Latest / Bloomberg Intelligence / Bank Stocks Haven't Priced In Credit Disappointments (Podcast)

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Bank Stocks Haven't Priced In Credit Disappointments (Podcast) · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim
• 0:08
  Speaker 1: Fox along with my co host Lisa A. Brahmowitz. Each
• 0:11
  Speaker 1: day we bring you the most important, noteworthy, and useful
• 0:14
  Speaker 1: interviews for you and your money, whether you're at the
• 0:17
  Speaker 1: grocery store or the trading floor. Find the Bloomberg P
• 0:20
  Speaker 1: M L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com.
• 0:33
  Speaker 1: We are smack dab in the middle of bank earning
• 0:36
  Speaker 1: season with JP Morgan and Wells Fargo reporting today. We've
• 0:40
  Speaker 1: seen some rough results out of the banks for their
• 0:42
  Speaker 1: fourth quarter. Uh. Joining us now to kind of bring
• 0:45
  Speaker 1: us up the date on what's going on with the
• 0:47
  Speaker 1: big money center banks and the investment banks is Charles Pvty,
• 0:51
  Speaker 1: President Portalis Partners, longtime analyst on the street covering the banks.
• 0:56
  Speaker 1: So Charles, thanks for being with us. Um, what have
• 0:58
  Speaker 1: you seen so far? We've had city, JP Morgan Wells report.
• 1:02
  Speaker 1: What have you seen in the results? Thanks Paul. Um.
• 1:07
  Speaker 1: You know what intrigues me Um the most is the
• 1:11
  Speaker 1: insistence by these companies that they're meeting their expense targets.
• 1:15
  Speaker 1: And they certainly are in absolute dollar terms, but none
• 1:19
  Speaker 1: of these guys are hitting their efficiency ratio targets, which
• 1:23
  Speaker 1: as you know, includes a numerator related to revenues, I
• 1:27
  Speaker 1: mean a denominator related to revenues. And so they're falling
• 1:30
  Speaker 1: shot on the revenues and and that's the big disappointment,
• 1:34
  Speaker 1: you know, And I think that's what has caused this
• 1:37
  Speaker 1: whole multiple revaluation of the stocks during the course of
• 1:40
  Speaker 1: two thousand and eighteen. It was the expectation that revenues
• 1:43
  Speaker 1: would slower disappoint So so far, do you think that
• 1:46
  Speaker 1: the disappointment, the disappointing revenue has already been baked into
• 1:49
  Speaker 1: the share prices here? Yes, I do think it has.
• 1:52
  Speaker 1: And so I've sort of indicated that I thought the
• 1:54
  Speaker 1: first leg of the bear market has concluded, um, and
• 1:58
  Speaker 1: that a relief rally is in in place right now.
• 2:01
  Speaker 1: But the second leg of the bear market is out there,
• 2:04
  Speaker 1: you know, ready to start at some point, maybe spring, summer,
• 2:06
  Speaker 1: I don't know, UM. And it's going to be characterized
• 2:09
  Speaker 1: by deteriorating credit and you are starting to see some
• 2:13
  Speaker 1: early signs of that likely to happen. So, Charles, you've
• 2:18
  Speaker 1: been I think pretty spot on on these banks. You've
• 2:20
  Speaker 1: got cautious In October, you downgraded some of the names
• 2:23
  Speaker 1: in December ahead of the earnings. You know, cities seem
• 2:28
  Speaker 1: to have had the CFO seemed to have some moderately
• 2:31
  Speaker 1: positive outlook for twenty nineteen. Do you share that optimism?
• 2:36
  Speaker 1: I don't in terms of where they're headed. I mean,
• 2:40
  Speaker 1: you know, they had promised a two hundred basis point
• 2:44
  Speaker 1: improvement in operating efficiency in two thousand nineteen. They walked
• 2:48
  Speaker 1: that back yesterday on the call um and started to
• 2:51
  Speaker 1: take a page out of Wells fargoes Um you know approach,
• 2:54
  Speaker 1: and say, well, we think we can keep expenses flat
• 2:57
  Speaker 1: around forty two billion, but we're not going to promise
• 3:00
  Speaker 1: or than you know, a ninety to some plus ninety
• 3:04
  Speaker 1: basis point improvement inefficiency. So they're already walking back, you know,
• 3:08
  Speaker 1: some of the expectations in nineteen and and it really
• 3:11
  Speaker 1: is related to the uncertain revenue environment. You know, I
• 3:14
  Speaker 1: think short term, you know, on a trading basis, you
• 3:17
  Speaker 1: know that revenue disappointments are been discounted, but I don't
• 3:20
  Speaker 1: think the credit disappointments that are coming have been discounted yet.
• 3:23
  Speaker 1: All right, talking about credit, now we get to talk
• 3:26
  Speaker 1: about debt, and I'm very excited of course, because that's
• 3:29
  Speaker 1: that's where I feel most comfortable. But Gila boss actually
• 3:32
  Speaker 1: of Janny Montgomery Scott came out today and so that
• 3:35
  Speaker 1: two banks, City Group and JP Morgan have reported increases
• 3:38
  Speaker 1: in loan loss provisions and credit costs. And he takes
• 3:42
  Speaker 1: this it is an indication that they're preparing for the
• 3:44
  Speaker 1: credit downturn, even if that's not what they're saying outright,
• 3:48
  Speaker 1: Do you agree? I do? UM. In fact, you know
• 3:52
  Speaker 1: JP Morgan got caught here in the fourth quarter, um
• 3:55
  Speaker 1: being a little bit too aggressive in the capital markets arena. Um,
• 3:58
  Speaker 1: they did see a jump in loans held for sale
• 4:03
  Speaker 1: that we're put on non accrual status. And I'm guessing,
• 4:06
  Speaker 1: and I don't know this, but I'm guessing that it's
• 4:08
  Speaker 1: related to some of their leverage lending or hung loans
• 4:11
  Speaker 1: for the syndications of buyouts. But um, you know there
• 4:17
  Speaker 1: are indications there there are too good Bloombird functions. If
• 4:20
  Speaker 1: you have a Bloomberg terminal that are worth looking at,
• 4:24
  Speaker 1: you see why go and if your listeners can put
• 4:29
  Speaker 1: that up on their terminal. It shows the concentration where
• 4:32
  Speaker 1: bankruptcy filings are occurring, and then also shows most recently
• 4:36
  Speaker 1: bankruptcy filings. And the second one is UM the symbolist
• 4:42
  Speaker 1: b n k R I n d X index go
• 4:47
  Speaker 1: and it shows the pace of bankruptcy filings. And you
• 4:50
  Speaker 1: see your bottom line as you're seeing a pick up
• 4:53
  Speaker 1: in the fourth quarter bankruptcy filings in the corporate world.
• 4:56
  Speaker 1: And I think that's a forerunner of more things to come. So,
• 5:01
  Speaker 1: Charles on the cost side of the equation, do you
• 5:03
  Speaker 1: think these big money center banks and investment banks are
• 5:06
  Speaker 1: they right sized for kind of the revenue environment that
• 5:10
  Speaker 1: is likely to occur we're likely to see over the
• 5:11
  Speaker 1: next several years. Uh, you know, it's you're gonna have
• 5:16
  Speaker 1: to answer that. Business by business, You're you're going to
• 5:19
  Speaker 1: see more downsizing. For example, in the mortgage banking business,
• 5:22
  Speaker 1: you're probably going to see more downsizing, and the wealth
• 5:25
  Speaker 1: management business. Um. So it is a business by business UM.
• 5:30
  Speaker 1: You know situation. I would say, what we are facing,
• 5:34
  Speaker 1: you know, in the course of nineteen twenty is a
• 5:37
  Speaker 1: earnings recession for these banks as opposed to a balance
• 5:41
  Speaker 1: sheet impairment. Words. I do think these banks will come
• 5:44
  Speaker 1: through the next downturn with their capital intact um and
• 5:49
  Speaker 1: and so they'll become out of that recession day one,
• 5:52
  Speaker 1: ready to invest in their businesses and and build as
• 5:55
  Speaker 1: opposed to repairing their balance sheets for two or three
• 5:57
  Speaker 1: years after the recession ends. So the good news is
• 6:00
  Speaker 1: they might not have to get bailed out by the
• 6:02
  Speaker 1: US government. The bad news they're not going to make
• 6:04
  Speaker 1: that much money. In fact, they're going to see their
• 6:06
  Speaker 1: earnings decline. Thank you so much, Charles Peabody, Thank you
• 6:09
  Speaker 1: for your insights. They always are welcome and usually spot on,
• 6:14
  Speaker 1: President of Prtalis Partners. Let's talk Brexit. Theresa May faces
• 6:32
  Speaker 1: what is likely to be a disappointing vote for her,
• 6:35
  Speaker 1: possibly the biggest disappointment of her tenure as Private Minister
• 6:40
  Speaker 1: of Great Britain. Joining us now to speak with us
• 6:44
  Speaker 1: about Brexit is somebody who has called economists charlatans and
• 6:48
  Speaker 1: crackpots when it comes to supporting Brexit. Danny blanche Flower,
• 6:53
  Speaker 1: professor of economics at Dartmouth College, as well as the
• 6:56
  Speaker 1: x Bank of England Monetary Policy Committee member, joining us
• 7:00
  Speaker 1: our so um, please explain, professor Well, I think the
• 7:04
  Speaker 1: claims that the people who thought that there would be
• 7:08
  Speaker 1: a Brexit hard Brexit and everything would be easy and
• 7:12
  Speaker 1: all the the negotiations would deliver easily were completely wrong.
• 7:19
  Speaker 1: Here we are today in a position of complete chaos. Um.
• 7:24
  Speaker 1: I was reading a book by Nicholas Shakespeare's called six
• 7:26
  Speaker 1: Minutes in May, and it refers back to May nine forty,
• 7:30
  Speaker 1: when actually six minutes of voting in Parliament brought Churchill
• 7:35
  Speaker 1: to Paris. It's probably the most consequential vote since then.
• 7:39
  Speaker 1: But I would say chaos reigned. I mean, we have
• 7:42
  Speaker 1: really no idea what the heck the outcomes are going
• 7:45
  Speaker 1: to be, Um, and everything's on the table, and I
• 7:49
  Speaker 1: think perhaps you understated how cataclysmic this vote is. The
• 7:53
  Speaker 1: Only question I think is how badly Theresa May loses.
• 7:59
  Speaker 1: She'll probably lose by the biggest historic margin ever seen.
• 8:03
  Speaker 1: I mean in the UK governments lose votes by eight
• 8:06
  Speaker 1: or ten votes. Several of the newspapers today are calling
• 8:10
  Speaker 1: that she may well lose by over two hundred. So
• 8:13
  Speaker 1: this is this is really you know, we're sitting watching
• 8:17
  Speaker 1: chaos being made. So, Professor, this is clearly uncharted territory.
• 8:22
  Speaker 1: Let's say that Prime Minister May does in fact lose
• 8:26
  Speaker 1: and lose big votes. Where do they go from there? Well,
• 8:33
  Speaker 1: I thought you'd ask me that question. I wrote down
• 8:35
  Speaker 1: five things, none of which you can rule out. I mean,
• 8:38
  Speaker 1: if she loses by and May loses by a number
• 8:41
  Speaker 1: around two hundred or so, prospects are and she says
• 8:45
  Speaker 1: she's going to give a statement straight afterwards. The first
• 8:47
  Speaker 1: prospect is actually the Prime Minister may quit, so that's
• 8:51
  Speaker 1: on the table. Another possibility is actually that there will
• 8:54
  Speaker 1: be no Brexit at all. That's still now on the table.
• 8:58
  Speaker 1: Another possibility is that Article fifty, which is the data
• 9:01
  Speaker 1: which Brexit occurs and it would be extended, and another possibility.
• 9:06
  Speaker 1: All of these are on the table. Another possibility, which
• 9:09
  Speaker 1: is probably the most likely I think now, is that
• 9:12
  Speaker 1: there will be a second referendum. And of course then
• 9:15
  Speaker 1: you're saying to me, well, what's the question in the reference.
• 9:17
  Speaker 1: I don't know the answer to that. So all of
• 9:19
  Speaker 1: those things are on the table. I think the one
• 9:22
  Speaker 1: that's most unlikely right now is a hard brexit with
• 9:27
  Speaker 1: no deal. I think the Parliament has moved against that.
• 9:31
  Speaker 1: But this is going to be pretty exciting. All of
• 9:33
  Speaker 1: those things are on the table today, all based up.
• 9:36
  Speaker 1: I mean, we're just simply talking about how badly she's
• 9:39
  Speaker 1: going to lose. I think that's really where we are.
• 9:42
  Speaker 1: And the question is when I called a bloomberg, I
• 9:44
  Speaker 1: said about a month ago that Theresa May was a
• 9:46
  Speaker 1: dead woman walking, that's probably where we are. What's your
• 9:49
  Speaker 1: view on the pound from here? Yeah, I mean I
• 9:53
  Speaker 1: think that the risk are clearly to the downside. That's
• 9:56
  Speaker 1: exactly what the MPC has said, UM um that that
• 10:01
  Speaker 1: that's the biggest concern. Obviously we've seen it dropped some
• 10:04
  Speaker 1: was I mean, I think I think the biggest piece
• 10:07
  Speaker 1: of evidence here is that businesses have really worried about
• 10:10
  Speaker 1: the uncertainty that's going on UM, and investment has has
• 10:15
  Speaker 1: been falling for the three quarters in a row. In
• 10:17
  Speaker 1: some way, I think the pound is going to be
• 10:19
  Speaker 1: impacted UM in a way once we know where things
• 10:23
  Speaker 1: are going here, once we have a clue which are
• 10:25
  Speaker 1: the options that I put on the table. There's no
• 10:28
  Speaker 1: Brexit brex to the second referendument, so I think that
• 10:31
  Speaker 1: some of that uncertainty gets resolved UM. But it doesn't
• 10:35
  Speaker 1: appear to me that anything looks very great. When I
• 10:38
  Speaker 1: wrote a column last week, I think in the Guarden
• 10:40
  Speaker 1: where I said all the options are either bad, horrendous
• 10:42
  Speaker 1: or disastrous, and I think that's probably where we are
• 10:45
  Speaker 1: risk to the pound of the downstad and if there's
• 10:47
  Speaker 1: a hard Brexit, then I think the risk really out
• 10:50
  Speaker 1: of the downstad and the question could even come to
• 10:53
  Speaker 1: that we get to dollar pound parity. I mean, I
• 10:55
  Speaker 1: think the Brexit, hard Brexit would really be a disaster
• 10:59
  Speaker 1: for the for the pound, and that's what the Bank
• 11:01
  Speaker 1: of England has said in its inflation reporting um and
• 11:03
  Speaker 1: it's comments recently, Paul, whenever I speak with Professor Blant
• 11:07
  Speaker 1: Flower always wonder how does he really feel? How does
• 11:09
  Speaker 1: he really feel that? Actually, so, professor, let's let's go
• 11:14
  Speaker 1: across the English Channel to Brussels. What do you think
• 11:17
  Speaker 1: the European Union would like to see here? What's kind
• 11:20
  Speaker 1: of a best case scenario from their perspective? Well, I
• 11:25
  Speaker 1: think they want to see calm and calm nerves. I mean,
• 11:28
  Speaker 1: part of the reason for that particularly is that that
• 11:31
  Speaker 1: we've seen data now with Sweden, Italy, Germany having negative
• 11:35
  Speaker 1: growth in in the in the last quarter, European sentiment
• 11:39
  Speaker 1: industries being low, German industrial production being low. So again,
• 11:43
  Speaker 1: the uncertainty is obviously something you want to see resolve.
• 11:47
  Speaker 1: But I think I think the twenty seven have been
• 11:49
  Speaker 1: pretty down United and their concern obviously is that you
• 11:52
  Speaker 1: don't want it to be another another one. You don't
• 11:55
  Speaker 1: want I texted and you know any of these other
• 11:57
  Speaker 1: countries thinking of leaving, so they position shouldn't has been
• 12:01
  Speaker 1: a pretty tough one. I think they're going to respond
• 12:05
  Speaker 1: by the nature of the vote. One possibility is to
• 12:08
  Speaker 1: go back and renegotiate again. I mean, the possibility still
• 12:11
  Speaker 1: is that we could have a different government and then
• 12:13
  Speaker 1: they'll go back. But they've been pretty sum saying, you know,
• 12:17
  Speaker 1: there are benefits of being a member of the club.
• 12:19
  Speaker 1: If you want to have those benefits, you have to pay,
• 12:21
  Speaker 1: and if you want to leave, then you can't just
• 12:24
  Speaker 1: have an allah cart menu. And I think they're going
• 12:26
  Speaker 1: to stick with that um And I think the big
• 12:29
  Speaker 1: deal for the name is pretty dumb much. They're spoken
• 12:31
  Speaker 1: with one voice, which is pretty hard to twenty seven
• 12:34
  Speaker 1: people around the table, so I think they're going to
• 12:37
  Speaker 1: try and prevent that from cracking. Professor Danny Blancheflower, thank
• 12:40
  Speaker 1: you so much for your time, a professor of economics
• 12:43
  Speaker 1: at Dartmouth College, also former Bank of England Monetary Policy
• 12:46
  Speaker 1: Committee member. Talking about that Brexit vote, I am eager
• 13:07
  Speaker 1: to learn more from George Magnets, economists and associate at
• 13:10
  Speaker 1: the China Center for Oxford University, also the former chief
• 13:14
  Speaker 1: economist of UBS, author of the book Red Flags Why
• 13:19
  Speaker 1: Jes China Is in Jeopardy. Love having you on the show.
• 13:24
  Speaker 1: Let's just talk about trade. What does the US want
• 13:28
  Speaker 1: from trade negotiations with China and advice versa? What is
• 13:31
  Speaker 1: China hoping to get out of them? Um So, I
• 13:34
  Speaker 1: think the easier question for me is what is what
• 13:37
  Speaker 1: does China hope to get out of it? They hope
• 13:39
  Speaker 1: not to have the tariff taken out of deep out
• 13:43
  Speaker 1: of the cold stories. They don't want to change anything.
• 13:45
  Speaker 1: They don't want anything. They want the status quote. They want,
• 13:48
  Speaker 1: you know, wherever President Trump was in terms of his
• 13:50
  Speaker 1: you know, suspension of the tariffs, not broadening them to
• 13:53
  Speaker 1: the rest of imports from China, they want that status
• 13:56
  Speaker 1: quote to remain because because their trade position is starting
• 14:00
  Speaker 1: to hurt, not just because of the tariffs, but it
• 14:02
  Speaker 1: is starting to hurt, and it's it's joining all the
• 14:05
  Speaker 1: other things we were talking about earlier, which are weighing
• 14:08
  Speaker 1: on the economy. What the American side wants out of
• 14:11
  Speaker 1: it may be different now that it was the President
• 14:14
  Speaker 1: Trump may want different things out of this. From his
• 14:16
  Speaker 1: US trade representative, I'm not sure how this is all
• 14:18
  Speaker 1: going to play out, um, but I suppose the narrow win,
• 14:23
  Speaker 1: if that's the right word way to put it, would be, uh,
• 14:27
  Speaker 1: you know, the appearance of a deal which is good
• 14:30
  Speaker 1: for the equity market and good for business confidence. I
• 14:33
  Speaker 1: don't think there's too much more into it. I mean,
• 14:35
  Speaker 1: obviously it would be good for American farmers and for
• 14:38
  Speaker 1: energy producers and for some other companies if the Chinese
• 14:44
  Speaker 1: agreed to step up their purchases of these products, no
• 14:47
  Speaker 1: question about it. So there are some interest groups for
• 14:49
  Speaker 1: whom it would be good. But from the point of
• 14:52
  Speaker 1: view of what is the United States get out of this,
• 14:55
  Speaker 1: I'm not sure other than very kind of transient, short
• 14:58
  Speaker 1: term kind of business equity market benefits, Whereas what they
• 15:02
  Speaker 1: want is a substantial change in the things which are
• 15:06
  Speaker 1: really really difficult to negotiate, which is tech transfer, intellectual
• 15:10
  Speaker 1: property infringement, ownership caps on foreign businesses, market access and opening,
• 15:15
  Speaker 1: and so on. These things are going to be hard.
• 15:17
  Speaker 1: So George, to what extent are is the is the
• 15:20
  Speaker 1: trade dispute between the US and China impacting the Chinese
• 15:23
  Speaker 1: economy do you believe and maybe how much pain do
• 15:26
  Speaker 1: you think that they can take before maybe they have
• 15:28
  Speaker 1: to engage more substance conversations with the US. I think,
• 15:32
  Speaker 1: looking backwards, let's say over the last twelve months, the
• 15:35
  Speaker 1: trade dispute or trade war didn't really have that much
• 15:38
  Speaker 1: impact on China's economy, and what impact it may have
• 15:42
  Speaker 1: had was probably offset by incremental easing of reserve requirement
• 15:47
  Speaker 1: ratios on banks and tax cuts and easier regulatory environment
• 15:52
  Speaker 1: and so on, So it was a bit of a wash.
• 15:54
  Speaker 1: But I think, um, if those tariffs had begun on
• 15:59
  Speaker 1: the first of January and they had been broadened to
• 16:02
  Speaker 1: the other half of imports into the United States from China,
• 16:07
  Speaker 1: this would have had a probably an impact of about
• 16:09
  Speaker 1: one one and a quarter percent of GDP this year.
• 16:12
  Speaker 1: It's it's that meaningful, so really important from a Chinese
• 16:16
  Speaker 1: perspective that this does not happen. So let's talk about
• 16:20
  Speaker 1: the thornier issues that go beyond just some kind of
• 16:24
  Speaker 1: cosmetic deal that gives a boost to the number of
• 16:27
  Speaker 1: soybean bushels that China imports from the US. What could
• 16:33
  Speaker 1: be on the table, say, come, and what is on
• 16:35
  Speaker 1: the table for European countries that are also negotiating with China. Yeah.
• 16:40
  Speaker 1: Now this is really interesting because just imagine that the
• 16:44
  Speaker 1: relationship between the United States and European countries and Japan
• 16:50
  Speaker 1: career and so on were you know, great, you know
• 16:54
  Speaker 1: that there hadn't been any disputes, any any kind of
• 16:56
  Speaker 1: bad blood about and with Canada, of course, Um, then
• 17:01
  Speaker 1: I think I was forgetting Canada. Yeah, well, you know,
• 17:04
  Speaker 1: I think the Western you know, the Western negotiating positions
• 17:07
  Speaker 1: on China, I think would be much stronger and would
• 17:10
  Speaker 1: and I think the Chinese would would be certainly cognizant
• 17:14
  Speaker 1: of that fact. But as it is, Um, President Trump
• 17:19
  Speaker 1: has has kind of awoken, uh you know, kind of
• 17:22
  Speaker 1: a sleeping demon or something like that. So it's not
• 17:25
  Speaker 1: just the White House that is starting to get or
• 17:28
  Speaker 1: has gotten tough with China or tougher with China about
• 17:31
  Speaker 1: trade and investment rules and you know what kind of
• 17:34
  Speaker 1: investment were prepared to accept and whatnot. But in London
• 17:38
  Speaker 1: and Berlin and Brussels, Paris, um, you know, Tokyo soul,
• 17:43
  Speaker 1: I mean, it's everybody is basically singing from the same
• 17:46
  Speaker 1: hymn book. And in fact, there were data published just
• 17:49
  Speaker 1: within the last day or two that showed that the
• 17:51
  Speaker 1: amount of Chinese foreign direct investment into the United States,
• 17:55
  Speaker 1: Europe and Canada last year was about thirty billion dollars,
• 17:58
  Speaker 1: which was a quarter of what it was in two
• 18:00
  Speaker 1: thousand and seventeen, and pretty much that ratio for two
• 18:04
  Speaker 1: thousand and sixteen as well. So that's fallen off a
• 18:07
  Speaker 1: long way, and a good part of that is much
• 18:10
  Speaker 1: greater scrutiny over the kind of sectors and companies that
• 18:15
  Speaker 1: we are prepared to allow Chinese investment to come into. So, George,
• 18:19
  Speaker 1: when I think about the negotiating position of China in
• 18:22
  Speaker 1: this dispute, I often wonder about the position of President She.
• 18:26
  Speaker 1: How secure is he in his position within China? I
• 18:30
  Speaker 1: guess externally it seems very strong, very secure. But is
• 18:34
  Speaker 1: that the case, Well, yes, it is the case. He
• 18:38
  Speaker 1: he is. I mean, I don't see any threat to
• 18:40
  Speaker 1: his leadership or to his position um and I think
• 18:44
  Speaker 1: it would be that the optics would be different if
• 18:47
  Speaker 1: there were something going on. But that said, I think
• 18:51
  Speaker 1: it is of note that during the last twelve months
• 18:54
  Speaker 1: we have seen the emergence of what I call disquiet,
• 18:57
  Speaker 1: Okay from professor's intellectual even subtly from some senior party officials.
• 19:04
  Speaker 1: Not everybody is happy with his approach to the United
• 19:07
  Speaker 1: States over trade, with his approach to the Belton Road initiative,
• 19:11
  Speaker 1: and with his approach to the economy. So could there
• 19:14
  Speaker 1: be a meaningful pushback from inside of China right now? Well,
• 19:17
  Speaker 1: I don't really see because these people who are you know,
• 19:19
  Speaker 1: who are exercising the disquiet, are really not in a
• 19:22
  Speaker 1: position to push back, and they the state is very powerful,
• 19:25
  Speaker 1: the party is very powerful. Um. I think President Sei
• 19:29
  Speaker 1: Ping would probably have to step out of line. Somebody
• 19:31
  Speaker 1: would have to. He would have to take on the
• 19:34
  Speaker 1: blame for something that had gone really wrong. Um, for
• 19:37
  Speaker 1: any pushback within China. But I think at the moment
• 19:40
  Speaker 1: that's not the case. But you never can tell with
• 19:43
  Speaker 1: authoritarian people. And I'm sorry, you know, what's the big
• 19:48
  Speaker 1: business in China? How much pressure are they feeling? How
• 19:52
  Speaker 1: much pressure maybe are they putting on the negotiators and
• 19:54
  Speaker 1: she and the government to get something done. Well, I
• 19:58
  Speaker 1: don't really think that the when you say big business
• 20:00
  Speaker 1: you mean big domestic business. Yes, um uh, Well, it's
• 20:06
  Speaker 1: very hard for that kind of that lobbying effect. I mean,
• 20:08
  Speaker 1: you don't really know what happens behind behind closed doors,
• 20:11
  Speaker 1: you know, between leaders of the party and you know,
• 20:14
  Speaker 1: the chief executives of major corporations. But you imagine that
• 20:18
  Speaker 1: there's probably, you know, not much more than a cigarette
• 20:21
  Speaker 1: paper between what the government thinks and what the what
• 20:24
  Speaker 1: the corporations think, which is, you know, we need to
• 20:27
  Speaker 1: resist pressure from outside, and we need to come away
• 20:30
  Speaker 1: with as as much as we can offer without compromising
• 20:33
  Speaker 1: our principles. George Magnus a pleasure having you here. Thank
• 20:36
  Speaker 1: you so much for being with my pleasure. Thank you.
• 20:38
  Speaker 1: George Magnus is economist and associate with the China Center
• 20:41
  Speaker 1: for Oxford University, also former chief economist at You Be
• 20:45
  Speaker 1: as author of a new book, Red Flags, Why She's
• 20:47
  Speaker 1: China is in jeopardy Right now, I want to talk
• 21:04
  Speaker 1: about the battle of the behemoths in the healthcare industry.
• 21:08
  Speaker 1: Walmart coming out and saying that it will leave CVS
• 21:10
  Speaker 1: Health network that administers drug benefits for millions of Americans
• 21:14
  Speaker 1: joining us now in our Bloomberg Interactive Broker Studios, Drew Armstrong,
• 21:18
  Speaker 1: team leader for US Healthcare at Bloomberg News. So what's
• 21:21
  Speaker 1: going on here? Drew? Well, So you know, if you
• 21:24
  Speaker 1: think about CVS and you're a normal person, you know,
• 21:26
  Speaker 1: you probably walk around, you see the pharmacy on the street.
• 21:28
  Speaker 1: You and if you're a normal person, I don't know, Well,
• 21:32
  Speaker 1: I won't go that far and call you normal, but
• 21:34
  Speaker 1: I will say a regular person said, eyes, who you
• 21:36
  Speaker 1: know walks around on the street to New York City.
• 21:38
  Speaker 1: You've got to you've you know, you know CVS because
• 21:41
  Speaker 1: it's a drug store where you you know, you go
• 21:43
  Speaker 1: and buy you know, toilet paper, pick up a prescription.
• 21:45
  Speaker 1: But actually about sixty of their business is something called
• 21:48
  Speaker 1: pharmacy benefits management, And essentially what they do is they
• 21:51
  Speaker 1: sell their services to health insurers and big employers like
• 21:55
  Speaker 1: Bloomberg for example, and they say, hey, there's thousands and
• 21:59
  Speaker 1: thousands of drugs out there. You gotta negotiate the price
• 22:01
  Speaker 1: of each and everyone. You also have to, you know,
• 22:03
  Speaker 1: get a network of pharmacies where you can go pick
• 22:05
  Speaker 1: this stuff up. We'll handle it. They're basically a middleman
• 22:07
  Speaker 1: for this super complex market. What they do is they
• 22:10
  Speaker 1: charge their employer and ensure clients fee for their services,
• 22:14
  Speaker 1: and then they pay the drug stores in order to
• 22:18
  Speaker 1: dispense the drugs and so you know, all right, now,
• 22:21
  Speaker 1: look at Walmart. Walmart's got about five thousand stores. They've
• 22:23
  Speaker 1: got a drug store in each one. I mean, CVS
• 22:25
  Speaker 1: is paying these guys a fee every time that someone
• 22:28
  Speaker 1: walks into a Walmart and says, hey, I need a prescription.
• 22:31
  Speaker 1: You know, my my prescription from my libertor. Walmart said,
• 22:34
  Speaker 1: you are not paying us nearly enough for This is
• 22:37
  Speaker 1: essentially a dispute over prices, and it got bad enough
• 22:40
  Speaker 1: that Walmart was willing to say we're gonna walk away
• 22:43
  Speaker 1: from one of the biggest, biggest PBM networks here. Now,
• 22:47
  Speaker 1: CVS has tons of stores everywhere, so does Walmart. You're
• 22:50
  Speaker 1: not dealing with a lot of geographic overlap here necessarily,
• 22:53
  Speaker 1: so it's you know, people are saying it won't be
• 22:55
  Speaker 1: that big of a hit to CVS for that reason
• 22:57
  Speaker 1: because they have stores where they can see your their
• 23:00
  Speaker 1: drug customers. That said, this is a pretty big shake up,
• 23:04
  Speaker 1: and I think the really meaningful stuff could be what
• 23:06
  Speaker 1: comes next year. So all right, so we've got Walmart,
• 23:09
  Speaker 1: we've got CBS. As you mentioned, two of the you know,
• 23:11
  Speaker 1: the biggest players in the business basically having a tiff
• 23:15
  Speaker 1: over price. Is there an expectation that this will get
• 23:18
  Speaker 1: resolved at some reasonable period of time. It just seems
• 23:21
  Speaker 1: like these are two big players I have to do
• 23:23
  Speaker 1: business with one another, you know. I think when we
• 23:25
  Speaker 1: looked at the public statements side of these companies, it
• 23:28
  Speaker 1: was pretty surprising. Walmart came out swinging pretty hard. I
• 23:30
  Speaker 1: mean they basically said, this has been you know, bad
• 23:32
  Speaker 1: for healthcare, bad for our customers. We don't want to
• 23:35
  Speaker 1: play ball on this anymore. Uh. Most of the time
• 23:38
  Speaker 1: these are disputes, they do get resolved quietly, discreetly. I mean,
• 23:42
  Speaker 1: this is like a this is a B two B
• 23:43
  Speaker 1: thing where you know, it has impact unreal, unreal, folks.
• 23:47
  Speaker 1: But most of the time this gets worked out. This
• 23:49
  Speaker 1: has turned ugly, and there has been a lot of
• 23:51
  Speaker 1: pressure on these pharmacy benefit managers. They're getting it from
• 23:54
  Speaker 1: both sides. They're being criticized by you know, the administration
• 23:57
  Speaker 1: and drug makers for having a role in keeping drug
• 23:59
  Speaker 1: prices high, and now they're getting criticized by pharmacists who
• 24:02
  Speaker 1: are saying, hey, you're you're you're hosting us on this
• 24:04
  Speaker 1: and we can't get enough money to run our business effectively.
• 24:07
  Speaker 1: So just to give you a sense of what the
• 24:08
  Speaker 1: market reaction has been Walmart definitely coming out ahead, shares
• 24:11
  Speaker 1: out one point three p, CVS down more than one percent.
• 24:14
  Speaker 1: I'm wondering, from your perspective, how this reflects the bigger
• 24:18
  Speaker 1: issue here, which is big corporations in the United States
• 24:21
  Speaker 1: taking on the bargaining power themselves. I mean, is there
• 24:24
  Speaker 1: any talk of Walmart potentially acting as its own pharmacy
• 24:28
  Speaker 1: benefit administrator and just sort of bypassing CVS entirely. I
• 24:32
  Speaker 1: think a lot of big employers and insurers and anyone
• 24:35
  Speaker 1: who spends a lot of money buying drug benefits have
• 24:38
  Speaker 1: looked at this industry and said, is there a way
• 24:40
  Speaker 1: for us to do this better ourselves? And there has
• 24:43
  Speaker 1: been a lot of pressure on any kind of middleman
• 24:46
  Speaker 1: in healthcare to say, you know, justify why you're here
• 24:49
  Speaker 1: for us, Justify why you're not just you know, taking
• 24:51
  Speaker 1: rents out of here. And these guys will fairly argue
• 24:53
  Speaker 1: a lot of times, these are really complex benefits. We
• 24:55
  Speaker 1: handle something that other people don't want to do or
• 24:58
  Speaker 1: can't do. I think that the there's also a perception
• 25:01
  Speaker 1: by some of their business partners that they started as
• 25:05
  Speaker 1: one thing, which was a relatively discrete kind of middleman
• 25:08
  Speaker 1: entityam managing some really tough stuff and then have since
• 25:10
  Speaker 1: grown into a business that figures out to add on
• 25:13
  Speaker 1: fees and profits and do all sorts of stuff through
• 25:15
  Speaker 1: a pick contracting. I mean, that's the criticism of these
• 25:18
  Speaker 1: guys that it turned into a massive profit center as
• 25:21
  Speaker 1: opposed to just being a you know, a service provider
• 25:23
  Speaker 1: that's relatively benign. So does the market expect or does
• 25:27
  Speaker 1: the industry expect more of these disputes coming down the
• 25:29
  Speaker 1: road here? I think you're going to see more disputes
• 25:32
  Speaker 1: like this where you do have you know, big pharmacy chains,
• 25:35
  Speaker 1: big employers, insurers pushing back on the folks who kind
• 25:38
  Speaker 1: of exist between them and the patient or between them
• 25:41
  Speaker 1: and the customer. There's immense pressure in the U s
• 25:43
  Speaker 1: right now to deal with healthcare costs, to squeeze money
• 25:46
  Speaker 1: out of the system, and people looking at this and saying, there,
• 25:50
  Speaker 1: you know, between the end customer and you know, the
• 25:52
  Speaker 1: doctor prescribing this stuff. We've got five different layers of companies.
• 25:55
  Speaker 1: Do we need them all? Cvs? You know, to be fair,
• 25:58
  Speaker 1: just bought ETNA, a giant in in order to simplify
• 26:01
  Speaker 1: and vertically integrate a lot of these things for some
• 26:03
  Speaker 1: of the same reasons. So I mean this is, you know,
• 26:05
  Speaker 1: they're they're both feeling this pressure and creating some of
• 26:08
  Speaker 1: it themselves. Yeah, and perhaps even trying to set up
• 26:11
  Speaker 1: for a time when they are cut out. If they
• 26:13
  Speaker 1: are cut out of the picture, have diversified business due
• 26:15
  Speaker 1: I'm strong. Thank you so much for being with us,
• 26:18
  Speaker 1: really really great rundown of what's going on here. Drew
• 26:20
  Speaker 1: Armstrong as team leader for US Healthcare at Bloomberg News,
• 26:23
  Speaker 1: joining us here in our living three oh studios. Thanks
• 26:28
  Speaker 1: for listening to the Bloomberg P and L podcast. You
• 26:31
  Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 26:35
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 26:38
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa
• 26:42
  Speaker 1: Abramo wits one. Before the podcast, you can always catch
• 26:45
  Speaker 1: us worldwide on Bloomberg Radio.