Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amerie Hordern. Join us each day
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Speaker 2: Terminal and the Bloomberg Business app. Stockslower as doubtscrow over
Speaker 2: the credit house of US regional banks. Lisa is standing
Speaker 2: by with a key guest. Hey Lisa, Hey John, thanks
Speaker 2: so much.
Speaker 3: I am here with Christian Saving, the CEO of Deutsche Bank.
Speaker 3: And before we get started, I want to say we
Speaker 3: booked this weeks ago. This was not necessarily booked to
Speaker 3: talk about the credit issues that are emerging to stave
Speaker 3: off any concerns that might be percolating out. But I
Speaker 3: do want to start there this idea that this morning
Speaker 3: we're all focused on.
Speaker 4: What are we missing?
Speaker 1: Have things gotten too.
Speaker 3: Frauthy and have there been some issues of fraud or
Speaker 3: easy financing conditions. Do you see that anywhere.
Speaker 5: In your book, morning, Liza, I know, actually not. I
Speaker 5: mean there's a lot of volatility in the market. We
Speaker 5: have seen that actually over the last weeks and months.
Speaker 5: Whenever something is supposed to be the market is reacting.
Speaker 5: In our books, I can tell you no, there is
Speaker 5: no deterioration we have. Actually, we are very confident with
Speaker 5: our credit portfolio and that across the world, whether it's
Speaker 5: in Germany, whether it's in Europe, whether it's in the US,
Speaker 5: in the different asset classes corporate bank, private bank, and
Speaker 5: in this regard, I think the market is reacting quite heavily,
Speaker 5: but I think you always have to see it over
Speaker 5: the long term, and so far, to be honest, I
Speaker 5: see no credit.
Speaker 4: Deterioration long term.
Speaker 3: Your shares are up more than eighty percent so far
Speaker 3: this year, so a couple percent here there is sort
Speaker 3: of you know, Okay, it's tough, but we can manage
Speaker 3: through it. Just wondering though, whether it's indicative of people's
Speaker 3: mood that people are looking for a reason to sell
Speaker 3: because they're getting nervous about how good things are getting
Speaker 3: and how.
Speaker 1: Far valuations have gone.
Speaker 3: Do you see that with any executives and the confidence
Speaker 3: that you're hearing from them in terms of what they're
Speaker 3: seeking to do or how much they're extending to planning
Speaker 3: to expand.
Speaker 1: No, actually confidence is quite good.
Speaker 5: I mean, there's obviously always the risk in case in
Speaker 5: case a recession would come, then obviously the confidence would
Speaker 5: go down. You would also see then a situation in
Speaker 5: the credititfolio. But this is not the topic at all. Also,
Speaker 5: in the whole week here in Washington, we haven't discussed
Speaker 5: the topic of recession at all. People are seeing growth,
Speaker 5: they're seeing employment. We talk a lot about what is
Speaker 5: happening in Germany and in Europe and how we can
Speaker 5: actually grow competitiveness and the economic output. So therefore I
Speaker 5: wouldn't say that people are concerned. Of course, the geopolitical
Speaker 5: uncertainties still discussions. Other other issues are also dominating, dominating
Speaker 5: the discussions, But I wouldn't say that there is a
Speaker 5: concern of the executives. We are watching the market, but
Speaker 5: there is nothing out where I would say people are
Speaker 5: concerned of a deterioration given the fact.
Speaker 3: That there are so many uncertainties still outstanding. Are you
Speaker 3: surprised by how much optimism you've been hearing.
Speaker 5: Yes, because we have talked for the last two years,
Speaker 5: given all the instabilities and uncertainties, when when is actually
Speaker 5: a potential down downturn in the market's coming. But again,
Speaker 5: there is a lot of liquidity in the market people.
Speaker 5: We have seen it, for instance in the in the
Speaker 5: second quarter when there was a stimulus program in Germany,
Speaker 5: how much liquidity came to Europe. And you see that
Speaker 5: people really want to deploy their money. And therefore, I
Speaker 5: think you always have to see if there is a
Speaker 5: slight decrease in market prices, liquidity immediately comes in again.
Speaker 5: And therefore I'm still optimistic actually that we are not
Speaker 5: talking about an overvaluation.
Speaker 1: We have some stretch valuations.
Speaker 5: No doubt, but I wouldn't say that the whole market
Speaker 5: is overvalued.
Speaker 3: Let's talk about Germany and European banks in general have
Speaker 3: been on a tear this year, and it's been driven
Speaker 3: by this idea that maybe there will be deregulation and
Speaker 3: maybe there will be actual fiscal spending to support the region.
Speaker 3: Are you seeing any actual tangible signs of deregulation that
Speaker 3: you think could unleash, whether it's bank mergers, whether it's
Speaker 3: just more dynamism in the European banking sector.
Speaker 1: Well, at least we have discussions.
Speaker 5: I mean, look, there are also some tangible items like
Speaker 5: the delay in the implementation of fr to be we
Speaker 5: have also in certain national buffers. When it comes to
Speaker 5: capital buffers, we have seen some movements of the national regulators,
Speaker 5: but also of the ECB. I think we have a
Speaker 5: constructive discussion with the ECB. We are talking about that
Speaker 5: we as European banks, are demanding a level playing field.
Speaker 5: We see the developments here in the US, we see
Speaker 5: developments in the UK, and therefore I think there are
Speaker 5: constructive discussions with our regulators, so there.
Speaker 1: Is some movement.
Speaker 5: Nevertheless, I think it's not only about regulation. I think
Speaker 5: the most important is how can we ensure that Europe
Speaker 5: of all, but also Germany is actually increasing the competitiveness
Speaker 5: and growth, and therefore we need to do more on
Speaker 5: the structural reform saute, which goes way beyond bank regulations.
Speaker 5: That is actually the topic which we need to push for,
Speaker 5: because at the end of the day, regulation is important,
Speaker 5: we need a level playing field, but the most important
Speaker 5: is the underlying growth and therefore we need structural reforms
Speaker 5: in Europe is.
Speaker 2: That friscal spending.
Speaker 3: Are you saying that you hope that they increase it
Speaker 3: more and that you're already seeing stimulative effects from that?
Speaker 5: I suppose I personally think that the debt break alignment
Speaker 5: and adjustments which we have seen in Germany was the
Speaker 5: right step to do. But only doing this is not
Speaker 5: the right thing. Just increasing debt is not the right thing.
Speaker 5: What you need to do is in parallel work on
Speaker 5: structural reforms that it makes sense for corporate's private individuals
Speaker 5: to invest. And that has all about to do with
Speaker 5: tackling the problem of energy prices in Germany, reducing bureaucracy,
Speaker 5: making sure that we are doing bigger investments into infrastructure,
Speaker 5: that the approvals for new investments are not taking that
Speaker 5: long as it did before.
Speaker 1: All that needs to be done.
Speaker 5: So aligning or just growing by a stimulus program will.
Speaker 1: Not be sufficient.
Speaker 5: We need imperilel structural reforms, and there I can see
Speaker 5: that actually the German government is taking the first step.
Speaker 1: So what about businesses?
Speaker 3: How much are businesses in Germany moving away from places
Speaker 3: like China in terms of sources of business? How much
Speaker 3: are you seeing those fissures just in the companies that
Speaker 3: you work with.
Speaker 5: Well, it's the result already of the COVID. I think
Speaker 5: after COVID people really thought far more about diversification. We
Speaker 5: can see that German corporates, European corporates are very active
Speaker 5: in diversifying their supply chains, their production chains, and are
Speaker 5: also trying to invest more globally and less concentrated. You
Speaker 5: can also see actually that business are confident actually to
Speaker 5: really reinvest in Germany. You may have heard about the
Speaker 5: initiative which is running in Germany, the Made for Germany initiative,
Speaker 5: where more than one hundred corporates are actually committed to
Speaker 5: invest over seven hundred billion euros in Germany over the
Speaker 5: next three years. That shows actually that there is confidence
Speaker 5: in the business and at the same time that corporates
Speaker 5: are really redistributing their supply chains.
Speaker 3: Are you seeing any clients trying to shift away from
Speaker 3: dollar exposure right now?
Speaker 5: Look, there was clearly a trend in Q two about reallocation.
Speaker 5: But I wouldn't join the core of saying well, that
Speaker 5: is the end of the US dollar as the reserve current.
Speaker 1: The US dollar will be the reserve currency.
Speaker 5: But I think that a lot of investors actually are
Speaker 5: trying to reallocate, and in particular with what happened in
Speaker 5: the second quarter in Germany but also in Europe, you
Speaker 5: could see a shift to Europe and that's actually the
Speaker 5: momentum which we need to retain and where we need
Speaker 5: to build on.
Speaker 3: And this move away from the dollar has been largely
Speaker 3: in derivative's markets. I mean, how much has that just
Speaker 3: been on fire this year in terms of hedging any
Speaker 3: exposure to the dollar, not necessarily getting out of dollar
Speaker 3: denominated assets.
Speaker 1: Well, I think it's both.
Speaker 5: It's it's not only in the derivative market can we
Speaker 5: really have seen rear flows And therefore it has been
Speaker 5: it has been a trend in Q two, it's a
Speaker 5: little bit reversing in Q three. And therefore it is
Speaker 5: so important in particular for Europe that they really continue.
Speaker 1: With structural reforms.
Speaker 5: If this is not going through, if we are not
Speaker 5: continued with structural reforms, then obviously grows and therefore so
Speaker 5: the inflow in European assets will not further increase.
Speaker 3: And is that just whether there will be reforms or not.
Speaker 3: How does that effect where you want your footprint to
Speaker 3: be dominant?
Speaker 1: Right?
Speaker 3: Do you want to be more in Germany. Do you
Speaker 3: want to be more in the United States? Do you
Speaker 3: want to expand more in one place or another based
Speaker 3: on your faith, hope, et cetera, that there will be
Speaker 3: reform in Europe versus what actually is happening elsewhere.
Speaker 5: Look, Liza, for me, it is that from a bank's
Speaker 5: point of view, the most important is to be diversified,
Speaker 5: and we as Loutsche Bank, have taking a clear decision
Speaker 5: to be a global bank and to make sure that
Speaker 5: we are not too concentrated in any one of the regions.
Speaker 1: Of course, when you.
Speaker 5: Have your home market in Germany with forty percent of
Speaker 5: the revenues, you have a great interest that this country
Speaker 5: is growing, that you have the right structural reforms, that
Speaker 5: fiscal stimulus is kicking in.
Speaker 1: But at the same time, despite.
Speaker 5: All the talks about the end of globalization, globalization will
Speaker 5: not end. Globalization will be different going forward, but that
Speaker 5: needs actually global banks with local nohow and that is
Speaker 5: actually where we are focusing from a Deutsche Bank point
Speaker 5: of view, strong home market, but being an international player,
Speaker 5: because what we see from our clients, they would like
Speaker 5: to have a bank with an international exposure, with an
Speaker 5: international expertise, and that with the global network, and that's
Speaker 5: exactly what we want to be. So diversified and a
Speaker 5: global setup is I think the key to success.
Speaker 3: Are you interested in any acquisitions or is this going
Speaker 3: to be a very organic process going forward?
Speaker 5: So very organic process. Look, I'm very happy with the
Speaker 5: development which we have taken. You were just talking about
Speaker 5: our share price. I think overall the bank has done
Speaker 5: very well over the last three four years. The turnaround
Speaker 5: has been completed, and now it's really bringing the bank
Speaker 5: from a ten percent hour to eat to the next stage.
Speaker 5: All leavers for that are leavers which are sort of say,
Speaker 5: within our own hands.
Speaker 1: It's about a.
Speaker 5: Better capital management, it's about focus growth, it's further about
Speaker 5: investing into technology to get further efficiencies out that is
Speaker 5: in our hands.
Speaker 1: And as long as if.
Speaker 5: I have the chance to further increase my return on
Speaker 5: equity with sort of.
Speaker 1: Say homework, that is always the preferred option.
Speaker 3: So not interested in any local banks that are nearby
Speaker 3: that you might bring out here.
Speaker 5: As I said again, if you can focus on yourself,
Speaker 5: if you can improve your return on equity by applying
Speaker 5: this homework, honestly, it's always the first option.
Speaker 3: There's also a big question here about artificial intelligence and
Speaker 3: how much it's going to alter the size of the staff,
Speaker 3: the way of doing business going forward. Have you seen
Speaker 3: any material changes or advantages from using and adopting artificial
Speaker 3: intelligence of late that have really materially improved profitability.
Speaker 1: Or decreased staff.
Speaker 5: Well, we have many use cases and you can apply
Speaker 5: that across the bank. And the interesting part is it
Speaker 5: actually it actually applies to revenue SI, customer satisfaction, interaction
Speaker 5: risk clients. It applies to efficiency and cost management, and
Speaker 5: also it applies to something which is very important for banks,
Speaker 5: control and regulatory compliance. And in each of these three
Speaker 5: areas we have seen great use cases. If you think
Speaker 5: about also our research department, they started actually applying AI.
Speaker 5: If you think about the precision of research reports, with
Speaker 5: the help of AI got far better. Of course, that
Speaker 5: has an impact in terms of the speed and turnaround
Speaker 5: of research reports. Same actually in other areas when you
Speaker 5: think about operations, the way we can apply AI. Now,
Speaker 5: the really important thing is now that we have a
Speaker 5: structural approach to all these use cases and that we
Speaker 5: have a clear priority where do we prioritize it at first?
Speaker 5: Because you can imagine that everybody in this bank wants
Speaker 5: to apply now, AI, we need to have a clear
Speaker 5: priority of investments. But I think it will be a
Speaker 5: game changer going forward and it will be one of
Speaker 5: the key leavers how to increase profitability of banks.
Speaker 2: Stay with us more Bloomberg Surveillance coming up after this,
Speaker 2: Let's turn to private equity. The Consortium Bank Electronic Arts
Speaker 2: is set to add more than a dozen banks to
Speaker 2: its underwriting group after JP Morgan put up twenty billion
Speaker 2: dollars of debt to bankroll the leverage buyout. The banks
Speaker 2: are inline to share roughly five hundred million dollars in
Speaker 2: fees for arranging the financinc joining us. Now, a man
Speaker 2: who knows something about a leverage buyout, Steve Paluk of
Speaker 2: Being Capital. Steve's good to see it, so it could
Speaker 2: be a good morning. Let's reflect on your time. The
Speaker 2: largest leverage buyo ever before this one was HCA back
Speaker 2: in two thousand and sixty thousand and seven. There are
Speaker 2: you were right there in the middle of it. Despite
Speaker 2: that moment, and how it compares to what we're seeing
Speaker 2: play out now.
Speaker 4: Well, it's really interesting.
Speaker 6: I think that buyout was five billion equity and twenty
Speaker 6: seven billion dollars debt. This buyout is much more equity,
Speaker 6: you know, kind of thirty billion of equity and twenty
Speaker 6: five twenty billion, may thirty five billion of equity. So
Speaker 6: the markets have changed to that extent that you can't
Speaker 6: leverage you much. But the EBA does a little less
Speaker 6: very quality sponsor, and JP Morgan is a very quality bank.
Speaker 6: So they did the deal because of the great growth
Speaker 6: in gaming and media and entertainment, and I think is
Speaker 6: a very solid company.
Speaker 2: You did the tremendously well out of HCA. It needs
Speaker 2: to be very very clear about that. But the timing
Speaker 2: of it is curious. It came right at the peak
Speaker 2: of credit and this is now too. Is that anything
Speaker 2: to be concerned about?
Speaker 6: You know, I'm less concerned about credit right now in
Speaker 6: terms of the private credit markets because the private letters actually.
Speaker 4: Are very good.
Speaker 6: The banks have been very good JP Morgan, especially Bank
Speaker 6: of America, well run, well capitalized banks.
Speaker 4: And private credit is different.
Speaker 6: Than credit from banks because if it does go bad,
Speaker 6: you only write off the equity from people that put
Speaker 6: the equity in. It doesn't have a systemic multiplier effect.
Speaker 6: So I'm less concerned about private credit. What one more
Speaker 6: concerned about is the size of the national debt and
Speaker 6: how much interest we're spending on the national debt. It's
Speaker 6: really interesting if you go back to when I got
Speaker 6: out of business school, there was a huge sturm and
Speaker 6: drawing about the national debt passing one trillion. That's in
Speaker 6: nineteen eighty two, So it took two hundred and fifty
Speaker 6: years to have one trillion of national debt. In the
Speaker 6: last forty years, we now have thirty seven trillion.
Speaker 4: Which is more than the GDPGB.
Speaker 6: It's about thirty trillion, So that concerns me more in
Speaker 6: terms of the impact of the dollar interest rates. Our
Speaker 6: interest from the government now is one of the highest expenditures.
Speaker 6: It's right up there with defense and healthcare. So that
Speaker 6: concerns me more than private credit.
Speaker 2: I Steve, I could probably find you people who a
Speaker 2: consent back in the eighties two, and then in the
Speaker 2: two thousands, and as we went through ten trillion, twenty
Speaker 2: trillion and kept going high, they were concerned all the
Speaker 2: way up. Unfortunately, I say this moment.
Speaker 6: Different, Well, I think I don't know if it is different,
Speaker 6: But in situations like this, it's always okay till it
Speaker 6: isn't okay. So you get used to you pass a trillion. Ever,
Speaker 6: Dirkson had a board up that was counting it up
Speaker 6: at that time, and it passed a trillion, there was
Speaker 6: a huge outcry. Now it's ten trillion, then twenty trillion,
Speaker 6: then thirty trillion. But at some point you've got to
Speaker 6: have some long term plan to pay that money back
Speaker 6: and get that deficit down because it's eating up huge
Speaker 6: amounts of the government budget.
Speaker 4: And as as as the interest rates roll.
Speaker 6: Over, you know, a lot of that is still financing
Speaker 6: the old really low interest rates. They're going to have
Speaker 6: to refinance it at five percent, you know, you know,
Speaker 6: four and a half percent, and then the number goes
Speaker 6: up again.
Speaker 7: Well, when you see what's going on Washington, I want
Speaker 7: to go back to your EA deal. It's not just
Speaker 7: the size and scope that got a ton of people's attention.
Speaker 7: There's concern in Washington given some of the players involved.
Speaker 7: Have you heard from politicians about that.
Speaker 6: I don't think there's been a lot of pushback on
Speaker 6: that and the deal. I think we'll be controlled by
Speaker 6: silver Lake, which is an American, you know, fantastic private
Speaker 6: equity company, but.
Speaker 7: With the Saudi PIF being involved, some people think Jared
Speaker 7: Kushner was brought in just to get the check government
Speaker 7: seal of approval.
Speaker 6: You know, again, I think silver Lake's a fantastic firm
Speaker 6: and they're leading the charge there and so I think
Speaker 6: there's really going to be no concern because they'll be
Speaker 6: calling the shots on the deal.
Speaker 2: And say, if we started this conversation by comparing this
Speaker 2: dale ci in I was six. I seven. Have the
Speaker 2: pose off capits have changed in the last twenty years.
Speaker 4: Yeah? Absolutely.
Speaker 6: You know, when I started out in the industry, there
Speaker 6: was only three or four firms doing this I think
Speaker 6: in general, and it was mostly USA. Now it's global.
Speaker 6: The fund sizes are up probably twenty times from when
Speaker 6: I started. And also you have sovereigns and bid againstucial
Speaker 6: players partnering with private equity, so the dry powder is huge.
Speaker 2: Are there are enough opportunities to go around?
Speaker 4: You know?
Speaker 6: You know I got asked that question in nineteen eighty
Speaker 6: nine again, and I feel like a broken record. Private equity,
Speaker 6: I think is here to stay. The model has really evolved,
Speaker 6: so it really is huge value added to to kind
Speaker 6: of transform companies, make them better, globalize them, build new products,
Speaker 6: and in an environment where you don't have to worry
Speaker 6: about quart of learning. So the model is a very
Speaker 6: good model, and it's only expanded, it's only gotten bigger,
Speaker 6: and I think it'll meet There will be plenty of
Speaker 6: opportunit these for these folks to invest money.
Speaker 2: Well, let's talk about the opportunities now for you and
Speaker 2: how your sport franchise is are going. Starting with Atlanta.
Speaker 2: Steve walked into the room with some Atlanta sneakers with
Speaker 2: the sponsor New Balance. On the relationship between you and
Speaker 2: New balants, can you just debscribe what that's like at
Speaker 2: the moment?
Speaker 4: Fantastic.
Speaker 6: A New Balance is a is kind of a fighting
Speaker 6: brand growing taking a lot of share. They really like
Speaker 6: the Atalanta story because we have the same values. You know,
Speaker 6: we're kind of a fighting brand against your the wanted
Speaker 6: AC one team that you support, and so it's kind
Speaker 6: of a matchmate and having the New Balance is very
Speaker 6: excited about it. We're excited about it. We've just named
Speaker 6: our stadium New Balance Arena. I think it's the first
Speaker 6: arena that New Balance is named. And we're very proud
Speaker 6: to be associated with New Balance as a family company.
Speaker 6: You know, the Package Group is a family company in
Speaker 6: the precossis in Italy, your family companies, so the three
Speaker 6: families have come together and hopefully take to the next level.
Speaker 2: You've done a tremendous job with the same in a franchise.
Speaker 2: Can you just describe the opportunities now that exist in
Speaker 2: the sports world at a time when some people are
Speaker 2: pushing back against funny wish.
Speaker 6: Well, no question valuations or record levels. Why is that
Speaker 6: is because sports is now the only thing left that
Speaker 6: aggregates huge audiences globally.
Speaker 4: And there's been a technology change where.
Speaker 6: When I lived in Holland and in the nineteen seventies,
Speaker 6: you would only get sports scores three days later from
Speaker 6: an international tribune and you could watch anything. Now you
Speaker 6: can watch any team globally. So fans are counted in
Speaker 6: the billions instead of the tens of thousands where they
Speaker 6: used to be thirty years ago. So I think sports
Speaker 6: still has upside because advertisers, you don't want to reach
Speaker 6: the globe and that's the way to do it.
Speaker 2: As you look at the sports world and it's pretty broad.
Speaker 2: Where do you see the best opportunity right now? Because
Speaker 2: your name's been linked to a team in the WNBA,
Speaker 2: I know you wanted to bring a team up to Boston.
Speaker 2: Is that where you're looking stale or is it outsewere Well, we're.
Speaker 6: Looking at many opportunities. I think the WNBA is a
Speaker 6: great opportunity. Women's sports and general women's soccer in the
Speaker 6: USA and globally is growing.
Speaker 4: The NFL is the market proper.
Speaker 6: I think they've had record ratings and record advertising on
Speaker 6: the NFL. So again, I think sports as a category
Speaker 6: is really a growth asset, and as you have this
Speaker 6: battle between old media and new media, it's ex extential
Speaker 6: for them and they're battling over these properties that get
Speaker 6: all the eyeballs in.
Speaker 4: So I think that bodes well for all the leagues.
Speaker 7: John mentioned the WA Connecticut team. Do you think that
Speaker 7: there potentially could be a future for you and that team.
Speaker 4: That's something clear.
Speaker 6: We've kind of stood down for now and we're going
Speaker 6: to abide by whatever the NBA wants to do with
Speaker 6: the team. I think it's very exciting. The ratings are
Speaker 6: huge for WNBA, and I think it's great that all
Speaker 6: Americans are following that sport now and it's going to
Speaker 6: it's going to really take off, and the NBA has
Speaker 6: done a great job.
Speaker 2: With that You've done a great job, Stafe. It's always
Speaker 2: going to catch up with you.
Speaker 1: What a career.
Speaker 2: It's those you have in the best of times now.
Speaker 6: You know, I've been very fortunate, you know, coming my
Speaker 6: grandfather came from Italy on a boat with one suitcase
Speaker 6: and worked in a shoe factory here in New York
Speaker 6: and the Bronx for eight dollars a week. So I
Speaker 6: would say America is a great place coming from that.
Speaker 6: And I've loved the homecoming, coming back to Italy with Atalanta.
Speaker 6: I get off the plane and I love it because
Speaker 6: everyone looks like me.
Speaker 1: There.
Speaker 2: Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: The ten year below four percent at three ninety nine,
Speaker 2: Steve schuttev Missua right in the following. This is the
Speaker 2: minimum level of rates you would expect if the Fed
Speaker 2: were credible in its inflation target. At four percent, the
Speaker 2: yield on the tenure is fully priced for an economy
Speaker 2: with little to no inflation risk. Steve joined us now
Speaker 2: for more. Steve, goodmnic good morning. Do you think we
Speaker 2: should be priced for an economy with little to no
Speaker 2: inflation risk?
Speaker 4: No, I don't.
Speaker 8: I think there is more inflation risk in the system
Speaker 8: than the markets are currently pricing in. But I think
Speaker 8: the markets are pricing in the degree of excess liquidity
Speaker 8: that's still there. Even though we're seeing some you know,
Speaker 8: chinks in the armor in terms of the quantitative approach
Speaker 8: here and what's happening in terms of some of the
Speaker 8: reverse repo areas, there's still an enormous amount of liquidity.
Speaker 4: And you see the way it trade.
Speaker 8: The market traded this week, especially you know, earlier in
Speaker 8: the week and the credit story when we're worried about
Speaker 8: banks initially, and then we saw the Goldman issue come
Speaker 8: out and the market was substantially over subscribed for that issue.
Speaker 8: While we're worried about banks, and so I think there's
Speaker 8: still an enormous amount of liquidity, and I think that's
Speaker 8: holding down the long end of the curve. Plus there's
Speaker 8: the global deflation story that's holding down the long end
Speaker 8: of the curve as well.
Speaker 7: When you see inflation risk, do you mean tariffs or
Speaker 7: are you seeing inflation in other parts?
Speaker 8: Well, I mean we've got to fed a reserve that
Speaker 8: wants to maintain full employment, and we have an economy
Speaker 8: where we are seeing inflation without much tariff running at
Speaker 8: well above its target, running closer to three percent, So
Speaker 8: you would sit there and say, okay, then there is
Speaker 8: inflation risk in there that's not being priced in. Now
Speaker 8: you could say the tenure is expecting on average the
Speaker 8: FED to be credible over a ten year period of time.
Speaker 4: True.
Speaker 8: However, we have been above two percent for four plus years,
Speaker 8: so there starts to be a window there where this is.
Speaker 4: A fully priced market.
Speaker 8: And I think that's part of the reason why we
Speaker 8: had this rally yesterday afternoon and then we've pulled back
Speaker 8: towards that four percent level, because it is a critical
Speaker 8: psychological level, and it's also a critical mathematical level because
Speaker 8: it's a two percent inflation rate.
Speaker 2: Why is it critical psychological.
Speaker 8: Level Because it's an environment in which, when you look
Speaker 8: at most people who've been in the marketplace, if you
Speaker 8: break through four percent, you're usually looking at a substantial
Speaker 8: move below that because something has gone wrong in the system.
Speaker 8: And that's why you had so much of a response
Speaker 8: to yesterday's announcements by Zion and so forth in terms
Speaker 8: of the way the market's knee jerk response took place
Speaker 8: on that. And now we're starting to see the pullback
Speaker 8: as we begin to realize it's more idiosyncratic than it
Speaker 8: is systemic.
Speaker 2: And we've bounced back big time. The broader recory market
Speaker 2: has too. We'll be tracking that. I want to stay
Speaker 2: on course for the federal reservance downtrack with you. This
Speaker 2: FED and the recent decisions, and the next one too
Speaker 2: is anchored to a massive step down at payrolls. What
Speaker 2: do you think they should be anchoring these decisions too.
Speaker 8: I think they should be setting it up as an
Speaker 8: insurance policy standpoint, and I think they should be setting
Speaker 8: it up in an environment in which they want to
Speaker 8: make sure that they are achieving still full employment. That's
Speaker 8: what they say their target is. And I think if
Speaker 8: you wind up getting an unemployment rate movement that goes
Speaker 8: against their need to cut interest rates, that I think
Speaker 8: they should pause.
Speaker 2: So this is a risk management decision, correct, That's kind
Speaker 2: of what they're doing, isn't it. How much daylight is
Speaker 2: there between you and what they're doing right now?
Speaker 4: There's not a lot.
Speaker 8: I mean, after the payroll employment numbers came out in August,
Speaker 8: we were I was on this call and we talked
Speaker 8: about the fact that they might as well just do
Speaker 8: three September, October and December, and it looks as if
Speaker 8: that's what we're going to get out of it, and
Speaker 8: that will.
Speaker 2: Pull us back into from my.
Speaker 8: Calculations, a margin least stimulative monetary policy standpoint for the market.
Speaker 8: They still have to get to three percent to be neutral.
Speaker 8: For me, four percent is neutral. So if we get
Speaker 8: to that level of three and three quarters or so
Speaker 8: on the tenure note, then we're into a stimulative territory.
Speaker 7: If they're biases to the labor market, yes, what do
Speaker 7: they do with how the labor market report?
Speaker 8: Well, I mean, as the chairman indicated the other day,
Speaker 8: they have the ADP numbers, They could look at some
Speaker 8: of the weekly claims numbers, they can look at some
Speaker 8: of the continuing claims numbers. They can do some work
Speaker 8: and adding those things up and making those kind of assessments.
Speaker 8: And I think you basically have to take onto consideration
Speaker 8: that there's a lot of uncertainty.
Speaker 4: Built into this situation.
Speaker 1: If you look at the.
Speaker 4: Wall of worry.
Speaker 8: I mean, we've got a government shutdown, we've got the
Speaker 8: tariff situation, we've got the Chinese trade war negotiations.
Speaker 4: In terms of our CALP call of that or not.
Speaker 8: We've got the Middle East hostilities, We've got the Ukrainian hostilities,
Speaker 8: We've got a government shutdown that doesn't look as if
Speaker 8: it's going away. We have the upcoming question as to
Speaker 8: whether or not of the TERRORIFFTSHO are legal or nothing.
Speaker 7: So why why not go on pause then for October
Speaker 7: and recalibrate for the end of the year.
Speaker 8: I think you want to make sure if there is
Speaker 8: something wrong, you get it in in October so that
Speaker 8: you make sure there's a good fourth quarter of the year.
Speaker 2: Steve, I've got no idea what happens in man beyond
Speaker 2: because we don't know what the leadership of the Federal
Speaker 2: Reserve looks like. But do you think markets might be
Speaker 2: underappreciating the potential for a pause from the new year
Speaker 2: up to May?
Speaker 5: Oh?
Speaker 8: I think the market definitely is underestimating the potential not
Speaker 8: to get to three percent.
Speaker 2: Yes, stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: Let's stick with the data. CPI could be the only
Speaker 2: government print the Fed gets ahead of the rate decision
Speaker 2: later on this month. Mark Hayfley of UPS, writing with
Speaker 2: the Fed on track to continue its rate cutting cycle,
Speaker 2: we believe the case for quality fixed income as a
Speaker 2: source of fullier resilience remained strong. Mark John, Just now
Speaker 2: for more, Mike, welcome back, sir. Let's just talk about
Speaker 2: that income. Over the last week or so, they yield
Speaker 2: is just slipping away from us. Mark, what do you
Speaker 2: think is driving that story?
Speaker 9: Well, I mean it's a lot of factors. I think First,
Speaker 9: we do have some you know, some concerns out there
Speaker 9: about the labor market and other things. But you know,
Speaker 9: we've got a FED that's going to cut. And then
Speaker 9: I do think this QT story is also important to
Speaker 9: this because you know, that was a huge factor perhaps
Speaker 9: in creating some of those term premiums. So that side
Speaker 9: of it seems to be be coming together.
Speaker 2: S and P five hundred target for you and a
Speaker 2: team midyear next year seventy three hundred, Mark, What needs
Speaker 2: to go right to get us from where we are
Speaker 2: to get us there?
Speaker 9: Yeah? Well, first, anybody who's in the equity market does
Speaker 9: have a call on AI, whether they like it or not.
Speaker 9: And we think that the cap can continue into next year.
Speaker 9: That's one thing. Second, again, don't fight the FED. Third,
Speaker 9: the earnings are looking good. And fourth, the one big
Speaker 9: beautiful bill is going to start to add some stimulus
Speaker 9: as we get into next year. So that's that looks
Speaker 9: like a positive backdrop to.
Speaker 7: Us, even you're constructive on AI. Do you have any
Speaker 7: sort of concerns about the vendor financing that's happening within
Speaker 7: this space?
Speaker 9: Well, you know, twenty six years ago I sat down
Speaker 9: and was writing to clients about the dot com bubble,
Speaker 9: and so writing this month was you know, brought back
Speaker 9: some memory. So yes, you know, I think that I remember,
Speaker 9: you know, some of the circular financing of the dot
Speaker 9: com very well. And you know, I think that it's
Speaker 9: still early stages. Obviously, you know, it's getting somebody's concerned
Speaker 9: enough that it's getting disclosed, and it's definitely something to watch.
Speaker 9: We just have to see where it goes from here.
Speaker 7: Mark, when it comes to what we had this morning,
Speaker 7: which was the bank sector under pressure given the concerns
Speaker 7: of these bankruptcies and credit qualities, do you think that
Speaker 7: this could potentially be a longer term problem within this
Speaker 7: space and that can affect and have contagion across the
Speaker 7: border market.
Speaker 1: On the banks.
Speaker 9: On the banks, we're you know, we're looking at the
Speaker 9: delinquency rates. They look like they're okay so far, and
Speaker 9: so we're still thinking this is kind of a one
Speaker 9: off and the you know, the globally significant banks, the
Speaker 9: large banks are doing very well.
Speaker 2: It's Altmark that we finished the week talking about these
Speaker 2: issues and I get them, they're import them. We should
Speaker 2: track them on a week when we've just had blowout
Speaker 2: numbers from the big banks on Wall Street. Mark, do
Speaker 2: you see this market as a bit of a market
Speaker 2: of contradictions at the moment?
Speaker 9: Well, you know, I love talking to you on a
Speaker 9: Friday because you're looking back on the week with this
Speaker 9: sense of wonder, almost awe that like all the stuff
Speaker 9: that has happened, And so I agree with you. I mean,
Speaker 9: we've had a heck of a run in the market.
Speaker 9: We don't have a lot of data right now, you know,
Speaker 9: economic data, and so every data point is important. But
Speaker 9: I think as some of the you know, as you highlighted,
Speaker 9: you have to look at everything that's going on from
Speaker 9: what the President is saying to you know, what the
Speaker 9: Fed is saying, to what foreign leaders are saying to
Speaker 9: you know, what you're hearing from companies and put it
Speaker 9: all together in the right matrix.
Speaker 2: The good news is Mark that in bad times bonds
Speaker 2: are working. And I guess the good news for gold
Speaker 2: is that gold works when the market's down and gold
Speaker 2: works when the market's up. This is just a relentless
Speaker 2: rally market. We're on a ninth straight week of gains,
Speaker 2: a run we haven't seen since twenty twenty. This week alone,
Speaker 2: we're up by close to eight percent. I think seven
Speaker 2: point five percent is the number of my Bloomberg terminal
Speaker 2: Right now, Mark, can we just finish that the relationship
Speaker 2: ship between gold and risk. We were touching on this
Speaker 2: when we taught last time. How are you reading these
Speaker 2: moves in gold? What's it all about?
Speaker 9: Well? I think that part of it is feers about
Speaker 9: kind of the dollar and and this this you know,
Speaker 9: and the concerns about debt. But a large part of
Speaker 9: it is the weaponization of the dollar after the Russian
Speaker 9: invasion of Ukraine, the use of sanctions and central banks saying, hey,
Speaker 9: you know, how else can we function that we're not
Speaker 9: necessarily beholden to the dollar system. And we continue to
Speaker 9: see that happening. Obviously we've seen speculatory trades and and
Speaker 9: retail come in on top of those things. But I
Speaker 9: think this this central bank component is key to the story.
Speaker 9: And then of course underpinning this whole rally is the
Speaker 9: continued fiscal spending, deficit spending that that goes on, and
Speaker 9: you know it's don't fight the Fed, but also don't
Speaker 9: fight that tide of money that is stimulating economies around
Speaker 9: the world.
Speaker 2: That's an interesting component of this markt And please you
Speaker 2: mentioned the central bank diversification of the back of what
Speaker 2: happened with Russia, because that's been a source a massive
Speaker 2: tail went for this story. A non yielding assets perform
Speaker 2: so well in an otherwise high interest rate environment. Marcus,
Speaker 2: we start to reduce interest rates to the federal reserve,
Speaker 2: is that just more fuel for the next leg of
Speaker 2: the trade And what kind of numbers are you and
Speaker 2: the team considering?
Speaker 9: Yeah, it normally would be, but I think that given
Speaker 9: this run, you know, from here, we're a little cautious
Speaker 9: and thinking more of gold as a hedge against potential
Speaker 9: risks that pop up, rather than saying, hey, this is
Speaker 9: a great to great time to pile in for kind
Speaker 9: of speculative gains or trading gains.
Speaker 2: This is the Bloomberg Sevendents podcast bringing you the best
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Speaker 9: Mm hmm