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A Deep Dive Into Oil Demand · Bloomberg Intelligence

• 0:00
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
• 0:04
  Speaker 1: my co host Matt Miller. Every business day, we bring
• 0:06
  Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
• 0:11
  Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
• 0:15
  Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
• 0:18
  Speaker 1: at Bloomberg dot com slash podcast. John was just mentioning oil, Matt.
• 0:22
  Speaker 1: I'm looking at Brent crude here, sixty seven dollars sixty
• 0:25
  Speaker 1: four cents a barrel, up about one point eight four plus.
• 0:30
  Speaker 1: You know I also mentioned earlier, Matt, that article I
• 0:32
  Speaker 1: saw on Bloomberg terminal four dollars a gallon, UH to
• 0:35
  Speaker 1: fill up your car if you live in the state
• 0:37
  Speaker 1: of California. Energy pushing higher. Let's get behind the drivers
• 0:41
  Speaker 1: of this crucial commodity. We do that the Virginia Regina
• 0:44
  Speaker 1: mayor Global Energy head for KPMG Regina, thanks so much
• 0:48
  Speaker 1: for joining us here. We're seeing energy prices move up,
• 0:51
  Speaker 1: oil move higher. Is this simply a demand play here?
• 0:55
  Speaker 1: As more and more vaccines get into arms on a
• 0:58
  Speaker 1: global basis, the expectation is that the demand for oil
• 1:01
  Speaker 1: will be rising as well. Clearly it is a big
• 1:05
  Speaker 1: A big part of the story is demand and how
• 1:07
  Speaker 1: quickly demand has recovered. You know, prices are incredible and
• 1:12
  Speaker 1: very buoyant, but I like to take people back to
• 1:15
  Speaker 1: where were we one year ago this month, when w
• 1:18
  Speaker 1: t I settled in negative territory, and now look at
• 1:21
  Speaker 1: where we are, and I think there's still upward momentum
• 1:24
  Speaker 1: because we're seeing some potential supply disruptions and it's still
• 1:28
  Speaker 1: a question of how quickly opec plus is going to
• 1:30
  Speaker 1: bring back those surplus barrels into the market. And in addition,
• 1:34
  Speaker 1: the world seems to have worked through the billion plus
• 1:38
  Speaker 1: supply overhang that we predicted a year ago, so I'm excited.
• 1:42
  Speaker 1: It's very buoyant. I wouldn't have predicted these fundamentals even
• 1:45
  Speaker 1: six months ago, but the industry is quite quite favorable.
• 1:50
  Speaker 1: How much of cramp on demand is the tragedy that
• 1:56
  Speaker 1: we're seeing play out in India truly a tragic event um,
• 2:03
  Speaker 1: and and that will have an impact on global demand.
• 2:07
  Speaker 1: But I think the the overall global demand story from
• 2:11
  Speaker 1: places like the US and China are overcoming the tragedy
• 2:16
  Speaker 1: that we're seeing in India as well as you know,
• 2:18
  Speaker 1: the challenges that we're seeing in other strong fuels markets
• 2:20
  Speaker 1: like Brazil. The market seems to be very bullish that
• 2:23
  Speaker 1: demand will continue to increase. We've got summer driving season
• 2:27
  Speaker 1: coming up, We've got summer vacation season coming up. People
• 2:30
  Speaker 1: are trying to countries are trying to look at ways
• 2:32
  Speaker 1: that they can open up their borders. So even my
• 2:34
  Speaker 1: refining clients that were pretty pessimistic about gasoline demand return
• 2:39
  Speaker 1: and jet fuel demand return are are actually quite optimistic
• 2:42
  Speaker 1: as they look into and definitely into alright, Regina. So
• 2:48
  Speaker 1: the demand side seems pretty solid improving. Let's talk about
• 2:51
  Speaker 1: the supply side here. Talk to us about OPEC plus
• 2:55
  Speaker 1: and the pressure on some of those key members of
• 2:59
  Speaker 1: OPEC plus start ramping up production. Yeah, so it's interesting
• 3:04
  Speaker 1: that OPEC plus decided not to have the meeting that
• 3:07
  Speaker 1: they were going to have today. I think that shows
• 3:09
  Speaker 1: that they're very confident in their strategy and they're very
• 3:12
  Speaker 1: confident in the commitment that they have and a part
• 3:15
  Speaker 1: of the members to retain the cuts and slowly trickle
• 3:20
  Speaker 1: those barrels back into the market. Um, there is still
• 3:23
  Speaker 1: even after the two million barrels per day come back
• 3:26
  Speaker 1: into the market, that they've committed will come back by
• 3:28
  Speaker 1: the end of July. There's still six million barrels per
• 3:30
  Speaker 1: day that they're still sitting on, So that is the
• 3:33
  Speaker 1: governor against a huge price spike, and how they trickle
• 3:37
  Speaker 1: that back will be will be interesting. The sixty range
• 3:41
  Speaker 1: that we're in now is not enough to balance the
• 3:44
  Speaker 1: budgets of all of those OPEC plus nations, but it
• 3:47
  Speaker 1: is a nice buffer that's building on their financial reserves.
• 3:50
  Speaker 1: But I could see them trying to push it to
• 3:52
  Speaker 1: see can we get Brent over the seventy dollar mark
• 3:54
  Speaker 1: before we start more actively putting those withheld barrels back
• 3:59
  Speaker 1: into the market. What do OPEC nations need to balance
• 4:02
  Speaker 1: the budget? The most estimates are that it's in the
• 4:07
  Speaker 1: eighties UM for most of the countries. So I but
• 4:10
  Speaker 1: I don't think the world can survive that. I think
• 4:13
  Speaker 1: there will be a lot of pressure on the OPEC
• 4:15
  Speaker 1: plus countries. You already saw it a couple of months
• 4:19
  Speaker 1: ago with calls from the Biden administration into Saudi Arabia
• 4:22
  Speaker 1: as well as calls from the Indian government into Saudi
• 4:25
  Speaker 1: Arabia that we can't have crude oil price be too hot.
• 4:28
  Speaker 1: You mentioned that it's four dollars per gallon in California.
• 4:32
  Speaker 1: The average retail price for gasoline in the US right
• 4:34
  Speaker 1: now is almost three dollars, and that's for all grades
• 4:38
  Speaker 1: in all markets. So I think we're sort of at
• 4:41
  Speaker 1: that tipping point. Seventy for Brent might be as high
• 4:44
  Speaker 1: as people feel comfortable. Um, but I think they're really
• 4:47
  Speaker 1: enjoying threading the needle by keeping things relatively stable in
• 4:51
  Speaker 1: the high sixties, which makes them more comfortable with their
• 4:53
  Speaker 1: board looking position. Three dollars a gallon would be a
• 4:56
  Speaker 1: dream come true for me here in Berlin. I would
• 4:58
  Speaker 1: drive so much if I had three dollars per game.
• 5:01
  Speaker 1: What is it's it's it's about seven and change, I
• 5:06
  Speaker 1: think right, it's um, I mean I tank up with
• 5:09
  Speaker 1: shell V power, of course, because I care about my engine.
• 5:13
  Speaker 1: All right, all right, So let's talk about the shale patch.
• 5:18
  Speaker 1: Are we gonna start to see some of these share
• 5:19
  Speaker 1: patch producers ramping up production and maybe mucking up the
• 5:23
  Speaker 1: works a little bit? I don't think so. And you know,
• 5:27
  Speaker 1: you never say never with the with US exuberants around
• 5:31
  Speaker 1: oil production, right that's in our d n A and
• 5:33
  Speaker 1: I sit in Texas and I definitely don't pay as
• 5:35
  Speaker 1: much as you do for your kathleen, um, but they
• 5:38
  Speaker 1: are making commitments to their shareholders that the the returns
• 5:43
  Speaker 1: above some of you even said above forty dollars per
• 5:45
  Speaker 1: barrel will be returned in terms of dividend growth to
• 5:48
  Speaker 1: their shareholders. That could be a very strong message if
• 5:51
  Speaker 1: we take those profits and instead of funneling it all
• 5:53
  Speaker 1: into captics, we pay down debt and we return that
• 5:56
  Speaker 1: cash to the shareholders in the form of dividends. That's
• 6:00
  Speaker 1: a story that all of the large ones have told
• 6:02
  Speaker 1: to the marketplace, and I expect them to hold to that.
• 6:06
  Speaker 1: And I think OPEC plus will be watching rig counts
• 6:09
  Speaker 1: and US activity. Rick counts have had held very stable,
• 6:12
  Speaker 1: so most predictions are we might get to twelve million
• 6:15
  Speaker 1: barrels per day by the end of but I don't
• 6:19
  Speaker 1: think we'll see the thirteen million barrels per day or
• 6:21
  Speaker 1: higher and the exuberance that we saw in the shale
• 6:24
  Speaker 1: patch to quote mark up the works as you put it.
• 6:27
  Speaker 1: By the way, I sit in Berlin, which is why
• 6:28
  Speaker 1: my gas prices are so high. Um, Regina, let me
• 6:32
  Speaker 1: just ask you quickly. We only got thirty seconds here.
• 6:34
  Speaker 1: But having noted that, does the electric vehicle push do
• 6:39
  Speaker 1: anything to hurt demand in the near term. Not in
• 6:43
  Speaker 1: the near term. It only degrades about two um uh
• 6:49
  Speaker 1: gallons of total fuel, and so we only see maybe
• 6:53
  Speaker 1: a million two a couple million barrels per day coming
• 6:57
  Speaker 1: off in the next five years from v penetration, and
• 7:00
  Speaker 1: so it's just a drop in the proverbial bucket. I see,
• 7:03
  Speaker 1: all right, Well that's what I thought, but I just
• 7:05
  Speaker 1: wanted to get it confirmed by the experts. There are
• 7:08
  Speaker 1: a bunch of electric vehicles whizzing around here, but obviously
• 7:11
  Speaker 1: it's not even close to um the majority, not not
• 7:16
  Speaker 1: even close to half. When I'm in California, I see
• 7:19
  Speaker 1: a lot more than really much more prevalent. Well, maybe
• 7:23
  Speaker 1: California is the future. Man, Regina, thanks very much for
• 7:27
  Speaker 1: joining us. Regina Mayor, their global energy head at KPMG
• 7:32
  Speaker 1: talking to us about UM, this commodity price, the games,
• 7:37
  Speaker 1: maybe transitory. We're waiting for FED chair J. Powell. This
• 7:40
  Speaker 1: is Bloomberg. Let's bring in now Stephen Kine. He is
• 7:47
  Speaker 1: the group managing director and a portfolio manager at tc W.
• 7:52
  Speaker 1: They have about two hundred fifty three billion dollars in
• 7:54
  Speaker 1: assets under management. I know Paul when he was working
• 7:58
  Speaker 1: in the finance sector. You must a musty when you
• 8:01
  Speaker 1: go to stop out there every time he was on
• 8:04
  Speaker 1: the on the best coast. Stephen, UM, big day today,
• 8:07
  Speaker 1: right because we had kicked off the day with news
• 8:09
  Speaker 1: about the Biden tax plan, which is very big, and
• 8:14
  Speaker 1: we're gonna finish the session with the Fed. Um. These
• 8:18
  Speaker 1: two pillars to me seem key for your business. What
• 8:23
  Speaker 1: do you make of the current environment? Uh? Well, what
• 8:27
  Speaker 1: I would say, I think you're you're dead on. As
• 8:30
  Speaker 1: a matter of fact, I think the bigger point as
• 8:33
  Speaker 1: we think about the markets in general is the markets
• 8:35
  Speaker 1: are always affected by fiscal and monetary policy. But I
• 8:39
  Speaker 1: think given the degree of involvement of the government currently
• 8:42
  Speaker 1: not only in the uh COVID era, but as we
• 8:45
  Speaker 1: move forward and the degree of involvement by the FED,
• 8:48
  Speaker 1: I don't think the capital markets have ever been as
• 8:50
  Speaker 1: as driven and influenced um by my policy right now.
• 8:55
  Speaker 1: So UM, in terms of today and what's going on. Um,
• 9:00
  Speaker 1: you know, I don't think there's much to talk about
• 9:02
  Speaker 1: in terms of the FED. I think it's it's going
• 9:04
  Speaker 1: to be a bit of a snoozer. I wouldn't hold
• 9:06
  Speaker 1: your breath for anything significant out of the Fed. The
• 9:09
  Speaker 1: Fed is extremely duvish. They've changed their framework, as they've
• 9:12
  Speaker 1: articulated uh numerous times to be outcome driven and not
• 9:16
  Speaker 1: outlook out uh look driven. And therefore, given that inflation
• 9:20
  Speaker 1: is running far below the two plus percent that they're
• 9:23
  Speaker 1: looking to see for a stain period and unemployment it's six, um,
• 9:27
  Speaker 1: it would be shocking to see the Fed do anything
• 9:30
  Speaker 1: but maybe tweak the language on on the current you know,
• 9:33
  Speaker 1: statements around the current economic environment. UM. On the fiscal side, um, yeah,
• 9:38
  Speaker 1: this is developing. It seems to be one big package
• 9:41
  Speaker 1: after another. What's changing now is those packages are now
• 9:45
  Speaker 1: being balanced to some degree with potential tax increases. And
• 9:50
  Speaker 1: we'll just have to see how things go. But if
• 9:53
  Speaker 1: it goes in this direction, uh, not to get to
• 9:56
  Speaker 1: uh uh you know uh loud about this, but you know,
• 10:02
  Speaker 1: we could be entering an era bigger government um, and
• 10:05
  Speaker 1: you know that could have bigger implications for for the
• 10:07
  Speaker 1: economy long term. Alright, So, given where we are in
• 10:11
  Speaker 1: the cycle here, Stephen, we have this reopening trade, if
• 10:14
  Speaker 1: you will, We have in a comminent date of federal reserve.
• 10:17
  Speaker 1: We have fiscal stimulus, perhaps partially offset by taxes. What
• 10:20
  Speaker 1: are some of the sectors that TCW is looking at,
• 10:23
  Speaker 1: know and your unconstrained fund do you do top down
• 10:27
  Speaker 1: but also a lot of bottoms up work as well? Yeah? Yeah,
• 10:30
  Speaker 1: So kind of the good news bad news for UM
• 10:34
  Speaker 1: for the credit sectors is that the good news is
• 10:37
  Speaker 1: we do have significant fundamental tail winds in terms of
• 10:41
  Speaker 1: strong economic growth and good operating leverage for businesses. There's
• 10:44
  Speaker 1: gonna be a lot of good earnings and cash flow
• 10:46
  Speaker 1: and all those good things that tend to support risk taking.
• 10:49
  Speaker 1: The bad news is that's already in the markets. Spreads
• 10:53
  Speaker 1: are extremely tight. The the overall yield and the high
• 10:56
  Speaker 1: yield market is just under four percent, So you're really
• 11:00
  Speaker 1: not getting paid, uh for for taking a ton of risks.
• 11:04
  Speaker 1: So as we look at sectors UM, we are up
• 11:08
  Speaker 1: in quality just due to the value and UM. One
• 11:12
  Speaker 1: of the sectors that we think offers probably the best
• 11:14
  Speaker 1: risk return is the highest quality sector outside of treasuries,
• 11:18
  Speaker 1: which is agency mortgage backed securities. And the reason for
• 11:22
  Speaker 1: that is that it's a FED controlled asset. UM they're
• 11:25
  Speaker 1: buying forty billion a month and therefore really controlling the
• 11:28
  Speaker 1: price and the spread. And then the second reason, and
• 11:31
  Speaker 1: what makes them really attractive to us is to buy
• 11:34
  Speaker 1: them in the forward or tb a market where, due
• 11:37
  Speaker 1: to the fact that the Fed's buying up all the
• 11:39
  Speaker 1: net supply of production of agency mortgages, the financing rate
• 11:45
  Speaker 1: to to not own the mortgages but roll them forward
• 11:48
  Speaker 1: in the forward market is extremely attractive. It's it's minus
• 11:51
  Speaker 1: seventy basis points, so you're picking up one and a
• 11:54
  Speaker 1: half to two percent spread to treasuries for a risk
• 11:57
  Speaker 1: free credit, risk free asset that is controlled by the FED.
• 12:00
  Speaker 1: That's you know, double the spread that you get from
• 12:03
  Speaker 1: investment great corporate bond. So we'd start there and then
• 12:06
  Speaker 1: from there we would, uh, you know, go to other
• 12:08
  Speaker 1: areas of the securitized market where you can stay relatively
• 12:12
  Speaker 1: high in quality, double A, triple A in the non
• 12:14
  Speaker 1: agency mortgage market, in the CLO market collateralized loan obligation UM,
• 12:19
  Speaker 1: and you can get spreads in the mid one, you know,
• 12:22
  Speaker 1: far better than you can do in the corporate bond
• 12:24
  Speaker 1: market with uh, you know, with reasonable volatility. When is
• 12:31
  Speaker 1: the FED I'm going to be interesting, you know, we
• 12:34
  Speaker 1: we had UM some people start to talk about talking
• 12:37
  Speaker 1: about tapering and expecting that to happen towards the end
• 12:41
  Speaker 1: of this year. Does that time frame make sense to you?
• 12:44
  Speaker 1: You know, I think it's I think it depends on
• 12:47
  Speaker 1: what happens in the economy and with inflation. UM. People
• 12:50
  Speaker 1: tend to be focusing on the the Jackson Hole meeting
• 12:55
  Speaker 1: or time period is when they might start to introduce it,
• 12:58
  Speaker 1: and certainly that's it's good. At time frame is any,
• 13:00
  Speaker 1: but it really sort of depends on how things go.
• 13:02
  Speaker 1: I think the FED is if the mark financial conditions
• 13:06
  Speaker 1: stay loose, UM, I think the Fed will probably sit
• 13:09
  Speaker 1: on its hands as long as it wants. If things
• 13:11
  Speaker 1: start to get volatile at the market starts to um
• 13:15
  Speaker 1: worry about inflation more than today, you could you could
• 13:18
  Speaker 1: see the Fed move that time frame up a little bit. Hey, Steven,
• 13:21
  Speaker 1: thanks so much for joining us. We really appreciate getting
• 13:24
  Speaker 1: your insights and thoughts there. Stephen Kane, Group Managing Director,
• 13:27
  Speaker 1: Portfolio manager at t c W. As more and more
• 13:34
  Speaker 1: people in this country get vaccinated, we're starting to see
• 13:36
  Speaker 1: economic activity pick up the reopening trade, if you will.
• 13:40
  Speaker 1: We're starting to see that in the economic data. Are
• 13:42
  Speaker 1: we seeing it on Main Street America? Let's check in
• 13:45
  Speaker 1: with Don McCree. He is vice chairman and the head
• 13:47
  Speaker 1: of Commercial Banking for Citizens Financial Group that's the New
• 13:50
  Speaker 1: York Stock Exchange listed financial services company onto the CIBIL
• 13:53
  Speaker 1: cf G. Don thanks so much for joining us here.
• 13:56
  Speaker 1: I'd love to get a feeling from you as you
• 13:59
  Speaker 1: talk to your clients, the businesses, the small emit sized
• 14:02
  Speaker 1: businesses that you guys deal with. Are they investing in
• 14:06
  Speaker 1: their businesses? Are they seeing a pickup in business activity?
• 14:09
  Speaker 1: You know, it couldn't be here fall it's a tuck
• 14:11
  Speaker 1: you again. UM. We we're definitely seeing indications across the
• 14:15
  Speaker 1: board of of companies coming out of their dormancy stage,
• 14:18
  Speaker 1: at the stage as I would call it UM, not
• 14:21
  Speaker 1: not huge amounts of investment going on, but beginning to
• 14:24
  Speaker 1: see it in the form of a little bit more
• 14:26
  Speaker 1: loan growth than we had seen before UM and certainly
• 14:28
  Speaker 1: seeing it in terms of the results of companies. Results
• 14:31
  Speaker 1: are generally coming in broadly much stronger than we expected
• 14:35
  Speaker 1: as as revenue lines recover UM and companies begin to
• 14:38
  Speaker 1: get back to business. And of course it's it's at
• 14:40
  Speaker 1: different speeds in different parts of the country UM, with
• 14:44
  Speaker 1: with some of the southern states opening more quickly through
• 14:46
  Speaker 1: the outdoor activity UM in the Northern States, but we're
• 14:49
  Speaker 1: seeing it up north. Also, what kind of loan demand
• 14:52
  Speaker 1: are you seeing and what kind of loan demand do
• 14:55
  Speaker 1: you forecast throughout the year. Loan loan demand on the
• 14:59
  Speaker 1: commercial side, that's been relatively muted, and I think part
• 15:02
  Speaker 1: of that is due to the significant securities issue instead
• 15:06
  Speaker 1: of taken place over the last year or so. Companies
• 15:09
  Speaker 1: are pretty flushed with liquidity, particularly the midsized companies UM,
• 15:13
  Speaker 1: and there's lots of deposits sitting in the banking system.
• 15:15
  Speaker 1: So what I would expect is to see some of
• 15:17
  Speaker 1: that excess liquidity burned down before we begin to see
• 15:21
  Speaker 1: loan demand. What our what our base cases is really
• 15:24
  Speaker 1: the second half of the year, we expect to see
• 15:26
  Speaker 1: UH loan growth on the On the commercial side, we
• 15:29
  Speaker 1: are seeing quite significant transactional activity, both in support of
• 15:35
  Speaker 1: of M and A and then other corporate events that
• 15:37
  Speaker 1: are beginning to materialize. So really record activity in the
• 15:41
  Speaker 1: syndicated loan markets and continued record activity in the in
• 15:45
  Speaker 1: the bond markets. Don I'd love to get a sense
• 15:48
  Speaker 1: of kind of maybe the credit quality out there. It's
• 15:50
  Speaker 1: been obviously a very difficult period for corporate America. What's
• 15:55
  Speaker 1: the credit quality of your portfolio right here? Are you
• 15:58
  Speaker 1: seeing any cracks in there? Uh? It feels good. It
• 16:02
  Speaker 1: feels a lot better than it felt a year ago.
• 16:04
  Speaker 1: And you saw most banks including US released reserves in
• 16:07
  Speaker 1: the first quarter, and that's an indication that the credit
• 16:10
  Speaker 1: is improving across the board. We still have a ways
• 16:13
  Speaker 1: to go and things like you know, service businesses like
• 16:16
  Speaker 1: hotels and restaurants who were only beginning to recover as
• 16:19
  Speaker 1: the vaccines, uh take take hold across the country. But
• 16:23
  Speaker 1: we're seeing every indicator of credit is improving. And you know,
• 16:27
  Speaker 1: we had you know, billions and billions on watch a
• 16:29
  Speaker 1: year ago and that's down by about seventy in terms
• 16:33
  Speaker 1: of a total amount of credit that we're we're still
• 16:36
  Speaker 1: working through the back ends of the pandemic risks. What
• 16:40
  Speaker 1: are your net interest margins look like? And what can
• 16:42
  Speaker 1: you do in a in an environment like this? You know,
• 16:46
  Speaker 1: we we were very deliberate around how we price credit.
• 16:49
  Speaker 1: Our Our net interest margin actually held up well in
• 16:52
  Speaker 1: the first quarter um as we as we achieved slightly
• 16:55
  Speaker 1: better spreads on our lending than we expected to by
• 16:59
  Speaker 1: being disciplined, really because we were able to lower our
• 17:02
  Speaker 1: deposit costs aggressively UM and with the with the amount
• 17:05
  Speaker 1: of liquidity that's in the system, both on the consumer
• 17:08
  Speaker 1: side and on the commercial side. UM, there's just a
• 17:11
  Speaker 1: very attractive deposit UH costs to financial institutions right now.
• 17:15
  Speaker 1: You know that could compress a little bit as we
• 17:17
  Speaker 1: go forward, but we're very focused on maintaining that interest margin.
• 17:21
  Speaker 1: And of course, if you see a little bit of
• 17:22
  Speaker 1: uptick in the tenure like we're seeing over the last
• 17:25
  Speaker 1: couple of weeks, that helps a little bit in terms
• 17:27
  Speaker 1: of doing interest margining DON in your business in the
• 17:32
  Speaker 1: commercial banking business, are you guys looking for M and
• 17:35
  Speaker 1: A opportunities to grow? Is that something that's in UH
• 17:39
  Speaker 1: in the space that you compete in. Is that something
• 17:41
  Speaker 1: you're looking to do with the strategic vision going forward. Yes,
• 17:45
  Speaker 1: so so a couple of different things. We we actually
• 17:47
  Speaker 1: have acquired three merger and acquisition firms over the last
• 17:51
  Speaker 1: three years. UM. Our M and A activity for our
• 17:54
  Speaker 1: clients is at record levels right now. UM. It's it's
• 17:57
  Speaker 1: really concentrated in changes ownership, where private companies are selling
• 18:02
  Speaker 1: themselves to take advantage of what has relatively attracted multiples
• 18:06
  Speaker 1: and very very attractive financing markets. So the macros on
• 18:10
  Speaker 1: the on the client side are quite good and on
• 18:13
  Speaker 1: the M and A side are quite good. Right now
• 18:16
  Speaker 1: for us, we're really focused on, you know, small add
• 18:19
  Speaker 1: ons to the portfolio like we've been doing. We're constantly
• 18:22
  Speaker 1: looking and what we really try to do is is
• 18:25
  Speaker 1: build industry expertise by bringing on corporate finance and M
• 18:28
  Speaker 1: and A expertise that we can differentiate with our clients
• 18:31
  Speaker 1: versus competition. Don, what about clients who want to avoid
• 18:34
  Speaker 1: the step up basis changes? I mean, Um, these tax
• 18:38
  Speaker 1: plan changes are significant. Must be significant to your wealthy
• 18:41
  Speaker 1: clients and institutions. Yeah, they you know, the their their
• 18:45
  Speaker 1: their proposals at this point, so there will see where
• 18:48
  Speaker 1: they land. But I would expect some some form of
• 18:51
  Speaker 1: increases of taxes. It's definitely accelerating things on the M
• 18:54
  Speaker 1: and A side. So if we were, if we were
• 18:57
  Speaker 1: in a robust market before the proposals that came out
• 18:59
  Speaker 1: of the administration, I think people are looking to UM too.
• 19:03
  Speaker 1: If if they're sellers, they're looking to sell their companies
• 19:06
  Speaker 1: probably within the calendar year of two thousand one. Don,
• 19:10
  Speaker 1: thanks so much, great to get your insight you have
• 19:13
  Speaker 1: a really unique point of view that I think is
• 19:15
  Speaker 1: helpful for everybody looking at this market. Don McCree is
• 19:18
  Speaker 1: the vice chair and the head of commercial banking at
• 19:21
  Speaker 1: Citizens Financial Group. Really a policy day today in addition
• 19:29
  Speaker 1: to earnings, Matt, you know, we've got the Federal Reserve
• 19:31
  Speaker 1: it too was John was just mentioning, which Bloomberg will
• 19:33
  Speaker 1: bring you as well as President Biden's speech at nine
• 19:36
  Speaker 1: pm Wall Street time again Walls, Bloomberg will be bringing
• 19:39
  Speaker 1: that to you. So a lot of policy initiatives here
• 19:43
  Speaker 1: that are likely to have a, you know, pretty significant
• 19:45
  Speaker 1: impact on this economic recovery as this reopening begins to
• 19:49
  Speaker 1: really accelerate here in the US. Yeah. Absolutely. Let's check
• 19:53
  Speaker 1: in right now with someone who knows a little bit
• 19:56
  Speaker 1: more about, um, the policy and effects. Casey Matthews joins
• 20:00
  Speaker 1: US Chief Investment Officer at U m B on what
• 20:03
  Speaker 1: we could get from these tax changes. In Casey, I
• 20:06
  Speaker 1: want to start first with the with the arguments, Um,
• 20:10
  Speaker 1: if this had happened ten years ago, you would have
• 20:13
  Speaker 1: heard freshwater economists go absolutely nuts with the jump in
• 20:18
  Speaker 1: a capital gains tax, even if it is for people
• 20:20
  Speaker 1: who are in more than a million dollars a year.
• 20:22
  Speaker 1: But as it is, it doesn't seem like there are
• 20:25
  Speaker 1: any more freshwater economists with any cloud. At least all
• 20:28
  Speaker 1: of the economists who have influenced these days are um
• 20:33
  Speaker 1: of the salt water variety or more um Kynesian. So
• 20:38
  Speaker 1: where is the pushback on this? Well, good morning, you know,
• 20:43
  Speaker 1: I don't think there's much pushback because our takeaway is
• 20:49
  Speaker 1: taxes don't drive economic activity. There's all kinds of data
• 20:55
  Speaker 1: out there. Even though every cycle, you know, you talk
• 20:57
  Speaker 1: about your years ago, every economic cycle, every potential tax
• 21:01
  Speaker 1: policy change has its own set of nuances. But yeah,
• 21:06
  Speaker 1: we know and economists know that. One the academic research
• 21:11
  Speaker 1: says tax policy doesn't drive economic activity, and we can
• 21:15
  Speaker 1: use the fiscal multiplier to prove that. And that is
• 21:18
  Speaker 1: the bang for the buck that each government, that the
• 21:21
  Speaker 1: government spends for stimulus, what happens if they spend a dollar,
• 21:26
  Speaker 1: do we get more than a dollar of economic activity?
• 21:29
  Speaker 1: And the data shows us that low and behold direct
• 21:32
  Speaker 1: purchases of goods and services has the highest potential the
• 21:36
  Speaker 1: biggest bang for its buck to stimulate the economy. The
• 21:40
  Speaker 1: lowest initiative would be corporate tax cuts and tax cuts
• 21:45
  Speaker 1: for um, high way earners. So this stuff doesn't impact
• 21:50
  Speaker 1: economic activity at all. It's not a catalyst, it's not
• 21:53
  Speaker 1: a driver. All right, Casey, how much do you think, uh,
• 21:58
  Speaker 1: these tax increases, the post tax increases are economically based
• 22:02
  Speaker 1: i e. To pay in part for President Biden's fiscal
• 22:06
  Speaker 1: stimulus plans. And how much is maybe social i e.
• 22:11
  Speaker 1: Trying to deal with the income inequality, wealth inequality, the
• 22:15
  Speaker 1: redistribution type of issue. How do you think about that? Well,
• 22:20
  Speaker 1: I would go back and look at the empirical evidence
• 22:22
  Speaker 1: that we've seen tax policy changes before, and some of
• 22:25
  Speaker 1: these things just um. I think it was Mark Twain
• 22:28
  Speaker 1: who said maybe history doesn't repeat itself. Maybe at rhymes,
• 22:31
  Speaker 1: but we hear a lot of rhyming right now. Right.
• 22:34
  Speaker 1: So back in UH was President Clinton who changed the
• 22:40
  Speaker 1: highest marginal tax bracket for individuals from to thirty nine
• 22:44
  Speaker 1: point six. He bumped up corporate taxes a little bit, right, So,
• 22:48
  Speaker 1: I don't know. I think it was for economic reasons
• 22:51
  Speaker 1: were trying to do. That was the Deficit Reduction Act
• 22:55
  Speaker 1: in Lowell Behold that had little impact on the economy
• 22:58
  Speaker 1: and no impact on markets. And we saw it again
• 23:01
  Speaker 1: in two thousand and thirteen. Of course, President Obama changed
• 23:04
  Speaker 1: the top marginal tax bracket on those making over four
• 23:08
  Speaker 1: and thousand dollars a year, So you can see this rhyming.
• 23:10
  Speaker 1: And even in nineteen Apartment two thousand thirteen, I mentioned
• 23:13
  Speaker 1: that these cycles have their own nuances. The tenure Treasury
• 23:16
  Speaker 1: rate went from one point seven to three percent that year.
• 23:21
  Speaker 1: But she would think would be negative for markets, negative
• 23:23
  Speaker 1: for economic growth, so I would probably be in the
• 23:27
  Speaker 1: economic camp. I think what they're trying to do is
• 23:29
  Speaker 1: just pay for the stimulus to make sure we um
• 23:32
  Speaker 1: get out of the COVID recession, stay out of it,
• 23:36
  Speaker 1: and get back to a sense of normalcy. One of
• 23:38
  Speaker 1: the things, one of the changes were likely to see.
• 23:40
  Speaker 1: We just spoke with Don McCree over a Citizens Financial
• 23:44
  Speaker 1: and he told us private companies now are looking to
• 23:48
  Speaker 1: to sell in this calendar year, a lot of them
• 23:51
  Speaker 1: to avoid things like step up basis changes. You know,
• 23:55
  Speaker 1: if you're gonna get danged, or your kids are gonna
• 23:57
  Speaker 1: get danged when you when you pass it onto them,
• 23:59
  Speaker 1: you may as well sell and deal with it in
• 24:01
  Speaker 1: a different way. Do you see that kind of behavior
• 24:04
  Speaker 1: changing some of it? Yes. Of course, with these smaller
• 24:09
  Speaker 1: family owned business. I don't think it's driven again by uh,
• 24:13
  Speaker 1: capital gain taxes or the elimination of the stept up
• 24:18
  Speaker 1: cost spaces. The family wants to run the business and
• 24:21
  Speaker 1: they feel good about it. They're just going to row harder,
• 24:23
  Speaker 1: if you will, case some more tax in row harder.
• 24:26
  Speaker 1: But I would tell you the the empirical evidence suggests
• 24:30
  Speaker 1: you see some behavior changes. So back in when capital
• 24:35
  Speaker 1: gain tax rates were increased, you saw realized capital gains
• 24:39
  Speaker 1: surged by And this isn't the public markets the same
• 24:43
  Speaker 1: thing in two thousand and twelve, but there was a
• 24:44
  Speaker 1: change in the capital gain tax rate, realized gains increased by.
• 24:50
  Speaker 1: So yes, you do see a slight change of behavior
• 24:54
  Speaker 1: when you have some of these tax policies. But you
• 24:57
  Speaker 1: don't see a drop an investment because that's the concern,
• 25:00
  Speaker 1: the sort of awesome concern, not at all. Because here's
• 25:04
  Speaker 1: the thing. I mean, of course, when we talk to
• 25:06
  Speaker 1: our clients, a lot of small business owners if the
• 25:09
  Speaker 1: tax policy change changes to some degree, are they going
• 25:13
  Speaker 1: to sell risk based assets? What you think about it?
• 25:15
  Speaker 1: Just using the SMP as a proxy. Last year we
• 25:18
  Speaker 1: made this year, we're up eleven. You're gonna sell those assets?
• 25:23
  Speaker 1: To avoid some type of tax to what go by
• 25:25
  Speaker 1: a tenure treasury at one point six ten year yield? Right,
• 25:30
  Speaker 1: I don't think so? All right. Veriously, we will pay
• 25:32
  Speaker 1: attention certainly to the Feds for noon, and obviously President
• 25:35
  Speaker 1: Biden tonight to get a handle on his tax plans.
• 25:39
  Speaker 1: Casey Matthews, economist and chief investment officer for U m
• 25:43
  Speaker 1: B Bank giving us his thoughts, and certainly we will
• 25:46
  Speaker 1: cover both of those later on today and this evening.
• 25:49
  Speaker 1: This is bloom Work. Thanks for listening to the Bloomberg
• 25:52
  Speaker 1: Markets podcast. You can subscribe and listen to interviews with
• 25:55
  Speaker 1: Apple Podcasts or whatever podcast platform you prefer. I'm Miller.
• 26:00
  Speaker 1: I'm on Twitter at Matt Miller three, and I fall
• 26:04
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• 26:07
  Speaker 1: you can always catch us worldwide at Bloomberg Radio.