1 00:00:10,039 --> 00:00:13,720 Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always 2 00:00:14,000 --> 00:00:17,560 Speaker 1: with Michael McKee. Daily we bring you insight from the 3 00:00:17,560 --> 00:00:22,760 Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg 4 00:00:22,840 --> 00:00:27,240 Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course 5 00:00:27,760 --> 00:00:33,199 Speaker 1: on the Bloomberg. Where do we go from here? That 6 00:00:33,400 --> 00:00:37,559 Speaker 1: is the real question. Uh, there are certainly there is 7 00:00:37,600 --> 00:00:42,760 Speaker 1: certainly a unanimity of forecasts about some sort of economic 8 00:00:42,840 --> 00:00:46,560 Speaker 1: slowdown around the world because of Brexit. How much, how bad, 9 00:00:46,680 --> 00:00:51,680 Speaker 1: how quickly depends on I guess you're economic model. Peter 10 00:00:51,720 --> 00:00:53,920 Speaker 1: Hooper is one of the people who puts the model 11 00:00:53,960 --> 00:00:56,880 Speaker 1: together for Deutsche Bank. He is with us here in studio, 12 00:00:56,920 --> 00:00:59,800 Speaker 1: and Peter, while we wait for the Prime Minister to 13 00:01:00,000 --> 00:01:02,840 Speaker 1: tell us something, uh, we don't know about how bad 14 00:01:02,880 --> 00:01:05,039 Speaker 1: their economics are going to be, maybe you have some 15 00:01:05,120 --> 00:01:10,200 Speaker 1: news for him. Well, Mike, our models are, to say 16 00:01:10,240 --> 00:01:15,560 Speaker 1: the least, tarnished these days, very difficult to and what 17 00:01:15,600 --> 00:01:18,280 Speaker 1: we put into them is far more uncertain than it 18 00:01:18,360 --> 00:01:21,320 Speaker 1: usually is. We really need we didn't need another three 19 00:01:21,400 --> 00:01:24,360 Speaker 1: or four months to begin to figure out what's going 20 00:01:24,400 --> 00:01:27,600 Speaker 1: to happen there. Uh, certainly, yes, as you say, many 21 00:01:27,600 --> 00:01:30,960 Speaker 1: people looking for recession in Europe. I don't know. In 22 00:01:30,959 --> 00:01:34,720 Speaker 1: in the UK, I don't know that we're necessarily there yet. 23 00:01:35,080 --> 00:01:38,960 Speaker 1: And uh dragging himself told us that expect half percent 24 00:01:39,040 --> 00:01:42,120 Speaker 1: off of GDP in Europe over the next several years. Um, 25 00:01:42,520 --> 00:01:45,000 Speaker 1: that's on the level I think not the growth. Um. 26 00:01:45,440 --> 00:01:49,080 Speaker 1: Implications for the US we probably count in in in 27 00:01:49,360 --> 00:01:53,920 Speaker 1: tenth or tenths of a percentage point at this point, 28 00:01:54,640 --> 00:01:59,320 Speaker 1: barring a surprising really negative outcome in Europe. But you know, 29 00:01:59,360 --> 00:02:03,880 Speaker 1: anything's possible. Um, We're in the process of rethinking our outlook. 30 00:02:04,800 --> 00:02:09,360 Speaker 1: Pre Brexit. We said that if Brexit we'd probably take 31 00:02:09,440 --> 00:02:11,600 Speaker 1: a couple of tents off a global growth and uh 32 00:02:12,200 --> 00:02:15,359 Speaker 1: uh something half to a three quarter percentage point off UK. 33 00:02:15,760 --> 00:02:18,000 Speaker 1: I imagine those numbers will be marked up. But the 34 00:02:18,400 --> 00:02:21,239 Speaker 1: bottom line in here here is any number you pick 35 00:02:21,760 --> 00:02:24,200 Speaker 1: is going to be revised very soon because this is 36 00:02:24,240 --> 00:02:27,519 Speaker 1: just an uncertain world. But in any case, no matter 37 00:02:27,560 --> 00:02:32,079 Speaker 1: what number you picked, we growth is so slow that, um, 38 00:02:32,120 --> 00:02:36,560 Speaker 1: it's not good. Well, you know, FED Governor j Palisman 39 00:02:36,639 --> 00:02:39,359 Speaker 1: going some very interesting speeches lately, did another one last 40 00:02:39,440 --> 00:02:42,400 Speaker 1: night and he focused on this is very slow growth 41 00:02:42,840 --> 00:02:46,320 Speaker 1: and by that I mean potential growth for the economy, 42 00:02:46,360 --> 00:02:48,359 Speaker 1: what's happening on the supply side, what's happening in the 43 00:02:48,440 --> 00:02:52,680 Speaker 1: labor force and and and particularly productivity growth. The baseline 44 00:02:52,840 --> 00:02:55,919 Speaker 1: is growth is much slower today than it was pre 45 00:02:56,480 --> 00:03:01,280 Speaker 1: pre crisis UM and, but the implication is that you're 46 00:03:01,320 --> 00:03:04,840 Speaker 1: getting some pretty good improvement in labor markets. I mean, 47 00:03:04,919 --> 00:03:08,360 Speaker 1: look across the globe, whether it's US, whether it's Japan, 48 00:03:08,480 --> 00:03:13,359 Speaker 1: whether it's Europe. All we're seeing significant declines and unemployment. 49 00:03:13,440 --> 00:03:16,800 Speaker 1: Labor markets are tightening. The US is now very close 50 00:03:16,840 --> 00:03:19,519 Speaker 1: to full employment, Japan not far away. Europe has a 51 00:03:19,600 --> 00:03:22,240 Speaker 1: ways to go, but they made a fair amount of progress. UH. 52 00:03:22,440 --> 00:03:26,200 Speaker 1: This is both because employment has been expanding, but the 53 00:03:27,160 --> 00:03:31,440 Speaker 1: bottom line is that the available UH supply of labor 54 00:03:31,480 --> 00:03:35,000 Speaker 1: has has been slowing and the productivity of the labor 55 00:03:35,600 --> 00:03:39,119 Speaker 1: has been slowing. So you know, two percent growth gives 56 00:03:39,120 --> 00:03:41,000 Speaker 1: you a lot more improvement in the labor market than 57 00:03:41,000 --> 00:03:44,560 Speaker 1: it used to. I guess the question is, how do 58 00:03:44,600 --> 00:03:47,880 Speaker 1: your model's account for political upset of the kind that 59 00:03:47,920 --> 00:03:51,840 Speaker 1: we're seeing, or can you even begin We do know 60 00:03:52,480 --> 00:03:58,720 Speaker 1: that uncertainty has a significant impact on business spending UH 61 00:03:58,760 --> 00:04:01,120 Speaker 1: and and one of and be the biggest reason that 62 00:04:01,200 --> 00:04:03,800 Speaker 1: we're seeing this very low productivity is that there just 63 00:04:03,880 --> 00:04:10,400 Speaker 1: hasn't been the kind of investment in new capital, new equipment. UM. 64 00:04:10,520 --> 00:04:14,480 Speaker 1: Machinery structures have been much weaker than you you normally 65 00:04:14,520 --> 00:04:18,280 Speaker 1: see at this point in an economic expansion. Uh. And 66 00:04:18,360 --> 00:04:22,240 Speaker 1: we've had just a series of shocks all all along here, UM, 67 00:04:22,440 --> 00:04:27,320 Speaker 1: the initial euro crises, UH, fiscal crisis in the US, China, 68 00:04:27,960 --> 00:04:31,800 Speaker 1: and now the latest developments in Europe. All factors that 69 00:04:31,800 --> 00:04:35,520 Speaker 1: are keeping businesses on the sideline. Goldman Sacks just putting 70 00:04:35,520 --> 00:04:41,200 Speaker 1: out a statement saying it is not moving to Frankfurt immediately. 71 00:04:41,200 --> 00:04:45,560 Speaker 1: There's been no change in their operations or real estate needs. 72 00:04:45,760 --> 00:04:48,320 Speaker 1: I mean, there's a lot a lot of talk about 73 00:04:48,360 --> 00:04:50,840 Speaker 1: what the banks are going to do. Francine said, it's 74 00:04:50,920 --> 00:04:56,080 Speaker 1: feverish already. UM, I'm curious. Peter Hooper one of the 75 00:04:56,160 --> 00:04:58,160 Speaker 1: things nobody's talking about, and I know Tom brought it 76 00:04:58,200 --> 00:05:01,160 Speaker 1: up on the on the show this morning. Uh, everybody 77 00:05:01,279 --> 00:05:06,200 Speaker 1: is the Europeans basically held a hammer over David Cameron's 78 00:05:06,200 --> 00:05:08,360 Speaker 1: head last night and said, you guys, we're going to 79 00:05:08,560 --> 00:05:12,840 Speaker 1: nail you whatever. But Germany needs the UK. I mean, 80 00:05:12,880 --> 00:05:16,040 Speaker 1: nobody is talking about that. It's a huge export market 81 00:05:16,279 --> 00:05:19,919 Speaker 1: for a country whose economy is built on exports. Uh no, 82 00:05:20,120 --> 00:05:22,680 Speaker 1: no question, there will be, there will continue to be 83 00:05:22,960 --> 00:05:26,880 Speaker 1: important economic ties whatever happens this uh, this fall and 84 00:05:27,240 --> 00:05:31,240 Speaker 1: into the winter. Um. UK is just too important to Europe, 85 00:05:31,320 --> 00:05:33,960 Speaker 1: is too important to Germany. Um. I think UK is 86 00:05:33,960 --> 00:05:38,120 Speaker 1: a major export market for for Germany. My my recollection 87 00:05:38,279 --> 00:05:43,360 Speaker 1: is Germany enjoys a pretty large trade surplus with the UK, 88 00:05:44,320 --> 00:05:48,000 Speaker 1: with with exports having grown pretty substantially over time. Uh. 89 00:05:48,040 --> 00:05:50,560 Speaker 1: This this, this slip in the in the pound may 90 00:05:50,640 --> 00:05:54,960 Speaker 1: help to change things a bit there, but uh, no 91 00:05:55,080 --> 00:05:58,880 Speaker 1: question uh uh. I also wanted to note that the 92 00:05:58,920 --> 00:06:01,760 Speaker 1: Deutsche Bank already has a very large presence in Frankfort. 93 00:06:02,160 --> 00:06:06,840 Speaker 1: Really really politically saying we say good morning to John Crying, 94 00:06:06,839 --> 00:06:10,000 Speaker 1: who I'm sure was listening to his chief economist Michael. 95 00:06:10,360 --> 00:06:14,080 Speaker 1: There is a headline out which shows how moment to moment, 96 00:06:14,600 --> 00:06:18,760 Speaker 1: our linkage of Peter Hooper's economics is into politics. Mr 97 00:06:18,800 --> 00:06:23,520 Speaker 1: Cameron speaking up in Parliament, yes, telling Jeremy corbyon he 98 00:06:23,560 --> 00:06:26,559 Speaker 1: should reside as the Labor Party. It's starting to sound 99 00:06:26,560 --> 00:06:30,640 Speaker 1: like Hillary Clinton and Donald Trump a little bit. Um, 100 00:06:30,680 --> 00:06:32,600 Speaker 1: I want to get Peter Rupper back on script here 101 00:06:32,640 --> 00:06:35,320 Speaker 1: you are kind enough to mention Jerome Paul the Governor's 102 00:06:35,360 --> 00:06:39,839 Speaker 1: speech in Chicago yesterday, and it's almost as if ripped 103 00:06:39,839 --> 00:06:43,120 Speaker 1: from a page of the Laureate Ned Phelps speaking eight 104 00:06:43,240 --> 00:06:48,760 Speaker 1: years ago on dynamism. What is dynamism and do I care? 105 00:06:49,200 --> 00:06:52,599 Speaker 1: Is it something that's going to help me as an American? 106 00:06:53,680 --> 00:06:57,880 Speaker 1: Dynamism is an antidote to secular stagnation, if you will, 107 00:06:58,040 --> 00:07:01,080 Speaker 1: or it's the opposite view right now, it's it's the 108 00:07:01,160 --> 00:07:05,640 Speaker 1: sense that we have as times going by, all kinds 109 00:07:05,640 --> 00:07:12,680 Speaker 1: of technological developments taking place, whether it's in um, genetic engineering, 110 00:07:12,800 --> 00:07:17,960 Speaker 1: bio biotech, robotics, a lot of developments going on here. 111 00:07:18,840 --> 00:07:22,400 Speaker 1: The view is that there's there's huge potential to raise 112 00:07:22,520 --> 00:07:25,880 Speaker 1: us productivity if businesses will only start to invest in 113 00:07:25,960 --> 00:07:29,960 Speaker 1: some of these new new developments. Are it is uncertainty 114 00:07:30,000 --> 00:07:34,080 Speaker 1: that's holding us back. It's not the lack of new inventions. 115 00:07:34,280 --> 00:07:38,320 Speaker 1: It's not I mean, I'll Bob Gordon, Uh, we don't 116 00:07:38,360 --> 00:07:42,360 Speaker 1: need to close down the patent office because we're not 117 00:07:42,400 --> 00:07:46,280 Speaker 1: inventing enough new stuff. So the dynamism view is, uh, 118 00:07:46,360 --> 00:07:49,480 Speaker 1: there's a lot of potential out there. The economy will 119 00:07:49,880 --> 00:07:54,080 Speaker 1: pick up as uncertainty receives as firms begin to invest again. 120 00:07:54,680 --> 00:07:57,200 Speaker 1: Another headline Michael just to drop in here to show 121 00:07:57,200 --> 00:08:01,000 Speaker 1: the frenzy of the morning. Germany said to oppose shielding 122 00:08:01,080 --> 00:08:05,920 Speaker 1: investors in Italy bank plan. He that presumes that there's 123 00:08:05,960 --> 00:08:10,160 Speaker 1: a plan. Well, there is a plan and what it 124 00:08:10,200 --> 00:08:13,360 Speaker 1: gets complicated? Um, but basically the Italians want to be 125 00:08:13,400 --> 00:08:16,720 Speaker 1: able to put capital into their banks without having any 126 00:08:16,720 --> 00:08:21,360 Speaker 1: shareholder haircuts in the which is against EU rules. They 127 00:08:21,360 --> 00:08:24,600 Speaker 1: want a suspension of the rules and from Merkel is 128 00:08:24,640 --> 00:08:26,520 Speaker 1: saying no, we can talk about that with Mike Mayo 129 00:08:26,640 --> 00:08:29,520 Speaker 1: later in the program. Uh. Let me quickly ask you, 130 00:08:29,560 --> 00:08:32,680 Speaker 1: Peter Hooper. Uh, the economy will pick up, dynamism will 131 00:08:32,679 --> 00:08:36,040 Speaker 1: come into play. Will tariffs will tearing up free trade 132 00:08:36,040 --> 00:08:40,640 Speaker 1: agreements help that? Obviously we've taken a step back here 133 00:08:40,760 --> 00:08:45,840 Speaker 1: in the whole globalization the opening up of the global 134 00:08:45,880 --> 00:08:49,880 Speaker 1: economy to free trade. Uh and and the benefits of trade. 135 00:08:50,080 --> 00:08:54,880 Speaker 1: So um, this this recent development in the UK visably, 136 00:08:54,960 --> 00:08:58,680 Speaker 1: you're you uh not helpful in that in that regard. 137 00:08:59,200 --> 00:09:03,680 Speaker 1: I'm not into a painting a sudden surge in protected protectionism, 138 00:09:03,720 --> 00:09:06,160 Speaker 1: but the recent trans the politics say it's going to 139 00:09:06,240 --> 00:09:10,480 Speaker 1: be Perhaps there is a political candidate who does and 140 00:09:10,960 --> 00:09:16,280 Speaker 1: pate a surgeon protection Uh, Peter Hooper, thank you so 141 00:09:16,400 --> 00:09:19,040 Speaker 1: much for joining us today, yet eighteen reasons to stay 142 00:09:19,080 --> 00:09:23,040 Speaker 1: in brief Deutsche Bank clients, we greatly appreciate your tendency. 143 00:09:23,120 --> 00:09:37,320 Speaker 1: Is the chief economist of Deutsche Bank. To get perspective. 144 00:09:38,040 --> 00:09:40,280 Speaker 1: There are those that talk. We've had a little bit 145 00:09:40,320 --> 00:09:43,120 Speaker 1: of that in the last number of days, including talking 146 00:09:43,120 --> 00:09:46,880 Speaker 1: their book in many ways. David Harrow has written the 147 00:09:46,960 --> 00:09:52,720 Speaker 1: book on European investment. He has been a long year 148 00:09:52,800 --> 00:09:58,480 Speaker 1: owner of more conservative European banks and multinationals. Mr Harrow 149 00:09:59,200 --> 00:10:04,240 Speaker 1: is with UH Harris Associates. Excuse me in Chicago, David, 150 00:10:04,280 --> 00:10:07,680 Speaker 1: good morning, Good morning Tom. How are you? I think 151 00:10:07,720 --> 00:10:10,760 Speaker 1: I'm good. Have you been acquiring shares of b MP, 152 00:10:10,920 --> 00:10:17,040 Speaker 1: Perry BA which are modestly on sale? Is others? Crater? Well, 153 00:10:17,080 --> 00:10:19,959 Speaker 1: let me just say this because I can't talk specifically 154 00:10:20,000 --> 00:10:22,760 Speaker 1: as to what we're doing, but you know, our m 155 00:10:22,800 --> 00:10:25,080 Speaker 1: O is to determine the value of business and to 156 00:10:25,160 --> 00:10:27,920 Speaker 1: buy as long as that value is stable and it 157 00:10:27,960 --> 00:10:31,880 Speaker 1: doesn't match the changes in share prices is to buy 158 00:10:31,880 --> 00:10:35,160 Speaker 1: on weakness. And what we've really seen in the last 159 00:10:35,240 --> 00:10:38,920 Speaker 1: two or three days starting with the Brexit event, was 160 00:10:39,040 --> 00:10:42,560 Speaker 1: a massive destruction of the price of many of these 161 00:10:42,559 --> 00:10:46,720 Speaker 1: European financials, and we certainly do not believe that the 162 00:10:46,880 --> 00:10:51,160 Speaker 1: price destruction was anywhere near the decline and values. So 163 00:10:51,240 --> 00:10:55,480 Speaker 1: you saw and see a big value gap opening up. 164 00:10:55,880 --> 00:10:59,200 Speaker 1: These stocks were cheap to begin with on fears of Brexit, 165 00:11:00,040 --> 00:11:03,920 Speaker 1: and then when the actual event happened, you saw many 166 00:11:03,960 --> 00:11:10,040 Speaker 1: of these financials down in two days. So our m 167 00:11:10,080 --> 00:11:12,760 Speaker 1: O is to buy low and to sell high. And 168 00:11:13,520 --> 00:11:19,400 Speaker 1: perhaps because of additional weakness that will exist in the 169 00:11:19,440 --> 00:11:23,080 Speaker 1: macro environment as a result of the uncertainty surrounding Brugs 170 00:11:23,120 --> 00:11:26,760 Speaker 1: that you might see lower profit growth, but it certainly 171 00:11:26,760 --> 00:11:30,080 Speaker 1: doesn't match the business is being dropped in by twenty 172 00:11:31,200 --> 00:11:35,319 Speaker 1: what is your study of the ability to generate revenues 173 00:11:35,360 --> 00:11:38,200 Speaker 1: to move down the income statement and generate free cash 174 00:11:38,240 --> 00:11:41,840 Speaker 1: flow for these banks if they're living in the land 175 00:11:41,920 --> 00:11:46,400 Speaker 1: of negative rates. That's original Herold research, isn't it. Yes? 176 00:11:46,520 --> 00:11:48,559 Speaker 1: And what you have to do tom is you just 177 00:11:48,679 --> 00:11:52,360 Speaker 1: can't look at the interest rate spread, which is negatively 178 00:11:52,440 --> 00:11:56,000 Speaker 1: impacted by the lower negative rates. To be sure, but 179 00:11:56,080 --> 00:12:01,960 Speaker 1: there are other forms of earnings power from banks costs, fees, 180 00:12:02,760 --> 00:12:07,720 Speaker 1: loan growth, loan losses, etcetera. And for the most part 181 00:12:07,760 --> 00:12:12,439 Speaker 1: these other forms will be positive. The loan growth, now 182 00:12:12,760 --> 00:12:15,600 Speaker 1: it might be a little stickier given uncertainty in the 183 00:12:15,640 --> 00:12:19,200 Speaker 1: macro environment. But certainly fees have been going up. I 184 00:12:19,200 --> 00:12:21,719 Speaker 1: mean you talk to companies who refinanced, they say, oh, 185 00:12:21,760 --> 00:12:23,960 Speaker 1: we refinanced at a lower rate, but we had to 186 00:12:23,960 --> 00:12:27,760 Speaker 1: pay a huge fee. So fees are going up. Uh, 187 00:12:27,880 --> 00:12:31,560 Speaker 1: costs are coming down and low losses actually have been, 188 00:12:31,800 --> 00:12:35,200 Speaker 1: you know, somewhat aggressively coming down in the Europe as 189 00:12:35,200 --> 00:12:39,800 Speaker 1: a result of the periphery healing. So yes, there spreads 190 00:12:39,840 --> 00:12:43,240 Speaker 1: under pressure. But in the meantime, the prices you're being 191 00:12:43,320 --> 00:12:45,680 Speaker 1: asked to pay in the market for these banks is 192 00:12:45,720 --> 00:12:49,240 Speaker 1: in many cases somewhere less than three quarters book value 193 00:12:49,280 --> 00:12:53,080 Speaker 1: today to the identities that should earn a normal Are 194 00:12:53,280 --> 00:12:57,959 Speaker 1: we in the low double digits ten eleven twelve? Can 195 00:12:58,000 --> 00:13:01,839 Speaker 1: I ask David just to verify you're talking about UK banks. 196 00:13:01,880 --> 00:13:05,200 Speaker 1: I would imagine you'd be more discriminating about the outlook 197 00:13:05,280 --> 00:13:08,920 Speaker 1: for European banks, given some of them are not in 198 00:13:09,000 --> 00:13:12,480 Speaker 1: as good to shape as others. No, you have to 199 00:13:12,520 --> 00:13:15,320 Speaker 1: be discriminating against banks in general and our views to 200 00:13:15,440 --> 00:13:19,400 Speaker 1: look for those banks that have a large capital buffer, 201 00:13:19,520 --> 00:13:22,360 Speaker 1: that have a good capital position, and this is really 202 00:13:22,360 --> 00:13:25,120 Speaker 1: one of the things the market is missing. The market 203 00:13:25,160 --> 00:13:28,240 Speaker 1: thinks we're an O nine again, and the neat jerk 204 00:13:28,280 --> 00:13:30,840 Speaker 1: reaction of the market is any time there is a 205 00:13:30,880 --> 00:13:34,920 Speaker 1: disturbance to aggressively sell the banks. However, if you look 206 00:13:34,960 --> 00:13:40,199 Speaker 1: at capital positions Eurozone banks and O eight, tangible equity 207 00:13:40,240 --> 00:13:44,440 Speaker 1: to assets was around three today it's over five percent. 208 00:13:45,200 --> 00:13:48,920 Speaker 1: The core equity tier one ratio, well, it's not comparable 209 00:13:49,400 --> 00:13:52,520 Speaker 1: because it was bossile one in two thousand and eight, 210 00:13:52,520 --> 00:13:55,520 Speaker 1: but somewhere around six or seven percent today. The Eurozone 211 00:13:55,640 --> 00:13:59,120 Speaker 1: is twelve percent now. And if you look at the 212 00:13:59,240 --> 00:14:03,600 Speaker 1: quality of the within that Eurozone, the margins of safety 213 00:14:03,640 --> 00:14:07,760 Speaker 1: are even better there, even stronger. And so again this 214 00:14:07,840 --> 00:14:11,079 Speaker 1: is what the market is missing is going into this crisis, 215 00:14:11,600 --> 00:14:15,400 Speaker 1: the banks, the quality banks have a much, much and 216 00:14:15,520 --> 00:14:19,960 Speaker 1: sometimes as a factor to capital position. Michael, I've been 217 00:14:20,040 --> 00:14:24,680 Speaker 1: remissed today on not mentioning the Wednesday rollover of Deutsche 218 00:14:24,680 --> 00:14:26,760 Speaker 1: Bank and UNI Credit. Mike and I are using those 219 00:14:26,800 --> 00:14:30,400 Speaker 1: as two proxies for troubled Europe, and Mike, I really 220 00:14:30,440 --> 00:14:34,760 Speaker 1: miss we're almost back to June twent seven lows on 221 00:14:34,920 --> 00:14:38,880 Speaker 1: UNI credit. I did not know that until two minutes ago. 222 00:14:40,280 --> 00:14:43,920 Speaker 1: John Tucker does not brief that there is the whole, 223 00:14:44,320 --> 00:14:46,400 Speaker 1: the whole argument in the whole situation with the Italian 224 00:14:46,400 --> 00:14:50,840 Speaker 1: bank recapitalization. But we we've been talking, David Harrold about 225 00:14:50,920 --> 00:14:55,760 Speaker 1: the banks, the financials in the UK and Europe. There's 226 00:14:55,800 --> 00:14:59,480 Speaker 1: been a lot written about US companies with exposure to 227 00:14:59,520 --> 00:15:03,200 Speaker 1: the UK and Europe. Is it too early to worry 228 00:15:03,280 --> 00:15:06,320 Speaker 1: about them? Well, again, anyone who has exposure to the 229 00:15:06,400 --> 00:15:09,520 Speaker 1: UK in particular. As a result of this uncertainty, at 230 00:15:09,600 --> 00:15:11,640 Speaker 1: least in the short term, you're going to see some 231 00:15:11,760 --> 00:15:15,080 Speaker 1: slower growth in the UK. Whether it falls off a 232 00:15:15,120 --> 00:15:18,520 Speaker 1: cliff like I think some of the fear proponents have 233 00:15:18,560 --> 00:15:23,280 Speaker 1: put forth, is another question, especially if whoever the new 234 00:15:23,360 --> 00:15:27,960 Speaker 1: leadership is in the UK promotes a strong growth. Uh. 235 00:15:28,000 --> 00:15:31,440 Speaker 1: It's kind of a supply side economic plan and which 236 00:15:31,480 --> 00:15:34,040 Speaker 1: at some point the UK two, three or four years 237 00:15:34,040 --> 00:15:37,400 Speaker 1: down the road may be outgrowing as it has the 238 00:15:37,480 --> 00:15:40,000 Speaker 1: continental Europe and be a good place to invest in. 239 00:15:40,400 --> 00:15:43,240 Speaker 1: But in a short term, of course, there's uncertainty, and 240 00:15:43,320 --> 00:15:45,760 Speaker 1: this uncertainty is going to lead to the lack of 241 00:15:45,800 --> 00:15:48,760 Speaker 1: business decision making, which will lead to some slower growth. 242 00:15:49,360 --> 00:15:52,200 Speaker 1: The U S companies are fairly well diversified. The UK 243 00:15:52,320 --> 00:15:55,040 Speaker 1: economy is okay, set number two or three in Europe, 244 00:15:55,080 --> 00:15:57,560 Speaker 1: and the grand scheme of things the U S companies, 245 00:15:57,680 --> 00:16:01,200 Speaker 1: I believe can easily deal with US okay, very quickly. 246 00:16:01,360 --> 00:16:03,920 Speaker 1: David's exactly where I wanted to go. Do I express 247 00:16:03,960 --> 00:16:09,280 Speaker 1: an international UH view by buying US multinationals or do 248 00:16:09,360 --> 00:16:11,120 Speaker 1: I need to go into the land of David Harrow 249 00:16:11,480 --> 00:16:14,520 Speaker 1: and by direct Well you do both, and you really 250 00:16:14,680 --> 00:16:18,160 Speaker 1: have to analyze where a company earns its cash flow, 251 00:16:18,640 --> 00:16:21,520 Speaker 1: not where the zip code of its corporate headquarters. And 252 00:16:21,560 --> 00:16:24,120 Speaker 1: this is I think a big mistake investors still make. 253 00:16:24,400 --> 00:16:26,320 Speaker 1: They say, well, how could you be invested in europe 254 00:16:26,520 --> 00:16:28,920 Speaker 1: blow growth, it's blah blah blah. Well, of course it is. 255 00:16:28,960 --> 00:16:31,280 Speaker 1: I don't disagree with any of that. In fact, this 256 00:16:31,400 --> 00:16:33,960 Speaker 1: is why perhaps one of the reasons why the UK 257 00:16:34,120 --> 00:16:37,280 Speaker 1: wants to separate it from it. But but you have 258 00:16:37,400 --> 00:16:39,800 Speaker 1: to look at these companies where they earn their money 259 00:16:39,800 --> 00:16:42,360 Speaker 1: and how they earn their money, not where they're located, 260 00:16:42,400 --> 00:16:44,960 Speaker 1: and investors just cannot get that out of their minds. 261 00:16:45,040 --> 00:16:48,080 Speaker 1: And and David, I think one of the great questions, 262 00:16:48,360 --> 00:16:51,480 Speaker 1: and to get a little geeky here, is when you 263 00:16:51,600 --> 00:16:57,200 Speaker 1: determine that cash flow is sustained and rising at a company, 264 00:16:57,240 --> 00:17:00,640 Speaker 1: how do you exactly figure out that it's good cash 265 00:17:00,680 --> 00:17:05,080 Speaker 1: flow or indeed great cash flow. What's the trick to that? Well, 266 00:17:05,240 --> 00:17:08,040 Speaker 1: you have to do is in analyzing the cash flow stream, 267 00:17:08,160 --> 00:17:10,439 Speaker 1: a you have to try to get an idea on 268 00:17:10,760 --> 00:17:13,960 Speaker 1: the pace of growth, but be you also have to 269 00:17:13,960 --> 00:17:17,159 Speaker 1: get an idea on the sustainability and whether that cash 270 00:17:17,200 --> 00:17:21,520 Speaker 1: flow stream could withstand shocks, and so in pricing that 271 00:17:21,720 --> 00:17:25,680 Speaker 1: cash flow stream and determining what multiples to use, it's 272 00:17:25,720 --> 00:17:28,640 Speaker 1: really a function of the strength of it, the durability 273 00:17:28,680 --> 00:17:33,520 Speaker 1: of it, the ability for to to withstand shocks, etcetera, etcetera, etcetera. 274 00:17:33,920 --> 00:17:36,520 Speaker 1: The big mistake investors make is they think, well, just 275 00:17:36,560 --> 00:17:42,400 Speaker 1: because a company might face a short period of uncertainty 276 00:17:42,520 --> 00:17:47,800 Speaker 1: or of lower cash flow, they completely uh impact this 277 00:17:48,040 --> 00:17:50,919 Speaker 1: on the share price, even though the value of the 278 00:17:51,000 --> 00:17:54,879 Speaker 1: business is the present value of all cash flow streams, 279 00:17:54,920 --> 00:17:56,840 Speaker 1: not just the next couple of quarters or a couple 280 00:17:56,840 --> 00:17:59,320 Speaker 1: of years, but all the way to perpetuity to today. 281 00:17:59,440 --> 00:18:02,200 Speaker 1: The present value and This is why a long term 282 00:18:02,280 --> 00:18:05,480 Speaker 1: value investor has opportunities to make money, is because mr 283 00:18:05,560 --> 00:18:09,879 Speaker 1: market tends to be very short term, focuses on disturbances, 284 00:18:09,960 --> 00:18:14,640 Speaker 1: and ignores the fact that intrinsic value is the present 285 00:18:14,760 --> 00:18:17,680 Speaker 1: value of all cash flow streams, not just a couple 286 00:18:17,680 --> 00:18:20,679 Speaker 1: of quarters. So in analyzing businesses, that's what you have 287 00:18:20,720 --> 00:18:22,560 Speaker 1: to look at, not just what's going to happen in 288 00:18:22,560 --> 00:18:26,600 Speaker 1: the short term. Well, when you do that, what are 289 00:18:26,600 --> 00:18:33,760 Speaker 1: you discounting for inflation these days and for um interest rates? Well, again, 290 00:18:33,800 --> 00:18:36,679 Speaker 1: when you're when you're looking at this cash flow stream 291 00:18:36,880 --> 00:18:40,199 Speaker 1: as something that goes into perpetuity, you can't necessarily just 292 00:18:40,320 --> 00:18:43,840 Speaker 1: use today's conditions. And this is the tricky part. You 293 00:18:44,000 --> 00:18:46,119 Speaker 1: have to use what you think the future is going 294 00:18:46,200 --> 00:18:49,359 Speaker 1: to be like. So even though the interest rates today 295 00:18:49,400 --> 00:18:52,359 Speaker 1: are low, it is unlikely that they're going to be 296 00:18:52,400 --> 00:18:56,240 Speaker 1: this low forever. In fact, I would say extremely improbable. 297 00:18:56,600 --> 00:18:58,440 Speaker 1: So you have to come up with what is a 298 00:18:58,560 --> 00:19:02,199 Speaker 1: normal interest rate in a normal inflation rate. By the 299 00:19:02,240 --> 00:19:05,240 Speaker 1: way of the two are very they're very much a link. 300 00:19:05,320 --> 00:19:08,880 Speaker 1: At the help inflation expectations go up, so to interest rate, 301 00:19:09,359 --> 00:19:13,080 Speaker 1: So real interest rates that is so um This is 302 00:19:13,080 --> 00:19:14,639 Speaker 1: what you have to do as an analyst. You have 303 00:19:14,720 --> 00:19:16,640 Speaker 1: to look at the business, you have to look at 304 00:19:16,840 --> 00:19:19,680 Speaker 1: the condition which it operates, and you have to come 305 00:19:19,680 --> 00:19:23,280 Speaker 1: with judgments of what is normalcy and and and it's 306 00:19:23,359 --> 00:19:27,120 Speaker 1: hard and it's an exact but by doing this exercise 307 00:19:27,720 --> 00:19:31,960 Speaker 1: you can't come up with some relatively accurate idea and 308 00:19:32,040 --> 00:19:36,359 Speaker 1: what a business. David Harrold, thank you so much, greatly appreciative. 309 00:19:46,080 --> 00:19:48,639 Speaker 1: Michael McKee jump in here with Michael Mayo of c 310 00:19:48,840 --> 00:19:52,879 Speaker 1: ls A and that GE announcement m L does not 311 00:19:52,920 --> 00:19:55,960 Speaker 1: a banker anymore, is that the headline. He's still a banker, 312 00:19:56,000 --> 00:19:58,680 Speaker 1: but a much smaller banker and a much uh less 313 00:19:58,720 --> 00:20:02,080 Speaker 1: important one to the government. The Financial Stability Oversight Council 314 00:20:02,160 --> 00:20:06,119 Speaker 1: taking GE Capital office lists of too big to fail 315 00:20:06,160 --> 00:20:12,280 Speaker 1: financial institutions. That designation brings restrictive capital and leverage requirements. 316 00:20:12,480 --> 00:20:15,000 Speaker 1: They've been working with the f STOCK for quite some 317 00:20:15,040 --> 00:20:18,040 Speaker 1: time like to get this done. It's really no surprise 318 00:20:18,119 --> 00:20:20,720 Speaker 1: Jeff mL has been selling off parts of GE Capital 319 00:20:20,920 --> 00:20:24,040 Speaker 1: to try to really slim it down. Well, you know, 320 00:20:24,040 --> 00:20:27,000 Speaker 1: the bank regulators have you know, a big stick, and 321 00:20:27,000 --> 00:20:29,280 Speaker 1: they've used that stick a lot. And you'll see that 322 00:20:29,440 --> 00:20:31,679 Speaker 1: actually in seven hours from now when we get the 323 00:20:31,680 --> 00:20:33,560 Speaker 1: result of the FED stress tests, what out of seven 324 00:20:33,600 --> 00:20:36,840 Speaker 1: banks have issues due to qualitative factors. But this is 325 00:20:36,880 --> 00:20:39,960 Speaker 1: an example of the regulators having a carrot, and I 326 00:20:40,000 --> 00:20:42,280 Speaker 1: think the regulators need to have more carrots to reward 327 00:20:42,359 --> 00:20:45,440 Speaker 1: good behavior. And it's nice to see, uh, you know, 328 00:20:45,520 --> 00:20:47,880 Speaker 1: company that took action and now they're getting reward for that. 329 00:20:48,080 --> 00:20:50,400 Speaker 1: We would like to see more rewards for good behavior 330 00:20:50,440 --> 00:20:53,120 Speaker 1: for the banks. But the difference is Jeff Emil wanted 331 00:20:53,160 --> 00:20:56,520 Speaker 1: to get out of this business. Jamie Diamond doesn't want 332 00:20:56,520 --> 00:20:59,160 Speaker 1: to shed businesses at least as far as we know. Well, 333 00:20:59,160 --> 00:21:02,199 Speaker 1: it's a matter of the ree So the degree of 334 00:21:02,280 --> 00:21:05,520 Speaker 1: regulatory burden is a lot greater for the largest banks, 335 00:21:05,520 --> 00:21:09,000 Speaker 1: and they can reduce that regulatory burden by selling off businesses, 336 00:21:09,080 --> 00:21:12,360 Speaker 1: by shrinking, by simplifying. And they've done that. I don't 337 00:21:12,480 --> 00:21:15,480 Speaker 1: always think they've done that quite enough. So City Group 338 00:21:15,480 --> 00:21:19,000 Speaker 1: they should sell their Mexican bank, Bank America should perhaps 339 00:21:19,080 --> 00:21:22,800 Speaker 1: you know, liberate, sell off Merrill Lynch America. Regional banks 340 00:21:22,840 --> 00:21:24,800 Speaker 1: should sell off for regions. So there's a lot the 341 00:21:24,840 --> 00:21:27,600 Speaker 1: banks can do to go more in the direction of 342 00:21:27,640 --> 00:21:32,119 Speaker 1: ge while still remaining large banks we've been Europe your brexit, 343 00:21:32,160 --> 00:21:35,560 Speaker 1: brexit Brexit. Let's let's do Michael here, American banking. Have 344 00:21:35,640 --> 00:21:38,840 Speaker 1: you been surprised by the lack of mergers and acquisitions 345 00:21:39,359 --> 00:21:43,960 Speaker 1: given weak nominal GDP, given revenue struggles, given net margin? 346 00:21:44,440 --> 00:21:47,720 Speaker 1: Are you waking up and saying where's the M and A? Well, 347 00:21:47,760 --> 00:21:50,680 Speaker 1: the largest banks, you know, take City Group in Jake 348 00:21:50,760 --> 00:21:54,119 Speaker 1: Morgan America, they can't buy anymore. But you're absolutely right, Tom. 349 00:21:54,440 --> 00:21:57,760 Speaker 1: For the US banks, it's been the worst revenue growth 350 00:21:57,920 --> 00:22:01,520 Speaker 1: this decade in eighty year. So if you're not making 351 00:22:01,800 --> 00:22:04,240 Speaker 1: if you're not making it on the top line, the 352 00:22:04,240 --> 00:22:05,879 Speaker 1: only way to make it on the bottom line is 353 00:22:05,920 --> 00:22:09,439 Speaker 1: to become more efficient. And so that's why we really 354 00:22:09,560 --> 00:22:12,840 Speaker 1: request or almost require the large banks to have a 355 00:22:12,920 --> 00:22:15,520 Speaker 1: Plan B. Hope is not as tragedy. Can't wait for 356 00:22:15,600 --> 00:22:17,800 Speaker 1: higher interest rates forever. So what are you doing to 357 00:22:17,840 --> 00:22:20,000 Speaker 1: become more efficient? And if you don't have a Plan B, 358 00:22:20,160 --> 00:22:22,600 Speaker 1: one way to get expense savings is to go ahead 359 00:22:22,640 --> 00:22:28,240 Speaker 1: and merge and create new opportunities. Well, is it regulation, Dodd, Frank, 360 00:22:28,320 --> 00:22:31,560 Speaker 1: et cetera that has led them to this terrible earnings 361 00:22:31,760 --> 00:22:34,720 Speaker 1: decade or is it the economy stupid to quote an 362 00:22:34,760 --> 00:22:37,639 Speaker 1: old president. Is that the chicken or the egg. I 363 00:22:37,640 --> 00:22:41,800 Speaker 1: think it's a combination of both. Clearly, Uh, the regulators 364 00:22:41,800 --> 00:22:44,720 Speaker 1: in the United States and globally want the banks to 365 00:22:44,960 --> 00:22:48,000 Speaker 1: de risk and de lever. Well, guess what If banks 366 00:22:48,000 --> 00:22:50,399 Speaker 1: are going to de risk and de lever, they're not 367 00:22:50,440 --> 00:22:52,480 Speaker 1: going to grow assets as much, if they're not going 368 00:22:52,520 --> 00:22:54,600 Speaker 1: to make as many loans, they're going to have a 369 00:22:54,600 --> 00:22:57,760 Speaker 1: lot worse revenue. So clearly that's been a factor. The 370 00:22:57,760 --> 00:23:01,560 Speaker 1: flip side of this terrible revenue growth environment for banks 371 00:23:01,680 --> 00:23:04,479 Speaker 1: is that they are much more resilient. In fact, we 372 00:23:04,520 --> 00:23:07,359 Speaker 1: think the banks balance sheets in the United States are 373 00:23:07,400 --> 00:23:11,399 Speaker 1: the most resilient that they've been in decades. Yeah, the 374 00:23:11,400 --> 00:23:15,399 Speaker 1: the round one of the stress tests last week was 375 00:23:15,440 --> 00:23:21,280 Speaker 1: pretty good, considering that the severely adverse scenario was pretty severe. 376 00:23:21,520 --> 00:23:24,200 Speaker 1: The stress test for the US banks when part one 377 00:23:24,240 --> 00:23:26,879 Speaker 1: came out last week, it was great. I mean, the 378 00:23:26,960 --> 00:23:33,240 Speaker 1: Fed is assuming a severe global recession with ten percent unemployment, 379 00:23:33,680 --> 00:23:37,879 Speaker 1: negative six percent GDP growth, stock prices declined by half. 380 00:23:38,040 --> 00:23:41,159 Speaker 1: They even added in negative interest rates at this go around, 381 00:23:41,320 --> 00:23:44,760 Speaker 1: And even after a terrible scenario like that, the result 382 00:23:44,880 --> 00:23:48,159 Speaker 1: is that the bank would still have about four billion 383 00:23:48,160 --> 00:23:52,159 Speaker 1: dollars of excess capital to absorb even more losses. So 384 00:23:52,400 --> 00:23:55,919 Speaker 1: the US banks could absorb multiple brexits and still have 385 00:23:55,960 --> 00:24:00,680 Speaker 1: strong balance sheets earnings issues, Yes, balance sheets solid. Where 386 00:24:00,680 --> 00:24:03,359 Speaker 1: are you by hold cell on Bank of America? So 387 00:24:03,520 --> 00:24:06,800 Speaker 1: Bank America, we were negative one for many years, and 388 00:24:06,840 --> 00:24:10,200 Speaker 1: then earlier this year we convinced ourselves that their book 389 00:24:10,280 --> 00:24:15,440 Speaker 1: value continues to grow even in a recession. So that's 390 00:24:15,440 --> 00:24:17,560 Speaker 1: why we love part of the FED stress test. Because 391 00:24:17,560 --> 00:24:20,040 Speaker 1: the FED stress test last week validated from our thoughts. 392 00:24:20,080 --> 00:24:22,800 Speaker 1: They have almost fifty billion of excess capital after a 393 00:24:22,920 --> 00:24:26,200 Speaker 1: terrible you know, uh, you know, severe global recession. But 394 00:24:26,240 --> 00:24:30,120 Speaker 1: the issue remains tom as you know, terrible governance at 395 00:24:30,119 --> 00:24:32,400 Speaker 1: the top. I can't believe that Bank America gets away 396 00:24:32,400 --> 00:24:35,200 Speaker 1: with whet. I think this is an important point, folks. 397 00:24:35,200 --> 00:24:37,720 Speaker 1: Each analyst is different. Maybe you and I go back 398 00:24:37,760 --> 00:24:41,960 Speaker 1: to credit Suite a million years ago. You got Betsy Um, 399 00:24:42,200 --> 00:24:45,480 Speaker 1: Betsy caseok over at Morgan Stanley, Susan Rothkosky. You guys 400 00:24:45,480 --> 00:24:48,160 Speaker 1: all been doing this for years. Each of you has 401 00:24:48,240 --> 00:24:52,800 Speaker 1: a different style, but you all come to the conclusion 402 00:24:53,240 --> 00:24:55,760 Speaker 1: that Bank of America can catch up with the others. 403 00:24:56,080 --> 00:25:00,280 Speaker 1: How long will that take well. My conclusion and is 404 00:25:00,560 --> 00:25:03,000 Speaker 1: not that they catch up with the others. My conclusion 405 00:25:03,160 --> 00:25:05,680 Speaker 1: is that you know they will do better than they've done. 406 00:25:06,680 --> 00:25:08,960 Speaker 1: But what I think they need is more a better 407 00:25:09,000 --> 00:25:11,639 Speaker 1: tone at the top to have time frames for a 408 00:25:11,720 --> 00:25:13,520 Speaker 1: key financial target. How do you get away with that, 409 00:25:13,800 --> 00:25:15,879 Speaker 1: not having a time frame for a financial target. I mean, 410 00:25:15,920 --> 00:25:18,120 Speaker 1: it's just stump has that is what you would say. 411 00:25:18,320 --> 00:25:21,680 Speaker 1: Wells Fargo, you know they've delivered the goods. Jake Morgan's 412 00:25:21,680 --> 00:25:24,399 Speaker 1: delivered the goods. But for a bank that's had single 413 00:25:24,440 --> 00:25:27,560 Speaker 1: digit r o ees all decade, you need to hold 414 00:25:27,680 --> 00:25:30,320 Speaker 1: management's feet to the fire very quickly. Or Macquarie has 415 00:25:30,359 --> 00:25:33,359 Speaker 1: a wonderful chart. Look in the ratio of it. Folks 416 00:25:33,359 --> 00:25:36,720 Speaker 1: on the X axis is basically be a C is 417 00:25:36,760 --> 00:25:40,520 Speaker 1: a European like bank. Do you agree with that? That's 418 00:25:40,680 --> 00:25:45,679 Speaker 1: absolutely wrong, That's ridiculous. Because Bank America their liquidity has 419 00:25:45,720 --> 00:25:48,000 Speaker 1: gone up from a hundred billion a decade ago to 420 00:25:48,119 --> 00:25:51,960 Speaker 1: four hundred billion dollars of liquidity of record record capital. 421 00:25:52,200 --> 00:25:55,280 Speaker 1: They are a solid balance sheet bank. Even if they're 422 00:25:55,320 --> 00:25:58,600 Speaker 1: earnings you need to improve some I want to make 423 00:25:58,640 --> 00:26:00,720 Speaker 1: this a gossip session. We got four and a half 424 00:26:00,760 --> 00:26:05,320 Speaker 1: minutes with you tell me how you perceive Michael Mayo 425 00:26:05,560 --> 00:26:09,639 Speaker 1: the future of New York Wall Street. There's a twenty 426 00:26:09,720 --> 00:26:12,440 Speaker 1: seven year old intern out there right now. He's got 427 00:26:12,440 --> 00:26:14,840 Speaker 1: his m b A. He wants to be Mike Mayo 428 00:26:15,040 --> 00:26:19,600 Speaker 1: or David Vinier or whoever is there a future. Yeah. 429 00:26:19,680 --> 00:26:24,280 Speaker 1: I still believe in growth in global capitalism. I believe 430 00:26:24,440 --> 00:26:28,200 Speaker 1: that markets are better at allocating capital than governments. Having 431 00:26:28,240 --> 00:26:30,680 Speaker 1: said that, boy, this Brexit is a big speed bump, 432 00:26:30,880 --> 00:26:32,879 Speaker 1: and we have a lot of foreign banks that are 433 00:26:32,880 --> 00:26:35,320 Speaker 1: based here in New York. So the number of jobs 434 00:26:35,320 --> 00:26:38,040 Speaker 1: you're gonna be you'll see reduction probably later this year. 435 00:26:38,200 --> 00:26:41,399 Speaker 1: You're going to see compensation go down. You have major 436 00:26:41,520 --> 00:26:44,359 Speaker 1: headwinds in the financial industry here in New York. So 437 00:26:44,400 --> 00:26:46,800 Speaker 1: if you're thinking about going into finance, I love it 438 00:26:46,840 --> 00:26:49,960 Speaker 1: long term, but over the next couple of years, it's 439 00:26:50,000 --> 00:26:52,359 Speaker 1: going to be tough. The f t at an article 440 00:26:52,480 --> 00:26:57,000 Speaker 1: a year ago in the summer US banks killing European banks, 441 00:26:57,000 --> 00:26:58,320 Speaker 1: and it was one of those things where it just 442 00:26:58,359 --> 00:27:01,439 Speaker 1: got traction out with Brexit and all that in the 443 00:27:01,480 --> 00:27:04,400 Speaker 1: distractions of the EU today, is going to be ever 444 00:27:04,560 --> 00:27:07,680 Speaker 1: true that a given American bank is going to take 445 00:27:07,760 --> 00:27:12,159 Speaker 1: market share in Dublin, in Frankfurt, or in Warsaw. Well, 446 00:27:12,280 --> 00:27:15,320 Speaker 1: this could be an enormous silver lining for the US banks. 447 00:27:15,320 --> 00:27:18,840 Speaker 1: So for all the head winds and compensation and jobs, 448 00:27:19,240 --> 00:27:22,480 Speaker 1: in the meantime, we expect US banks to continue to 449 00:27:22,520 --> 00:27:26,199 Speaker 1: gain market share, especially against the European players. So this 450 00:27:26,280 --> 00:27:30,560 Speaker 1: could be an epic market share gain grab for the 451 00:27:30,680 --> 00:27:33,400 Speaker 1: large US banks. So you know, when you have resumes, 452 00:27:33,400 --> 00:27:36,439 Speaker 1: you're working at a European bank right now, you know, 453 00:27:36,920 --> 00:27:39,240 Speaker 1: update those and send them to JP Morgan and Goldman 454 00:27:39,280 --> 00:27:42,080 Speaker 1: sacks because they'll want to gain sharing. Michael McKee, EPIC 455 00:27:42,359 --> 00:27:46,680 Speaker 1: is tested in cf A level four. I never quite 456 00:27:46,720 --> 00:27:50,800 Speaker 1: got that far, I guess to EPIC. It's important to 457 00:27:50,800 --> 00:27:53,480 Speaker 1: note um in the in all of this that the 458 00:27:53,560 --> 00:27:56,199 Speaker 1: FED has changed the rules for foreign banks operating in 459 00:27:56,240 --> 00:27:58,960 Speaker 1: the US uh Come next month or so, they gotta 460 00:27:59,000 --> 00:28:03,120 Speaker 1: have its subsidiary walled off subsidiaries, and then in two 461 00:28:03,119 --> 00:28:07,120 Speaker 1: thousand eighteen they're subject to some basically the same kind 462 00:28:07,119 --> 00:28:11,359 Speaker 1: of stress tests as the US banks, and the FEDS 463 00:28:11,359 --> 00:28:13,360 Speaker 1: are gonna hold out of their profits if they're if 464 00:28:13,359 --> 00:28:16,720 Speaker 1: their capital is not high enough. Well, you're leveling the 465 00:28:16,720 --> 00:28:19,880 Speaker 1: playing field, and it's the rules that US banks face 466 00:28:19,960 --> 00:28:21,920 Speaker 1: here in our country, and it's part of making the 467 00:28:22,040 --> 00:28:26,520 Speaker 1: overall uh, you know, banking system safer. And you know, 468 00:28:26,800 --> 00:28:29,000 Speaker 1: last week, part one of the stress tests showed that 469 00:28:29,200 --> 00:28:33,240 Speaker 1: US banks had four billion dollars of excess capital even 470 00:28:33,280 --> 00:28:36,879 Speaker 1: after a severe global recession. So this is simply, you know, 471 00:28:36,960 --> 00:28:40,120 Speaker 1: reaffirming the excess capital not just for the US banks 472 00:28:40,120 --> 00:28:42,440 Speaker 1: based here, but for the foreign banks that do business 473 00:28:42,480 --> 00:28:47,040 Speaker 1: here too. We should ask YouTube in UH nine words 474 00:28:47,040 --> 00:28:51,120 Speaker 1: in cf A level one half language to explain the 475 00:28:51,160 --> 00:28:54,000 Speaker 1: difference between last week's stress tests and this week's stress test. 476 00:28:54,720 --> 00:28:58,840 Speaker 1: So stress test part one is where the Federal Reserve 477 00:28:58,920 --> 00:29:02,400 Speaker 1: ran through their model and said how much capital do 478 00:29:02,480 --> 00:29:07,000 Speaker 1: banks have to absorb another Lehman type scenario. And the 479 00:29:07,040 --> 00:29:09,960 Speaker 1: conclusion that we calculated from the FED data is that 480 00:29:10,160 --> 00:29:13,440 Speaker 1: the banks had four hundred billion dollars of extra capital 481 00:29:13,640 --> 00:29:15,400 Speaker 1: left over even after that. And they do that for 482 00:29:15,440 --> 00:29:18,320 Speaker 1: the industry, they do that for each bank, and all 483 00:29:18,360 --> 00:29:22,960 Speaker 1: of the banks passed on a quantitative basis. Tonight, seven 484 00:29:22,960 --> 00:29:27,000 Speaker 1: hours from now, the banks are told how much of 485 00:29:27,040 --> 00:29:31,360 Speaker 1: their earnings they're allowed to return to investors through dividends 486 00:29:31,360 --> 00:29:34,760 Speaker 1: and stock buy backs. But they don't fail they don't 487 00:29:34,800 --> 00:29:37,560 Speaker 1: have issues due to quantitative factors. Typically it's due to 488 00:29:37,640 --> 00:29:40,360 Speaker 1: qualitative factors. And so when I talk about the FED 489 00:29:40,400 --> 00:29:43,360 Speaker 1: stress test, I say it's a love hate relationship. I 490 00:29:43,440 --> 00:29:46,800 Speaker 1: love how the Federal Reserve can reassure investors in the 491 00:29:46,840 --> 00:29:49,960 Speaker 1: public that the balance sheets are more resilient than they've 492 00:29:49,960 --> 00:29:52,520 Speaker 1: been in a couple of decades. But I hate the 493 00:29:52,560 --> 00:29:56,440 Speaker 1: subjectivity that allows the FED to say banks have issues 494 00:29:56,760 --> 00:29:59,160 Speaker 1: one out of seven times due to qualitative factors. How 495 00:29:59,240 --> 00:30:01,680 Speaker 1: much are we talking about in what may go out 496 00:30:01,760 --> 00:30:05,840 Speaker 1: the door to shareholders if the FED approves, We're looking 497 00:30:05,920 --> 00:30:10,480 Speaker 1: at capital increases at US banks to increase by about 498 00:30:10,520 --> 00:30:13,640 Speaker 1: one five year every year. That is a significant increase. 499 00:30:13,720 --> 00:30:16,440 Speaker 1: At a time you might be talking about European banks. 500 00:30:16,560 --> 00:30:18,240 Speaker 1: Do they need to raise capital? Do they need to 501 00:30:18,240 --> 00:30:21,280 Speaker 1: cut dividends? You're not having capital raised at US banks. 502 00:30:21,280 --> 00:30:23,440 Speaker 1: And facts seven hours from now, you'll see that banks 503 00:30:23,440 --> 00:30:26,120 Speaker 1: will be allowed to increase their dividends and increase the 504 00:30:26,080 --> 00:30:28,280 Speaker 1: amount of stock by Does anybody fail? I mean, I 505 00:30:28,320 --> 00:30:30,320 Speaker 1: guess we call it failing, But is anybody going to 506 00:30:30,400 --> 00:30:33,479 Speaker 1: be prevented from doing that any of that? The answer 507 00:30:33,520 --> 00:30:36,680 Speaker 1: is yes, um and over the last five years one 508 00:30:36,720 --> 00:30:39,080 Speaker 1: third of the banks that have had issues were the 509 00:30:39,200 --> 00:30:41,600 Speaker 1: large money center banks, one third were regional banks, and 510 00:30:41,600 --> 00:30:45,040 Speaker 1: one third were foreign banks. Um, but it's really tough 511 00:30:45,080 --> 00:30:49,040 Speaker 1: to handicap on the outside a single best by. You know, 512 00:30:49,120 --> 00:30:52,680 Speaker 1: we're really focused on the dividend stock. So I'm gonna 513 00:30:52,680 --> 00:30:55,920 Speaker 1: give you two for the for the safer investment. Wells 514 00:30:55,920 --> 00:30:58,920 Speaker 1: far Ago, n JP Morgan both have dividend yields over 515 00:30:59,000 --> 00:31:02,440 Speaker 1: three percent, nice long term holdings, and those dividends are 516 00:31:02,480 --> 00:31:06,520 Speaker 1: safe even through a Lehman type event, even through many brexits. 517 00:31:06,720 --> 00:31:08,719 Speaker 1: Michael Mayo, thank you so much for being with us 518 00:31:08,760 --> 00:31:13,640 Speaker 1: making world headlines today on the Bloomberg. Thanks for listening 519 00:31:13,720 --> 00:31:18,240 Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews 520 00:31:18,240 --> 00:31:23,640 Speaker 1: on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm 521 00:31:23,680 --> 00:31:28,040 Speaker 1: on Twitter at Tom Keane, Michael McKee is at Economy 522 00:31:28,040 --> 00:31:31,800 Speaker 1: Before the podcast. You can always catch us worldwide. I'm 523 00:31:31,840 --> 00:31:32,760 Speaker 1: Bloomberg Radio.