Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Farrow and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot com,
Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. For those
Speaker 1: of you gloomy. This is the interview of the day.
Speaker 1: There have been optimists. They are congenital optimists, and they're
Speaker 1: also reasoned optimists. And one of them is Neil Duddy.
Speaker 1: He's out of US economic research at Renaissance Macro and
Speaker 1: has been extraordinary, not over the last three months, six months,
Speaker 1: but frankly the last two years of saying this is
Speaker 1: America the resilient. The data chart is out there, Neil,
Speaker 1: and it is finally we have legitimate income growth. Will
Speaker 1: we sustain that?
Speaker 2: I believe so, Tom, thanks for having me on. Obviously,
Speaker 2: there's a lot of disinflation in the pipeline, at least
Speaker 2: over the next you know, you could say three to
Speaker 2: four months. The most obvious is used cars. We know
Speaker 2: that wholesale auction prices have been coming down. That's going
Speaker 2: to bleed into consumer prices for use cars and trucks.
Speaker 2: Supply chains are improving, that's going to take some pressure
Speaker 2: off of core goods outside of vehicles, and there's still
Speaker 2: some disinflation and train with respect to shelter looking at
Speaker 2: new lease growth. At the same time, we know the
Speaker 2: labor markets are holding up and that's going to support
Speaker 2: real incomes. And if real incomes are rising, ultimately I
Speaker 2: think consumers are going to go out and spend that money.
Speaker 2: So I think that's sort of the lynchpin for why
Speaker 2: things are holding up better than expected.
Speaker 1: Atlanta has a GDP now numbers. We came in at
Speaker 1: a two percent statistic Q one, and all of a
Speaker 1: sudden we're migrating one one point a two ish on
Speaker 1: Atlanta GDP whatever it is, I really don't care what
Speaker 1: the number is.
Speaker 3: But my question is to the Gloom, what statistic of
Speaker 3: positive GDP in America is a so called growth recession?
Speaker 3: Is it half a percent point five? Do you have
Speaker 3: that number in your head?
Speaker 2: Well, I would define a growth recession as a situation
Speaker 2: where the economy is has a you know, GDP has
Speaker 2: a positive sign in front of it, but that growth
Speaker 2: is not strong enough to keep the unemployment rate from rising.
Speaker 2: So typically in a growth receession, you'd see the unemployment
Speaker 2: rate go up. So it's effectively a below potential growth state, Tom,
Speaker 2: But that's not what we have right now. I mean,
Speaker 2: you mentioned the Atlanta Fed that that number is tracking
Speaker 2: two point four percent, you know, with very little contribution
Speaker 2: from consumer spending. I suspect that probably builds over the summer, frankly,
Speaker 2: but wow, but you know, look, there's more upside to
Speaker 2: the economy than not. But we're growing above potential and
Speaker 2: that means that whatever un employment rate increase you see
Speaker 2: sort of bobbing around three and a half percent, I mean,
Speaker 2: it's probably going to be short lived. Not on a
Speaker 2: situation where we're going to see above four percent unemployment.
Speaker 4: Goldilocks seems to be the moment that we're in. That's
Speaker 4: a lot of people are saying, how long can goldilocks last?
Speaker 2: I mean, talk to me in the fall, Lisa, I mean,
Speaker 2: that's what I'll say. I mean, I think it's I'm
Speaker 2: sort of I'm sort of in the goldilocks for now. Camp.
Speaker 2: I mean, I do think that there are reasons to
Speaker 2: be somewhat suspicious about how long this can last, about
Speaker 2: whether this is a durable sort of sustainable moderation and inflation.
Speaker 2: I think that's a question that needs to be answered.
Speaker 2: I don't think we can answer it just yet. But
Speaker 2: you know, to me, when you think about economic scenarios,
Speaker 2: I think the risk of recession has receded dramatically, and
Speaker 2: so now it's a question for investors about where do
Speaker 2: you put these other percentages?
Speaker 3: Right?
Speaker 2: I mean, do you? I mean, I think the markets
Speaker 2: are right to kind of allocate a little bit more
Speaker 2: to the soft landing story. But I think you know,
Speaker 2: you could. I think you can make a good case,
Speaker 2: and maybe we're getting a little bit over our skis
Speaker 2: here and we should probably put some more potential on
Speaker 2: the resurgence of the inflationary boom scenario.
Speaker 4: Okay, Well, I wanted you to double down on that
Speaker 4: because you were just saying that people are perhaps a
Speaker 4: little too sanguine about the steady disinflation that they expect
Speaker 4: to see. Where is it that you see reinflation coming
Speaker 4: back down the pike, especially if you hear all these
Speaker 4: people saying that FED policy hasn't worked its way through
Speaker 4: the financial system and still has more restraining to do well.
Speaker 2: Home prices are rising again. They're actually arising for the
Speaker 2: for four months in a row. We get weekly data
Speaker 2: from redfin and you know that's more up to date,
Speaker 2: and that shows continued to increases in home prices over
Speaker 2: the summer, even after seasonal adjustment. So you know, to
Speaker 2: the extent that home prices go up, and you know, obviously,
Speaker 2: for a landlord and the underlying value of your asset
Speaker 2: is rising, You're not going to go around saying up,
Speaker 2: I'm going to start cutting your rent. So it leads
Speaker 2: me to believe that we could see some upward momentum
Speaker 2: in housing rental inflation in the CPI statistics sometime you know,
Speaker 2: let's say in the first or second quarter of next year.
Speaker 2: So that would be the most obvious area. But you know,
Speaker 2: more broadly, I mean, let's take a step back, and
Speaker 2: you know, what are we talking about here. We're talking
Speaker 2: about real growth improving. Real growth is improving over time,
Speaker 2: that that erotes physical capacity, and that forces economic actors
Speaker 2: to bid up wages and prices. So I have a
Speaker 2: little bit of skepticism in terms of how far we
Speaker 2: can push this kind of immaculate disinflation story just real quick.
Speaker 4: Here, Neil, Given that, how far do you think the
Speaker 4: Fed could go? I mean, do you think that people
Speaker 4: are pricing out future rate hikes after this month and
Speaker 4: that that's inaccurate? That you think that that's wrong?
Speaker 2: I mean, who am I to say what's right and
Speaker 2: what's wrong? But I would just if they were me.
Speaker 2: I mean, I think the probabilities of a high you know,
Speaker 2: after July are probably somewhat higher than the markets are
Speaker 2: currently expected.
Speaker 1: Neil Doda, They are extraordinary on this two percent American
Speaker 1: real GDP is with Renaissance Macro.
Speaker 5: And I hand joined us now equity strategist over at
Speaker 5: wels Faco and a good morning to you. Great to
Speaker 5: have you with us, say in New York, let's start
Speaker 5: with this. You were looking for ten percent mode for
Speaker 5: ten percent correction. You throw in the town on that
Speaker 5: over the last month. What's gone right for you in
Speaker 5: the team?
Speaker 6: Well, I'll say one of our biggest calls being tied
Speaker 6: to that AI trend, you know, one of our largest
Speaker 6: calls coming to this year median entertainment, and that's actually
Speaker 6: kept up with a tech sector, if not outperformed it.
Speaker 6: I think that call we came in because we wanted
Speaker 6: to see that pivot of spending from really the gird
Speaker 6: opal goods into something more services, a little more of
Speaker 6: that away from home trade. But at the same time
Speaker 6: you see this kind of networking cable, these media groups
Speaker 6: still having that poll. We thought that might be that
Speaker 6: sweet balance. That was one of our largest calls, and
Speaker 6: right now as we see it, we've stepped off that
Speaker 6: pole back call. Well, you know, we'll throw in the
Speaker 6: towel andmit ourselves on that one. But something we're still
Speaker 6: watching here is you know, what is going to be
Speaker 6: the pace of this rally in the back half this
Speaker 6: year and can this AI and really uber top led
Speaker 6: rally continue. I think that's what's really weighing on people's minds.
Speaker 1: Your mathwiness informs your research node. I'm fascinated what you
Speaker 1: think about what revenues are going to do made up
Speaker 1: of unit and price and the calculus jargon here is
Speaker 1: the partial differentials of units and revenues. How do you
Speaker 1: see that playing out over the next year.
Speaker 6: No, that's very important. Right when you have this top
Speaker 6: line figure, it's important to figure if that is declining
Speaker 6: you know, how much can margins really increase to make
Speaker 6: up for it? And if it doesn't, then what about
Speaker 6: prices versus volumes? We've seen volumes declining. Those volumes are declining,
Speaker 6: and price elasticity returns to normal, then what happens to
Speaker 6: that bottom line? These margins continue to be pressured, continue
Speaker 6: to be compressed, But so far the market seems to
Speaker 6: look through those things. Perhaps they're trading already on next
Speaker 6: year's earnings or expectations. What we've seen is not just
Speaker 6: the one and done, but what if we get rate cups?
Speaker 6: That easing also trickles into investors' minds and helps look
Speaker 6: at equity valuations above what perhaps we expected.
Speaker 4: So do earnings matter or do you just basically look
Speaker 4: at what the returns have been and then just say
Speaker 4: we're going to keep buying because everybody else is.
Speaker 6: You know that momentum trade is always interesting. You know,
Speaker 6: do we stay on the train? Who's going to be
Speaker 6: the first to leave the party? But no one wants
Speaker 6: to be the last. I think with earnings, the more
Speaker 6: important is directional than really the figure. Like Tom mentioned earlier,
Speaker 6: you know, is it two hundreds, it two ten? What
Speaker 6: is it? But it's more the sentiment of how much
Speaker 6: contraction are we seeing, if it's going to be light
Speaker 6: enough for investors to look through and really what is
Speaker 6: driving it? Is it the consumer and your need or
Speaker 6: pulling back sharply, that's not what we're hearing. Even with
Speaker 6: bank earnings early in the season, we see that consumer
Speaker 6: still remains resilient, rages remains resilient, Labor markets are supporting that.
Speaker 6: But that general slowing tells us things are cooling a bit.
Speaker 6: But if the Fed is able to give us that
Speaker 6: goldilocks almost that pow put in terms of not just
Speaker 6: equities but really economic consumer spending, then that's a kind
Speaker 6: of a happy scenario for a lot of people.
Speaker 4: It's a confusing market for people who are trying to
Speaker 4: look at facts and extrap laid out some sort of
Speaker 4: price target. From your vantage point, how bullish can you
Speaker 4: get just with a momentum trade even as you see
Speaker 4: some of the earnings come in softer than you'd like
Speaker 4: to see.
Speaker 6: Well, the mollentium trade actually has been flipping a little.
Speaker 6: You know, what we've seen was market leaders, and you're
Speaker 6: seeing the momentum factor. The top top leaders aside from
Speaker 6: those AI names have actually started to rotate, and that
Speaker 6: rotation could also bring a little churn in volatility. So
Speaker 6: when we think about how long the market can ride
Speaker 6: on momentum, quite long, no doubt, But what leads that momentum,
Speaker 6: who those momentum leaders are. I think that continues to
Speaker 6: have some mean reversion to it, and that's what we
Speaker 6: use to look at technicals and think about where we
Speaker 6: want to position.
Speaker 5: Shine a light on your client conversations if you can,
Speaker 5: do you sense capitulation after the last couple of weeks.
Speaker 6: I don't think we're sensing that just yet. I think
Speaker 6: right now the beginning of this year burned a lot
Speaker 6: of people. A lot of people came in more conservative.
Speaker 6: You know, you were mentioning that etf earlier. We're worried
Speaker 6: about protecting against losses. People were happy to take four
Speaker 6: percent five percent in some sort of a bond investment,
Speaker 6: and now they've missed out on twenty percent in the
Speaker 6: first half of this year. So that kind of mentality,
Speaker 6: I think they have to remain strong the rest of
Speaker 6: this year. But in what underweight names have been most painful.
Speaker 6: That's going to be the hard part is when do
Speaker 6: they capitulate on that and we have not seen that.
Speaker 5: This is what lace is getting at. Really, if you've
Speaker 5: sat on cash and you've missed out on this rally
Speaker 5: and you feel foolish, are you chasing the winners? Big tech?
Speaker 5: Where you going to places where you haven't seen the games?
Speaker 5: When you have those conversations, what they sound like?
Speaker 6: You know, I will say, you know, we're not bringing
Speaker 6: out the tissue boxes. Yes yet it's not full tears.
Speaker 6: But it is a difficult conversation. You want to be
Speaker 6: thank you, you want to be chasing in some ways
Speaker 6: you you really believe that I've got to make up
Speaker 6: for this. I've got to get back on this train
Speaker 6: the same time when that trains left. Look for growth
Speaker 6: opportunities in other parts of the market, someplace where maybe
Speaker 6: valuations are a little more friendly. And if we do
Speaker 6: get this growing, where as a.
Speaker 1: Friendly valuation out there, enlighten me. Where's a friendly a
Speaker 1: friendly valuation?
Speaker 6: Well, we can look for actual sustained grow photos autos.
Speaker 6: I think autos given the economy we expect in this slowdown,
Speaker 6: that's a little bit of a hard sell for people.
Speaker 5: I thought you were going to say, Cavan, Well, friend
Speaker 5: evaluations and combinations.
Speaker 1: Walmart's trading to twenty four times earnings.
Speaker 5: That's not that friendly.
Speaker 1: I don't know, I've never seen it. That's absolutely nuts.
Speaker 5: And to thank you one wis aneha was Faga, I.
Speaker 1: Think Amanda Linum joins us now how of macro credit
Speaker 1: research at Blackrock. But there is an equivalent overlay here,
Speaker 1: and that is mister Solomon and others, including mister Fink,
Speaker 1: have to deal with a new interest rate regime which
Speaker 1: hearkens back sixteen years, twenty years, twenty five years. And
Speaker 1: as you brilliantly say in your note of macro credit research,
Speaker 1: there's a new higher cost of capital. Have we adjusted
Speaker 1: to it or are we in early innings?
Speaker 7: I think in good morning, thank you for having me,
Speaker 7: I think we're in the early innings of adjusting to that.
Speaker 7: And I think one of the really interesting things from
Speaker 7: my perspective, and looking through the regional bank earnings even
Speaker 7: yesterday and earlier last last week, was that companies are
Speaker 7: taking reserves against intra sensitive pockets of the market like
Speaker 7: commercial real estate, for example, but they're saying that they'll
Speaker 7: need those reserves even if there is a soft landing,
Speaker 7: and so it's not necessarily reserves in the event of
Speaker 7: a worst case downturn, but it's reserves even if we
Speaker 7: kind of get an okay outcome. And I think that's
Speaker 7: true for areas like leverage loans, for example, where we
Speaker 7: expect the default rate to outpace that for hiled bonds.
Speaker 7: And I think it's also true for areas like commercial
Speaker 7: real estate, where we, as you know, Tom wrote that
Speaker 7: we think we're in the early innings of that distress cycle.
Speaker 7: And I think what's really challenging in this pocket of
Speaker 7: the market is that there's going to be a new
Speaker 7: sense of price discovery. So maybe the LTVs and the
Speaker 7: cap rates that the market has used in previous periods
Speaker 7: to kind of understand where the floor is on commercial
Speaker 7: real estate, they might not be as relevant this time around.
Speaker 7: And so rather we'll look at cash flow of assets.
Speaker 7: We'll look at the basis to require to be bringing
Speaker 7: those properties up to market, and that's very heterogeneous, and
Speaker 7: I don't think we know the answer to that.
Speaker 5: For how a ring fence do you think that pain
Speaker 5: might be, how I slate do you think it will
Speaker 5: be in credit?
Speaker 7: I think for I think we're expecting most of the
Speaker 7: pain to be on the smaller banks that the data
Speaker 7: just tells us have had bigger exposure over time. We're
Speaker 7: also seeing that's where a lot of the reserves are
Speaker 7: being upticked. But I don't think it's limited to those areas.
Speaker 7: And I think in some ways the cash is fungible
Speaker 7: across the system, and so if that's a reason for
Speaker 7: certain parts of the banking system to pull back on
Speaker 7: their lending, then that may be felt in other areas
Speaker 7: of the market that aren't necessarily directly related, but impacted nonetheless.
Speaker 4: And even as as is right now, we're seeing a
Speaker 4: big contraction in auto lending as well as others aside
Speaker 4: from the credit card alone area, which seems to be
Speaker 4: on fire, how much do you expect that to accelerate
Speaker 4: and pressure credit in other areas.
Speaker 7: Yeah, I mean, you guys were talking about it earlier
Speaker 7: this morning with some of the restructuring news, and I
Speaker 7: think it's interesting that companies are already restructuring some of
Speaker 7: the maturities that are coming out twenty twenty five, twenty
Speaker 7: twenty six, twenty twenty seven, and so I think on
Speaker 7: the corporate side that's definitely going to be a pressure point.
Speaker 7: On the consumer side, I think it was really interesting
Speaker 7: you had mentioned that the Federal Reserve data for the
Speaker 7: Center of Microeconomic Analysis earlier this week, there was a
Speaker 7: chart in there that showed financial distress, and it showed
Speaker 7: the percentage of consumers that thought they might need two
Speaker 7: thousand dollars coming up over a period of time and
Speaker 7: those who thought they would be able to get it,
Speaker 7: And those numbers are moving in the wrong direction, and
Speaker 7: so I think for those for the consumers at the
Speaker 7: low end of the of the economic spectrum, I think
Speaker 7: there's going to be a pressure point. That being said,
Speaker 7: I view it as more normalization as opposed to deterioration
Speaker 7: in the consumer That's.
Speaker 4: Where I was going to go with this, especially at
Speaker 4: a time when some people are saying we've only seen
Speaker 4: a small part of the ramifications from the FED tightening cycle.
Speaker 4: How far do you expect the deterioration to go and
Speaker 4: how will be expressed in your credit markets?
Speaker 7: So I think, you know, the first half of twenty
Speaker 7: twenty three has surprised us to the upside in the
Speaker 7: terms of the resilience of the corporate credit market. Specifically
Speaker 7: when you look at the highield market and the leverage
Speaker 7: loan market that hasn't extended though, all the way down
Speaker 7: to the very low end of the capital structure. So
Speaker 7: if you were to look at the current level of
Speaker 7: the high yield index, so three hundred and eighty basis
Speaker 7: points at that level, you would think that triple C
Speaker 7: spreads would be tighter than where they are now, around
Speaker 7: one hundred one hundred fifty basis points tighter actually, So
Speaker 7: we're not seeing that. So I think there's a limit
Speaker 7: to investors comfort with over leveraged deteriorating fundamentals that probably extends,
Speaker 7: and so there's a lot of talk about kind of
Speaker 7: the equity market rally broadening. What I actually think is
Speaker 7: there's probably some scope for resilience still at the high
Speaker 7: end of the high yield spectrum, specifically because supply has
Speaker 7: been so low technicals, which are really important as you
Speaker 7: know in the credit market, have been so friendly. But
Speaker 7: I think that's probably a near term issue. Over time,
Speaker 7: I would expect there to be a bit more weakness
Speaker 7: in that market as we see defaults flow through, as
Speaker 7: we see risk premiere rebuild. Importantly, we don't view a
Speaker 7: recession a necessary ingredient for an uptick in defaults. So
Speaker 7: similar to how these banks are talking about, you know
Speaker 7: we'll need these commercial real estate reserves even in a
Speaker 7: soft landing. I think enough damage has been done in
Speaker 7: the cost of capital environment that Tom alluded to that
Speaker 7: we'll see an uptick into faults. Regardless, it won't be
Speaker 7: broad based. It'll be more focused on, for example, the
Speaker 7: leverage loan market on a relative basis. But I don't
Speaker 7: think we're immune.
Speaker 1: Let's cut to the black rock chase. The bottom line
Speaker 1: is Globen Sachs has a page on commercial real estate.
Speaker 1: Tionelle covered that Allison Williams alluded to that we're talking
Speaker 1: this morning. We've got our wonderful offices at Queen Victoria
Speaker 1: Street in London, and there's a Motel six. I stay
Speaker 1: out across the street. It's like two blocks away, and
Speaker 1: in between our office and the Motel six is this
Speaker 1: office building. It's a b property and it's in the
Speaker 1: media this morning. Basically it's at half its value. I'm
Speaker 1: speaking as an amateur. Maybe it's forty percent, sixty percent discount.
Speaker 1: That seems awfully pervasive in each and every city. How
Speaker 1: to black rocks, how to black stones? How to black
Speaker 1: this black that? How do they adjust to that over
Speaker 1: say two years, over a reeficicycle.
Speaker 6: Yeah.
Speaker 7: So I again, I think we're early in the innings
Speaker 7: of this distress cycle, and I think what's really important
Speaker 7: is the price discovery. I think one of the other
Speaker 7: points of conservatism that are it's really going to be
Speaker 7: relevant in this particular cycle is that we look a
Speaker 7: lot at kind of Class A, Class B, Class C properties,
Speaker 7: but the market is evolving so quickly that those Class
Speaker 7: A properties may be reclassified lower.
Speaker 2: This is going forward.
Speaker 1: This is important.
Speaker 7: And I think just because something is Class A today,
Speaker 7: as it becomes older in ages and there's more competition
Speaker 7: and there's more price discovery, probably lower in competing assets,
Speaker 7: that may get all.
Speaker 3: Turned on its head.
Speaker 1: That's that's that's that's.
Speaker 5: A tech hose of fifteen years ago. When I hear
Speaker 5: you say things like that.
Speaker 8: It really is.
Speaker 5: I'm not saying it's as scarial will be, just you know,
Speaker 5: some similarities, that's in parallels.
Speaker 7: I think it's going to be a longer default cycle.
Speaker 7: In the financial crisis, we know that was a multi
Speaker 7: year cycle. Perhaps it gets frontloaded a bit.
Speaker 3: I don't know.
Speaker 7: I don't I don't think it is priced in it
Speaker 7: because of that. Price discovery is.
Speaker 1: Last discovery phrase.
Speaker 5: Excellent as silly clinic on commercial way to stay.
Speaker 1: Right now, we're gonna have a conversation that we did
Speaker 1: not have with Shnelli Bassek and Allison Williams. They are
Speaker 1: in the heat of the earnings coming out the numbers,
Speaker 1: the PowerPoint and the ratios. But with Strina o Rogen
Speaker 1: of Bloomberg News, we can sit back and actually look
Speaker 1: at the discussion that's being had. Sre I'm looking at
Speaker 1: a board. I'm gonna go all William Cohen on you here,
Speaker 1: David Vinnier who live two thousand and seven, two thousand
Speaker 1: and eight, Peter Oppenheimer who we talked to all the time,
Speaker 1: Kimberly Harris, a new board member, Kevin Johnson. What's the
Speaker 1: spirit of the board if they look and it's too
Speaker 1: much to say the train wreck, but just simply the
Speaker 1: tension and complexity of the underperformance of Goldman Sachs, how's
Speaker 1: a board respond?
Speaker 8: And don't forget the new incoming board member, Tom montag
Speaker 8: at Goldman Sachs for over two decades, then at Bank
Speaker 8: of America and now returning to Goldman Sachson.
Speaker 1: Well will be the response to the board.
Speaker 8: I think they will tell you that the stock does
Speaker 8: not fall off a cliff. They're okay, they're not getting
Speaker 8: ANTSI because over the last five years, since David Solomon
Speaker 8: took the seat October one, twenty eighteen, too today Goldman
Speaker 8: stock has done well. They will tell you they've done
Speaker 8: extraordinary well. The reality is they're middle of the pack,
Speaker 8: and middle of the pack is not a crisis.
Speaker 1: And this is critical now. And I'm thinking of David Vinnier.
Speaker 1: I have the clearest memories of him and I going
Speaker 1: back and forth on librar Ohis August of seven, and
Speaker 1: here that huge responsibility running the ship essentially financially at
Speaker 1: gold and Sacks. The collective memory on the board at
Speaker 1: Golden Sachs, including mister Montag, how do they respond to this?
Speaker 1: Is there like sharp words or is it like a
Speaker 1: McKenzie meeting where everybody's planning in a complex way to
Speaker 1: move forward.
Speaker 8: I think reality is no one on the board is
Speaker 8: going to be very comfortable seeing all the noise on
Speaker 8: the headlines coming out of Goldman Sachs. But what they
Speaker 8: ultimately want to see is stock performance. They want to
Speaker 8: see that they're on target to achieve some of the
Speaker 8: goals they've set out. There's obviously been strategy turnaround some
Speaker 8: one eighties they've done on their retail banking strategy, but
Speaker 8: they have committed to a new, new new strategy. As
Speaker 8: long as they can deliver on that, the board will
Speaker 8: be content. And okay, it doesn't look like anyone on
Speaker 8: the board is thirsting to make a change right about now.
Speaker 4: Where's the growth going to come from in the new
Speaker 4: new strategy?
Speaker 8: Well, that's important. A lot of analysts, some of the
Speaker 8: analyst at least, have called this a kitchens in quarter.
Speaker 8: Try and throw out all the bad stuff in this
Speaker 8: quarter because the numbers are really bad. Return on equity
Speaker 8: four percent? How does that compare to some of the peers?
Speaker 8: It's the worst among the big banks. You have JP
Speaker 8: Morgan posting twenty percent return on equity, so that's not good.
Speaker 8: And you've had a few consecutive quarters of Gorman missing
Speaker 8: on its profitability goal, which is a mid teens ROI.
Speaker 8: So the question is where does the growth come from?
Speaker 8: You know, and we heard James Gorman talk about this yesterday.
Speaker 8: Gorman said, investment banking the trophy, and investment banking has arrived.
Speaker 8: It's going to look up going forward. When that when
Speaker 8: capital markets reopen, when deal making goes up again, you
Speaker 8: can be rest assured that Goldman will be in a
Speaker 8: good place, and they will look to point out the
Speaker 8: increasing durable revenue growth in their asset management business.
Speaker 4: It seems as though the banks that are most diversified
Speaker 4: and largest have been benefiting the most from the recent enthusiasm,
Speaker 4: at least over the past few weeks of bank shares.
Speaker 4: How is Gorman going to try to appeal to this
Speaker 4: or are they going to say, no, we essentially are
Speaker 4: a niche markets focused bank. We try a for a
Speaker 4: into consumer banking. It didn't work.
Speaker 8: No, they'll certainly not say that they tried a different tack.
Speaker 8: They said, we're very we're very good investment bank in
Speaker 8: trading and banking, but we're going to expand into retail banking.
Speaker 8: We'll make that as good as our investment banking franchise.
Speaker 8: That clearly didn't happen. You wasted a few years going
Speaker 8: deep into that space and now trying to retreat. But
Speaker 8: now they are talking about the two pillars, the investment
Speaker 8: bank and the asset and wealth management business, and that
Speaker 8: is the one place that they can hope to show
Speaker 8: growth going forward.
Speaker 1: I think it was at page six of the presentation
Speaker 1: very clearly laid out. Commercial real estate has challenges. What
Speaker 1: is their uniqueness in commercial real estate versus the other
Speaker 1: major banks?
Speaker 8: Quite a few important things, right, investments where they have
Speaker 8: operational control. They're mostly tied to commercial real estate, about
Speaker 8: ten billion dollars of investment there. They took a half
Speaker 8: a billion dollar hit there. They have equity investments, a
Speaker 8: lot of it through principal investments, from office to warehouses
Speaker 8: and everything else that falls under the commercial real estate rubrics.
Speaker 8: They have about twenty eight billion dollars in loans in
Speaker 8: the commercial real estate space, so that's about fifteen percent
Speaker 8: of their total loan portfolio. So they've taken some hits there.
Speaker 8: They've taken hits on their equity investments and also on
Speaker 8: what they call their consolidated investments. That's contributed to about
Speaker 8: a billion dollar hit this quarter. Their hope will be
Speaker 8: they're not taking any more write downs going ahead, and
Speaker 8: that's really important for them and not entirely in their
Speaker 8: control as well.
Speaker 4: A head count has gone down by about five percent,
Speaker 4: I believe based on the latest assessment. How much more
Speaker 4: does it have to fall.
Speaker 8: Five percent year to date, eight percent is probably another
Speaker 8: figure to look at, because that's year on year doesn't
Speaker 8: include the new analyst batch intake. One would think that
Speaker 8: they've done the biggest exercises needed. They haven't come out
Speaker 8: and explicitly said that, and if they do need to
Speaker 8: take more action, that tells you there's a lot more
Speaker 8: bad news to come out of there. So they will
Speaker 8: certainly be hoping that they do not have to take
Speaker 8: any more head actions. They've already done three different rounds
Speaker 8: of the last year, and that doesn't show great management.
Speaker 4: Frankly, just taking a step back, we did just wrap
Speaker 4: up the earning cycle in the big banks, and it
Speaker 4: seems as though the themes are deposits cost something. Particularly
Speaker 4: if you're a smaller bank, Credit is contracting on the
Speaker 4: margins and credit cards are the sweet spot. How would
Speaker 4: you wrap that together to push it forward and say
Speaker 4: where this is going for the next quarter.
Speaker 8: Yes, all of those points are true. Credit is perhaps contracting,
Speaker 8: but look at the commentary that we've gotten from some
Speaker 8: of the big consumer bank. Look at what JP Morgan
Speaker 8: kept telling us. Charge of rates are going up. It'll
Speaker 8: probably end the year at two point six percent on
Speaker 8: their credit card portfolio. They keep repeating, this is a normalization,
Speaker 8: not deterioration. This is normalization post the pandemic. They're not
Speaker 8: that concerned. So if you zoom out, the economy is
Speaker 8: not as bad, or at least the trajectory does not
Speaker 8: appear to be as bad as three or four months ago.
Speaker 8: So if that holds up, the consumer is okay, Main
Speaker 8: Street remains okay. Wall Street opens up with the return
Speaker 8: of capital markets, that'll only mean continued good news for
Speaker 8: the big banks going ahead.
Speaker 1: You're gonna be out of the US Open tennis open.
Speaker 1: Here there's like the Gray Goose Pavilion or whatever it is.
Speaker 1: Shreeholds court there for like three weeks or whatever it is.
Speaker 1: What's going to be the chat at the Gray Goose
Speaker 1: Pavilion at the Open about what would Tom montag do.
Speaker 1: Here's this force of nature. I've dealt with him at Davos,
Speaker 1: Love him to death. What an interesting guy is he? Like?
Speaker 1: Is this just like a moment or is this going
Speaker 1: to be a big deal where he steps in?
Speaker 8: He's a force of nature. We've obviously seen a lot
Speaker 8: of commentary around this reality is at least based on
Speaker 8: our reporting, and I know some other people disagree, but
Speaker 8: Goldman had been in conversation with Tom Montag for several
Speaker 8: months months a conversation.
Speaker 1: This is Solomon dialing one eight hundred, save us.
Speaker 8: It's at least Solomon dialing one eight hundred. Tom Montag,
Speaker 8: he's in the past only he's one of the greatest
Speaker 8: partners at Goldman Sachs. He's made an effort to quote
Speaker 8: Tom Montag over the park few years, brought him back
Speaker 8: into the famous Goldman Sachs Retired Partners dinner is something
Speaker 8: that Montag had been avoiding for several years. And David
Speaker 8: Solomon's certainly brought him back into the fold. And in
Speaker 8: the last several months he's led the effort to bring
Speaker 8: him onto the board. And remember he is a big
Speaker 8: prominent voice when it comes to risk expertise, and that
Speaker 8: is still a big engine in Goldman Sacks.
Speaker 1: Shure not Orogen, thank you so much. Look for Bloomberg
Speaker 1: Reports should not Orogen here on Goldman Sachs and on
Speaker 1: the rest of the banking season. Subscribe to the Bloomberg
Speaker 1: Surveillance podcast on Apple, Spotify and anywhere else you get
Speaker 1: your podcasts. Listen live every weekday starting at seven am
Speaker 1: Eastern on Bloomberg dot com, the iHeartRadio app tune In,
Speaker 1: and the Bloomberg Business app. You can watch us live
Speaker 1: on Bloomberg Television and always on the Bloomberg Terminal. Thanks
Speaker 1: for listening. I'm Tom Keen, and this is Bloomberg
Speaker 2: A