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Speaker 2: Alex see you alongside Paul Sweeny and John Tucker. Let's
Speaker 2: go back to that ism manufacturing data because an ism
Speaker 2: manufacturing and read on the employment side was what really
Speaker 2: preceded that weaker jobs report that we saw in August,
Speaker 2: So it might set us up then for this Friday
Speaker 2: and the jobs report. Tim Fury is a chair for
Speaker 2: the Institute of Supply Managements Manufacturing Business Survey Committee. Hey Tim,
Speaker 2: it's great to see you. So is this number good?
Speaker 2: Is it bad? Is it the same?
Speaker 3: Well?
Speaker 4: Good morning, So you know, I think it's a little
Speaker 4: bit of a misnomer. So you know, we came in
Speaker 4: a little bit lighter than people thought. We're a little
Speaker 4: bit better than last month. But if you look at
Speaker 4: the three elements demand, output, in in puts, the biggest
Speaker 4: reason for the lack of slowing down even further is
Speaker 4: the fact that our manufacturing inventory number came up surprisingly.
Speaker 3: So overall demand is still elusive. It's hard to find.
Speaker 3: It's still not there.
Speaker 4: Okay, fine, backlog is still contracting, not quite as bad,
Speaker 4: but it's still pretty bad.
Speaker 3: On the input.
Speaker 4: Side, we had suppliers are living a little bit slower,
Speaker 4: but not a big deal, probably stable month a month.
Speaker 4: The big surprise there was really manufacturing inventory is popping
Speaker 4: up to fifty point five when it's been historically.
Speaker 3: Forty eight or less.
Speaker 4: So, but I think that's really a timing issue between
Speaker 4: reduced output and trying to slow down the inputs, because
Speaker 4: the real story here is on the output side, with
Speaker 4: production coming down again for the third straight month, which
Speaker 4: really means revenue.
Speaker 3: Good surrogate for revenue, And as you.
Speaker 4: Mentioned, Alex, the employment numbers is continuing to sag and
Speaker 4: in fact, in this month's evaluation, almost sixty five percent
Speaker 4: of our force reduction actions were layoffs, which are the
Speaker 4: highest number we've seen so far.
Speaker 2: Tim.
Speaker 5: When I'm looking at the ISM manufacturing data, what am
Speaker 5: I looking at? What industries are most notably represented in
Speaker 5: that data?
Speaker 2: Point?
Speaker 4: Well, the big six are you know, your first one
Speaker 4: is chemical products, and you have transportation equipment, You've got
Speaker 4: computer and electronics, food and beverage, those two are kind
Speaker 4: of intermixed. You got fabricated metal products, machinery, and those
Speaker 4: are the big six. Those make up seventy percent, seventy
Speaker 4: two percent of manufacturing GDP, so you know, they're pretty
Speaker 4: strong drivers.
Speaker 3: And if you look at five of those top.
Speaker 4: Six, the inventory number actually broke fifty, which we haven't
Speaker 4: seen in probably a couple of years. So I really
Speaker 4: think it's a timing issue. We weren't able to slow
Speaker 4: down the inputs as fast as we really wanted, and I.
Speaker 3: Think it will self correct itself. So if you take that.
Speaker 4: Number and you do a normalization where it would have
Speaker 4: been based on what's happening last month, you're probably down
Speaker 4: that same range that we were at last month. So
Speaker 4: you know, the summary on this is is that don't
Speaker 4: really see demand coming back before the end of the year.
Speaker 3: It's a combination of interest rates.
Speaker 4: We got good news last week, obviously, but there's a
Speaker 4: lot of other issues here around the election that are
Speaker 4: really coming to play now. People are they're really holding
Speaker 4: back waiting to see which party actually tastes control and
Speaker 4: how significant that control will be. Demand is the problem
Speaker 4: has been the problem inputs are kind of overwhelming the
Speaker 4: output side. The output sides continuing to sag. So not
Speaker 4: a great story here, but you know, no big surprise.
Speaker 3: We saw this coming last month.
Speaker 4: This report pretty much validates where we were last month,
Speaker 4: and that is that manufacturing and slowing down. It's not
Speaker 4: in a super dangerous category yet it's in a yellow area.
Speaker 4: We had fifty three percent of overall manufacturing GDP contracting,
Speaker 4: which was better than last month at eighty four percent.
Speaker 3: I think it was. So, you know, not a great report,
Speaker 3: but not catastrophic either, but.
Speaker 2: Great, great insight and really helps set us up and
Speaker 2: understand how we are headed into Friday Jobs Friday. All right, Tim,
Speaker 2: thanks a lot. Tim Fiory, chair of the Institute for
Speaker 2: Supply Management's Manufacturing Business Survey Committee. So then it's surprise
Speaker 2: that you still the S and P off by one
Speaker 2: point two percent. There may be some other factors obviously
Speaker 2: going on in that, but it also explains the continued dip.
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Speaker 2: to the markets here, we're right around the lows of
Speaker 2: the session. I have read so many notes about how
Speaker 2: bad September is for equities. I'm very much not surprised
Speaker 2: by the downdraft today. Grace Lee joins us now. She's
Speaker 2: a senior portfolio manager at Columbia Thread. It'll joining us
Speaker 2: from Boston, Massachusetts. Grace, do I just you know, glaze
Speaker 2: over today and say yeah, okay, seasonality whatever and move on?
Speaker 2: Or is there something real going on here?
Speaker 6: Well?
Speaker 7: Alex, thanks for having me.
Speaker 8: I think we when when you look at August, August
Speaker 8: was actually pretty strong. So uh, you know, when we
Speaker 8: come back from vacation and people are kind of back
Speaker 8: to reality and looking at what is historically a not
Speaker 8: so great month for stocks. I think, I think it's worthwhile,
Speaker 8: but this is not anything to be alarmed about. It's
Speaker 8: it's a bit of a breather and the market certainly
Speaker 8: need some of that every once in a while, So overall,
Speaker 8: not not particularly concerned. It's I think it's somewhat normal.
Speaker 8: And and again there there is still green on the
Speaker 8: screen as well, So it just depends on where where
Speaker 8: people choose to look. So I think there's there's a
Speaker 8: number of defensive type names that are doing holding up
Speaker 8: just fine, and even in a tough market today, in a.
Speaker 5: Tough market like today, or just in general here as
Speaker 5: we head into the last few months of the year,
Speaker 5: am I still banking on the big tech stocks grace
Speaker 5: or should I be looking for other areas in the market,
Speaker 5: other sectors, maybe for value?
Speaker 7: Yeah, I think as a value manager myself, I always
Speaker 7: think value is an interesting place, but in particular given that,
Speaker 7: you know, I think tech has certainly done very well
Speaker 7: and continues to post very strong numbers. But I think
Speaker 7: if you look at some of the estimates.
Speaker 8: For the non mag seven stocks, those are projected to
Speaker 8: do somewhat better in the second half of the year,
Speaker 8: and I think We've already seen the broadening of the market,
Speaker 8: you know, with sectors like utilities and reads posting double
Speaker 8: digits in the last couple of months. Ever, since that
Speaker 8: big July CPI print came out, I think that really
Speaker 8: shifted the tone of the market to people looking forward
Speaker 8: to the first rate cuts.
Speaker 2: So before you move on to sort of what other
Speaker 2: stocks are good, did you mentioned tech? However, everyone still
Speaker 2: wants to own AI. So on days like today, like
Speaker 2: do you buy the dip in video or do you
Speaker 2: just sort of like hold those tech positions of where
Speaker 2: they're at and then put the new money to work
Speaker 2: somewhere else, like in consumer or staples or something.
Speaker 8: Well, I think a lot of people are spending a
Speaker 8: lot of time wringing their hands over how to be
Speaker 8: positioned in in the big tech stocks like in video.
Speaker 7: You know, I think.
Speaker 8: There's still I think most people probably have enough exposure
Speaker 8: at this point. You know, I think it's probably wise
Speaker 8: to look at the other sectors where people have not
Speaker 8: you know, they go to them every once in a while,
Speaker 8: but I think people need to really change their habits
Speaker 8: a little bit. It's been a always return to growth,
Speaker 8: you know, after some of these shakeouts, and you know,
Speaker 8: maybe people need to stick a little bit more to
Speaker 8: the center or more toward value, especially as we are
Speaker 8: seeing rate cuts and some of the sectors that have
Speaker 8: been parked by that are poised to do a lot better.
Speaker 8: And that if people are concerned about recession or so
Speaker 8: then you know, you do have a little bit more
Speaker 8: room in defensive names.
Speaker 5: To hold up so grace. As a dividend focused manager,
Speaker 5: if Tim Cook walked into your office today, what would
Speaker 5: you tell him about or what would you what would
Speaker 5: you suggest to him about a dividend policy For a
Speaker 5: company that's got you know, one hundred and fifty billion
Speaker 5: in cash on the balance sheet, one hundred million dollars
Speaker 5: for free cash flow every year, what kind of advice
Speaker 5: would you give him vis via a dividend policy.
Speaker 8: Well, I think it's up to every management with that
Speaker 8: type of cash flows. It's always welcome to have, and
Speaker 8: I think it does broaden the investor base quite a
Speaker 8: bit when you have a reasonably meet full dividend and
Speaker 8: you're still able to invest plenty in your in your
Speaker 8: business in order to grow, you know, but it's it's
Speaker 8: it's a different balance for all all types of companies. So,
Speaker 8: you know, but I think certainly dividend investors would welcome,
Speaker 8: you know, an increase in any of the big tech
Speaker 8: names if they wanted to to increase their dividends.
Speaker 2: I don't know, Paul, what would you say.
Speaker 5: I would say, give me a two and a half
Speaker 5: three percent dividend yield. And I've said this one already
Speaker 5: said university and campus. I've told him. Then he just
Speaker 5: kind of.
Speaker 3: Brushed me on.
Speaker 2: He says, okay, thanks, Paul, Bye bye, I see you later. Okay,
Speaker 2: So great's final word? If I want to get defensive here,
Speaker 2: what's my best bet?
Speaker 8: Well, we still think that that some of the real
Speaker 8: estate stocks actually look pretty interesting were we've been involved.
Speaker 8: But uh, you know, the other day I looked at
Speaker 8: a couple of them, and they still look very attractive
Speaker 8: in terms of absolute historical valuations and and getting the
Speaker 8: tailwind from rake cuts. They've been probably some of the
Speaker 8: most pressured names of the last couple of years. So
Speaker 8: I think, you know, you've got names like Simon Property,
Speaker 8: which is the big mall owner.
Speaker 7: That is trading at fifty two week highs but is still.
Speaker 8: Not extremely expensive and really is very well positioned overall.
Speaker 8: And still has I think close to a five percent
Speaker 8: dividend yield, so we think names like that still have
Speaker 8: room to go.
Speaker 5: Grace, thanks so much for joining us. Really appreciate getting
Speaker 5: some of your time.
Speaker 1: Grace Lee.
Speaker 5: She's a senior portfolio manager at Columbia thread Needle in Boston.
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Speaker 2: Happy Tuesday, Everybody. Alex steal Here alongside Paul Sweeney is
Speaker 2: Boomberg Intelligence Radio. We bring you all the top news
Speaker 2: and business, economics, finance, and politics. There are lens of
Speaker 2: our Bloomberg Intelligence folks. They cover two thousand companies and
Speaker 2: one hundred and thirty industries all around the world. We
Speaker 2: also tap our deep resources coming from Bloomberg News and
Speaker 2: print to cover all the top stories. Now this caught
Speaker 2: my eye over the weekend. I try to check out
Speaker 2: when I'm on VAK, but this one I really had
Speaker 2: to read in because Volkswagen is turning on Germany that
Speaker 2: the company is considering factory closures in Germany for the
Speaker 2: first time and it's eighty seven year history. Not only
Speaker 2: does it part with this tradition, but risks of feud
Speaker 2: with unions in a step that truly reflects the heartache
Speaker 2: that is happening within the European automakers. So we want
Speaker 2: to get more on that with Stefan Nikola, European Automotive editor,
Speaker 2: joining us from Berlin, Germany. So many layers to this
Speaker 2: stuff on. But are they going to are they going
Speaker 2: to cut factories or is this like a threat to
Speaker 2: the government or something.
Speaker 9: Well, we don't know for all, but what we know
Speaker 9: for sure is that a lot of car makers in
Speaker 9: Europe are having issues, and Volkswagen is right at the
Speaker 9: front of that. There is over capacity in Europe. Car
Speaker 9: sales never really returned to levels before the pandemic. EV
Speaker 9: sales growth is slowing, and we have new competitors like Tesla,
Speaker 9: like some of the Chinese entrants that make their life difficult.
Speaker 9: So you know, it could very well be that one
Speaker 9: or even more factories we'll have to close.
Speaker 5: Stefan talk to us about that Chinese competition, because there's
Speaker 5: no Chinese cars to speak of here in the US.
Speaker 5: Talk to us about how it is in Europe.
Speaker 9: Yeah, of course, in the US, the Chinese can't really
Speaker 9: make an entry because of the tariffs there and the
Speaker 9: trade tensions. The EU has answered, as you know, with
Speaker 9: its own set of terraffs. But you know, the Chinese
Speaker 9: car makers have started to expand here in Europe since
Speaker 9: early last year, and the big brands by d MG,
Speaker 9: which is now owned by a Chinese company, Jily, but
Speaker 9: also some of the smaller ones are offering electric but
Speaker 9: also combustion engine cars at a discount prices. So they're
Speaker 9: really you know, producing very cheaply in China and selling
Speaker 9: at a quite affordable and competitive competitive price here in Europe.
Speaker 9: So you know, they're making in roads. They represent about
Speaker 9: ten percent of new sales, so a significant you know,
Speaker 9: competitive competition already, and they have plans to expand more
Speaker 9: produced locally even so, yeah, it's only going to get
Speaker 9: more intense competition here in Europe.
Speaker 2: What I don't understand is my impression of just working
Speaker 2: in Europe is that unions really rule the roost. I mean,
Speaker 2: where unions allow this, Like, what what's that dynamic?
Speaker 9: Yeah, it's a it's a difficult dynamic to say the least.
Speaker 9: Unions will fight this, that's obvious. They will try to
Speaker 9: sweeten any deal. You know, no company in Europe that
Speaker 9: has a major union presence will be able to do
Speaker 9: this on the cheap, So folk Sagen will have to
Speaker 9: pay sort of considerable uh you know, payoffs to any any.
Speaker 3: Workers it will let go.
Speaker 9: But of course unions also understand that the European automotive
Speaker 9: landscape is changing, that label costs are relatively high in
Speaker 9: countries such as Germany, but also Belgium, where an Audi
Speaker 9: plant might go. So it's a fine fine line that
Speaker 9: they have to to walk. But for sure they will
Speaker 9: not go down easily on this front. And and there's
Speaker 9: there's gonna be hard negotiations to come in the coming months.
Speaker 5: All right, Stefan, thanks so much for joining us. Stuff
Speaker 5: on Nicola joining us. He's European automotive editor for Bloomberg News.
Speaker 5: Joining us from Berlin, Germany via zoom Again. That looks
Speaker 5: like tough times in the European One of the questions
Speaker 5: I have just thinking about the longer termanys why are
Speaker 5: they not buying as many cars as it did pre pandemic?
Speaker 5: Are we not the same here in the US. I mean,
Speaker 5: I don't know.
Speaker 2: Oh, I don't know. Let's see you. I feel like
Speaker 2: I should know this off the top of my head.
Speaker 5: But I just I mean, I know they're not.
Speaker 2: Yeah, I'm looking, so I'm like.
Speaker 5: I mean, what are you doing if you're not buying
Speaker 5: a car? How are you getting around? I mean, like me,
Speaker 5: I go my Vespa scooter.
Speaker 2: Maybe in Jersey, maybe talkers don't. Maybe you just don't
Speaker 2: have as many. So I'm looking at where we're are
Speaker 2: in cars. We're not where we were pre pandemic. Yet
Speaker 2: we're definitely not where we were during a spike during
Speaker 2: twenty twenty one, but also not during the pandemic, but
Speaker 2: not by a terrible amount. I just think it's it's
Speaker 2: also more about the cars that they are selling in
Speaker 2: terms of say, evs are just not profitable, so they
Speaker 2: have to spend all this money and then they don't
Speaker 2: get the money back. Like that seems to be sort
Speaker 2: of the issue and how Germany then deals with it.
Speaker 2: But that was a story that really caught my eye.
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Speaker 5: Boston starting at noon today. How cool is that? That's
Speaker 5: a big stick up there, So that'd be good for
Speaker 5: our friends up there in New England. Marvin Lowe, he
Speaker 5: joins US senior Global market strategist State Street. He's up
Speaker 5: in Boston. He's all fired up for that move to
Speaker 5: ninety two nine. Hey, Marvin, I got what is it?
Speaker 5: You're in the marketplace here? I mean, twenty nine companies
Speaker 5: hitting the bond market today. What does that tell you? You
Speaker 5: know what?
Speaker 6: I didn't realize that the calendar was that heavy. And
Speaker 6: it's interesting, right, especially if you think that the FED
Speaker 6: is going to start cutting that, you know, corporate America.
Speaker 6: Corporate treasurers are just marvelous at really understanding the markets
Speaker 6: in a lot of ways better than we do because
Speaker 6: they're they're trying to figure out how to how to
Speaker 6: deal with their funding costs. There must and and and
Speaker 6: I think we're seeing that in some of the price actions.
Speaker 6: There's got to be an increased amount of recessionary concerns
Speaker 6: making their way into the market, because for them to
Speaker 6: want to come in when they know rates are are
Speaker 6: likely going lower must mean that they're worried about access.
Speaker 6: And that's, you know, that's the telling market narrative, if
Speaker 6: you will.
Speaker 2: So what do you think that the potential for upside
Speaker 2: or downside is for them? I mean, we have some
Speaker 2: key risk events, right, so where is the where's the
Speaker 2: risk profile at this point?
Speaker 3: Yeah? For sure.
Speaker 6: I mean the data this week is is top tier.
Speaker 6: We're going to get a real perspective on this twenty
Speaker 6: twenty five versus fifty. You know, we'll get a sense
Speaker 6: of if.
Speaker 3: Bad is good or bad is bad, if.
Speaker 6: You will, you know, I think the real data point
Speaker 6: that's going to define what this quarter looks like is
Speaker 6: that job's number and whether or not kind of the
Speaker 6: slowing that we saw at the end of the summer,
Speaker 6: at least with the July job support which kind of
Speaker 6: set off kind of the recessionary concerns. Is actually the trend?
Speaker 6: You know, are are we really slowing the jobs market
Speaker 6: to the degree that you know that one hundred and
Speaker 6: fourteen thousand print last month indicates? And if we are,
Speaker 6: then the som rule and everything about recession is a
Speaker 6: legitimate market concern kind of going into the end of the.
Speaker 5: Year, Marvin, for better or worse, it's is an election year.
Speaker 5: How does that typically factor into your calculus or do
Speaker 5: you kind of try to put that to the side.
Speaker 6: You know, I try to put it to the side.
Speaker 6: I mean, it's close. We know how heated this election is.
Speaker 6: The FED itself kind of changed their November meeting to
Speaker 6: Thursday rather than Wednesday in the event that the election
Speaker 6: has created a lot of market volatility, So you know,
Speaker 6: you have to take it seriously. The data leads us, however,
Speaker 6: in terms of what the reaction function from a financial
Speaker 6: conditions perspective is. So we're more focused on non farm
Speaker 6: We're more focused on what the data is telling us
Speaker 6: and whether or not what seems like a fairly aggressive
Speaker 6: rate cutting path that's expected for the FED this year.
Speaker 6: You know, four cuts this year potentially might be underestimating
Speaker 6: the economic weakness, but the data is going to guide
Speaker 6: us to the answer around that.
Speaker 2: So already with one hundred basis points, we're looking at
Speaker 2: one fifty basis point cut. It sounds like you're of
Speaker 2: the mind that we should and maybe have more than
Speaker 2: that if there's more economic weakness.
Speaker 6: You know what, I'm still in the camp that's a
Speaker 6: very methodical one per meeting through the end of the
Speaker 6: year makes sense. I'm still in the soft landing camp.
Speaker 6: But in terms of market pricing, if you're not worried
Speaker 6: about reacceleration of debt, the only other part of the
Speaker 6: discussion is that the economy performs worse than expected. And
Speaker 6: from that perspective, you know, I think that the market
Speaker 6: is going to price in a little bit more and
Speaker 6: could probably get more aggressive if the data really starts
Speaker 6: to move in that in that direction. We're not in
Speaker 6: the camp of that. We haven't really seen it. The
Speaker 6: jobs market still looks like it's creating a decent amount
Speaker 6: of jobs to kind of keep the consumer engaged. But
Speaker 6: every data point is live.
Speaker 5: Marvin, You're a senior global macro strategist, Where do you
Speaker 5: see the macro opportunities on a global basis these days?
Speaker 6: Yeah, you know, I think I think on the currency
Speaker 6: side of things, some of this dollar weakness probably went
Speaker 6: a little bit too far. I think kind of this
Speaker 6: volatility that we're seeing within the markets are going to
Speaker 6: uh provide an opportunity to buy the dollar at least
Speaker 6: against maybe some of thehigher data currencies. I think what
Speaker 6: we're seeing out of Japan is super interesting. Uada and
Speaker 6: Japan itself is in a bit of a bind when
Speaker 6: it comes to inflation. They should have higher rates, So
Speaker 6: you know, you kind of hope that that doesn't create
Speaker 6: the amount of volatility that it did earlier this year.
Speaker 6: But you know, certainly I think that the market is
Speaker 6: on edge based on that, and really from a rates perspective,
Speaker 6: if you don't think the Fed is going to be
Speaker 6: able to be as aggressive as the market is pricing,
Speaker 6: or if you think that it needs to be more aggressive,
Speaker 6: you know that that's kind of your call. There definitely
Speaker 6: is curve trades around it. You know, we're in the
Speaker 6: camp that curve steepening is still a trade that you
Speaker 6: could put on even if the FED doesn't necessarily reach
Speaker 6: what the market is pricing right now.
Speaker 2: Marvin, I guess my other question, though, is how influential
Speaker 2: do you think the dollar is going to be to
Speaker 2: all of this? Because we were talking AMIGAILT. Dilittle, she
Speaker 2: does technical she also does market research for US here,
Speaker 2: and she was saying that the carry trade could really
Speaker 2: also be unwinding again with the yen rally, and I'm
Speaker 2: just wondering, when you look at that global sphere in
Speaker 2: addition to the US, how much is hinged on it
Speaker 2: and how much of the is that US just making
Speaker 2: a big deal out of nothing.
Speaker 6: I mean, the dollar is always the most important currency
Speaker 6: in the world. Our analysis in terms of where we
Speaker 6: potentially are with the yen carry trade is that most
Speaker 6: of it's been unwound, So I'm not expecting a lot
Speaker 6: of volatility to come along with kind of the stronger
Speaker 6: yen as we see now. It's ultimately one of the
Speaker 6: harder things to try to figure out in the market.
Speaker 6: You know, for the dollar not to be important, however,
Speaker 6: really does have to get towards its position as a
Speaker 6: reserve currency more of an intermediate term type of discussion,
Speaker 6: and you know, I just don't see the dollar being
Speaker 6: toppled anytime soon. In US exceptionalism when it comes to
Speaker 6: our companies and the earnings potential and really the technology
Speaker 6: advancements that are driven by US corporation still still seems
Speaker 6: like it's intact.
Speaker 5: To me, Marvin, American exceptionalism as it relates to the economy.
Speaker 5: Is that something you buy and if so, how does
Speaker 5: that reflect it in kind of your outlook?
Speaker 3: Yeah?
Speaker 6: I do buy it. I think that, you know, I
Speaker 6: really think that the companies that are developed in the
Speaker 6: US in terms of kind of new business models, the
Speaker 6: ability to find capital, and really an advanced capital market
Speaker 6: environment that allows companies to not only wind up in
Speaker 6: the US, but really those ideas to incubate in the
Speaker 6: US is something that that other countries other parts of
Speaker 6: the world would like to replicate, but they just can't.
Speaker 6: Some of that's because of the reserve currency. It's the
Speaker 6: fact that we've got the liquidity that allows that to happen.
Speaker 6: But you know, we were talking about in VideA. Everyone
Speaker 6: was talking about in video pretty much around the world
Speaker 6: all summer and certainly last week, that business model. It's
Speaker 6: it's not an accent that it's here. You know, its
Speaker 6: founders are not American, and I think that we're going
Speaker 6: to continue to be able to germinate that type of
Speaker 6: business model. She really puts the US in a position
Speaker 6: where our capital flows benefit from that.
Speaker 2: Yeah, but we're the ones with the huge deficits, not
Speaker 2: that other countries don't, but we're the ones with the
Speaker 2: ginormous death deficit that's not going to be fixed no
Speaker 2: matter who's in the White House.
Speaker 6: Yeah, yeah, I mean, it's it's it's one of my
Speaker 6: self box issues for sure. I am in the camp
Speaker 6: that I'm in the camp that that you know, Washington
Speaker 6: needs to get it, get it right. They've got to
Speaker 6: start to acknowledge it the correct way. And unfortunately, you know,
Speaker 6: all the actors in Washington have weaponized the concept of
Speaker 6: the deficit to the point that it doesn't exist from
Speaker 6: that perspective. It's going to be up to the markets
Speaker 6: to ultimately shutter and get them to focus on it.
Speaker 6: But that doesn't really change the fact that the US
Speaker 6: still has some advantages that you know, we're going to
Speaker 6: be able to retain. But but hire yields, But I'm sorry,
Speaker 6: but hire yields are something that we should definitely think
Speaker 6: about from a longer duration perspective.
Speaker 2: Yeah, exactly, like we're kind of stuck with them for
Speaker 2: a little bit. Hey, Marvin, really appreciate it. Thanks so much.
Speaker 2: Marvin Low joining us from Stay Streets.
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Speaker 3: All right?
Speaker 5: Citadel Securities Jane Street Group, two of the largest market
Speaker 5: making firms in the US, are on track for record
Speaker 5: annual revenue halls as they further encroach on the big
Speaker 5: banks trading territory. Catherine Dodhugherty joins us here. She's a
Speaker 5: financi reporter for Bloomberg News. She joins us here in
Speaker 5: our New York studio. Where did these guys come from?
Speaker 5: Citadel Jane Street? If I'm Fidelity, from I'm a hedge
Speaker 5: fund X, I'm calling these guys to do my trades right.
Speaker 10: So a lot of trading isn't happening by phone, and
Speaker 10: that's part of the story of how these firms have
Speaker 10: become so prominent with electronic trading, A lot of it
Speaker 10: is happening offline or off of the phone. And so
Speaker 10: these firms are developing algorithms technology that is helping just
Speaker 10: facilitate faster trading and that trading. The pricing is becoming tighter,
Speaker 10: and the banks are having to compete with these market
Speaker 10: making firms because they need to provide pricing that is
Speaker 10: competitive and gives their institutional or retail investors the best
Speaker 10: price for what they're either looking to buy or sell.
Speaker 2: How much money are these guys like Citadel and making
Speaker 2: off of this, like is do they care? Is it
Speaker 2: a lot for them or what?
Speaker 10: It's billions? And these two firms are on track. Twenty
Speaker 10: twenty two was record years for both of them, and
Speaker 10: it's looking like twenty twenty four might beat that record year.
Speaker 10: So for Jane Street that's over ten billion. For Citadel
Speaker 10: it was seven and a half in twenty twenty two,
Speaker 10: and that's not close to what the big US banks
Speaker 10: are making in their trading arms, but it's a significant
Speaker 10: increase when you just.
Speaker 2: Look at the year over year jump.
Speaker 10: So for Citadel Securities it was an eighty two percent jump.
Speaker 10: I believe it was seventy eight for Jane Street. So
Speaker 10: just the growth is extraordinary, and the banks are starting
Speaker 10: to look over their shoulder and say, a second, it's
Speaker 10: not if your b of A or your JP Morgan.
Speaker 10: It's not your big US bank competitors that you're worried about,
Speaker 10: or even European. It's these market making firms just looking
Speaker 10: at the growth and the market share that they're taking
Speaker 10: each quarter.
Speaker 5: If I'm Morgan standing Goldman Sachs, do I care I'm
Speaker 5: losing this share? Am I fighting to keep this share?
Speaker 5: Is it a profitable business? How are they?
Speaker 2: How would they fight for it? At some point? So
Speaker 2: there you have to invest.
Speaker 10: You have to invest in your people and your technology,
Speaker 10: and yes they.
Speaker 2: Are I don't.
Speaker 10: I don't know if they're going to broadcast that they're saying, oh,
Speaker 10: we're worried. I think that most of them would say
Speaker 10: we're fine and we're competitive. But if you don't invest
Speaker 10: in put money and balance sheet into supporting these trading businesses,
Speaker 10: you're going to lose out. And in terms of the
Speaker 10: big banks with investment bank with trading, that's a significant
Speaker 10: portion of your yearly revenue.
Speaker 2: So if they don't. Okay, so they say they're investing there,
Speaker 2: say that they're competing, but clearly that must not be
Speaker 2: the case in some ways. If you still have a
Speaker 2: Citadel's Jane Street getting more and more market share, how
Speaker 2: do you think that this plays out? Like? Who is
Speaker 2: it more important to?
Speaker 10: So the market is also expanding at the same time
Speaker 10: that these marketing the pies are growing. The pie is growing,
Speaker 10: So it's the banks are able to make more money
Speaker 10: and these market makers are able to make more money
Speaker 10: at the same time. Now the portion of the pie
Speaker 10: will that change so that the market makers over time
Speaker 10: take more.
Speaker 2: Even as the pie expands.
Speaker 10: That's what we're tracking, and it does look like they
Speaker 10: if they keep up this momentum, it's it's going to
Speaker 10: become potentially a problem for the big US banks, especially
Speaker 10: those like Goldman that rely so heavily on their trading
Speaker 10: as their core money making unit.
Speaker 5: Jane Street Citadel Securities. These are private companies right, yes,
Speaker 5: are there? I mean they seem like pretty good businesses
Speaker 5: or do they think about going public anything?
Speaker 10: So Citadel Securities has said that it would be right place,
Speaker 10: right time, is kind of what they've broadcast. Their CEO
Speaker 10: has talked about their expansion, but he said, we're in
Speaker 10: no rush. It's definitely on their radar.
Speaker 2: But they're not.
Speaker 10: They're not forced into going public anytime soon. So they
Speaker 10: would only do it, and they're positioning themselves to go public,
Speaker 10: but they would only do it when they feel that
Speaker 10: the market has stabilized that they would get the best pricing.
Speaker 10: There's not as much uncertainty. I would say going into
Speaker 10: the twenty twenty four election, it's not the best time
Speaker 10: right now, but I would after the election, if things
Speaker 10: have are looked stable, we could see a public offering
Speaker 10: of Citadel in the next handful of years.
Speaker 2: I mean, i'd be huge. I think this would be
Speaker 2: an enormous IPO.
Speaker 10: No, it would, I mean, just based on the financials,
Speaker 10: their return on equity, it would likely be priced competitively.
Speaker 10: I would say I'm not the one that I wouldn't
Speaker 10: be here talking if I was the one doing the
Speaker 10: financials to see what they would actually fetch if they
Speaker 10: were to go public. But just looking at the appetite
Speaker 10: in the credit market. Jane Street and Citadel both have loans,
Speaker 10: so that's why they're going to their investors, and these
Speaker 10: are credit investors to show their growth over time and
Speaker 10: just the appetite for the debt that might reflect that.
Speaker 10: In the equity market, they'd also be perceived quite positively.
Speaker 5: Catherin Darty great, so I appreciate kath dartiy fan reporter
Speaker 5: Bloomberg News.
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Speaker 2: This is Alex Steel alongside Paul Sweeney, and this is
Speaker 2: Bloomberg Intelligence Radio. We cover all the tap news and business,
Speaker 2: economics and finance through our lens of our Bloomberg Intelligence folks.
Speaker 2: They cover three two thousand, two thousand companies and one
Speaker 2: hundred and thirty industries worldwide. Once a week. We also
Speaker 2: tap into our huge arm of resources over at Bloomberg
Speaker 2: n EF. It's take it for New Energy Finance, and
Speaker 2: they go through and they cover commodities, power, transport, industry, buildings,
Speaker 2: agricultural sectors, technology, sustainability issues. It's all in part of
Speaker 2: the energy transition, and a big part of that is
Speaker 2: how we finance that well. Trina White is benef sustainable
Speaker 2: finance analysts and she joins us now on the role
Speaker 2: the big banks are playing in the energy transition. Trina,
Speaker 2: how do you measure that? First of all, because you
Speaker 2: can make an argument that, okay, we'll forget it. If
Speaker 2: you're lending to Chevron then doesn't count, or a big
Speaker 2: oil company. But those big oil companies also do other
Speaker 2: stuff in the energy transition. So how did you measure
Speaker 2: everything along this line?
Speaker 11: It's a really great question.
Speaker 12: The primary climate impact that banks in particular have it
Speaker 12: looks a lot different from a real economy company like
Speaker 12: an oil major or like a steel company. Instead of
Speaker 12: their operations, it really lies in the deals that they're
Speaker 12: doing with these companies, So the projects they're financing, the pipelines,
Speaker 12: the drilling, but also the solar projects and these newer,
Speaker 12: cleaner companies that they're helping to access capital. And so
Speaker 12: how we measure this is through a ratio called the
Speaker 12: energy supply banking ratio, and this is the proportion of
Speaker 12: the financing that banks are facilitating toward low carbon projects
Speaker 12: and companies to that of fossil fuels. And your specific
Speaker 12: question on oil companies is a great point because all
Speaker 12: of those oil majors are also beginning to make investments
Speaker 12: in clean so will sort of portion the amount of
Speaker 12: financing that is going to those oil companies the amount
Speaker 12: that is going toward their low carbon projects versus their
Speaker 12: existing fossil operations.
Speaker 5: So I would think most banks, I'm i can say
Speaker 5: all banks, but most banks they bank the energy sector.
Speaker 5: Everybody's got an energy team. Are they banking both the
Speaker 5: fossil fuels and the new energy? Are they doing both?
Speaker 11: Absolutely?
Speaker 12: So what we see globally is a ratio of about
Speaker 12: seventy seventy three percent as much low carbon financing as
Speaker 12: fossil fuels. So for every dollar going to fossil fuels,
Speaker 12: about seventy three cents is going toward low carbon solutions
Speaker 12: in twenty twenty two. Most of these banks have a
Speaker 12: pretty diversified portfolio. It really depends regionally. So in Canada,
Speaker 12: for example, where the economy is super tied to energy
Speaker 12: exports of traditional oil and gas, we see really low
Speaker 12: ratios about zero point three zero point four. In Europe,
Speaker 12: where low carbon is much more developed and there's more
Speaker 12: of these companies and projects for banks to finance, we
Speaker 12: see a ratio of about one point eight, so much higher.
Speaker 2: Are these banks making stuff on the loans to do
Speaker 2: the green things? Or is it how do they manage
Speaker 2: that risk?
Speaker 12: So these are definitely still profitable deals. They're not making
Speaker 12: any real concessions. It's really just are there the companies
Speaker 12: looking for this financing are traditional companies also looking for
Speaker 12: labeled like green and sustainable debt to raise as well,
Speaker 12: So there's not necessarily a ton of control that banks
Speaker 12: have over the demand.
Speaker 11: From this underlying set of companies.
Speaker 12: So in many ways it's also an indicator of who
Speaker 12: their client base is.
Speaker 5: So if I'm a banker JP, Morgan and chevrun's my
Speaker 5: client all on the right, any kind of bond day one.
Speaker 5: I don't care if it's green or not green, as
Speaker 5: long as they pay me.
Speaker 2: But he's a former banker, by the way, so don't
Speaker 2: you know That's why I'm saying, that's all about.
Speaker 11: That's what we hear from all our clients too.
Speaker 5: So but I don't want to hold the you know,
Speaker 5: the loan on my books. I want to syndicate it
Speaker 5: out and syndicate the risk exactly. Do I feel okay
Speaker 5: that there are investors out there the one own new
Speaker 5: energy debt for example, or new energy financial instruments. Do
Speaker 5: people want to own that stuff?
Speaker 11: There's definitely demand for it.
Speaker 12: I mean, we see it with the takeoff of the
Speaker 12: labeled market, so giving investors visibility into you know, a
Speaker 12: bond or a loan that's actually labeled as green or
Speaker 12: sustainable use of proceeds. But in terms of what we
Speaker 12: hear from banks, it is exactly that they follow where
Speaker 12: the money is. And so in many ways this tends
Speaker 12: to be a lagging indicator of what's going on in
Speaker 12: the underlying real economy.
Speaker 2: What other stuff are you looking for within this energy
Speaker 2: bank ratio, sustainability ratio? Like, what else are you guys
Speaker 2: focusing on?
Speaker 12: So what we would really like to see is both
Speaker 12: in the banking sector but also in the underlying real economy.
Speaker 12: This measure of low carbon to fossil fuels more than
Speaker 12: quadruple across this decade, so to be consistent with one
Speaker 12: point five degree climate scenarios. So those are you know,
Speaker 12: models that are put out by the International Energy Agency
Speaker 12: for example, indicate that we would need to see four
Speaker 12: times as much low carbon investment as fossil fuels this decade.
Speaker 12: So whether or not it's you know, because the banks
Speaker 12: don't have agency or these underlying companies are not quite
Speaker 12: raising financing at the levels that we would need to see.
Speaker 12: We're nowhere near hitting our one point five degree climate targets.
Speaker 5: Are there certain banks or financial institutions that are doing
Speaker 5: a better job of financing the green.
Speaker 2: Economy, like European banks? Maybe or not.
Speaker 11: There's large variation.
Speaker 12: Last year, Santander had a ratio of about two to one,
Speaker 12: just under two times as much low carbon financing as
Speaker 12: fossil fuels. Again, it tends to be the North America
Speaker 12: and the Canadian the US and also the Chinese banks
Speaker 12: and emerging markets that tend to have much lower ratios.
Speaker 5: In some ways, a bank in Texas isn't doing a
Speaker 5: lot of green energy fuels, but.
Speaker 2: Because they have the biggest wind area in the country.
Speaker 11: Yeah, yeah, that's exactly right.
Speaker 12: I mean, we're seeing a lot of the new tax
Speaker 12: credits being claimed in Republican states like Texas.
Speaker 2: And then also they have like more local banks too,
Speaker 2: so I would wonder they don't have more. But I'm saying,
Speaker 2: like I wonder if it's exclusively oil and gas. And
Speaker 2: also to the point that again, like big oil does
Speaker 2: do other stuff, so it's just harder I think to
Speaker 2: break it down in a way that makes sense. But
Speaker 2: they do other things than just you know, stick something
Speaker 2: in the ground and get oil out.
Speaker 11: Exactly.
Speaker 12: Even within the oil companies, there's a big difference in
Speaker 12: how they're spending their capital expenditures on low carbon infrastructure
Speaker 12: versus fossil fuels. Like an Exon is very far behind
Speaker 12: a Nesty, for example, which is investing heavily in their
Speaker 12: renewable fuels.
Speaker 2: Interesting, and do they have to like get loans out
Speaker 2: to do that or can they sustain it with their
Speaker 2: own cash.
Speaker 12: Flow because they were so profitable in the past couple
Speaker 12: of years. A lot of these oil companies are financing
Speaker 12: off of their own balance sheets. So we did see
Speaker 12: a bit of a dip in these large oil majors
Speaker 12: raising financing.
Speaker 5: I mean, I don't know. I mean I think I
Speaker 5: would make a loan and I don't care, you know, right, but.
Speaker 2: It has to have the right kind of return. That's
Speaker 2: yeah problem that well.
Speaker 5: Yeah, I can figure that out, I know. But I
Speaker 5: want to make my loan, take my fee, and then
Speaker 5: syndicate ninety to ninety five percent the loan out to
Speaker 5: other banks. So I just hold a little piece. Yeah,
Speaker 5: so I can get back into the clients and I
Speaker 5: still own your paper.
Speaker 2: But then what if those other banks are like, ooh
Speaker 2: oh is that how green is that? I don't know
Speaker 2: if I can take it because in my my clients
Speaker 2: are going to be mad.
Speaker 5: So I don't want to go to my syndication desk
Speaker 5: and I say, can you sell this?
Speaker 2: Right?
Speaker 12: And these banks see the writing on the wall about
Speaker 12: you know, how long are they going to be able
Speaker 12: to do business with these traditional oil companies and so
Speaker 12: are those companies that they're doing business with?
Speaker 2: All right, we appreciate it, Thanks so much, Trina White.
Speaker 2: Have been a really fascinating conversation.
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