WEBVTT - Surveillance: Hooper, Herro, Mayo 0:00:10.039 --> 0:00:13.720 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always 0:00:14.000 --> 0:00:17.560 with Michael McKee. Daily we bring you insight from the 0:00:17.560 --> 0:00:22.760 best in economics, finance, investment, and international relations. Find Bloomberg 0:00:22.840 --> 0:00:27.240 Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course 0:00:27.760 --> 0:00:33.199 on the Bloomberg. Where do we go from here? That 0:00:33.400 --> 0:00:37.559 is the real question. Uh, there are certainly there is 0:00:37.600 --> 0:00:42.760 certainly a unanimity of forecasts about some sort of economic 0:00:42.840 --> 0:00:46.560 slowdown around the world because of Brexit. How much, how bad, 0:00:46.680 --> 0:00:51.680 how quickly depends on I guess you're economic model. Peter 0:00:51.720 --> 0:00:53.920 Hooper is one of the people who puts the model 0:00:53.960 --> 0:00:56.880 together for Deutsche Bank. He is with us here in studio, 0:00:56.920 --> 0:00:59.800 and Peter, while we wait for the Prime Minister to 0:01:00.000 --> 0:01:02.840 tell us something, uh, we don't know about how bad 0:01:02.880 --> 0:01:05.039 their economics are going to be, maybe you have some 0:01:05.120 --> 0:01:10.200 news for him. Well, Mike, our models are, to say 0:01:10.240 --> 0:01:15.560 the least, tarnished these days, very difficult to and what 0:01:15.600 --> 0:01:18.280 we put into them is far more uncertain than it 0:01:18.360 --> 0:01:21.320 usually is. We really need we didn't need another three 0:01:21.400 --> 0:01:24.360 or four months to begin to figure out what's going 0:01:24.400 --> 0:01:27.600 to happen there. Uh, certainly, yes, as you say, many 0:01:27.600 --> 0:01:30.960 people looking for recession in Europe. I don't know. In 0:01:30.959 --> 0:01:34.720 in the UK, I don't know that we're necessarily there yet. 0:01:35.080 --> 0:01:38.960 And uh dragging himself told us that expect half percent 0:01:39.040 --> 0:01:42.120 off of GDP in Europe over the next several years. Um, 0:01:42.520 --> 0:01:45.000 that's on the level I think not the growth. Um. 0:01:45.440 --> 0:01:49.080 Implications for the US we probably count in in in 0:01:49.360 --> 0:01:53.920 tenth or tenths of a percentage point at this point, 0:01:54.640 --> 0:01:59.320 barring a surprising really negative outcome in Europe. But you know, 0:01:59.360 --> 0:02:03.880 anything's possible. Um, We're in the process of rethinking our outlook. 0:02:04.800 --> 0:02:09.360 Pre Brexit. We said that if Brexit we'd probably take 0:02:09.440 --> 0:02:11.600 a couple of tents off a global growth and uh 0:02:12.200 --> 0:02:15.359 uh something half to a three quarter percentage point off UK. 0:02:15.760 --> 0:02:18.000 I imagine those numbers will be marked up. But the 0:02:18.400 --> 0:02:21.239 bottom line in here here is any number you pick 0:02:21.760 --> 0:02:24.200 is going to be revised very soon because this is 0:02:24.240 --> 0:02:27.519 just an uncertain world. But in any case, no matter 0:02:27.560 --> 0:02:32.079 what number you picked, we growth is so slow that, um, 0:02:32.120 --> 0:02:36.560 it's not good. Well, you know, FED Governor j Palisman 0:02:36.639 --> 0:02:39.359 going some very interesting speeches lately, did another one last 0:02:39.440 --> 0:02:42.400 night and he focused on this is very slow growth 0:02:42.840 --> 0:02:46.320 and by that I mean potential growth for the economy, 0:02:46.360 --> 0:02:48.359 what's happening on the supply side, what's happening in the 0:02:48.440 --> 0:02:52.680 labor force and and and particularly productivity growth. The baseline 0:02:52.840 --> 0:02:55.919 is growth is much slower today than it was pre 0:02:56.480 --> 0:03:01.280 pre crisis UM and, but the implication is that you're 0:03:01.320 --> 0:03:04.840 getting some pretty good improvement in labor markets. I mean, 0:03:04.919 --> 0:03:08.360 look across the globe, whether it's US, whether it's Japan, 0:03:08.480 --> 0:03:13.359 whether it's Europe. All we're seeing significant declines and unemployment. 0:03:13.440 --> 0:03:16.800 Labor markets are tightening. The US is now very close 0:03:16.840 --> 0:03:19.519 to full employment, Japan not far away. Europe has a 0:03:19.600 --> 0:03:22.240 ways to go, but they made a fair amount of progress. UH. 0:03:22.440 --> 0:03:26.200 This is both because employment has been expanding, but the 0:03:27.160 --> 0:03:31.440 bottom line is that the available UH supply of labor 0:03:31.480 --> 0:03:35.000 has has been slowing and the productivity of the labor 0:03:35.600 --> 0:03:39.119 has been slowing. So you know, two percent growth gives 0:03:39.120 --> 0:03:41.000 you a lot more improvement in the labor market than 0:03:41.000 --> 0:03:44.560 it used to. I guess the question is, how do 0:03:44.600 --> 0:03:47.880 your model's account for political upset of the kind that 0:03:47.920 --> 0:03:51.840 we're seeing, or can you even begin We do know 0:03:52.480 --> 0:03:58.720 that uncertainty has a significant impact on business spending UH 0:03:58.760 --> 0:04:01.120 and and one of and be the biggest reason that 0:04:01.200 --> 0:04:03.800 we're seeing this very low productivity is that there just 0:04:03.880 --> 0:04:10.400 hasn't been the kind of investment in new capital, new equipment. UM. 0:04:10.520 --> 0:04:14.480 Machinery structures have been much weaker than you you normally 0:04:14.520 --> 0:04:18.280 see at this point in an economic expansion. Uh. And 0:04:18.360 --> 0:04:22.240 we've had just a series of shocks all all along here, UM, 0:04:22.440 --> 0:04:27.320 the initial euro crises, UH, fiscal crisis in the US, China, 0:04:27.960 --> 0:04:31.800 and now the latest developments in Europe. All factors that 0:04:31.800 --> 0:04:35.520 are keeping businesses on the sideline. Goldman Sacks just putting 0:04:35.520 --> 0:04:41.200 out a statement saying it is not moving to Frankfurt immediately. 0:04:41.200 --> 0:04:45.560 There's been no change in their operations or real estate needs. 0:04:45.760 --> 0:04:48.320 I mean, there's a lot a lot of talk about 0:04:48.360 --> 0:04:50.840 what the banks are going to do. Francine said, it's 0:04:50.920 --> 0:04:56.080 feverish already. UM, I'm curious. Peter Hooper one of the 0:04:56.160 --> 0:04:58.160 things nobody's talking about, and I know Tom brought it 0:04:58.200 --> 0:05:01.160 up on the on the show this morning. Uh, everybody 0:05:01.279 --> 0:05:06.200 is the Europeans basically held a hammer over David Cameron's 0:05:06.200 --> 0:05:08.360 head last night and said, you guys, we're going to 0:05:08.560 --> 0:05:12.840 nail you whatever. But Germany needs the UK. I mean, 0:05:12.880 --> 0:05:16.040 nobody is talking about that. It's a huge export market 0:05:16.279 --> 0:05:19.919 for a country whose economy is built on exports. Uh no, 0:05:20.120 --> 0:05:22.680 no question, there will be, there will continue to be 0:05:22.960 --> 0:05:26.880 important economic ties whatever happens this uh, this fall and 0:05:27.240 --> 0:05:31.240 into the winter. Um. UK is just too important to Europe, 0:05:31.320 --> 0:05:33.960 is too important to Germany. Um. I think UK is 0:05:33.960 --> 0:05:38.120 a major export market for for Germany. My my recollection 0:05:38.279 --> 0:05:43.360 is Germany enjoys a pretty large trade surplus with the UK, 0:05:44.320 --> 0:05:48.000 with with exports having grown pretty substantially over time. Uh. 0:05:48.040 --> 0:05:50.560 This this, this slip in the in the pound may 0:05:50.640 --> 0:05:54.960 help to change things a bit there, but uh, no 0:05:55.080 --> 0:05:58.880 question uh uh. I also wanted to note that the 0:05:58.920 --> 0:06:01.760 Deutsche Bank already has a very large presence in Frankfort. 0:06:02.160 --> 0:06:06.840 Really really politically saying we say good morning to John Crying, 0:06:06.839 --> 0:06:10.000 who I'm sure was listening to his chief economist Michael. 0:06:10.360 --> 0:06:14.080 There is a headline out which shows how moment to moment, 0:06:14.600 --> 0:06:18.760 our linkage of Peter Hooper's economics is into politics. Mr 0:06:18.800 --> 0:06:23.520 Cameron speaking up in Parliament, yes, telling Jeremy corbyon he 0:06:23.560 --> 0:06:26.559 should reside as the Labor Party. It's starting to sound 0:06:26.560 --> 0:06:30.640 like Hillary Clinton and Donald Trump a little bit. Um, 0:06:30.680 --> 0:06:32.600 I want to get Peter Rupper back on script here 0:06:32.640 --> 0:06:35.320 you are kind enough to mention Jerome Paul the Governor's 0:06:35.360 --> 0:06:39.839 speech in Chicago yesterday, and it's almost as if ripped 0:06:39.839 --> 0:06:43.120 from a page of the Laureate Ned Phelps speaking eight 0:06:43.240 --> 0:06:48.760 years ago on dynamism. What is dynamism and do I care? 0:06:49.200 --> 0:06:52.599 Is it something that's going to help me as an American? 0:06:53.680 --> 0:06:57.880 Dynamism is an antidote to secular stagnation, if you will, 0:06:58.040 --> 0:07:01.080 or it's the opposite view right now, it's it's the 0:07:01.160 --> 0:07:05.640 sense that we have as times going by, all kinds 0:07:05.640 --> 0:07:12.680 of technological developments taking place, whether it's in um, genetic engineering, 0:07:12.800 --> 0:07:17.960 bio biotech, robotics, a lot of developments going on here. 0:07:18.840 --> 0:07:22.400 The view is that there's there's huge potential to raise 0:07:22.520 --> 0:07:25.880 us productivity if businesses will only start to invest in 0:07:25.960 --> 0:07:29.960 some of these new new developments. Are it is uncertainty 0:07:30.000 --> 0:07:34.080 that's holding us back. It's not the lack of new inventions. 0:07:34.280 --> 0:07:38.320 It's not I mean, I'll Bob Gordon, Uh, we don't 0:07:38.360 --> 0:07:42.360 need to close down the patent office because we're not 0:07:42.400 --> 0:07:46.280 inventing enough new stuff. So the dynamism view is, uh, 0:07:46.360 --> 0:07:49.480 there's a lot of potential out there. The economy will 0:07:49.880 --> 0:07:54.080 pick up as uncertainty receives as firms begin to invest again. 0:07:54.680 --> 0:07:57.200 Another headline Michael just to drop in here to show 0:07:57.200 --> 0:08:01.000 the frenzy of the morning. Germany said to oppose shielding 0:08:01.080 --> 0:08:05.920 investors in Italy bank plan. He that presumes that there's 0:08:05.960 --> 0:08:10.160 a plan. Well, there is a plan and what it 0:08:10.200 --> 0:08:13.360 gets complicated? Um, but basically the Italians want to be 0:08:13.400 --> 0:08:16.720 able to put capital into their banks without having any 0:08:16.720 --> 0:08:21.360 shareholder haircuts in the which is against EU rules. They 0:08:21.360 --> 0:08:24.600 want a suspension of the rules and from Merkel is 0:08:24.640 --> 0:08:26.520 saying no, we can talk about that with Mike Mayo 0:08:26.640 --> 0:08:29.520 later in the program. Uh. Let me quickly ask you, 0:08:29.560 --> 0:08:32.680 Peter Hooper. Uh, the economy will pick up, dynamism will 0:08:32.679 --> 0:08:36.040 come into play. Will tariffs will tearing up free trade 0:08:36.040 --> 0:08:40.640 agreements help that? Obviously we've taken a step back here 0:08:40.760 --> 0:08:45.840 in the whole globalization the opening up of the global 0:08:45.880 --> 0:08:49.880 economy to free trade. Uh and and the benefits of trade. 0:08:50.080 --> 0:08:54.880 So um, this this recent development in the UK visably, 0:08:54.960 --> 0:08:58.680 you're you uh not helpful in that in that regard. 0:08:59.200 --> 0:09:03.680 I'm not into a painting a sudden surge in protected protectionism, 0:09:03.720 --> 0:09:06.160 but the recent trans the politics say it's going to 0:09:06.240 --> 0:09:10.480 be Perhaps there is a political candidate who does and 0:09:10.960 --> 0:09:16.280 pate a surgeon protection Uh, Peter Hooper, thank you so 0:09:16.400 --> 0:09:19.040 much for joining us today, yet eighteen reasons to stay 0:09:19.080 --> 0:09:23.040 in brief Deutsche Bank clients, we greatly appreciate your tendency. 0:09:23.120 --> 0:09:37.320 Is the chief economist of Deutsche Bank. To get perspective. 0:09:38.040 --> 0:09:40.280 There are those that talk. We've had a little bit 0:09:40.320 --> 0:09:43.120 of that in the last number of days, including talking 0:09:43.120 --> 0:09:46.880 their book in many ways. David Harrow has written the 0:09:46.960 --> 0:09:52.720 book on European investment. He has been a long year 0:09:52.800 --> 0:09:58.480 owner of more conservative European banks and multinationals. Mr Harrow 0:09:59.200 --> 0:10:04.240 is with UH Harris Associates. Excuse me in Chicago, David, 0:10:04.280 --> 0:10:07.680 good morning, Good morning Tom. How are you? I think 0:10:07.720 --> 0:10:10.760 I'm good. Have you been acquiring shares of b MP, 0:10:10.920 --> 0:10:17.040 Perry BA which are modestly on sale? Is others? Crater? Well, 0:10:17.080 --> 0:10:19.959 let me just say this because I can't talk specifically 0:10:20.000 --> 0:10:22.760 as to what we're doing, but you know, our m 0:10:22.800 --> 0:10:25.080 O is to determine the value of business and to 0:10:25.160 --> 0:10:27.920 buy as long as that value is stable and it 0:10:27.960 --> 0:10:31.880 doesn't match the changes in share prices is to buy 0:10:31.880 --> 0:10:35.160 on weakness. And what we've really seen in the last 0:10:35.240 --> 0:10:38.920 two or three days starting with the Brexit event, was 0:10:39.040 --> 0:10:42.560 a massive destruction of the price of many of these 0:10:42.559 --> 0:10:46.720 European financials, and we certainly do not believe that the 0:10:46.880 --> 0:10:51.160 price destruction was anywhere near the decline and values. So 0:10:51.240 --> 0:10:55.480 you saw and see a big value gap opening up. 0:10:55.880 --> 0:10:59.200 These stocks were cheap to begin with on fears of Brexit, 0:11:00.040 --> 0:11:03.920 and then when the actual event happened, you saw many 0:11:03.960 --> 0:11:10.040 of these financials down in two days. So our m 0:11:10.080 --> 0:11:12.760 O is to buy low and to sell high. And 0:11:13.520 --> 0:11:19.400 perhaps because of additional weakness that will exist in the 0:11:19.440 --> 0:11:23.080 macro environment as a result of the uncertainty surrounding Brugs 0:11:23.120 --> 0:11:26.760 that you might see lower profit growth, but it certainly 0:11:26.760 --> 0:11:30.080 doesn't match the business is being dropped in by twenty 0:11:31.200 --> 0:11:35.319 what is your study of the ability to generate revenues 0:11:35.360 --> 0:11:38.200 to move down the income statement and generate free cash 0:11:38.240 --> 0:11:41.840 flow for these banks if they're living in the land 0:11:41.920 --> 0:11:46.400 of negative rates. That's original Herold research, isn't it. Yes? 0:11:46.520 --> 0:11:48.559 And what you have to do tom is you just 0:11:48.679 --> 0:11:52.360 can't look at the interest rate spread, which is negatively 0:11:52.440 --> 0:11:56.000 impacted by the lower negative rates. To be sure, but 0:11:56.080 --> 0:12:01.960 there are other forms of earnings power from banks costs, fees, 0:12:02.760 --> 0:12:07.720 loan growth, loan losses, etcetera. And for the most part 0:12:07.760 --> 0:12:12.439 these other forms will be positive. The loan growth, now 0:12:12.760 --> 0:12:15.600 it might be a little stickier given uncertainty in the 0:12:15.640 --> 0:12:19.200 macro environment. But certainly fees have been going up. I 0:12:19.200 --> 0:12:21.719 mean you talk to companies who refinanced, they say, oh, 0:12:21.760 --> 0:12:23.960 we refinanced at a lower rate, but we had to 0:12:23.960 --> 0:12:27.760 pay a huge fee. So fees are going up. Uh, 0:12:27.880 --> 0:12:31.560 costs are coming down and low losses actually have been, 0:12:31.800 --> 0:12:35.200 you know, somewhat aggressively coming down in the Europe as 0:12:35.200 --> 0:12:39.800 a result of the periphery healing. So yes, there spreads 0:12:39.840 --> 0:12:43.240 under pressure. But in the meantime, the prices you're being 0:12:43.320 --> 0:12:45.680 asked to pay in the market for these banks is 0:12:45.720 --> 0:12:49.240 in many cases somewhere less than three quarters book value 0:12:49.280 --> 0:12:53.080 today to the identities that should earn a normal Are 0:12:53.280 --> 0:12:57.959 we in the low double digits ten eleven twelve? Can 0:12:58.000 --> 0:13:01.839 I ask David just to verify you're talking about UK banks. 0:13:01.880 --> 0:13:05.200 I would imagine you'd be more discriminating about the outlook 0:13:05.280 --> 0:13:08.920 for European banks, given some of them are not in 0:13:09.000 --> 0:13:12.480 as good to shape as others. No, you have to 0:13:12.520 --> 0:13:15.320 be discriminating against banks in general and our views to 0:13:15.440 --> 0:13:19.400 look for those banks that have a large capital buffer, 0:13:19.520 --> 0:13:22.360 that have a good capital position, and this is really 0:13:22.360 --> 0:13:25.120 one of the things the market is missing. The market 0:13:25.160 --> 0:13:28.240 thinks we're an O nine again, and the neat jerk 0:13:28.280 --> 0:13:30.840 reaction of the market is any time there is a 0:13:30.880 --> 0:13:34.920 disturbance to aggressively sell the banks. However, if you look 0:13:34.960 --> 0:13:40.199 at capital positions Eurozone banks and O eight, tangible equity 0:13:40.240 --> 0:13:44.440 to assets was around three today it's over five percent. 0:13:45.200 --> 0:13:48.920 The core equity tier one ratio, well, it's not comparable 0:13:49.400 --> 0:13:52.520 because it was bossile one in two thousand and eight, 0:13:52.520 --> 0:13:55.520 but somewhere around six or seven percent today. The Eurozone 0:13:55.640 --> 0:13:59.120 is twelve percent now. And if you look at the 0:13:59.240 --> 0:14:03.600 quality of the within that Eurozone, the margins of safety 0:14:03.640 --> 0:14:07.760 are even better there, even stronger. And so again this 0:14:07.840 --> 0:14:11.079 is what the market is missing is going into this crisis, 0:14:11.600 --> 0:14:15.400 the banks, the quality banks have a much, much and 0:14:15.520 --> 0:14:19.960 sometimes as a factor to capital position. Michael, I've been 0:14:20.040 --> 0:14:24.680 remissed today on not mentioning the Wednesday rollover of Deutsche 0:14:24.680 --> 0:14:26.760 Bank and UNI Credit. Mike and I are using those 0:14:26.800 --> 0:14:30.400 as two proxies for troubled Europe, and Mike, I really 0:14:30.440 --> 0:14:34.760 miss we're almost back to June twent seven lows on 0:14:34.920 --> 0:14:38.880 UNI credit. I did not know that until two minutes ago. 0:14:40.280 --> 0:14:43.920 John Tucker does not brief that there is the whole, 0:14:44.320 --> 0:14:46.400 the whole argument in the whole situation with the Italian 0:14:46.400 --> 0:14:50.840 bank recapitalization. But we we've been talking, David Harrold about 0:14:50.920 --> 0:14:55.760 the banks, the financials in the UK and Europe. There's 0:14:55.800 --> 0:14:59.480 been a lot written about US companies with exposure to 0:14:59.520 --> 0:15:03.200 the UK and Europe. Is it too early to worry 0:15:03.280 --> 0:15:06.320 about them? Well, again, anyone who has exposure to the 0:15:06.400 --> 0:15:09.520 UK in particular. As a result of this uncertainty, at 0:15:09.600 --> 0:15:11.640 least in the short term, you're going to see some 0:15:11.760 --> 0:15:15.080 slower growth in the UK. Whether it falls off a 0:15:15.120 --> 0:15:18.520 cliff like I think some of the fear proponents have 0:15:18.560 --> 0:15:23.280 put forth, is another question, especially if whoever the new 0:15:23.360 --> 0:15:27.960 leadership is in the UK promotes a strong growth. Uh. 0:15:28.000 --> 0:15:31.440 It's kind of a supply side economic plan and which 0:15:31.480 --> 0:15:34.040 at some point the UK two, three or four years 0:15:34.040 --> 0:15:37.400 down the road may be outgrowing as it has the 0:15:37.480 --> 0:15:40.000 continental Europe and be a good place to invest in. 0:15:40.400 --> 0:15:43.240 But in a short term, of course, there's uncertainty, and 0:15:43.320 --> 0:15:45.760 this uncertainty is going to lead to the lack of 0:15:45.800 --> 0:15:48.760 business decision making, which will lead to some slower growth. 0:15:49.360 --> 0:15:52.200 The U S companies are fairly well diversified. The UK 0:15:52.320 --> 0:15:55.040 economy is okay, set number two or three in Europe, 0:15:55.080 --> 0:15:57.560 and the grand scheme of things the U S companies, 0:15:57.680 --> 0:16:01.200 I believe can easily deal with US okay, very quickly. 0:16:01.360 --> 0:16:03.920 David's exactly where I wanted to go. Do I express 0:16:03.960 --> 0:16:09.280 an international UH view by buying US multinationals or do 0:16:09.360 --> 0:16:11.120 I need to go into the land of David Harrow 0:16:11.480 --> 0:16:14.520 and by direct Well you do both, and you really 0:16:14.680 --> 0:16:18.160 have to analyze where a company earns its cash flow, 0:16:18.640 --> 0:16:21.520 not where the zip code of its corporate headquarters. And 0:16:21.560 --> 0:16:24.120 this is I think a big mistake investors still make. 0:16:24.400 --> 0:16:26.320 They say, well, how could you be invested in europe 0:16:26.520 --> 0:16:28.920 blow growth, it's blah blah blah. Well, of course it is. 0:16:28.960 --> 0:16:31.280 I don't disagree with any of that. In fact, this 0:16:31.400 --> 0:16:33.960 is why perhaps one of the reasons why the UK 0:16:34.120 --> 0:16:37.280 wants to separate it from it. But but you have 0:16:37.400 --> 0:16:39.800 to look at these companies where they earn their money 0:16:39.800 --> 0:16:42.360 and how they earn their money, not where they're located, 0:16:42.400 --> 0:16:44.960 and investors just cannot get that out of their minds. 0:16:45.040 --> 0:16:48.080 And and David, I think one of the great questions, 0:16:48.360 --> 0:16:51.480 and to get a little geeky here, is when you 0:16:51.600 --> 0:16:57.200 determine that cash flow is sustained and rising at a company, 0:16:57.240 --> 0:17:00.640 how do you exactly figure out that it's good cash 0:17:00.680 --> 0:17:05.080 flow or indeed great cash flow. What's the trick to that? Well, 0:17:05.240 --> 0:17:08.040 you have to do is in analyzing the cash flow stream, 0:17:08.160 --> 0:17:10.439 a you have to try to get an idea on 0:17:10.760 --> 0:17:13.960 the pace of growth, but be you also have to 0:17:13.960 --> 0:17:17.159 get an idea on the sustainability and whether that cash 0:17:17.200 --> 0:17:21.520 flow stream could withstand shocks, and so in pricing that 0:17:21.720 --> 0:17:25.680 cash flow stream and determining what multiples to use, it's 0:17:25.720 --> 0:17:28.640 really a function of the strength of it, the durability 0:17:28.680 --> 0:17:33.520 of it, the ability for to to withstand shocks, etcetera, etcetera, etcetera. 0:17:33.920 --> 0:17:36.520 The big mistake investors make is they think, well, just 0:17:36.560 --> 0:17:42.400 because a company might face a short period of uncertainty 0:17:42.520 --> 0:17:47.800 or of lower cash flow, they completely uh impact this 0:17:48.040 --> 0:17:50.919 on the share price, even though the value of the 0:17:51.000 --> 0:17:54.879 business is the present value of all cash flow streams, 0:17:54.920 --> 0:17:56.840 not just the next couple of quarters or a couple 0:17:56.840 --> 0:17:59.320 of years, but all the way to perpetuity to today. 0:17:59.440 --> 0:18:02.200 The present value and This is why a long term 0:18:02.280 --> 0:18:05.480 value investor has opportunities to make money, is because mr 0:18:05.560 --> 0:18:09.879 market tends to be very short term, focuses on disturbances, 0:18:09.960 --> 0:18:14.640 and ignores the fact that intrinsic value is the present 0:18:14.760 --> 0:18:17.680 value of all cash flow streams, not just a couple 0:18:17.680 --> 0:18:20.679 of quarters. So in analyzing businesses, that's what you have 0:18:20.720 --> 0:18:22.560 to look at, not just what's going to happen in 0:18:22.560 --> 0:18:26.600 the short term. Well, when you do that, what are 0:18:26.600 --> 0:18:33.760 you discounting for inflation these days and for um interest rates? Well, again, 0:18:33.800 --> 0:18:36.679 when you're when you're looking at this cash flow stream 0:18:36.880 --> 0:18:40.199 as something that goes into perpetuity, you can't necessarily just 0:18:40.320 --> 0:18:43.840 use today's conditions. And this is the tricky part. You 0:18:44.000 --> 0:18:46.119 have to use what you think the future is going 0:18:46.200 --> 0:18:49.359 to be like. So even though the interest rates today 0:18:49.400 --> 0:18:52.359 are low, it is unlikely that they're going to be 0:18:52.400 --> 0:18:56.240 this low forever. In fact, I would say extremely improbable. 0:18:56.600 --> 0:18:58.440 So you have to come up with what is a 0:18:58.560 --> 0:19:02.199 normal interest rate in a normal inflation rate. By the 0:19:02.240 --> 0:19:05.240 way of the two are very they're very much a link. 0:19:05.320 --> 0:19:08.880 At the help inflation expectations go up, so to interest rate, 0:19:09.359 --> 0:19:13.080 So real interest rates that is so um This is 0:19:13.080 --> 0:19:14.639 what you have to do as an analyst. You have 0:19:14.720 --> 0:19:16.640 to look at the business, you have to look at 0:19:16.840 --> 0:19:19.680 the condition which it operates, and you have to come 0:19:19.680 --> 0:19:23.280 with judgments of what is normalcy and and and it's 0:19:23.359 --> 0:19:27.120 hard and it's an exact but by doing this exercise 0:19:27.720 --> 0:19:31.960 you can't come up with some relatively accurate idea and 0:19:32.040 --> 0:19:36.359 what a business. David Harrold, thank you so much, greatly appreciative. 0:19:46.080 --> 0:19:48.639 Michael McKee jump in here with Michael Mayo of c 0:19:48.840 --> 0:19:52.879 ls A and that GE announcement m L does not 0:19:52.920 --> 0:19:55.960 a banker anymore, is that the headline. He's still a banker, 0:19:56.000 --> 0:19:58.680 but a much smaller banker and a much uh less 0:19:58.720 --> 0:20:02.080 important one to the government. The Financial Stability Oversight Council 0:20:02.160 --> 0:20:06.119 taking GE Capital office lists of too big to fail 0:20:06.160 --> 0:20:12.280 financial institutions. That designation brings restrictive capital and leverage requirements. 0:20:12.480 --> 0:20:15.000 They've been working with the f STOCK for quite some 0:20:15.040 --> 0:20:18.040 time like to get this done. It's really no surprise 0:20:18.119 --> 0:20:20.720 Jeff mL has been selling off parts of GE Capital 0:20:20.920 --> 0:20:24.040 to try to really slim it down. Well, you know, 0:20:24.040 --> 0:20:27.000 the bank regulators have you know, a big stick, and 0:20:27.000 --> 0:20:29.280 they've used that stick a lot. And you'll see that 0:20:29.440 --> 0:20:31.679 actually in seven hours from now when we get the 0:20:31.680 --> 0:20:33.560 result of the FED stress tests, what out of seven 0:20:33.600 --> 0:20:36.840 banks have issues due to qualitative factors. But this is 0:20:36.880 --> 0:20:39.960 an example of the regulators having a carrot, and I 0:20:40.000 --> 0:20:42.280 think the regulators need to have more carrots to reward 0:20:42.359 --> 0:20:45.440 good behavior. And it's nice to see, uh, you know, 0:20:45.520 --> 0:20:47.880 company that took action and now they're getting reward for that. 0:20:48.080 --> 0:20:50.400 We would like to see more rewards for good behavior 0:20:50.440 --> 0:20:53.120 for the banks. But the difference is Jeff Emil wanted 0:20:53.160 --> 0:20:56.520 to get out of this business. Jamie Diamond doesn't want 0:20:56.520 --> 0:20:59.160 to shed businesses at least as far as we know. Well, 0:20:59.160 --> 0:21:02.199 it's a matter of the ree So the degree of 0:21:02.280 --> 0:21:05.520 regulatory burden is a lot greater for the largest banks, 0:21:05.520 --> 0:21:09.000 and they can reduce that regulatory burden by selling off businesses, 0:21:09.080 --> 0:21:12.360 by shrinking, by simplifying. And they've done that. I don't 0:21:12.480 --> 0:21:15.480 always think they've done that quite enough. So City Group 0:21:15.480 --> 0:21:19.000 they should sell their Mexican bank, Bank America should perhaps 0:21:19.080 --> 0:21:22.800 you know, liberate, sell off Merrill Lynch America. Regional banks 0:21:22.840 --> 0:21:24.800 should sell off for regions. So there's a lot the 0:21:24.840 --> 0:21:27.600 banks can do to go more in the direction of 0:21:27.640 --> 0:21:32.119 ge while still remaining large banks we've been Europe your brexit, 0:21:32.160 --> 0:21:35.560 brexit Brexit. Let's let's do Michael here, American banking. Have 0:21:35.640 --> 0:21:38.840 you been surprised by the lack of mergers and acquisitions 0:21:39.359 --> 0:21:43.960 given weak nominal GDP, given revenue struggles, given net margin? 0:21:44.440 --> 0:21:47.720 Are you waking up and saying where's the M and A? Well, 0:21:47.760 --> 0:21:50.680 the largest banks, you know, take City Group in Jake 0:21:50.760 --> 0:21:54.119 Morgan America, they can't buy anymore. But you're absolutely right, Tom. 0:21:54.440 --> 0:21:57.760 For the US banks, it's been the worst revenue growth 0:21:57.920 --> 0:22:01.520 this decade in eighty year. So if you're not making 0:22:01.800 --> 0:22:04.240 if you're not making it on the top line, the 0:22:04.240 --> 0:22:05.879 only way to make it on the bottom line is 0:22:05.920 --> 0:22:09.439 to become more efficient. And so that's why we really 0:22:09.560 --> 0:22:12.840 request or almost require the large banks to have a 0:22:12.920 --> 0:22:15.520 Plan B. Hope is not as tragedy. Can't wait for 0:22:15.600 --> 0:22:17.800 higher interest rates forever. So what are you doing to 0:22:17.840 --> 0:22:20.000 become more efficient? And if you don't have a Plan B, 0:22:20.160 --> 0:22:22.600 one way to get expense savings is to go ahead 0:22:22.640 --> 0:22:28.240 and merge and create new opportunities. Well, is it regulation, Dodd, Frank, 0:22:28.320 --> 0:22:31.560 et cetera that has led them to this terrible earnings 0:22:31.760 --> 0:22:34.720 decade or is it the economy stupid to quote an 0:22:34.760 --> 0:22:37.639 old president. Is that the chicken or the egg. I 0:22:37.640 --> 0:22:41.800 think it's a combination of both. Clearly, Uh, the regulators 0:22:41.800 --> 0:22:44.720 in the United States and globally want the banks to 0:22:44.960 --> 0:22:48.000 de risk and de lever. Well, guess what If banks 0:22:48.000 --> 0:22:50.399 are going to de risk and de lever, they're not 0:22:50.440 --> 0:22:52.480 going to grow assets as much, if they're not going 0:22:52.520 --> 0:22:54.600 to make as many loans, they're going to have a 0:22:54.600 --> 0:22:57.760 lot worse revenue. So clearly that's been a factor. The 0:22:57.760 --> 0:23:01.560 flip side of this terrible revenue growth environment for banks 0:23:01.680 --> 0:23:04.479 is that they are much more resilient. In fact, we 0:23:04.520 --> 0:23:07.359 think the banks balance sheets in the United States are 0:23:07.400 --> 0:23:11.399 the most resilient that they've been in decades. Yeah, the 0:23:11.400 --> 0:23:15.399 the round one of the stress tests last week was 0:23:15.440 --> 0:23:21.280 pretty good, considering that the severely adverse scenario was pretty severe. 0:23:21.520 --> 0:23:24.200 The stress test for the US banks when part one 0:23:24.240 --> 0:23:26.879 came out last week, it was great. I mean, the 0:23:26.960 --> 0:23:33.240 Fed is assuming a severe global recession with ten percent unemployment, 0:23:33.680 --> 0:23:37.879 negative six percent GDP growth, stock prices declined by half. 0:23:38.040 --> 0:23:41.159 They even added in negative interest rates at this go around, 0:23:41.320 --> 0:23:44.760 And even after a terrible scenario like that, the result 0:23:44.880 --> 0:23:48.159 is that the bank would still have about four billion 0:23:48.160 --> 0:23:52.159 dollars of excess capital to absorb even more losses. So 0:23:52.400 --> 0:23:55.919 the US banks could absorb multiple brexits and still have 0:23:55.960 --> 0:24:00.680 strong balance sheets earnings issues, Yes, balance sheets solid. Where 0:24:00.680 --> 0:24:03.359 are you by hold cell on Bank of America? So 0:24:03.520 --> 0:24:06.800 Bank America, we were negative one for many years, and 0:24:06.840 --> 0:24:10.200 then earlier this year we convinced ourselves that their book 0:24:10.280 --> 0:24:15.440 value continues to grow even in a recession. So that's 0:24:15.440 --> 0:24:17.560 why we love part of the FED stress test. Because 0:24:17.560 --> 0:24:20.040 the FED stress test last week validated from our thoughts. 0:24:20.080 --> 0:24:22.800 They have almost fifty billion of excess capital after a 0:24:22.920 --> 0:24:26.200 terrible you know, uh, you know, severe global recession. But 0:24:26.240 --> 0:24:30.120 the issue remains tom as you know, terrible governance at 0:24:30.119 --> 0:24:32.400 the top. I can't believe that Bank America gets away 0:24:32.400 --> 0:24:35.200 with whet. I think this is an important point, folks. 0:24:35.200 --> 0:24:37.720 Each analyst is different. Maybe you and I go back 0:24:37.760 --> 0:24:41.960 to credit Suite a million years ago. You got Betsy Um, 0:24:42.200 --> 0:24:45.480 Betsy caseok over at Morgan Stanley, Susan Rothkosky. You guys 0:24:45.480 --> 0:24:48.160 all been doing this for years. Each of you has 0:24:48.240 --> 0:24:52.800