Latest / Bloomberg Intelligence / Mike Mayo: Banks Are Poised To Party Like It’s 1995

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Mike Mayo: Banks Are Poised To Party Like It’s 1995 · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg PENL podcast. I'm Paul swing you,
0:05
Speaker 1: along with my co host Lisa Brahma wits. Each day
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Speaker 1: we bring you the most noteworthy and useful interviews for
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Speaker 1: you and your money. Whether at the grocery store or
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Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
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Speaker 1: podcast or wherever you listen to podcasts, as well as
0:17
Speaker 1: at Bloomberg dot com. We are so lucky to have
0:23
Speaker 1: Mike Bayo with us. Uh. You probably have heard of him,
0:25
Speaker 1: You've read his notes. Uh thirty years in the banking
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Speaker 1: analyzing business places Totsche Bank, Prudential, csfb CLS, c l
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Speaker 1: s A. Currently he is at Wells Fargo as a
0:39
Speaker 1: senior analyst, joining us here in our Bloomberg attor Active
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Speaker 1: Brokers studios. Mike, you move markets yesterday single handedly. You
0:45
Speaker 1: made bank stocks go up because you said, perhaps you're
0:48
Speaker 1: ready to party like. Why, well, we think bank stocks
0:52
Speaker 1: could be ready to party like. Was the start of
0:56
Speaker 1: the best performance of bank stocks in modern history. And
1:00
Speaker 1: let's take us back to that's when you had Paisley
1:04
Speaker 1: ties Forrest Gump, when the movie Academy Award Best Picture,
1:09
Speaker 1: we had Bill Clinton Boris Yeltson always the Springsteen reference. Alright,
1:20
Speaker 1: don't forget about the bank stocks then, really well, and
1:23
Speaker 1: look back then, like today, you had efficiency improving to
1:27
Speaker 1: new levels. Then it was from the federal threat of
1:30
Speaker 1: take over. Today it's technology of digital banking and AI
1:34
Speaker 1: and cloud and blockchain and all that it's really paying off.
1:37
Speaker 1: The other parallel would be deregulation. Actually, Bill Clinton led
1:41
Speaker 1: some de regulation for the banks. Don't forget that. Today
1:44
Speaker 1: it's streamlining from the regulation that's already in place. Oh
1:47
Speaker 1: and also, it was the end of a FED tightening cycle,
1:50
Speaker 1: just like today. Regardless of whether the FED cuts rates
1:53
Speaker 1: or not, it's the end of the FED tightening. I
1:55
Speaker 1: think we can all agree on that. So you have
1:57
Speaker 1: some parallels there. In addition, the bank stock valuations are
2:01
Speaker 1: cheaper today. And in addition, as opposed to the nine
2:05
Speaker 1: nineties when you had to worry about what bank was
2:07
Speaker 1: going to pay what price for what target, today banks
2:10
Speaker 1: are returning record amounts of capital. And you have a
2:13
Speaker 1: major industry event this month that is the FED stress
2:16
Speaker 1: test and approvals for banks return capital. So there's a
2:20
Speaker 1: lot going on in the bank space, and there's still
2:23
Speaker 1: a lot of recency bias. I say recency bias from
2:26
Speaker 1: the financial crisis. Everyone's like, oh, banks are gonna blow up.
2:29
Speaker 1: I'd call that healthy paranoia. The more everybody is concerned
2:32
Speaker 1: about banks blowing up, the less likely it is to occur.
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Speaker 1: So this is a very good time for the bank stocks. So, Mike,
2:38
Speaker 1: how about just in terms of the returns that the
2:40
Speaker 1: big banks can generate today? I have investors really ratcheted
2:44
Speaker 1: down their expectations given the regulatory overhang that's been put
2:47
Speaker 1: on upon the banks after the financial crisis, the days
2:50
Speaker 1: of fifteen or as investors say, Okay, I know I'm
2:54
Speaker 1: not gonna get that, but let's reset from here. Well,
2:57
Speaker 1: what we did in our report, we said, what would
2:58
Speaker 1: the bank returns big if banks, you know, had the
3:01
Speaker 1: same leveraged as they had before the financial crisis, And
3:05
Speaker 1: in a couple of years, we think on an apple
3:07
Speaker 1: to apples basis, banks will have the best returns in history,
3:11
Speaker 1: again after adjusting for leverage. But absolutely, investors and the
3:14
Speaker 1: stock market in the public has reduced their expectations for banks.
3:18
Speaker 1: That's why they're so inexpensive. City groups trading at tangible
3:21
Speaker 1: book value that historically other than the financial crisis that
3:25
Speaker 1: was a recession price. So you have a recession price
3:28
Speaker 1: with that a recession, so you're pricing in a lot
3:30
Speaker 1: of pessimism. Okay, so let's talk about some of the pessimism.
3:34
Speaker 1: Yield curve flattening depending on what you look at inverted
3:37
Speaker 1: inverted for day ten, which is ringing alarm bells in
3:39
Speaker 1: some places. If you look at three month tenure gap,
3:42
Speaker 1: why is this not a problem. Well, that's not ideals equal.
3:45
Speaker 1: You have a rate headwind to the banks, but it's
3:47
Speaker 1: a matter of degree. So if the Fed were to
3:50
Speaker 1: cut twenty five or fifty basis points, some banks earnings
3:53
Speaker 1: could be hurt by one percent. On the other hand,
3:56
Speaker 1: a reduction and interest rates is really good for credit quality.
3:59
Speaker 1: It could help a more risk going attitude, It could
4:01
Speaker 1: help fixed income activities, and you have to look at
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Speaker 1: the offsets and steeper yolker would also be pretty good
4:08
Speaker 1: for the bank. So we feel pretty good with where
4:11
Speaker 1: we are. Second pessimistic thought, we are getting to the
4:13
Speaker 1: end of this credit cycle, which would be basically an
4:16
Speaker 1: idea that would be legitimized by the FED cutting rates.
4:20
Speaker 1: We're seeing low losses pick up consumers and corporate Why
4:24
Speaker 1: is that not going to be a problem for the banks.
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Speaker 1: So you're contributing to that healthy pessimism. Absolutely well, come on,
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Speaker 1: I a lot to hear what the responses are, because
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Speaker 1: this is these are the arguments that people are putting
4:34
Speaker 1: out there. No, I think it's fair. Look, credit losses
4:36
Speaker 1: are going higher for the largest banks. We have credit
4:38
Speaker 1: losses almost doubling over the next four years. That's not
4:41
Speaker 1: new news. In fact, if we're wrong, it might be
4:43
Speaker 1: because credit losses don't go up as much as we expect.
4:46
Speaker 1: Oh and by the way, news flash, in a low
4:49
Speaker 1: rate environment, it's easier for people to pay their bills.
4:51
Speaker 1: Another very important point. There are issues out there. Certainly
4:55
Speaker 1: a lot of people are talking about leverage, lending and
4:59
Speaker 1: activities by I have it, equity firms, b dcs, reads,
5:02
Speaker 1: the non bank financial players. That's the talk of the town.
5:05
Speaker 1: That's the chatter. But when it comes to the banks themselves,
5:09
Speaker 1: they've gotten a lot more religion. The boards are asking questions.
5:12
Speaker 1: Every time somebody hiccups, everybody says are you okay? It's
5:15
Speaker 1: like a regulatory swat team swoops in. So I say
5:19
Speaker 1: thank you regulators, because regulators, as opposed to before the
5:23
Speaker 1: financial crisis. Now they give you a little bit extra
5:25
Speaker 1: confidence that banks are not going to blow up. They'll
5:27
Speaker 1: be blow ups, but it's less likely that it will
5:29
Speaker 1: be the banks, even though low losses are going higher.
5:31
Speaker 1: How about the capital markets business. We've seen you know,
5:33
Speaker 1: really rocky fourth quarter for the big banks in terms
5:36
Speaker 1: of their capital markets desks. Uh, not that much better
5:39
Speaker 1: in the first quarter. What's going on there? They lost
5:41
Speaker 1: their touch shorts. It's just the lack of volatility. Sometimes
5:44
Speaker 1: when you got volatility, they say it's the wrong kind
5:47
Speaker 1: of volatility. Can that be a driver of earnings for
5:49
Speaker 1: the banks? I always love that one. Like when things
5:51
Speaker 1: aren't going well, that's bad volatility. When things are going well,
5:53
Speaker 1: it's good volatility. So, um, Look, you've not recovered in
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Speaker 1: the trading business is the last few years like you
6:01
Speaker 1: might have had expected. Um. Look, Uh, some banks recently
6:05
Speaker 1: have guided that you know, their capital marks activities won't
6:07
Speaker 1: be that strong in the second quarter. Um. So to
6:10
Speaker 1: the extent that, um, you get kind of good volatility
6:14
Speaker 1: back or you have a lot of you know, chatter
6:17
Speaker 1: and the markets generally, whether it's you know, trade with
6:20
Speaker 1: Mexico or China or Brexit and a lot of activities,
6:23
Speaker 1: so we yet to break up. But I would say
6:25
Speaker 1: in our earnings models were not expecting much growth, so
6:28
Speaker 1: I think the markets kind of priced that out. If
6:30
Speaker 1: they were to happen, it would be a kind of
6:32
Speaker 1: a call option on the upside. All right, So Mike,
6:35
Speaker 1: you highlighted City Group, followed by Bank of America and
6:38
Speaker 1: then JP Morgan Chase as your top trades within this
6:41
Speaker 1: bullish bank stock call. Are there any banks left out?
6:46
Speaker 1: You know? I this is a twenty five year structural
6:49
Speaker 1: breakout for the benefits of scale in um national banking
6:55
Speaker 1: in the US was permitted for the first time. It
6:57
Speaker 1: didn't work out so well. For twenty five years you
6:59
Speaker 1: had a financial crisis, regulatory change systems issues. But now
7:04
Speaker 1: the largest banks are capitalizing on being national banks. I mean,
7:07
Speaker 1: going back then, I used to have to get travelers
7:09
Speaker 1: checks if I was going to California right like it's
7:12
Speaker 1: and you'd have to switch banks. You're going to college,
7:15
Speaker 1: you're moving home, you have to. Now you can have
7:16
Speaker 1: a bank for life. The concern though, who could be
7:19
Speaker 1: left out? As scales making more of a difference than
7:22
Speaker 1: ever before, especially with technology and marketing. Who's left out
7:25
Speaker 1: it would be the smaller banks. So the biggest question
7:28
Speaker 1: that comes up, um more than ever before is the
7:32
Speaker 1: smaller banks. At what point could they have franchise erosion? Now, look,
7:36
Speaker 1: a lot of small banks have very good service, They
7:39
Speaker 1: have a certain select businesses they can perform well. So
7:42
Speaker 1: as an individual basis, you can find some good ones.
7:45
Speaker 1: But as a group you start to wonder, like the
7:48
Speaker 1: corner Deli when uh, you know one of the uh
7:52
Speaker 1: the big help me out here in New York or
7:55
Speaker 1: or or even Fairway. You could you you could tell
8:00
Speaker 1: I don't do the shopping in my family. So well
8:04
Speaker 1: I'll tell, I'll tell'll teach you a m really interesting.
8:09
Speaker 1: I mean one one question that I have just going
8:12
Speaker 1: forward is you know, are we then going to see
8:15
Speaker 1: consolidation and how long is this sort of secular bullmarket
8:19
Speaker 1: gonna last? Well, we thought you'd see more consolidation already,
8:22
Speaker 1: I mean, b Bing sun Trust. We we like that merger.
8:25
Speaker 1: It's big overlap two banks in the southeast, really getting
8:29
Speaker 1: a lot of synergies. So that was good. And uh,
8:31
Speaker 1: once we saw that, I mean, what does that say
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Speaker 1: about banks you know, number ten through five thousand, if
8:37
Speaker 1: they have enough scale, if these two banks, you know,
8:39
Speaker 1: had to merge, so there's a big question. We haven't
8:41
Speaker 1: seen it, and I think the problem is there's more,
8:44
Speaker 1: you know, buyers and sellers, everybody, every bank wants to
8:46
Speaker 1: go ahead and buy. So the other issue is with
8:49
Speaker 1: a change in political administration, it might not be as
8:52
Speaker 1: easy to merge, depending on what plays out in the
8:55
Speaker 1: presidential elections. So if you're a bank management and you
8:59
Speaker 1: want to for to a bank merger, merge now. Otherwise
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Speaker 1: it might not be so easy. Later on, Mike Mayo,
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Speaker 1: thank you so much for joining us. Mike Mayo, Wells
9:08
Speaker 1: Fargo Securities senior Annals covering the banks with his note
9:11
Speaker 1: about how it might be the time to buy banks
9:14
Speaker 1: right here well amid rising trade tensions, the SNPI down
9:33
Speaker 1: about four from its recent high, but it's still up
9:36
Speaker 1: about twelve for the year. To get a sense of
9:38
Speaker 1: where we go from here, we welcome our next guest,
9:40
Speaker 1: Ken Fisher. Ken as founder, executive chairman and co c
9:43
Speaker 1: IO of Fisher Investments about a hundred seven billion under management,
9:47
Speaker 1: joining us here in our Bloomberg Interactive Broker studio. Ken,
9:49
Speaker 1: thanks so much for joining us. Um talking just a
9:52
Speaker 1: little bit about that volatility we've seen recently, How how
9:55
Speaker 1: do you factor into your outlook what appeared to be
10:00
Speaker 1: rising trade tensions with some of our biggest partners China, Mexico,
10:03
Speaker 1: maybe India. How does that factor into your outlook? So
10:06
Speaker 1: what I tend to always want to think about is
10:09
Speaker 1: current perceptions versus future realities. And I'm always trying to
10:13
Speaker 1: measure sentiment versus what I think is the scale or
10:17
Speaker 1: measurable size of a good or a bad ahead. And
10:21
Speaker 1: so when I think about all this, I just, for example,
10:26
Speaker 1: in the trade war issue, which is really teriffs in
10:29
Speaker 1: a different way, you just total up all the tariffs
10:32
Speaker 1: that might be applied. You remember that they're not all
10:34
Speaker 1: going to get applied. Then you actually remember that there's
10:36
Speaker 1: going to be some substitution that I buy this instead
10:38
Speaker 1: of that so I don't get that higher price. And
10:41
Speaker 1: then when you think about that, you say, how big
10:43
Speaker 1: is that compared to GDP? And you can actually total
10:45
Speaker 1: them all up. Nobody ever does that. But the scale is,
10:49
Speaker 1: you know about if they were all applied and there
10:52
Speaker 1: was no substitution effect at all, still about one percent
10:56
Speaker 1: of global GDP growth. So I'm one present of global GDP.
10:59
Speaker 1: Excuse me by a third of a normal year's GDP
11:02
Speaker 1: growth with no inflation. If there's some inflation even less.
11:05
Speaker 1: So the impact of that is smaller than people think
11:08
Speaker 1: it is. It's big fear over a relatively small negative,
11:13
Speaker 1: and big fear over a relatively small negative still fits
11:16
Speaker 1: within the framework of a positive. It's easier to see
11:18
Speaker 1: that big fear of a false factor is bullish, but
11:21
Speaker 1: big fear of a little negative is also bullish. Here,
11:26
Speaker 1: so there's a big feature going on that nobody notices
11:28
Speaker 1: that helps us stock. Which is it? Right now? I
11:31
Speaker 1: can borrow money in Europe short term at basically zero,
11:37
Speaker 1: and I can lend it to my own firm in
11:39
Speaker 1: America and then turn around and lend it back out
11:42
Speaker 1: short term with the currency hedge, and I got a
11:45
Speaker 1: two and a half percent hole. I can drive a
11:47
Speaker 1: truck through. And if I can do that, so can
11:49
Speaker 1: every major bank and every major global corporation in the world.
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Speaker 1: And they are and people don't seem to notice that
11:55
Speaker 1: we're getting funded by Europe and Japan right now at
11:58
Speaker 1: a huge rate, and nobody talks about that. It's the
12:01
Speaker 1: reason why in a world war are relatively flat yield
12:04
Speaker 1: curve America's relatively flat yield curve that everybody squawks about
12:10
Speaker 1: is in fact in parallel with a perfectly reasonable growth
12:16
Speaker 1: in the quantity of money because the banks are still
12:19
Speaker 1: lending because they're able to get funded out of Europe
12:22
Speaker 1: and Japan, and nobody really thinks about that. You don't
12:26
Speaker 1: think that city or JP Morgan or or or knows
12:30
Speaker 1: how to borrow in their European operations and lend out
12:33
Speaker 1: in America. So are we long buying banks? Uh I
12:42
Speaker 1: wouldn't focus too much singularly on banks because banks typically
12:46
Speaker 1: are late cycle laggards. They're really not growth companies. But
12:51
Speaker 1: the reality is this is is an argument for America.
12:55
Speaker 1: It's America is getting funded and people don't even notice
12:58
Speaker 1: it's getting funded. Nobody talks about that. Anything that's big
13:01
Speaker 1: that people don't talk about. To me, that's important. The
13:06
Speaker 1: fundamental I got reasons to be optimistic about Europe in
13:09
Speaker 1: a different way that nobody talks about. But the reality
13:12
Speaker 1: of what's going on is that people are afraid of
13:15
Speaker 1: that yield curve. And yet it's really the global yield
13:18
Speaker 1: curve that matters today, not the U S yield curve
13:21
Speaker 1: or any other single countries yield curve because the ability
13:23
Speaker 1: to borrow in one place in London another. I think
13:26
Speaker 1: that one reason why people don't talk about that is
13:28
Speaker 1: because it sounds relatively simple to you. But it's There
13:32
Speaker 1: is another way of saying that, which is, this is
13:34
Speaker 1: the reason why yields have stayed so low in the
13:36
Speaker 1: United States, because there is a sort of divergence in
13:38
Speaker 1: this sort of relative relative game that's being played with
13:41
Speaker 1: Europe and always right, always, but but but then, but
13:44
Speaker 1: then let's play that a different way, because I can
13:47
Speaker 1: hear nearly endless chatter about what should the FED do?
13:50
Speaker 1: What will the FED do? What's going on with the Fed?
13:52
Speaker 1: That that that that that of which I'm largely fed up.
13:55
Speaker 1: And the fact of the matter is, the fact of
13:57
Speaker 1: the matter is that let's say that country, to everyone's expectations,
14:01
Speaker 1: which I don't expect, the FED raised rates right now.
14:04
Speaker 1: What would that do? That would accelerate borrowing from overseason
14:07
Speaker 1: to America. But if you think about them reducing rates
14:10
Speaker 1: right now, if they were to do that, which I
14:12
Speaker 1: also don't expect them to do, but if they did,
14:15
Speaker 1: that would reduce the spread. That would motivate folks to
14:19
Speaker 1: be barring overseas and lending into America. So in that regard,
14:23
Speaker 1: you could say, simply, which I've always believed, that the
14:25
Speaker 1: fit is less important than people think it is. That's
14:27
Speaker 1: not to say it's not important, but it's less important
14:30
Speaker 1: than people think it is. But what happens if there's
14:32
Speaker 1: a major move in the dollar? I mean, does that
14:33
Speaker 1: disrupt some of these changes? If there's a I agree
14:36
Speaker 1: with that, But let's just go back to a crisis,
14:39
Speaker 1: Every darn crisis you've ever seen in history, no real exceptions,
14:44
Speaker 1: the dollar goes up, not down. And the fact is
14:47
Speaker 1: what has been happening as we've gone through this year.
14:49
Speaker 1: The dollar has been strong. Why has the dollar been
14:52
Speaker 1: strong because money has been flowing from those other places
14:56
Speaker 1: into here. You mentioned Europe as someplace you might have
15:00
Speaker 1: an interest. Why would that be. It seems like there's
15:03
Speaker 1: generally weakening economies there, uncertainty of Brexit. What draws your
15:07
Speaker 1: attention to Europe? About seventeen things from Sunday, But let
15:11
Speaker 1: me start off with just a couple of more important
15:12
Speaker 1: ones since we don't have because we don't have between
15:16
Speaker 1: now and Sunday, the fact is a let me go
15:22
Speaker 1: back to America for a second third years of president's
15:26
Speaker 1: terms have been positive of history since the nineteen twenties.
15:30
Speaker 1: Because the midterm elections give us gridlock, governments will become
15:34
Speaker 1: inactive and what's otherwise, the moving obstacle course of regulatory
15:38
Speaker 1: and legislative change turns into a stationary obstacle course, and
15:42
Speaker 1: business will become more willing to take risks as they
15:45
Speaker 1: can maneuver around the stationary obstacles or the more stationary
15:49
Speaker 1: obstacles relative prior moving ones. We have a similar thing
15:52
Speaker 1: going on in Europe that people don't get in two ways.
15:55
Speaker 1: One is that parliaments across Europe have had their ideological
15:58
Speaker 1: spectrums completely hand kacked out like a bell curve pushed
16:02
Speaker 1: down in the middle out on the edges, and coalitions
16:05
Speaker 1: agree on almost nothing. There's almost complete gridlock politically across
16:09
Speaker 1: all of Western Europe. Secondarily, just like American elections, their
16:14
Speaker 1: elections they just had a few weeks ago, actually not
16:18
Speaker 1: even a few we've had eight of before. The history
16:23
Speaker 1: of the aftermath of those elections in the next twelve
16:25
Speaker 1: months is overwhelmingly possible. Only once it was negative, the
16:28
Speaker 1: very first one, and it was only negative two point
16:30
Speaker 1: six percent on average, they're positive eleven of the next
16:33
Speaker 1: twelve months because you get that same feature, which is
16:37
Speaker 1: that people fear just like they feared what if those
16:40
Speaker 1: crazy populus take everything over? And then in fact the
16:45
Speaker 1: fears of the election end up being less bad than
16:47
Speaker 1: people feared, and you get a more stable world, and
16:49
Speaker 1: the more stable world markets like that better than they expected.
16:53
Speaker 1: Expectations versus reality is always the game, and I expect
16:57
Speaker 1: both of those two political features to play in Europe
17:00
Speaker 1: than the final point. Just look last night, p m
17:03
Speaker 1: I S across Europe came up better than expected in
17:07
Speaker 1: almost every single country, almost every single one, and particularly
17:11
Speaker 1: people focus on negatives and manufacturing p m S when
17:14
Speaker 1: they don't focus on positives and services p m I S,
17:17
Speaker 1: and yet services three times a size of manufacturing across Europe.
17:21
Speaker 1: Ken Fisher, Unfortunately, we're gonna have to leave it there,
17:24
Speaker 1: although I'm gonna have to lobby from here till Sunday
17:26
Speaker 1: for the next time, because it's fabulous having you on.
17:28
Speaker 1: Ken Fisher, Founder, executive chairman and co chief investment Officer
17:31
Speaker 1: of Fisher Investments, with a hundred and seven billion dollars
17:34
Speaker 1: of assets under management M and a deal volume is
17:55
Speaker 1: down in versus last year. Trade tensions certainly cannot be
17:59
Speaker 1: helping to get a sense of what's going on in
18:01
Speaker 1: the global M and A space. We're very fortunate to
18:03
Speaker 1: have Mark Schaeffer here, Marcus co, head of global Mergers
18:05
Speaker 1: and Acquisitions at City. He joined us in our Bloomberg
18:08
Speaker 1: and after Broker studio, and he's I think he's speaking
18:10
Speaker 1: in at the Bloomberg invest conferences. We just we just
18:12
Speaker 1: did a panel. Yes, okay, so what was your panel?
18:14
Speaker 1: It was on it was an okay, it wasn't on
18:18
Speaker 1: you know, politics. Sorry, I mean, what's so? I guess
18:22
Speaker 1: trade volumes MNY volumes are down this year. What's kind
18:24
Speaker 1: of the tone of the market. What are you seeing
18:26
Speaker 1: the drivers here? So it's it's interesting because it's sort
18:29
Speaker 1: of a thin market. Right, I'm gonna give you the good,
18:30
Speaker 1: the bad, and the ugly. Right. The good is on
18:32
Speaker 1: the positive side, it's the fourth fastest start in history,
18:35
Speaker 1: second fastest start since the financial crisis. But that's sort
18:40
Speaker 1: of when you get to the bad. It's a it's
18:42
Speaker 1: a thin or a narrow market in the sense of
18:44
Speaker 1: a couple of He's one is it's regionally very skewed
18:46
Speaker 1: to the US, and volumes in Asia and Europe are
18:49
Speaker 1: way down, you know, thirty ish. The US is down
18:53
Speaker 1: about eleven. It's also narrow from an industry perspective. The
18:56
Speaker 1: only industries that are up this year are tech, industrial
19:00
Speaker 1: and energy, and the other piece of it it's a
19:03
Speaker 1: little bit daunting is that it's very skewed to The
19:06
Speaker 1: mega deals twenty billion and up are sort of at
19:09
Speaker 1: record levels. The one to five billion, which we call
19:12
Speaker 1: a sweet spot or wave down about in the number
19:14
Speaker 1: of deals. The ugly is the macro environment to a
19:17
Speaker 1: political environment appears to be worsening. So from a second
19:20
Speaker 1: half perspective, that does give us some pause for concern.
19:23
Speaker 1: So what about what happened to healthcare? Are we going
19:25
Speaker 1: to see this wave of consolidation that was gonna create
19:28
Speaker 1: these uh incredible get your pharmacy supplies, get your beauty,
19:33
Speaker 1: get your doctor, and get a cat scan kind of places. Look,
19:36
Speaker 1: we know it started that way. I mean it's uh
19:39
Speaker 1: and if you look at actually the US, it's techn
19:40
Speaker 1: healthcare of driven the volumes. But you know, cel Gene
19:43
Speaker 1: was obviously being part of that. We were fortunate enough
19:45
Speaker 1: to be in that um I I agree with you.
19:47
Speaker 1: It's sort of it. We were expecting more, we haven't
19:50
Speaker 1: quite seen as much. Be interesting to see how it
19:53
Speaker 1: how it plays out the rest of the year and
19:55
Speaker 1: into next year. How about I mean, when you look
19:57
Speaker 1: at the pipeline or the deals to date, gives a
19:59
Speaker 1: sense of kind of how much of our strategic buyers
20:02
Speaker 1: coming in making strategic acquisitions as opposed to some of
20:05
Speaker 1: the financial deals driven by the you know, LBO shops
20:07
Speaker 1: are private acquasure Look. I mean, it's it's still largely
20:10
Speaker 1: been a strategic market, UM. And that's that's obviously been
20:14
Speaker 1: He's been driven this market over the last several years.
20:16
Speaker 1: But what is interesting, UM, in the in the last
20:19
Speaker 1: three months, we've seen in each month twenty billion dollar
20:22
Speaker 1: plus financial sponsored transactions, which is up, so more of
20:26
Speaker 1: a shift to the by side for quite a couple
20:28
Speaker 1: of years. For number of years, there was a lot
20:30
Speaker 1: of monetizations going on, and now we're seeing more of
20:32
Speaker 1: a shift to the buy side as valuations come down.
20:35
Speaker 1: You would expect that, and particularly if it's a secular
20:38
Speaker 1: shift where people believe it's a reset, that'll make it
20:41
Speaker 1: um you know that that that will make leverage transactions
20:43
Speaker 1: more affordable. So I'm interested in sort of what is
20:46
Speaker 1: causing the slowdown, especially because financing is still cheap, depending
20:51
Speaker 1: on whether you go to the loan side of the
20:52
Speaker 1: hyo band side, it's pretty cheap. And then of course
20:54
Speaker 1: in the corporate credit I have to think about regulators,
20:57
Speaker 1: and we just had this story this week about any
20:59
Speaker 1: truck regulators looking into big tech. How much is that
21:04
Speaker 1: huge dampening factor on EM and A right now? You
21:07
Speaker 1: know unequivocally it it's had an impact. I mean that
21:10
Speaker 1: that you know the the the issues are. It's it's
21:13
Speaker 1: much now it's much harder. I would say under the
21:14
Speaker 1: previous administration from an anitrust perspective, if you were in
21:17
Speaker 1: a certain set of parameters, you you've got pretty good advice.
21:20
Speaker 1: You could probably get it done. It's much harder in
21:23
Speaker 1: this administration, particularly with the emphasis and I trust on
21:26
Speaker 1: structural remedies. Um, but I do think it's had a
21:29
Speaker 1: and and the other piece of it. It's really mad
21:31
Speaker 1: matters is it's just length. Anything that's close to the line.
21:34
Speaker 1: The deal duration as it were, as lengthened to as
21:38
Speaker 1: much as two years, very very difficult to be in
21:40
Speaker 1: basically on an agreed deal basis have to wait two
21:43
Speaker 1: years to close it. It changes your forecasts, It impacts,
21:46
Speaker 1: you know, the ability to retain employees. So yes, it's
21:49
Speaker 1: it's clearly had an impact, but I don't think that's
21:52
Speaker 1: the soul, you know, sort of sort of rationale here.
21:55
Speaker 1: Part of it is, listen, we've got a more challenging environment.
21:58
Speaker 1: Arguably there's talk about is at the end of the cycle.
22:00
Speaker 1: Is the end of the equity cycle? Um? With the
22:03
Speaker 1: China trade situation looking like it's worsening, it could very
22:06
Speaker 1: well be, you know, and you've got fragmented politics in Europe,
22:10
Speaker 1: so it's a you know, it's it's a more daunting environment.
22:13
Speaker 1: I think of a number of these factors have gotten
22:14
Speaker 1: into it. But the fact of the matter is we're
22:16
Speaker 1: still seeing very big deals get done. So you can
22:19
Speaker 1: argue it's still a risk on market. Well, the good news,
22:21
Speaker 1: I guess for a city, I'm looking at the m
22:23
Speaker 1: A GO function on the Bloomberg Terminal Cities. Uh, we
22:26
Speaker 1: have a year to date ranked third behind JP Morgan
22:29
Speaker 1: and Goleman Sack. So you guys are performing well relative
22:32
Speaker 1: to your peers, but beneath when you sit down with
22:34
Speaker 1: CEOs and boards. I would guess just in the last
22:37
Speaker 1: couple of months, how much of the trade tensions, the rhetoric,
22:41
Speaker 1: the uncertainty of global trade, is that factoring into their
22:45
Speaker 1: appetite to think maybe strategic Look, I think it's an
22:48
Speaker 1: increasing function. I mean to to be candid. I think
22:51
Speaker 1: that um, as I said, it's still a bit of
22:53
Speaker 1: a risk on market something that is becomes actionable. It's
22:55
Speaker 1: been very high on the priority list for a number
22:57
Speaker 1: of years. That is going to be taken off the table.
22:59
Speaker 1: The scarce real estate argument. Um, I think they're still
23:02
Speaker 1: getting done. But I do think that as the perception
23:06
Speaker 1: is now that this the you know, the trade dispute
23:09
Speaker 1: with trying to could lengthen that could have impact on growth,
23:12
Speaker 1: and growth is a big driver, you know GDP growth
23:14
Speaker 1: is a big driver. And as solid economy, M and
23:16
Speaker 1: A does well in a in a in a tougher economy,
23:19
Speaker 1: M and A doesn't do as well. So I am
23:21
Speaker 1: seeing increasingly creep into the discussion about it is should
23:24
Speaker 1: we do something material now talking about sort of some
23:27
Speaker 1: of these trade tensions. What about cross border deals? You
23:31
Speaker 1: know there by our data there at the lowest the
23:34
Speaker 1: first five months of the year on a year to
23:36
Speaker 1: day basis the lowest we have in our database. It's
23:39
Speaker 1: only about of the volumes. It's typically thirty or or higher.
23:43
Speaker 1: How far back does your database and this goes back
23:45
Speaker 1: to two thousand at least. I don't know if we
23:47
Speaker 1: go back into the nineties or even further, but it's
23:49
Speaker 1: it's it's it's really really underscores that it's become a
23:53
Speaker 1: sort of a regional market, as it were, and that
23:56
Speaker 1: you know, a more mercantile world that we live in
23:59
Speaker 1: is having an impact. There are still some places where
24:01
Speaker 1: it's getting done. I mean the market is still it's
24:04
Speaker 1: not insignificant, but it's way down relative to what it's been.
24:07
Speaker 1: So Mark, managing your business, it all comes down to talent.
24:10
Speaker 1: Tell us about you know the marketplace today the former talent.
24:17
Speaker 1: It's not the seat, it's the person. I guess we're
24:18
Speaker 1: not at that time. I want to become a radio
24:21
Speaker 1: exactly exactly. So I mean, how is it retaining or
24:25
Speaker 1: attracting and retaining talent. I know a lot of the
24:27
Speaker 1: kids are all going out the Silicon Valley to tech
24:29
Speaker 1: technology companies and then private equity and venture capitals out there.
24:33
Speaker 1: How about for the traditional investment banking track M and
24:36
Speaker 1: A track. What's the market like? Look, it's I mean,
24:39
Speaker 1: it's a very competitive world. I mean unequivocally and um.
24:43
Speaker 1: But you know, i'd say we're we see great talent.
24:45
Speaker 1: We see it, you know, at the coming out of
24:47
Speaker 1: the universities, we see it coming out of the business schools.
24:49
Speaker 1: We get you know, laterals. But you know, make no
24:52
Speaker 1: mistake about it. I mean, there are a lot of
24:54
Speaker 1: options for you know, for very talented individuals, whether it
24:57
Speaker 1: be you know, so the hedge fund world, private equity,
25:00
Speaker 1: Silicon valley entrepreneurship. But we think we do pretty well. Um,
25:04
Speaker 1: We're very happy with what we have. And you know,
25:06
Speaker 1: I think that you know, I would argue that there
25:08
Speaker 1: was a period a few years ago, post a crisis,
25:10
Speaker 1: that banking might have been a little out of favor.
25:12
Speaker 1: I think that's shifting, particularly the US banks, you know,
25:15
Speaker 1: just given the fact that we you know, are now
25:17
Speaker 1: in a you know, in a very strong position from
25:19
Speaker 1: a capital perspective and otherwise. So right now, it just
25:23
Speaker 1: sort of talking about where we expect deal volume to
25:25
Speaker 1: actually be should it pick up in the second half.
25:28
Speaker 1: And I'm wondering. Oil prices now at the lowest since
25:31
Speaker 1: the end of January, and we did see actually, you know,
25:34
Speaker 1: we didn't see as much consolidation as people had expected
25:37
Speaker 1: after the big debaccle with the oil prices plunging, uh
25:40
Speaker 1: and and a lot of companies went bankrupt. Are you
25:42
Speaker 1: expecting a new wave of consolidation in the oil and
25:46
Speaker 1: gas sector? You know, but post oxy which we were
25:48
Speaker 1: involved in, UM, you would think that there would be
25:51
Speaker 1: you know, an impetus to to some more consolidation. The
25:53
Speaker 1: question is, you know, will it will it play? Because
25:57
Speaker 1: the competing factor is you've got a arguably, you know,
26:01
Speaker 1: sort of an economic environment that that is worsening, and
26:05
Speaker 1: the extent that happens, you know that people go to
26:07
Speaker 1: a risk off sort of mentality. But you would think
26:10
Speaker 1: that an energy particularly the upstream, you know, there are
26:13
Speaker 1: a lot of logical potential combinations. Uh. You know, but
26:16
Speaker 1: like anything else, you have to it takes both buyer
26:19
Speaker 1: and seller to get together on these things, which is
26:21
Speaker 1: probably the reason why we didn't see more deals getting
26:23
Speaker 1: done back in two thousand and fifteen two sixteen, I
26:26
Speaker 1: remember everyone was expecting that. Instead we just saw bankruptcies
26:30
Speaker 1: and restructurings. Mark Schaffer, thank you so much for joining
26:32
Speaker 1: us at having you here. Mark Schaefer is a co
26:35
Speaker 1: head of global mergers and Acquisitions at City Group. Well,
26:53
Speaker 1: first it was China, then Mexico, perhaps now India and
26:56
Speaker 1: maybe even Cuba. Trade tensions between the US and some
27:00
Speaker 1: of its biggest partners are escalating. To get a sense
27:03
Speaker 1: of what this means for the global economy, we welcome
27:06
Speaker 1: Brad Setzer. Brad is stephen A Tannebaum Senior Fellow for
27:10
Speaker 1: International Economics at the Council of Foreign Relations. He joins
27:13
Speaker 1: us here in a Bloomberg Interactive Broker studio. Brad, thanks
27:16
Speaker 1: so much for being with us. Let's start with China.
27:19
Speaker 1: Just I mean, that's probably just the most developed story,
27:21
Speaker 1: I guess if you will. And we've had, you know,
27:24
Speaker 1: negotiators going back and forth, but tariffs are going back
27:27
Speaker 1: and forth. Where do we stand now? How do you
27:30
Speaker 1: think this might play out? So I guess at this
27:34
Speaker 1: stage my baseline is that Trump will carry out his
27:38
Speaker 1: threat to put tariffs on all trade, all imports UH
27:44
Speaker 1: from China. Right now, we've raised tariffs on two d
27:48
Speaker 1: and fifty billion to and there's about three hundred billion
27:52
Speaker 1: of trade left to tariff, mostly electronics, mostly close. Most
27:58
Speaker 1: of the industrial impact it's have already been tariffed. So
28:02
Speaker 1: given your experience, and you have extensive experience with even
28:06
Speaker 1: the Treasury Department analyzing the economic impact of things like tariffs,
28:10
Speaker 1: what will the fallout be from that base case in
28:13
Speaker 1: terms of economic uh slowdown or points off the GDP
28:18
Speaker 1: for both the US and China. Well, the impact is
28:22
Speaker 1: somewhat larger on China. I would put the base estimate
28:29
Speaker 1: for the overall impact of the full ensemble of tariffs
28:32
Speaker 1: and not the incremental effect on the US at about
28:35
Speaker 1: a half point of GDP, just you know, you're more
28:38
Speaker 1: paying more for imports, there's less money in the economy
28:42
Speaker 1: to buy other things. Uh. And then the impact on China,
28:46
Speaker 1: because trade is more important to the Chinese economy, is
28:49
Speaker 1: probably twice that. So about a point that assumes no
28:52
Speaker 1: policy response. And I think you know the market, certainly
28:56
Speaker 1: the bond market is increasingly anticipating that the FED will
28:59
Speaker 1: try to off set some of the impact. Chinese policymakers
29:02
Speaker 1: will certainly try to offset some of the impact. What
29:05
Speaker 1: is your sense of you know, you have a baseline
29:09
Speaker 1: case on kind of how you think this might play out.
29:11
Speaker 1: Do we get an agreement? When do we get an agreement?
29:13
Speaker 1: What is your thoughts? What are your thoughts there? Well,
29:15
Speaker 1: right now, there isn't an active negotiation between the US
29:19
Speaker 1: and China. That negotiation broke down about a month ago
29:22
Speaker 1: when the President tweeted that China was walking back their
29:27
Speaker 1: offer and threatened and then carried out the threat to
29:30
Speaker 1: raise tariffs from ten to twenty five on two billion.
29:35
Speaker 1: The President and President She will have a chance to
29:38
Speaker 1: meet in Japan at the end of June at the
29:40
Speaker 1: G twenty UH. They could agree on a new negotiating process,
29:46
Speaker 1: and likely in that case they would agree. The President
29:50
Speaker 1: would agree to defer the tariffs on the further three billion.
29:54
Speaker 1: Maybe China would agree to some goodwill gestures and they
29:57
Speaker 1: would go back to the negotiating table. But don't at
30:00
Speaker 1: this stage see a scenario where they would reach agreement
30:03
Speaker 1: in June to walk back the existing tariffs before we
30:07
Speaker 1: shift to North America. Because the trade tariff tension is
30:10
Speaker 1: picking up here, I'm wondering who is the beneficiary, if
30:15
Speaker 1: there are any beneficiaries of the trades between the US
30:19
Speaker 1: and China. Well, at the biggest beneficiaries to date have
30:24
Speaker 1: been other Asian economies which can substitute for Chinese production.
30:30
Speaker 1: So there's been a big pickup in imports from Vietnam,
30:32
Speaker 1: for example. Over time, you would expect to see a
30:37
Speaker 1: broader set of beneficiaries as supply chains, and just one
30:40
Speaker 1: of the biggest potential beneficiaries, you know, to pivot to
30:43
Speaker 1: North America is Mexico. But it's a little hard to
30:46
Speaker 1: make a decision to orient your supply chain away from
30:50
Speaker 1: China and towards Mexico if you're anticipating tariffs on Mexico too.
30:55
Speaker 1: So it seems like initially it was just the U
30:58
Speaker 1: S And China and you could see some longstanding issues here.
31:01
Speaker 1: But the Trump administration seems to be expanding their tariffs,
31:04
Speaker 1: expanding their um you know, their their commerce policy to
31:09
Speaker 1: Mexico for other reasons, maybe for to India maybe too,
31:13
Speaker 1: maybe the other parts of Europe. What do you think
31:15
Speaker 1: the strategy is of this White House? You know, when
31:19
Speaker 1: you said Trump administration, I immediately thought, well, we're really
31:22
Speaker 1: just talking about President Trump. Uh. President Trump seems to
31:26
Speaker 1: like tariffs, and I don't think it's more complicated than that. Uh,
31:30
Speaker 1: there's been abundant reporting by every major news outlet that
31:34
Speaker 1: the bulk of the administration and including the U S.
31:37
Speaker 1: Trade Representative Bob Leightheiser, were opposed to the use of
31:40
Speaker 1: the latest tariff threat against Mexico. This is the president,
31:43
Speaker 1: and for now, the president likes tariffs. So one thing
31:47
Speaker 1: that I find interesting is that China is the world's
31:49
Speaker 1: second largest economy, and yet the way that markets seem
31:52
Speaker 1: to be responding is much more severely to the threat
31:55
Speaker 1: of Mexico tariffs on the US economy than tariff in
32:00
Speaker 1: China and the effect on the US economy. So, given
32:03
Speaker 1: your history and experience doing economic analyzes of tariffs and
32:07
Speaker 1: trade issues, how much more of an impact would the
32:11
Speaker 1: sort of threatened tariffs on Mexico have on the US economy.
32:15
Speaker 1: I think there's probably three important points to make here.
32:19
Speaker 1: The first is that if you sum up imports from
32:22
Speaker 1: Mexico and auto imports which the President is is threatening
32:27
Speaker 1: from Europe and Japan and Canada, you get a total
32:30
Speaker 1: of about five billions, so it's roughly equal in size
32:34
Speaker 1: two current imports from China. If you look at exports
32:39
Speaker 1: UH the U S actually exports proportionately more to Mexico
32:42
Speaker 1: and to Europe than it does to China, so the
32:45
Speaker 1: opportunities on the other side for retaliation are stronger. But
32:49
Speaker 1: I think the third and probably most important point is
32:51
Speaker 1: that the president has threats against China emerged out of
32:56
Speaker 1: a a standard you might say, trade process at three
33:00
Speaker 1: a one complaint UH that was derived from long standing
33:04
Speaker 1: concerns about Chinese commercial practices. The threat against Mexico materialized
33:10
Speaker 1: out of the blue. It exerts presidential authority foreign national
33:15
Speaker 1: security emergencies and tries to use that authority to essentially
33:20
Speaker 1: raise tariffs in a week at the whim of the
33:22
Speaker 1: President UH in a way that hasn't been done before.
33:27
Speaker 1: So when the market has to set a suddenly factor
33:30
Speaker 1: in the increased uncertainty as well as the direct threat.
33:36
Speaker 1: So in other words, it was maybe perhaps not that
33:38
Speaker 1: the economic impact would be that much more on the
33:42
Speaker 1: Mexico teiriffs, but that it had not been priced into
33:44
Speaker 1: the market in any way. Is that accurate? I think
33:47
Speaker 1: two weeks ago, the baseline assumption was that there was
33:50
Speaker 1: going to be a fight about ratification of U S
33:53
Speaker 1: m c A, but there weren't going to be tariffs
33:55
Speaker 1: on Mexico obviously that baseline assumption has been overturned. Tequila Corona,
34:05
Speaker 1: I mean some big issues for the economy I thought,
34:08
Speaker 1: I mean the really big one from you know set
34:10
Speaker 1: Aside the advocado issue and the Corona issue, the big
34:13
Speaker 1: one is auto parts and the absolutely Brad s thank
34:17
Speaker 1: you so much for being here. Always fantastic to have
34:19
Speaker 1: your perspective. Brad Setser is the Steven A. Tannenbaum Senior
34:22
Speaker 1: Fellow for International Economics at the Council of Foreign Relations.
34:26
Speaker 1: He's also a senior advisor at Exante Data. He also,
34:29
Speaker 1: just to give you a sense, served as Deputy Assistant
34:32
Speaker 1: Secretary for International Economic Analysis in the US Treasure Department
34:35
Speaker 1: from two thousand and eleven to two thousand and fifteen.
34:39
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.
34:42
Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
34:45
Speaker 1: or whatever podcast platform you prefer. Paul Sweeney, I'm on
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Speaker 1: Twitter at pt Sweeney. I'm Lisa bram Woyds. I'm on
34:50
Speaker 1: Twitter at Lisa A. Bram Woit's one before the podcast.
34:53
Speaker 1: You can always catch us worldwide on Bloomberg Radio. It