WEBVTT - Banks Are Facing a 'Toxic Cocktail,' Kass Says 0:00:00.240 --> 0:00:04.040 Runch you by Bank of America Mary Lynch with virtual reality, 0:00:04.320 --> 0:00:09.719 virtually everything will change. Discover opportunities in a transforming world 0:00:10.160 --> 0:00:14.440 VI of a mL dot Com slash VR, Mary Lynch, 0:00:14.520 --> 0:00:28.120 Pierced Fenner and Smith Incorporated. Ye, Welcome to the Bloomberg 0:00:28.160 --> 0:00:32.360 Surveillance Podcast. I'm Tom Keene with David Gura. Daily we 0:00:32.440 --> 0:00:36.080 bring you insight from the best of economics, finance, investment, 0:00:36.120 --> 0:00:42.200 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:42.280 --> 0:00:49.960 Bloomberg dot Com, and of course, on the Bloomberg To 0:00:50.080 --> 0:00:51.760 begin this morning with Peter Hooper. He is the chief 0:00:51.760 --> 0:00:53.680 economist at Deutsche Bank and he's with us here in 0:00:53.680 --> 0:00:57.040 our Bloomberg eleven three oh studios. Let's travel to uh 0:00:57.360 --> 0:00:59.560 western Portugal if we could hear to begin Peter into 0:00:59.560 --> 0:01:02.360 the goings on there. Over these last couple of days 0:01:02.840 --> 0:01:05.080 we watched with interest is Marito Droggy spoke about the 0:01:05.440 --> 0:01:08.440 employment picture in Europe, about the inflation picture as well, 0:01:08.480 --> 0:01:10.479 and saw him and the ECP try to walk back 0:01:10.520 --> 0:01:11.800 some of what he said. A great lead on a 0:01:11.800 --> 0:01:14.360 Bloomberg news piece this morning. This is what it sounds 0:01:14.400 --> 0:01:17.039 like when doves screech. What happened what do we learn 0:01:17.080 --> 0:01:19.160 about the way that central bankers communicate here over these 0:01:19.200 --> 0:01:22.520 last couple of days. Well, central bankers obviously have big 0:01:22.560 --> 0:01:25.400 impacts on the market. And uh, Mr Droggy had to 0:01:26.000 --> 0:01:29.600 correct perceptions a little bit yesterday, people getting a little 0:01:29.920 --> 0:01:32.520 interpreting him as being a little bit more hawkish than 0:01:32.640 --> 0:01:35.040 I think he wanted to be. Uh he said, Uh, no, 0:01:35.160 --> 0:01:37.639 we're going to take our time and moving towards balance 0:01:37.680 --> 0:01:43.080 sheet normalization this sort of thing. Um. But uh, certainly, certainly, 0:01:43.480 --> 0:01:46.920 I think that the sense that my my colleague George 0:01:46.920 --> 0:01:51.400 Surveyalis has come up with something very unusual. I mean, 0:01:51.400 --> 0:01:55.600 central banks don't normally coordinate on policy. I mean, if 0:01:55.640 --> 0:02:00.280 if at most you have some some moving in contain 0:02:00.320 --> 0:02:04.080 because the data are moving together across countries. Uh, and 0:02:04.080 --> 0:02:05.960 and they happen to be moving in the same direction. 0:02:06.040 --> 0:02:10.720 But but the the sense that Mr Droggy, I guess 0:02:11.440 --> 0:02:16.720 introduced the word coordination in his text. Uh. We wonder 0:02:16.720 --> 0:02:19.079 if we're gonna get a little pushback on that as well, 0:02:19.160 --> 0:02:22.200 now from him or for from some of his colleagues. 0:02:22.200 --> 0:02:25.680 But it's an interesting possibility. I think. Certainly, certainly the 0:02:25.760 --> 0:02:29.680 data have been have been suggesting there's room for that 0:02:29.960 --> 0:02:32.400 two sets of headlines coming out now as we interrupt, 0:02:32.639 --> 0:02:36.160 Dr Hooper of Deutsche Bank. This in the corporate world. David, 0:02:36.200 --> 0:02:37.720 I don't know if you've got these up on your screes. 0:02:37.760 --> 0:02:39.960 David has is faster, But what is that? Why does 0:02:40.040 --> 0:02:44.080 David Gurry have a better A few dollars? You know, 0:02:44.560 --> 0:02:47.960 my computer is like the original one Mike made years ago. 0:02:48.120 --> 0:02:51.360 Sky TV, is this gonna happen? Sky shares a race 0:02:51.520 --> 0:02:56.919 gains united inclination? Yes, the UK government inclined to refer 0:02:57.040 --> 0:02:59.880 the Fox Sky bid to to regulator. We were ex 0:03:00.000 --> 0:03:01.880 acting some word on that this morning. Indeed we did 0:03:01.880 --> 0:03:03.720 get that, and then uh, some news here about right 0:03:03.720 --> 0:03:05.920 eight and Walgreen's boots as well. They're mutually agring to 0:03:06.000 --> 0:03:09.360 terminate their merger. This has been something that's been undulating 0:03:09.400 --> 0:03:13.200 churning here for for many months. Five billion dollars. Absolutely, 0:03:13.840 --> 0:03:16.760 they're gonna do. Walgreens rather is going to authorize at 0:03:16.880 --> 0:03:21.959 five billion dollars share buyback program out of this, Walgreens 0:03:22.000 --> 0:03:24.160 will pay This is a kind of fee Peter Hooper 0:03:24.160 --> 0:03:30.760 would pay someone five million dollar termination fee. Wow. Yeah, 0:03:30.800 --> 0:03:33.480 Walgreen's at Walgreen's buying stories and assets and right aight 0:03:33.560 --> 0:03:36.040 for five point one eight billion dollars in cash. A 0:03:36.080 --> 0:03:39.040 couple stories will be following throughout the morning Berg surveillance. 0:03:39.520 --> 0:03:42.200 We won't make a Dr Hooper comment on why why 0:03:42.240 --> 0:03:46.680 don't you continue here with the David? It's almost schizophrenic? 0:03:46.760 --> 0:03:51.680 Is that the right world? You know? The action of bankers? Yeah? Exactly. 0:03:52.480 --> 0:03:54.720 Let me ask you here sort of what we heard 0:03:54.920 --> 0:03:57.280 you talking about the the the influence of Mr dr 0:03:57.800 --> 0:04:00.240 speech a couple of days to go back in train. 0:04:00.360 --> 0:04:03.200 He talked about the employment picture, the challenges facing European employment, 0:04:03.200 --> 0:04:05.160 how that dovetails with with inflation. What did you make 0:04:05.200 --> 0:04:06.880 of what he had to say there? In other words, 0:04:06.920 --> 0:04:09.040 there seemed to be some positive indications about sentiment in 0:04:09.040 --> 0:04:12.760 the Eurozone, positive indications about where the employment picture he's 0:04:12.760 --> 0:04:15.640 had it, but he still seems not satisfying. Well. I 0:04:15.680 --> 0:04:19.800 think the main reason not satisfied is inflation has been 0:04:19.800 --> 0:04:22.320 a little on the soft side, pably, and that's that's 0:04:22.360 --> 0:04:26.640 the key. That is. Ultimately, the ECB is objective, UH, 0:04:26.640 --> 0:04:29.320 and the employment picture of obviously feeds into that, and 0:04:29.440 --> 0:04:32.840 growth is important. UH. Growth has been doing pretty well, 0:04:32.880 --> 0:04:37.640 and the prospects there for for continued advancement and the 0:04:37.680 --> 0:04:39.360 one and a half two percent range over the year 0:04:39.440 --> 0:04:43.200 head seems seems reasonably good and the labor market likely 0:04:43.240 --> 0:04:48.360 picking up with that. UH. I think the interesting point 0:04:48.760 --> 0:04:54.240 is that he's suggesting that the softness and of inflation 0:04:54.360 --> 0:04:56.840 that that normally would keep a central bank like the 0:04:56.880 --> 0:05:01.520 ECB very much at bay is viewed as being transitory, 0:05:01.560 --> 0:05:05.000 which is the same kind of message you're getting out 0:05:05.040 --> 0:05:09.000 of the Fed. UH. And I think these these central 0:05:09.040 --> 0:05:12.359 banks generally are feeling we've been at these uh, you know, 0:05:12.440 --> 0:05:16.320 emergency floor levels for for quite a while. UM. There 0:05:16.400 --> 0:05:19.120 is a little bit of growing concern on this side 0:05:19.120 --> 0:05:23.240 of the Atlantic about financial stability issues may be associated 0:05:23.279 --> 0:05:28.480 with that. So UM, I think, yes, it's a little 0:05:28.520 --> 0:05:30.960 bit of a mixed mixed message out of out of Europe. 0:05:30.960 --> 0:05:35.080 But overall, this is a central bank that we think 0:05:35.279 --> 0:05:39.960 will will be UH tapering further round the end of 0:05:40.000 --> 0:05:44.120 this year and and progressing with with at a much 0:05:44.160 --> 0:05:48.719 slower pace, lagged a long behind the Fed, but is 0:05:48.760 --> 0:05:50.599 moving in that direction. Let me ask you about that 0:05:50.640 --> 0:05:54.320 descriptor transitory. Something that we heard from Cherry Yelling after 0:05:54.360 --> 0:05:56.560 her after that rate decision during her press conference, she 0:05:56.600 --> 0:05:58.280 said it many times are we certainly in the statement 0:05:58.640 --> 0:06:00.560 as well, do you agree with her on that point? 0:06:00.640 --> 0:06:02.040 Is it? How hard is it for her to defend 0:06:02.040 --> 0:06:04.600 the transitory nature of the inflationary headlines we're seeing here 0:06:04.600 --> 0:06:09.200 in the US? Well, UM so so the recent surprises 0:06:09.800 --> 0:06:12.919 of inflation, what what what's been driving that? UM? In 0:06:13.040 --> 0:06:16.560 March we had this this huge drop in in cell 0:06:16.600 --> 0:06:22.040 phone services service charges UH with with the BLS, UH, 0:06:22.080 --> 0:06:24.160 I think probably struggling a little bit to catch up 0:06:24.160 --> 0:06:27.039 on on some quality changes there and and maybe there 0:06:27.120 --> 0:06:32.320 was an unusually large observation. Since then, we've we've we've 0:06:32.320 --> 0:06:38.080 seen certainly in the CPI significant decline and in UM 0:06:38.480 --> 0:06:42.479 doctor's fees for example, medical health healthcare inflation has come 0:06:42.520 --> 0:06:45.919 down after after rising pretty pretty strongly. So you have 0:06:46.040 --> 0:06:48.880 this sort of a natural correction to slow down from 0:06:49.040 --> 0:06:53.040 from a very large increase previously. And that's I don't 0:06:53.200 --> 0:06:58.839 see UH pressures on healthcare inflation diminishing with the baby 0:06:58.880 --> 0:07:02.520 boom generation continue at age. I think that overall is 0:07:02.560 --> 0:07:07.720 gonna be so so uptrend. There other areas, uh, we 0:07:07.920 --> 0:07:10.600 we we had we had a drop in in apparel inflation, 0:07:10.640 --> 0:07:13.360 good inflation, and surprised a little bit to the downside. 0:07:13.360 --> 0:07:17.520 Apparel inflation had again risen well above where the producer 0:07:17.520 --> 0:07:20.960 prices had had been running. There they're catching up now, uh. 0:07:21.000 --> 0:07:23.240 And then and finally a little bit of a slowdown 0:07:23.320 --> 0:07:30.040 in in um rental inflation. Uh. Housing housing inflation, if 0:07:30.080 --> 0:07:32.960 you will. That is not a friend that we expect 0:07:32.960 --> 0:07:35.600 to continue either, because vacancy rates are low. So all 0:07:35.600 --> 0:07:38.680 of these factors, say transitory. Peter Hooper, thank you so much, 0:07:38.760 --> 0:07:40.520 very generous of your time, and again thank you to 0:07:40.520 --> 0:07:44.880 your colleague George Serveills for joining us in London earlier 0:07:44.960 --> 0:08:00.640 this morning. Dr Hooper is with Deutsche Bank joining us out. 0:08:00.680 --> 0:08:03.760 Doug cast Doug, I'm in therapy. It's no other way 0:08:03.800 --> 0:08:07.000 to put it. It's fun to watch the Yankees. If 0:08:07.040 --> 0:08:10.000 you had more fun watching your dreaded New York Yankees 0:08:10.040 --> 0:08:14.800 and years the greatest, the most fun I think I've 0:08:14.800 --> 0:08:17.800 had probably in ten years, you know. And and you 0:08:17.840 --> 0:08:20.960 saw it developing. You saw a bunch of young players 0:08:21.000 --> 0:08:26.480 being developed. And even Jim Palmer in our disc in 0:08:26.520 --> 0:08:29.400 our interview on surveillance a couple of months ago, was 0:08:29.440 --> 0:08:33.280 bullish on the Yankees and parish on the Orioles. Within 0:08:33.440 --> 0:08:36.400 this last night was exciting and yeah, I sent you 0:08:36.440 --> 0:08:38.840 an email. You noticed the standings as we have this 0:08:38.920 --> 0:08:43.240 interview winning percentage points FY three New York, always providing 0:08:43.240 --> 0:08:47.679 good notes to us. Why you keep your finger over 0:08:47.720 --> 0:08:50.120 the red button that would be the exit cast button 0:08:50.400 --> 0:08:53.240 anyway source for a global audience. This is exciting. And 0:08:53.559 --> 0:08:56.320 just one more comment on the baseball thing, Doug I 0:08:56.360 --> 0:08:58.760 said last year the Doug cast seats right by Joe 0:08:58.800 --> 0:09:01.400 Girardi to the left of the dugout, and there was 0:09:01.440 --> 0:09:04.720 this big lummox out on the on deck circle. And 0:09:04.760 --> 0:09:09.120 you have guys seen this. Rookie baseball players need time 0:09:10.000 --> 0:09:14.199 to lose the panic of OMG, I'm here and that's 0:09:14.240 --> 0:09:15.880 what we saw. Were there and judge for this year 0:09:15.920 --> 0:09:18.800 to last year, from last year to this year. And 0:09:18.840 --> 0:09:21.680 now you got this whole youth, this this kittie corps 0:09:22.160 --> 0:09:27.640 coming up. It's amazing and our judge, it's a remarkable. 0:09:28.679 --> 0:09:31.360 You've been wrong, Doug. The bull market continues. When does 0:09:31.360 --> 0:09:34.160 this at last Friday? All the gloom and you're not 0:09:34.360 --> 0:09:40.360 writing gloom crew emails? Describe the nuance of your caution 0:09:40.600 --> 0:09:44.320 on this bull market versus the usual doom and gloom 0:09:44.400 --> 0:09:48.720 stuff we all read well I think, I you know, 0:09:48.760 --> 0:09:52.360 the issue to me is not how high the SMP 0:09:52.600 --> 0:09:55.760 is this morning. The issue to me is how long 0:09:56.160 --> 0:09:59.240 the markets will stay this high? And I think to 0:09:59.360 --> 0:10:03.080 understand what's happened, what's happening today, we have to understand 0:10:03.080 --> 0:10:06.640 what's happened in history. And the fact is that very 0:10:06.640 --> 0:10:11.400 few active managers were able to deliver alpha over the 0:10:11.480 --> 0:10:13.640 last decade or so, and you saw it. They were 0:10:13.640 --> 0:10:17.880 not protected in the large drawdown in two thousand seven nine, 0:10:17.920 --> 0:10:22.040 for example. And the public looks at these outcomes and says, 0:10:22.320 --> 0:10:24.559 why they Actually, I pay higher fees to managers who 0:10:24.600 --> 0:10:29.720 can outperform or can identify specular blowoff or an imminent 0:10:30.640 --> 0:10:34.480 draw down of major magnitude. Let me just stay fully invested. 0:10:34.559 --> 0:10:36.040 Them might as well be in an e T F 0:10:36.200 --> 0:10:39.400 or an index fund. So since two thousand and seven 0:10:39.440 --> 0:10:45.040 the Great Recession, basically passive activities and indexing has risen 0:10:45.080 --> 0:10:50.400 from about eight percent to almost and um as you 0:10:50.400 --> 0:10:53.600 shift assets from active managers to passive managers, they buy 0:10:53.600 --> 0:10:57.040 an index. Since the index is capital weighted, it means 0:10:57.080 --> 0:10:59.680 more and more money is going into fewer and fewer stocks. 0:11:00.040 --> 0:11:02.120 And we've seen this before, and so have you. Guys. 0:11:02.559 --> 0:11:04.800 We saw it when I enter when I graduated business 0:11:04.800 --> 0:11:08.040 school in the early seventies. With the nifty fifty stocks, 0:11:08.720 --> 0:11:12.320 you outperformed only if you continued to go into them. 0:11:12.360 --> 0:11:15.000 If you were a growth stock manager in the late 0:11:15.080 --> 0:11:18.360 ninety nineties, you were. If you weren't buying the net 0:11:18.440 --> 0:11:21.880 stocks you under perform, you were fired. More and more 0:11:22.040 --> 0:11:26.240 money went into fewer and fewer stocks. NAZDAC ultimately declined 0:11:26.280 --> 0:11:29.480 by so you have a similar case today with the 0:11:29.520 --> 0:11:32.320 fang stocks. More money, more and more money is being 0:11:32.679 --> 0:11:36.160 deployed into a narrow and narrow area. In each case, 0:11:36.240 --> 0:11:39.080 this trend doesn't end. Well, let me ask you about 0:11:39.160 --> 0:11:41.520 the deal that we saw scuttle this morning between Walgreens 0:11:41.559 --> 0:11:44.200 and Right. What's your takeaway from what happened there? Does 0:11:44.200 --> 0:11:46.080 it does it sif the insight in teach for you 0:11:46.120 --> 0:11:50.079 into the regulatory landscape? Does it taste just specifically about 0:11:50.080 --> 0:11:52.960 the sense of this deal in and of itself. What's 0:11:52.960 --> 0:11:55.079 your take on what we saw this morning? Well, I 0:11:55.080 --> 0:11:59.359 would say not with regard into that deal David individually, 0:11:59.440 --> 0:12:04.199 but I do think that the political and regulatory landscape 0:12:04.920 --> 0:12:10.040 UM is moving unfriendly towards the market leaders. The fangs 0:12:11.080 --> 0:12:14.000 owing to obviously a market dominance, and you look at 0:12:14.000 --> 0:12:18.720 saying Amazon. The question is to me, and I've written 0:12:18.760 --> 0:12:21.600 on the street about this over the last month since 0:12:21.640 --> 0:12:24.920 the whole Whole Foods view was announced. The question to me, 0:12:25.280 --> 0:12:30.760 is Amazon a company that's providing lower product prices to 0:12:30.840 --> 0:12:35.280 the consumers or it is or is it creating jobs 0:12:35.640 --> 0:12:38.199 and the destroyer of our economy? And I think you're 0:12:38.200 --> 0:12:43.360 gonna hear a lot about going forward. Within all this 0:12:44.200 --> 0:12:47.560 is use of cash, which is a fundamental concept. And 0:12:47.640 --> 0:12:50.600 I might point out to those younger that Mr Kass 0:12:50.640 --> 0:12:54.440 has a little bit of experience and securities analysis. We're 0:12:54.440 --> 0:12:57.400 seeing it with a vengeance of the banks. Can do 0:12:57.400 --> 0:13:01.320 you have the courage to short the banks here? Doug? Actually, 0:13:01.360 --> 0:13:04.240 I just showed it UM this morning in pre market 0:13:04.240 --> 0:13:08.040 trading Bank of America City Bank in JP Morgan's on 0:13:08.120 --> 0:13:10.960 the ramp, and it's probably a trade look. I think 0:13:10.960 --> 0:13:13.720 the I followed the industry since I was a Nati 0:13:13.840 --> 0:13:16.120 rat and wrote a book called Citi Bank with Ralph Nader, 0:13:16.160 --> 0:13:20.640 and while I was finishing my MBA at Wharton. This 0:13:20.800 --> 0:13:25.000 is an industry that UM has de leveraged and has 0:13:25.040 --> 0:13:28.640 a low return on assets and is barely earning its 0:13:28.679 --> 0:13:33.280 cost of capital. Its valuations have risen dramatically, and the 0:13:33.360 --> 0:13:39.040 industry faces three dominant headwinds. Lower credit demand's going forward, 0:13:40.440 --> 0:13:44.320 a flattening yield curve, and low absolute interest rates. And 0:13:44.360 --> 0:13:48.040 this is that this is could potentially be a toxic cocktail. 0:13:48.200 --> 0:13:50.640 While the market is rejoicing this morning, well, I have 0:13:50.720 --> 0:13:53.920 a toxic cocktail with Fortress Moointing Hand. Good morning, Mr Money, 0:13:53.960 --> 0:13:56.599 And I know you're listening. Operating income at B A 0:13:56.720 --> 0:14:01.959 C has gone twenty four heaven and somebody's modeling out 0:14:02.000 --> 0:14:04.720 for next year thirty two billion large. I mean is 0:14:04.720 --> 0:14:07.319 a growth vector. Maybe it's not a diamond growth vector, 0:14:07.559 --> 0:14:09.720 but it's a Moointing hand growth factor. How do you 0:14:09.840 --> 0:14:12.840 short that growth factor in operating a little bit of 0:14:13.080 --> 0:14:15.160 h that's a little bit of data money, because you 0:14:15.200 --> 0:14:17.160 have to go back and see what the disaster was 0:14:17.240 --> 0:14:19.160 the five years prior to that, and you think we're 0:14:19.160 --> 0:14:22.640 going to revisit that disaster. I don't think we're gonna 0:14:22.640 --> 0:14:25.480 revisit I think the stocks are more than fully priced 0:14:25.520 --> 0:14:30.520 relative to their projected returns on equity. When you when 0:14:30.560 --> 0:14:32.720 you let me ask you, we we're talking about regulation 0:14:32.760 --> 0:14:34.480 here just a moment ago. We're gonna talk about stress 0:14:34.480 --> 0:14:37.200 tests a little later on on the program, But what 0:14:37.320 --> 0:14:38.920 is what we've seen here over these last two weeks. 0:14:38.960 --> 0:14:40.800 These two rounds of stress tests tell you about the 0:14:41.080 --> 0:14:45.760 health financial sector here in the US. The UM financial 0:14:45.800 --> 0:14:52.600 sector is um as relatively strong, especially visa v the 0:14:52.800 --> 0:14:58.040 pre Great Recession crisis and oh seven or nine UM, 0:14:58.080 --> 0:15:01.880 But so is the the industry's earning power. It's much lower. 0:15:02.840 --> 0:15:06.040 Doug Folding here, what share Yellin's doing in central bank? 0:15:06.080 --> 0:15:08.280 You do that it's not just all equity analysis for 0:15:08.440 --> 0:15:11.360 mr cast. We've had a real shift in the last 0:15:11.400 --> 0:15:13.800 two days, and really, for the first time since I 0:15:13.840 --> 0:15:17.280 can remember, it almost looks like a coordinated hope and 0:15:17.360 --> 0:15:22.840 prayer by bankers that inflation or disinflation will migrate into 0:15:22.960 --> 0:15:26.720 some form of greater inflation. Do you agree with the 0:15:26.800 --> 0:15:30.480 coordinated action of banks in their discourse in a rhetoric 0:15:30.800 --> 0:15:34.280 or does that end up being market volatility. I think 0:15:34.320 --> 0:15:37.720 that they're going to coordinate in terms of tightening. And 0:15:37.920 --> 0:15:43.400 what I really don't understand is the markets of bulliance. UM. 0:15:43.520 --> 0:15:48.760 I understand the bulliance following a period of historically large 0:15:48.840 --> 0:15:54.960 monetary large s I don't understand. I don't envision a 0:15:55.080 --> 0:16:00.120 positive response in the fullness of time from Tighten. It 0:16:00.240 --> 0:16:04.400 just doesn't follow. Um, I thought you were getting at 0:16:04.480 --> 0:16:08.360 something quote Yellings quote on Tuesday. Yeah that no more 0:16:08.400 --> 0:16:12.840 financial crisis. Yeah yeah, I mean it's remarkable. It's I 0:16:12.880 --> 0:16:17.200 did a piece entitled some really stupid Things undered by 0:16:17.240 --> 0:16:20.040 some really smart people on the street a day ago, 0:16:20.760 --> 0:16:26.000 and it's kind of a humble reminder David and Tom 0:16:26.080 --> 0:16:29.080 of how dim our visions are. We talk about the 0:16:29.120 --> 0:16:33.880 markets bulliance right now. Um, the fact as many sectors 0:16:33.880 --> 0:16:36.880 have gone down, many shorts have been quite successful in 0:16:36.960 --> 0:16:40.520 two thousand seventeen, and we live because of the domes 0:16:40.640 --> 0:16:44.080 of passive investing in quant strategies in the market without 0:16:44.160 --> 0:16:46.200 memory from day to day. Well, let's come back with 0:16:46.320 --> 0:16:48.680 memory and talk to Doug Cass, the Sebris Partners and 0:16:48.720 --> 0:16:50.640 lots to talk about. I think we should do a 0:16:50.720 --> 0:16:53.480 little more, maybe investing one oh one, which is in 0:16:53.520 --> 0:16:57.480 a log normal world, how not to lose money, which 0:16:57.480 --> 0:17:00.560 it maybe of sport with a sun investor wisdom on 0:17:00.680 --> 0:17:04.000 how not to lose money. Douglas cast Sea Breeze Partners. 0:17:04.040 --> 0:17:06.720 Doug is a guy named Van Tharpe, who wrote a 0:17:06.720 --> 0:17:09.639 really important book and in it a jewel of a 0:17:09.800 --> 0:17:15.040 chapter years ago on what he called position sizing. I 0:17:15.200 --> 0:17:19.320 call it in my lectures the how much idness, which 0:17:19.359 --> 0:17:22.359 is something nobody ever talks about, which is you decide 0:17:22.400 --> 0:17:25.679 to do this long, this short, and the real art 0:17:25.840 --> 0:17:28.920 is how much do you put into the trade? If 0:17:28.960 --> 0:17:32.360 you've been short and you've been in a long bullmarket, 0:17:32.520 --> 0:17:35.480 how do you not get wiped out? How does Doug 0:17:35.600 --> 0:17:39.439 Cass do the how much idness when you commit to 0:17:39.480 --> 0:17:45.600 a trade? Great question? Um One of the things. First 0:17:45.600 --> 0:17:48.720 of all, position size is a function of your time 0:17:48.760 --> 0:17:53.520 frames and also of your risk appetite or risk profile. 0:17:54.080 --> 0:17:58.240 I personally, personally, I am a very conservative short seller. 0:17:59.080 --> 0:18:04.200 Um so I relatively small positions, particularly against my core 0:18:04.800 --> 0:18:08.639 investment long positions as well. I do a lot of 0:18:08.680 --> 0:18:12.359 synthetic puts. I short stocks and buy out of the 0:18:12.400 --> 0:18:16.240 money calls. So what does that do for me? That, basically, 0:18:16.760 --> 0:18:20.840 um um allows me to quantify the risk I have 0:18:21.480 --> 0:18:26.240 not only in each individual short but in my entire portfolio. Essentially, 0:18:26.280 --> 0:18:31.440 I'm paying for the privilege of protecting the short position, 0:18:32.080 --> 0:18:35.040 and that worked out obviously very well for me in 0:18:35.480 --> 0:18:38.760 seven and two thousand seven to two thousand nine, and 0:18:38.840 --> 0:18:43.280 I suspect when the markets finally do break as they 0:18:43.359 --> 0:18:47.240 always have historically, it will work out going forward. Doug, 0:18:47.280 --> 0:18:49.560 how much is the price of oil right now shaping 0:18:49.560 --> 0:18:54.080 your investment outlook? Well, something that no one early is 0:18:54.119 --> 0:18:56.800 talking about. I'm of the view that not only stocks 0:18:56.800 --> 0:19:01.159 are over priced, but so are bonds and UM. I 0:19:01.200 --> 0:19:06.239 believe that the tenure is based upon my calculus is 0:19:07.080 --> 0:19:14.640 projecting a real growth in the domestic product and domestically 0:19:15.359 --> 0:19:19.440 UM and that's too low. UM. And the recent decline 0:19:19.440 --> 0:19:23.400 in the price of oil going as Dennis Gartman our 0:19:23.440 --> 0:19:25.560 friends says, from the top of the left chart to 0:19:25.600 --> 0:19:30.040 the bottom right is historically at least that's what I 0:19:30.119 --> 0:19:31.960 learned to business school and used to work in the 0:19:32.000 --> 0:19:36.760 seventies and eighties and nineties until Quan Trating took strategies 0:19:36.800 --> 0:19:42.320 took over. That's a stimulant to growth. When you when 0:19:42.359 --> 0:19:44.640 when you you mentioned Whole Foods a little while back, 0:19:44.640 --> 0:19:46.440 I want to ask you about that deal, in particular 0:19:46.480 --> 0:19:48.879 what it says about the direction of retail. When that 0:19:48.960 --> 0:19:51.480 news broke, Tom and I were scrambled just to figure 0:19:51.480 --> 0:19:54.320 out what directionally that that means when when Doug has 0:19:54.359 --> 0:19:59.040 breakfast at mar Lago, I forgot about that the avocado omelet. 0:19:59.160 --> 0:20:02.360 You know he wants a blue free Whole Foods avocado. Yeah, 0:20:02.520 --> 0:20:05.600 that's the way it is. You know, I was. I 0:20:05.640 --> 0:20:09.320 actually had dinner when the when the President of China 0:20:09.440 --> 0:20:14.040 was there, you were there? Did you conduct foreign policy 0:20:14.280 --> 0:20:17.119 with everyone else there? For the briefing? I was with 0:20:17.200 --> 0:20:21.480 a high level I do have Republican friends. I was 0:20:21.520 --> 0:20:26.800 with a high level exclusive. But Doug, what does that 0:20:26.840 --> 0:20:30.720 say to you? Doesn't know that direction to retail? What 0:20:31.080 --> 0:20:35.359 is the Whole Foods Amazon deal say to you? Well, 0:20:35.400 --> 0:20:40.199 the disruption continued, but you know I would questioning. I 0:20:40.240 --> 0:20:46.240 would question and suggest we are approaching peak Amazon and 0:20:46.359 --> 0:20:51.840 Pink Fang for the reasons I mentioned UM as well 0:20:51.880 --> 0:20:56.600 as you know the growing political and regulatory risk of 0:20:56.640 --> 0:21:00.240 these companies face. Look at look at the advertising. Could 0:21:00.280 --> 0:21:05.720 for a second, Facebook and Google have approximately of online 0:21:05.760 --> 0:21:11.919 add dollars going to them. UM online advertising accounts for 0:21:12.840 --> 0:21:19.480 roughly of total advertising today, so multiply point eight times, 0:21:19.960 --> 0:21:22.800 and that means they have roughly those two companies have 0:21:23.640 --> 0:21:27.360 total advertising in this in this country, and that's probably 0:21:27.400 --> 0:21:30.000 in the process of speaking. No one's talking about that much. 0:21:31.040 --> 0:21:34.480 Tug one fund a question if if we could, when 0:21:34.520 --> 0:21:36.320 do you cover a short? If we get to down, 0:21:37.400 --> 0:21:39.520 do you change your view? Mean, how do you flip 0:21:39.600 --> 0:21:45.240 to being a bull? Well, I'm not flipping to being 0:21:45.240 --> 0:21:49.760 a bull. Um. You know, I am concerned about increasingly 0:21:49.960 --> 0:21:53.600 about sector risks. I'm concerned about a higher percentage as 0:21:53.600 --> 0:21:56.920 I mentioned of assets and then index funds, and I'm 0:21:56.960 --> 0:22:01.560 worried that both quant strategies and passive and thing which 0:22:01.600 --> 0:22:05.439 has been a stabilizing influence and the tall wind for 0:22:05.480 --> 0:22:10.920 the equity markets will become destabilizing influences because fear ultimately 0:22:10.960 --> 0:22:13.840 will enter the marketplace. We probably don't know what the 0:22:13.920 --> 0:22:16.760 specific catalyst. And all you all you have to do 0:22:16.920 --> 0:22:20.640 is ask two words at that point, to whom are 0:22:20.720 --> 0:22:24.200 index funds and ets going to sell to? They don't 0:22:24.240 --> 0:22:28.520 carry any cash reserves, and active marriages who have diminished 0:22:28.560 --> 0:22:32.080 in size, most of them aren't carrying high level of 0:22:32.240 --> 0:22:36.000 liquidity for fear of business. The last margin the development 0:22:36.000 --> 0:22:39.800 of potentially a perfect storm. Okay, a perfect storm, yes, 0:22:39.840 --> 0:22:43.080 that defines the New York Yankees does thank you so much? 0:22:43.560 --> 0:22:54.760 This is Bloomberg runch you by Bank of America Mary Lynch. 0:22:55.040 --> 0:23:00.200 With virtual reality, virtually everything will change. Discover opportunity is 0:23:00.440 --> 0:23:03.920 in a transforming world. Be of a mL dot Com, 0:23:04.119 --> 0:23:15.159 slash VR, Mary Lynch, Pierced Fenner and Smith Incorporated. We 0:23:15.320 --> 0:23:18.000 love to get in guests when they're wrong, beat them up, 0:23:18.200 --> 0:23:21.200 make them clear that we keep scoring Bloomer surveillance, and 0:23:21.280 --> 0:23:24.520 every once in a while we're afforded the luxury of 0:23:24.560 --> 0:23:27.679 a victory. Let Charles Peabody is one of the deans 0:23:27.760 --> 0:23:32.520 of bank Analysis UH on the street and you need 0:23:32.560 --> 0:23:35.280 a major victory left Charles a year and a half ago. 0:23:35.800 --> 0:23:39.080 Charles Peabody said, not now, but a year and a 0:23:39.119 --> 0:23:42.320 half from now, the casts bigott will turn it. We 0:23:42.480 --> 0:23:45.600 that's what we're observing in the last forty eight hours right, definitely, 0:23:45.720 --> 0:23:48.360 and and and I was even more conservative than most 0:23:48.359 --> 0:23:52.159 street analysts on the c car Copita return requests. So 0:23:52.400 --> 0:23:56.199 um it beat all expectations within this is the durability 0:23:56.280 --> 0:23:59.800 Doug cast was just on with us UH cautious on 0:24:00.160 --> 0:24:04.280 banks for a set of good reasons. You would push 0:24:04.280 --> 0:24:08.360 against that, I believe and say their cash machines are 0:24:08.400 --> 0:24:11.960 they their own internal a t M machine from a 0:24:12.000 --> 0:24:14.600 CAPO perspective, they do have excess capital, and that was 0:24:15.280 --> 0:24:17.800 the state. But on the P and L you have 0:24:17.880 --> 0:24:19.920 to sort of split the regionals and the money center 0:24:19.960 --> 0:24:22.959 banks and the brokers. I think you're gonna see very 0:24:23.000 --> 0:24:25.640 weak second quarter earnings out of the brokers and money 0:24:25.640 --> 0:24:29.200 center banks because the capital markets have not been very robust, 0:24:29.880 --> 0:24:32.520 and that's going to lead to a lot of estimate 0:24:32.520 --> 0:24:35.000 cuts and I think more to come in the second 0:24:35.000 --> 0:24:37.440 half of the year could be importantly here, Mr pebody 0:24:37.560 --> 0:24:40.040 nudging towards the world of Doug Gass, which is a 0:24:40.080 --> 0:24:43.280 scary thing to say. Can Jamie Diamond keep double digit 0:24:43.320 --> 0:24:47.560 dividend growth going five year dividend growth? Is this a 0:24:47.640 --> 0:24:50.720 single digit world for Mr Diamond? I think it is 0:24:50.720 --> 0:24:52.960 a single digit on the dividend for him. He's pushing 0:24:53.040 --> 0:24:55.679 up against that soft cap of a thirty percent payout 0:24:55.760 --> 0:24:59.440 ratio of earnings. So now to wrote to raise the 0:24:59.480 --> 0:25:02.080 dividends function of your earnings power, and it's tough to 0:25:02.080 --> 0:25:06.119 grow earnings double digits well, particularly here with the Domino GDP. 0:25:06.320 --> 0:25:08.399 We just I said, what's your single best buy. We're 0:25:08.400 --> 0:25:10.200 gonna come back and talk to you more about banking, 0:25:10.240 --> 0:25:13.080 but do you have a single best buy right now. Well, 0:25:13.240 --> 0:25:16.399 you know I don't have by rated stocks at the 0:25:16.440 --> 0:25:19.080 moment um just because of the weak earnings outlook. Um, 0:25:19.320 --> 0:25:21.440 but there's no question that City group hit the ball 0:25:21.440 --> 0:25:24.119 out of the park um in this capital. Let's do that. 0:25:24.160 --> 0:25:26.359 We don't talk enough about Mr Corbett. Let's let's come 0:25:26.400 --> 0:25:29.240 back with a trust Peopody and talk about I don't 0:25:29.280 --> 0:25:33.000 say that David I saw him. Do you know? I 0:25:33.040 --> 0:25:35.840 got the banker wave. The banker wave David is when 0:25:35.840 --> 0:25:39.000 the bankers see me from forty two feet away the way, 0:25:40.720 --> 0:25:43.240 you know, like like they got four handlers around him. No, 0:25:43.560 --> 0:25:47.000 don't talk to him. I got I got the Corbett bank. 0:25:48.400 --> 0:25:51.679 You know it's a banker wave. It happens. Wait, Larry 0:25:51.680 --> 0:25:54.520 Fink doesn't give me the banker wave, will actually come 0:25:54.560 --> 0:26:00.679 and talk to me? The banker I Joe Joey and 0:26:00.960 --> 0:26:05.320 Joey Vangelista wants crushed Jamie Diamond's elbow. Screet, don't talk 0:26:05.359 --> 0:26:11.400 to jamis Joe That hurts Anyways, it's fun the banker wave. Yeah, 0:26:11.400 --> 0:26:14.640 we'll come back with Charles Peabody truly excellent on the 0:26:14.720 --> 0:26:17.760 major in the regional banks and get some wisdom and perspective. 0:26:18.040 --> 0:26:20.000 David Garrett and Tom Keane here in New York in 0:26:20.400 --> 0:26:22.600 eleven three Studio, So with Charles Peabody, Great to have 0:26:22.640 --> 0:26:24.320 you with us. You're talking about the banks. Let me 0:26:24.320 --> 0:26:26.560 start just by asking you broadly about these stress tests. 0:26:26.560 --> 0:26:29.240 We've just been through them at this point now a 0:26:29.240 --> 0:26:32.080 few years into them. How much have they improved? How 0:26:32.080 --> 0:26:33.879 how much they telling you about the health of the 0:26:33.920 --> 0:26:38.520 banking sector? Oh, dramatically improvement? Um. I mean, the amount 0:26:38.520 --> 0:26:41.400 of capital that they returned in this exam was way 0:26:41.440 --> 0:26:45.040 beyond anyone's expectations. And they still have excess capital. So 0:26:45.440 --> 0:26:48.159 you know, returning a percent of your net income is 0:26:48.200 --> 0:26:50.600 probably going to continue going forward. How much do they 0:26:50.600 --> 0:26:52.480 stand to change you as you survey if you look 0:26:52.480 --> 0:26:55.159 ahead here to what the regulatory landscape could look like 0:26:55.400 --> 0:26:57.520 six months a year out, are we going to see 0:26:57.520 --> 0:27:01.400 a different kind of test going forward? You know, one 0:27:01.400 --> 0:27:04.399 could argue that this test showed some leniency from the 0:27:04.400 --> 0:27:07.879 regulatory community and that may continue under Trump. But caution 0:27:07.960 --> 0:27:10.920 about getting too far ahead of yourself on that front, 0:27:10.960 --> 0:27:15.080 because I think financial legislative reform is probably dead in 0:27:15.080 --> 0:27:18.760 the water. Into healthcare and tax reform, and we get 0:27:18.760 --> 0:27:20.720 through the midterm elections, so it's not going to happen 0:27:20.800 --> 0:27:24.959 until nine the earliers. If you look at regulatory fiat reform, 0:27:25.119 --> 0:27:27.400 that's the way it's going to occur. But even there, 0:27:27.440 --> 0:27:30.080 the process is you've got to get the nominees in place. 0:27:30.880 --> 0:27:34.960 You're not going to get confirmation hearings probably until early eighteen, 0:27:35.600 --> 0:27:37.560 and then you've got you know, and not notice the 0:27:37.600 --> 0:27:41.120 proposed rulemaking the hearing periods. You're probably not gonna get 0:27:41.160 --> 0:27:44.159 formal rules changed until early two tho nineteen. On the 0:27:44.200 --> 0:27:48.960 regulatory fiat front, where are we with the regionals? We 0:27:49.080 --> 0:27:53.119 have a huge wrong bias here two six or seven 0:27:53.160 --> 0:27:56.640 big banks. Where are we on the regionals right now? 0:27:56.680 --> 0:27:59.880 Do they have a place in the future of banking? Well, 0:28:00.040 --> 0:28:03.880 you know, at compass point, um, the position is very 0:28:03.880 --> 0:28:06.840 constructive on the regional banks. Um. Now they are you know, 0:28:06.880 --> 0:28:09.479 they're going to benefit from the steepening neal curve um 0:28:09.600 --> 0:28:13.960 and from you know, the rate hikes if that continues. Um. 0:28:14.000 --> 0:28:16.000 The problem is the loan growth remains fairly in na 0:28:16.040 --> 0:28:18.040 make at three percent. And that's that's the problem I'm 0:28:18.080 --> 0:28:20.280 having with banks in generalists. I'm just not seeing the 0:28:20.320 --> 0:28:24.120 economic activity either in the lending markets, where the capital markets, 0:28:24.600 --> 0:28:27.200 and so you know, there's only so much cost cutting 0:28:27.200 --> 0:28:29.359 you can do. And we're probably on the other side 0:28:29.400 --> 0:28:31.879 of the credit spectrum where credit costs now are going 0:28:31.920 --> 0:28:35.639 to rise, so you need much more stronger revenue growth. Ok, 0:28:35.760 --> 0:28:37.080 that's right where I wanted to go, and then I 0:28:37.119 --> 0:28:39.000 want to go to City Group. Then are we going 0:28:39.040 --> 0:28:44.400 to see nominal GDP or better revenue growth or is 0:28:44.400 --> 0:28:48.640 it going to be we must merge and combined because 0:28:48.640 --> 0:28:52.640 we don't have five or six or seven percent revenue growth. 0:28:53.160 --> 0:28:55.120 I think in the muddle through economy that we seem 0:28:55.160 --> 0:28:56.800 to be having a one and a half two percent 0:28:56.840 --> 0:28:59.240 GDP growth. You're going to see much more of a 0:28:59.320 --> 0:29:02.600 combination of firms take place at the regional bank level. 0:29:02.640 --> 0:29:05.600 How is Mr Corbett's challenge different from Mr morning Hans 0:29:05.680 --> 0:29:10.120 or Mr Diamond's. Well, he's transformed the bank from what 0:29:10.160 --> 0:29:13.160 was really a consumer led orientation to much more of 0:29:13.160 --> 0:29:16.400 a corporate led orientation. As you know, Corbat and Freeze 0:29:16.480 --> 0:29:18.520 both came out of Solomon Brothers, and that's where they're 0:29:18.560 --> 0:29:21.680 more comfortable taking their risk so that the challenges can 0:29:21.720 --> 0:29:26.160 they improve their capital markets positions, particularly on the equity side. 0:29:26.680 --> 0:29:28.640 Do they have a desire to do that or are 0:29:28.680 --> 0:29:31.400 they so far behind they can't catch up. No, they 0:29:31.440 --> 0:29:33.160 have a very strong desire to do that. I mean, 0:29:33.200 --> 0:29:37.880 they've got an excellent thick franchise fixed income currency franchise, 0:29:38.000 --> 0:29:40.800 but their week sister on the equity side, and they've 0:29:40.840 --> 0:29:44.160 been pushing pretty aggressively on the equity side up their position. 0:29:44.160 --> 0:29:45.480 How do they do that? Do they do it with 0:29:45.520 --> 0:29:48.200 a global projection? Do they do it with marketing and brandy? 0:29:48.240 --> 0:29:50.320 Do they do it by retaining? Do we get into 0:29:50.360 --> 0:29:53.720 a body war which no one's expecting. The body war 0:29:53.800 --> 0:29:55.840 that I'm seeing is that they're being much more aggressive 0:29:55.960 --> 0:29:58.240 in the bidding, for example, on the equity front. What 0:29:58.240 --> 0:30:01.680 do you mean by bidding? Bidding for what? Deals? From deals? 0:30:02.000 --> 0:30:03.960 For example? On the equity side. Right now, we're seeing 0:30:04.160 --> 0:30:06.560 a lot of equity issues through what we call block 0:30:07.080 --> 0:30:10.840 overnight deals where you you buy the deal at four 0:30:10.880 --> 0:30:12.800 pm and you try and sell it out before it's 0:30:12.800 --> 0:30:16.800 called blue Apron is what we call not going well 0:30:16.880 --> 0:30:19.720 this week. I believe Goldman's lead has been set in 0:30:19.760 --> 0:30:23.160 the dinner tables, Mr Mr Corbett. It's only it's seamless 0:30:23.440 --> 0:30:27.280 and and we saw this happen in fourteen and early fifteen, 0:30:27.320 --> 0:30:29.520 and then all of a sudden the markets fell in 0:30:29.600 --> 0:30:31.520 the second half of fifteen and City got hurt in 0:30:31.520 --> 0:30:34.840 the fourth quarter because they were trying to do that. Um. 0:30:35.000 --> 0:30:37.640 So it's a question of managing the risks. Um they 0:30:37.640 --> 0:30:41.640 have managed them well so far. I mean there's a 0:30:41.680 --> 0:30:46.360 guy over over overlooking all this, who's who was pretty important, 0:30:46.400 --> 0:30:50.040 a guy named O'Neill out of Hawaii. How's Michael O'Neill done? 0:30:50.040 --> 0:30:54.480 And giving Corbett the chairmanship guidance to reframe the disaster 0:30:55.120 --> 0:30:58.000 that it was. I think they've set out a very 0:30:58.080 --> 0:31:01.960 constructive strategic plan and Corebat has been executing on that. 0:31:02.040 --> 0:31:04.640 It's taken longer than I think anyone answer. They need retail, 0:31:06.280 --> 0:31:09.120 they need cards and and that's the big growth story 0:31:09.160 --> 0:31:10.560 for the second half of the year is that we're 0:31:10.560 --> 0:31:12.360 going to see the card business. Am I gonna get 0:31:12.360 --> 0:31:15.680 a hundred thousand dollar visa hundred thousand mile visa card 0:31:16.040 --> 0:31:17.480 out of City Group? That's all they want to know. 0:31:19.040 --> 0:31:21.200 That's what has come down to, right And by their 0:31:21.200 --> 0:31:23.520 own admission, they had under invested in that card business. 0:31:23.520 --> 0:31:26.320 And about two years ago they started really pushing that 0:31:26.360 --> 0:31:29.240 card business and and now we're starting to see a 0:31:29.280 --> 0:31:31.560 payoff in the second half of the year UM. But 0:31:31.600 --> 0:31:33.840 it's coming at a time where there's an inflection the 0:31:33.840 --> 0:31:36.040 credit costs and all these banks are having to raise 0:31:36.120 --> 0:31:39.440 their assumptions of of credit costs. Question is how rapidly 0:31:39.440 --> 0:31:42.040 do they rise versus where David Guru lives. There six 0:31:42.240 --> 0:31:45.760 branches on the corner. It's called over banking. The City 0:31:45.760 --> 0:31:48.840 Group over banks. Are they over branched not? City Group 0:31:48.920 --> 0:31:50.600 does not have the branch structure that a b of 0:31:50.680 --> 0:31:52.480 A or JP Morgan has in the United States, in 0:31:52.520 --> 0:31:54.760 New York City and in certain pockets they do. And 0:31:54.800 --> 0:31:58.600 that's their strategy is to target urban areas. We're talking 0:31:58.600 --> 0:32:01.840 about blockchain and bit coin and cryptocurrency literally on on 0:32:01.880 --> 0:32:03.479 the program. When you look at when you look at 0:32:03.480 --> 0:32:06.360 all of the banks, who's best positioned uh to to 0:32:06.520 --> 0:32:10.800 embrace technological change in the industry, Well, I think J. P. 0:32:10.960 --> 0:32:14.000 Morgan and Jamie Diamond in you know, years ahead of 0:32:14.000 --> 0:32:18.000 the other major banks and investing in technology UM so 0:32:18.240 --> 0:32:20.520 I would say that they probably have the advantage. But 0:32:20.560 --> 0:32:24.360 everyone's you know, investing in digital um technology right now, 0:32:24.440 --> 0:32:26.440 and they're all going to end up in the same place. 0:32:27.080 --> 0:32:29.680 How big of a way our student loans. We're talking 0:32:29.680 --> 0:32:32.080 about delinquencies on the show yesterday, the prospect for more 0:32:32.160 --> 0:32:34.000 than an auto loans and in student loans. When you 0:32:34.040 --> 0:32:35.840 when you look at the big banks, how much of 0:32:35.840 --> 0:32:39.080 a weight is that on them. It's a non issue. Yeah, 0:32:39.120 --> 0:32:41.280 I mean even auto ending, where they're obviously going to 0:32:41.360 --> 0:32:43.680 be problems in the subprime area, it's less than four 0:32:43.720 --> 0:32:46.600 percent of their loan exposure. It's not going to move 0:32:46.600 --> 0:32:48.400 the needle. The needle is going to be moved by 0:32:48.400 --> 0:32:51.200 what happens in cards. The student loans and autos really 0:32:51.200 --> 0:32:53.080 aren't going with the needle. I'm glad you bring this up, 0:32:53.120 --> 0:32:55.240 because this is why I wanted to bring this up 0:32:55.240 --> 0:32:57.320 in my brain. Froze. I'm still getting over talking too 0:32:57.400 --> 0:33:00.560 much Inkee baseball, Doug cam So you know this is 0:33:00.600 --> 0:33:02.640 what we do, folks. People go, well, you if you 0:33:02.680 --> 0:33:05.200 have someone from the Cato Institute on, you have to 0:33:05.240 --> 0:33:08.280 have some leftists on to balance. That's what we're doing, 0:33:08.320 --> 0:33:10.880 your folks. We had casts on who loves at Yankees 0:33:11.200 --> 0:33:14.120 and Peobody who's got a retired number out at Fenway 0:33:14.480 --> 0:33:17.560 Party went to so many games as a kid. People 0:33:17.640 --> 0:33:22.200 forget that City Group is seventy billion in revenue and 0:33:22.280 --> 0:33:26.280 JP Morgan is a hundred billion in revenue. What the 0:33:26.360 --> 0:33:30.040 tenth of a trillion dollars? My number one complaint, Charles, 0:33:30.520 --> 0:33:32.520 is the media and so much of the public don't 0:33:32.520 --> 0:33:35.440 realize how big these things are. Are they too big 0:33:35.480 --> 0:33:38.480 to fail? Thank you, Andrew. Oh, they definitely are too 0:33:38.520 --> 0:33:40.880 big to fail. And and that too big to fail 0:33:40.960 --> 0:33:43.280 concepts still exists worldwide, as we just saw with the 0:33:43.360 --> 0:33:46.760 Venetian banks in Italy. Um, they had to be bailed 0:33:46.760 --> 0:33:49.120 out at the expense j P. We're gonna be allowed 0:33:49.120 --> 0:33:54.600 to buy us by European banks? Why not? I think 0:33:54.640 --> 0:33:58.400 that concentration of power would be dangerous. Um. You know, 0:33:58.640 --> 0:34:02.440 I think we need large banks to compete internationally, but 0:34:02.560 --> 0:34:07.920 do we need large banks in every single continent? And 0:34:07.960 --> 0:34:09.879 they learned this the hard way. I mean City Group 0:34:10.239 --> 0:34:13.920 pre Corbett learn this in Mexico, right, Yeah, I mean 0:34:14.400 --> 0:34:17.560 they've struggled with their Banner X franchise, and and that's 0:34:17.600 --> 0:34:19.520 one of the areas that they're trying to beef up 0:34:19.560 --> 0:34:23.160 and invest in. And there should be a payback presumably 0:34:23.200 --> 0:34:25.560 next year. There are actually already starting to generate some 0:34:25.600 --> 0:34:28.799 positive operating leverage in Mexico. What's the message that the 0:34:28.800 --> 0:34:30.960 takeaway that you have from what we saw in Italy 0:34:30.960 --> 0:34:35.839 and Spain about the way that government's intervened in those banks. Well, 0:34:36.080 --> 0:34:38.720 as you know, there were subtle differences between what happened 0:34:38.719 --> 0:34:42.000 in Spain and Italy. But um, to me, it's that 0:34:42.080 --> 0:34:46.480 the rules are going to be changed to affect a 0:34:46.600 --> 0:34:51.520 process that disrupts the markets the least and all of 0:34:51.560 --> 0:34:55.040 these you know, regulators are looking at markets and are 0:34:55.080 --> 0:34:58.239 worried about markets and the and the feedback mechanism if 0:34:58.280 --> 0:35:02.200 markets go awry. Charles, people do to thank you so much. 0:35:02.239 --> 0:35:07.239 Congratulations and figuring out use of cash long before others here. Um, 0:35:07.280 --> 0:35:10.920 I should point out I have no ownership of financial shares. 0:35:11.000 --> 0:35:15.640 David leverage cash triple average, the double leverage, double leverage 0:35:15.680 --> 0:35:19.680 cash cash fun. It's been great. I mean, the markets 0:35:19.680 --> 0:35:35.120 are terror. You can't make money in stocks, folks, what 0:35:35.280 --> 0:35:40.680 a joy and timely jab with us. Daniel Jurgen, who 0:35:40.960 --> 0:35:43.719 is known for oil. I just sold six copies of 0:35:43.760 --> 0:35:47.120 the book The Prize, which came out. John D. Rockefeller 0:35:47.200 --> 0:35:49.319 read it. Um. It came out a few years ago, 0:35:49.360 --> 0:35:51.960 and I said to some youngsters in the oil business. 0:35:52.040 --> 0:35:55.120 I said, you can't do your business unless you read 0:35:55.160 --> 0:35:58.160 your in the prize, and of course, uh, the Quest, 0:35:58.400 --> 0:36:02.440 which I'll call an update highly readable sandwich. In between 0:36:02.440 --> 0:36:04.360 it was The Commanding Heights, which is a book I 0:36:04.360 --> 0:36:07.400 throw at people too often, the Battle for the World Economy, 0:36:07.480 --> 0:36:10.359 and um the Royalty check I get annually from Oran. 0:36:10.400 --> 0:36:14.880 It's awesome on that, Dan Jurgen, in honor of Lord Patton, 0:36:14.960 --> 0:36:19.560 who I spoke to today of kiss Hong Kong. Mr 0:36:19.640 --> 0:36:23.440 Jurgen joining us, and I quoted to Lord Patton Jurgen 0:36:24.480 --> 0:36:28.520 from Commanding Heights in Hong Kong, it's seen the particular 0:36:28.600 --> 0:36:33.920 advantages of location and the accident of history that had 0:36:33.920 --> 0:36:37.920 brought enterprise and investment to ninety nine. And then you 0:36:38.040 --> 0:36:40.840 go on brilliantly to say the classical liberal system in 0:36:40.880 --> 0:36:43.440 the colony compared to what was going on in the 0:36:43.560 --> 0:36:47.319 United Kingdom. That was really I remember that years ago 0:36:48.040 --> 0:36:51.440 in your book. Give us an update on the experiment 0:36:51.560 --> 0:36:56.040 of Hong Kong. Is it working well? Hong Kong stood 0:36:56.040 --> 0:36:59.000 out because it was such a vibrant center of global 0:36:59.680 --> 0:37:03.759 globe markets and capitalism and contrast to mouse China. But 0:37:03.840 --> 0:37:07.040 of course, the world has moved on tremendously since then, 0:37:07.560 --> 0:37:11.480 not only the rest of Asia, but China itself. Is 0:37:10.320 --> 0:37:15.000 U such a economic powerhouse in such a center of 0:37:15.040 --> 0:37:18.080 the world economy. I was thinking just the difference between 0:37:18.800 --> 0:37:23.000 UH when the handover of Hong Kong occurred to China, 0:37:23.360 --> 0:37:26.840 two systems in one country and a degree China not 0:37:26.920 --> 0:37:29.960 yet joined the World Trade Organization, and there wasn't the 0:37:30.040 --> 0:37:33.840 sense that there was UH the G two, the United 0:37:33.880 --> 0:37:36.879 States and China. But now China has so much more 0:37:36.920 --> 0:37:40.120 of a preponderant role in the world economy. Do they 0:37:40.120 --> 0:37:42.719 play with a fair deck? I mean, the President the 0:37:42.800 --> 0:37:47.319 United States gets upset about other countries and then maybe 0:37:47.320 --> 0:37:50.000 he's got a bit of a zero sum architecture there 0:37:50.640 --> 0:37:53.280 in defense of the President the United States, Is China 0:37:53.360 --> 0:37:57.680 playing with a fair capitalistic commanding heights deck? Know that 0:37:57.800 --> 0:38:03.799 they play with it? Used to be socialism with Chinese characteristics, 0:38:03.840 --> 0:38:06.160 as a as Dung show Ping put it, And now 0:38:06.239 --> 0:38:09.440 I guess you would say it's capitalism with Chinese characteristics. 0:38:09.800 --> 0:38:12.360 It's clearly the state has a very big role in 0:38:12.360 --> 0:38:16.759 the economy and UH. I think it's striking to me 0:38:16.840 --> 0:38:20.920 when I've heard American CEOs talk in the last few years, 0:38:21.040 --> 0:38:24.920 they're feeling that they don't have the same access to 0:38:25.000 --> 0:38:30.319 the market as as as their Chinese competitors. So, uh, 0:38:29.920 --> 0:38:33.160 it's it is. It is still a different system. Hong 0:38:33.239 --> 0:38:35.279 Kong was a place to go. I wonder if you 0:38:35.320 --> 0:38:37.359 were talking to a recent graduate of your alma mater 0:38:37.800 --> 0:38:40.799 thinking of moving overseas, would you counsel moving to Hong 0:38:40.880 --> 0:38:42.920 Kong here in the year two thousand seventeen doesn't have 0:38:42.960 --> 0:38:45.719 the same sense of dynamism and opportunity that it had 0:38:45.760 --> 0:38:48.920 back then. I think it would be one of the locations, 0:38:48.960 --> 0:38:50.960 but it would not be you know, it would not 0:38:51.000 --> 0:38:54.560 be the standout location. I mean, going to Asia makes 0:38:54.600 --> 0:38:57.640 a lot of sense. Uh. You know, you might say 0:38:57.640 --> 0:39:00.200 go to Shanghai, or you might say go to bay Jing. 0:39:00.280 --> 0:39:04.399 I'm struck, you know. I remember in the late eighties too, 0:39:04.920 --> 0:39:07.080 you'd see a lot of young people went to Japan 0:39:07.160 --> 0:39:09.200 because Japan was going to be number one, if you 0:39:09.200 --> 0:39:11.959 remember the title of that book. And now, of course 0:39:12.000 --> 0:39:15.560 you go to Beijing and you see so many young Americans, 0:39:15.600 --> 0:39:21.080 many nationalities there and with a sense of vibrancy that 0:39:21.440 --> 0:39:24.520 is in the overall Chinese economy and the recognition of 0:39:24.560 --> 0:39:27.240 how important China is in the global economy. The number 0:39:27.239 --> 0:39:30.480 of students who study Chinese, of course at universities has 0:39:30.520 --> 0:39:33.480 just shot up. Don't you're gonna help us understand what 0:39:33.520 --> 0:39:35.719 we saw in Saudi Arabia a couple of weeks ago, 0:39:35.840 --> 0:39:38.160 the the the institution of a new heir apparent in 0:39:38.440 --> 0:39:41.520 the kingdom there. You know the region so well, the 0:39:41.600 --> 0:39:44.400 history and the politics of it. What should we what 0:39:44.440 --> 0:39:47.520 should we uh take away from what we saw there 0:39:47.520 --> 0:39:49.400 in Riot a couple of weeks ago. I think we 0:39:49.400 --> 0:39:52.640 should take away that Mohammed ben Solomon, who was the 0:39:52.880 --> 0:39:56.800 deputy Crown Prince and promoted to Crown Prince, is a 0:39:56.880 --> 0:40:00.839 person who's really in charge of the country right out. Uh. 0:40:01.000 --> 0:40:03.520 He has a defense portfolio even before he moved up, 0:40:03.800 --> 0:40:09.520 the economic portfolio, the oil portfolio, and uh he's the author, 0:40:09.640 --> 0:40:13.800 he's the driving force behind this vision which is seeking 0:40:13.840 --> 0:40:17.720 to to sort of move the Saudi economy into into 0:40:18.200 --> 0:40:20.080 you know, in a sense we've been talking about Asian 0:40:20.120 --> 0:40:23.280 to a more modern, engaged economy that isn't just based 0:40:23.360 --> 0:40:26.080 upon oil. It's a very big job to do that 0:40:27.320 --> 0:40:31.920 isn't so far away. How big you mentioned all of 0:40:31.920 --> 0:40:36.040 the breadth of his portfolio, and we're interested in the 0:40:36.160 --> 0:40:38.439 role that oil plays in that. Of course he's talked 0:40:38.440 --> 0:40:42.400 about moving away from the kingdom's reliance on on oil. Uh, 0:40:43.280 --> 0:40:45.560 how how well to pace is that transition going? How 0:40:45.680 --> 0:40:48.000 how how far along are we in that transformation? I 0:40:48.040 --> 0:40:50.680 think it's it's still it's still very early days. And 0:40:50.680 --> 0:40:53.400 it is interesting that I mean in the crucial to it. 0:40:53.440 --> 0:40:55.959 I mean the ideas that versify the economy away from oil. 0:40:56.160 --> 0:40:58.319 In order to do that, you need oil. You need 0:40:58.360 --> 0:41:01.480 to sell a lot of oil to rate the income 0:41:01.520 --> 0:41:03.359 to do what they want to do. I think it's 0:41:03.360 --> 0:41:07.439 still very much in a phase of getting getting getting ready, 0:41:07.440 --> 0:41:10.520 trying to get things into place. And of course, um, 0:41:10.520 --> 0:41:13.239 with oil at forty five dollars, it puts a lot 0:41:13.280 --> 0:41:15.560 more pressure than it would be if oil is sixty 0:41:15.680 --> 0:41:19.439 or seventy dollars and more urgency. What do you learn 0:41:19.560 --> 0:41:23.399 from your consultancy? What do you learn from the PhDs 0:41:23.440 --> 0:41:27.680 and petroleum knee deep in this and linking it into economics, 0:41:27.760 --> 0:41:31.920 what's the insight Dr Jurgen that you hear seminar after 0:41:32.000 --> 0:41:36.399 seminar that matters well? I think, um, because I think 0:41:36.400 --> 0:41:39.480 about the research we do at h S Market. I 0:41:39.520 --> 0:41:42.919 think I just came back from Detroit, where we did 0:41:43.440 --> 0:41:46.800 we have a sort of a study group involving a 0:41:46.880 --> 0:41:50.480 number of companies on our own experts called Reinventing the Wheel, 0:41:50.560 --> 0:41:55.279 trying to understand how transportation will change, how what type 0:41:55.280 --> 0:41:58.439 of vehicles people move in will change. And I think 0:41:58.480 --> 0:42:01.080 that's obviously I find everywhere I go that's on the 0:42:01.120 --> 0:42:04.640 minds of a bil global oil industry, as it is 0:42:04.680 --> 0:42:08.000 of course the automotive industry and a tech industry that's 0:42:08.040 --> 0:42:12.399 kind of convergence of them. I think the other big 0:42:12.480 --> 0:42:16.279 questions are the kind of the perennial questions understanding, you know, 0:42:16.320 --> 0:42:21.360 the overall forces of supply and demand, and and how 0:42:21.400 --> 0:42:23.839 the rest of the world is accommodating to this new 0:42:23.920 --> 0:42:27.920 force that has emerged out of US innovation basically, which 0:42:28.000 --> 0:42:30.680 is a shale oil and shale gas. And I was 0:42:30.719 --> 0:42:35.719 struck as I've been traveling in around the world in 0:42:35.760 --> 0:42:39.880 a way other countries almost first of all, see the 0:42:39.960 --> 0:42:43.279 change in the U S energy position more dramatically than 0:42:43.480 --> 0:42:46.920 we may do. And secondly, the growing recognition that the 0:42:47.080 --> 0:42:50.120 shale industry and the way it operates is a major 0:42:50.160 --> 0:42:53.279 new force in the in the world economy. Let's come 0:42:53.280 --> 0:42:55.279 back and talk a bit about the shale economy. Let 0:42:55.280 --> 0:42:57.080 me ask you one question though, about what you were 0:42:57.120 --> 0:42:59.880 just mentioning there. Your trip to Detroit. Is our imagine 0:42:59.880 --> 0:43:03.040 a two bridled, not unbridled, but bridled. When we think 0:43:03.080 --> 0:43:05.480 about the future of cars, we think about autonomous vehicles 0:43:05.480 --> 0:43:08.239 and driverless cars. Are you are you foreseeing something when 0:43:08.280 --> 0:43:10.680 you imagine what the future of ground transportation looks like? 0:43:11.440 --> 0:43:14.640 What do you foresee happening? Well, I think we've learned 0:43:14.680 --> 0:43:16.840 again and again that you know, these kind of things 0:43:16.880 --> 0:43:21.399 that to change can happen in ways that you don't 0:43:21.400 --> 0:43:23.840 expect and don't see. I mean, it's the tenth anniversary 0:43:23.840 --> 0:43:27.680 of the iPhone, who imagined this whole new economy based 0:43:27.760 --> 0:43:32.960 upon Have you predicted that in the prize? I was 0:43:33.040 --> 0:43:35.359 in an event last week the Prime Minister Motive from 0:43:35.400 --> 0:43:38.520 India and he was saying how India is in, as 0:43:38.560 --> 0:43:40.719 he put it, in a digital mood, and he wants 0:43:40.760 --> 0:43:44.520 to move everybody to online banking, out of out of 0:43:44.560 --> 0:43:47.319 the cash system, although after what happened in Ukraine, you 0:43:47.360 --> 0:43:51.040 may want to think twice about about doing that. So 0:43:51.080 --> 0:43:53.359 I think we're we find that, you know, you really 0:43:53.400 --> 0:43:56.319 do have to use kind of realistic stories about the 0:43:56.360 --> 0:44:00.400 future scenarios to try and to see what are the 0:44:00.560 --> 0:44:02.879 kind of going to be the milestones on the way 0:44:02.880 --> 0:44:07.440 to how the transportation system changes. But I think I 0:44:07.480 --> 0:44:10.440 would say, I would say that there's such a focus 0:44:10.440 --> 0:44:12.600 on this that this wasn't there two years ago. I 0:44:12.600 --> 0:44:14.799 guess I want to go here. Uh, doctor, you're going 0:44:14.920 --> 0:44:17.680 more towards your wonderful book to quest. I picked it up. 0:44:17.719 --> 0:44:19.520 I was like, yeah, yeah, you know, like a big 0:44:19.560 --> 0:44:25.920 deal and it's highly readable about the new world of hydrocarbons. Doctor, 0:44:25.960 --> 0:44:28.719 you're gonna where are the big oil companies in ten 0:44:28.800 --> 0:44:33.360 or twenty years. They're not dinosaurs, but what are they? 0:44:34.000 --> 0:44:37.120 I think they will become, first of all, more gas companies, 0:44:37.200 --> 0:44:42.120 more focused on natural gas. Uh. Secondly, I think you 0:44:42.239 --> 0:44:45.959 see the big companies hung back from shale. They left 0:44:45.960 --> 0:44:48.120 it to the independence, and I think they now see 0:44:48.600 --> 0:44:51.520 that shale needs to be part of their portfolios because 0:44:51.520 --> 0:44:54.680 of the flexibility. It gives them to sort of flex 0:44:54.760 --> 0:44:58.040 their systems up and down as the markets change. But 0:44:58.120 --> 0:45:00.520 I think they're all going I think back to ours 0:45:00.600 --> 0:45:04.200 Syahweed conference a couple of months ago. I think they're 0:45:04.239 --> 0:45:08.080 all going through a sort of soul searching about, you know, 0:45:08.160 --> 0:45:11.200 what what kind of energy transition is at hand and 0:45:11.360 --> 0:45:15.160 what their role in it will be. So uh, I 0:45:15.280 --> 0:45:18.480 think you know, they'll still be there. There'll be large players. 0:45:19.000 --> 0:45:21.680 World demands still I think over the next ten or 0:45:21.719 --> 0:45:24.520 twenty years will continue to grow, but they are kind 0:45:24.560 --> 0:45:28.560 of looking at how much do they need to move 0:45:28.680 --> 0:45:33.080 into other parts of this sort of value chain and energy. 0:45:34.640 --> 0:45:37.160 I would say that other big thing is gas. Really 0:45:37.200 --> 0:45:39.400 they you know, they start to refer them to selves 0:45:39.440 --> 0:45:41.960 as gas and oil companies rather than oil and gas companies. 0:45:42.719 --> 0:45:45.080 As we look here at oil in the mid to 0:45:45.600 --> 0:45:48.040 high forties, I wonder if you think we're facing more 0:45:48.040 --> 0:45:50.600 bankruptcy is not the major oil corporations, of course, but 0:45:50.840 --> 0:45:53.879 in the industry as a whole. I think that we 0:45:54.000 --> 0:45:56.960 you know, over a hundred companies went bankrupt after the 0:45:57.840 --> 0:46:03.719 twenty fort when prices really started down. Uh. Their assets 0:46:03.760 --> 0:46:08.560 remained there, just the companies went through reorganizations in some form. 0:46:08.600 --> 0:46:12.279 I think that the companies have generally re engineered themselves, 0:46:12.440 --> 0:46:15.760 uh for to operate at a much lower cost level. 0:46:16.239 --> 0:46:18.600 When this when the prices started to collapse, the end 0:46:18.600 --> 0:46:22.680 of the assumption among many was it at seventy dollars. 0:46:22.680 --> 0:46:26.840 These companies disappear. They have now re engineered themselves to 0:46:27.520 --> 0:46:30.400 work at forty to fifty dollars a barrel. So I 0:46:30.440 --> 0:46:34.160 think there's a much greater resilience there in the system. Obviously, 0:46:34.200 --> 0:46:37.759 the closer you get to forty, the more the more 0:46:37.800 --> 0:46:41.840 pressured creates on these companies. But I think and what 0:46:41.960 --> 0:46:44.279 we see we just didn't analysis look at the whole 0:46:44.280 --> 0:46:47.319 cost structure of the industry around the world. You see 0:46:47.320 --> 0:46:50.360 this kind of re engineering to operate more in a 0:46:50.520 --> 0:46:52.759 kind of fifty dollar world. And looking back on a 0:46:52.840 --> 0:46:55.440 hundred dollars is uh it was a few years ago 0:46:55.520 --> 0:46:57.279 was seen as a new normal. Now was seen as 0:46:57.280 --> 0:47:01.040 an oberration. I want to up the script. Uh, DR, 0:47:01.080 --> 0:47:03.279 you're going, which we can always do for you. You 0:47:03.320 --> 0:47:06.120 and I are at Davos. What people don't know is 0:47:06.120 --> 0:47:08.160 there's a valley as we look out to the right 0:47:08.200 --> 0:47:10.480 side of our TV set, and it's a glacier there. 0:47:10.560 --> 0:47:13.120 That's I think in five or ten years, DR, You're 0:47:13.120 --> 0:47:15.439 going to glacier will be on our set the way 0:47:15.440 --> 0:47:19.040 it's coming down the mountain. There's a glacier iceberg in 0:47:19.120 --> 0:47:22.040 Antarctica right now, that's the size of Delaware or something. 0:47:22.440 --> 0:47:24.319 It's going to break off, and nobody knows what's going 0:47:24.360 --> 0:47:26.919 to happen to it. Give us an update on your 0:47:26.960 --> 0:47:31.640 thoughts on climate change, in your thoughts on the calculus 0:47:31.680 --> 0:47:36.400 of climate change, the rates of change of climate change, 0:47:37.120 --> 0:47:38.880 I'm not a first thing I have to say is 0:47:38.880 --> 0:47:42.479 I'm not a client scientist. So uh, but you read 0:47:42.520 --> 0:47:45.920 it and everybody knows you come on, right, So I 0:47:45.960 --> 0:47:48.799 think that, um, you know, the recognition is that you 0:47:48.840 --> 0:47:52.560 know the climate is changing. Uh, there's a wide spectrum 0:47:52.560 --> 0:47:56.400 of alarm at how fast it's going to change. Yeah. Uh, 0:47:56.520 --> 0:48:00.160 and it's I think you see, Uh, if you look 0:48:00.160 --> 0:48:02.480 at the oil industry, you see a number of the 0:48:02.480 --> 0:48:05.560 major companies now in favor of a carbon tax to 0:48:06.080 --> 0:48:09.560 kind of give a kind of predictability to future investments 0:48:10.480 --> 0:48:14.440 within that in the the auction process, and now it 0:48:14.480 --> 0:48:17.160 hasn't worked in Europe. And that is the rate of 0:48:17.280 --> 0:48:19.839 change of all this is this all happening faster than 0:48:19.840 --> 0:48:25.399 we thought? Is? What is climate change happening faster than 0:48:25.440 --> 0:48:27.560 we thought? I don't know. I mean, it's been so 0:48:28.000 --> 0:48:31.160 heavily studied that I don't know if you can say 0:48:31.160 --> 0:48:34.000 that the pace is faster than we thought. I mean, 0:48:34.280 --> 0:48:37.319 you know clearly the carbon levels are higher, and we're 0:48:37.400 --> 0:48:42.560 much more conscious of change. I saw that the Chancellor 0:48:42.640 --> 0:48:46.760 mercle just today reenforced that all the European countries remained 0:48:46.800 --> 0:48:50.000 committed to the Paris Agreement. I think the other aspect 0:48:50.080 --> 0:48:52.960 of it is that, you know, the energy base is changing. 0:48:53.000 --> 0:48:56.360 There is a growing role of renewables, wind and solar 0:48:56.400 --> 0:48:59.360 now or eight percent of our electricity. Does it change 0:48:59.400 --> 0:49:02.200 the sense of system for going to renewable energy? That is, 0:49:02.239 --> 0:49:04.160 if you have an administration that isn't backing it to 0:49:04.200 --> 0:49:06.040 the degree the previous one was, Is that change what 0:49:06.160 --> 0:49:09.360 companies are investing in? Well? I think that the in 0:49:09.440 --> 0:49:12.920 the US, I mean, obviously the real focus was on 0:49:13.160 --> 0:49:17.040 Paris and whether we were in or out, and with 0:49:17.080 --> 0:49:20.520 all the repercussions that people have on different sides of it. 0:49:21.000 --> 0:49:25.160 But of course Paris did not commit countries to specifics things. 0:49:25.640 --> 0:49:27.799 Was that they said they do these things. To me, 0:49:27.960 --> 0:49:31.120 what stands out is, uh, well, two things. One Trump 0:49:31.120 --> 0:49:34.359 administration he said that he was going to back out 0:49:34.360 --> 0:49:36.320 of Paris, and so in a way it shouldn't be 0:49:36.360 --> 0:49:39.080 a surprise that that he took the US out of it, 0:49:39.200 --> 0:49:41.080 or seeks to take the U S out because it's 0:49:41.080 --> 0:49:43.960 a long process. But I think what's really significant is 0:49:44.000 --> 0:49:46.640 the tax incentives that were put in at the end 0:49:46.680 --> 0:49:50.480 of and we think that as a result of those, 0:49:51.160 --> 0:49:53.839 two thirds of the new electric capacity will be wind 0:49:53.880 --> 0:49:57.799 and solar. And that's a that's a change, and that's 0:49:57.800 --> 0:50:00.759 going to happen. Whatever. We have to leave it there. Dan, 0:50:00.840 --> 0:50:02.759 You're gonna thank you so Much's never enough time with 0:50:02.920 --> 0:50:19.560 Dr Jurgen read the quest. This is Bloomer David Girl. 0:50:19.680 --> 0:50:22.399 I am in such shock I can't speak. It is 0:50:22.560 --> 0:50:25.360 so unique in the history of the nation to have 0:50:25.400 --> 0:50:28.360 a Chairman of the House Ways and Means Committee actually 0:50:28.400 --> 0:50:31.520 show up on time for a radio interview. I believe 0:50:31.600 --> 0:50:35.160 that's the first. It goes back at least to Madison 0:50:35.560 --> 0:50:38.080 and maybe as far as Washington. And we thank the 0:50:38.160 --> 0:50:39.840 Chairman of the House Ways and Means Committee, that is 0:50:39.840 --> 0:50:42.520 one Kevin Brady, the congress from the eighth District in Texas. 0:50:42.520 --> 0:50:45.040 That's Montgomery County, Walker County, just north of Houston. If 0:50:45.040 --> 0:50:47.000 I'm not the mistaken joining us on our phone life 0:50:47.040 --> 0:50:48.920 this morning, is no more important person to talk to 0:50:48.960 --> 0:50:51.000 on the issue a tax form in particularly than Congressman. 0:50:51.000 --> 0:50:53.080 Pretty great to have you with us this morning. Thank 0:50:53.120 --> 0:50:58.040 you for that intro, the Madison reference. So I'll take it. 0:50:58.120 --> 0:50:59.960 We'll see where we go. Let me ask you for 0:51:00.400 --> 0:51:02.600 Let me first ask you about the calendar here Congress 0:51:02.600 --> 0:51:05.040 approaching the July fourth recess. Say you guys come back. 0:51:05.080 --> 0:51:07.880 You've got about ten legislative working days, if I'm not mistaken, 0:51:07.880 --> 0:51:11.040 and then it's onward to the August recess. How worried 0:51:11.080 --> 0:51:14.920 are you at this point about the compressed congressional calendar? Look, Um, 0:51:15.600 --> 0:51:20.560 I'm not look it. Uh, we know what the schedule is. Um, 0:51:20.960 --> 0:51:24.839 I'm confident. Frankly, the Senate is going to resolve their 0:51:24.880 --> 0:51:29.200 differences and deliver on healthcare reform. I know our challenge 0:51:29.600 --> 0:51:32.640 in the House going forward is to finish this budget 0:51:32.960 --> 0:51:35.360 and move that to the Senate because that budget is 0:51:35.400 --> 0:51:39.880 really key to tax reform this fall. And so look, um, 0:51:39.920 --> 0:51:42.480 it is a tight schedule. I think we can can 0:51:42.640 --> 0:51:45.400 meet it. Let me ask you a question here about 0:51:45.560 --> 0:51:47.400 where things are added when headed when it comes to 0:51:47.440 --> 0:51:49.319 tax reform. I wonder if you'd be open to an 0:51:49.320 --> 0:51:52.960 overhaul that would include maybe temporary cuts on the individual side, 0:51:52.960 --> 0:51:55.759 but permanent changes for for those on the corporate side. 0:51:55.760 --> 0:51:57.759 Are you willing to weigh that or consider that this 0:51:57.800 --> 0:51:59.959 point in light of where we are so right now, 0:52:00.200 --> 0:52:05.839 I'm focused on bold, permanent tax reforms that dramatically simplifies 0:52:05.880 --> 0:52:10.239 the code, really lowers rates significantly for job creators in 0:52:10.239 --> 0:52:13.960 in in middle class families, but as as importantly leap 0:52:14.040 --> 0:52:16.840 frogs America from I think roughly thirty feet in the 0:52:16.880 --> 0:52:20.240 world into the top three for competitiveness. And we're we're 0:52:20.280 --> 0:52:24.840 focused on that permanence because we think that's critical for 0:52:24.840 --> 0:52:30.640 for companies making the investment decisions they create jobs for families. Uh. Carsman, 0:52:30.840 --> 0:52:33.600 Robert Capital of the Dallas fed of the People's Republic 0:52:33.600 --> 0:52:37.080 of Texas just told me that all of this uncertainty 0:52:37.080 --> 0:52:41.400 in the land of Brady, Uh is gonna dampen economic growth? 0:52:41.760 --> 0:52:45.600 Is the uncertainty of your Washington getta dampen or slow 0:52:45.719 --> 0:52:50.200 economic growth in Texas? Well? No, I don't believe it will. Um. 0:52:50.239 --> 0:52:53.480 In fact, back home, Um where I spent a lot 0:52:53.520 --> 0:52:56.000 of time we lived back in the woodlands to northeastern 0:52:56.480 --> 0:53:00.839 Um where people are families and small businesses. See, they're 0:53:00.920 --> 0:53:03.600 very excited about tax reform. They feel like we're going 0:53:03.680 --> 0:53:06.480 to get it done. Uh. It makes him more optimistic 0:53:06.920 --> 0:53:10.359 about this year and next going forward. And so I 0:53:10.360 --> 0:53:15.040 think in the world of politics and anguishing over every 0:53:15.080 --> 0:53:19.000 different phrase and word, you know there's uncertainty. But I think, 0:53:19.560 --> 0:53:23.759 um business is large and small feel confident we're going 0:53:23.800 --> 0:53:25.879 to get this done. I listened with interest a couple 0:53:25.880 --> 0:53:27.919 of weeks back when the House Speaker Paul Ryan spoke 0:53:27.920 --> 0:53:30.480 before the National Association of Manufactories in Washington, d c. 0:53:30.640 --> 0:53:32.759 And the news so much as I could ascertain what 0:53:32.800 --> 0:53:34.960 it was that he placed a deadlight on getting this done. 0:53:34.960 --> 0:53:36.960 He said, let's get tax reform done here by the 0:53:37.040 --> 0:53:38.719 end of the year. I was struck by the urgency 0:53:39.200 --> 0:53:42.279 in that statement. Is your sense of urgency is his 0:53:42.719 --> 0:53:44.480 being matched by the White House? Would you like to 0:53:44.480 --> 0:53:47.000 see the White House doing more to make this the 0:53:47.040 --> 0:53:51.359 paramount issue for him? So it is in my experience 0:53:51.880 --> 0:53:56.560 with President Trump's tax team that urgency is clearly there. 0:53:56.600 --> 0:53:59.520 They know what were the economy is struggling, they know 0:53:59.600 --> 0:54:03.960 we're falling behind. Is the timetable we've set and I 0:54:03.960 --> 0:54:07.320 haven't seen anything yet that knocks us off that timetable. 0:54:07.360 --> 0:54:10.120 I don't anticipate one, so I share that urgency and 0:54:10.120 --> 0:54:12.560 I believe that the wine house does as well. You know, David, 0:54:12.600 --> 0:54:14.480 I want you to continue here with a chairman, but 0:54:14.520 --> 0:54:17.480 I want to make clear folks who need a surveillance correction. 0:54:17.840 --> 0:54:20.520 Chairman Brady talks about the woodlands and it sounds like 0:54:20.560 --> 0:54:23.759 he lives in a pup tent outside Houston. I just 0:54:23.800 --> 0:54:26.520 want to point out to everybody that you can get 0:54:26.560 --> 0:54:30.000 for five hundred forty five thousand dollars, five bedrooms, three 0:54:30.000 --> 0:54:33.160 plus bass David, this thing is the size of Brooklyn. 0:54:33.280 --> 0:54:36.720 I mean it's these houses are ginormous where Chairman Brady 0:54:36.760 --> 0:54:39.960 lives and Frankie, that's part of the competition that Texas 0:54:40.000 --> 0:54:42.520 wins at. You can almost afford the stuff you can't 0:54:42.520 --> 0:54:49.360 talk about. Affordable housing is one of our strength in Texas. 0:54:49.440 --> 0:54:53.359 And with low tax and no income tax, you're killing 0:54:53.440 --> 0:54:56.680 We're moving the show to Texas. Let's go, Chairman Brady. 0:54:56.920 --> 0:54:58.960 Let's let's talk a bit about the conversations you're having 0:54:59.040 --> 0:55:01.239 with the White House about the border adjusted tax that 0:55:01.360 --> 0:55:03.160 you've embraced, that it's a central part of the plan 0:55:03.200 --> 0:55:05.680 that you've devised with the House Speaker you flow to 0:55:05.760 --> 0:55:07.320 the idea of a five year phase in for a 0:55:07.320 --> 0:55:10.040 border adjusted attacks. What's the case you're making to the 0:55:10.040 --> 0:55:11.759 White House? Now, get us up to speed on where 0:55:11.800 --> 0:55:14.160 things stand when it comes to the conversation over A B, 0:55:14.320 --> 0:55:16.520 A T. Yeah. So here's one of the We we 0:55:16.520 --> 0:55:19.480 have several big challenges in tax reform, and one of 0:55:19.560 --> 0:55:22.759 them is how do we stop businesses from continuing to 0:55:22.880 --> 0:55:25.239 leave the US. More importantly, how do we get them 0:55:25.239 --> 0:55:28.200 to reconsider their supply chains to terms what can be 0:55:28.239 --> 0:55:31.200 brought back the United States? Because our current tax co 0:55:31.360 --> 0:55:34.880 clearly tells them move it elsewhere, and so our proposal 0:55:34.920 --> 0:55:39.560 on border adjustment matches our competitors. Basically is equal taxation 0:55:39.680 --> 0:55:42.479 in the US, and by lifting the mad Americat tax 0:55:42.680 --> 0:55:46.200 a level playing field abroad, it is a bold change 0:55:46.320 --> 0:55:49.080 and I recognize that, and that's why the five year 0:55:49.120 --> 0:55:53.280 phase in was is proposed to dress what we believe 0:55:53.320 --> 0:55:56.439 are valid concerns about making sure there's plenty of time 0:55:56.480 --> 0:55:59.160 for the dollar to dust in all of that. But 0:55:59.280 --> 0:56:03.600 bottom line is whether border adjustment is in the final 0:56:03.800 --> 0:56:08.120 product or it is set aside for further study, the 0:56:08.160 --> 0:56:12.520 problem still persists. How do we stop companies from leaving, 0:56:12.760 --> 0:56:14.720 how do we bring them back? And so we're having 0:56:15.239 --> 0:56:18.040 a really good discussions in the White House and Center 0:56:18.320 --> 0:56:21.200 on how best to solve that issue. And we're I'm 0:56:21.239 --> 0:56:23.320 just telling you, We're going to stay at the table 0:56:23.719 --> 0:56:27.000 with President Trump's team and Senate Republicans until we solve 0:56:27.120 --> 0:56:30.200 that principle issue. Sherman Brady got one more serious question 0:56:30.239 --> 0:56:33.640 for you before you get on with your productive day. 0:56:33.920 --> 0:56:36.359 You you, more than anybody we speak to h knows 0:56:36.400 --> 0:56:39.960 the upset of parents and families broken apart and by violence. 0:56:40.000 --> 0:56:43.600 And that I'm begun calling the opioid epidemic the heroin 0:56:43.719 --> 0:56:47.319 opioid epidemic because I don't think anybody listening in the 0:56:47.360 --> 0:56:51.240 real world knows what opioids are. You're in a leadership position. 0:56:51.680 --> 0:56:55.440 What does Washington need to do to help Woodlands, Texas 0:56:55.440 --> 0:56:58.040 a rich place or the poort place you know better 0:56:58.040 --> 0:57:00.759 than me in Houston. What does she didn't need to 0:57:00.760 --> 0:57:05.360 do about the heroin opioid epidemic? Well, it is an epidemic, 0:57:05.440 --> 0:57:08.879 and we've seen we've we've worked to close down pill 0:57:08.960 --> 0:57:13.040 mills in Southeast Texas and there's one point four hundred 0:57:13.040 --> 0:57:16.680 of them in the Houston region, all of which drive 0:57:16.760 --> 0:57:20.720 that epidemic. It's going to take several concerted efforts, and 0:57:21.040 --> 0:57:23.720 one of them, frankly, is in healthcare. I was pleased 0:57:23.760 --> 0:57:26.360 to see the Senate ad some more funding to address 0:57:26.440 --> 0:57:29.120 this in the healthcare bill that they have the House 0:57:29.160 --> 0:57:31.920 has already in Senate has acted in some other ways 0:57:31.960 --> 0:57:35.800 as well. But but what I'm what I'm actually really 0:57:35.800 --> 0:57:39.920 pleased about is this has finally gotten the attention it deserves, 0:57:40.200 --> 0:57:43.560 both up here in Washington and back home as well. 0:57:43.640 --> 0:57:46.120 And so I this is this issue isn't going to 0:57:46.200 --> 0:57:49.160 go away, and we know we've got to act. Chairman, 0:57:49.160 --> 0:57:52.840 Thank you so much, Uh, David, why don't you exit 0:57:52.920 --> 0:57:56.840 the chairman? Chairman Kevin Brady there the chairman of the 0:57:56.840 --> 0:57:59.600 House Ways and Man's Committee from the eighth District in Texas. 0:58:08.800 --> 0:58:12.960 Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and 0:58:13.040 --> 0:58:18.360 listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast 0:58:18.480 --> 0:58:22.000 platform you prefer. I'm on Twitter at Tom Keene, David 0:58:22.040 --> 0:58:26.240 Gura is at David Gura. Before the podcast, you could 0:58:26.280 --> 0:58:40.880 always catch us worldwide. I'm Bloomberg Radio. Runt you by 0:58:41.160 --> 0:58:45.440 Bank of America Mary Lynch with Virtual Reality virtually everything 0:58:45.480 --> 0:58:50.560 will change. Discover opportunities in a transforming world. VI of a, 0:58:50.960 --> 0:58:55.280 mL dot Com, slash vr, Mary Lynch, Pierced Fenner and 0:58:55.320 --> 0:58:56.840 Smith Incorporated,