Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Always
Speaker 1: with Michael McKee. Daily we bring you insight from the
Speaker 1: best in economics, finance, investment, and international relations. Find Bloomberg
Speaker 1: Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of course
Speaker 1: on the Bloomberg. Where do we go from here? That
Speaker 1: is the real question. Uh, there are certainly there is
Speaker 1: certainly a unanimity of forecasts about some sort of economic
Speaker 1: slowdown around the world because of Brexit. How much, how bad,
Speaker 1: how quickly depends on I guess you're economic model. Peter
Speaker 1: Hooper is one of the people who puts the model
Speaker 1: together for Deutsche Bank. He is with us here in studio,
Speaker 1: and Peter, while we wait for the Prime Minister to
Speaker 1: tell us something, uh, we don't know about how bad
Speaker 1: their economics are going to be, maybe you have some
Speaker 1: news for him. Well, Mike, our models are, to say
Speaker 1: the least, tarnished these days, very difficult to and what
Speaker 1: we put into them is far more uncertain than it
Speaker 1: usually is. We really need we didn't need another three
Speaker 1: or four months to begin to figure out what's going
Speaker 1: to happen there. Uh, certainly, yes, as you say, many
Speaker 1: people looking for recession in Europe. I don't know. In
Speaker 1: in the UK, I don't know that we're necessarily there yet.
Speaker 1: And uh dragging himself told us that expect half percent
Speaker 1: off of GDP in Europe over the next several years. Um,
Speaker 1: that's on the level I think not the growth. Um.
Speaker 1: Implications for the US we probably count in in in
Speaker 1: tenth or tenths of a percentage point at this point,
Speaker 1: barring a surprising really negative outcome in Europe. But you know,
Speaker 1: anything's possible. Um, We're in the process of rethinking our outlook.
Speaker 1: Pre Brexit. We said that if Brexit we'd probably take
Speaker 1: a couple of tents off a global growth and uh
Speaker 1: uh something half to a three quarter percentage point off UK.
Speaker 1: I imagine those numbers will be marked up. But the
Speaker 1: bottom line in here here is any number you pick
Speaker 1: is going to be revised very soon because this is
Speaker 1: just an uncertain world. But in any case, no matter
Speaker 1: what number you picked, we growth is so slow that, um,
Speaker 1: it's not good. Well, you know, FED Governor j Palisman
Speaker 1: going some very interesting speeches lately, did another one last
Speaker 1: night and he focused on this is very slow growth
Speaker 1: and by that I mean potential growth for the economy,
Speaker 1: what's happening on the supply side, what's happening in the
Speaker 1: labor force and and and particularly productivity growth. The baseline
Speaker 1: is growth is much slower today than it was pre
Speaker 1: pre crisis UM and, but the implication is that you're
Speaker 1: getting some pretty good improvement in labor markets. I mean,
Speaker 1: look across the globe, whether it's US, whether it's Japan,
Speaker 1: whether it's Europe. All we're seeing significant declines and unemployment.
Speaker 1: Labor markets are tightening. The US is now very close
Speaker 1: to full employment, Japan not far away. Europe has a
Speaker 1: ways to go, but they made a fair amount of progress. UH.
Speaker 1: This is both because employment has been expanding, but the
Speaker 1: bottom line is that the available UH supply of labor
Speaker 1: has has been slowing and the productivity of the labor
Speaker 1: has been slowing. So you know, two percent growth gives
Speaker 1: you a lot more improvement in the labor market than
Speaker 1: it used to. I guess the question is, how do
Speaker 1: your model's account for political upset of the kind that
Speaker 1: we're seeing, or can you even begin We do know
Speaker 1: that uncertainty has a significant impact on business spending UH
Speaker 1: and and one of and be the biggest reason that
Speaker 1: we're seeing this very low productivity is that there just
Speaker 1: hasn't been the kind of investment in new capital, new equipment. UM.
Speaker 1: Machinery structures have been much weaker than you you normally
Speaker 1: see at this point in an economic expansion. Uh. And
Speaker 1: we've had just a series of shocks all all along here, UM,
Speaker 1: the initial euro crises, UH, fiscal crisis in the US, China,
Speaker 1: and now the latest developments in Europe. All factors that
Speaker 1: are keeping businesses on the sideline. Goldman Sacks just putting
Speaker 1: out a statement saying it is not moving to Frankfurt immediately.
Speaker 1: There's been no change in their operations or real estate needs.
Speaker 1: I mean, there's a lot a lot of talk about
Speaker 1: what the banks are going to do. Francine said, it's
Speaker 1: feverish already. UM, I'm curious. Peter Hooper one of the
Speaker 1: things nobody's talking about, and I know Tom brought it
Speaker 1: up on the on the show this morning. Uh, everybody
Speaker 1: is the Europeans basically held a hammer over David Cameron's
Speaker 1: head last night and said, you guys, we're going to
Speaker 1: nail you whatever. But Germany needs the UK. I mean,
Speaker 1: nobody is talking about that. It's a huge export market
Speaker 1: for a country whose economy is built on exports. Uh no,
Speaker 1: no question, there will be, there will continue to be
Speaker 1: important economic ties whatever happens this uh, this fall and
Speaker 1: into the winter. Um. UK is just too important to Europe,
Speaker 1: is too important to Germany. Um. I think UK is
Speaker 1: a major export market for for Germany. My my recollection
Speaker 1: is Germany enjoys a pretty large trade surplus with the UK,
Speaker 1: with with exports having grown pretty substantially over time. Uh.
Speaker 1: This this, this slip in the in the pound may
Speaker 1: help to change things a bit there, but uh, no
Speaker 1: question uh uh. I also wanted to note that the
Speaker 1: Deutsche Bank already has a very large presence in Frankfort.
Speaker 1: Really really politically saying we say good morning to John Crying,
Speaker 1: who I'm sure was listening to his chief economist Michael.
Speaker 1: There is a headline out which shows how moment to moment,
Speaker 1: our linkage of Peter Hooper's economics is into politics. Mr
Speaker 1: Cameron speaking up in Parliament, yes, telling Jeremy corbyon he
Speaker 1: should reside as the Labor Party. It's starting to sound
Speaker 1: like Hillary Clinton and Donald Trump a little bit. Um,
Speaker 1: I want to get Peter Rupper back on script here
Speaker 1: you are kind enough to mention Jerome Paul the Governor's
Speaker 1: speech in Chicago yesterday, and it's almost as if ripped
Speaker 1: from a page of the Laureate Ned Phelps speaking eight
Speaker 1: years ago on dynamism. What is dynamism and do I care?
Speaker 1: Is it something that's going to help me as an American?
Speaker 1: Dynamism is an antidote to secular stagnation, if you will,
Speaker 1: or it's the opposite view right now, it's it's the
Speaker 1: sense that we have as times going by, all kinds
Speaker 1: of technological developments taking place, whether it's in um, genetic engineering,
Speaker 1: bio biotech, robotics, a lot of developments going on here.
Speaker 1: The view is that there's there's huge potential to raise
Speaker 1: us productivity if businesses will only start to invest in
Speaker 1: some of these new new developments. Are it is uncertainty
Speaker 1: that's holding us back. It's not the lack of new inventions.
Speaker 1: It's not I mean, I'll Bob Gordon, Uh, we don't
Speaker 1: need to close down the patent office because we're not
Speaker 1: inventing enough new stuff. So the dynamism view is, uh,
Speaker 1: there's a lot of potential out there. The economy will
Speaker 1: pick up as uncertainty receives as firms begin to invest again.
Speaker 1: Another headline Michael just to drop in here to show
Speaker 1: the frenzy of the morning. Germany said to oppose shielding
Speaker 1: investors in Italy bank plan. He that presumes that there's
Speaker 1: a plan. Well, there is a plan and what it
Speaker 1: gets complicated? Um, but basically the Italians want to be
Speaker 1: able to put capital into their banks without having any
Speaker 1: shareholder haircuts in the which is against EU rules. They
Speaker 1: want a suspension of the rules and from Merkel is
Speaker 1: saying no, we can talk about that with Mike Mayo
Speaker 1: later in the program. Uh. Let me quickly ask you,
Speaker 1: Peter Hooper. Uh, the economy will pick up, dynamism will
Speaker 1: come into play. Will tariffs will tearing up free trade
Speaker 1: agreements help that? Obviously we've taken a step back here
Speaker 1: in the whole globalization the opening up of the global
Speaker 1: economy to free trade. Uh and and the benefits of trade.
Speaker 1: So um, this this recent development in the UK visably,
Speaker 1: you're you uh not helpful in that in that regard.
Speaker 1: I'm not into a painting a sudden surge in protected protectionism,
Speaker 1: but the recent trans the politics say it's going to
Speaker 1: be Perhaps there is a political candidate who does and
Speaker 1: pate a surgeon protection Uh, Peter Hooper, thank you so
Speaker 1: much for joining us today, yet eighteen reasons to stay
Speaker 1: in brief Deutsche Bank clients, we greatly appreciate your tendency.
Speaker 1: Is the chief economist of Deutsche Bank. To get perspective.
Speaker 1: There are those that talk. We've had a little bit
Speaker 1: of that in the last number of days, including talking
Speaker 1: their book in many ways. David Harrow has written the
Speaker 1: book on European investment. He has been a long year
Speaker 1: owner of more conservative European banks and multinationals. Mr Harrow
Speaker 1: is with UH Harris Associates. Excuse me in Chicago, David,
Speaker 1: good morning, Good morning Tom. How are you? I think
Speaker 1: I'm good. Have you been acquiring shares of b MP,
Speaker 1: Perry BA which are modestly on sale? Is others? Crater? Well,
Speaker 1: let me just say this because I can't talk specifically
Speaker 1: as to what we're doing, but you know, our m
Speaker 1: O is to determine the value of business and to
Speaker 1: buy as long as that value is stable and it
Speaker 1: doesn't match the changes in share prices is to buy
Speaker 1: on weakness. And what we've really seen in the last
Speaker 1: two or three days starting with the Brexit event, was
Speaker 1: a massive destruction of the price of many of these
Speaker 1: European financials, and we certainly do not believe that the
Speaker 1: price destruction was anywhere near the decline and values. So
Speaker 1: you saw and see a big value gap opening up.
Speaker 1: These stocks were cheap to begin with on fears of Brexit,
Speaker 1: and then when the actual event happened, you saw many
Speaker 1: of these financials down in two days. So our m
Speaker 1: O is to buy low and to sell high. And
Speaker 1: perhaps because of additional weakness that will exist in the
Speaker 1: macro environment as a result of the uncertainty surrounding Brugs
Speaker 1: that you might see lower profit growth, but it certainly
Speaker 1: doesn't match the business is being dropped in by twenty
Speaker 1: what is your study of the ability to generate revenues
Speaker 1: to move down the income statement and generate free cash
Speaker 1: flow for these banks if they're living in the land
Speaker 1: of negative rates. That's original Herold research, isn't it. Yes?
Speaker 1: And what you have to do tom is you just
Speaker 1: can't look at the interest rate spread, which is negatively
Speaker 1: impacted by the lower negative rates. To be sure, but
Speaker 1: there are other forms of earnings power from banks costs, fees,
Speaker 1: loan growth, loan losses, etcetera. And for the most part
Speaker 1: these other forms will be positive. The loan growth, now
Speaker 1: it might be a little stickier given uncertainty in the
Speaker 1: macro environment. But certainly fees have been going up. I
Speaker 1: mean you talk to companies who refinanced, they say, oh,
Speaker 1: we refinanced at a lower rate, but we had to
Speaker 1: pay a huge fee. So fees are going up. Uh,
Speaker 1: costs are coming down and low losses actually have been,
Speaker 1: you know, somewhat aggressively coming down in the Europe as
Speaker 1: a result of the periphery healing. So yes, there spreads
Speaker 1: under pressure. But in the meantime, the prices you're being
Speaker 1: asked to pay in the market for these banks is
Speaker 1: in many cases somewhere less than three quarters book value
Speaker 1: today to the identities that should earn a normal Are
Speaker 1: we in the low double digits ten eleven twelve? Can
Speaker 1: I ask David just to verify you're talking about UK banks.
Speaker 1: I would imagine you'd be more discriminating about the outlook
Speaker 1: for European banks, given some of them are not in
Speaker 1: as good to shape as others. No, you have to
Speaker 1: be discriminating against banks in general and our views to
Speaker 1: look for those banks that have a large capital buffer,
Speaker 1: that have a good capital position, and this is really
Speaker 1: one of the things the market is missing. The market
Speaker 1: thinks we're an O nine again, and the neat jerk
Speaker 1: reaction of the market is any time there is a
Speaker 1: disturbance to aggressively sell the banks. However, if you look
Speaker 1: at capital positions Eurozone banks and O eight, tangible equity
Speaker 1: to assets was around three today it's over five percent.
Speaker 1: The core equity tier one ratio, well, it's not comparable
Speaker 1: because it was bossile one in two thousand and eight,
Speaker 1: but somewhere around six or seven percent today. The Eurozone
Speaker 1: is twelve percent now. And if you look at the
Speaker 1: quality of the within that Eurozone, the margins of safety
Speaker 1: are even better there, even stronger. And so again this
Speaker 1: is what the market is missing is going into this crisis,
Speaker 1: the banks, the quality banks have a much, much and
Speaker 1: sometimes as a factor to capital position. Michael, I've been
Speaker 1: remissed today on not mentioning the Wednesday rollover of Deutsche
Speaker 1: Bank and UNI Credit. Mike and I are using those
Speaker 1: as two proxies for troubled Europe, and Mike, I really
Speaker 1: miss we're almost back to June twent seven lows on
Speaker 1: UNI credit. I did not know that until two minutes ago.
Speaker 1: John Tucker does not brief that there is the whole,
Speaker 1: the whole argument in the whole situation with the Italian
Speaker 1: bank recapitalization. But we we've been talking, David Harrold about
Speaker 1: the banks, the financials in the UK and Europe. There's
Speaker 1: been a lot written about US companies with exposure to
Speaker 1: the UK and Europe. Is it too early to worry
Speaker 1: about them? Well, again, anyone who has exposure to the
Speaker 1: UK in particular. As a result of this uncertainty, at
Speaker 1: least in the short term, you're going to see some
Speaker 1: slower growth in the UK. Whether it falls off a
Speaker 1: cliff like I think some of the fear proponents have
Speaker 1: put forth, is another question, especially if whoever the new
Speaker 1: leadership is in the UK promotes a strong growth. Uh.
Speaker 1: It's kind of a supply side economic plan and which
Speaker 1: at some point the UK two, three or four years
Speaker 1: down the road may be outgrowing as it has the
Speaker 1: continental Europe and be a good place to invest in.
Speaker 1: But in a short term, of course, there's uncertainty, and
Speaker 1: this uncertainty is going to lead to the lack of
Speaker 1: business decision making, which will lead to some slower growth.
Speaker 1: The U S companies are fairly well diversified. The UK
Speaker 1: economy is okay, set number two or three in Europe,
Speaker 1: and the grand scheme of things the U S companies,
Speaker 1: I believe can easily deal with US okay, very quickly.
Speaker 1: David's exactly where I wanted to go. Do I express
Speaker 1: an international UH view by buying US multinationals or do
Speaker 1: I need to go into the land of David Harrow
Speaker 1: and by direct Well you do both, and you really
Speaker 1: have to analyze where a company earns its cash flow,
Speaker 1: not where the zip code of its corporate headquarters. And
Speaker 1: this is I think a big mistake investors still make.
Speaker 1: They say, well, how could you be invested in europe
Speaker 1: blow growth, it's blah blah blah. Well, of course it is.
Speaker 1: I don't disagree with any of that. In fact, this
Speaker 1: is why perhaps one of the reasons why the UK
Speaker 1: wants to separate it from it. But but you have
Speaker 1: to look at these companies where they earn their money
Speaker 1: and how they earn their money, not where they're located,
Speaker 1: and investors just cannot get that out of their minds.
Speaker 1: And and David, I think one of the great questions,
Speaker 1: and to get a little geeky here, is when you
Speaker 1: determine that cash flow is sustained and rising at a company,
Speaker 1: how do you exactly figure out that it's good cash
Speaker 1: flow or indeed great cash flow. What's the trick to that? Well,
Speaker 1: you have to do is in analyzing the cash flow stream,
Speaker 1: a you have to try to get an idea on
Speaker 1: the pace of growth, but be you also have to
Speaker 1: get an idea on the sustainability and whether that cash
Speaker 1: flow stream could withstand shocks, and so in pricing that
Speaker 1: cash flow stream and determining what multiples to use, it's
Speaker 1: really a function of the strength of it, the durability
Speaker 1: of it, the ability for to to withstand shocks, etcetera, etcetera, etcetera.
Speaker 1: The big mistake investors make is they think, well, just
Speaker 1: because a company might face a short period of uncertainty
Speaker 1: or of lower cash flow, they completely uh impact this
Speaker 1: on the share price, even though the value of the
Speaker 1: business is the present value of all cash flow streams,
Speaker 1: not just the next couple of quarters or a couple
Speaker 1: of years, but all the way to perpetuity to today.
Speaker 1: The present value and This is why a long term
Speaker 1: value investor has opportunities to make money, is because mr
Speaker 1: market tends to be very short term, focuses on disturbances,
Speaker 1: and ignores the fact that intrinsic value is the present
Speaker 1: value of all cash flow streams, not just a couple
Speaker 1: of quarters. So in analyzing businesses, that's what you have
Speaker 1: to look at, not just what's going to happen in
Speaker 1: the short term. Well, when you do that, what are
Speaker 1: you discounting for inflation these days and for um interest rates? Well, again,
Speaker 1: when you're when you're looking at this cash flow stream
Speaker 1: as something that goes into perpetuity, you can't necessarily just
Speaker 1: use today's conditions. And this is the tricky part. You
Speaker 1: have to use what you think the future is going
Speaker 1: to be like. So even though the interest rates today
Speaker 1: are low, it is unlikely that they're going to be
Speaker 1: this low forever. In fact, I would say extremely improbable.
Speaker 1: So you have to come up with what is a
Speaker 1: normal interest rate in a normal inflation rate. By the
Speaker 1: way of the two are very they're very much a link.
Speaker 1: At the help inflation expectations go up, so to interest rate,
Speaker 1: So real interest rates that is so um This is
Speaker 1: what you have to do as an analyst. You have
Speaker 1: to look at the business, you have to look at
Speaker 1: the condition which it operates, and you have to come
Speaker 1: with judgments of what is normalcy and and and it's
Speaker 1: hard and it's an exact but by doing this exercise
Speaker 1: you can't come up with some relatively accurate idea and
Speaker 1: what a business. David Harrold, thank you so much, greatly appreciative.
Speaker 1: Michael McKee jump in here with Michael Mayo of c
Speaker 1: ls A and that GE announcement m L does not
Speaker 1: a banker anymore, is that the headline. He's still a banker,
Speaker 1: but a much smaller banker and a much uh less
Speaker 1: important one to the government. The Financial Stability Oversight Council
Speaker 1: taking GE Capital office lists of too big to fail
Speaker 1: financial institutions. That designation brings restrictive capital and leverage requirements.
Speaker 1: They've been working with the f STOCK for quite some
Speaker 1: time like to get this done. It's really no surprise
Speaker 1: Jeff mL has been selling off parts of GE Capital
Speaker 1: to try to really slim it down. Well, you know,
Speaker 1: the bank regulators have you know, a big stick, and
Speaker 1: they've used that stick a lot. And you'll see that
Speaker 1: actually in seven hours from now when we get the
Speaker 1: result of the FED stress tests, what out of seven
Speaker 1: banks have issues due to qualitative factors. But this is
Speaker 1: an example of the regulators having a carrot, and I
Speaker 1: think the regulators need to have more carrots to reward
Speaker 1: good behavior. And it's nice to see, uh, you know,
Speaker 1: company that took action and now they're getting reward for that.
Speaker 1: We would like to see more rewards for good behavior
Speaker 1: for the banks. But the difference is Jeff Emil wanted
Speaker 1: to get out of this business. Jamie Diamond doesn't want
Speaker 1: to shed businesses at least as far as we know. Well,
Speaker 1: it's a matter of the ree So the degree of
Speaker 1: regulatory burden is a lot greater for the largest banks,
Speaker 1: and they can reduce that regulatory burden by selling off businesses,
Speaker 1: by shrinking, by simplifying. And they've done that. I don't
Speaker 1: always think they've done that quite enough. So City Group
Speaker 1: they should sell their Mexican bank, Bank America should perhaps
Speaker 1: you know, liberate, sell off Merrill Lynch America. Regional banks
Speaker 1: should sell off for regions. So there's a lot the
Speaker 1: banks can do to go more in the direction of
Speaker 1: ge while still remaining large banks we've been Europe your brexit,
Speaker 1: brexit Brexit. Let's let's do Michael here, American banking. Have
Speaker 1: you been surprised by the lack of mergers and acquisitions
Speaker 1: given weak nominal GDP, given revenue struggles, given net margin?
Speaker 1: Are you waking up and saying where's the M and A? Well,
Speaker 1: the largest banks, you know, take City Group in Jake
Speaker 1: Morgan America, they can't buy anymore. But you're absolutely right, Tom.
Speaker 1: For the US banks, it's been the worst revenue growth
Speaker 1: this decade in eighty year. So if you're not making
Speaker 1: if you're not making it on the top line, the
Speaker 1: only way to make it on the bottom line is
Speaker 1: to become more efficient. And so that's why we really
Speaker 1: request or almost require the large banks to have a
Speaker 1: Plan B. Hope is not as tragedy. Can't wait for
Speaker 1: higher interest rates forever. So what are you doing to
Speaker 1: become more efficient? And if you don't have a Plan B,
Speaker 1: one way to get expense savings is to go ahead
Speaker 1: and merge and create new opportunities. Well, is it regulation, Dodd, Frank,
Speaker 1: et cetera that has led them to this terrible earnings
Speaker 1: decade or is it the economy stupid to quote an
Speaker 1: old president. Is that the chicken or the egg. I
Speaker 1: think it's a combination of both. Clearly, Uh, the regulators
Speaker 1: in the United States and globally want the banks to
Speaker 1: de risk and de lever. Well, guess what If banks
Speaker 1: are going to de risk and de lever, they're not
Speaker 1: going to grow assets as much, if they're not going
Speaker 1: to make as many loans, they're going to have a
Speaker 1: lot worse revenue. So clearly that's been a factor. The
Speaker 1: flip side of this terrible revenue growth environment for banks
Speaker 1: is that they are much more resilient. In fact, we
Speaker 1: think the banks balance sheets in the United States are
Speaker 1: the most resilient that they've been in decades. Yeah, the
Speaker 1: the round one of the stress tests last week was
Speaker 1: pretty good, considering that the severely adverse scenario was pretty severe.
Speaker 1: The stress test for the US banks when part one
Speaker 1: came out last week, it was great. I mean, the
Speaker 1: Fed is assuming a severe global recession with ten percent unemployment,
Speaker 1: negative six percent GDP growth, stock prices declined by half.
Speaker 1: They even added in negative interest rates at this go around,
Speaker 1: And even after a terrible scenario like that, the result
Speaker 1: is that the bank would still have about four billion
Speaker 1: dollars of excess capital to absorb even more losses. So
Speaker 1: the US banks could absorb multiple brexits and still have
Speaker 1: strong balance sheets earnings issues, Yes, balance sheets solid. Where
Speaker 1: are you by hold cell on Bank of America? So
Speaker 1: Bank America, we were negative one for many years, and
Speaker 1: then earlier this year we convinced ourselves that their book
Speaker 1: value continues to grow even in a recession. So that's
Speaker 1: why we love part of the FED stress test. Because
Speaker 1: the FED stress test last week validated from our thoughts.
Speaker 1: They have almost fifty billion of excess capital after a
Speaker 1: terrible you know, uh, you know, severe global recession. But
Speaker 1: the issue remains tom as you know, terrible governance at
Speaker 1: the top. I can't believe that Bank America gets away
Speaker 1: with whet. I think this is an important point, folks.
Speaker 1: Each analyst is different. Maybe you and I go back
Speaker 1: to credit Suite a million years ago. You got Betsy Um,
Speaker 1: Betsy caseok over at Morgan Stanley, Susan Rothkosky. You guys
Speaker 1: all been doing this for years. Each of you has
Speaker 1: a different style, but you all come to the conclusion
Speaker 1: that Bank of America can catch up with the others.
Speaker 1: How long will that take well. My conclusion and is
Speaker 1: not that they catch up with the others. My conclusion
Speaker 1: is that you know they will do better than they've done.
Speaker 1: But what I think they need is more a better
Speaker 1: tone at the top to have time frames for a
Speaker 1: key financial target. How do you get away with that,
Speaker 1: not having a time frame for a financial target. I mean,
Speaker 1: it's just stump has that is what you would say.
Speaker 1: Wells Fargo, you know they've delivered the goods. Jake Morgan's
Speaker 1: delivered the goods. But for a bank that's had single
Speaker 1: digit r o ees all decade, you need to hold
Speaker 1: management's feet to the fire very quickly. Or Macquarie has
Speaker 1: a wonderful chart. Look in the ratio of it. Folks
Speaker 1: on the X axis is basically be a C is
Speaker 1: a European like bank. Do you agree with that? That's
Speaker 1: absolutely wrong, That's ridiculous. Because Bank America their liquidity has
Speaker 1: gone up from a hundred billion a decade ago to
Speaker 1: four hundred billion dollars of liquidity of record record capital.
Speaker 1: They are a solid balance sheet bank. Even if they're
Speaker 1: earnings you need to improve some I want to make
Speaker 1: this a gossip session. We got four and a half
Speaker 1: minutes with you tell me how you perceive Michael Mayo
Speaker 1: the future of New York Wall Street. There's a twenty
Speaker 1: seven year old intern out there right now. He's got
Speaker 1: his m b A. He wants to be Mike Mayo
Speaker 1: or David Vinier or whoever is there a future. Yeah.
Speaker 1: I still believe in growth in global capitalism. I believe
Speaker 1: that markets are better at allocating capital than governments. Having
Speaker 1: said that, boy, this Brexit is a big speed bump,
Speaker 1: and we have a lot of foreign banks that are
Speaker 1: based here in New York. So the number of jobs
Speaker 1: you're gonna be you'll see reduction probably later this year.
Speaker 1: You're going to see compensation go down. You have major
Speaker 1: headwinds in the financial industry here in New York. So
Speaker 1: if you're thinking about going into finance, I love it
Speaker 1: long term, but over the next couple of years, it's
Speaker 1: going to be tough. The f t at an article
Speaker 1: a year ago in the summer US banks killing European banks,
Speaker 1: and it was one of those things where it just
Speaker 1: got traction out with Brexit and all that in the
Speaker 1: distractions of the EU today, is going to be ever
Speaker 1: true that a given American bank is going to take
Speaker 1: market share in Dublin, in Frankfurt, or in Warsaw. Well,
Speaker 1: this could be an enormous silver lining for the US banks.
Speaker 1: So for all the head winds and compensation and jobs,
Speaker 1: in the meantime, we expect US banks to continue to
Speaker 1: gain market share, especially against the European players. So this
Speaker 1: could be an epic market share gain grab for the
Speaker 1: large US banks. So you know, when you have resumes,
Speaker 1: you're working at a European bank right now, you know,
Speaker 1: update those and send them to JP Morgan and Goldman
Speaker 1: sacks because they'll want to gain sharing. Michael McKee, EPIC
Speaker 1: is tested in cf A level four. I never quite
Speaker 1: got that far, I guess to EPIC. It's important to
Speaker 1: note um in the in all of this that the
Speaker 1: FED has changed the rules for foreign banks operating in
Speaker 1: the US uh Come next month or so, they gotta
Speaker 1: have its subsidiary walled off subsidiaries, and then in two
Speaker 1: thousand eighteen they're subject to some basically the same kind
Speaker 1: of stress tests as the US banks, and the FEDS
Speaker 1: are gonna hold out of their profits if they're if
Speaker 1: their capital is not high enough. Well, you're leveling the
Speaker 1: playing field, and it's the rules that US banks face
Speaker 1: here in our country, and it's part of making the
Speaker 1: overall uh, you know, banking system safer. And you know,
Speaker 1: last week, part one of the stress tests showed that
Speaker 1: US banks had four billion dollars of excess capital even
Speaker 1: after a severe global recession. So this is simply, you know,
Speaker 1: reaffirming the excess capital not just for the US banks
Speaker 1: based here, but for the foreign banks that do business
Speaker 1: here too. We should ask YouTube in UH nine words
Speaker 1: in cf A level one half language to explain the
Speaker 1: difference between last week's stress tests and this week's stress test.
Speaker 1: So stress test part one is where the Federal Reserve
Speaker 1: ran through their model and said how much capital do
Speaker 1: banks have to absorb another Lehman type scenario. And the
Speaker 1: conclusion that we calculated from the FED data is that
Speaker 1: the banks had four hundred billion dollars of extra capital
Speaker 1: left over even after that. And they do that for
Speaker 1: the industry, they do that for each bank, and all
Speaker 1: of the banks passed on a quantitative basis. Tonight, seven
Speaker 1: hours from now, the banks are told how much of
Speaker 1: their earnings they're allowed to return to investors through dividends
Speaker 1: and stock buy backs. But they don't fail they don't
Speaker 1: have issues due to quantitative factors. Typically it's due to
Speaker 1: qualitative factors. And so when I talk about the FED
Speaker 1: stress test, I say it's a love hate relationship. I
Speaker 1: love how the Federal Reserve can reassure investors in the
Speaker 1: public that the balance sheets are more resilient than they've
Speaker 1: been in a couple of decades. But I hate the
Speaker 1: subjectivity that allows the FED to say banks have issues
Speaker 1: one out of seven times due to qualitative factors. How
Speaker 1: much are we talking about in what may go out
Speaker 1: the door to shareholders if the FED approves, We're looking
Speaker 1: at capital increases at US banks to increase by about
Speaker 1: one five year every year. That is a significant increase.
Speaker 1: At a time you might be talking about European banks.
Speaker 1: Do they need to raise capital? Do they need to
Speaker 1: cut dividends? You're not having capital raised at US banks.
Speaker 1: And facts seven hours from now, you'll see that banks
Speaker 1: will be allowed to increase their dividends and increase the
Speaker 1: amount of stock by Does anybody fail? I mean, I
Speaker 1: guess we call it failing, But is anybody going to
Speaker 1: be prevented from doing that any of that? The answer
Speaker 1: is yes, um and over the last five years one
Speaker 1: third of the banks that have had issues were the
Speaker 1: large money center banks, one third were regional banks, and
Speaker 1: one third were foreign banks. Um, but it's really tough
Speaker 1: to handicap on the outside a single best by. You know,
Speaker 1: we're really focused on the dividend stock. So I'm gonna
Speaker 1: give you two for the for the safer investment. Wells
Speaker 1: far Ago, n JP Morgan both have dividend yields over
Speaker 1: three percent, nice long term holdings, and those dividends are
Speaker 1: safe even through a Lehman type event, even through many brexits.
Speaker 1: Michael Mayo, thank you so much for being with us
Speaker 1: making world headlines today on the Bloomberg. Thanks for listening
Speaker 1: to the Bloomberg Surveillance podcast. Subscribe and listen to interviews
Speaker 1: on iTunes, SoundCloud, or whichever podcast platform you prefer. I'm
Speaker 1: on Twitter at Tom Keane, Michael McKee is at Economy
Speaker 1: Before the podcast. You can always catch us worldwide. I'm
Speaker 1: Bloomberg Radio.