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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day

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Speaker 1: for insight from the best and economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot com,

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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. For those

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Speaker 1: of you gloomy. This is the interview of the day.

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Speaker 1: There have been optimists. They are congenital optimists, and they're

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Speaker 1: also reasoned optimists. And one of them is Neil Duddy.

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Speaker 1: He's out of US economic research at Renaissance Macro and

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Speaker 1: has been extraordinary, not over the last three months, six months,

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Speaker 1: but frankly the last two years of saying this is

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Speaker 1: America the resilient. The data chart is out there, Neil,

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Speaker 1: and it is finally we have legitimate income growth. Will

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Speaker 1: we sustain that?

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Speaker 2: I believe so, Tom, thanks for having me on. Obviously,

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Speaker 2: there's a lot of disinflation in the pipeline, at least

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Speaker 2: over the next you know, you could say three to

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Speaker 2: four months. The most obvious is used cars. We know

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Speaker 2: that wholesale auction prices have been coming down. That's going

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Speaker 2: to bleed into consumer prices for use cars and trucks.

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Speaker 2: Supply chains are improving, that's going to take some pressure

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Speaker 2: off of core goods outside of vehicles, and there's still

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Speaker 2: some disinflation and train with respect to shelter looking at

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Speaker 2: new lease growth. At the same time, we know the

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Speaker 2: labor markets are holding up and that's going to support

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Speaker 2: real incomes. And if real incomes are rising, ultimately I

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Speaker 2: think consumers are going to go out and spend that money.

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Speaker 2: So I think that's sort of the lynchpin for why

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Speaker 2: things are holding up better than expected.

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Speaker 1: Atlanta has a GDP now numbers. We came in at

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Speaker 1: a two percent statistic Q one, and all of a

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Speaker 1: sudden we're migrating one one point a two ish on

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Speaker 1: Atlanta GDP whatever it is, I really don't care what

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Speaker 1: the number is.

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Speaker 3: But my question is to the Gloom, what statistic of

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Speaker 3: positive GDP in America is a so called growth recession?

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Speaker 3: Is it half a percent point five? Do you have

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Speaker 3: that number in your head?

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Speaker 2: Well, I would define a growth recession as a situation

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Speaker 2: where the economy is has a you know, GDP has

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Speaker 2: a positive sign in front of it, but that growth

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Speaker 2: is not strong enough to keep the unemployment rate from rising.

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Speaker 2: So typically in a growth receession, you'd see the unemployment

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Speaker 2: rate go up. So it's effectively a below potential growth state, Tom,

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Speaker 2: But that's not what we have right now. I mean,

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Speaker 2: you mentioned the Atlanta Fed that that number is tracking

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Speaker 2: two point four percent, you know, with very little contribution

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Speaker 2: from consumer spending. I suspect that probably builds over the summer, frankly,

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Speaker 2: but wow, but you know, look, there's more upside to

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Speaker 2: the economy than not. But we're growing above potential and

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Speaker 2: that means that whatever un employment rate increase you see

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Speaker 2: sort of bobbing around three and a half percent, I mean,

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Speaker 2: it's probably going to be short lived. Not on a

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Speaker 2: situation where we're going to see above four percent unemployment.

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Speaker 4: Goldilocks seems to be the moment that we're in. That's

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Speaker 4: a lot of people are saying, how long can goldilocks last?

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Speaker 2: I mean, talk to me in the fall, Lisa, I mean,

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Speaker 2: that's what I'll say. I mean, I think it's I'm

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Speaker 2: sort of I'm sort of in the goldilocks for now. Camp.

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Speaker 2: I mean, I do think that there are reasons to

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Speaker 2: be somewhat suspicious about how long this can last, about

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Speaker 2: whether this is a durable sort of sustainable moderation and inflation.

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Speaker 2: I think that's a question that needs to be answered.

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Speaker 2: I don't think we can answer it just yet. But

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Speaker 2: you know, to me, when you think about economic scenarios,

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Speaker 2: I think the risk of recession has receded dramatically, and

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Speaker 2: so now it's a question for investors about where do

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Speaker 2: you put these other percentages?

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Speaker 3: Right?

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Speaker 2: I mean, do you? I mean, I think the markets

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Speaker 2: are right to kind of allocate a little bit more

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Speaker 2: to the soft landing story. But I think you know,

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Speaker 2: you could. I think you can make a good case,

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Speaker 2: and maybe we're getting a little bit over our skis

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Speaker 2: here and we should probably put some more potential on

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Speaker 2: the resurgence of the inflationary boom scenario.

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Speaker 4: Okay, Well, I wanted you to double down on that

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Speaker 4: because you were just saying that people are perhaps a

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Speaker 4: little too sanguine about the steady disinflation that they expect

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Speaker 4: to see. Where is it that you see reinflation coming

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Speaker 4: back down the pike, especially if you hear all these

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Speaker 4: people saying that FED policy hasn't worked its way through

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Speaker 4: the financial system and still has more restraining to do well.

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Speaker 2: Home prices are rising again. They're actually arising for the

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Speaker 2: for four months in a row. We get weekly data

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Speaker 2: from redfin and you know that's more up to date,

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Speaker 2: and that shows continued to increases in home prices over

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Speaker 2: the summer, even after seasonal adjustment. So you know, to

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Speaker 2: the extent that home prices go up, and you know, obviously,

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Speaker 2: for a landlord and the underlying value of your asset

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Speaker 2: is rising, You're not going to go around saying up,

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Speaker 2: I'm going to start cutting your rent. So it leads

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Speaker 2: me to believe that we could see some upward momentum

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Speaker 2: in housing rental inflation in the CPI statistics sometime you know,

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Speaker 2: let's say in the first or second quarter of next year.

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Speaker 2: So that would be the most obvious area. But you know,

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Speaker 2: more broadly, I mean, let's take a step back, and

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Speaker 2: you know, what are we talking about here. We're talking

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Speaker 2: about real growth improving. Real growth is improving over time,

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Speaker 2: that that erotes physical capacity, and that forces economic actors

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Speaker 2: to bid up wages and prices. So I have a

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Speaker 2: little bit of skepticism in terms of how far we

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Speaker 2: can push this kind of immaculate disinflation story just real quick.

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Speaker 4: Here, Neil, Given that, how far do you think the

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Speaker 4: Fed could go? I mean, do you think that people

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Speaker 4: are pricing out future rate hikes after this month and

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Speaker 4: that that's inaccurate? That you think that that's wrong?

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Speaker 2: I mean, who am I to say what's right and

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Speaker 2: what's wrong? But I would just if they were me.

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Speaker 2: I mean, I think the probabilities of a high you know,

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Speaker 2: after July are probably somewhat higher than the markets are

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Speaker 2: currently expected.

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Speaker 1: Neil Doda, They are extraordinary on this two percent American

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Speaker 1: real GDP is with Renaissance Macro.

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Speaker 5: And I hand joined us now equity strategist over at

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Speaker 5: wels Faco and a good morning to you. Great to

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Speaker 5: have you with us, say in New York, let's start

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Speaker 5: with this. You were looking for ten percent mode for

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Speaker 5: ten percent correction. You throw in the town on that

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Speaker 5: over the last month. What's gone right for you in

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Speaker 5: the team?

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Speaker 6: Well, I'll say one of our biggest calls being tied

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Speaker 6: to that AI trend, you know, one of our largest

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Speaker 6: calls coming to this year median entertainment, and that's actually

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Speaker 6: kept up with a tech sector, if not outperformed it.

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Speaker 6: I think that call we came in because we wanted

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Speaker 6: to see that pivot of spending from really the gird

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Speaker 6: opal goods into something more services, a little more of

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Speaker 6: that away from home trade. But at the same time

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Speaker 6: you see this kind of networking cable, these media groups

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Speaker 6: still having that poll. We thought that might be that

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Speaker 6: sweet balance. That was one of our largest calls, and

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Speaker 6: right now as we see it, we've stepped off that

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Speaker 6: pole back call. Well, you know, we'll throw in the

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Speaker 6: towel andmit ourselves on that one. But something we're still

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Speaker 6: watching here is you know, what is going to be

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Speaker 6: the pace of this rally in the back half this

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Speaker 6: year and can this AI and really uber top led

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Speaker 6: rally continue. I think that's what's really weighing on people's minds.

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Speaker 1: Your mathwiness informs your research node. I'm fascinated what you

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Speaker 1: think about what revenues are going to do made up

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Speaker 1: of unit and price and the calculus jargon here is

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Speaker 1: the partial differentials of units and revenues. How do you

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Speaker 1: see that playing out over the next year.

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Speaker 6: No, that's very important. Right when you have this top

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Speaker 6: line figure, it's important to figure if that is declining

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Speaker 6: you know, how much can margins really increase to make

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Speaker 6: up for it? And if it doesn't, then what about

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Speaker 6: prices versus volumes? We've seen volumes declining. Those volumes are declining,

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Speaker 6: and price elasticity returns to normal, then what happens to

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Speaker 6: that bottom line? These margins continue to be pressured, continue

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Speaker 6: to be compressed, But so far the market seems to

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Speaker 6: look through those things. Perhaps they're trading already on next

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Speaker 6: year's earnings or expectations. What we've seen is not just

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Speaker 6: the one and done, but what if we get rate cups?

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Speaker 6: That easing also trickles into investors' minds and helps look

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Speaker 6: at equity valuations above what perhaps we expected.

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Speaker 4: So do earnings matter or do you just basically look

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Speaker 4: at what the returns have been and then just say

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Speaker 4: we're going to keep buying because everybody else is.

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Speaker 6: You know that momentum trade is always interesting. You know,

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Speaker 6: do we stay on the train? Who's going to be

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Speaker 6: the first to leave the party? But no one wants

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Speaker 6: to be the last. I think with earnings, the more

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Speaker 6: important is directional than really the figure. Like Tom mentioned earlier,

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Speaker 6: you know, is it two hundreds, it two ten? What

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Speaker 6: is it? But it's more the sentiment of how much

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Speaker 6: contraction are we seeing, if it's going to be light

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Speaker 6: enough for investors to look through and really what is

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Speaker 6: driving it? Is it the consumer and your need or

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Speaker 6: pulling back sharply, that's not what we're hearing. Even with

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Speaker 6: bank earnings early in the season, we see that consumer

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Speaker 6: still remains resilient, rages remains resilient, Labor markets are supporting that.

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Speaker 6: But that general slowing tells us things are cooling a bit.

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Speaker 6: But if the Fed is able to give us that

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Speaker 6: goldilocks almost that pow put in terms of not just

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Speaker 6: equities but really economic consumer spending, then that's a kind

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Speaker 6: of a happy scenario for a lot of people.

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Speaker 4: It's a confusing market for people who are trying to

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Speaker 4: look at facts and extrap laid out some sort of

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Speaker 4: price target. From your vantage point, how bullish can you

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Speaker 4: get just with a momentum trade even as you see

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Speaker 4: some of the earnings come in softer than you'd like

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Speaker 4: to see.

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Speaker 6: Well, the mollentium trade actually has been flipping a little.

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Speaker 6: You know, what we've seen was market leaders, and you're

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Speaker 6: seeing the momentum factor. The top top leaders aside from

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Speaker 6: those AI names have actually started to rotate, and that

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Speaker 6: rotation could also bring a little churn in volatility. So

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Speaker 6: when we think about how long the market can ride

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Speaker 6: on momentum, quite long, no doubt, But what leads that momentum,

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Speaker 6: who those momentum leaders are. I think that continues to

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Speaker 6: have some mean reversion to it, and that's what we

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Speaker 6: use to look at technicals and think about where we

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Speaker 6: want to position.

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Speaker 5: Shine a light on your client conversations if you can,

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Speaker 5: do you sense capitulation after the last couple of weeks.

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Speaker 6: I don't think we're sensing that just yet. I think

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Speaker 6: right now the beginning of this year burned a lot

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Speaker 6: of people. A lot of people came in more conservative.

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Speaker 6: You know, you were mentioning that etf earlier. We're worried

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Speaker 6: about protecting against losses. People were happy to take four

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Speaker 6: percent five percent in some sort of a bond investment,

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Speaker 6: and now they've missed out on twenty percent in the

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Speaker 6: first half of this year. So that kind of mentality,

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Speaker 6: I think they have to remain strong the rest of

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Speaker 6: this year. But in what underweight names have been most painful.

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Speaker 6: That's going to be the hard part is when do

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Speaker 6: they capitulate on that and we have not seen that.

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Speaker 5: This is what lace is getting at. Really, if you've

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Speaker 5: sat on cash and you've missed out on this rally

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Speaker 5: and you feel foolish, are you chasing the winners? Big tech?

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Speaker 5: Where you going to places where you haven't seen the games?

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Speaker 5: When you have those conversations, what they sound like?

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Speaker 6: You know, I will say, you know, we're not bringing

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Speaker 6: out the tissue boxes. Yes yet it's not full tears.

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Speaker 6: But it is a difficult conversation. You want to be

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Speaker 6: thank you, you want to be chasing in some ways

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Speaker 6: you you really believe that I've got to make up

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Speaker 6: for this. I've got to get back on this train

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Speaker 6: the same time when that trains left. Look for growth

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Speaker 6: opportunities in other parts of the market, someplace where maybe

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Speaker 6: valuations are a little more friendly. And if we do

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Speaker 6: get this growing, where as a.

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Speaker 1: Friendly valuation out there, enlighten me. Where's a friendly a

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Speaker 1: friendly valuation?

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Speaker 6: Well, we can look for actual sustained grow photos autos.

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Speaker 6: I think autos given the economy we expect in this slowdown,

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Speaker 6: that's a little bit of a hard sell for people.

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Speaker 5: I thought you were going to say, Cavan, Well, friend

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Speaker 5: evaluations and combinations.

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Speaker 1: Walmart's trading to twenty four times earnings.

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Speaker 5: That's not that friendly.

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Speaker 1: I don't know, I've never seen it. That's absolutely nuts.

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Speaker 5: And to thank you one wis aneha was Faga, I.

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Speaker 1: Think Amanda Linum joins us now how of macro credit

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Speaker 1: research at Blackrock. But there is an equivalent overlay here,

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Speaker 1: and that is mister Solomon and others, including mister Fink,

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Speaker 1: have to deal with a new interest rate regime which

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Speaker 1: hearkens back sixteen years, twenty years, twenty five years. And

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Speaker 1: as you brilliantly say in your note of macro credit research,

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Speaker 1: there's a new higher cost of capital. Have we adjusted

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Speaker 1: to it or are we in early innings?

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Speaker 7: I think in good morning, thank you for having me,

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Speaker 7: I think we're in the early innings of adjusting to that.

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Speaker 7: And I think one of the really interesting things from

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Speaker 7: my perspective, and looking through the regional bank earnings even

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Speaker 7: yesterday and earlier last last week, was that companies are

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Speaker 7: taking reserves against intra sensitive pockets of the market like

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Speaker 7: commercial real estate, for example, but they're saying that they'll

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Speaker 7: need those reserves even if there is a soft landing,

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Speaker 7: and so it's not necessarily reserves in the event of

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Speaker 7: a worst case downturn, but it's reserves even if we

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Speaker 7: kind of get an okay outcome. And I think that's

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Speaker 7: true for areas like leverage loans, for example, where we

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Speaker 7: expect the default rate to outpace that for hiled bonds.

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Speaker 7: And I think it's also true for areas like commercial

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Speaker 7: real estate, where we, as you know, Tom wrote that

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Speaker 7: we think we're in the early innings of that distress cycle.

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Speaker 7: And I think what's really challenging in this pocket of

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Speaker 7: the market is that there's going to be a new

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Speaker 7: sense of price discovery. So maybe the LTVs and the

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Speaker 7: cap rates that the market has used in previous periods

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Speaker 7: to kind of understand where the floor is on commercial

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Speaker 7: real estate, they might not be as relevant this time around.

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Speaker 7: And so rather we'll look at cash flow of assets.

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Speaker 7: We'll look at the basis to require to be bringing

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Speaker 7: those properties up to market, and that's very heterogeneous, and

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Speaker 7: I don't think we know the answer to that.

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Speaker 5: For how a ring fence do you think that pain

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Speaker 5: might be, how I slate do you think it will

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Speaker 5: be in credit?

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Speaker 7: I think for I think we're expecting most of the

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Speaker 7: pain to be on the smaller banks that the data

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Speaker 7: just tells us have had bigger exposure over time. We're

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Speaker 7: also seeing that's where a lot of the reserves are

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Speaker 7: being upticked. But I don't think it's limited to those areas.

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Speaker 7: And I think in some ways the cash is fungible

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Speaker 7: across the system, and so if that's a reason for

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Speaker 7: certain parts of the banking system to pull back on

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Speaker 7: their lending, then that may be felt in other areas

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Speaker 7: of the market that aren't necessarily directly related, but impacted nonetheless.

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Speaker 4: And even as as is right now, we're seeing a

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Speaker 4: big contraction in auto lending as well as others aside

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Speaker 4: from the credit card alone area, which seems to be

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Speaker 4: on fire, how much do you expect that to accelerate

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Speaker 4: and pressure credit in other areas.

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Speaker 7: Yeah, I mean, you guys were talking about it earlier

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Speaker 7: this morning with some of the restructuring news, and I

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Speaker 7: think it's interesting that companies are already restructuring some of

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Speaker 7: the maturities that are coming out twenty twenty five, twenty

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Speaker 7: twenty six, twenty twenty seven, and so I think on

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Speaker 7: the corporate side that's definitely going to be a pressure point.

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Speaker 7: On the consumer side, I think it was really interesting

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Speaker 7: you had mentioned that the Federal Reserve data for the

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Speaker 7: Center of Microeconomic Analysis earlier this week, there was a

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Speaker 7: chart in there that showed financial distress, and it showed

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Speaker 7: the percentage of consumers that thought they might need two

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Speaker 7: thousand dollars coming up over a period of time and

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Speaker 7: those who thought they would be able to get it,

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Speaker 7: And those numbers are moving in the wrong direction, and

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Speaker 7: so I think for those for the consumers at the

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Speaker 7: low end of the of the economic spectrum, I think

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Speaker 7: there's going to be a pressure point. That being said,

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Speaker 7: I view it as more normalization as opposed to deterioration

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Speaker 7: in the consumer That's.

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Speaker 4: Where I was going to go with this, especially at

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Speaker 4: a time when some people are saying we've only seen

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Speaker 4: a small part of the ramifications from the FED tightening cycle.

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Speaker 4: How far do you expect the deterioration to go and

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Speaker 4: how will be expressed in your credit markets?

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Speaker 7: So I think, you know, the first half of twenty

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Speaker 7: twenty three has surprised us to the upside in the

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Speaker 7: terms of the resilience of the corporate credit market. Specifically

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Speaker 7: when you look at the highield market and the leverage

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Speaker 7: loan market that hasn't extended though, all the way down

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Speaker 7: to the very low end of the capital structure. So

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Speaker 7: if you were to look at the current level of

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Speaker 7: the high yield index, so three hundred and eighty basis

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Speaker 7: points at that level, you would think that triple C

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Speaker 7: spreads would be tighter than where they are now, around

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Speaker 7: one hundred one hundred fifty basis points tighter actually, So

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Speaker 7: we're not seeing that. So I think there's a limit

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Speaker 7: to investors comfort with over leveraged deteriorating fundamentals that probably extends,

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Speaker 7: and so there's a lot of talk about kind of

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Speaker 7: the equity market rally broadening. What I actually think is

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Speaker 7: there's probably some scope for resilience still at the high

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Speaker 7: end of the high yield spectrum, specifically because supply has

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Speaker 7: been so low technicals, which are really important as you

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Speaker 7: know in the credit market, have been so friendly. But

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Speaker 7: I think that's probably a near term issue. Over time,

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Speaker 7: I would expect there to be a bit more weakness

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Speaker 7: in that market as we see defaults flow through, as

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Speaker 7: we see risk premiere rebuild. Importantly, we don't view a

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Speaker 7: recession a necessary ingredient for an uptick in defaults. So

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Speaker 7: similar to how these banks are talking about, you know

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Speaker 7: we'll need these commercial real estate reserves even in a

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Speaker 7: soft landing. I think enough damage has been done in

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Speaker 7: the cost of capital environment that Tom alluded to that

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Speaker 7: we'll see an uptick into faults. Regardless, it won't be

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Speaker 7: broad based. It'll be more focused on, for example, the

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Speaker 7: leverage loan market on a relative basis. But I don't

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Speaker 7: think we're immune.

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Speaker 1: Let's cut to the black rock chase. The bottom line

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Speaker 1: is Globen Sachs has a page on commercial real estate.

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Speaker 1: Tionelle covered that Allison Williams alluded to that we're talking

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Speaker 1: this morning. We've got our wonderful offices at Queen Victoria

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Speaker 1: Street in London, and there's a Motel six. I stay

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Speaker 1: out across the street. It's like two blocks away, and

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Speaker 1: in between our office and the Motel six is this

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Speaker 1: office building. It's a b property and it's in the

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Speaker 1: media this morning. Basically it's at half its value. I'm

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Speaker 1: speaking as an amateur. Maybe it's forty percent, sixty percent discount.

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Speaker 1: That seems awfully pervasive in each and every city. How

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Speaker 1: to black rocks, how to black stones? How to black

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Speaker 1: this black that? How do they adjust to that over

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Speaker 1: say two years, over a reeficicycle.

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Speaker 6: Yeah.

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Speaker 7: So I again, I think we're early in the innings

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Speaker 7: of this distress cycle, and I think what's really important

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Speaker 7: is the price discovery. I think one of the other

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Speaker 7: points of conservatism that are it's really going to be

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Speaker 7: relevant in this particular cycle is that we look a

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Speaker 7: lot at kind of Class A, Class B, Class C properties,

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Speaker 7: but the market is evolving so quickly that those Class

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Speaker 7: A properties may be reclassified lower.

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Speaker 2: This is going forward.

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Speaker 1: This is important.

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Speaker 7: And I think just because something is Class A today,

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Speaker 7: as it becomes older in ages and there's more competition

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Speaker 7: and there's more price discovery, probably lower in competing assets,

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Speaker 7: that may get all.

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Speaker 3: Turned on its head.

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Speaker 1: That's that's that's that's.

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Speaker 5: A tech hose of fifteen years ago. When I hear

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Speaker 5: you say things like that.

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Speaker 8: It really is.

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Speaker 5: I'm not saying it's as scarial will be, just you know,

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Speaker 5: some similarities, that's in parallels.

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Speaker 7: I think it's going to be a longer default cycle.

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Speaker 7: In the financial crisis, we know that was a multi

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Speaker 7: year cycle. Perhaps it gets frontloaded a bit.

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Speaker 3: I don't know.

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Speaker 7: I don't I don't think it is priced in it

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Speaker 7: because of that. Price discovery is.

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Speaker 1: Last discovery phrase.

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Speaker 5: Excellent as silly clinic on commercial way to stay.

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Speaker 1: Right now, we're gonna have a conversation that we did

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Speaker 1: not have with Shnelli Bassek and Allison Williams. They are

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Speaker 1: in the heat of the earnings coming out the numbers,

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Speaker 1: the PowerPoint and the ratios. But with Strina o Rogen

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Speaker 1: of Bloomberg News, we can sit back and actually look

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Speaker 1: at the discussion that's being had. Sre I'm looking at

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Speaker 1: a board. I'm gonna go all William Cohen on you here,

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Speaker 1: David Vinnier who live two thousand and seven, two thousand

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Speaker 1: and eight, Peter Oppenheimer who we talked to all the time,

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Speaker 1: Kimberly Harris, a new board member, Kevin Johnson. What's the

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Speaker 1: spirit of the board if they look and it's too

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Speaker 1: much to say the train wreck, but just simply the

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Speaker 1: tension and complexity of the underperformance of Goldman Sachs, how's

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Speaker 1: a board respond?

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Speaker 8: And don't forget the new incoming board member, Tom montag

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Speaker 8: at Goldman Sachs for over two decades, then at Bank

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Speaker 8: of America and now returning to Goldman Sachson.

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Speaker 1: Well will be the response to the board.

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Speaker 8: I think they will tell you that the stock does

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Speaker 8: not fall off a cliff. They're okay, they're not getting

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Speaker 8: ANTSI because over the last five years, since David Solomon

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Speaker 8: took the seat October one, twenty eighteen, too today Goldman

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Speaker 8: stock has done well. They will tell you they've done

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Speaker 8: extraordinary well. The reality is they're middle of the pack,

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Speaker 8: and middle of the pack is not a crisis.

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Speaker 1: And this is critical now. And I'm thinking of David Vinnier.

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Speaker 1: I have the clearest memories of him and I going

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Speaker 1: back and forth on librar Ohis August of seven, and

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Speaker 1: here that huge responsibility running the ship essentially financially at

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Speaker 1: gold and Sacks. The collective memory on the board at

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Speaker 1: Golden Sachs, including mister Montag, how do they respond to this?

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Speaker 1: Is there like sharp words or is it like a

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Speaker 1: McKenzie meeting where everybody's planning in a complex way to

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Speaker 1: move forward.

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Speaker 8: I think reality is no one on the board is

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Speaker 8: going to be very comfortable seeing all the noise on

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Speaker 8: the headlines coming out of Goldman Sachs. But what they

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Speaker 8: ultimately want to see is stock performance. They want to

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Speaker 8: see that they're on target to achieve some of the

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Speaker 8: goals they've set out. There's obviously been strategy turnaround some

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Speaker 8: one eighties they've done on their retail banking strategy, but

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Speaker 8: they have committed to a new, new new strategy. As

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Speaker 8: long as they can deliver on that, the board will

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Speaker 8: be content. And okay, it doesn't look like anyone on

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Speaker 8: the board is thirsting to make a change right about now.

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Speaker 4: Where's the growth going to come from in the new

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Speaker 4: new strategy?

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Speaker 8: Well, that's important. A lot of analysts, some of the

437
00:21:57,720 --> 00:21:59,920
Speaker 8: analyst at least, have called this a kitchens in quarter.

438
00:22:00,160 --> 00:22:02,040
Speaker 8: Try and throw out all the bad stuff in this

439
00:22:02,160 --> 00:22:04,959
Speaker 8: quarter because the numbers are really bad. Return on equity

440
00:22:05,040 --> 00:22:07,280
Speaker 8: four percent? How does that compare to some of the peers?

441
00:22:07,359 --> 00:22:09,320
Speaker 8: It's the worst among the big banks. You have JP

442
00:22:09,400 --> 00:22:13,240
Speaker 8: Morgan posting twenty percent return on equity, so that's not good.

443
00:22:13,440 --> 00:22:15,840
Speaker 8: And you've had a few consecutive quarters of Gorman missing

444
00:22:15,880 --> 00:22:18,800
Speaker 8: on its profitability goal, which is a mid teens ROI.

445
00:22:19,200 --> 00:22:21,320
Speaker 8: So the question is where does the growth come from?

446
00:22:21,640 --> 00:22:24,520
Speaker 8: You know, and we heard James Gorman talk about this yesterday.

447
00:22:24,840 --> 00:22:28,600
Speaker 8: Gorman said, investment banking the trophy, and investment banking has arrived.

448
00:22:28,680 --> 00:22:31,520
Speaker 8: It's going to look up going forward. When that when

449
00:22:31,560 --> 00:22:34,919
Speaker 8: capital markets reopen, when deal making goes up again, you

450
00:22:34,920 --> 00:22:36,879
Speaker 8: can be rest assured that Goldman will be in a

451
00:22:36,960 --> 00:22:39,520
Speaker 8: good place, and they will look to point out the

452
00:22:39,640 --> 00:22:43,760
Speaker 8: increasing durable revenue growth in their asset management business.

453
00:22:43,840 --> 00:22:46,520
Speaker 4: It seems as though the banks that are most diversified

454
00:22:46,720 --> 00:22:51,000
Speaker 4: and largest have been benefiting the most from the recent enthusiasm,

455
00:22:51,200 --> 00:22:53,560
Speaker 4: at least over the past few weeks of bank shares.

456
00:22:53,600 --> 00:22:55,080
Speaker 4: How is Gorman going to try to appeal to this

457
00:22:55,200 --> 00:22:57,120
Speaker 4: or are they going to say, no, we essentially are

458
00:22:57,400 --> 00:23:00,520
Speaker 4: a niche markets focused bank. We try a for a

459
00:23:00,640 --> 00:23:02,639
Speaker 4: into consumer banking. It didn't work.

460
00:23:02,920 --> 00:23:05,760
Speaker 8: No, they'll certainly not say that they tried a different tack.

461
00:23:05,920 --> 00:23:08,399
Speaker 8: They said, we're very we're very good investment bank in

462
00:23:08,440 --> 00:23:12,199
Speaker 8: trading and banking, but we're going to expand into retail banking.

463
00:23:12,240 --> 00:23:16,119
Speaker 8: We'll make that as good as our investment banking franchise.

464
00:23:16,280 --> 00:23:18,880
Speaker 8: That clearly didn't happen. You wasted a few years going

465
00:23:18,920 --> 00:23:21,240
Speaker 8: deep into that space and now trying to retreat. But

466
00:23:21,359 --> 00:23:23,840
Speaker 8: now they are talking about the two pillars, the investment

467
00:23:23,920 --> 00:23:26,720
Speaker 8: bank and the asset and wealth management business, and that

468
00:23:26,880 --> 00:23:28,800
Speaker 8: is the one place that they can hope to show

469
00:23:28,840 --> 00:23:29,560
Speaker 8: growth going forward.

470
00:23:30,320 --> 00:23:32,720
Speaker 1: I think it was at page six of the presentation

471
00:23:32,920 --> 00:23:36,679
Speaker 1: very clearly laid out. Commercial real estate has challenges. What

472
00:23:36,840 --> 00:23:40,800
Speaker 1: is their uniqueness in commercial real estate versus the other

473
00:23:40,880 --> 00:23:41,639
Speaker 1: major banks?

474
00:23:42,800 --> 00:23:45,960
Speaker 8: Quite a few important things, right, investments where they have

475
00:23:46,160 --> 00:23:49,640
Speaker 8: operational control. They're mostly tied to commercial real estate, about

476
00:23:49,640 --> 00:23:51,560
Speaker 8: ten billion dollars of investment there. They took a half

477
00:23:51,560 --> 00:23:54,520
Speaker 8: a billion dollar hit there. They have equity investments, a

478
00:23:54,520 --> 00:24:01,240
Speaker 8: lot of it through principal investments, from office to warehouses

479
00:24:01,280 --> 00:24:03,800
Speaker 8: and everything else that falls under the commercial real estate rubrics.

480
00:24:03,800 --> 00:24:05,960
Speaker 8: They have about twenty eight billion dollars in loans in

481
00:24:05,960 --> 00:24:09,119
Speaker 8: the commercial real estate space, so that's about fifteen percent

482
00:24:09,119 --> 00:24:11,679
Speaker 8: of their total loan portfolio. So they've taken some hits there.

483
00:24:11,720 --> 00:24:13,800
Speaker 8: They've taken hits on their equity investments and also on

484
00:24:13,960 --> 00:24:18,160
Speaker 8: what they call their consolidated investments. That's contributed to about

485
00:24:18,160 --> 00:24:20,520
Speaker 8: a billion dollar hit this quarter. Their hope will be

486
00:24:20,760 --> 00:24:23,520
Speaker 8: they're not taking any more write downs going ahead, and

487
00:24:23,560 --> 00:24:26,440
Speaker 8: that's really important for them and not entirely in their

488
00:24:26,480 --> 00:24:27,280
Speaker 8: control as well.

489
00:24:27,359 --> 00:24:29,480
Speaker 4: A head count has gone down by about five percent,

490
00:24:29,560 --> 00:24:33,160
Speaker 4: I believe based on the latest assessment. How much more

491
00:24:33,160 --> 00:24:34,200
Speaker 4: does it have to fall.

492
00:24:35,080 --> 00:24:38,040
Speaker 8: Five percent year to date, eight percent is probably another

493
00:24:38,040 --> 00:24:40,520
Speaker 8: figure to look at, because that's year on year doesn't

494
00:24:40,560 --> 00:24:44,560
Speaker 8: include the new analyst batch intake. One would think that

495
00:24:44,560 --> 00:24:47,800
Speaker 8: they've done the biggest exercises needed. They haven't come out

496
00:24:47,840 --> 00:24:50,960
Speaker 8: and explicitly said that, and if they do need to

497
00:24:51,000 --> 00:24:53,879
Speaker 8: take more action, that tells you there's a lot more

498
00:24:54,680 --> 00:24:56,360
Speaker 8: bad news to come out of there. So they will

499
00:24:56,359 --> 00:24:58,560
Speaker 8: certainly be hoping that they do not have to take

500
00:24:58,680 --> 00:25:02,359
Speaker 8: any more head actions. They've already done three different rounds

501
00:25:02,359 --> 00:25:06,160
Speaker 8: of the last year, and that doesn't show great management.

502
00:25:06,280 --> 00:25:09,600
Speaker 4: Frankly, just taking a step back, we did just wrap

503
00:25:09,720 --> 00:25:12,199
Speaker 4: up the earning cycle in the big banks, and it

504
00:25:12,200 --> 00:25:16,080
Speaker 4: seems as though the themes are deposits cost something. Particularly

505
00:25:16,119 --> 00:25:19,639
Speaker 4: if you're a smaller bank, Credit is contracting on the

506
00:25:19,720 --> 00:25:22,800
Speaker 4: margins and credit cards are the sweet spot. How would

507
00:25:22,840 --> 00:25:25,560
Speaker 4: you wrap that together to push it forward and say

508
00:25:25,600 --> 00:25:27,639
Speaker 4: where this is going for the next quarter.

509
00:25:28,040 --> 00:25:31,080
Speaker 8: Yes, all of those points are true. Credit is perhaps contracting,

510
00:25:31,480 --> 00:25:33,639
Speaker 8: but look at the commentary that we've gotten from some

511
00:25:33,720 --> 00:25:35,920
Speaker 8: of the big consumer bank. Look at what JP Morgan

512
00:25:36,000 --> 00:25:38,600
Speaker 8: kept telling us. Charge of rates are going up. It'll

513
00:25:38,600 --> 00:25:40,359
Speaker 8: probably end the year at two point six percent on

514
00:25:40,400 --> 00:25:44,720
Speaker 8: their credit card portfolio. They keep repeating, this is a normalization,

515
00:25:45,000 --> 00:25:49,119
Speaker 8: not deterioration. This is normalization post the pandemic. They're not

516
00:25:49,160 --> 00:25:51,959
Speaker 8: that concerned. So if you zoom out, the economy is

517
00:25:52,040 --> 00:25:54,840
Speaker 8: not as bad, or at least the trajectory does not

518
00:25:54,960 --> 00:25:57,160
Speaker 8: appear to be as bad as three or four months ago.

519
00:25:57,359 --> 00:26:00,840
Speaker 8: So if that holds up, the consumer is okay, Main

520
00:26:00,880 --> 00:26:03,800
Speaker 8: Street remains okay. Wall Street opens up with the return

521
00:26:03,840 --> 00:26:06,879
Speaker 8: of capital markets, that'll only mean continued good news for

522
00:26:06,880 --> 00:26:08,000
Speaker 8: the big banks going ahead.

523
00:26:08,080 --> 00:26:10,240
Speaker 1: You're gonna be out of the US Open tennis open.

524
00:26:10,320 --> 00:26:12,960
Speaker 1: Here there's like the Gray Goose Pavilion or whatever it is.

525
00:26:13,000 --> 00:26:16,600
Speaker 1: Shreeholds court there for like three weeks or whatever it is.

526
00:26:16,800 --> 00:26:19,159
Speaker 1: What's going to be the chat at the Gray Goose

527
00:26:19,440 --> 00:26:23,600
Speaker 1: Pavilion at the Open about what would Tom montag do.

528
00:26:23,920 --> 00:26:27,280
Speaker 1: Here's this force of nature. I've dealt with him at Davos,

529
00:26:27,359 --> 00:26:31,080
Speaker 1: Love him to death. What an interesting guy is he? Like?

530
00:26:31,240 --> 00:26:33,080
Speaker 1: Is this just like a moment or is this going

531
00:26:33,119 --> 00:26:35,359
Speaker 1: to be a big deal where he steps in?

532
00:26:35,760 --> 00:26:37,679
Speaker 8: He's a force of nature. We've obviously seen a lot

533
00:26:37,720 --> 00:26:40,159
Speaker 8: of commentary around this reality is at least based on

534
00:26:40,200 --> 00:26:42,280
Speaker 8: our reporting, and I know some other people disagree, but

535
00:26:42,480 --> 00:26:45,800
Speaker 8: Goldman had been in conversation with Tom Montag for several

536
00:26:45,840 --> 00:26:47,639
Speaker 8: months months a conversation.

537
00:26:47,800 --> 00:26:50,280
Speaker 1: This is Solomon dialing one eight hundred, save us.

538
00:26:50,960 --> 00:26:53,600
Speaker 8: It's at least Solomon dialing one eight hundred. Tom Montag,

539
00:26:54,040 --> 00:26:56,399
Speaker 8: he's in the past only he's one of the greatest

540
00:26:56,400 --> 00:26:58,800
Speaker 8: partners at Goldman Sachs. He's made an effort to quote

541
00:26:58,960 --> 00:27:01,280
Speaker 8: Tom Montag over the park few years, brought him back

542
00:27:01,320 --> 00:27:04,680
Speaker 8: into the famous Goldman Sachs Retired Partners dinner is something

543
00:27:04,720 --> 00:27:09,040
Speaker 8: that Montag had been avoiding for several years. And David

544
00:27:09,080 --> 00:27:11,199
Speaker 8: Solomon's certainly brought him back into the fold. And in

545
00:27:11,200 --> 00:27:13,040
Speaker 8: the last several months he's led the effort to bring

546
00:27:13,119 --> 00:27:15,119
Speaker 8: him onto the board. And remember he is a big

547
00:27:15,200 --> 00:27:19,119
Speaker 8: prominent voice when it comes to risk expertise, and that

548
00:27:19,200 --> 00:27:20,720
Speaker 8: is still a big engine in Goldman Sacks.

549
00:27:20,720 --> 00:27:23,560
Speaker 1: Shure not Orogen, thank you so much. Look for Bloomberg

550
00:27:23,600 --> 00:27:26,359
Speaker 1: Reports should not Orogen here on Goldman Sachs and on

551
00:27:26,480 --> 00:27:30,120
Speaker 1: the rest of the banking season. Subscribe to the Bloomberg

552
00:27:30,160 --> 00:27:34,200
Speaker 1: Surveillance podcast on Apple, Spotify and anywhere else you get

553
00:27:34,200 --> 00:27:38,520
Speaker 1: your podcasts. Listen live every weekday starting at seven am

554
00:27:38,600 --> 00:27:43,120
Speaker 1: Eastern on Bloomberg dot com, the iHeartRadio app tune In,

555
00:27:43,440 --> 00:27:46,840
Speaker 1: and the Bloomberg Business app. You can watch us live

556
00:27:47,040 --> 00:27:51,320
Speaker 1: on Bloomberg Television and always on the Bloomberg Terminal. Thanks

557
00:27:51,320 --> 00:27:55,160
Speaker 1: for listening. I'm Tom Keen, and this is Bloomberg

558
00:28:00,280 --> 00:28:00,320
Speaker 2: A