast. Subscribe and listen to
Speaker 1: interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.
Speaker 1: I'm on Twitter at Tom Keane before the podcast. You
Speaker 1: can always catch us worldwide. I'm Bloomberg Radio