Speaker 1: Yea. Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg Roberts
Speaker 1: Shower with US of Yale University. He is a laureate
Speaker 1: in this that in about fourteen other things as well. John,
Speaker 1: I thought we'd wander into the land of tariffs, and
Speaker 1: now that folds over into a national agony on wage growth.
Speaker 1: What's actually quite interesting as the President has actually scored
Speaker 1: his first win without much media coverage on on trade,
Speaker 1: a revamped trade deal with South Korea. Maybe small at
Speaker 1: the marching, but you do wonder whether this approach of
Speaker 1: this administration can generate results. Professor Schiller Cannon, Well, he's
Speaker 1: got people intimidated, and I think that it has an
Speaker 1: effect on the negotiations. I mean, it may have a
Speaker 1: positive effect in other area like North Korea. The you know,
Speaker 1: he comes across as a kind of unpredictable, aggressive guy,
Speaker 1: and I think he does know something about negotiating. Isn't
Speaker 1: that a really good point that professor should have that
Speaker 1: maybe some people are missing that the approach towards China
Speaker 1: over the last twenty years hasn't resulted in any significant
Speaker 1: opening up of the Chinese economy under pressure just through
Speaker 1: talks that this is probably the way to do it,
Speaker 1: using a stick rather than a carrot. Well, I don't know.
Speaker 1: It's not my personality. I feel unfamiliar territory to me,
Speaker 1: but I I think that a good relationship with these
Speaker 1: countries is also very important, and we're suffering from that
Speaker 1: right now. I was just in China last week. In
Speaker 1: the sense that I got was these these aggressive measures
Speaker 1: are are generating some anger and hostility. The anger and hostility, Professors,
Speaker 1: you've written in Finance and the Good Society and any
Speaker 1: of your other efforts is a societal scream in America.
Speaker 1: All of our listeners know this. The haves and they
Speaker 1: have nuts. Paul Krugman yesterday dropped on us that concept
Speaker 1: of your classes. Monopsony, which is a dominant coal mine
Speaker 1: minor in a coal mining town is the only employer,
Speaker 1: or maybe a rubber plantation in Malaysia where there's one
Speaker 1: rubber plantation in a lot of workers, is America's agony
Speaker 1: here on trade actually about the monopsony of American business
Speaker 1: where they almost can't raise wages because of the dominance
Speaker 1: of select businesses and industries. I thought you were going
Speaker 1: to refer to our trade policy as exploiting monopson moment.
Speaker 1: We may be exploiting it in other countries. But is
Speaker 1: the agony that brings us to this trade debate because
Speaker 1: of a lack of wage growth in America partly from
Speaker 1: monopsimistic tendencies. Uh, there has definitely been a lack of
Speaker 1: wage growth. Is it because monopximistic power has increased? Uh?
Speaker 1: I don't I tend to that. It's undoubtedly a complicated story,
Speaker 1: but I think of important reasons why wage growth hasn't
Speaker 1: been inspiring. Is a technological replacement, labor saving devices and
Speaker 1: be globalization which continues. Do they dwarf the trade debate?
Speaker 1: I mean, when the president's trade deficits are bad, is
Speaker 1: that discussion, whether it's constructive or not overwhelmed like technology? Yeah,
Speaker 1: you know, the general notion that trade deficits are bad
Speaker 1: is just not supported by economic theory trade. You know,
Speaker 1: trade deficits A lot of people want to invest in
Speaker 1: the US, so they that that helps finance the trade deficit.
Speaker 1: I don't. I don't think it seems like President Trump,
Speaker 1: in focusing so much on that measure is is misguided,
Speaker 1: just as he is in not not respecting the World
Speaker 1: Trade Organization, which is a outgrowth of the General Agreement
Speaker 1: on Tariffs and Trade in that was a post World
Speaker 1: War two, post depression, post World War two active enlightenment. Uh,
Speaker 1: and now we're losing sight of that, Professor um trite
Speaker 1: deficits can be a problem with that persistent drawn out
Speaker 1: of over a long period of time. And if there
Speaker 1: are a consequence of subsidies and protectionism, which which China
Speaker 1: front and center, right right right, that's a problem. Well,
Speaker 1: I think there are problems. I think Peter Navarro, who
Speaker 1: is Trump's advisor, makes it into more of a war
Speaker 1: type problem than uh. You know, there's there's there's there's
Speaker 1: something to be said for respect for other nations. I
Speaker 1: think we want China. I know it's it can be
Speaker 1: played as a cheat on American business, but on the
Speaker 1: other hand, we we do want China to prosper. That
Speaker 1: ultimately helps international accord. And uh, we we're talking about
Speaker 1: another massive nuclear power here. I think there could be
Speaker 1: more balance in our relations. Thank you for the time.
Speaker 1: To the Robert should University, We're housing free there. Next
Speaker 1: time we'll beat him to death about the housing market.
Speaker 1: One of the great engineering programs of America is the
Speaker 1: University of Illinois Urbanish Champaign, and that is where she
Speaker 1: was minted out of or she studied her thermodynamics and
Speaker 1: also a little bit she probably quoted Python when she
Speaker 1: was there. Eilean Bourbage uh joins us. She is a
Speaker 1: course definitive within the United Kingdom tech space, with a
Speaker 1: lot of experience with some of the tech giants over
Speaker 1: the years. We now speak with engineer Eileen Bourbage. Um,
Speaker 1: if you were to speak today II lean to the
Speaker 1: leadership of a beleaguered American tech industry, what would you
Speaker 1: say to them? Great question? Um. First of all, I
Speaker 1: probably asked him if I could get any sort of
Speaker 1: tips on on their future roadmaps. But I would then
Speaker 1: probably try and advise them that now is a really
Speaker 1: good sort of opportunity for them to really step up
Speaker 1: and to really demonstrate that they've got mindfulness and consumer
Speaker 1: sort of responsibility at the heart of what they do.
Speaker 1: I think that's what people are wanting to see. I
Speaker 1: think the markets are worried about you know, regulation or
Speaker 1: overstepping from the regulators, and I really think the tech
Speaker 1: leadership can actually thwart that. I think they can preempt
Speaker 1: it if they sort of demonstrate and communicate that they're
Speaker 1: thinking about these issues and that they're not taking them
Speaker 1: too lightly. Do you look at them, is publicly traded
Speaker 1: shareholder responsible managements or is there fiction of public ownership
Speaker 1: so great that they're basically private venture capitalists using the
Speaker 1: system while they do their tech stuff. I do think
Speaker 1: not to be led too much by your great question,
Speaker 1: but I do think they've probably been given a bit
Speaker 1: of a path, and I think, you know, with these
Speaker 1: sort of voting rights than the extraordinary sort of setups
Speaker 1: that a lot of them have, they've benefited from not
Speaker 1: having quite as much scrutiny from the markets and from
Speaker 1: other shareholders as come on, they're not John crying over
Speaker 1: at Deutsche Bank. I mean, that's what it comes, not
Speaker 1: John cry at Deutsche Bank. Is Facebook delivered a return
Speaker 1: of fifty on the I imagine it would be a
Speaker 1: bit different from Mark Zuckerberg, and if he hadn't, Eileen,
Speaker 1: the news coming from from Facebook is that they're going
Speaker 1: to make it more straightforward for users to change their
Speaker 1: their settings and delete data that they've already shared with
Speaker 1: with the company. How big a move is that? And
Speaker 1: if that's the ultimate business model? Now, if if you're
Speaker 1: allowed to delete the data as an end user, how
Speaker 1: do they monetize the platform as efficiently as they have
Speaker 1: over the last couple of years for the next couple
Speaker 1: of years with that a new policy setting. Yeah, so
Speaker 1: I think it's a great step on their part, by
Speaker 1: the way, And that's the kind of reaction that I
Speaker 1: was sort of alluding to, where they've got an opportunity
Speaker 1: to do these things right and make meaningful interventions to
Speaker 1: demonstrate that they're leading from the front. I think that
Speaker 1: the business model is not going to change because it's
Speaker 1: all on a scale, it's all spectrum and all very relative.
Speaker 1: Should some users choose to delete all their data, Facebook
Speaker 1: as an example, will still have more data on more
Speaker 1: people than any other platform in the world, And even
Speaker 1: should one delete their entire profile, they still will have
Speaker 1: the greatest ability to sort of target and offer insights
Speaker 1: to specific groups of people based on other behavior. Um.
Speaker 1: So it's a it's a bet worth taking in it's
Speaker 1: actually a sort of a feature and an option for
Speaker 1: users which they probably should have had all along. There
Speaker 1: is an overarching concern amongst some analysts out there, Eileen
Speaker 1: on Facebook specifically, that maybe we're meeting this point of
Speaker 1: saturation for add growth. Are we anywhere near to that?
Speaker 1: I don't think so. But even I've been skeptable about
Speaker 1: sort of Facebook's ability to keep the stating the growth
Speaker 1: that they've seen over recent years, and obviously I've been
Speaker 1: proven wrong time and time again. So I don't think
Speaker 1: what's happening now is a reason to think that they're
Speaker 1: going to be at saturation point. I think this is
Speaker 1: a minor stepback and actually has much more to do
Speaker 1: with communications and use a responsibility. There's Silicon fen in
Speaker 1: the United Kingdom, or I guess Cambridge Cluster is one
Speaker 1: way to do they have the same arrogance over there,
Speaker 1: or is it discreet to Silicon Valley the mess that
Speaker 1: we've Silicon Valley. Well, I think there's no other place
Speaker 1: in the world that's quite like Silicon Valley, and I
Speaker 1: think the culture is different in Silicon Valley, having been
Speaker 1: there a number of years. We've got silicon roundabout, but
Speaker 1: we also have a number of great huts across the UK,
Speaker 1: and I do think it's it's a different culture for sure,
Speaker 1: but there's lots to learn from both sides. So well,
Speaker 1: that was diplomatic. I come on, how can within the
Speaker 1: competitive landscape, whether it's an island in the East River
Speaker 1: of New York, Good morning, Cornell University, or it's what's
Speaker 1: going on over in the United Kingdom, how do you
Speaker 1: people take advantage of the chaos? Mr Zuckerberg is rot Oh,
Speaker 1: it's fantastic. I mean, there are great advantages even if
Speaker 1: you weren't to think about data privacy and data protection.
Speaker 1: We've got great policymakers who think about things like this
Speaker 1: an event so DPR that's going to be coming out
Speaker 1: in Europe, but even specific subsectors, so if you look
Speaker 1: at fintech or financial services, you know, policymakers here have
Speaker 1: been really helpful for innovation and have been working sort
Speaker 1: of in steps with the industry. That helps a lot.
Speaker 1: See that John Ferrell, that was just a wind And
Speaker 1: how vicious Eileen Burbage can be. Do you see how
Speaker 1: says it was just fantastic. I mean it's the nicest
Speaker 1: person in the world of tech eyes. When are we
Speaker 1: going to talk about cricket? Well, don't don't encourage him, Eileen,
Speaker 1: Please please don't encourage him. Apparently the captain has been
Speaker 1: banned for the Australian team for for twelve months. Under yes,
Speaker 1: I know we're not going We're not going down the road, Eileen,
Speaker 1: looking forward, thinking about someone that might get shredded and
Speaker 1: have their eyes pulled out. Could be Zuckerberg, and it
Speaker 1: could be in front of Congress. The reports the last
Speaker 1: twenty four hours leading us to believe that the CEO
Speaker 1: of Facebook will have his day on the hill. And
Speaker 1: I just wonder, Eileen, as an investor, how nervous investors
Speaker 1: should be about that, given that we know this is
Speaker 1: a man that's incredibly uncomfortable under pressure in those kind
Speaker 1: of situations, you know, I actually, I mean, I don't
Speaker 1: know how investors would feel. I would actually caution them
Speaker 1: that there's not too much concerned here. I think he
Speaker 1: will be extremely well briefed, really well prepped. He'll be
Speaker 1: sort of trained in condition to answer appropriately. And I
Speaker 1: actually think it's a good chance for sort of the
Speaker 1: air to be cleared in that there's not going to
Speaker 1: be anything that's going to come out that's going to
Speaker 1: be hugely detrimental. I think it's going to be a
Speaker 1: very straightforward you know, here's when our tea sency is
Speaker 1: always allowed for this is what happened. Yes, we will
Speaker 1: now take greater responsibility to make sure it's easier to understand.
Speaker 1: And we have taken these steps from A to Z
Speaker 1: already and so I actually think it's going to be
Speaker 1: a pretty strong opportunity for Facebook to say we did
Speaker 1: things correctly. We probably should have communicated even better about
Speaker 1: those things, and we will do our best to sort
Speaker 1: of help audit, monitor and verify that these things are
Speaker 1: being abided by even more so in the future. I mean,
Speaker 1: one final question, if we could give us an update
Speaker 1: on how you see the continent of Europe's tone of
Speaker 1: regulation of technology, a reticence about the dominance of technology.
Speaker 1: Is that a trend that's growing, Is it's stable or
Speaker 1: is it just a moment for them. I think it's
Speaker 1: relatively stable, and to be honest, just sort of being
Speaker 1: on this side of the pond, I think it's been
Speaker 1: pretty consistent. So I haven't seen, you know, as Princeton, say,
Speaker 1: a spike up or anything like that. I think it's
Speaker 1: been relatively consistent. Whether they're looking at tax treatment or
Speaker 1: they're looking at data rights and data protection, they've been consistent.
Speaker 1: And it just does happen that the largest tech companies
Speaker 1: are the ones that are squarely in the sites of
Speaker 1: where they might want to set examples or try and
Speaker 1: use for case study. It's going to be the American companies,
Speaker 1: you know. I think what will be interesting is if
Speaker 1: they start to take a look at, you know, maybe
Speaker 1: what companies from Asia are starting to do as they
Speaker 1: become more influential, or they start to increase their user
Speaker 1: basis sort of over here in Europe as well. But
Speaker 1: I think they would do the same, by the way,
Speaker 1: for a company that's coming out of Europe as well.
Speaker 1: I think thank you so much, Ellien Bourbage, a great, great,
Speaker 1: great briefing there with Passion Capital, of course, with their
Speaker 1: perspective Transatlantic perspective on that technology for Global Wall Street.
Speaker 1: This is a great interview. Features up six down, features
Speaker 1: up Mark Conners and the Credit Suites team. You know,
Speaker 1: I love this title, Prime Services, Risk and Portfolio Advisory
Speaker 1: market color and we're going to protect the copyright. We
Speaker 1: don't send it out. It is a spectacular detailed report
Speaker 1: on what hedge funds are actually doing doing And Mark,
Speaker 1: I love what you summarize puzzling positions. I mean, it's
Speaker 1: it's a mess right now, right, yeah, it is. And
Speaker 1: you know, we always like to have one theme because
Speaker 1: that you know, not many people are can take on
Speaker 1: three different ideas at once. But um, when you look
Speaker 1: at the rates position in which now we see funds
Speaker 1: net long to tenure, why would that be when we're
Speaker 1: stairs stepping up to you know, seven in or eight
Speaker 1: moves over the next two years. And people are selling
Speaker 1: base medals when we have you know, inflation, and they
Speaker 1: are selling banks, and we're expecting your characterize you've got
Speaker 1: all these esoteric things, mastery index, long short market blah
Speaker 1: blah blah. The trend guys and the commodity futures guys.
Speaker 1: They're getting hammered. Why is that? So? They January was
Speaker 1: one of the best months they had, right, but January
Speaker 1: is years ago in the world of markets, and then
Speaker 1: they got hammered to your point in February. But one
Speaker 1: reason why we are little, we're pretty constructive, is that
Speaker 1: they got washed out. So these folks are trend followers
Speaker 1: and they can really ramp up the equity positioning, and
Speaker 1: they took it down in feb They went down to
Speaker 1: a bottom desc style positioning. So we don't think that
Speaker 1: we're gonna have much follow through beyond where we are
Speaker 1: today on the equity market. What's the mood in raising
Speaker 1: money right now? I don't want to go into the
Speaker 1: you know, the nintet gritte of credit suite and what
Speaker 1: you're doing in prime brokerage. But can people start a
Speaker 1: hedge fund now or is it just brutal up there
Speaker 1: because people have to see fourteen years of track record
Speaker 1: for you to get you know, X million of dollars going.
Speaker 1: That's always going to be the case about track record.
Speaker 1: That's great, we love your system, we love your setup,
Speaker 1: in your pedigree, uh, your space that you're in, but
Speaker 1: give me a call in eighteen to thirty six months
Speaker 1: when you you know, and that's when your heart sinks.
Speaker 1: So what we're seeing is a lot of platforms are
Speaker 1: seeding uh folks and having them in house. So they're
Speaker 1: letting the hedge fund keep their name, keep the track
Speaker 1: record if they do well, but they're gonna share in
Speaker 1: the economics. So so the bigger getting bigger is what
Speaker 1: we see, and Mark the active guys must be loving this.
Speaker 1: I mean the last couple of months, they must be
Speaker 1: in a better place with a vix's north at twenty.
Speaker 1: So yeah, so what we saw was the reason why
Speaker 1: people couldn't make money was the great compression of two thousand,
Speaker 1: sort of post Q one sixteen, where it was all
Speaker 1: a monolithic move higher. Everything went higher. So now you
Speaker 1: have dispersion, but it would be careful what you wish for,
Speaker 1: because not everyone's of the monetized the vol right, and
Speaker 1: so it's yeah, let's talk about that because I want volatility.
Speaker 1: I want volatility, and then all of a sudden that
Speaker 1: so I don't want this kind of volatility. It is
Speaker 1: this good vall so to speak, is it bad vault?
Speaker 1: It is. So let's just look at returns right to
Speaker 1: what Tom is talking about. With returns earlier in the
Speaker 1: Master index UM hedge funds only caught about downside of
Speaker 1: feb So market was down, hedge funds were down only
Speaker 1: it March is going to be the test. So we're
Speaker 1: gonna find out, you know, week chaff, who the adults
Speaker 1: are in the room about how they didn't March. How
Speaker 1: do you respond, is a grizzled prime brokerage, strategist and analyst.
Speaker 1: When you see the media frenzy over a few select
Speaker 1: ginormous hedge fund players, whether they're up x per cent
Speaker 1: or down wide percent, when you see them, you know,
Speaker 1: I want to pick up Mr Ackman right now. When
Speaker 1: you see that focus on a few guys, how does
Speaker 1: a grizzled pro like you respond to that? You you
Speaker 1: step back and you say, definitely a segment of the market,
Speaker 1: an individual high profile. But you know, we don't speak
Speaker 1: about specific managers in case their clients. We look at
Speaker 1: the hedge funds space still three point one three point
Speaker 1: two trillion. That doesn't even speak to the alternative beta
Speaker 1: spaces that are derivative that some of these managers are
Speaker 1: also rolling in. They're becoming businesses. So a lot of
Speaker 1: these clients are no longer single strats, but they are
Speaker 1: multiple strategies down the margin. I would suggest in the
Speaker 1: real world of hedge funds, people are more diversified than
Speaker 1: the headline grabbing bets that the media is fixated on.
Speaker 1: Do I have that right? You did? You got too
Speaker 1: quicker than I did, so that's why. And you're exactly right,
Speaker 1: People are no longer saying, you know what I'm gonna
Speaker 1: bet against, you know, going back decades, I'm gonna bet
Speaker 1: against a certain currency pair, or I'm going to bet
Speaker 1: on a certain that is out the way I mean, John,
Speaker 1: let me translate this for you. When you're at bill
Speaker 1: Bok having the Cajun Chicken, I don't know what you're
Speaker 1: talking about. A week when you're at the bill Bokay,
Speaker 1: you know, they introduce you to a hed treat guy.
Speaker 1: He's way more diversified typically and way more managing his
Speaker 1: risk than all the headline grabbing alternative investment. Just I've
Speaker 1: only ever been to that restaurant three times, and those
Speaker 1: three times you took me. Okay, I have took myself.
Speaker 1: You took me good morning to Rhado, keeper of the continue.
Speaker 1: Did you expense that? Did your trouble? Mark Connors? How
Speaker 1: important was it that the treasury market actually took a
Speaker 1: bit yesterday in a risk off move in a significant way.
Speaker 1: We had a bit of one last week, but actually
Speaker 1: finally the treasury market acted as a shock absorber in
Speaker 1: the traditional way. How important was that? So that's that's
Speaker 1: very important because as you know, Tom was talking about
Speaker 1: the diversified hedge fund world. Not everyone is in equally
Speaker 1: long short. Some folks are playing that cross asset, and
Speaker 1: so when those brakes hit UM, it is constructive and
Speaker 1: acts as a breaker in the market. So one reason
Speaker 1: why a note we went out today to some clients
Speaker 1: was we don't we think the market acting well. We're
Speaker 1: not seeing a Q one sixteen de leveraging which was
Speaker 1: massively UM destructive to the alternative space, worst months in
Speaker 1: five years. Something that I think a lot of people
Speaker 1: will pick up on from listening to you was something
Speaker 1: you said about the positioning of some of these hedge funds.
Speaker 1: There is a narrative out there that the market in
Speaker 1: its entirety is net short treasuries and net short the
Speaker 1: U s, though in quite a significant way. But I
Speaker 1: heard you say something very different about the funds that
Speaker 1: you cover and about the positioning of those funds in
Speaker 1: those markets. Just walk me through it and what's driving it. Yeah,
Speaker 1: it's a time frame. We think it's a tactical move.
Speaker 1: And whether it's the you know, a longer lower for
Speaker 1: longer narrative UM over the outs, you know, for a
Speaker 1: period of time of one, two, three months, But it
Speaker 1: is absolutely opposite. What the narrative is of rate higher?
Speaker 1: Who wants to be long a tenure when three percent
Speaker 1: is a given? We went out with this when it
Speaker 1: was to and we're two seventy five, so they got
Speaker 1: it right. So c t A s are making money
Speaker 1: on rates now and that's why people like a c
Speaker 1: t A sleeve in their long equities. The counterbalance for
Speaker 1: those of you c tas are trend based. Uh, good morning,
Speaker 1: Monroe Trout if you're listening and John Henry of the
Speaker 1: Red Sox trend base people. That seems where my head
Speaker 1: is as well. How are the quants doing? How are
Speaker 1: the math the studs out of kurant n Yu are
Speaker 1: out of Carnegie Mel and how are the quants doing? Uh?
Speaker 1: There it's a wide dispersion. Some having a tough year.
Speaker 1: Again back to the volatility. They're not monetizing it. Uh
Speaker 1: And whether it because they had a tilt to the
Speaker 1: longside in the you know, given what's happening in seventeen
Speaker 1: with it being a so where are they flat to
Speaker 1: either side of the one question? We're gonna come back
Speaker 1: with you and keep this going. What is the short
Speaker 1: everybody wants? Now? They all up that go. Well, we're
Speaker 1: gonna give you our prime brokerage, but we gotta get shares.
Speaker 1: And what's that It's not Krispy Kreme, right, I mean
Speaker 1: we're past Crispy Creme, thank god? Right, because what's the short? No,
Speaker 1: I got gotta I gotta get I gotta get four
Speaker 1: million shares short? Go right, So we can't talk single names.
Speaker 1: Come on, no one's listening. My phone is already buzzing,
Speaker 1: So thank you on that one. Um so the I'll
Speaker 1: speak a little broader. The shorts are working. So for
Speaker 1: for two and a half years, you saw short underperformance
Speaker 1: eat away at alpha. I mean hedge funds weren't producing
Speaker 1: alpha a lot because of shorts. That changed mid seventeen
Speaker 1: and whether it was the advent of fiscal policy, tax initiatives,
Speaker 1: what have you um or rates, we did see shorts
Speaker 1: start to add to the bottom line. So whatever names
Speaker 1: you want to say, there there is more interest in
Speaker 1: have a Krispykreme donut. We'll come back. Mark Connors with
Speaker 1: us with credit sweeze. As we look at prime broker
Speaker 1: we now get brighter and smarter. With Michael Mayo at
Speaker 1: Wells Fargo, and he's dragged along at least Greenberg. We're
Speaker 1: gonna talk about b B and T, which his own
Speaker 1: twisted story here, but Mike, I gotta rip up the
Speaker 1: script and spent a good amount of time here on
Speaker 1: you don't follow Deutsche Bank, but you could certainly talk
Speaker 1: about European banking and your BB and T research. Note
Speaker 1: you talk about how they had to go out and
Speaker 1: quote reduced expenses by six percent year over year. European
Speaker 1: banks really can't do that, can they. Well, the U
Speaker 1: S banks took their medicine after the financial crisis and
Speaker 1: much of this decade, uh, you know, slim down the
Speaker 1: infrastructure or raised capital, just managed better for profitability. And
Speaker 1: that's a big contrast to the European banks which are
Speaker 1: less efficient, lower return less capital and just but did
Speaker 1: not take their medicine with your decades of experience. Are
Speaker 1: they that way because of the cultural realities of those
Speaker 1: nations and those people's in society or are they just
Speaker 1: afraid to be like BBNT, your Bank of America or JP. Morgan, Well,
Speaker 1: there are cultural and political differences that make it more difficult.
Speaker 1: But I also think that uh, the U S regulators
Speaker 1: did a better job at forcing the issue with the
Speaker 1: US banks, and as strong as the European regulators have been,
Speaker 1: it's not like one central regulator that's forcing the European
Speaker 1: banks to get into where they need to be at
Speaker 1: least wants to jump in here. But I got one
Speaker 1: more question here on Deutsche Bank. The the idea here
Speaker 1: that something radical is going to happen. The easiest way
Speaker 1: to change things is the geographical change. Do you predict
Speaker 1: that any of the troubled banks, whether it's Deutsche Bank
Speaker 1: or the other list of European banks, that they're gonna
Speaker 1: make geographical choices to get out of certain things in
Speaker 1: certain geographies. Well, you've seen that with the US banks.
Speaker 1: You know, I've been here talking about City group stock
Speaker 1: that we recommend um. But the US is the place
Speaker 1: to be right now, and especially with some deregulation, US
Speaker 1: looks a lot more favorable than your Europe. And so
Speaker 1: the European banks need to pick their spots to improve
Speaker 1: that efficiency, to improve their returns, to get closer to
Speaker 1: where the U. S banks are right now. But right
Speaker 1: in the U S banks have extended the lead in
Speaker 1: capital markets at leasta they should build a skyscraper in
Speaker 1: like you know, one question that I have. I'm watching
Speaker 1: the perpetual bonds of Deutsche Bank, and they had kind
Speaker 1: of a freak out in the past couple of years
Speaker 1: as people started to worry that this could become a
Speaker 1: capital issue. It certainly is a profitability issue with Deutsche Bank.
Speaker 1: When does it become a capital issue? Look, the US
Speaker 1: banks have the strongest balance sheets in a generation. Uh,
Speaker 1: certainly that the global banking system is stronger, and that
Speaker 1: includes the europe Pian banks. So the idea of the
Speaker 1: next financial crisis, financial crisis is financial crisis that it's
Speaker 1: been ten decades for past that stage. The foundation solid.
Speaker 1: The issue when we compare the European banks the US
Speaker 1: banks is really a profitability and efficiency one. You know.
Speaker 1: I do want to just get your thoughts on the
Speaker 1: two tens yield curve spread, which is the narrowest that
Speaker 1: it's been since two thousand seven. This is usually a
Speaker 1: key indicator for profitability of US banks. How worried are
Speaker 1: you about this? Well, I know a lot of investors
Speaker 1: look at, you know, the flat, flatter yield curve and say, oh,
Speaker 1: look out for the banks. But that's one of many
Speaker 1: factors driving banks, and that's kind of the typical way
Speaker 1: of looking at it. But we're seeing for the U
Speaker 1: S banks, it's a twenty five year structural breakout for
Speaker 1: the benefits of scale. A lot of people care there.
Speaker 1: So in terms of you know your national banking for
Speaker 1: the first time in n this is the first time
Speaker 1: in twenty five years when you can be a national
Speaker 1: bank without the distractions of big system integrations or financial
Speaker 1: racist or new regulations. So we're looking at the structural
Speaker 1: changes as opposed to the technical factor of flatter yolker.
Speaker 1: But some people care about that. No, No, I was
Speaker 1: kidding as a joke that I have with my producer
Speaker 1: Rich Trueman, we're going back and forth on the huge
Speaker 1: headline flow DOW up a hundred and five points. Let
Speaker 1: us migrate to something. And I give you great credit
Speaker 1: for this, both Mike Mayo and Elie Greenberg here of
Speaker 1: not looking at the top six banks. Where does BB
Speaker 1: and T fit in their regional bank? Is that a
Speaker 1: good place to start? So BB and T is a
Speaker 1: different animal. They are the tenth largest bank. They're a
Speaker 1: regional bank. They're mostly in the Southeast mid Atlantic in Texas.
Speaker 1: But what's unique about this bank is that they own
Speaker 1: the fifth largest insurance broker in the world, and it's
Speaker 1: a little less than one fifth of their revenues. So,
Speaker 1: as a bank analyst, bank aallics don't know a whole
Speaker 1: lot about the insurance So we collaborate with Elise green
Speaker 1: Span UM and you know, so I talked to my
Speaker 1: colleague Elie green Span and said, what do you think
Speaker 1: of this insurance business? What's happened in the insurance world?
Speaker 1: And that's where she came in. By the way, time
Speaker 1: yesterday we upgraded BB and T for the first time
Speaker 1: in many years to market out perform where buyers now.
Speaker 1: BB and what's it like working with Mike Mayo? Do
Speaker 1: they have to medicate you before you work with Michael Mayo?
Speaker 1: I mean, it's a it's an experience, right, They do not.
Speaker 1: He's very experienced and he's a pleasure to work with. UM.
Speaker 1: You know, we collaborate a lot across Wells Fargo Security.
Speaker 1: What's the distinction of their insurance company? So the distinction
Speaker 1: is they're they're an insurance broker, so essentially they're they're
Speaker 1: not taking on any underwriting risks. They're not doing the
Speaker 1: Bermuda thing. They're not doing the Bermuda thing. That's the
Speaker 1: host of companies in Bermuda are companies that underwrite risk.
Speaker 1: So when there's losses, like all the losses we had
Speaker 1: last year, there's exposure and they're going to take a
Speaker 1: big loss. A broker is essentially placing the business. That's
Speaker 1: what they're that's their role, and so they can benefit
Speaker 1: like BB and T is positioned to benefit from a
Speaker 1: firmer pricer pricing environment means rates are going up. So
Speaker 1: if we take a step back here, last year was
Speaker 1: the highest cat loss year ever for the industry. That's catastrophe,
Speaker 1: bond or catastrophe generally catastrophe, so anything that caused a
Speaker 1: big event. You at earthquakes, you had um you had hurricanes,
Speaker 1: who had fires. It was essentially the triple wammy for
Speaker 1: the industry, three events that hit in one year and
Speaker 1: so essentially so the largest level of losses. Pricing power
Speaker 1: has come back to the sector and it's really to
Speaker 1: the benefit of insurance brokers like BB and T as
Speaker 1: well as some other some other you know, large insurance brokers.
Speaker 1: Is this a way of saying that they can charge
Speaker 1: people a lot more to to get covered. Yes, So essentially,
Speaker 1: I mean you need losses to push for higher prices
Speaker 1: in the absence of losses. It had been many years
Speaker 1: before we actually suck a very large, significant hurricane, and
Speaker 1: so there is no pricing power if there's no losses.
Speaker 1: Is your interest here of the regional bank with the
Speaker 1: insurance brokerage that they would spin it off or sell
Speaker 1: it out to someone or is it really part Is
Speaker 1: it a corpus of BB No. I think it's it's
Speaker 1: something that's unique to B B and T. It's a
Speaker 1: capital light business that's different than the rest of their
Speaker 1: bank business. And so essentially, I think they like the
Speaker 1: diversification that they have here, and they're looking at this
Speaker 1: as an opportunity to grow their revenue, to expand their margins,
Speaker 1: and essentially to increase the earnings they're seeing from this
Speaker 1: business as opposed to looking to sell it. So I
Speaker 1: would not expect the sale of their insurance. And what
Speaker 1: these shares with me, Tom is that these companies, the
Speaker 1: pure plays that she covers in the insurance area, are
Speaker 1: often valued about one fourth higher and the banks. So
Speaker 1: this is a premium business that B B and T as,
Speaker 1: and again it's unique among you know, all the banks.
Speaker 1: Michael Mayo with us with Wells Fargoing the Street Spend
Speaker 1: as well. Thanks for listening to the Bloomberg Surveillance podcast.
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