Latest / Bloomberg Intelligence / Avoid Banks, More Downside Coming: Charles Peabody (Podcast)

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Avoid Banks, More Downside Coming: Charles Peabody (Podcast) · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg p m L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. We're
• 0:30
  Speaker 1: focused on banks. We've got a slew of earnings out
• 0:33
  Speaker 1: from the likes of Balls, Fargo City Group and JP Morgan.
• 0:36
  Speaker 1: JP Morgan in particular started out with a bang, but
• 0:40
  Speaker 1: shares have since gone negative. Joining us now as somebody
• 0:42
  Speaker 1: who perhaps isn't entirely surprised by this, Charles Peabody as
• 0:46
  Speaker 1: president of Portala's Partners and Charles, I'm so glad you're
• 0:49
  Speaker 1: joining us today because just Wednesday you actually downgraded your
• 0:53
  Speaker 1: rating on JP Morgan too, a neutral from a bio
• 0:56
  Speaker 1: believed today's results edify your decision in your view or
• 1:01
  Speaker 1: did it make you rethink anything? Um, just a quick clarification,
• 1:06
  Speaker 1: I went from a neutral to a sell on Yeah. Um, Listen,
• 1:13
  Speaker 1: when you when you think of the themes that are
• 1:15
  Speaker 1: out there that that the analysts are espousing to try
• 1:19
  Speaker 1: and get people to buy these banks. There are three
• 1:22
  Speaker 1: major themes. One is um by those banks that have
• 1:27
  Speaker 1: big capital returns. The second is by those banks they're
• 1:30
  Speaker 1: showing positive operating leverage and and the third is by
• 1:33
  Speaker 1: those banks that have low loan to deposit ratios because
• 1:38
  Speaker 1: they're not going to be as effected by an increasing
• 1:40
  Speaker 1: deposit data. And if there's a uh theme that I
• 1:45
  Speaker 1: think is running through the weakness in the stocks today,
• 1:49
  Speaker 1: it has to do with the lack of positive operating leverage,
• 1:54
  Speaker 1: which you didn't see at JP Morgan, you didn't see
• 1:56
  Speaker 1: at p n C. And that gets back to the
• 2:00
  Speaker 1: fact that revenue growth is starting to slow um at
• 2:04
  Speaker 1: the margin and particularly in n I I it's it's
• 2:08
  Speaker 1: still positive, but if you go back to the first quarter,
• 2:11
  Speaker 1: revenue growth was high single digits. Now it's mid to
• 2:14
  Speaker 1: low single digits. Charles, maybe you could explain to people
• 2:19
  Speaker 1: your perspective when it comes to the cycle of bank
• 2:24
  Speaker 1: operating earnings and how they go through cycles at times
• 2:29
  Speaker 1: of rising interest rates. Absolutely, you know, the theme I've
• 2:34
  Speaker 1: had all year is that we are now investing for
• 2:39
  Speaker 1: end of cycle dynamics, and when you enter that end
• 2:43
  Speaker 1: of cycle period. What you want to look at is
• 2:46
  Speaker 1: what is happening to the change in the rate of
• 2:49
  Speaker 1: growth and and there are three key line items that
• 2:52
  Speaker 1: you're gonna want to pay attention to UM. One is revenues,
• 2:56
  Speaker 1: the other is credit costs, and the third is capital return.
• 3:00
  Speaker 1: And this year, what we're seeing is the revenue growth
• 3:04
  Speaker 1: is decelerating. So we started high mid single digits in
• 3:08
  Speaker 1: the first quarter, we're entering sort of mid single digits
• 3:11
  Speaker 1: this quarter. We'll probably down to low single digits by
• 3:13
  Speaker 1: the fourth quarter. And I think that's what we're going
• 3:15
  Speaker 1: to see in in nineteen is low single digit revenue growth.
• 3:19
  Speaker 1: On the other hand, you're seeing credit costs, which are
• 3:23
  Speaker 1: right now are very benign UM are likely to accelerate
• 3:27
  Speaker 1: higher in nineteen UM. And then I think beyond that
• 3:32
  Speaker 1: the capital return is going to slow dramatically. So the
• 3:36
  Speaker 1: three variables are working against improving profitability. So I think
• 3:42
  Speaker 1: we've seen peak profitability and that's what these stocks are
• 3:45
  Speaker 1: starting to reflect. So one thing that I'm struck by
• 3:48
  Speaker 1: is that JP Morgan posted its biggest loan growth in
• 3:52
  Speaker 1: a back to back period ever. Uh and this really
• 3:57
  Speaker 1: edified initially anyway, people's feeling of strength at basically, even
• 4:00
  Speaker 1: as interest rates rise, they're able to expand their loan
• 4:03
  Speaker 1: book and they're able to capitalize the fact that interest
• 4:06
  Speaker 1: rates are raising fast, rising faster than how much they
• 4:08
  Speaker 1: have to pay depositors. Why does not not what does
• 4:12
  Speaker 1: that not give you confidence? Well, again, JP Morgan is
• 4:18
  Speaker 1: one of the better in terms of execution, and they've
• 4:20
  Speaker 1: been investing in their businesses and then showing some of
• 4:23
  Speaker 1: the better, um you know, revenue growth. This I mean
• 4:26
  Speaker 1: for this quarter, total revenues were up five percent year
• 4:29
  Speaker 1: over a year, which is one of the better quarters
• 4:31
  Speaker 1: that you're going to see. Um So, I have no
• 4:34
  Speaker 1: problem with what JP Morgan reported. What I'm what I'm
• 4:37
  Speaker 1: focused on is is that rate of change and growth.
• 4:41
  Speaker 1: And going back to your question about loans, they grew
• 4:44
  Speaker 1: core loans around six this quarter, but they have been
• 4:47
  Speaker 1: growing core loans at the upper single digit range earlier
• 4:50
  Speaker 1: in the year. So it's that rate of change that's
• 4:53
  Speaker 1: starting to show us flowing over what period of time, Charles,
• 4:58
  Speaker 1: do you believe that the banks can turn their operations
• 5:02
  Speaker 1: to be more nimble based on where they are in
• 5:05
  Speaker 1: the cycle right now, because that would reflect decisions that
• 5:10
  Speaker 1: are made now that only bear fruit six twelve months,
• 5:14
  Speaker 1: even twenty four months into the future, if not longer. Yeah,
• 5:18
  Speaker 1: that's an excellent question, tim because because for example, PNC
• 5:22
  Speaker 1: is getting punished today if the stock is down six dollars,
• 5:26
  Speaker 1: and the reason is because they had sluggish loan growth
• 5:29
  Speaker 1: in are only projecting low single digit revenue growth in
• 5:32
  Speaker 1: the fourth quarter, and and they're falling behind the competition
• 5:36
  Speaker 1: and some of their momentum indicators. And they're claiming it's
• 5:40
  Speaker 1: because they're trying to be prudent in this end of
• 5:43
  Speaker 1: cycle where a lot of mistakes are made, but they're
• 5:46
  Speaker 1: being punished for that because they're not showing the positive
• 5:49
  Speaker 1: operating leverage that somebody else is to maybe taking more risk.
• 5:52
  Speaker 1: Is I think at the end of the day, the
• 5:56
  Speaker 1: banks will come out of this next down cycle whenever
• 6:00
  Speaker 1: it happens. I think it's going to happen in nineteen
• 6:03
  Speaker 1: um the recession um with their balance sheets intact, with
• 6:07
  Speaker 1: their capital intact, and they're going to be able to
• 6:10
  Speaker 1: grow day one when we come out of that recession,
• 6:12
  Speaker 1: and there's going to be a much bigger positive revaluation
• 6:15
  Speaker 1: of these bank stalks out of that next cycle. But
• 6:18
  Speaker 1: going into it, there's going to be skepticism that they
• 6:22
  Speaker 1: haven't changed their historical practices, which is always to reach
• 6:26
  Speaker 1: for growth at the wrong time of the cycle. And
• 6:29
  Speaker 1: that's going on, but it's going on more in the
• 6:31
  Speaker 1: non bank system or the shadow market banking system than
• 6:34
  Speaker 1: it is the banking system. Charles, is there any bank
• 6:36
  Speaker 1: right now in the US that you think is a
• 6:38
  Speaker 1: buy well? You know, I think we started a bear
• 6:44
  Speaker 1: market and that the bank stocks will be down some
• 6:47
  Speaker 1: thirty from their September I mean from their first quarter
• 6:51
  Speaker 1: UM highs of eighteen, which I think is the peak.
• 6:54
  Speaker 1: Is the top is now in place, and they'll be
• 6:57
  Speaker 1: down thirty by the depth of the recession. So within
• 7:02
  Speaker 1: that cycle, call no, you don't want to buy banks.
• 7:06
  Speaker 1: Can they outperform relatively? They could, but I'm not convinced
• 7:12
  Speaker 1: that you get that change of secular leadership until you
• 7:15
  Speaker 1: have that down in turn. On a trading basis, I've
• 7:20
  Speaker 1: been advising my clients it's probably not no more than
• 7:23
  Speaker 1: another five percent downside from where we are today, and
• 7:27
  Speaker 1: so on a trading basis, maybe you want to pick
• 7:29
  Speaker 1: up a Wells Fargo or a city group. But you know,
• 7:34
  Speaker 1: I'm talking about as a trader, because I still think
• 7:37
  Speaker 1: that the cycle is for much bigger losses. Thank you
• 7:41
  Speaker 1: very much for spending time with us as always interesting
• 7:44
  Speaker 1: and insightful. Charles Peabody is the president of Portalis Partners.
• 7:49
  Speaker 1: Speaking about bank earnings. We are broadcasting from the Bloomberg
• 8:04
  Speaker 1: Interactive Broker's studios. I'm pim Fox along with my co
• 8:07
  Speaker 1: host and colleague, A Lisa Abramwitz. Just for an moment,
• 8:11
  Speaker 1: imagine that you are in charge of a one hundred
• 8:15
  Speaker 1: and fifty three year old company that started life in
• 8:19
  Speaker 1: the pulp business, a paper mill in Finland, and after
• 8:24
  Speaker 1: a series of reorganizations, it turns out that you have
• 8:27
  Speaker 1: remade yourself in just twelve months. Here's what happened at Nokia.
• 8:33
  Speaker 1: In April of the company completed the sale of its
• 8:36
  Speaker 1: mobile phone handset business to Microsoft that accounted for more
• 8:40
  Speaker 1: than half of the company's sales. In April of Alcatel
• 8:45
  Speaker 1: Lucent agreed to Nokia's sixteen point six billion dollar buyout offer.
• 8:53
  Speaker 1: The deal closed in January. It has created the world's
• 8:57
  Speaker 1: second biggest telecom equipment company. Hind Ericsson here to tell
• 9:02
  Speaker 1: us about transformation is the chairman of Nokia. Resto Salisma
• 9:07
  Speaker 1: He is the author of a new book entitled Transforming
• 9:11
  Speaker 1: Nokia The Power of Paranoid Optimism to Lead through Colossal Change,
• 9:17
  Speaker 1: and he joints us here in our studios. Thank you
• 9:19
  Speaker 1: very much, sir for being here. It's great to be here.
• 9:22
  Speaker 1: Tell us why you decided to write this book. Well,
• 9:26
  Speaker 1: I believe in learning. I'm an entrepreneur by background, and
• 9:31
  Speaker 1: if you want to develop your company, every time you
• 9:34
  Speaker 1: do something, you need to look back what worked out,
• 9:37
  Speaker 1: what didn't work out, to create a culture of learning,
• 9:40
  Speaker 1: so that people always sort of do a post mortem
• 9:43
  Speaker 1: after they finished a project. And this is about learning.
• 9:47
  Speaker 1: It's about sharing the story of how to create a
• 9:52
  Speaker 1: trusting environment, how to promote teamwork, how to promote openness,
• 9:57
  Speaker 1: how to make bad news flow to the top quickly
• 10:01
  Speaker 1: so that people can react to what is actually happening.
• 10:04
  Speaker 1: We were sort of poisoned by the success of Nakia
• 10:08
  Speaker 1: as a handset vendor, and that toxic side effect of
• 10:11
  Speaker 1: success faces every single company that is hugely successful. And
• 10:17
  Speaker 1: I think our lessons are worth sharing with other companies.
• 10:21
  Speaker 1: So what's the toxic side effect? Because at its peak,
• 10:24
  Speaker 1: Nokia is the world's largest mobile handsup maker and cadet
• 10:27
  Speaker 1: for about four of Finland's entire economic output. How is
• 10:32
  Speaker 1: that a poisoning factor? Because when you're at the top
• 10:36
  Speaker 1: of the world and everybody is telling you that you
• 10:38
  Speaker 1: are the best thing ever, you start to believe that.
• 10:42
  Speaker 1: And when you start to believe that, you become complacent.
• 10:47
  Speaker 1: You start paying more attention to external factors such as
• 10:50
  Speaker 1: share price and what the analysts are writing, what the
• 10:53
  Speaker 1: media says, rather than customers, got technology, employees, competition, and
• 11:00
  Speaker 1: those small things accumulate and suddenly your competitiveness starts to disappear,
• 11:07
  Speaker 1: but you may not notice because you're not paying attention
• 11:10
  Speaker 1: to those crucial details anymore. You've been described as someone
• 11:15
  Speaker 1: who has been motivated as much by maximum returns as
• 11:22
  Speaker 1: by soft values. Can you explain that a little bit? Well,
• 11:28
  Speaker 1: Like many entrepreneurs, I believe that the long term is
• 11:33
  Speaker 1: the the only real horizon. I don't follow daily share
• 11:38
  Speaker 1: price movements at all. It may be two weeks between
• 11:42
  Speaker 1: I pay attention to what the share price is. I
• 11:46
  Speaker 1: want to build companies where employees really want to be
• 11:50
  Speaker 1: proud of not only what the company achieves, but how
• 11:53
  Speaker 1: they achieve That that how thing is so important, and
• 11:58
  Speaker 1: that's all about the long term. So perhaps you don't
• 12:01
  Speaker 1: pay attention to the share price, but the shares have
• 12:03
  Speaker 1: risen more than since you took over in two thousand
• 12:07
  Speaker 1: and twelve the company, so I will say that it
• 12:10
  Speaker 1: has done well. How do you foster that feeling though,
• 12:14
  Speaker 1: of pride and belief in the company and its purpose,
• 12:18
  Speaker 1: especially as its purpose changes. And there are certain core
• 12:23
  Speaker 1: elements that that remain and survive all changes. And for example,
• 12:30
  Speaker 1: in Nokia, as we started rebuilding and transforming the company,
• 12:33
  Speaker 1: we went back to our values from the nineties, which
• 12:37
  Speaker 1: sort of resonated with people whose they they remember how
• 12:40
  Speaker 1: in the nineties Nokia grew from being completely unknown to
• 12:44
  Speaker 1: the top of the world. And it's it's that sentimental
• 12:49
  Speaker 1: feeling that we are all humans aren't driven by feelings
• 12:53
  Speaker 1: and emotions. It's not about fact only. Although I have
• 12:57
  Speaker 1: to wonder. I mean a big conglomerate, right, I mean
• 13:00
  Speaker 1: a lot of conglomerates are facing a lot of issues
• 13:02
  Speaker 1: because they have to kind of figure out what are
• 13:04
  Speaker 1: they right and when we're seeing this with General Electric
• 13:06
  Speaker 1: for example, So you know, belief and in faith, in
• 13:09
  Speaker 1: a sense of pride or go so far, But what
• 13:11
  Speaker 1: about the skills that you need to overhaul, etcetera. When
• 13:14
  Speaker 1: you when you make a big shift, that's a that's
• 13:16
  Speaker 1: a good point. If you have a strong foundation of trust,
• 13:22
  Speaker 1: which means openness, which needs means being ready for both
• 13:26
  Speaker 1: bad news and good news, then you can experiment. People
• 13:31
  Speaker 1: have the courage to try out new things even if
• 13:33
  Speaker 1: they know they might fail, because they know that if
• 13:35
  Speaker 1: I fail, nothing bad will happen. And when you experiment,
• 13:39
  Speaker 1: you'll learn, and if you can do that at a
• 13:42
  Speaker 1: rapid cycle, then you'll survive the unpredictable changes in the environment. Now,
• 13:48
  Speaker 1: you just went back to school in order to fulfill
• 13:51
  Speaker 1: exactly some of these things. Explain what you're learning at
• 13:54
  Speaker 1: school and why you decided to do this. Yeah, like
• 13:57
  Speaker 1: many other leaders, I was challenging ins by machine learning
• 14:01
  Speaker 1: and what it can do. And like many others, I
• 14:05
  Speaker 1: was told by my teams sort of what it means,
• 14:09
  Speaker 1: and I learned those bullet points by heart, and like
• 14:13
  Speaker 1: a paratte I went out and gave presentations on the
• 14:16
  Speaker 1: power of machine learning without understanding the whole thing at all.
• 14:21
  Speaker 1: And then I sort of woke up that this cannot be.
• 14:23
  Speaker 1: I can't tell the world that machine learning will be
• 14:26
  Speaker 1: the key component of our future competitiveness if I don't
• 14:29
  Speaker 1: understand how it works. And then I went back to
• 14:33
  Speaker 1: school and I have studied programming again. I have taken
• 14:36
  Speaker 1: six courses in machine learning programming and done so all
• 14:39
  Speaker 1: sorts of architectures. And then I created a training program
• 14:43
  Speaker 1: based on what I now understood and tried to create
• 14:47
  Speaker 1: content that I would have wanted somebody to tell me
• 14:50
  Speaker 1: when I was trying to figure out what does machine
• 14:53
  Speaker 1: learning mean for us? And this has been something of
• 14:56
  Speaker 1: an inspiration to our R and D people, who I
• 15:00
  Speaker 1: felt and come to me and said that I'm being
• 15:02
  Speaker 1: a bit of shame that our chairman knows more about
• 15:04
  Speaker 1: machine learning than I do. I'm not taking night courses
• 15:07
  Speaker 1: on machine learning, and that's of course music to my ears.
• 15:10
  Speaker 1: Let's let's sign up for this well, the power of shame,
• 15:12
  Speaker 1: right if if if your fosters more about your job
• 15:15
  Speaker 1: than you do, you start to feel like you gotta
• 15:17
  Speaker 1: catch up. Risto Celisma, thank you so much for being
• 15:20
  Speaker 1: with us, and thank you congratulations on your book, Transforming
• 15:23
  Speaker 1: Nokia The power of Paranoid Optimism to lead through colossal change.
• 15:28
  Speaker 1: Resto Celis's chairman of Nokia also chairman and founder and
• 15:32
  Speaker 1: former chief executive of f Secure Corporation. Here in our
• 15:35
  Speaker 1: eleven three oh studios. Washington Post columnist and known critic
• 15:50
  Speaker 1: of Saudi Arabia disappeared mysteriously. Turkey is accusing uh Saudi
• 15:56
  Speaker 1: Arabia of murdering the journalist in an alleged attack that
• 16:01
  Speaker 1: was planned. Joining us now as Bobby got Ghosh. Bobby
• 16:04
  Speaker 1: Ghosh is editor of Bloomberg Opinion based in London. Bobby,
• 16:07
  Speaker 1: thank you so much for being with us. First, can
• 16:09
  Speaker 1: you explain what we know at this point about this
• 16:12
  Speaker 1: situation and why it's so important. But we know that
• 16:17
  Speaker 1: Jamal Kashogi about a week ago went into the Saudia
• 16:21
  Speaker 1: consulate in Istanbul to collect some papers, um, and that
• 16:25
  Speaker 1: was the last anybody saw or heard from him. Um.
• 16:29
  Speaker 1: We know that the Turkish authorities have been leaking to
• 16:32
  Speaker 1: the media, both local as well as international media, that
• 16:36
  Speaker 1: they believed that they had evidence that Jamal Kashogi was
• 16:40
  Speaker 1: first tortured and then murdered and then that his body
• 16:43
  Speaker 1: was removed from the Saudi consul. That they also have
• 16:47
  Speaker 1: tracked the movements of a private aircraft with fifteen passengers
• 16:52
  Speaker 1: that arrived that very day. They believe that these passengers
• 16:55
  Speaker 1: included people who were responsible for the torture and murder.
• 16:59
  Speaker 1: This is the extent off These are the facts that
• 17:02
  Speaker 1: we know. UM. This is important because it is it
• 17:07
  Speaker 1: comes while Saudi Arabia is trying to change its image
• 17:12
  Speaker 1: in the world. The crown Prince, the relatively new Crown
• 17:15
  Speaker 1: Prince um moment Bin Salman, he's better known as MBS.
• 17:20
  Speaker 1: He has been trying to change the way the country behaves.
• 17:25
  Speaker 1: He has been trying to reform economy, trying to change
• 17:28
  Speaker 1: many of the social regulations in the country, and trying
• 17:31
  Speaker 1: to improve its image in the world. So this comes
• 17:33
  Speaker 1: at a time this is this couldn't have been worse
• 17:36
  Speaker 1: type UM. This incident. If it is true that Jamal
• 17:40
  Speaker 1: was killed in the Saudi consulate buy Saudi officials on
• 17:44
  Speaker 1: the orders of senior Saudi figures in government, then this
• 17:48
  Speaker 1: is not a new and improved Saudi Areia. This is
• 17:50
  Speaker 1: very much an old one. In fact, in some ways
• 17:52
  Speaker 1: it is worse than the old Saudi Arabia Bobby Ghost.
• 17:57
  Speaker 1: This also has implications for the relations and ship between
• 18:00
  Speaker 1: the United States and Saudi Arabia. Correct yes, name it
• 18:04
  Speaker 1: does because Jamal was a resident of the United States
• 18:09
  Speaker 1: of Washington. UM. He was a columnist of Washington Post,
• 18:14
  Speaker 1: well known in Washington political and diplomatic circles, were liked
• 18:17
  Speaker 1: in those circles. UM. This is important because Saudi Arabia
• 18:21
  Speaker 1: is very important to the Trump administration. Donald Trump's President Trump,
• 18:25
  Speaker 1: his first international trip was to Saudi Arabia. UM. His
• 18:29
  Speaker 1: son in law, Jared Kushner, has a close personal relationship
• 18:33
  Speaker 1: with the Cown Prince. UM. The Trump administration has made
• 18:36
  Speaker 1: a big deal of the fact that they're very close
• 18:38
  Speaker 1: to South Arabia. So anything that reflects poorly on South Arabia,
• 18:42
  Speaker 1: especially since it involves an American resident, UM, he is
• 18:46
  Speaker 1: going to there's going to be a splashback on the
• 18:48
  Speaker 1: Trump administration. Bobby, It's really interesting in light of the
• 18:52
  Speaker 1: news that we have this morning with Turkey freeing in
• 18:55
  Speaker 1: the detained pastor that President Trump and his administration have
• 18:59
  Speaker 1: argued war, and it's interesting district contrast the rhetoric out
• 19:04
  Speaker 1: of the Trump administration around that versus the rhetoric around
• 19:08
  Speaker 1: this particular incident, and that basically President Trump seems to
• 19:12
  Speaker 1: be taking a pretty hands off approach to this, saying yeah,
• 19:15
  Speaker 1: well you know who knows why. Argument This argument is
• 19:20
  Speaker 1: that jama Kahoki is not an American citizen, whereas the pastor,
• 19:23
  Speaker 1: of course he's an American citizen. Unfortunately, that argument won't
• 19:27
  Speaker 1: wash because you know, States does have a responsibility for
• 19:31
  Speaker 1: somebody who was legally resident in Washington. It has a
• 19:34
  Speaker 1: responsibility because Saudi Arabia is a major ally, and it
• 19:38
  Speaker 1: has a responsibility as the leader of the free world,
• 19:40
  Speaker 1: as a beacon for for free speech and a free expression.
• 19:44
  Speaker 1: And Jamaica Shokei was essentially exercising his free speech. He
• 19:50
  Speaker 1: was not I would I think we should point out
• 19:53
  Speaker 1: he was not a strident opponent of the Soudi regime.
• 19:57
  Speaker 1: He was very much a part of the South, the elite.
• 20:00
  Speaker 1: His criticism had been quite mild. He supported the conference
• 20:05
  Speaker 1: when the conference was appointed, he disagreed with some of
• 20:08
  Speaker 1: the policies at the conference, then implemented and wrote about it.
• 20:12
  Speaker 1: That's the extent. This is not some left wing radical
• 20:17
  Speaker 1: who's hiding out in the United States and taking pot
• 20:20
  Speaker 1: shots at a regime. Is it possible that the United
• 20:24
  Speaker 1: States will conduct an investigation and if it does and
• 20:28
  Speaker 1: find something untoward, that there will be sanctions. Well, a
• 20:33
  Speaker 1: number of senior senators in the US have pressed the
• 20:39
  Speaker 1: presidents to do exactly that. Um Ran Paul the the
• 20:44
  Speaker 1: Senator from Kentucky, is threatening to call a vote in
• 20:47
  Speaker 1: the Senates to block all American arms sales to sell
• 20:52
  Speaker 1: the Arabia. He's run into tens hundreds of billions of dollars.
• 20:56
  Speaker 1: Very senior American political figures are taking this seriously. Um
• 21:00
  Speaker 1: The Trump administration might try to wriggle out of it,
• 21:03
  Speaker 1: but if the if the Senators keep pressing and keep
• 21:07
  Speaker 1: demanding answers, uh, then I think it'd be hard for
• 21:12
  Speaker 1: the White House to keep avoiding it. Bobby, just real
• 21:16
  Speaker 1: quick here, there are a number of company leaders who
• 21:19
  Speaker 1: have already said that they're not going to attend the
• 21:21
  Speaker 1: so called Davos in the Desert event that is upcoming
• 21:25
  Speaker 1: because of this incident. How significantly will that gain the
• 21:28
  Speaker 1: attention of Saudi Arabian leadership. But this is a very
• 21:33
  Speaker 1: very important, in fact, arguably even more than than NGOs
• 21:37
  Speaker 1: or human rights organizations complaining about what happened to to Jamal.
• 21:42
  Speaker 1: This is going to make a much greater impact because
• 21:45
  Speaker 1: a big part of the Crown Prince's reform agenda is
• 21:49
  Speaker 1: to bring more foreign and private investment investment into the country.
• 21:54
  Speaker 1: If major business leaders are backing out and don't want
• 21:57
  Speaker 1: to be associated with this event, which is a sort
• 22:00
  Speaker 1: of crown jewel of the of the program, that's a
• 22:04
  Speaker 1: big deal. I want to thank you very much for
• 22:07
  Speaker 1: joining us. Bobby Ghosh is a Bloomberg opinion editor speaking
• 22:10
  Speaker 1: about a Saudi Arabia Turkey and the disappearance of the journalist.
• 22:15
  Speaker 1: Jamal also just mentioned that Bloomberg is a sponsor of
• 22:19
  Speaker 1: the devas and we are monitoring this situation. This is
• 22:22
  Speaker 1: Bloomberg here to tell us more about municipal markets as
• 22:36
  Speaker 1: Amanda Alright, municipal bond reporter for Bloomberg. She joins us
• 22:40
  Speaker 1: here in our Bloomberg Interactive Broker's studios. Amanda, thank you
• 22:45
  Speaker 1: very much for being with us. Before we get into
• 22:48
  Speaker 1: sort a big picture, you know, trends and so on,
• 22:50
  Speaker 1: I want to ask you about this really. I thought
• 22:52
  Speaker 1: it was a very interesting story having to do with
• 22:54
  Speaker 1: Los Angeles and what the city, what Los Angeles does
• 22:59
  Speaker 1: with the revenue that it receives from parking finds from
• 23:02
  Speaker 1: sales taxes. Explain what they do now and what might
• 23:07
  Speaker 1: happen in the future. Sure. So. We had a really
• 23:09
  Speaker 1: good story this week by reporter rom e Var Gazy
• 23:12
  Speaker 1: um So. She wrote about Los Angeles considering UM creating
• 23:15
  Speaker 1: a public bank. UM. It would be the first U.
• 23:18
  Speaker 1: S city to do so. Um So what that means
• 23:20
  Speaker 1: is that it would move it's eleven billion portfolio UM
• 23:23
  Speaker 1: from some of the biggest banks in the country to
• 23:26
  Speaker 1: you know, self managed UM. It would invest in you know,
• 23:29
  Speaker 1: local projects and kind of you know, seek to have
• 23:31
  Speaker 1: more of like an E. S. G UM mindset rather
• 23:34
  Speaker 1: than working with UM. Some banks that can come under controversy.
• 23:38
  Speaker 1: That's interesting. Why would they be doing this? Is it
• 23:41
  Speaker 1: because of that environmental, social and governance issue or would
• 23:45
  Speaker 1: there also be in a financial incentive. So the story
• 23:49
  Speaker 1: talks a little bit about kind of how this effort
• 23:51
  Speaker 1: UM you know, first started and so a lot of
• 23:53
  Speaker 1: it was prompted by UM concerns about the Dakota Access
• 23:56
  Speaker 1: pipeline UM and work with Wells Fargo a few years ago.
• 24:00
  Speaker 1: Um So. Actually there was a big movement around public
• 24:04
  Speaker 1: banks UM during the Occupy Wall Street time. Um So
• 24:07
  Speaker 1: it does sort of come from this E. S. G
• 24:09
  Speaker 1: mind frame, and we do see Los Angeles being one
• 24:11
  Speaker 1: of those cities that's you know, very much a leader
• 24:14
  Speaker 1: when it comes to e s g UM issues, Amanda,
• 24:17
  Speaker 1: I want to shift gears a little bit to what
• 24:18
  Speaker 1: happened in the past week. There were some pretty big
• 24:20
  Speaker 1: outflows I believe the biggest and more than a year
• 24:23
  Speaker 1: from municipal bond funds in the United States. Why is
• 24:27
  Speaker 1: this just a rising rates kind of story. Yes, So
• 24:30
  Speaker 1: the investors that I've spoken with, um, you know, one
• 24:32
  Speaker 1: of them described it as simple bond math um. Basically,
• 24:35
  Speaker 1: retail investors they start seeing the losses that munis have posted. UM,
• 24:39
  Speaker 1: they see you know, the FED telegraphing more rates, and
• 24:42
  Speaker 1: they get a little bit nervous about their holdings, and
• 24:44
  Speaker 1: so they start pulling out of these funds. UM. It
• 24:47
  Speaker 1: is something that investors keep a close eye on because
• 24:50
  Speaker 1: retail is so important to this market. UM. And you know,
• 24:53
  Speaker 1: banks and insurance companies have kind of been on the
• 24:55
  Speaker 1: sidelines after their taxes were cut earlier this year. UM.
• 24:58
  Speaker 1: So these outflows are really really importan and we've seen
• 25:00
  Speaker 1: them with mutual funds and we've also seen them with
• 25:02
  Speaker 1: community ETFs. So what is going to be the likely consequence?
• 25:06
  Speaker 1: I mean, at what point will this actually hamper or
• 25:09
  Speaker 1: make it prohibitively expensive for municipalities to borrow money to
• 25:13
  Speaker 1: continue with projects they have planned. Or we're not anywhere
• 25:16
  Speaker 1: close to that. I mean we're already seeing sort of
• 25:18
  Speaker 1: the beginning stages of that. UM. The tenure benchmark from
• 25:21
  Speaker 1: munis is at the highest since early UM. So that's
• 25:24
  Speaker 1: pretty significant UM. And that obviously we're seeing, you know,
• 25:27
  Speaker 1: deals that are coming in higher this year than they
• 25:29
  Speaker 1: were last year. UM. You know, issuers have kind of
• 25:31
  Speaker 1: had these really low UM borrowing costs UM, and you know,
• 25:35
  Speaker 1: we always wrote stories about how they didn't necessarily take
• 25:38
  Speaker 1: advantage of those costs as much as they could UM.
• 25:41
  Speaker 1: And so now they're kind of facing this prospect of
• 25:43
  Speaker 1: rising interest rates for the foreseeable future. Does any of
• 25:47
  Speaker 1: this have to do with the banks that no longer
• 25:51
  Speaker 1: see municipal bonds as an attractive investment previous to the
• 25:57
  Speaker 1: tax reform? Absolutely so. UM. One really interesting dynamic is UM,
• 26:02
  Speaker 1: the longer out you go on muni bond deals, the
• 26:05
  Speaker 1: higher the yields are. And so if you look at
• 26:07
  Speaker 1: where muni stand compared to treasuries, they're very cheap on
• 26:11
  Speaker 1: the long end, but they're more expensive on the short end,
• 26:13
  Speaker 1: which is where you know, retail kind of hangs out. UM.
• 26:16
  Speaker 1: But because banks and insurance companies, you know, face this
• 26:18
  Speaker 1: lower tax rate, they haven't been buying munis as much. UM,
• 26:22
  Speaker 1: So yields on the long end have already kind of
• 26:25
  Speaker 1: risen up this year, whereas now we're seeing the short
• 26:27
  Speaker 1: end kind of join in on on yield rising. I
• 26:30
  Speaker 1: have to wonder, just going back to what him was
• 26:32
  Speaker 1: talking about with this Los Angeles Public Bank, would that
• 26:35
  Speaker 1: replace municipal debt as a form of financing. Would they
• 26:40
  Speaker 1: have to borrow in the muni market? I ask this
• 26:42
  Speaker 1: because as rates rise, I have to wonder what alternative
• 26:46
  Speaker 1: methods municipalities are going to look to possibly finance themselves.
• 26:49
  Speaker 1: I think that's a great point, um. And also the
• 26:52
  Speaker 1: opportunity zones that we saw come out of the tax
• 26:54
  Speaker 1: reform Act, Um, municipalities are going to have to get
• 26:57
  Speaker 1: creative with how they finance projects within their own orders. UM.
• 27:01
  Speaker 1: You know, the Los Angeles Bank, you know, there's a
• 27:03
  Speaker 1: lot to be determined their you know, voters have to
• 27:05
  Speaker 1: approve it first of all. UM, And there are still
• 27:07
  Speaker 1: some questions about the costs of creating such a bank.
• 27:10
  Speaker 1: So Muni's might still end up being the more cost
• 27:13
  Speaker 1: effective option. As far as this creates this potential bank,
• 27:19
  Speaker 1: would that be something that would have to have like
• 27:21
  Speaker 1: a federal charter a state charter? Is there any precedent
• 27:24
  Speaker 1: for this? Do we know there is a state bank
• 27:26
  Speaker 1: out of North Dakota. UM, so it's not federally regulated,
• 27:30
  Speaker 1: which is interesting. UM. But obviously Los Angeles is very
• 27:33
  Speaker 1: very big, UM. You know, being the first to get
• 27:36
  Speaker 1: involved with something like this, UM, you're gonna invite a
• 27:39
  Speaker 1: lot of scrutiny not only from maybe regulators, but also
• 27:42
  Speaker 1: um from residents living in that city and wanting to
• 27:44
  Speaker 1: make sure funds are used appropriately and and matters like that. Amanda, alright,
• 27:49
  Speaker 1: really really great stuff. Thank you so much for joining us.
• 27:51
  Speaker 1: We really appreciate it. Thanks for listening to the Bloomberg
• 27:57
  Speaker 1: P and L podcast. You can subscribe and listen to
• 28:00
  Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 28:04
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 28:08
  Speaker 1: on Twitter at Lisa abramowits one before the podcast. You
• 28:11
  Speaker 1: can always catch us worldwide on Bluebirg Radio.