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Speaker 1: VI of a mL dot Com slash VR, Mary Lynch,
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Speaker 1: Surveillance Podcast. I'm Tom Keene with David Gura. Daily we
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Speaker 1: begin this morning with Peter Hooper. He is the chief
Speaker 1: economist at Deutsche Bank and he's with us here in
Speaker 1: our Bloomberg eleven three oh studios. Let's travel to uh
Speaker 1: western Portugal if we could hear to begin Peter into
Speaker 1: the goings on there. Over these last couple of days
Speaker 1: we watched with interest is Marito Droggy spoke about the
Speaker 1: employment picture in Europe, about the inflation picture as well,
Speaker 1: and saw him and the ECP try to walk back
Speaker 1: some of what he said. A great lead on a
Speaker 1: Bloomberg news piece this morning. This is what it sounds
Speaker 1: like when doves screech. What happened what do we learn
Speaker 1: about the way that central bankers communicate here over these
Speaker 1: last couple of days. Well, central bankers obviously have big
Speaker 1: impacts on the market. And uh, Mr Droggy had to
Speaker 1: correct perceptions a little bit yesterday, people getting a little
Speaker 1: interpreting him as being a little bit more hawkish than
Speaker 1: I think he wanted to be. Uh he said, Uh, no,
Speaker 1: we're going to take our time and moving towards balance
Speaker 1: sheet normalization this sort of thing. Um. But uh, certainly, certainly,
Speaker 1: I think that the sense that my my colleague George
Speaker 1: Surveyalis has come up with something very unusual. I mean,
Speaker 1: central banks don't normally coordinate on policy. I mean, if
Speaker 1: if at most you have some some moving in contain
Speaker 1: because the data are moving together across countries. Uh, and
Speaker 1: and they happen to be moving in the same direction.
Speaker 1: But but the the sense that Mr Droggy, I guess
Speaker 1: introduced the word coordination in his text. Uh. We wonder
Speaker 1: if we're gonna get a little pushback on that as well,
Speaker 1: now from him or for from some of his colleagues.
Speaker 1: But it's an interesting possibility. I think. Certainly, certainly the
Speaker 1: data have been have been suggesting there's room for that
Speaker 1: two sets of headlines coming out now as we interrupt,
Speaker 1: Dr Hooper of Deutsche Bank. This in the corporate world. David,
Speaker 1: I don't know if you've got these up on your screes.
Speaker 1: David has is faster, But what is that? Why does
Speaker 1: David Gurry have a better A few dollars? You know,
Speaker 1: my computer is like the original one Mike made years ago.
Speaker 1: Sky TV, is this gonna happen? Sky shares a race
Speaker 1: gains united inclination? Yes, the UK government inclined to refer
Speaker 1: the Fox Sky bid to to regulator. We were ex
Speaker 1: acting some word on that this morning. Indeed we did
Speaker 1: get that, and then uh, some news here about right
Speaker 1: eight and Walgreen's boots as well. They're mutually agring to
Speaker 1: terminate their merger. This has been something that's been undulating
Speaker 1: churning here for for many months. Five billion dollars. Absolutely,
Speaker 1: they're gonna do. Walgreens rather is going to authorize at
Speaker 1: five billion dollars share buyback program out of this, Walgreens
Speaker 1: will pay This is a kind of fee Peter Hooper
Speaker 1: would pay someone five million dollar termination fee. Wow. Yeah,
Speaker 1: Walgreen's at Walgreen's buying stories and assets and right aight
Speaker 1: for five point one eight billion dollars in cash. A
Speaker 1: couple stories will be following throughout the morning Berg surveillance.
Speaker 1: We won't make a Dr Hooper comment on why why
Speaker 1: don't you continue here with the David? It's almost schizophrenic?
Speaker 1: Is that the right world? You know? The action of bankers? Yeah? Exactly.
Speaker 1: Let me ask you here sort of what we heard
Speaker 1: you talking about the the the influence of Mr dr
Speaker 1: speech a couple of days to go back in train.
Speaker 1: He talked about the employment picture, the challenges facing European employment,
Speaker 1: how that dovetails with with inflation. What did you make
Speaker 1: of what he had to say there? In other words,
Speaker 1: there seemed to be some positive indications about sentiment in
Speaker 1: the Eurozone, positive indications about where the employment picture he's
Speaker 1: had it, but he still seems not satisfying. Well. I
Speaker 1: think the main reason not satisfied is inflation has been
Speaker 1: a little on the soft side, pably, and that's that's
Speaker 1: the key. That is. Ultimately, the ECB is objective, UH,
Speaker 1: and the employment picture of obviously feeds into that, and
Speaker 1: growth is important. UH. Growth has been doing pretty well,
Speaker 1: and the prospects there for for continued advancement and the
Speaker 1: one and a half two percent range over the year
Speaker 1: head seems seems reasonably good and the labor market likely
Speaker 1: picking up with that. UH. I think the interesting point
Speaker 1: is that he's suggesting that the softness and of inflation
Speaker 1: that that normally would keep a central bank like the
Speaker 1: ECB very much at bay is viewed as being transitory,
Speaker 1: which is the same kind of message you're getting out
Speaker 1: of the Fed. UH. And I think these these central
Speaker 1: banks generally are feeling we've been at these uh, you know,
Speaker 1: emergency floor levels for for quite a while. UM. There
Speaker 1: is a little bit of growing concern on this side
Speaker 1: of the Atlantic about financial stability issues may be associated
Speaker 1: with that. So UM, I think, yes, it's a little
Speaker 1: bit of a mixed mixed message out of out of Europe.
Speaker 1: But overall, this is a central bank that we think
Speaker 1: will will be UH tapering further round the end of
Speaker 1: this year and and progressing with with at a much
Speaker 1: slower pace, lagged a long behind the Fed, but is
Speaker 1: moving in that direction. Let me ask you about that
Speaker 1: descriptor transitory. Something that we heard from Cherry Yelling after
Speaker 1: her after that rate decision during her press conference, she
Speaker 1: said it many times are we certainly in the statement
Speaker 1: as well, do you agree with her on that point?
Speaker 1: Is it? How hard is it for her to defend
Speaker 1: the transitory nature of the inflationary headlines we're seeing here
Speaker 1: in the US? Well, UM so so the recent surprises
Speaker 1: of inflation, what what what's been driving that? UM? In
Speaker 1: March we had this this huge drop in in cell
Speaker 1: phone services service charges UH with with the BLS, UH,
Speaker 1: I think probably struggling a little bit to catch up
Speaker 1: on on some quality changes there and and maybe there
Speaker 1: was an unusually large observation. Since then, we've we've we've
Speaker 1: seen certainly in the CPI significant decline and in UM
Speaker 1: doctor's fees for example, medical health healthcare inflation has come
Speaker 1: down after after rising pretty pretty strongly. So you have
Speaker 1: this sort of a natural correction to slow down from
Speaker 1: from a very large increase previously. And that's I don't
Speaker 1: see UH pressures on healthcare inflation diminishing with the baby
Speaker 1: boom generation continue at age. I think that overall is
Speaker 1: gonna be so so uptrend. There other areas, uh, we
Speaker 1: we we had we had a drop in in apparel inflation,
Speaker 1: good inflation, and surprised a little bit to the downside.
Speaker 1: Apparel inflation had again risen well above where the producer
Speaker 1: prices had had been running. There they're catching up now, uh.
Speaker 1: And then and finally a little bit of a slowdown
Speaker 1: in in um rental inflation. Uh. Housing housing inflation, if
Speaker 1: you will. That is not a friend that we expect
Speaker 1: to continue either, because vacancy rates are low. So all
Speaker 1: of these factors, say transitory. Peter Hooper, thank you so much,
Speaker 1: very generous of your time, and again thank you to
Speaker 1: your colleague George Serveills for joining us in London earlier
Speaker 1: this morning. Dr Hooper is with Deutsche Bank joining us out.
Speaker 1: Doug cast Doug, I'm in therapy. It's no other way
Speaker 1: to put it. It's fun to watch the Yankees. If
Speaker 1: you had more fun watching your dreaded New York Yankees
Speaker 1: and years the greatest, the most fun I think I've
Speaker 1: had probably in ten years, you know. And and you
Speaker 1: saw it developing. You saw a bunch of young players
Speaker 1: being developed. And even Jim Palmer in our disc in
Speaker 1: our interview on surveillance a couple of months ago, was
Speaker 1: bullish on the Yankees and parish on the Orioles. Within
Speaker 1: this last night was exciting and yeah, I sent you
Speaker 1: an email. You noticed the standings as we have this
Speaker 1: interview winning percentage points FY three New York, always providing
Speaker 1: good notes to us. Why you keep your finger over
Speaker 1: the red button that would be the exit cast button
Speaker 1: anyway source for a global audience. This is exciting. And
Speaker 1: just one more comment on the baseball thing, Doug I
Speaker 1: said last year the Doug cast seats right by Joe
Speaker 1: Girardi to the left of the dugout, and there was
Speaker 1: this big lummox out on the on deck circle. And
Speaker 1: you have guys seen this. Rookie baseball players need time
Speaker 1: to lose the panic of OMG, I'm here and that's
Speaker 1: what we saw. Were there and judge for this year
Speaker 1: to last year, from last year to this year. And
Speaker 1: now you got this whole youth, this this kittie corps
Speaker 1: coming up. It's amazing and our judge, it's a remarkable.
Speaker 1: You've been wrong, Doug. The bull market continues. When does
Speaker 1: this at last Friday? All the gloom and you're not
Speaker 1: writing gloom crew emails? Describe the nuance of your caution
Speaker 1: on this bull market versus the usual doom and gloom
Speaker 1: stuff we all read well I think, I you know,
Speaker 1: the issue to me is not how high the SMP
Speaker 1: is this morning. The issue to me is how long
Speaker 1: the markets will stay this high? And I think to
Speaker 1: understand what's happened, what's happening today, we have to understand
Speaker 1: what's happened in history. And the fact is that very
Speaker 1: few active managers were able to deliver alpha over the
Speaker 1: last decade or so, and you saw it. They were
Speaker 1: not protected in the large drawdown in two thousand seven nine,
Speaker 1: for example. And the public looks at these outcomes and says,
Speaker 1: why they Actually, I pay higher fees to managers who
Speaker 1: can outperform or can identify specular blowoff or an imminent
Speaker 1: draw down of major magnitude. Let me just stay fully invested.
Speaker 1: Them might as well be in an e T F
Speaker 1: or an index fund. So since two thousand and seven
Speaker 1: the Great Recession, basically passive activities and indexing has risen
Speaker 1: from about eight percent to almost and um as you
Speaker 1: shift assets from active managers to passive managers, they buy
Speaker 1: an index. Since the index is capital weighted, it means
Speaker 1: more and more money is going into fewer and fewer stocks.
Speaker 1: And we've seen this before, and so have you. Guys.
Speaker 1: We saw it when I enter when I graduated business
Speaker 1: school in the early seventies. With the nifty fifty stocks,
Speaker 1: you outperformed only if you continued to go into them.
Speaker 1: If you were a growth stock manager in the late
Speaker 1: ninety nineties, you were. If you weren't buying the net
Speaker 1: stocks you under perform, you were fired. More and more
Speaker 1: money went into fewer and fewer stocks. NAZDAC ultimately declined
Speaker 1: by so you have a similar case today with the
Speaker 1: fang stocks. More money, more and more money is being
Speaker 1: deployed into a narrow and narrow area. In each case,
Speaker 1: this trend doesn't end. Well, let me ask you about
Speaker 1: the deal that we saw scuttle this morning between Walgreens
Speaker 1: and Right. What's your takeaway from what happened there? Does
Speaker 1: it does it sif the insight in teach for you
Speaker 1: into the regulatory landscape? Does it taste just specifically about
Speaker 1: the sense of this deal in and of itself. What's
Speaker 1: your take on what we saw this morning? Well, I
Speaker 1: would say not with regard into that deal David individually,
Speaker 1: but I do think that the political and regulatory landscape
Speaker 1: UM is moving unfriendly towards the market leaders. The fangs
Speaker 1: owing to obviously a market dominance, and you look at
Speaker 1: saying Amazon. The question is to me, and I've written
Speaker 1: on the street about this over the last month since
Speaker 1: the whole Whole Foods view was announced. The question to me,
Speaker 1: is Amazon a company that's providing lower product prices to
Speaker 1: the consumers or it is or is it creating jobs
Speaker 1: and the destroyer of our economy? And I think you're
Speaker 1: gonna hear a lot about going forward. Within all this
Speaker 1: is use of cash, which is a fundamental concept. And
Speaker 1: I might point out to those younger that Mr Kass
Speaker 1: has a little bit of experience and securities analysis. We're
Speaker 1: seeing it with a vengeance of the banks. Can do
Speaker 1: you have the courage to short the banks here? Doug? Actually,
Speaker 1: I just showed it UM this morning in pre market
Speaker 1: trading Bank of America City Bank in JP Morgan's on
Speaker 1: the ramp, and it's probably a trade look. I think
Speaker 1: the I followed the industry since I was a Nati
Speaker 1: rat and wrote a book called Citi Bank with Ralph Nader,
Speaker 1: and while I was finishing my MBA at Wharton. This
Speaker 1: is an industry that UM has de leveraged and has
Speaker 1: a low return on assets and is barely earning its
Speaker 1: cost of capital. Its valuations have risen dramatically, and the
Speaker 1: industry faces three dominant headwinds. Lower credit demand's going forward,
Speaker 1: a flattening yield curve, and low absolute interest rates. And
Speaker 1: this is that this is could potentially be a toxic cocktail.
Speaker 1: While the market is rejoicing this morning, well, I have
Speaker 1: a toxic cocktail with Fortress Moointing Hand. Good morning, Mr Money,
Speaker 1: And I know you're listening. Operating income at B A
Speaker 1: C has gone twenty four heaven and somebody's modeling out
Speaker 1: for next year thirty two billion large. I mean is
Speaker 1: a growth vector. Maybe it's not a diamond growth vector,
Speaker 1: but it's a Moointing hand growth factor. How do you
Speaker 1: short that growth factor in operating a little bit of
Speaker 1: h that's a little bit of data money, because you
Speaker 1: have to go back and see what the disaster was
Speaker 1: the five years prior to that, and you think we're
Speaker 1: going to revisit that disaster. I don't think we're gonna
Speaker 1: revisit I think the stocks are more than fully priced
Speaker 1: relative to their projected returns on equity. When you when
Speaker 1: you let me ask you, we we're talking about regulation
Speaker 1: here just a moment ago. We're gonna talk about stress
Speaker 1: tests a little later on on the program, But what
Speaker 1: is what we've seen here over these last two weeks.
Speaker 1: These two rounds of stress tests tell you about the
Speaker 1: health financial sector here in the US. The UM financial
Speaker 1: sector is um as relatively strong, especially visa v the
Speaker 1: pre Great Recession crisis and oh seven or nine UM,
Speaker 1: But so is the the industry's earning power. It's much lower.
Speaker 1: Doug Folding here, what share Yellin's doing in central bank?
Speaker 1: You do that it's not just all equity analysis for
Speaker 1: mr cast. We've had a real shift in the last
Speaker 1: two days, and really, for the first time since I
Speaker 1: can remember, it almost looks like a coordinated hope and
Speaker 1: prayer by bankers that inflation or disinflation will migrate into
Speaker 1: some form of greater inflation. Do you agree with the
Speaker 1: coordinated action of banks in their discourse in a rhetoric
Speaker 1: or does that end up being market volatility. I think
Speaker 1: that they're going to coordinate in terms of tightening. And
Speaker 1: what I really don't understand is the markets of bulliance. UM.
Speaker 1: I understand the bulliance following a period of historically large
Speaker 1: monetary large s I don't understand. I don't envision a
Speaker 1: positive response in the fullness of time from Tighten. It
Speaker 1: just doesn't follow. Um, I thought you were getting at
Speaker 1: something quote Yellings quote on Tuesday. Yeah that no more
Speaker 1: financial crisis. Yeah yeah, I mean it's remarkable. It's I
Speaker 1: did a piece entitled some really stupid Things undered by
Speaker 1: some really smart people on the street a day ago,
Speaker 1: and it's kind of a humble reminder David and Tom
Speaker 1: of how dim our visions are. We talk about the
Speaker 1: markets bulliance right now. Um, the fact as many sectors
Speaker 1: have gone down, many shorts have been quite successful in
Speaker 1: two thousand seventeen, and we live because of the domes
Speaker 1: of passive investing in quant strategies in the market without
Speaker 1: memory from day to day. Well, let's come back with
Speaker 1: memory and talk to Doug Cass, the Sebris Partners and
Speaker 1: lots to talk about. I think we should do a
Speaker 1: little more, maybe investing one oh one, which is in
Speaker 1: a log normal world, how not to lose money, which
Speaker 1: it maybe of sport with a sun investor wisdom on
Speaker 1: how not to lose money. Douglas cast Sea Breeze Partners.
Speaker 1: Doug is a guy named Van Tharpe, who wrote a
Speaker 1: really important book and in it a jewel of a
Speaker 1: chapter years ago on what he called position sizing. I
Speaker 1: call it in my lectures the how much idness, which
Speaker 1: is something nobody ever talks about, which is you decide
Speaker 1: to do this long, this short, and the real art
Speaker 1: is how much do you put into the trade? If
Speaker 1: you've been short and you've been in a long bullmarket,
Speaker 1: how do you not get wiped out? How does Doug
Speaker 1: Cass do the how much idness when you commit to
Speaker 1: a trade? Great question? Um One of the things. First
Speaker 1: of all, position size is a function of your time
Speaker 1: frames and also of your risk appetite or risk profile.
Speaker 1: I personally, personally, I am a very conservative short seller.
Speaker 1: Um so I relatively small positions, particularly against my core
Speaker 1: investment long positions as well. I do a lot of
Speaker 1: synthetic puts. I short stocks and buy out of the
Speaker 1: money calls. So what does that do for me? That, basically,
Speaker 1: um um allows me to quantify the risk I have
Speaker 1: not only in each individual short but in my entire portfolio. Essentially,
Speaker 1: I'm paying for the privilege of protecting the short position,
Speaker 1: and that worked out obviously very well for me in
Speaker 1: seven and two thousand seven to two thousand nine, and
Speaker 1: I suspect when the markets finally do break as they
Speaker 1: always have historically, it will work out going forward. Doug,
Speaker 1: how much is the price of oil right now shaping
Speaker 1: your investment outlook? Well, something that no one early is
Speaker 1: talking about. I'm of the view that not only stocks
Speaker 1: are over priced, but so are bonds and UM. I
Speaker 1: believe that the tenure is based upon my calculus is
Speaker 1: projecting a real growth in the domestic product and domestically
Speaker 1: UM and that's too low. UM. And the recent decline
Speaker 1: in the price of oil going as Dennis Gartman our
Speaker 1: friends says, from the top of the left chart to
Speaker 1: the bottom right is historically at least that's what I
Speaker 1: learned to business school and used to work in the
Speaker 1: seventies and eighties and nineties until Quan Trating took strategies
Speaker 1: took over. That's a stimulant to growth. When you when
Speaker 1: when you you mentioned Whole Foods a little while back,
Speaker 1: I want to ask you about that deal, in particular
Speaker 1: what it says about the direction of retail. When that
Speaker 1: news broke, Tom and I were scrambled just to figure
Speaker 1: out what directionally that that means when when Doug has
Speaker 1: breakfast at mar Lago, I forgot about that the avocado omelet.
Speaker 1: You know he wants a blue free Whole Foods avocado. Yeah,
Speaker 1: that's the way it is. You know, I was. I
Speaker 1: actually had dinner when the when the President of China
Speaker 1: was there, you were there? Did you conduct foreign policy
Speaker 1: with everyone else there? For the briefing? I was with
Speaker 1: a high level I do have Republican friends. I was
Speaker 1: with a high level exclusive. But Doug, what does that
Speaker 1: say to you? Doesn't know that direction to retail? What
Speaker 1: is the Whole Foods Amazon deal say to you? Well,
Speaker 1: the disruption continued, but you know I would questioning. I
Speaker 1: would question and suggest we are approaching peak Amazon and
Speaker 1: Pink Fang for the reasons I mentioned UM as well
Speaker 1: as you know the growing political and regulatory risk of
Speaker 1: these companies face. Look at look at the advertising. Could
Speaker 1: for a second, Facebook and Google have approximately of online
Speaker 1: add dollars going to them. UM online advertising accounts for
Speaker 1: roughly of total advertising today, so multiply point eight times,
Speaker 1: and that means they have roughly those two companies have
Speaker 1: total advertising in this in this country, and that's probably
Speaker 1: in the process of speaking. No one's talking about that much.
Speaker 1: Tug one fund a question if if we could, when
Speaker 1: do you cover a short? If we get to down,
Speaker 1: do you change your view? Mean, how do you flip
Speaker 1: to being a bull? Well, I'm not flipping to being
Speaker 1: a bull. Um. You know, I am concerned about increasingly
Speaker 1: about sector risks. I'm concerned about a higher percentage as
Speaker 1: I mentioned of assets and then index funds, and I'm
Speaker 1: worried that both quant strategies and passive and thing which
Speaker 1: has been a stabilizing influence and the tall wind for
Speaker 1: the equity markets will become destabilizing influences because fear ultimately
Speaker 1: will enter the marketplace. We probably don't know what the
Speaker 1: specific catalyst. And all you all you have to do
Speaker 1: is ask two words at that point, to whom are
Speaker 1: index funds and ets going to sell to? They don't
Speaker 1: carry any cash reserves, and active marriages who have diminished
Speaker 1: in size, most of them aren't carrying high level of
Speaker 1: liquidity for fear of business. The last margin the development
Speaker 1: of potentially a perfect storm. Okay, a perfect storm, yes,
Speaker 1: that defines the New York Yankees does thank you so much?
Speaker 1: This is Bloomberg runch you by Bank of America Mary Lynch.
Speaker 1: With virtual reality, virtually everything will change. Discover opportunity is
Speaker 1: in a transforming world. Be of a mL dot Com,
Speaker 1: slash VR, Mary Lynch, Pierced Fenner and Smith Incorporated. We
Speaker 1: love to get in guests when they're wrong, beat them up,
Speaker 1: make them clear that we keep scoring Bloomer surveillance, and
Speaker 1: every once in a while we're afforded the luxury of
Speaker 1: a victory. Let Charles Peabody is one of the deans
Speaker 1: of bank Analysis UH on the street and you need
Speaker 1: a major victory left Charles a year and a half ago.
Speaker 1: Charles Peabody said, not now, but a year and a
Speaker 1: half from now, the casts bigott will turn it. We
Speaker 1: that's what we're observing in the last forty eight hours right, definitely,
Speaker 1: and and and I was even more conservative than most
Speaker 1: street analysts on the c car Copita return requests. So
Speaker 1: um it beat all expectations within this is the durability
Speaker 1: Doug cast was just on with us UH cautious on
Speaker 1: banks for a set of good reasons. You would push
Speaker 1: against that, I believe and say their cash machines are
Speaker 1: they their own internal a t M machine from a
Speaker 1: CAPO perspective, they do have excess capital, and that was
Speaker 1: the state. But on the P and L you have
Speaker 1: to sort of split the regionals and the money center
Speaker 1: banks and the brokers. I think you're gonna see very
Speaker 1: weak second quarter earnings out of the brokers and money
Speaker 1: center banks because the capital markets have not been very robust,
Speaker 1: and that's going to lead to a lot of estimate
Speaker 1: cuts and I think more to come in the second
Speaker 1: half of the year could be importantly here, Mr pebody
Speaker 1: nudging towards the world of Doug Gass, which is a
Speaker 1: scary thing to say. Can Jamie Diamond keep double digit
Speaker 1: dividend growth going five year dividend growth? Is this a
Speaker 1: single digit world for Mr Diamond? I think it is
Speaker 1: a single digit on the dividend for him. He's pushing
Speaker 1: up against that soft cap of a thirty percent payout
Speaker 1: ratio of earnings. So now to wrote to raise the
Speaker 1: dividends function of your earnings power, and it's tough to
Speaker 1: grow earnings double digits well, particularly here with the Domino GDP.
Speaker 1: We just I said, what's your single best buy. We're
Speaker 1: gonna come back and talk to you more about banking,
Speaker 1: but do you have a single best buy right now. Well,
Speaker 1: you know I don't have by rated stocks at the
Speaker 1: moment um just because of the weak earnings outlook. Um,
Speaker 1: but there's no question that City group hit the ball
Speaker 1: out of the park um in this capital. Let's do that.
Speaker 1: We don't talk enough about Mr Corbett. Let's let's come
Speaker 1: back with a trust Peopody and talk about I don't
Speaker 1: say that David I saw him. Do you know? I
Speaker 1: got the banker wave. The banker wave David is when
Speaker 1: the bankers see me from forty two feet away the way,
Speaker 1: you know, like like they got four handlers around him. No,
Speaker 1: don't talk to him. I got I got the Corbett bank.
Speaker 1: You know it's a banker wave. It happens. Wait, Larry
Speaker 1: Fink doesn't give me the banker wave, will actually come
Speaker 1: and talk to me? The banker I Joe Joey and
Speaker 1: Joey Vangelista wants crushed Jamie Diamond's elbow. Screet, don't talk
Speaker 1: to jamis Joe That hurts Anyways, it's fun the banker wave. Yeah,
Speaker 1: we'll come back with Charles Peabody truly excellent on the
Speaker 1: major in the regional banks and get some wisdom and perspective.
Speaker 1: David Garrett and Tom Keane here in New York in
Speaker 1: eleven three Studio, So with Charles Peabody, Great to have
Speaker 1: you with us. You're talking about the banks. Let me
Speaker 1: start just by asking you broadly about these stress tests.
Speaker 1: We've just been through them at this point now a
Speaker 1: few years into them. How much have they improved? How
Speaker 1: how much they telling you about the health of the
Speaker 1: banking sector? Oh, dramatically improvement? Um. I mean, the amount
Speaker 1: of capital that they returned in this exam was way
Speaker 1: beyond anyone's expectations. And they still have excess capital. So
Speaker 1: you know, returning a percent of your net income is
Speaker 1: probably going to continue going forward. How much do they
Speaker 1: stand to change you as you survey if you look
Speaker 1: ahead here to what the regulatory landscape could look like
Speaker 1: six months a year out, are we going to see
Speaker 1: a different kind of test going forward? You know, one
Speaker 1: could argue that this test showed some leniency from the
Speaker 1: regulatory community and that may continue under Trump. But caution
Speaker 1: about getting too far ahead of yourself on that front,
Speaker 1: because I think financial legislative reform is probably dead in
Speaker 1: the water. Into healthcare and tax reform, and we get
Speaker 1: through the midterm elections, so it's not going to happen
Speaker 1: until nine the earliers. If you look at regulatory fiat reform,
Speaker 1: that's the way it's going to occur. But even there,
Speaker 1: the process is you've got to get the nominees in place.
Speaker 1: You're not going to get confirmation hearings probably until early eighteen,
Speaker 1: and then you've got you know, and not notice the
Speaker 1: proposed rulemaking the hearing periods. You're probably not gonna get
Speaker 1: formal rules changed until early two tho nineteen. On the
Speaker 1: regulatory fiat front, where are we with the regionals? We
Speaker 1: have a huge wrong bias here two six or seven
Speaker 1: big banks. Where are we on the regionals right now?
Speaker 1: Do they have a place in the future of banking? Well,
Speaker 1: you know, at compass point, um, the position is very
Speaker 1: constructive on the regional banks. Um. Now they are you know,
Speaker 1: they're going to benefit from the steepening neal curve um
Speaker 1: and from you know, the rate hikes if that continues. Um.
Speaker 1: The problem is the loan growth remains fairly in na
Speaker 1: make at three percent. And that's that's the problem I'm
Speaker 1: having with banks in generalists. I'm just not seeing the
Speaker 1: economic activity either in the lending markets, where the capital markets,
Speaker 1: and so you know, there's only so much cost cutting
Speaker 1: you can do. And we're probably on the other side
Speaker 1: of the credit spectrum where credit costs now are going
Speaker 1: to rise, so you need much more stronger revenue growth. Ok,
Speaker 1: that's right where I wanted to go, and then I
Speaker 1: want to go to City Group. Then are we going
Speaker 1: to see nominal GDP or better revenue growth or is
Speaker 1: it going to be we must merge and combined because
Speaker 1: we don't have five or six or seven percent revenue growth.
Speaker 1: I think in the muddle through economy that we seem
Speaker 1: to be having a one and a half two percent
Speaker 1: GDP growth. You're going to see much more of a
Speaker 1: combination of firms take place at the regional bank level.
Speaker 1: How is Mr Corbett's challenge different from Mr morning Hans
Speaker 1: or Mr Diamond's. Well, he's transformed the bank from what
Speaker 1: was really a consumer led orientation to much more of
Speaker 1: a corporate led orientation. As you know, Corbat and Freeze
Speaker 1: both came out of Solomon Brothers, and that's where they're
Speaker 1: more comfortable taking their risk so that the challenges can
Speaker 1: they improve their capital markets positions, particularly on the equity side.
Speaker 1: Do they have a desire to do that or are
Speaker 1: they so far behind they can't catch up. No, they
Speaker 1: have a very strong desire to do that. I mean,
Speaker 1: they've got an excellent thick franchise fixed income currency franchise,
Speaker 1: but their week sister on the equity side, and they've
Speaker 1: been pushing pretty aggressively on the equity side up their position.
Speaker 1: How do they do that? Do they do it with
Speaker 1: a global projection? Do they do it with marketing and brandy?
Speaker 1: Do they do it by retaining? Do we get into
Speaker 1: a body war which no one's expecting. The body war
Speaker 1: that I'm seeing is that they're being much more aggressive
Speaker 1: in the bidding, for example, on the equity front. What
Speaker 1: do you mean by bidding? Bidding for what? Deals? From deals?
Speaker 1: For example? On the equity side. Right now, we're seeing
Speaker 1: a lot of equity issues through what we call block
Speaker 1: overnight deals where you you buy the deal at four
Speaker 1: pm and you try and sell it out before it's
Speaker 1: called blue Apron is what we call not going well
Speaker 1: this week. I believe Goldman's lead has been set in
Speaker 1: the dinner tables, Mr Mr Corbett. It's only it's seamless
Speaker 1: and and we saw this happen in fourteen and early fifteen,
Speaker 1: and then all of a sudden the markets fell in
Speaker 1: the second half of fifteen and City got hurt in
Speaker 1: the fourth quarter because they were trying to do that. Um.
Speaker 1: So it's a question of managing the risks. Um they
Speaker 1: have managed them well so far. I mean there's a
Speaker 1: guy over over overlooking all this, who's who was pretty important,
Speaker 1: a guy named O'Neill out of Hawaii. How's Michael O'Neill done?
Speaker 1: And giving Corbett the chairmanship guidance to reframe the disaster
Speaker 1: that it was. I think they've set out a very
Speaker 1: constructive strategic plan and Corebat has been executing on that.
Speaker 1: It's taken longer than I think anyone answer. They need retail,
Speaker 1: they need cards and and that's the big growth story
Speaker 1: for the second half of the year is that we're
Speaker 1: going to see the card business. Am I gonna get
Speaker 1: a hundred thousand dollar visa hundred thousand mile visa card
Speaker 1: out of City Group? That's all they want to know.
Speaker 1: That's what has come down to, right And by their
Speaker 1: own admission, they had under invested in that card business.
Speaker 1: And about two years ago they started really pushing that
Speaker 1: card business and and now we're starting to see a
Speaker 1: payoff in the second half of the year UM. But
Speaker 1: it's coming at a time where there's an inflection the
Speaker 1: credit costs and all these banks are having to raise
Speaker 1: their assumptions of of credit costs. Question is how rapidly
Speaker 1: do they rise versus where David Guru lives. There six
Speaker 1: branches on the corner. It's called over banking. The City
Speaker 1: Group over banks. Are they over branched not? City Group
Speaker 1: does not have the branch structure that a b of
Speaker 1: A or JP Morgan has in the United States, in
Speaker 1: New York City and in certain pockets they do. And
Speaker 1: that's their strategy is to target urban areas. We're talking
Speaker 1: about blockchain and bit coin and cryptocurrency literally on on
Speaker 1: the program. When you look at when you look at
Speaker 1: all of the banks, who's best positioned uh to to
Speaker 1: embrace technological change in the industry, Well, I think J. P.
Speaker 1: Morgan and Jamie Diamond in you know, years ahead of
Speaker 1: the other major banks and investing in technology UM so
Speaker 1: I would say that they probably have the advantage. But
Speaker 1: everyone's you know, investing in digital um technology right now,
Speaker 1: and they're all going to end up in the same place.
Speaker 1: How big of a way our student loans. We're talking
Speaker 1: about delinquencies on the show yesterday, the prospect for more
Speaker 1: than an auto loans and in student loans. When you
Speaker 1: when you look at the big banks, how much of
Speaker 1: a weight is that on them. It's a non issue. Yeah,
Speaker 1: I mean even auto ending, where they're obviously going to
Speaker 1: be problems in the subprime area, it's less than four
Speaker 1: percent of their loan exposure. It's not going to move
Speaker 1: the needle. The needle is going to be moved by
Speaker 1: what happens in cards. The student loans and autos really
Speaker 1: aren't going with the needle. I'm glad you bring this up,
Speaker 1: because this is why I wanted to bring this up
Speaker 1: in my brain. Froze. I'm still getting over talking too
Speaker 1: much Inkee baseball, Doug cam So you know this is
Speaker 1: what we do, folks. People go, well, you if you
Speaker 1: have someone from the Cato Institute on, you have to
Speaker 1: have some leftists on to balance. That's what we're doing,
Speaker 1: your folks. We had casts on who loves at Yankees
Speaker 1: and Peobody who's got a retired number out at Fenway
Speaker 1: Party went to so many games as a kid. People
Speaker 1: forget that City Group is seventy billion in revenue and
Speaker 1: JP Morgan is a hundred billion in revenue. What the
Speaker 1: tenth of a trillion dollars? My number one complaint, Charles,
Speaker 1: is the media and so much of the public don't
Speaker 1: realize how big these things are. Are they too big
Speaker 1: to fail? Thank you, Andrew. Oh, they definitely are too
Speaker 1: big to fail. And and that too big to fail
Speaker 1: concepts still exists worldwide, as we just saw with the
Speaker 1: Venetian banks in Italy. Um, they had to be bailed
Speaker 1: out at the expense j P. We're gonna be allowed
Speaker 1: to buy us by European banks? Why not? I think
Speaker 1: that concentration of power would be dangerous. Um. You know,
Speaker 1: I think we need large banks to compete internationally, but
Speaker 1: do we need large banks in every single continent? And
Speaker 1: they learned this the hard way. I mean City Group
Speaker 1: pre Corbett learn this in Mexico, right, Yeah, I mean
Speaker 1: they've struggled with their Banner X franchise, and and that's
Speaker 1: one of the areas that they're trying to beef up
Speaker 1: and invest in. And there should be a payback presumably
Speaker 1: next year. There are actually already starting to generate some
Speaker 1: positive operating leverage in Mexico. What's the message that the
Speaker 1: takeaway that you have from what we saw in Italy
Speaker 1: and Spain about the way that government's intervened in those banks. Well,
Speaker 1: as you know, there were subtle differences between what happened
Speaker 1: in Spain and Italy. But um, to me, it's that
Speaker 1: the rules are going to be changed to affect a
Speaker 1: process that disrupts the markets the least and all of
Speaker 1: these you know, regulators are looking at markets and are
Speaker 1: worried about markets and the and the feedback mechanism if
Speaker 1: markets go awry. Charles, people do to thank you so much.
Speaker 1: Congratulations and figuring out use of cash long before others here. Um,
Speaker 1: I should point out I have no ownership of financial shares.
Speaker 1: David leverage cash triple average, the double leverage, double leverage
Speaker 1: cash cash fun. It's been great. I mean, the markets
Speaker 1: are terror. You can't make money in stocks, folks, what
Speaker 1: a joy and timely jab with us. Daniel Jurgen, who
Speaker 1: is known for oil. I just sold six copies of
Speaker 1: the book The Prize, which came out. John D. Rockefeller
Speaker 1: read it. Um. It came out a few years ago,
Speaker 1: and I said to some youngsters in the oil business.
Speaker 1: I said, you can't do your business unless you read
Speaker 1: your in the prize, and of course, uh, the Quest,
Speaker 1: which I'll call an update highly readable sandwich. In between
Speaker 1: it was The Commanding Heights, which is a book I
Speaker 1: throw at people too often, the Battle for the World Economy,
Speaker 1: and um the Royalty check I get annually from Oran.
Speaker 1: It's awesome on that, Dan Jurgen, in honor of Lord Patton,
Speaker 1: who I spoke to today of kiss Hong Kong. Mr
Speaker 1: Jurgen joining us, and I quoted to Lord Patton Jurgen
Speaker 1: from Commanding Heights in Hong Kong, it's seen the particular
Speaker 1: advantages of location and the accident of history that had
Speaker 1: brought enterprise and investment to ninety nine. And then you
Speaker 1: go on brilliantly to say the classical liberal system in
Speaker 1: the colony compared to what was going on in the
Speaker 1: United Kingdom. That was really I remember that years ago
Speaker 1: in your book. Give us an update on the experiment
Speaker 1: of Hong Kong. Is it working well? Hong Kong stood
Speaker 1: out because it was such a vibrant center of global
Speaker 1: globe markets and capitalism and contrast to mouse China. But
Speaker 1: of course, the world has moved on tremendously since then,
Speaker 1: not only the rest of Asia, but China itself. Is
Speaker 1: U such a economic powerhouse in such a center of
Speaker 1: the world economy. I was thinking just the difference between
Speaker 1: UH when the handover of Hong Kong occurred to China,
Speaker 1: two systems in one country and a degree China not
Speaker 1: yet joined the World Trade Organization, and there wasn't the
Speaker 1: sense that there was UH the G two, the United
Speaker 1: States and China. But now China has so much more
Speaker 1: of a preponderant role in the world economy. Do they
Speaker 1: play with a fair deck? I mean, the President the
Speaker 1: United States gets upset about other countries and then maybe
Speaker 1: he's got a bit of a zero sum architecture there
Speaker 1: in defense of the President the United States, Is China
Speaker 1: playing with a fair capitalistic commanding heights deck? Know that
Speaker 1: they play with it? Used to be socialism with Chinese characteristics,
Speaker 1: as a as Dung show Ping put it, And now
Speaker 1: I guess you would say it's capitalism with Chinese characteristics.
Speaker 1: It's clearly the state has a very big role in
Speaker 1: the economy and UH. I think it's striking to me
Speaker 1: when I've heard American CEOs talk in the last few years,
Speaker 1: they're feeling that they don't have the same access to
Speaker 1: the market as as as their Chinese competitors. So, uh,
Speaker 1: it's it is. It is still a different system. Hong
Speaker 1: Kong was a place to go. I wonder if you
Speaker 1: were talking to a recent graduate of your alma mater
Speaker 1: thinking of moving overseas, would you counsel moving to Hong
Speaker 1: Kong here in the year two thousand seventeen doesn't have
Speaker 1: the same sense of dynamism and opportunity that it had
Speaker 1: back then. I think it would be one of the locations,
Speaker 1: but it would not be you know, it would not
Speaker 1: be the standout location. I mean, going to Asia makes
Speaker 1: a lot of sense. Uh. You know, you might say
Speaker 1: go to Shanghai, or you might say go to bay Jing.
Speaker 1: I'm struck, you know. I remember in the late eighties too,
Speaker 1: you'd see a lot of young people went to Japan
Speaker 1: because Japan was going to be number one, if you
Speaker 1: remember the title of that book. And now, of course
Speaker 1: you go to Beijing and you see so many young Americans,
Speaker 1: many nationalities there and with a sense of vibrancy that
Speaker 1: is in the overall Chinese economy and the recognition of
Speaker 1: how important China is in the global economy. The number
Speaker 1: of students who study Chinese, of course at universities has
Speaker 1: just shot up. Don't you're gonna help us understand what
Speaker 1: we saw in Saudi Arabia a couple of weeks ago,
Speaker 1: the the the institution of a new heir apparent in
Speaker 1: the kingdom there. You know the region so well, the
Speaker 1: history and the politics of it. What should we what
Speaker 1: should we uh take away from what we saw there
Speaker 1: in Riot a couple of weeks ago. I think we
Speaker 1: should take away that Mohammed ben Solomon, who was the
Speaker 1: deputy Crown Prince and promoted to Crown Prince, is a
Speaker 1: person who's really in charge of the country right out. Uh.
Speaker 1: He has a defense portfolio even before he moved up,
Speaker 1: the economic portfolio, the oil portfolio, and uh he's the author,
Speaker 1: he's the driving force behind this vision which is seeking
Speaker 1: to to sort of move the Saudi economy into into
Speaker 1: you know, in a sense we've been talking about Asian
Speaker 1: to a more modern, engaged economy that isn't just based
Speaker 1: upon oil. It's a very big job to do that
Speaker 1: isn't so far away. How big you mentioned all of
Speaker 1: the breadth of his portfolio, and we're interested in the
Speaker 1: role that oil plays in that. Of course he's talked
Speaker 1: about moving away from the kingdom's reliance on on oil. Uh,
Speaker 1: how how well to pace is that transition going? How
Speaker 1: how how far along are we in that transformation? I
Speaker 1: think it's it's still it's still very early days. And
Speaker 1: it is interesting that I mean in the crucial to it.
Speaker 1: I mean the ideas that versify the economy away from oil.
Speaker 1: In order to do that, you need oil. You need
Speaker 1: to sell a lot of oil to rate the income
Speaker 1: to do what they want to do. I think it's
Speaker 1: still very much in a phase of getting getting getting ready,
Speaker 1: trying to get things into place. And of course, um,
Speaker 1: with oil at forty five dollars, it puts a lot
Speaker 1: more pressure than it would be if oil is sixty
Speaker 1: or seventy dollars and more urgency. What do you learn
Speaker 1: from your consultancy? What do you learn from the PhDs
Speaker 1: and petroleum knee deep in this and linking it into economics,
Speaker 1: what's the insight Dr Jurgen that you hear seminar after
Speaker 1: seminar that matters well? I think, um, because I think
Speaker 1: about the research we do at h S Market. I
Speaker 1: think I just came back from Detroit, where we did
Speaker 1: we have a sort of a study group involving a
Speaker 1: number of companies on our own experts called Reinventing the Wheel,
Speaker 1: trying to understand how transportation will change, how what type
Speaker 1: of vehicles people move in will change. And I think
Speaker 1: that's obviously I find everywhere I go that's on the
Speaker 1: minds of a bil global oil industry, as it is
Speaker 1: of course the automotive industry and a tech industry that's
Speaker 1: kind of convergence of them. I think the other big
Speaker 1: questions are the kind of the perennial questions understanding, you know,
Speaker 1: the overall forces of supply and demand, and and how
Speaker 1: the rest of the world is accommodating to this new
Speaker 1: force that has emerged out of US innovation basically, which
Speaker 1: is a shale oil and shale gas. And I was
Speaker 1: struck as I've been traveling in around the world in
Speaker 1: a way other countries almost first of all, see the
Speaker 1: change in the U S energy position more dramatically than
Speaker 1: we may do. And secondly, the growing recognition that the
Speaker 1: shale industry and the way it operates is a major
Speaker 1: new force in the in the world economy. Let's come
Speaker 1: back and talk a bit about the shale economy. Let
Speaker 1: me ask you one question though, about what you were
Speaker 1: just mentioning there. Your trip to Detroit. Is our imagine
Speaker 1: a two bridled, not unbridled, but bridled. When we think
Speaker 1: about the future of cars, we think about autonomous vehicles
Speaker 1: and driverless cars. Are you are you foreseeing something when
Speaker 1: you imagine what the future of ground transportation looks like?
Speaker 1: What do you foresee happening? Well, I think we've learned
Speaker 1: again and again that you know, these kind of things
Speaker 1: that to change can happen in ways that you don't
Speaker 1: expect and don't see. I mean, it's the tenth anniversary
Speaker 1: of the iPhone, who imagined this whole new economy based
Speaker 1: upon Have you predicted that in the prize? I was
Speaker 1: in an event last week the Prime Minister Motive from
Speaker 1: India and he was saying how India is in, as
Speaker 1: he put it, in a digital mood, and he wants
Speaker 1: to move everybody to online banking, out of out of
Speaker 1: the cash system, although after what happened in Ukraine, you
Speaker 1: may want to think twice about about doing that. So
Speaker 1: I think we're we find that, you know, you really
Speaker 1: do have to use kind of realistic stories about the
Speaker 1: future scenarios to try and to see what are the
Speaker 1: kind of going to be the milestones on the way
Speaker 1: to how the transportation system changes. But I think I
Speaker 1: would say, I would say that there's such a focus
Speaker 1: on this that this wasn't there two years ago. I
Speaker 1: guess I want to go here. Uh, doctor, you're going
Speaker 1: more towards your wonderful book to quest. I picked it up.
Speaker 1: I was like, yeah, yeah, you know, like a big
Speaker 1: deal and it's highly readable about the new world of hydrocarbons. Doctor,
Speaker 1: you're gonna where are the big oil companies in ten
Speaker 1: or twenty years. They're not dinosaurs, but what are they?
Speaker 1: I think they will become, first of all, more gas companies,
Speaker 1: more focused on natural gas. Uh. Secondly, I think you
Speaker 1: see the big companies hung back from shale. They left
Speaker 1: it to the independence, and I think they now see
Speaker 1: that shale needs to be part of their portfolios because
Speaker 1: of the flexibility. It gives them to sort of flex
Speaker 1: their systems up and down as the markets change. But
Speaker 1: I think they're all going I think back to ours
Speaker 1: Syahweed conference a couple of months ago. I think they're
Speaker 1: all going through a sort of soul searching about, you know,
Speaker 1: what what kind of energy transition is at hand and
Speaker 1: what their role in it will be. So uh, I
Speaker 1: think you know, they'll still be there. There'll be large players.
Speaker 1: World demands still I think over the next ten or
Speaker 1: twenty years will continue to grow, but they are kind
Speaker 1: of looking at how much do they need to move
Speaker 1: into other parts of this sort of value chain and energy.
Speaker 1: I would say that other big thing is gas. Really
Speaker 1: they you know, they start to refer them to selves
Speaker 1: as gas and oil companies rather than oil and gas companies.
Speaker 1: As we look here at oil in the mid to
Speaker 1: high forties, I wonder if you think we're facing more
Speaker 1: bankruptcy is not the major oil corporations, of course, but
Speaker 1: in the industry as a whole. I think that we
Speaker 1: you know, over a hundred companies went bankrupt after the
Speaker 1: twenty fort when prices really started down. Uh. Their assets
Speaker 1: remained there, just the companies went through reorganizations in some form.
Speaker 1: I think that the companies have generally re engineered themselves,
Speaker 1: uh for to operate at a much lower cost level.
Speaker 1: When this when the prices started to collapse, the end
Speaker 1: of the assumption among many was it at seventy dollars.
Speaker 1: These companies disappear. They have now re engineered themselves to
Speaker 1: work at forty to fifty dollars a barrel. So I
Speaker 1: think there's a much greater resilience there in the system. Obviously,
Speaker 1: the closer you get to forty, the more the more
Speaker 1: pressured creates on these companies. But I think and what
Speaker 1: we see we just didn't analysis look at the whole
Speaker 1: cost structure of the industry around the world. You see
Speaker 1: this kind of re engineering to operate more in a
Speaker 1: kind of fifty dollar world. And looking back on a
Speaker 1: hundred dollars is uh it was a few years ago
Speaker 1: was seen as a new normal. Now was seen as
Speaker 1: an oberration. I want to up the script. Uh, DR,
Speaker 1: you're going, which we can always do for you. You
Speaker 1: and I are at Davos. What people don't know is
Speaker 1: there's a valley as we look out to the right
Speaker 1: side of our TV set, and it's a glacier there.
Speaker 1: That's I think in five or ten years, DR, You're
Speaker 1: going to glacier will be on our set the way
Speaker 1: it's coming down the mountain. There's a glacier iceberg in
Speaker 1: Antarctica right now, that's the size of Delaware or something.
Speaker 1: It's going to break off, and nobody knows what's going
Speaker 1: to happen to it. Give us an update on your
Speaker 1: thoughts on climate change, in your thoughts on the calculus
Speaker 1: of climate change, the rates of change of climate change,
Speaker 1: I'm not a first thing I have to say is
Speaker 1: I'm not a client scientist. So uh, but you read
Speaker 1: it and everybody knows you come on, right, So I
Speaker 1: think that, um, you know, the recognition is that you
Speaker 1: know the climate is changing. Uh, there's a wide spectrum
Speaker 1: of alarm at how fast it's going to change. Yeah. Uh,
Speaker 1: and it's I think you see, Uh, if you look
Speaker 1: at the oil industry, you see a number of the
Speaker 1: major companies now in favor of a carbon tax to
Speaker 1: kind of give a kind of predictability to future investments
Speaker 1: within that in the the auction process, and now it
Speaker 1: hasn't worked in Europe. And that is the rate of
Speaker 1: change of all this is this all happening faster than
Speaker 1: we thought? Is? What is climate change happening faster than
Speaker 1: we thought? I don't know. I mean, it's been so
Speaker 1: heavily studied that I don't know if you can say
Speaker 1: that the pace is faster than we thought. I mean,
Speaker 1: you know clearly the carbon levels are higher, and we're
Speaker 1: much more conscious of change. I saw that the Chancellor
Speaker 1: mercle just today reenforced that all the European countries remained
Speaker 1: committed to the Paris Agreement. I think the other aspect
Speaker 1: of it is that, you know, the energy base is changing.
Speaker 1: There is a growing role of renewables, wind and solar
Speaker 1: now or eight percent of our electricity. Does it change
Speaker 1: the sense of system for going to renewable energy? That is,
Speaker 1: if you have an administration that isn't backing it to
Speaker 1: the degree the previous one was, Is that change what
Speaker 1: companies are investing in? Well? I think that the in
Speaker 1: the US, I mean, obviously the real focus was on
Speaker 1: Paris and whether we were in or out, and with
Speaker 1: all the repercussions that people have on different sides of it.
Speaker 1: But of course Paris did not commit countries to specifics things.
Speaker 1: Was that they said they do these things. To me,
Speaker 1: what stands out is, uh, well, two things. One Trump
Speaker 1: administration he said that he was going to back out
Speaker 1: of Paris, and so in a way it shouldn't be
Speaker 1: a surprise that that he took the US out of it,
Speaker 1: or seeks to take the U S out because it's
Speaker 1: a long process. But I think what's really significant is
Speaker 1: the tax incentives that were put in at the end
Speaker 1: of and we think that as a result of those,
Speaker 1: two thirds of the new electric capacity will be wind
Speaker 1: and solar. And that's a that's a change, and that's
Speaker 1: going to happen. Whatever. We have to leave it there. Dan,
Speaker 1: You're gonna thank you so Much's never enough time with
Speaker 1: Dr Jurgen read the quest. This is Bloomer David Girl.
Speaker 1: I am in such shock I can't speak. It is
Speaker 1: so unique in the history of the nation to have
Speaker 1: a Chairman of the House Ways and Means Committee actually
Speaker 1: show up on time for a radio interview. I believe
Speaker 1: that's the first. It goes back at least to Madison
Speaker 1: and maybe as far as Washington. And we thank the
Speaker 1: Chairman of the House Ways and Means Committee, that is
Speaker 1: one Kevin Brady, the congress from the eighth District in Texas.
Speaker 1: That's Montgomery County, Walker County, just north of Houston. If
Speaker 1: I'm not the mistaken joining us on our phone life
Speaker 1: this morning, is no more important person to talk to
Speaker 1: on the issue a tax form in particularly than Congressman.
Speaker 1: Pretty great to have you with us this morning. Thank
Speaker 1: you for that intro, the Madison reference. So I'll take it.
Speaker 1: We'll see where we go. Let me ask you for
Speaker 1: Let me first ask you about the calendar here Congress
Speaker 1: approaching the July fourth recess. Say you guys come back.
Speaker 1: You've got about ten legislative working days, if I'm not mistaken,
Speaker 1: and then it's onward to the August recess. How worried
Speaker 1: are you at this point about the compressed congressional calendar? Look, Um,
Speaker 1: I'm not look it. Uh, we know what the schedule is. Um,
Speaker 1: I'm confident. Frankly, the Senate is going to resolve their
Speaker 1: differences and deliver on healthcare reform. I know our challenge
Speaker 1: in the House going forward is to finish this budget
Speaker 1: and move that to the Senate because that budget is
Speaker 1: really key to tax reform this fall. And so look, um,
Speaker 1: it is a tight schedule. I think we can can
Speaker 1: meet it. Let me ask you a question here about
Speaker 1: where things are added when headed when it comes to
Speaker 1: tax reform. I wonder if you'd be open to an
Speaker 1: overhaul that would include maybe temporary cuts on the individual side,
Speaker 1: but permanent changes for for those on the corporate side.
Speaker 1: Are you willing to weigh that or consider that this
Speaker 1: point in light of where we are so right now,
Speaker 1: I'm focused on bold, permanent tax reforms that dramatically simplifies
Speaker 1: the code, really lowers rates significantly for job creators in
Speaker 1: in in middle class families, but as as importantly leap
Speaker 1: frogs America from I think roughly thirty feet in the
Speaker 1: world into the top three for competitiveness. And we're we're
Speaker 1: focused on that permanence because we think that's critical for
Speaker 1: for companies making the investment decisions they create jobs for families. Uh. Carsman,
Speaker 1: Robert Capital of the Dallas fed of the People's Republic
Speaker 1: of Texas just told me that all of this uncertainty
Speaker 1: in the land of Brady, Uh is gonna dampen economic growth?
Speaker 1: Is the uncertainty of your Washington getta dampen or slow
Speaker 1: economic growth in Texas? Well? No, I don't believe it will. Um.
Speaker 1: In fact, back home, Um where I spent a lot
Speaker 1: of time we lived back in the woodlands to northeastern
Speaker 1: Um where people are families and small businesses. See, they're
Speaker 1: very excited about tax reform. They feel like we're going
Speaker 1: to get it done. Uh. It makes him more optimistic
Speaker 1: about this year and next going forward. And so I
Speaker 1: think in the world of politics and anguishing over every
Speaker 1: different phrase and word, you know there's uncertainty. But I think,
Speaker 1: um business is large and small feel confident we're going
Speaker 1: to get this done. I listened with interest a couple
Speaker 1: of weeks back when the House Speaker Paul Ryan spoke
Speaker 1: before the National Association of Manufactories in Washington, d c.
Speaker 1: And the news so much as I could ascertain what
Speaker 1: it was that he placed a deadlight on getting this done.
Speaker 1: He said, let's get tax reform done here by the
Speaker 1: end of the year. I was struck by the urgency
Speaker 1: in that statement. Is your sense of urgency is his
Speaker 1: being matched by the White House? Would you like to
Speaker 1: see the White House doing more to make this the
Speaker 1: paramount issue for him? So it is in my experience
Speaker 1: with President Trump's tax team that urgency is clearly there.
Speaker 1: They know what were the economy is struggling, they know
Speaker 1: we're falling behind. Is the timetable we've set and I
Speaker 1: haven't seen anything yet that knocks us off that timetable.
Speaker 1: I don't anticipate one, so I share that urgency and
Speaker 1: I believe that the wine house does as well. You know, David,
Speaker 1: I want you to continue here with a chairman, but
Speaker 1: I want to make clear folks who need a surveillance correction.
Speaker 1: Chairman Brady talks about the woodlands and it sounds like
Speaker 1: he lives in a pup tent outside Houston. I just
Speaker 1: want to point out to everybody that you can get
Speaker 1: for five hundred forty five thousand dollars, five bedrooms, three
Speaker 1: plus bass David, this thing is the size of Brooklyn.
Speaker 1: I mean it's these houses are ginormous where Chairman Brady
Speaker 1: lives and Frankie, that's part of the competition that Texas
Speaker 1: wins at. You can almost afford the stuff you can't
Speaker 1: talk about. Affordable housing is one of our strength in Texas.
Speaker 1: And with low tax and no income tax, you're killing
Speaker 1: We're moving the show to Texas. Let's go, Chairman Brady.
Speaker 1: Let's let's talk a bit about the conversations you're having
Speaker 1: with the White House about the border adjusted tax that
Speaker 1: you've embraced, that it's a central part of the plan
Speaker 1: that you've devised with the House Speaker you flow to
Speaker 1: the idea of a five year phase in for a
Speaker 1: border adjusted attacks. What's the case you're making to the
Speaker 1: White House? Now, get us up to speed on where
Speaker 1: things stand when it comes to the conversation over A B,
Speaker 1: A T. Yeah. So here's one of the We we
Speaker 1: have several big challenges in tax reform, and one of
Speaker 1: them is how do we stop businesses from continuing to
Speaker 1: leave the US. More importantly, how do we get them
Speaker 1: to reconsider their supply chains to terms what can be
Speaker 1: brought back the United States? Because our current tax co
Speaker 1: clearly tells them move it elsewhere, and so our proposal
Speaker 1: on border adjustment matches our competitors. Basically is equal taxation
Speaker 1: in the US, and by lifting the mad Americat tax
Speaker 1: a level playing field abroad, it is a bold change
Speaker 1: and I recognize that, and that's why the five year
Speaker 1: phase in was is proposed to dress what we believe
Speaker 1: are valid concerns about making sure there's plenty of time
Speaker 1: for the dollar to dust in all of that. But
Speaker 1: bottom line is whether border adjustment is in the final
Speaker 1: product or it is set aside for further study, the
Speaker 1: problem still persists. How do we stop companies from leaving,
Speaker 1: how do we bring them back? And so we're having
Speaker 1: a really good discussions in the White House and Center
Speaker 1: on how best to solve that issue. And we're I'm
Speaker 1: just telling you, We're going to stay at the table
Speaker 1: with President Trump's team and Senate Republicans until we solve
Speaker 1: that principle issue. Sherman Brady got one more serious question
Speaker 1: for you before you get on with your productive day.
Speaker 1: You you, more than anybody we speak to h knows
Speaker 1: the upset of parents and families broken apart and by violence.
Speaker 1: And that I'm begun calling the opioid epidemic the heroin
Speaker 1: opioid epidemic because I don't think anybody listening in the
Speaker 1: real world knows what opioids are. You're in a leadership position.
Speaker 1: What does Washington need to do to help Woodlands, Texas
Speaker 1: a rich place or the poort place you know better
Speaker 1: than me in Houston. What does she didn't need to
Speaker 1: do about the heroin opioid epidemic? Well, it is an epidemic,
Speaker 1: and we've seen we've we've worked to close down pill
Speaker 1: mills in Southeast Texas and there's one point four hundred
Speaker 1: of them in the Houston region, all of which drive
Speaker 1: that epidemic. It's going to take several concerted efforts, and
Speaker 1: one of them, frankly, is in healthcare. I was pleased
Speaker 1: to see the Senate ad some more funding to address
Speaker 1: this in the healthcare bill that they have the House
Speaker 1: has already in Senate has acted in some other ways
Speaker 1: as well. But but what I'm what I'm actually really
Speaker 1: pleased about is this has finally gotten the attention it deserves,
Speaker 1: both up here in Washington and back home as well.
Speaker 1: And so I this is this issue isn't going to
Speaker 1: go away, and we know we've got to act. Chairman,
Speaker 1: Thank you so much, Uh, David, why don't you exit
Speaker 1: the chairman? Chairman Kevin Brady there the chairman of the
Speaker 1: House Ways and Man's Committee from the eighth District in Texas.
Speaker 1: Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and
Speaker 1: listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast
Speaker 1: platform you prefer. I'm on Twitter at Tom Keene, David
Speaker 1: Gura is at David Gura. Before the podcast, you could
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