WEBVTT - BB&T, Suntrust Merger Follows Key Fed Rule Change (Podcast) 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penl podcast. I'm Paul Sweene. You, 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma wits each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money, whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.959 podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:23.320 at Bloomberg dot com. Well, it certainly looks like the 0:00:23.360 --> 0:00:27.200 media spotlight is back on the US regional bank business. Uh, 0:00:27.280 --> 0:00:29.960 given today's big deal BB and T is merging with 0:00:30.000 --> 0:00:33.519 SunTrust Banks in a twenty eight billion dollar deal, creating 0:00:33.560 --> 0:00:36.120 the sixth largest bank in the US. To help us 0:00:36.120 --> 0:00:38.199 break it this deal down and what it means for 0:00:38.240 --> 0:00:40.560 the sector overall that, we have two interesting guests today 0:00:40.560 --> 0:00:42.360 that will help us do that. First is Chris Whale 0:00:42.360 --> 0:00:45.280 and chairman of Whale and Global Advisers. He's on the 0:00:45.280 --> 0:00:48.559 phone in New York. And Arnold Cacuda. Arnold is a 0:00:48.640 --> 0:00:52.400 senior credit analyst carving the global banking sector for Bloomberg Intelligence. 0:00:52.400 --> 0:00:54.640 He joins us in our Bloomberg eleven three oh studios 0:00:54.680 --> 0:00:57.080 here in New York. Gentlemen, thank you for joining US. 0:00:57.080 --> 0:01:00.280 I'll start with you, Chris, what do you make of 0:01:00.400 --> 0:01:03.240 this deal? Why did this deal happen? Why did it happen? Now? 0:01:04.360 --> 0:01:07.600 I think mostly this is about cost savings. Uh. These 0:01:07.640 --> 0:01:12.160 are two very consistent performers. They're big, um, they're probably 0:01:12.319 --> 0:01:14.640 two of the largest banks. It would be allowed to 0:01:14.760 --> 0:01:18.080 do a deal by regulators right now. U S Bank 0:01:18.120 --> 0:01:20.200 could also do a deal if they chose to. But 0:01:20.280 --> 0:01:22.480 they like the size they're at, which is roughly where 0:01:22.520 --> 0:01:24.560 these two banks are going to be. And you look 0:01:24.600 --> 0:01:26.720 at the asset and equity returns and like I say, 0:01:26.760 --> 0:01:29.640 they're dead center of peer group one, which is all 0:01:29.640 --> 0:01:32.600 the big banks and anything above ten billion in assets. 0:01:32.680 --> 0:01:35.280 So you know to me, they're going to consolidate the 0:01:35.280 --> 0:01:37.640 back end. They're going to keep doing what they're doing. 0:01:37.959 --> 0:01:41.960 They have slightly lower funding costs and the big banks, 0:01:42.280 --> 0:01:46.360 and they're good CNI lenders, kind of middle market lenders. 0:01:46.640 --> 0:01:49.000 RESI is not a huge part of their book in 0:01:49.000 --> 0:01:51.440 either case. Although sun Trusts used to be very big 0:01:51.760 --> 0:01:56.200 in residential lending before the crisis. UM, But unlike a 0:01:56.280 --> 0:01:59.200 US bank, they don't have that big trust business at 0:01:59.200 --> 0:02:02.560 big off balance cheap component that would make them a 0:02:02.600 --> 0:02:05.640 money center. So there's still a big, big regional bank. 0:02:05.680 --> 0:02:08.360 Now if you look in the evaluations one point three 0:02:08.440 --> 0:02:12.200 one point four Tom's book about the same. So Arnold, 0:02:12.240 --> 0:02:16.480 come on in here, Arnold Cucuta of Bloomberg Intelligence. Is 0:02:16.520 --> 0:02:19.200 there a risk that when banks start to get very 0:02:19.280 --> 0:02:22.679 big through consolidation, that they start feeling compelled to take 0:02:22.720 --> 0:02:25.160 on more risk and go global? Is that sort of 0:02:25.160 --> 0:02:27.800 a concern from a credit perspective or is this wholly 0:02:27.880 --> 0:02:31.200 a positive? Well, so far it looks like, um, you know, 0:02:31.240 --> 0:02:34.480 the combined entities, Uh, they're they're asset quality, credit quality 0:02:34.600 --> 0:02:36.840 is going to be you know towards the better end appears, 0:02:36.840 --> 0:02:38.840 and you know they're not talking about you know, taking 0:02:38.840 --> 0:02:40.960 on more risk if anything. You know, they have a 0:02:41.040 --> 0:02:43.920 good um you know, synergies overlap in the mid Atlantic. 0:02:44.040 --> 0:02:46.079 You got you got UM B, B and T more 0:02:46.120 --> 0:02:49.680 mid Atlantic focus and then um UM sun Trust who 0:02:49.680 --> 0:02:51.920 has more of a Southeast and mid Atlantic so you know, 0:02:51.960 --> 0:02:54.320 taking out costs the first thing, and then that's going 0:02:54.360 --> 0:02:56.720 to help their effigiency ratio, which is basically your costs 0:02:56.720 --> 0:02:58.400 as a percentage of revenue, which is going to be 0:02:58.440 --> 0:03:01.640 pure leading exceeding even lower than even US bank corps, 0:03:01.840 --> 0:03:05.000 which should bring their returns their profitability to the highest 0:03:05.000 --> 0:03:07.120 of the peer group. So you know that that's something 0:03:07.160 --> 0:03:09.400 that you know, really that's what the equity trade on, 0:03:09.560 --> 0:03:11.760 is profitability. And if that's going to take that higher 0:03:11.760 --> 0:03:13.600 than US Bancorp, you know, there's a lot to like, 0:03:13.800 --> 0:03:16.200 and I think you see it in the stock reaction today. 0:03:16.280 --> 0:03:19.760 So Chris is interesting to note that. I'm sorry, Chris, No, 0:03:19.960 --> 0:03:22.280 they are efficient. They're very good at what they do, 0:03:22.440 --> 0:03:25.680 especially BB and T s I I described this as 0:03:25.720 --> 0:03:29.600 an exemple are getting together with a very good UH bank. 0:03:30.040 --> 0:03:32.079 You know, BB and T as far as lending and 0:03:32.160 --> 0:03:35.680 overall operational efficiency is great. But what they don't have 0:03:35.880 --> 0:03:39.560 is that huge funding advantage you know, forty plus basis 0:03:39.560 --> 0:03:43.000 points the US Bank has because of their their float 0:03:43.480 --> 0:03:46.720 from their custodial business and everything else They're They're funding 0:03:46.760 --> 0:03:49.720 costs is half of the average for peer group one, 0:03:49.760 --> 0:03:52.880 which is extraordinary, and that's because you have a lot 0:03:52.880 --> 0:03:55.320 of employers and a lot of other customers who just 0:03:55.440 --> 0:03:59.720 leave money on deposit with US Bank. Chris, I mean 0:04:00.400 --> 0:04:02.440 both you as well as Arnold. Both of you are 0:04:02.680 --> 0:04:07.320 talking very positively about this transaction. The stock but to 0:04:07.360 --> 0:04:09.880 your question, Yes, the answer is yes, but we have 0:04:09.920 --> 0:04:13.720 to chase bigger loans, yes, no question. In other words, 0:04:13.760 --> 0:04:16.880 take more risk. Yeah, and they don't bank the way 0:04:16.880 --> 0:04:19.679 a community bank banks. So bank at the community level 0:04:19.720 --> 0:04:23.599 knows our customers. Once you see these large mergers, the 0:04:23.640 --> 0:04:27.800 ability of the branch managers of those banks gets constrained 0:04:28.120 --> 0:04:30.400 because the Fed starts to look at them like a 0:04:30.440 --> 0:04:33.880 big bank. To your point, right, they end up in 0:04:33.920 --> 0:04:36.760 a world where the law of large numbers governs their 0:04:36.839 --> 0:04:40.640 production more than know your customer. And that's why the 0:04:40.720 --> 0:04:44.159 small bank is much better at managing credit. So Arnold, 0:04:44.440 --> 0:04:46.520 is that is that consistent with what you've seen in 0:04:46.640 --> 0:04:52.320 terms of smaller banks taking on a bit uh perhaps risk, 0:04:52.600 --> 0:04:55.520 but they actually know who they're dealing with, whereas at 0:04:55.520 --> 0:04:59.200 big banks, customers become numbers and there can be more 0:04:59.320 --> 0:05:01.640 sort of holess stick credit concerns. I mean, there is 0:05:01.640 --> 0:05:04.440 a concern with that right where you know, they say 0:05:04.480 --> 0:05:08.159 scale helps profitability, but then again, well, if you're having 0:05:08.240 --> 0:05:10.760 a fewer eyeballs or technology to kind of look through 0:05:10.800 --> 0:05:15.400 something while your revenues increasing, things can fall through the track. Cox. 0:05:15.440 --> 0:05:18.039 But you know, then again it's uh, you get efficiencies 0:05:18.080 --> 0:05:20.440 and technology, right, so you know, the more you can 0:05:20.440 --> 0:05:22.359 invest there and then you have a bigger based to 0:05:22.680 --> 0:05:25.279 kind of offset it over then then yes, definitely, I 0:05:25.279 --> 0:05:27.120 think I think that helps too. But but more so 0:05:27.160 --> 0:05:30.600 I think, um, you know, in terms of added oversight, um, 0:05:30.640 --> 0:05:33.400 you know the two fifty billion there, they're both exceeding that, right, 0:05:33.440 --> 0:05:36.839 Yet you're taking to two billion banks pretty much doubling 0:05:36.839 --> 0:05:39.080 the size. You're gonna go over two hundred fifty billion. 0:05:39.120 --> 0:05:41.600 But a key thing I think that is driving this 0:05:41.680 --> 0:05:44.880 merger and that I think will drive even more regional 0:05:44.880 --> 0:05:48.520 bank mergers is uh this October proposal by the FED 0:05:48.680 --> 0:05:52.800 which really lowers regulation for the regional banks, and so 0:05:52.880 --> 0:05:55.040 kind of the new threshold to look at I think 0:05:55.120 --> 0:05:58.160 in terms of big regional banks is seven billion, right, 0:05:58.200 --> 0:06:01.320 and so US bank Corps four than seventy billion, and 0:06:01.400 --> 0:06:02.960 you still got a long way to go from that. 0:06:03.040 --> 0:06:05.400 So I think as long as you stay under seven bill, 0:06:05.920 --> 0:06:08.520 you're still going to get this you know, less regulation 0:06:08.960 --> 0:06:10.880 that that that's going to come into sex right October. 0:06:11.480 --> 0:06:15.000 It's size, but it's also the composition of the business. 0:06:15.160 --> 0:06:17.560 If you have a lot of touch points with many 0:06:17.640 --> 0:06:21.360 other financial institutions, then even somebody is boring his Bank 0:06:21.400 --> 0:06:24.000 of New York. I love them, right, but they're custodian. 0:06:24.400 --> 0:06:27.320 They are very significant in the grand scheme of things. 0:06:27.960 --> 0:06:31.120 US Bank has much more street exposure. And then another 0:06:31.160 --> 0:06:33.120 one that you know we could have talked about in 0:06:33.160 --> 0:06:35.560 this group is P and C. P and C is 0:06:35.720 --> 0:06:38.600 much more Wall Street exposure than a BBT or a 0:06:38.680 --> 0:06:42.520 sun Trust. You know, these are two commercial lenders. They 0:06:42.560 --> 0:06:45.240 come from the Southeast, which was a tough area. It 0:06:45.360 --> 0:06:48.480 still is. The the off market areas still haven't come 0:06:48.520 --> 0:06:52.560 back in the Southeast. So you know, it's an interesting merger. 0:06:52.600 --> 0:06:54.640 But I agree with my colleague. I think could cost 0:06:54.800 --> 0:06:57.760 savings is driving this um and there was nothing else 0:06:57.800 --> 0:06:59.920 to do. They could buy a smaller bank, but it's 0:07:00.080 --> 0:07:03.200 not going to move the needle um sold. The street 0:07:03.240 --> 0:07:05.880 barely cares about this transaction. Let's be fair. We all 0:07:05.920 --> 0:07:09.680 love banks, but you know it's not that big, right 0:07:09.720 --> 0:07:12.440 so Arnold. So the obviously the equity markets like this deal. 0:07:12.480 --> 0:07:15.640 Both SunTrust and BBT stocks are up. There's a credit 0:07:15.680 --> 0:07:19.240 market support consolidation in the banking sector. Well, um, you know, 0:07:19.320 --> 0:07:21.240 unlike M and A and other space where you know, 0:07:21.320 --> 0:07:24.800 typically you'd see huge bond deals, sit to finances. This 0:07:24.920 --> 0:07:27.680 is an all stock, um, you know merger, and then 0:07:27.720 --> 0:07:29.840 you know you don't need that financing. And and the 0:07:29.840 --> 0:07:32.040 thing with that is, you know, banks are highly regulated. 0:07:32.320 --> 0:07:34.760 They need to keep their equity ratios you know where 0:07:34.800 --> 0:07:37.080 they are or you know, at at high levels. And 0:07:37.080 --> 0:07:39.960 and even post merger, you know, they they're still targeting 0:07:40.520 --> 0:07:42.840 a ten percent common equity at one ratio, which is 0:07:42.880 --> 0:07:45.440 you know, still pretty solid. So um and and and 0:07:45.480 --> 0:07:47.160 the thing is, you know we talk about size. They're 0:07:47.160 --> 0:07:50.280 increasing in size, but they're not going to become global 0:07:50.360 --> 0:07:53.960 systemically important banks, right. Um. You know, you know, Chris 0:07:53.960 --> 0:07:57.679 talked about kind of the state streets the US bank course, 0:07:57.720 --> 0:08:01.000 but I'm sorry, I'm the being hy melon. But those guys, 0:08:01.040 --> 0:08:05.000 even though asset wise they're not that big, they're huge 0:08:05.040 --> 0:08:09.720 custol Global custolial presence makes them highly systemically important. Right, 0:08:09.720 --> 0:08:12.440 So that's why they're they're considered gesip's higher equity and 0:08:12.520 --> 0:08:15.560 debt requirements. So this is not the case for you know, 0:08:15.600 --> 0:08:17.320 the merger that we see today. Well, I'm sure that 0:08:17.360 --> 0:08:19.520 we will have you both back on when we announce er. 0:08:19.680 --> 0:08:22.960 We discussed the next merger between a two regional banks 0:08:22.960 --> 0:08:25.960 that will inevitably get to announced based on this backdrop. 0:08:26.040 --> 0:08:28.440 That makes a lot of sense for them to do so. 0:08:28.520 --> 0:08:31.960 Chris Whale and chairman of Whaling Global Advisors, and Arnold Cakuta, 0:08:32.080 --> 0:08:35.040 senior credit analyst of focusing on the global banking sector 0:08:35.120 --> 0:08:37.760 for Bloomberg Intelligence, joining us here in our Bloomberg Director 0:08:37.800 --> 0:08:40.000 Broker Studios. Both of you, thank you so much for 0:08:40.040 --> 0:08:57.920 being with us. So Earlier this week we were speaking 0:08:57.960 --> 0:09:00.040 with the head of fixed income for JP Morgan's of 0:09:00.120 --> 0:09:02.560 a Bank, Tom Kennedy, who said that when the FED 0:09:02.640 --> 0:09:05.840 talks about being patient with raising rates, it means they're 0:09:05.840 --> 0:09:07.640 not going to raise rates for the next three months, 0:09:07.679 --> 0:09:10.360 but then they're gonna be data dependent again. Joining us 0:09:10.360 --> 0:09:12.559 now to weigh in on that and all things fixed 0:09:12.559 --> 0:09:15.720 income is Kevin get Us, Executive vice president and head 0:09:15.800 --> 0:09:18.559 of fixed Income for Raymond James, joining us here in 0:09:18.600 --> 0:09:21.320 our bloombergiddera active broker's studios. So, Kevin, what do you 0:09:21.360 --> 0:09:24.400 make of that? Well, I would say that it actually 0:09:24.440 --> 0:09:28.520 goes contrary to what Robert Kaplan said today about being patient. 0:09:28.600 --> 0:09:31.320 I think patient uh to the FED is longer than 0:09:31.320 --> 0:09:33.880 a three month period, So you know when we started 0:09:33.880 --> 0:09:37.800 the year, UM, we thought that June could be the 0:09:37.840 --> 0:09:40.840 next rate height and they would be on the sidelines 0:09:40.920 --> 0:09:44.160 until then. It seems like that's now pushed to September 0:09:44.320 --> 0:09:46.840 at a minimum, And some are saying, you know, and 0:09:46.880 --> 0:09:50.800 if you look at FED funds probability index UM, the 0:09:50.840 --> 0:09:54.160 next double digit chance of anything is the FED lowering 0:09:54.240 --> 0:09:57.600 rates in January. So I actually think it means something 0:09:57.640 --> 0:09:59.719 longer than three months, and I think the Fed will 0:09:59.800 --> 0:10:03.120 kind I watched this market for the next uh probably 0:10:03.120 --> 0:10:06.079 six to nine months. So alright, so the FED is 0:10:06.160 --> 0:10:08.839 on the sidelines. What do you think gets them back 0:10:08.920 --> 0:10:11.080 into the game, if you will, to re engage. What 0:10:11.120 --> 0:10:12.800 do you think are the data points that they are 0:10:12.840 --> 0:10:16.360 focusing on. It centers around inflation um, whether it's wage 0:10:16.440 --> 0:10:19.880 or price. So as long as you know the latest 0:10:20.120 --> 0:10:23.240 even the wage, our greatest hope for inflation came from wages, 0:10:23.360 --> 0:10:26.200 right average early learning slowly ticked up during the course 0:10:26.200 --> 0:10:30.920 of eighteen UM. Yet more recently it's appears to have 0:10:30.960 --> 0:10:34.040 stopped um or you know, up one tenth or something 0:10:34.120 --> 0:10:37.120 like that. So until we see really any wage inflation 0:10:37.720 --> 0:10:41.160 UM price inflation will get numbers next week with further 0:10:41.200 --> 0:10:43.960 definition it's just not there. The interesting thing is, and 0:10:44.000 --> 0:10:46.160 somebody else has made this point, so I'm stealing it. 0:10:46.240 --> 0:10:49.480 Just full disclosure. But last year the Federal Reserve hiked 0:10:49.800 --> 0:10:54.520 numerous times, and the expected inflation over the next decade plummeted. 0:10:54.559 --> 0:10:56.960 It fell off a cliff. There was no inflation pressures 0:10:57.040 --> 0:11:00.559 last year, and yet the Feds still raised rates. So 0:11:00.840 --> 0:11:05.360 what changed? What changed for the Fed? Yeah, they realized 0:11:05.360 --> 0:11:07.520 they made a mistake by raising rates too many times. 0:11:07.559 --> 0:11:10.440 And think that they realized they made a mistake. Yeah, 0:11:10.440 --> 0:11:12.360 two out of the three mandates were met a long 0:11:12.400 --> 0:11:16.080 time ago. The mandate of inflation has yet to be met. 0:11:16.120 --> 0:11:19.600 And we touched two percent basically once for a short 0:11:19.640 --> 0:11:22.880 period of time and then fell back slightly below it. 0:11:23.000 --> 0:11:25.160 So you know, they got to their target. They said, okay, 0:11:25.160 --> 0:11:27.480 here we go, this is the launch and and you 0:11:27.520 --> 0:11:30.600 know around every corner is another brick wall for inflation. 0:11:30.720 --> 0:11:33.439 So I think the world has just changed for us 0:11:33.480 --> 0:11:36.600 to calculate inflation in the way that meets the FEDS 0:11:37.000 --> 0:11:39.160 real mandate, and I think that they just missed it. 0:11:39.160 --> 0:11:41.320 In fact, part of the global slowdown is because of that. 0:11:41.600 --> 0:11:43.320 I want to push back a little bit because some 0:11:43.360 --> 0:11:45.480 people could say you're like, all right, bring it, because 0:11:45.480 --> 0:11:47.880 some people could say, all right, the inflation expectations were 0:11:47.880 --> 0:11:51.480 falling last year, the Federal Reserve still raised rates, and 0:11:51.800 --> 0:11:55.680 inflation has continued to accelerate, albeit not at the pace 0:11:55.760 --> 0:11:57.600 that people would like to see. But wages are still 0:11:57.640 --> 0:11:59.719 going up. Doesn't this say that they didn't make a 0:11:59.760 --> 0:12:01.800 miss stake and that they were right to raise rates 0:12:01.800 --> 0:12:04.680 to normalize? Yeah, I mean you can. You can certainly 0:12:04.720 --> 0:12:07.720 make that argument. It's the problem is is you know 0:12:07.760 --> 0:12:10.920 where are we now? UM? We're we've peeked and turned 0:12:10.920 --> 0:12:15.480 back down UM or slight increases UM, it's not UM, 0:12:15.679 --> 0:12:18.199 it's not hurting the job market, but it's not creating wealth. 0:12:18.200 --> 0:12:20.199 It's going to help the economy. So you know, I 0:12:20.400 --> 0:12:22.840 would say that um, the fet is going to do 0:12:22.920 --> 0:12:27.280 more harm to the economy than meet the mandate of inflation. UM, 0:12:27.320 --> 0:12:31.040 and I doubt will be at two percent all year long. So, Kevin, 0:12:31.040 --> 0:12:33.800 as you're out and about talking to your clients, institutional 0:12:33.840 --> 0:12:37.320 and retail clients, what are they doing? What do you sense? 0:12:37.320 --> 0:12:40.240 It is the risk appetite. They really embraced this market 0:12:40.280 --> 0:12:42.760 and are back in, you know, maybe allocating more of 0:12:42.800 --> 0:12:44.560 an investment rate, the high yield and maybe going out 0:12:44.600 --> 0:12:46.600 on the risk curve. What are you hearing from them? 0:12:46.640 --> 0:12:49.400 You know, we've kind of UM, we've we've taken this 0:12:49.559 --> 0:12:55.240 UM approach that UM, they needed a shortened duration last year, UM, 0:12:55.400 --> 0:12:59.080 and UH still invest in quality and stay away from 0:12:59.160 --> 0:13:03.480 some of the risk here aspects of the fixed income market. UM. 0:13:03.559 --> 0:13:05.960 And that proved to be pretty true until the end 0:13:05.960 --> 0:13:08.040 of the year. And then UM, you know, the Fed 0:13:08.080 --> 0:13:11.800 put the brakes on the dollar UM. UH made some 0:13:11.800 --> 0:13:16.840 some real fundamental changes, and UM it felt okay to 0:13:16.920 --> 0:13:19.839 go back into risk. I think that what we're saying 0:13:19.840 --> 0:13:23.240 this year is stay with quality UM. But you you 0:13:23.320 --> 0:13:26.160 have the ability to go back out on the duration 0:13:26.200 --> 0:13:29.160 curve UM with your investments without getting hurt. This is 0:13:29.160 --> 0:13:31.040 so interesting to me because you're seeing this in et 0:13:31.160 --> 0:13:33.920 F flows two and other people are doing this as well. UH. 0:13:34.040 --> 0:13:36.840 Two funds that are actually they've seen the biggest withdrawals 0:13:36.880 --> 0:13:39.160 year today in the fixed income space are too short 0:13:39.280 --> 0:13:41.600 term US debt funds. In other words, it's a reversal 0:13:41.880 --> 0:13:44.720 of the flight to cash last year, coming out of cash, 0:13:44.760 --> 0:13:47.600 going into duration and going into risk. How long is 0:13:47.640 --> 0:13:50.240 that gonna work? You know? It could work for a while. 0:13:50.280 --> 0:13:52.439 I think, Look, the fundamental change of the bond market 0:13:52.480 --> 0:13:57.400 actually actually occurred with the elections, which gave them the 0:13:57.440 --> 0:14:00.320 Democrats back the house. So you know what what the 0:14:00.360 --> 0:14:03.520 market was worried. If you remember, the MENI market was 0:14:03.679 --> 0:14:05.880 um kind of on its heels for the first part 0:14:05.880 --> 0:14:09.000 of the year because of the tax uh rebates and 0:14:09.240 --> 0:14:11.000 things that they that were taking them away from what 0:14:11.120 --> 0:14:14.240 was gonna fundamentally be able to finance in the state 0:14:14.240 --> 0:14:17.960 county municipal market. That went away with the election, and 0:14:18.000 --> 0:14:20.680 then so money started plunging back into the meuni market 0:14:20.800 --> 0:14:23.920 is actually driven spreads tighter as well as some risk 0:14:24.000 --> 0:14:27.240 and a lot of investment grade credits. So I think, um, 0:14:27.280 --> 0:14:29.920 I think you have a real opportunity, um, and we're 0:14:29.920 --> 0:14:31.760 not part of it. This is not a credit crisis 0:14:32.240 --> 0:14:33.920 that we're in. It doesn't appear to be one in 0:14:33.960 --> 0:14:37.120 the future. You don't have inflationary pressures that are gonna 0:14:37.400 --> 0:14:40.120 gonna hurt the long in the market. You can swim 0:14:40.160 --> 0:14:42.040 for a while out in the open water right now, 0:14:42.320 --> 0:14:45.600 So just real quickly, any place you're telling your clients 0:14:45.640 --> 0:14:50.440 to really just avoid. You know that this is a 0:14:50.520 --> 0:14:53.320 we We've had about a five year stretch for yield 0:14:53.600 --> 0:14:55.880 and UM. The offset to that is a down and 0:14:55.960 --> 0:15:00.120 credit trade that UM still makes us nervous. UM. There's 0:14:59.920 --> 0:15:02.360 a been a lot spoken about the legers woman market 0:15:02.400 --> 0:15:05.320 that that index itself dropped pretty hard, then it came 0:15:05.360 --> 0:15:08.320 back up UM. But we're still We're still a quality 0:15:08.480 --> 0:15:11.080 UM quality buyer right now. So if you're going, if 0:15:11.080 --> 0:15:15.800 you want to go along end, avoid triple C. Yeah. 0:15:15.840 --> 0:15:17.800 So so long if you want to reach duration, you 0:15:17.840 --> 0:15:19.440 reach it in your knees. If you want to reach 0:15:19.880 --> 0:15:22.560 for yield, reach it inside of five years in corporates, 0:15:22.720 --> 0:15:26.640 got it? Kevin? Kevin Gettish, thanks so much. Kevin's executive 0:15:26.680 --> 0:15:29.120 vice president, head of fixed income from Raymond James based 0:15:29.120 --> 0:15:31.720 in Memphis, Tennessee. But he joins us in our eleven 0:15:31.760 --> 0:15:52.400 three oh studio today. Facebook's advertising model it's coming to 0:15:52.400 --> 0:15:55.360 our attack, you know. Yet again it's particularly in Europe. 0:15:55.400 --> 0:15:58.360 So what we've had just recently in Europe is German 0:15:58.440 --> 0:16:01.280 antitrust regulators have ordered the social network to overall how 0:16:01.360 --> 0:16:05.520 attracts its users internet browsing smartphone apps. This is once again, 0:16:05.560 --> 0:16:07.360 I think if you think about Facebook and they're advertising 0:16:07.440 --> 0:16:09.880 model and social media in general list. They're really kind 0:16:09.880 --> 0:16:13.760 of coming under some increased regulatory oversight that investors, I 0:16:13.760 --> 0:16:15.720 think in the back of the mind really have as 0:16:15.720 --> 0:16:20.200 a risk factor here, they do accept shares are not 0:16:20.440 --> 0:16:22.680 down that much, which is really the question I want 0:16:22.720 --> 0:16:25.560 to ask Alex web about his European technology columnists with 0:16:25.640 --> 0:16:29.520 Bloomberg Opinion joining us from London. Alex, why do shareholders 0:16:29.520 --> 0:16:32.120 not care more about the fact that Germany is taking 0:16:32.120 --> 0:16:35.280 a much harder stance with them. I think there's probably 0:16:35.280 --> 0:16:37.880 two things that play here. On the one hand, it 0:16:37.960 --> 0:16:39.640 might be prized into the share as already. You know, 0:16:39.680 --> 0:16:43.920 we've seen this Facebook stock take a huge pummeling since 0:16:43.920 --> 0:16:46.960 the middle of last year when it first said that 0:16:47.000 --> 0:16:49.000 it was going to have to that its margins were 0:16:49.000 --> 0:16:51.960 going to be impacted by some of the measures they're 0:16:51.960 --> 0:16:54.440 putting in place to reduce the amount of dangerous content. 0:16:55.040 --> 0:17:02.080 But equally, the this German UH decision probably will take 0:17:02.080 --> 0:17:03.480 a while to play out. You know, there's going to 0:17:03.520 --> 0:17:06.720 be an appeal process. It could then you know, ultimately 0:17:06.800 --> 0:17:10.960 be overturned and and for now it's only in Germany. 0:17:10.960 --> 0:17:14.000 What really becomes significant though, and this is the issue 0:17:14.040 --> 0:17:16.320 with the German decision, is that Germany is seen as 0:17:16.320 --> 0:17:18.359 the model for the rest of Europe. Germany was almost 0:17:18.359 --> 0:17:21.359 given this as a test case by European authorities to 0:17:21.520 --> 0:17:24.040 do the legwork and see what needed to be done, 0:17:24.320 --> 0:17:27.439 and other European nations might start following suit. So, Alex, 0:17:27.440 --> 0:17:29.679 what do you think is the risk that again, this 0:17:29.720 --> 0:17:32.480 will be more of a European wide issue. We've seen 0:17:32.520 --> 0:17:36.320 again just coming from the EU regulations against the facebooks 0:17:36.320 --> 0:17:37.800 of the world's and the Googles of the world, and 0:17:37.880 --> 0:17:40.920 just US technology companies in general taking a much harder 0:17:40.920 --> 0:17:43.560 review of US tech. What is the risk or the 0:17:43.600 --> 0:17:47.399 concern at this point that some of these issues may 0:17:47.400 --> 0:17:50.880 become more European wide. What the problem that Facebook has 0:17:50.880 --> 0:17:53.560 in Europe right now is that user engagement is declining. 0:17:53.600 --> 0:17:56.520 There's been a huge amount of antipathy towards its platforms, 0:17:56.600 --> 0:18:00.919 not just Facebook itself, but Instagram and WhatsApp. That means 0:18:00.920 --> 0:18:03.879 that it's under more pressure therefore to increase its average 0:18:03.880 --> 0:18:07.280 revenue per user. That means that um even if the 0:18:07.320 --> 0:18:09.399 number of people who are using the website declines, it 0:18:09.400 --> 0:18:13.280 can still grow revenue because it's getting more AD dollars 0:18:13.320 --> 0:18:15.520 for each user. Now in order to deliver that. They've 0:18:15.520 --> 0:18:18.199 got to have more compelling, more granular data on the 0:18:18.280 --> 0:18:21.560 users they have and being able to tie together what'sapp, 0:18:21.600 --> 0:18:24.399 Instagram and Facebook, which is what this ruling is all about. 0:18:24.520 --> 0:18:27.080 That people have to consciously opt into that rather than 0:18:27.440 --> 0:18:30.480 finding a way to opt out. UM that damages their 0:18:30.480 --> 0:18:34.120 ability to find that granular data and therefore expand their 0:18:34.240 --> 0:18:37.000 their average revenue per user to set off the declining 0:18:37.160 --> 0:18:39.960 user growth. So, Alex, we should really go over what 0:18:40.160 --> 0:18:44.720 exactly this German ruling said. Basically, it was it's an 0:18:44.760 --> 0:18:48.840 overhaul or it's forcing Facebook to overall how it tracks 0:18:48.840 --> 0:18:53.560 its users internet browsing and smartphone apps. So in plain English, 0:18:53.720 --> 0:18:56.760 why does this matter? What happens right now is if 0:18:56.760 --> 0:18:59.280 you visit a website and anywhere on and you are 0:18:59.320 --> 0:19:01.199 a Facebook US sir and frankly even if you're not 0:19:01.240 --> 0:19:04.480 a Facebook user, but there if on that website there's 0:19:04.800 --> 0:19:08.800 a button which says like this page or share this page. 0:19:09.160 --> 0:19:11.840 Irrespective of whether you click that button or not, that 0:19:11.960 --> 0:19:15.680 website will send a cookie to Facebook servers indicating that 0:19:16.160 --> 0:19:20.080 either you the user or be this particular computer UM 0:19:20.320 --> 0:19:22.720 has visited this website. And that's the way of tracking 0:19:23.080 --> 0:19:25.199 you know how people navigate the internet, possibly what the 0:19:25.240 --> 0:19:27.960 interests are, and building up you know, these very complex 0:19:28.000 --> 0:19:31.800 models of what people's interests are. This stops their ability 0:19:31.800 --> 0:19:34.520 to do that, to do that without people opting actively 0:19:34.560 --> 0:19:37.480 opting into it, and therefore, you know, poses a huge 0:19:37.560 --> 0:19:40.760 risk to Facebook's advertising model. So, Alex, is there a 0:19:40.960 --> 0:19:44.800 what is your sense of regulatory oversight? It seems to 0:19:44.800 --> 0:19:48.399 be obviously focused on Facebook, But how about Snap, Twitter, Google? 0:19:48.480 --> 0:19:51.480 Are you hearing that there is a growing sense that 0:19:51.520 --> 0:19:54.840 maybe these companies as well need to be monitored? Frank 0:19:54.960 --> 0:19:58.560 frankly Snap on Twitter, No, these are small companies. You know, 0:19:58.800 --> 0:20:02.080 Snap has about hundred and eighty million active users. Twitter, 0:20:02.119 --> 0:20:04.879 as we learned today has about a hundred hundred twenty million. 0:20:05.080 --> 0:20:07.560 That's global daily active uses. Now Facebook has one point 0:20:07.600 --> 0:20:11.399 six billion daily active users. It's a whole different realm 0:20:11.400 --> 0:20:14.399 they're operating in. Nonetheless, it is a threat for Google. 0:20:14.440 --> 0:20:18.119 Google has a similar thing. They also find you can 0:20:18.160 --> 0:20:20.760 get cookie sent to them from every website that people visit, 0:20:21.359 --> 0:20:23.840 uh and therefore build up these profiles and what your 0:20:23.880 --> 0:20:26.199 interests are. That then feeds into the ads that you 0:20:26.240 --> 0:20:29.760 get served on YouTube and Google Search, and so they 0:20:29.840 --> 0:20:33.320 are highly vulnerable to being the next company that comes 0:20:33.320 --> 0:20:36.360 into the firing line on this privacy front. I want 0:20:36.359 --> 0:20:38.320 to go back to where we started and just to 0:20:38.359 --> 0:20:41.119 wrap up the conversation with this idea of you know, 0:20:41.200 --> 0:20:44.760 how much of a financial risk is this to Facebook, 0:20:44.920 --> 0:20:47.840 to the behemoths that capture the great majority of the 0:20:47.880 --> 0:20:51.120 advertising dollars and the eyeballs. And I'm just wondering, because 0:20:51.240 --> 0:20:54.200