Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Ferrell and Lisa Brownwitz Jailey. We bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot Com,
Speaker 1: and of course on the Bloomberg terminal. All right now
Speaker 1: to make a smarter Matthew Loseetti with us for you
Speaker 1: on Global Wall Street. Deutsche Bank has just done a
Speaker 1: terrific job. It's maybe a fractious view with a different
Speaker 1: view short term versus their view long term. Let's go
Speaker 1: wicked short to Friday with Matthew Lozetti our first real
Speaker 1: discussion of this job's report. Matthew, I love what you say.
Speaker 1: It is a perplexing labor economy. How will this Friday's
Speaker 1: report be perplexing? Sure, thank you for having me. I
Speaker 1: think what we've seen over the past of the months
Speaker 1: is UH data data points which are pointing at two
Speaker 1: different things. We have an economy which on a number
Speaker 1: of metrics look like looks like there's a lot of slack,
Speaker 1: seven point six million jobs below pre COVID, a labor
Speaker 1: force at three point five million below pre COVID as well.
Speaker 1: On the other hand, you have record quits, record job openings,
Speaker 1: wages have been firm. Uh. And so I think we've
Speaker 1: been looking for data points to try to resolve these
Speaker 1: two issues in our mind, and I know the feed
Speaker 1: is is certainly looking at data points there. I don't
Speaker 1: think we get a resolution this week. We expect seven
Speaker 1: thousand jobs. We expect the employment rates to take down
Speaker 1: by by one t the labor force to pick up
Speaker 1: a little bit. But I think, you know, as FED
Speaker 1: officials have said, it's more likely that we have to
Speaker 1: wait until the fall to we get labor supply coming
Speaker 1: on fully and get a greater resolution of these this
Speaker 1: real dichotomy that we're seeing in the labor market. That
Speaker 1: February before the pandemic, we all look back at that
Speaker 1: Nirvano of what was build as a fully employed America.
Speaker 1: Is that what we're going back to or are we
Speaker 1: going forward to something new and different? Look. I think
Speaker 1: there's definitely some things that have changed, and probably from
Speaker 1: a structural sense, and and the FED and Chair Palace
Speaker 1: has talked about retirements really picking up, probably on the
Speaker 1: back of a big pickup and wealth and and savings
Speaker 1: that the households have had there. But in my mind,
Speaker 1: what we learned from the pre COVID labor market was
Speaker 1: we just continually found labor supply. The primary labor force
Speaker 1: participation rate continue to trend hire people coming off disability
Speaker 1: insurance roles, you know. Vice Chair Clarad at that point
Speaker 1: was saying that NEHRU could be as low as three
Speaker 1: and a half percent. And I don't think that there's
Speaker 1: anything from the shock that prevents us from getting back there.
Speaker 1: If anything, you know, greater workforce flexibility, some of these
Speaker 1: policies that the buying administration is looking at should help
Speaker 1: the lift labor supply. So there is no doubt constraints
Speaker 1: in the near term on labor supply. But if we
Speaker 1: look for by a year, two years, um, I think
Speaker 1: that we should anticipate that we can get back to
Speaker 1: that pre COVID labor market. Some people have made the
Speaker 1: argument that holding back labor supply. Want factor behind that
Speaker 1: has been the additional unemployment insurance. You ke THEOGUMAN you
Speaker 1: find limited evidence that enhanced unemployment insurance benefits were exerting
Speaker 1: a material drag on aggregate employment. What did you look at,
Speaker 1: Matt sure, So I know there's been a lot of
Speaker 1: look at the work done on this, and what we've
Speaker 1: looked at is try to look across states, try to
Speaker 1: look across sectors, and are you seeing labor markets either
Speaker 1: in low wage states that look like they are are
Speaker 1: more constrained because they should be more impacted by enhanced
Speaker 1: unemployment benefits? Are you seeing low wage sectors that are
Speaker 1: also being more constrained and you really don't find that. So,
Speaker 1: for example, leisure and hospitality, we looked at the vacancy
Speaker 1: yield and this is the rate at which they're you're
Speaker 1: turning job openings into hires. The vacancy yield and leisure
Speaker 1: on hospitality, which is a low wage sector, is actually
Speaker 1: well above a lot of high wage sectors. Similarly, if
Speaker 1: you look at across states, it's actually the low wage
Speaker 1: states that are really outperforming here, it's it's the high
Speaker 1: wage states that still have a lot of slack or
Speaker 1: or a well blow pre code levels. So in our mind,
Speaker 1: you know, unemployment trans benefits you no doubt, I would
Speaker 1: not deny that it is probably a factor for some,
Speaker 1: But if you look at the big macro stories, in
Speaker 1: my mind, it's COVID and it's really not unemployment insurance benefits.
Speaker 1: It's the return to school part of the COVID story.
Speaker 1: So two things happen in September. The additional u I
Speaker 1: expires and the schools reopened hopefully and everyone gets to
Speaker 1: go back to school. Match you think that could be
Speaker 1: the dominant factor. Hit Absolutely. I think you have the
Speaker 1: direct effect of that in reopening, which is just getting
Speaker 1: greater education employment. But on the other hand, it opens
Speaker 1: up labor supply to an extent that we haven't seen
Speaker 1: as of yet. So I think in the debates that
Speaker 1: we have with clients on this, uh, there's a very
Speaker 1: forceful debate on on both sides. But but we all
Speaker 1: kind of end up in a place where once we
Speaker 1: get to the fall, as vaccinations have picked up, as
Speaker 1: schools reopened, as unemployment insurance benage bits roll off, all
Speaker 1: of those things should really lead to a lift and
Speaker 1: labor suppli as we get to towards the ball. Yet
Speaker 1: we haven't seen as much progress in the labor market
Speaker 1: as many people had expected. And yes, we have to wait,
Speaker 1: but at what point, well you rethink your your goals
Speaker 1: in terms of getting the unemployment rate back down to
Speaker 1: where it was and frankly getting the participation rate higher.
Speaker 1: I mean, what is concerning you and keeping you up
Speaker 1: at night with respect to this, Yeah, I think the
Speaker 1: lack of response from labor force participation has has certainly
Speaker 1: been one of them. Um. You know, the trend that
Speaker 1: we've seen in employment gains has been weaker than than
Speaker 1: we anticipated. There's an interesting um if you look at
Speaker 1: the non seasonally adjusted data, we've been printing about one
Speaker 1: million jobs per month on average over over the past
Speaker 1: four months, a very steady pace, and Charepal noted this.
Speaker 1: There may just be speed limits on how quickly we
Speaker 1: can rehire people into this economy, and maybe it's one
Speaker 1: million jobs per month on a nonseasonally adjusted basis. UH
Speaker 1: indeed has some great data looking at a really big
Speaker 1: pickup in job postings for HR departments, and so maybe
Speaker 1: this is business is trying to get around this natural
Speaker 1: speed limit. UH. In any event, as if we continue
Speaker 1: to print those types of nonseasonally adjusted jobs, it will
Speaker 1: get a boost over over the next few months. So
Speaker 1: I you know, with a labor demand that we have
Speaker 1: out there, as labor supply does normalize, I anticipate that,
Speaker 1: you know, our our bullish outlook for the labor market
Speaker 1: should be fulfilled as we get towards the end of
Speaker 1: this year, and then as we get into next year.
Speaker 1: A lot of people will talk about the frictions in
Speaker 1: the labor market as leading to a lot of wage increases.
Speaker 1: How persistent. How much has the balance shifted back to
Speaker 1: labor from corporations in terms of demanding higher wages? Yeah, there,
Speaker 1: you know. I think you're seeing different views from different
Speaker 1: wage numbers. So the Atlanta Feds wage metrics have actually
Speaker 1: decelerated in a broadway, and they're tracking individuals over time,
Speaker 1: so they're able to control for a lot of different
Speaker 1: compositional shifts. The average on learnings data will get on Friday,
Speaker 1: it's just skewed by so many compositional issues that they
Speaker 1: don't control for occupation or sectoral shifts. So so it's
Speaker 1: really difficult to read too much into those data. We
Speaker 1: have to wait for the employment cost index to come
Speaker 1: out each quarter. But but what I would say, there
Speaker 1: is no doubt you're seeing wage pressures. I think uh
Speaker 1: in a number of metrics. Now, certainly a lot of
Speaker 1: anecdotes and labor supply is constrained at this point, but
Speaker 1: if I go back to what I said before, I'd
Speaker 1: be very surprised if we go back, you know, if
Speaker 1: we look forward by a year, two years, and we're
Speaker 1: still seeing these same constraints there. I think, on the contrary,
Speaker 1: we should be back towards a pre COVID labor market
Speaker 1: where we are really unleashing significant labor supply. And that
Speaker 1: I that I think keeps price pressures in check, keeps
Speaker 1: wage pressures in check as well. So what is your
Speaker 1: unemployment rate? That is a mental tip point? You know,
Speaker 1: the Deutsche Bank research of folkirts Landau and Hooper worried
Speaker 1: about inflation out three and four years and yet a
Speaker 1: short term view that's very much different than that. Can
Speaker 1: we use a tip point of unemployment rate is a
Speaker 1: signal that we're back to where we're supposed to be. Yeah,
Speaker 1: And I should be clear, you know, we have a
Speaker 1: baseline view that the inflation jumped at this year's transitory
Speaker 1: and I think there's good reasons for that. But you know,
Speaker 1: we completely agree that the risks are very clearly skewed
Speaker 1: to the upside, given substantial fiscal stimulus that we've seen,
Speaker 1: given this regime shift from the FED, it's really unprecedented.
Speaker 1: So I completely agree that the risks are to the upside.
Speaker 1: Specifically to your point, you know, identifying NEHRW pre COVID
Speaker 1: was almost impossible. As I mentioned, Vice Chair Clarida had
Speaker 1: said that neighbor could be as low as three and
Speaker 1: a half percent. In fact, we never really found it.
Speaker 1: He you know, I I would agree with that assessment
Speaker 1: at that point in time, which was we never really
Speaker 1: found it. You know, we tried to do state level
Speaker 1: analysis where could you see a non linear Phillips Pholps
Speaker 1: curve kick in, and the evidence was you really need
Speaker 1: to see the unemployment rate dropped to very low levels,
Speaker 1: you know, low three percents, perhaps one percentage point or
Speaker 1: more below what people thought neighbor was. So my takeaway
Speaker 1: from the pre COVID economy was we did not find neighrew.
Speaker 1: We we could not find, you know, where full employment was.
Speaker 1: And I think the FED that was a big takeaway
Speaker 1: from their policy review that they had, which was you
Speaker 1: really could get broad based gains. The film scrup really
Speaker 1: flattened h and neighbor was probably lower than they always anticipated.
Speaker 1: So let's finish on this. You've just painted this picture
Speaker 1: of a world that we won't see more clearly until
Speaker 1: the end of the year, which is basically the all
Speaker 1: my awesome, your full September October time. Why would the
Speaker 1: Federal Reserve make an announcement on the reduction of asset
Speaker 1: purchases until they've seen that data. Yeah. So I think
Speaker 1: there's there's two things. One, the significant demand that they
Speaker 1: see in the labor market, record, job openings, um, you know,
Speaker 1: all the different survey indicators give them a lot of
Speaker 1: confidence that if supply does become unleashed, the demand is
Speaker 1: there to see substantial further progress in the labor market.
Speaker 1: So I think that's an important data point. The second
Speaker 1: is this risk management. And you know, we agree that
Speaker 1: there is just substantial upside risk to inflation, even though
Speaker 1: I believe in the baseline transitory story. And because there
Speaker 1: is you know, a process here of your tape beginning
Speaker 1: the tapering process, drawing down to the net zero asset purchases,
Speaker 1: raising interest rates. Given the growth outlook, given the labor
Speaker 1: market outlook, it probably does make sense to start that process.
Speaker 1: And again they'll say that it's not tightening, it's just
Speaker 1: pulling back on some of the accommodation that they have.
Speaker 1: So I think by the of the year, given our outlook,
Speaker 1: they should start that process. I think they will start
Speaker 1: that process. Uh. And we have them announcing tapering in December.
Speaker 1: In December, okay, MONTI with the December called Deutsche Bank
Speaker 1: Chief US economists joining us now is Manama John Alliance
Speaker 1: Global Investors, senior US investment strategist. Moment, let's just start here.
Speaker 1: The cyclical trade seen some cracks through the month. The
Speaker 1: bank struggled at one point, the airlines have been struggling
Speaker 1: over the past dirty days too. Do you want to
Speaker 1: stick with it? Yeah? You know generally obviously, we've had
Speaker 1: a phenomenal run in the value trade, and we talked
Speaker 1: about this since November. UM, we've been up. Energy has
Speaker 1: been up, nearly, financials up fifty, industrials up over so
Speaker 1: you know, it's been a it's been a good run.
Speaker 1: And I think certainly people were anticipating investors were anticipating
Speaker 1: some of the recovery that we are now seeing in
Speaker 1: the economy. UM. But as we're standing here today, the
Speaker 1: tenure again under one fifty. When you think about the
Speaker 1: upside downside on the yield profile, UM, if you really
Speaker 1: think you know yields have much more downside to go,
Speaker 1: then perhaps you step back from the value trade. But
Speaker 1: if you think that yields now may start to either
Speaker 1: stabilize or grind higher, given both technical factors and fundamental factors,
Speaker 1: then I think that there is one more leg in
Speaker 1: the value trade to come. Keep in mind as we
Speaker 1: move through this year, as you know, the FED starts
Speaker 1: to taper eventually as the reopening occurs in earnest UH,
Speaker 1: that will support the value trade. But as we head
Speaker 1: into two, we are looking at comps that might get
Speaker 1: a little bit harder for some of the value sectors
Speaker 1: and compact get once again easier for some of these
Speaker 1: growth tech names. Again, so we do think as your progresses,
Speaker 1: the more and more interests or there will be more
Speaker 1: and more interest in some of the tech trade. But
Speaker 1: for now we stick with the value mon American investors
Speaker 1: like to buy America. They want to go on American.
Speaker 1: You say, go law in the un American European stocks.
Speaker 1: These are unfamiliar names a s mL l V m H.
Speaker 1: We know that's not unfamiliar. Unfortunately, s AP Lindian Totel,
Speaker 1: the French oil company. Should we be buying European big caps?
Speaker 1: You know, we think Europe obviously has leveraged or is
Speaker 1: leveraged towards the value trade. You know, a lot of
Speaker 1: their sectors and industries are long financials, long industrials, and
Speaker 1: a lot of great European industrial companies and long energy,
Speaker 1: so classic value sectors in Europe right now, combined with
Speaker 1: a European economy that's also catching up in terms of
Speaker 1: vaccine rollout in terms of economic recovery. That being said,
Speaker 1: when you look at some of the index performance already
Speaker 1: year to date, a lot of European industries are in line,
Speaker 1: if not outperforming the SMP five hundreds, So some of
Speaker 1: that catch up trade has been had. But that being said,
Speaker 1: we do think that as this global recovery is unfolding,
Speaker 1: investors need to think more global in their portfolios as well.
Speaker 1: You know, earlier this year there as a period of
Speaker 1: what we call us exceptionalism. The US really came out strong,
Speaker 1: uh in the March time frame with their vaccine rollout.
Speaker 1: Economic recovery started in earnest during that time period. But
Speaker 1: now we are starting to see this unfold globally. Of course,
Speaker 1: we're watching the variances as you guys noted noted earlier
Speaker 1: as well. Um, but through the summer months, we do
Speaker 1: expect some stability, and not only the European economies, but
Speaker 1: some of those e M economies that really were lagging,
Speaker 1: you know, think areas like India, like Brazil that are
Speaker 1: now starting to show signs of stability. Their markets are
Speaker 1: playing catch up as well. And if we resume a
Speaker 1: softening dollar, friend, we do think that over time that
Speaker 1: supports some of the real egards beyond just Europe, parts
Speaker 1: of those em as well. There was a lot in there.
Speaker 1: Let's unpack one point. You said that that you are
Speaker 1: watching the delta variant and how that is spreading. How
Speaker 1: does that play into your thesis? How much and how
Speaker 1: closely are you watching that to determine when you perhaps
Speaker 1: should shift gears. Yeah, you know, it does really seem
Speaker 1: to be a race betweenvaccines and variants, and I think
Speaker 1: here in the US we've done a really good job.
Speaker 1: I mean, the vaccine roll out perhaps won't hit the
Speaker 1: seventy percent target by July four that President Biden had outlined,
Speaker 1: but we're getting pretty close, and so in many states
Speaker 1: we are now at seventy or higher. We think that's
Speaker 1: a pretty good situation. To be in UM to fight
Speaker 1: or offset some of the growth and the variants. Aside
Speaker 1: from the variance, the other thing that we're watching closely
Speaker 1: is the seasonality of this uh you know this UM covid.
Speaker 1: I guess, uh, you know the COVID itself. And so
Speaker 1: you know, when you think about it as a September
Speaker 1: October months roll around, UM, that really could be when
Speaker 1: we see a surgeon cases once more. And so we
Speaker 1: are you know, looking at the summer months in line
Speaker 1: with last year's summer months where we're seeing a plateau
Speaker 1: in cases. But keep in mind seasonality is a big
Speaker 1: factor here, as are the variants. These are tail risks
Speaker 1: in our case, in our view, not really a base
Speaker 1: case scenario. Mona always gonna see it. Thank you, Globe
Speaker 1: invest the senior US investment strategist. Right now, this is
Speaker 1: really a joy. We don't do enough on the soft
Speaker 1: We talked to Dennis Gartman about red weed, but we
Speaker 1: really just don't do enough on the softs soft. She
Speaker 1: is expert on the soft commodities. ConA Hey, because E. D.
Speaker 1: N f Man, head of research with just a terrific
Speaker 1: distinguished career in these trends, I want you to discuss
Speaker 1: ConA first, the linkage of your world to Brazil. Why
Speaker 1: is Brazil so important in getting on board a soft
Speaker 1: commodity trend? Yeah, it's super important. Brazil is the biggest
Speaker 1: exporter for coffee, for sugar, It's a huge exporter of cotton, um,
Speaker 1: you name it. It's massive. So everything that goes on
Speaker 1: in Brasil, whether it's the currency or whether it's the weather,
Speaker 1: will have a direct impact on sugar, coffee in Cordon, Yeah,
Speaker 1: it's and corn and soybeans. These are massive, massive. My
Speaker 1: my take on your world is you've got to get
Speaker 1: on a trend and stay on the trend as well.
Speaker 1: What's the most identifiable trend right now in soft commodities?
Speaker 1: It gives comfort to be either long or short. It's
Speaker 1: very similar to what we're seeing in the general commodity space.
Speaker 1: So obviously the inflation trade, the fact that we've had
Speaker 1: a post commodity inflation, rising inflationary expectations has led to
Speaker 1: a boom in commodities. Now. Whether we're a supercycle or not,
Speaker 1: that's still debatable, but for sure we are seeing money
Speaker 1: flowing into commodities, and the soft commodity sector has definitely
Speaker 1: been a beneficiary to that. So we have seen speculative
Speaker 1: and investor buying across coffee sugar, and it helps that
Speaker 1: the forward curves are in backwardation, so you know, that's
Speaker 1: basically suggesting that the markets are slightly tight, and that's
Speaker 1: helped by the fact that Brazil has been very dry
Speaker 1: in the first half of the year and that's really
Speaker 1: caused some concerns for yields. With just fuels concerned, well,
Speaker 1: there's a question about the elasticity of some of the
Speaker 1: soft commodities, a question of how quickly you com plant,
Speaker 1: how quickly you can compensate for the increase in demand
Speaker 1: or the reduction in supply based on the droughts that
Speaker 1: we're seeing not only in Brazil but also across the
Speaker 1: United States. What asset classes, what commodities have the least elasticity,
Speaker 1: are the least capable of being produced quickly to meet
Speaker 1: the demand. So I suppose firsh things like soybean and corns.
Speaker 1: At least you have other countries like the USA and
Speaker 1: Argentina that can competit. So if Brazil has a disaster crop,
Speaker 1: you can look to the USA. But right now we
Speaker 1: have seen some issues, you know, it's very drying parts
Speaker 1: of the US UM. The weather is turning a little
Speaker 1: bit better, so corn and soybeans. The rally those in
Speaker 1: those commodities have come off a little bit um, so
Speaker 1: we wait to see. The nice thing about the way
Speaker 1: these commodities work is that just when Brazil is exporting,
Speaker 1: that's when um you know, and then when they finished
Speaker 1: export season, that's when the U S starts expertting. So
Speaker 1: you have a nice little supply UM chain across the
Speaker 1: calendar year. With when it comes to coffee and sugar,
Speaker 1: you're looking at more sort of the beginning the middle
Speaker 1: of the year when you start seeing harvests. So then
Speaker 1: and there really isn't a lot of substitute areas to
Speaker 1: provide that kind of huge replacements, So we are more
Speaker 1: concentrated in in the soft as such. But I mean,
Speaker 1: if I wanted to talk about the demands at elasticity,
Speaker 1: I mean we're talking different things now. So for coffee,
Speaker 1: for example, the pandemic meant that lockdown cafes were closed
Speaker 1: across um the world if you like, and people had
Speaker 1: to drink coffee at home. And now there's a real
Speaker 1: hope that as lockdowns are risk lifted, people can go
Speaker 1: back to outdoor coffee consumption. That should provide a nice
Speaker 1: little boost there, all right, Well, maybe some people drink
Speaker 1: more coffee when they go out, other people like myself
Speaker 1: during plenty when I'm at home as well. There is
Speaker 1: a question just more broadly in the entire commodities complex.
Speaker 1: We've been talking about peak reflation, whether we have reached
Speaker 1: peak every thing, and whether that's being reflected and some
Speaker 1: of the commodity prices easing off where they were earlier
Speaker 1: in the year. Do you see that consistently around the
Speaker 1: commodities that are most sensitive to global growth? Um, So,
Speaker 1: the agricultural site, I suppose it is less sensitive to
Speaker 1: economic birth per se. If anything, you'd say that emerging
Speaker 1: markets more of the income is spent on staple food commodities,
Speaker 1: So it's more about the you know, as the countries
Speaker 1: they move out of the COVID, their demand for basic
Speaker 1: romatils is going to be very, very strong, and that
Speaker 1: is definitely happening. Um you know, we have we are
Speaker 1: seeing food inflation, and if governments start taking wind of
Speaker 1: that and they start worrying about food rights the likes
Speaker 1: we saw in two thousand eight, they might want to
Speaker 1: start important to start building the strategics reserves to ensure
Speaker 1: that they don't have domestic food inflation. So I think,
Speaker 1: you know, are we at the peak? I would say
Speaker 1: we're in the middle with I mean, certainly for some commodities, UM,
Speaker 1: harvests are coming up that should provide something life pressure.
Speaker 1: But generally speaking, I think because interest rates are still
Speaker 1: so low, and the rate hikes by the Fed promised
Speaker 1: now are now still two years away, people need to
Speaker 1: put their money in. And I think commodities right now
Speaker 1: still feel like a good bet. Connor has switched to oil,
Speaker 1: and of course you followed out at Macquarie for years.
Speaker 1: I don't want you to single point oil out to
Speaker 1: a hundred dollars, But do you see an identifiable trend
Speaker 1: in Brent crude that launches out to eight And then
Speaker 1: I think, Um, the fact that oil has done so
Speaker 1: much better than even I thought, you know, just a
Speaker 1: few months ago, suggest that the demand we really maybe
Speaker 1: underestimate the demand. So as more and more countries come
Speaker 1: out of lockdown, I think that demand can really spike higher. Um.
Speaker 1: Maybe in the US we've slowed the demand. Birth from
Speaker 1: here is going to be slightly slower. We probably need
Speaker 1: aviation to take off for the next leg higher um.
Speaker 1: But at the same time we do know that OPEC
Speaker 1: is now, you know, bringing supply on the plan, and
Speaker 1: I think, how if they if they go over bottom,
Speaker 1: it is most risk of cheating. And then I think
Speaker 1: he could stop seeing a little bit of a slow
Speaker 1: down in the old price cuad Conor John from Milan
Speaker 1: emails in and he says he's probably gonna lose money
Speaker 1: on Germany England today. What's your single best idea here
Speaker 1: for people that lose a pot this afternoon on that
Speaker 1: big soccer game. I mean, if you look the way
Speaker 1: France's art porshugoes out, I mean, if that's the same trend,
Speaker 1: then maybe Jermy's gonna go. I don't know, but England
Speaker 1: has a good chance kind of. I love that. That's
Speaker 1: the best dance we've had all day. That's great. I'll
Speaker 1: expect it kind of thanne I think, because what I
Speaker 1: heard that head of race, she'd be bound the bottom
Speaker 1: in France this morning, wouldn't you tell them? I guess so.
Speaker 1: And it's just terrible. This is what surveillance is about.
Speaker 1: We talked to one analyst and go right to another
Speaker 1: analyst where we can link them together. Ira Jersey on yielding,
Speaker 1: now David George on the outcome for the equity market,
Speaker 1: and of course the banks as expertise at Robert war
Speaker 1: David George. If we get in Ira Jersey tenure yield
Speaker 1: two point two two points, what does that do to
Speaker 1: bank equities? Um, If we get that, Tom, good morning,
Speaker 1: I think that it's fair to expect a you know,
Speaker 1: if you're gonna pin me down to a number ten
Speaker 1: upside for banks Fox if that's the outcome out of it.
Speaker 1: In addition to the rate the rate environment itself, that
Speaker 1: obviously reflects a much a much stronger macro backdrop as well,
Speaker 1: so I that undoubtedly would be positive. How do you
Speaker 1: calibrate the umph of this one off in share by
Speaker 1: back and particularly dividend increase with the sustained dividend growth?
Speaker 1: What kind of model do you have for these big
Speaker 1: banks is they try to figure out the sustained dividend
Speaker 1: that they will give shareholders well over over time. We're
Speaker 1: we're of the view that most of the big banks,
Speaker 1: and I say this as a positive, are going to
Speaker 1: be very utility like with respect to how they distribute capital.
Speaker 1: I would expect over the longer term, the three five
Speaker 1: seven year time arizon, you're going to see close to
Speaker 1: capita return to shareholders, both in the form of of
Speaker 1: buy back in dividend. And obviously the buy back discussion
Speaker 1: can be variable depending upon uh movements in the economy,
Speaker 1: stock price movements, etcetera. But but I think that the
Speaker 1: punchline is that there's going to be very significant kapita
Speaker 1: return out of the financial services industry over the next
Speaker 1: several years. David Mike Mayo of Wells Fargo came on
Speaker 1: the program last week and said that right now, with
Speaker 1: all in payouts, the yield on these financial stocks are
Speaker 1: probably equate to something like eight or potentially even nine
Speaker 1: percent one how much can people buy these shares for
Speaker 1: simply the payouts versus the dynamism from a steeper yield curve,
Speaker 1: from greater consumer lending activity, things that perhaps we're not
Speaker 1: really seeing as much. Um. I think part of the
Speaker 1: investment cases is clearly capital return. But but I think
Speaker 1: buying banks on that alone is probably a somewhat of
Speaker 1: a frail thesis. I think in order to be very
Speaker 1: bullish from these prices and again to to kind of
Speaker 1: give you some perspective banks or out of over over
Speaker 1: the last twelve months, they're up over t on a
Speaker 1: year to day basis, So clearly they're significant expectations priced
Speaker 1: into them today. So so I think that the challenges
Speaker 1: from here. UM. Capital returned from my perspective is very positive,
Speaker 1: but it's not enough to make a very bullish call
Speaker 1: for financials from these levels. I think for for for
Speaker 1: the group to do well, you need higher rates, you
Speaker 1: need more loan growth, you need to continue to strengthen
Speaker 1: the capital markets. And and again, as you said, UM,
Speaker 1: that that kind of remains to be seen at this point. Okay,
Speaker 1: let's put the rates picture aside, since that's a less
Speaker 1: determined frankly is anyone's guests. There is a question about
Speaker 1: loan growth. And Alison Williams of Bluebrig Intelligence and I
Speaker 1: were talking yesterday and she said, really, the untold story
Speaker 1: over the past month was from these big executives saying
Speaker 1: that actually consumer loan growth is sluggish, that JP Morgan
Speaker 1: City Group is actually seeing disappointments in that area, particularly
Speaker 1: with respect to credit cards. How much have you noticed that?
Speaker 1: How concerning is that too? Um, it's not, it's not concerning,
Speaker 1: but it's absolutely a factor. Allison is right on um
Speaker 1: as usual and this last basically, in simplest terms, the
Speaker 1: government stimulus has crowded out loan growth. That's basically from
Speaker 1: my perspective, really what's happening here that the amount of
Speaker 1: stimulus has been so significant that it is really um
Speaker 1: eliminated the need for many entities and consumers frankly, to
Speaker 1: to really binge on borrowing. Now. I think that will
Speaker 1: change over the next couple of years, but over the
Speaker 1: short term it shouldn't be a significant surprise because it's
Speaker 1: it's very much in bank deposits. If you look at
Speaker 1: deposit growth for the banks, it's it's been well, well
Speaker 1: in excess of loan growth for the last several months.
Speaker 1: So in order for us to see loan growth improve,
Speaker 1: we would probably need to see deposits start to come down,
Speaker 1: and that frankly, hasn't happened yet. Will it happen with
Speaker 1: these announcement of capital deployment. If they're gonna buy back shares,
Speaker 1: they're gonna use cash to do that, they by definition
Speaker 1: become smaller entities. You leverage out what they've got left
Speaker 1: there onto their balance sheet, and with that, do they
Speaker 1: preclude growth? Do they limit their growth? Um? No, No,
Speaker 1: they don't. If if loan growth does not manifest itself
Speaker 1: in a meaningful way. Ironically, most of these companies will
Speaker 1: generate capital faster um because they're not growing their balance
Speaker 1: sheets because of that lack of loan demand. So I
Speaker 1: don't think that any um pick up in sheer bodyback
Speaker 1: activity Tom has any implications for loan growth. David Love
Speaker 1: catching up. It's gonna hear from you, David joyge that
Speaker 1: Robert W. Bad sena research analyst. This is the Bloomberg
Speaker 1: Surveillance Podcast. Thanks for listening. Join us live weekdays from
Speaker 1: seven to ten am Eastern on Bloomberg Radio and on
Speaker 1: Bloomberg Television each day from six to nine am for
Speaker 1: insight from the best in economics, finance, investment, and international relations.
Speaker 1: And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,
Speaker 1: Bloomberg dot com, and of course on the terminal. I'm
Speaker 1: Tom Keene and this is Bloomberg