Latest / Bloomberg Intelligence / Analyst Mike Mayo: Banks Are On the Road To Record Efficiency

Transcript

Analyst Mike Mayo: Banks Are On the Road To Record Efficiency · 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. Greig Jera, thank you
0:22
Speaker 1: so much. We appreciate it. Well. Bank stocks are on
0:25
Speaker 1: the move. I'm looking at some of the big money
0:26
Speaker 1: center banks on a you today basis up anywhere from
0:28
Speaker 1: fifteen to uh. Good moves for a long time beleaguered group.
0:34
Speaker 1: Let's see what's moving this group. We talked to Mike Mayo,
0:37
Speaker 1: of course, senior banking analysts at Wells Fargo, joining us
0:41
Speaker 1: on the phone from New York. Mike, thanks so much
0:43
Speaker 1: for joining us here. Nice move here for the banks.
0:46
Speaker 1: Love to get your take on the group. Uh sure,
0:50
Speaker 1: and thanks for having me on. I'd say we have
0:53
Speaker 1: more confidence that banks are on the road again to
0:56
Speaker 1: the pre pandemic returns evaluations they had before the last
1:01
Speaker 1: year year and a half, and we think banks are
1:04
Speaker 1: on the road to record efficiency. They're demonstrating resiliency through
1:08
Speaker 1: this recession, and they're showing that this is not your
1:11
Speaker 1: parents banking industry. I mean, it's night and day versus
1:15
Speaker 1: the past recession. If you remember the last recession, the
1:18
Speaker 1: global financial crisis, what a mess for for banks. I mean,
1:21
Speaker 1: but instead of out of control credit costs, now you're
1:24
Speaker 1: seeing banks actually release reserves for problem with credits. They
1:29
Speaker 1: are still sobering times. Look, you have individuals and companies
1:33
Speaker 1: you know, likely to go bankrupt having difficult times, but
1:36
Speaker 1: it's just not as bad as expected, and banks have
1:39
Speaker 1: gotten ahead of that. They're not being so Mike, They're
1:42
Speaker 1: not being brazen and releasing reserves. You think they're genuine genuinely,
1:46
Speaker 1: isn't such a huge risk of you know, cascading bankruptcies
1:50
Speaker 1: that Joe Stiglitz was warning about last year. That's correct,
1:55
Speaker 1: and banks have been pretty conservative. I mean, it was
1:58
Speaker 1: the biggest build up of reserves for problem loans in
2:02
Speaker 1: the history of banking in the first half of last year,
2:05
Speaker 1: and in the fourth quarter they released only about you
2:08
Speaker 1: know that, So you still have you know the other
2:12
Speaker 1: of reserves to to you know, cushion against different losses
2:16
Speaker 1: and another change versus the last recession, banks issued all
2:19
Speaker 1: kinds of new equity to show up the balance sheets.
2:23
Speaker 1: And now like literally as we speak, banks are allowed
2:27
Speaker 1: to buy back their stock after the most stressful bed
2:30
Speaker 1: stress tests in history in December. And then instead of
2:33
Speaker 1: the big charges and mishaps and problems that banks caused,
2:38
Speaker 1: now this time banks are more a part of the solutions.
2:41
Speaker 1: So it's really uh, you know, I think reform school
2:45
Speaker 1: worked for banks. You know, thank your regulators for you know,
2:49
Speaker 1: making banks shape up and have more liquidity and capital
2:53
Speaker 1: or resiliency. And and there's this, it's a very technical
2:56
Speaker 1: phrase called level three assets. These are assets that are
3:00
Speaker 1: hard to value and you you kind of value on
3:03
Speaker 1: your own, UM. But you know, these level three assets
3:06
Speaker 1: are down from the last recession. So that's just one
3:11
Speaker 1: area of one example of how banks have really reduced
3:14
Speaker 1: risk and showing much more sustainable results. And I'd say,
3:18
Speaker 1: nowhere do you see this more than Bank of America.
3:21
Speaker 1: Remember Bank of America was the poster child for mortgage
3:24
Speaker 1: problems after they bought countrywide very ill time deal will
3:29
Speaker 1: go down in history is one of the worst acquisitions
3:31
Speaker 1: ever pursued by a bank. UM. But you know, our
3:35
Speaker 1: view is that maybe because I read the book Sapience.
3:39
Speaker 1: But ten thousand years ago was the agricultural revolution? Well, well,
3:42
Speaker 1: Bank of America's has had its own personal agricultural revolution.
3:47
Speaker 1: They've gone from hunter gatherers to farmers. In the past,
3:51
Speaker 1: they would kind of hunt for a new mortgage or
3:53
Speaker 1: gather a trade or season acquisition. And now they're like
3:58
Speaker 1: farmers are cultivating relations ships, They're they're reading what they sew.
4:02
Speaker 1: Are they do this year and year out? Much more disciplined,
4:05
Speaker 1: sustainable than you've ever seen before, by the way, So
4:09
Speaker 1: what are the crops that that matter most? In that case?
4:12
Speaker 1: I mean, we've seen interest rates go off. That's good
4:14
Speaker 1: for net interest margins, right, we have forecasts for volatility
4:18
Speaker 1: continue and equities and FX so uh and obviously in
4:21
Speaker 1: fixed income, so that's good for for trading and um
4:25
Speaker 1: M and A. Everyone I talked to says this is
4:28
Speaker 1: gonna be a better year for M and A as well.
4:30
Speaker 1: And last year wasn't even that bad considering the pandemic.
4:33
Speaker 1: What's the most important, Well, for I'm gonna give you
4:36
Speaker 1: the general answer, and then that's specific. It's not you're
4:40
Speaker 1: asking the question wrong. You're asking a question like it
4:42
Speaker 1: was last century. What are the most important crops for
4:45
Speaker 1: for banks? So at least like a bank American JP
4:49
Speaker 1: Morgan and from the big banks now and the question
4:51
Speaker 1: is what's the most important meal, What's the meal that's
4:54
Speaker 1: going to satisfy the customers? More so, it's more of
4:56
Speaker 1: a relationship approach as opposed to a product approach. Now,
5:00
Speaker 1: I will answer your question of having said that there
5:03
Speaker 1: are certain areas that are growing faster than others, and
5:05
Speaker 1: capital markets are stronger for longer. You've heard uh, just
5:10
Speaker 1: this morning. JP Morrigan's chief financial officer expects meniateuly stronger
5:15
Speaker 1: trading year every year, meniately better investment banking year every year. Uh.
5:21
Speaker 1: You've heard other banks UM say that the backlog for
5:26
Speaker 1: mergers is that a record Goldman Sax has said that
5:28
Speaker 1: record year to day um uh, equity underwriting and I
5:33
Speaker 1: p O s So capital markets are are here for long, Mike.
5:37
Speaker 1: That's really do do investors does the market Mike typically
5:42
Speaker 1: play a similar multiple for capital markets earnings as they
5:45
Speaker 1: do for the bread and butter net interest income earnings. No,
5:50
Speaker 1: And that's that's a fair question. Like a lot of
5:51
Speaker 1: times investors think of it as one time but these
5:54
Speaker 1: are once again going back to the idea of a relationship,
5:58
Speaker 1: and so you might be getting a doing a trade
6:00
Speaker 1: with the customer one time and doing a little more
6:03
Speaker 1: lending with them another time, and doing some prime brokers
6:06
Speaker 1: a third time. But so that's why the steeper yield
6:09
Speaker 1: curve that helps the net entrance margins and spread revenues
6:14
Speaker 1: that's likely to stay around for a lot longer. So
6:16
Speaker 1: the fact that you have the highest UH ten year
6:21
Speaker 1: treasury yield in a year that is significant. As Bloomberg
6:25
Speaker 1: reported yesterday, banks at a fourteen year high yesterday, and
6:29
Speaker 1: part of that certainly is on the steeper yolk curve,
6:32
Speaker 1: higher rates, and that certainly helps the bread and butter
6:36
Speaker 1: traditional banking activities that banks have done, you know, for
6:39
Speaker 1: the last couple of hundred years, um. So that you
6:42
Speaker 1: get the spread revenues doing better at least for a
6:45
Speaker 1: little longer, you get capital markets doing well. But underlying
6:48
Speaker 1: all of this is technology, and technology is helping banks
6:52
Speaker 1: to control costs like they've never done before. Going back
6:56
Speaker 1: to the the Bank of America, Bank of America is a
6:59
Speaker 1: digital bank banking leader. They're one of the best fintech
7:02
Speaker 1: companies in the world. Um, they have over four thousand patents.
7:06
Speaker 1: They had a record number of patent last year. And
7:10
Speaker 1: you know, I I joke maybe they need to move
7:12
Speaker 1: their headquarters from Charlotte to Silicon Valley to get more
7:15
Speaker 1: credit for what they've been doing. But this is what
7:18
Speaker 1: they've been doing behind the scenes, you know, before the pandemic.
7:21
Speaker 1: During the pandemic, they've actually shined U through the pandemic
7:26
Speaker 1: because digital banking usage has really accelerated as a result
7:30
Speaker 1: of a change in customer behavior. So I don't know
7:33
Speaker 1: if you were going into branches before, but certainly during
7:36
Speaker 1: the pandemic, Uh, you and everybody else you know started
7:39
Speaker 1: a youth digital banking a lot more so the laggards
7:42
Speaker 1: I finally jumped on the digital banking fanwagon, and that
7:45
Speaker 1: allows uh, the large banks to close more branches uh
7:50
Speaker 1: as people use more digital banking and makes sense. So
7:53
Speaker 1: I guess that's part of the problem here here, Mike.
7:56
Speaker 1: I mean, I'm in Germany, which is you know, which is?
7:59
Speaker 1: Initially I would ask the question about which is more important,
8:02
Speaker 1: because you know, Christian Saving wanted to go a lean
8:04
Speaker 1: on corporate banking and lending and phase out trading as
8:07
Speaker 1: an important source of revenue. Now it's gone the other way.
8:10
Speaker 1: I know you cover US banks and I see that
8:12
Speaker 1: you have overweights on almost all of them, or more
8:16
Speaker 1: than half, let's say, right, but only underweights on a couple.
8:19
Speaker 1: What are the US banks doing right or what is
8:22
Speaker 1: the setup that allows them to be stronger than than
8:25
Speaker 1: Germany's banks or Europe's banks? Is it the technology piece?
8:29
Speaker 1: Is it the fact that they're not as um that
8:31
Speaker 1: they're not as the US isn't as overbanked. Well, I'll
8:36
Speaker 1: start with the last global financial crisis, and the US
8:39
Speaker 1: banking system certainly recapitalized stronger and faster. So if you
8:44
Speaker 1: look at the level of capital of US banks, it's
8:48
Speaker 1: it's stronger. The second thing would be, UH, cost control.
8:53
Speaker 1: There's a greater flexibility of US banks to go ahead
8:58
Speaker 1: and UH do what it takes to control costs. And
9:02
Speaker 1: sometimes that does relate to personnel. UM, so the uh
9:07
Speaker 1: you know, it's painful in the short term, but it
9:09
Speaker 1: can allow for growth longer term. And I say the
9:12
Speaker 1: third thing would be capital markets. And the US has
9:15
Speaker 1: a deeper, wider capital markets then in Europe, and you've
9:19
Speaker 1: seen the five largest US banks continue to gain share.
9:23
Speaker 1: So that's City Group, Bank America, JP, Morgan Morgan, Stanley,
9:26
Speaker 1: Goldman Sachs continue to gain share against the big European
9:29
Speaker 1: players like UBS, Credits, REEF, HSBC, Barclays, and Deutsche Bank UM.
9:35
Speaker 1: And so that's that's that's kind of across the board.
9:38
Speaker 1: So I'd call it the differences the three fees of
9:42
Speaker 1: capital costs and capital markets that are differentiating the US
9:46
Speaker 1: banks versus the European banks. Hey, Mike, thanks so much
9:49
Speaker 1: for joining us. We really appreciate getting your thoughts here.
9:51
Speaker 1: A good move here for the banks. Great to get
9:54
Speaker 1: your perspective. Mike Mayo, senior banking analysts at Wells Fargo Security.
10:00
Speaker 1: We just heard a couple of stories about the real
10:01
Speaker 1: estate market. It is hotting up, as the British say, um,
10:06
Speaker 1: and let's bring in best Freeman to talk about this
10:09
Speaker 1: for a second. She's the CEO of Brown Harris Stevens
10:12
Speaker 1: in New York City. Best Um, I am shocked that
10:18
Speaker 1: the market is getting so tight. Zillo is actually going
10:21
Speaker 1: to offer people cash on five thousand homes if they want.
10:25
Speaker 1: This estimate could be a little low, but it still
10:28
Speaker 1: seems like, Um, that's the sign of a little bit
10:31
Speaker 1: of froth. Yeah, I mean in New York City is
10:35
Speaker 1: definitely what was the word you said, hawking up? I
10:37
Speaker 1: like that, I might have cotton hotting they say, instead
10:40
Speaker 1: of heating up, they say hotting up, it's hawking up. Well,
10:43
Speaker 1: in New York City is definitely doing that. As far
10:46
Speaker 1: as zillo AND's estimates, you know, in New York City,
10:49
Speaker 1: that would not work. And we don't use that sort
10:52
Speaker 1: of format because you really do need people in the
10:54
Speaker 1: process because, as you know, New York City, for the
10:57
Speaker 1: most part, the housing stock that you can purchase is
11:00
Speaker 1: comprised of cooperatives, which require a human being to help
11:04
Speaker 1: you walk through the process. So's estimates might work and
11:07
Speaker 1: more like a team of human beings, right and some
11:09
Speaker 1: lawyers exactly, it's a it's you know, you have to
11:13
Speaker 1: give a financial portrait of who you are UM as
11:16
Speaker 1: a corporation. So's estimates work in some places, but New
11:20
Speaker 1: York City would not work. UM. But the market we're
11:23
Speaker 1: very um optimistic because we had one of the strongest
11:27
Speaker 1: januaries in five years for the luxury market for properties
11:31
Speaker 1: over four million dollars. And so New York City is
11:34
Speaker 1: starting to re emerge. UM and so we're feeling pretty
11:38
Speaker 1: good about that. My financial portrait is more like a
11:41
Speaker 1: crayon drawing, which is why, which is why I need
11:45
Speaker 1: to work somewhere else. Best talk to us, you know,
11:50
Speaker 1: there is this I'd love to get your thoughts best
11:53
Speaker 1: on kind of this broader theme of Okay, maybe it's
11:55
Speaker 1: not the death of New York, but New York is
11:58
Speaker 1: not going to be post pandemic. What it was pre
12:01
Speaker 1: pandemic in terms of commercial real estate, vibrancy, business, uh
12:07
Speaker 1: participation in the city, and that is likely to spill
12:10
Speaker 1: over to the residential market. How do you take that narrative? No,
12:14
Speaker 1: I mean you're this is true. I mean we definitely
12:16
Speaker 1: got hit very hard during the pandemic. We were shut down,
12:19
Speaker 1: you know, urban centers were, but we were kind of
12:21
Speaker 1: the epicenter, so you know, everything shut down, Broadway restaurants
12:25
Speaker 1: and all of that. Um. But of course, when we
12:28
Speaker 1: come back completely, we will be a different type of
12:31
Speaker 1: New York. But I would argue a better type of
12:33
Speaker 1: New York, um with different ideas and new creative thinking
12:37
Speaker 1: and that sort of thing. But um, it's going to
12:40
Speaker 1: take some time. I think there are a lot of
12:42
Speaker 1: issues that we have to wrestle with one. Besides the
12:46
Speaker 1: vaccine rollout, which is very important. UM crime, we have
12:50
Speaker 1: to you know, make sure that we are addressing uh
12:54
Speaker 1: crime and make sure it's a safe city and taxes.
12:57
Speaker 1: You know, we do have some political headwinds here in
13:00
Speaker 1: New York City. There's a lot of city council seats
13:02
Speaker 1: that are coming up in June, uh, something like thirty
13:05
Speaker 1: odd seats. You have the controllers race, the Mayor's race,
13:08
Speaker 1: and so all of those things are really important for
13:11
Speaker 1: the future of New York City. I'm not worried about
13:14
Speaker 1: us bouncing back. People want to be here. It's the
13:16
Speaker 1: best city in the world. But I think people need
13:18
Speaker 1: to start to get involved and pay attention to the
13:20
Speaker 1: political landscape, um because otherwise, you know, you're gonna have
13:23
Speaker 1: a piano tear at tax for example, and that would
13:25
Speaker 1: be very um detrimental to the city. So I grew
13:29
Speaker 1: up on ninety answer damn in the seventies. Um, New
13:32
Speaker 1: York to me looks incredibly safe. But I hear more
13:36
Speaker 1: and more talk about crime. Is that really an issue
13:38
Speaker 1: in Manhattan? You know, Look, it is an issue. It's
13:42
Speaker 1: definitely picked up. Even the percentages show it, and the
13:45
Speaker 1: subway ridership now I think is down se um, so
13:50
Speaker 1: there is some of that, and you're seeing more homelessness
13:53
Speaker 1: and that during the pandemic was you know, all over
13:56
Speaker 1: the place. And that's really important because if we don't
13:58
Speaker 1: have a safe city, we're not going to have sixty
14:01
Speaker 1: million tourists a year and people who want to not
14:04
Speaker 1: want to buy here. So crime is certainly an issue
14:07
Speaker 1: and it needs to be addressed. And we need to
14:09
Speaker 1: not have slogans like defund the police, because I don't
14:13
Speaker 1: think that helps us. I think we want to you know,
14:16
Speaker 1: work with the police and you know, uh maybe educate
14:20
Speaker 1: the police and help the police. We want to protect
14:22
Speaker 1: our citizens and have a very safe and vibrant city
14:25
Speaker 1: as we have had in the past. So best that
14:28
Speaker 1: the Bloomberg HQ here in New York is at fifty
14:30
Speaker 1: eight and Lex And as we look out our window,
14:32
Speaker 1: we see what I deem these silly towers that reached
14:35
Speaker 1: to the sky. And a lot of that demand was
14:38
Speaker 1: from international buyers, particularly China. Where is the international buyer
14:41
Speaker 1: vis you know, as it relates to New York City. No,
14:44
Speaker 1: I'm not seeing any of them, uh, you know, with
14:46
Speaker 1: the travel restrictions and uh, a lot of other challenges. Politically,
14:51
Speaker 1: we have not seen international buyers at all. In fact,
14:54
Speaker 1: I was at a project yesterday and you know they
14:57
Speaker 1: have had no international buyers and their own sold out.
15:01
Speaker 1: Um so it's been mostly domestic what you're seeing lately
15:04
Speaker 1: as of late. Um the purchasers here are all just
15:07
Speaker 1: like from west coast to east coast or coming from
15:09
Speaker 1: the south. I mean we're having a mixture. Um So,
15:11
Speaker 1: I think it's gonna be a while before we see
15:13
Speaker 1: that re emerge. What about the bourge out of New
15:16
Speaker 1: York though, I mean, especially in the age of social distancing,
15:19
Speaker 1: don't people want to have outdoor space? You know, um
15:24
Speaker 1: three thousand square feet? I mean, isn't Isn't that what
15:28
Speaker 1: they're looking for now? I mean that's you know, look,
15:31
Speaker 1: you have to have a lot of money to be
15:33
Speaker 1: able to afford three thousand square feet, and the a
15:35
Speaker 1: lot of you know, the average New York who was
15:37
Speaker 1: raising a family here, have kids going to school here,
15:39
Speaker 1: they can't afford three thousand square feet. Um So they
15:43
Speaker 1: are reimagining the space. Maybe they want a little outdoor,
15:46
Speaker 1: maybe they want a home office. Um So people have
15:49
Speaker 1: done that and undergone some changes, um and Brooklyn is
15:53
Speaker 1: still doing extremely well because there's a lot of townhouse
15:56
Speaker 1: inventory there. So you know, people have moved around a
15:59
Speaker 1: little bit. But I right to have a lot of
16:00
Speaker 1: friends who have moved and they want to there in
16:02
Speaker 1: Palm Beach or Connecticut and they missed the city because
16:07
Speaker 1: it's born in other places. Hey, best, thank you so
16:10
Speaker 1: much for joining us once again. We always appreciate it.
16:12
Speaker 1: Best Freedman, CEO, Brown, Howard Stevens, Greig Jerry, thank you
16:16
Speaker 1: so much. We appreciate it. Well. Big big news coming
16:19
Speaker 1: out of Australia as it relates to the digital news business.
16:23
Speaker 1: Australia just passed a law making Facebook and Google actually
16:27
Speaker 1: pay for the local news that is generated by operators
16:31
Speaker 1: within Australian question is well other countries follow suit and
16:35
Speaker 1: what does it mean for these big digital media companies.
16:37
Speaker 1: For that answers to that, we go to Jim Manners
16:39
Speaker 1: and he's the CEO of Social Flow based in New York.
16:41
Speaker 1: UM full disclosure. Social Flow is a platform used by
16:45
Speaker 1: Bloomberg for social media purposes. Jim, thanks so much for
16:48
Speaker 1: joining us here. So it seems like a big deal
16:52
Speaker 1: because todate Google Facebook, other digital players have generally received
16:56
Speaker 1: their news at little to no costs. So what does
16:59
Speaker 1: this mean? Yeah, it is big news and I think
17:02
Speaker 1: it's a win for both parties. The Australian government who
17:05
Speaker 1: has pushed more dollars the publishers and is able to
17:08
Speaker 1: say that they took on big second one and that's
17:10
Speaker 1: great for them. But Facebook made its point as well.
17:13
Speaker 1: They preserved their right to just stand news content again
17:15
Speaker 1: that they did very briefly in in this negotiation, rather
17:19
Speaker 1: than submitting themselves to forced arbitration, and they made it
17:22
Speaker 1: very clear to other countries around the world who were
17:25
Speaker 1: watching very closely, that there's a point past which they're
17:27
Speaker 1: not willing to go. So, you know, there aren't many
17:30
Speaker 1: negotiations where you can you can claim both sides wind,
17:32
Speaker 1: but this is one I think they did. So how
17:35
Speaker 1: does this work? Um? In practice? I mean, if I
17:38
Speaker 1: put a New York Times story on my Facebook page, um,
17:46
Speaker 1: Facebook has to pay the New York Times to show
17:48
Speaker 1: it to my uh to my friends. Well, actually, so
17:52
Speaker 1: it's in Australia. This is fairly interesting. It's specifically Australian
17:57
Speaker 1: media organizations. That's obviously what the Australian government's move is
18:00
Speaker 1: interested in so you're talking about News Corporate Australia and
18:03
Speaker 1: other big media companies. Facebook is effectively paying them a
18:06
Speaker 1: licensing fee, and so what the law says is that
18:09
Speaker 1: they have to reach some kind of licensing agreement working
18:13
Speaker 1: with each other. And if they don't reach a licensing agreement,
18:16
Speaker 1: that's where the requirements of the law kicked in. It
18:18
Speaker 1: doesn't affect you as a user. It doesn't affect the
18:20
Speaker 1: New York Times, you know here in the United States.
18:22
Speaker 1: The real question though, as you said, is what are
18:24
Speaker 1: other government's gonna do. And you can see EU and Canada, uh,
18:29
Speaker 1: you know, being jurisdictions where they might follow the Australian approach.
18:32
Speaker 1: I'm not so sure that that approach would fly here
18:34
Speaker 1: in the United States. It's a little bit too much
18:36
Speaker 1: government picking winners and well or Jim, does this Does
18:40
Speaker 1: this mean that Australians are now going to have a
18:43
Speaker 1: much bigger exposure to foreign media? No, I don't think
18:48
Speaker 1: it does. Interestingly, you know what Facebook has said all
18:50
Speaker 1: along is, you know, media companies choose to put their
18:53
Speaker 1: content on Facebook, whether it be an Australian media company
18:56
Speaker 1: or foreign media companies, They of course have algorithms that
19:00
Speaker 1: can bubble content up or down, and we see that
19:02
Speaker 1: all the time with our media clients. You know, the
19:04
Speaker 1: reach rises in the reach balls. And that's been one
19:07
Speaker 1: of the criticisms as well, is it's so unpredictable what
19:09
Speaker 1: Facebook does. But there's nothing in this law that requires,
19:13
Speaker 1: you know, that reach to be any higher. There are
19:15
Speaker 1: some requirements of that disclosure of algorithms, and and those
19:18
Speaker 1: don't think to be talked about a lot. I think
19:20
Speaker 1: that's in practice gonna be a lot harder than what
19:22
Speaker 1: they were hoping for in theory. So, Jimmy, is this
19:25
Speaker 1: a risk to the economics of a Facebook, of a Google.
19:31
Speaker 1: You would think it would be if it was uncapped.
19:33
Speaker 1: You know, every company is going to be wildly reluctant
19:36
Speaker 1: to take on an uncapped liability. And I think that's
19:39
Speaker 1: what this forced arbitration looked a little bit like. But
19:42
Speaker 1: they've gotten a lot of certainty here. They have preserved
19:45
Speaker 1: their right to just walk away if the if the
19:47
Speaker 1: stakes get too high or the cost get too high.
19:50
Speaker 1: But Facebook made some news this morning, I think it
19:52
Speaker 1: was they said they were going to commit more than
19:54
Speaker 1: a billion dollars over three three years but I mean,
19:57
Speaker 1: your Facebook is a seven and fifty billion dollar company.
20:00
Speaker 1: This is very much a constant doing business. It's a
20:02
Speaker 1: it's an acceptable cost for both Facebook and Google, and
20:05
Speaker 1: I think as long as they can keep it in
20:07
Speaker 1: the low billions of dollars, which sounds like a lot
20:09
Speaker 1: of money, and it is. But the Facebook and Google,
20:11
Speaker 1: you know, it's really not that much money. Except to
20:14
Speaker 1: your point, Jim, this is only one country and others.
20:17
Speaker 1: I mean, I'm in Berlin and I've had conversations with
20:20
Speaker 1: Matthias Duffner, who runs Axel Springer Um. They published build
20:25
Speaker 1: Uh newspaper, among many other publications. He has complained about
20:29
Speaker 1: the fact that Facebook and Google use their content without
20:34
Speaker 1: paying them for it. So does does Germany look at
20:38
Speaker 1: this too? Does does the US look at this? Yeah? Well,
20:41
Speaker 1: so definitely Germany and and more broadly the European Union
20:45
Speaker 1: are going to look at this. I think that's probably
20:46
Speaker 1: the jurisdiction that would be most likely to copy the
20:50
Speaker 1: Australian approach, and perhaps Canada as well. I just don't
20:54
Speaker 1: see that working in the US though. More practically, I mean,
20:57
Speaker 1: you've got literally the government taking the role picking a
21:01
Speaker 1: winner and a loser. In a commercial negotiation via for starbitration.
21:05
Speaker 1: As polar rights as our politics are in the US,
21:07
Speaker 1: and as as strong as some conservative beliefs are, is
21:11
Speaker 1: that really a role that you want government playing. So
21:13
Speaker 1: I don't see that approach applying here, but I very
21:17
Speaker 1: much think that the European Union is watching closely and
21:20
Speaker 1: may very well choose to follow Australia's approach. So, Jim,
21:23
Speaker 1: you follow these, you know, the social media technology space closely.
21:27
Speaker 1: What do you think the regulatory risk is for a
21:30
Speaker 1: lot of these companies? You know, we've over the last
21:32
Speaker 1: couple of years, we've seen CEOs of some of these
21:34
Speaker 1: big tech companies hauled before Congress that testify about various
21:37
Speaker 1: parts of their business. You know, we now have a
21:39
Speaker 1: new administration in the White House. Um, what's the expectation
21:43
Speaker 1: on Silicon Valley. Well, without a doubt, it's got to
21:46
Speaker 1: be anti trust, right. The facebooks and Googles and Amazons
21:49
Speaker 1: and Apples of the world are giant companies. I mean,
21:52
Speaker 1: they are the standard oils of of this this century
21:56
Speaker 1: and and this decade, or the A T and T
21:58
Speaker 1: s if you want to go back to that, Um,
22:00
Speaker 1: that analogy so clearly antitrust not just in the US,
22:03
Speaker 1: but also in the EU for instance. It's got to
22:05
Speaker 1: be a giant concern. And that leads to the point
22:07
Speaker 1: this this Australian you know, sort of the debate and
22:10
Speaker 1: negotiation UM is a commercial negotiation wrapped inside of a
22:15
Speaker 1: public relations battle. I mean, there's a question about how
22:18
Speaker 1: much money goes to who, and that's very important obviously
22:21
Speaker 1: to the Australian media. But the larger point to Facebook
22:24
Speaker 1: and Google is that public relations battle because ultimately that's
22:27
Speaker 1: what affects the antitrust action from government. So I wonder
22:34
Speaker 1: if then, uh, Facebook or Google could be broken up
22:38
Speaker 1: When you say anti trust, that's what I think of. UM.
22:41
Speaker 1: Is that a possibility? Yeah? I think it is, and
22:44
Speaker 1: and that's probably the biggest concern. So let's think about this.
22:47
Speaker 1: Facebook will start with them. They own Instagrams, they own
22:51
Speaker 1: what'sab and so it wouldn't be hard to imagine some
22:54
Speaker 1: kind of antitrust requirement that would force them to divest
22:57
Speaker 1: one or both of these. Google and the stably owned
23:00
Speaker 1: YouTube just to pick one example. They also have owned
23:03
Speaker 1: what was formerly called Doubliclick, which powers a lot of
23:06
Speaker 1: the advertising on Google and on YouTube. So there are
23:09
Speaker 1: certainly elements of each company that you could imagine being
23:13
Speaker 1: on the table in an antitrust type conversation. Obviously, neither
23:17
Speaker 1: a company would be in favor of that divestiture. You
23:19
Speaker 1: can expect them to battle consider place. But I don't
23:21
Speaker 1: think that will unfold quickly. But over the next you know,
23:24
Speaker 1: one to three years, might we see those kinds of discussions.
23:27
Speaker 1: I think that's entirely possible. H M, thanks so much
23:31
Speaker 1: for joining us. We appreciate it as always. Jim Anderson,
23:34
Speaker 1: CEO of Social Flow, giving us his thoughts on what
23:36
Speaker 1: we're seeing coming out of Australia from some little bit
23:38
Speaker 1: of a increased regulation there as it relates to some
23:41
Speaker 1: of that local news. And you know, Matt, I could
23:44
Speaker 1: see the European Union probably thinking about this might be
23:47
Speaker 1: an opportunity for us to maybe assert a little bit
23:49
Speaker 1: of a control over our content. It's coming out of Germany.
23:52
Speaker 1: You know, for the last ten years at Saint Paul,
23:55
Speaker 1: you've been the person I go to when I'm when
23:57
Speaker 1: I'm wondering about media properties. So what's your take on
24:02
Speaker 1: Facebook and the possibility of a breakup. I don't think
24:06
Speaker 1: that the breakup is likely, but I think it's the
24:09
Speaker 1: in terms of any new deals. Uh, any anti competitive
24:13
Speaker 1: behavior is going to be looked at very closely. So
24:14
Speaker 1: I think the overall light touch that the U. S.
24:18
Speaker 1: Tech industry has enjoyed over the last forty to fifty
24:21
Speaker 1: years that I think on the margin is changing and
24:24
Speaker 1: they need to be positioned for that. Oh man, you're
24:29
Speaker 1: gonna get canceled if you call us that. That's not
24:32
Speaker 1: got that's dangerous. UM. But I want to bring in
24:35
Speaker 1: another boy right now. Barry rid Holds joins us UM
24:39
Speaker 1: from what Holds Ridholes Wealth Management, also the host of
24:41
Speaker 1: course of Masters in Business, the podcast that's grown so popular,
24:46
Speaker 1: and Barry, I gotta start with one of what I
24:49
Speaker 1: think is one of the most interesting stories UM. Today,
24:53
Speaker 1: Deutsche Bank did a survey of, you know, potential recipients
24:57
Speaker 1: of the four d and sixty five billion dollars indirect
25:00
Speaker 1: stimulus that's expected to come soon thirty seven percent. So
25:05
Speaker 1: they want to put it directly into stocks. And as
25:08
Speaker 1: I watch game stock rise again today, I wonder, is this, uh,
25:14
Speaker 1: you know, Charlie Munger has said this is a dirty business,
25:17
Speaker 1: a dirty way to make money. It's gambling. Is this
25:19
Speaker 1: a problem. Um. Well, there's two questions in there, one
25:25
Speaker 1: about the stimulus of the second about um the gamification
25:30
Speaker 1: of of trading apps. And so from the stimulus perspective,
25:35
Speaker 1: we can't let the perfect be the enemy of the good.
25:38
Speaker 1: We know that there's ten million people unemployed, there are
25:40
Speaker 1: lots and lots of people underemployed. It's still going to
25:44
Speaker 1: be a quarter or two before we can even hope
25:48
Speaker 1: to beginning back to normal, and lots and lots of
25:51
Speaker 1: people are finding themselves both food and healthcare and secure.
25:55
Speaker 1: And this is to resolve some of that which will
25:59
Speaker 1: resolve from the pandemic. So is it going to be perfect. No,
26:04
Speaker 1: But that's the nature of federal government rescue plans is
26:08
Speaker 1: there are always going to be people who don't deserve
26:12
Speaker 1: what they get. I you know, those surveys are always terrible.
26:17
Speaker 1: In my firm, we put people through a form of
26:22
Speaker 1: a risk tolerance survey. It's almost pro former at advisory firms.
26:27
Speaker 1: But all it ends up telling us is what the
26:30
Speaker 1: markets done over the past couple of months. It doesn't
26:32
Speaker 1: really give you insight. And so thirty percent of people
26:36
Speaker 1: say they want to put some money into stocks. What
26:38
Speaker 1: that tells us is not what their real intentions are,
26:42
Speaker 1: but the fallmo surrounding recently rising markets and let the
26:47
Speaker 1: market to take a fifteen or twenty dip and that
26:50
Speaker 1: number will drop to far, far below thirty. Hey, Barry,
26:55
Speaker 1: we just had Mike Mayo on bank analyst at Wells
26:58
Speaker 1: Fargo Securities. Uh, you know, really constructive on the banking sector.
27:03
Speaker 1: You know that interest margin improvement with the steepening of
27:07
Speaker 1: the yield curving, really strong capital markets activity. What's your
27:11
Speaker 1: take on the on the bank stocks? So so you
27:13
Speaker 1: said the magic words, steepening of the yield curve. You know,
27:17
Speaker 1: when you're a bank, you could borrow from the Fed
27:20
Speaker 1: at FED funds rate and then lend it out at
27:23
Speaker 1: prevailing rates. And people don't realize when all rates are
27:26
Speaker 1: close to zero, there's not a whole lot of fat
27:29
Speaker 1: there for banks to make a lot of money when
27:32
Speaker 1: you look out on the other side of the valley
27:35
Speaker 1: of the pandemic. Once we're all done sheltering in place
27:38
Speaker 1: and working from home, which surely is sooner rather than later.
27:44
Speaker 1: But even if some of the more conservetive estimates put
27:47
Speaker 1: us in September October, well that's a couple of quarters
27:51
Speaker 1: from now. I'm not in the inflation camp. Um. We
27:55
Speaker 1: certainly should see in freely or we should see inflation
27:59
Speaker 1: normal lies, and there'll be some transitory increases in prices.
28:04
Speaker 1: There's a lot of spot shortages of goods as as
28:06
Speaker 1: manufacturers start to ramp back up again. But you know,
28:11
Speaker 1: all these factors are suggesting that there's a big, fat
28:17
Speaker 1: change coming that's gonna very much accrue to the benefit
28:21
Speaker 1: of banks from from the yield curve and improving economics
28:25
Speaker 1: and just seeing that ten million unemployee start to head
28:30
Speaker 1: back towards you know, a more normalized rates. As this
28:34
Speaker 1: externality passes banks, I can I can buy banks doing
28:38
Speaker 1: well because everything is going to go in their favor.
28:40
Speaker 1: The yield curve, volatility is expected to remain or even
28:45
Speaker 1: increase in risk assets, so they can trade a whole
28:48
Speaker 1: bunch of stuff around and make money off of that too.
28:51
Speaker 1: M and A is supposed to be strong again this year. UM.
28:54
Speaker 1: I gotta take issue with the inflation called transitory. I
28:58
Speaker 1: mean all the prices is that I see going up
29:01
Speaker 1: on UM commodities, for example, copper and lumber and oil.
29:06
Speaker 1: I can't imagine gold. I don't see it going up
29:10
Speaker 1: and gold, but you don't. You don't need gold to
29:11
Speaker 1: rebuild Texas, right, you don't need gold to um to
29:16
Speaker 1: to triple or quadruple the ev fleet. Gold isn't necessary
29:19
Speaker 1: to put in chargers. I mean, infrastructure spending isn't going
29:24
Speaker 1: to be buying gold. I'm I might myself all of
29:28
Speaker 1: this stuff barrier. It seems like we're gonna need more
29:31
Speaker 1: of it. I mean, as governments are trillions and trillions
29:34
Speaker 1: of dollars, they're gonna be buying copper with it. Absolutely so.
29:38
Speaker 1: So you're coming out of a year plus of a
29:42
Speaker 1: forced lockdown in all sorts of things that have normally
29:47
Speaker 1: taking place. You you and you're starting we see spot
29:50
Speaker 1: lumber shortages, and I'm the middle of a kitchen renovation
29:54
Speaker 1: that was supposed to start March. I'm still a waiting
29:58
Speaker 1: from my refrigerator doors to show up eight months later.
30:01
Speaker 1: Like all these things are taking much longer because it's
30:05
Speaker 1: hard to restart an economy after you lock it down
30:08
Speaker 1: for a couple of months. That said, um, when when
30:12
Speaker 1: you see all the different things that we're going to
30:14
Speaker 1: be spending money on, that that's why I say say
30:16
Speaker 1: this is transitory. Overall, for the past three decades, the
30:22
Speaker 1: dominant economic inflation has been deflation. You have between technology
30:29
Speaker 1: making the cost of digital goods cheaper, automation and and
30:33
Speaker 1: logistics making the cost of physical goods cheaper, and then
30:38
Speaker 1: global labor arbitrage making everything cheaper. Deflation is your background
30:45
Speaker 1: um driver. With these periodic spasms of inflation. I wouldn't
30:50
Speaker 1: be surprised to see a pop in inflation higher from
30:56
Speaker 1: where we are, But it looks like it's going to
30:58
Speaker 1: be transitory. It's not gonna take twenty years to rebuild Texas.
31:02
Speaker 1: It will take a couple of years. Yes, there are
31:05
Speaker 1: massive infrastructure needs in the United States, but those aren't
31:09
Speaker 1: get it done by tuesdays and here and here. Germans
31:13
Speaker 1: do spend decades rebuilding stuff. I mean it took us
31:15
Speaker 1: two decades to build the Berlin Airport. So so generally speaking,
31:20
Speaker 1: the US has moved from a infrastructure leader to a
31:25
Speaker 1: giant laggard we we once were. The Look at the
31:28
Speaker 1: Interstate highway system built under Eisenhower and how it's been
31:33
Speaker 1: starved of maintenance funds, and it's bridges and tunnels and
31:37
Speaker 1: rails and airports and go down the list. There is
31:40
Speaker 1: nothing preventing the Biden administration from saying we want to
31:45
Speaker 1: do a ten year, five trillion dollar infrastructure build funded
31:50
Speaker 1: if they're smart, with fifty a hundred year bonds while
31:53
Speaker 1: things are as cheap as they are now, and that
31:56
Speaker 1: is not necessarily inflationary because it's it's gonna be over
32:00
Speaker 1: a decade, and it's what we should have been doing
32:04
Speaker 1: over the past thirty years. Maybe part of the deflation
32:07
Speaker 1: we've been experiencing is our failure to do what most
32:11
Speaker 1: countries countries do, which is take care of their infrastructure.
32:15
Speaker 1: Will so beyond and so Barritt, hopefully there's some bipartisan
32:18
Speaker 1: support for that. But as we think about inflation, you're
32:21
Speaker 1: really not gonna have a meaningful inflation and in this
32:24
Speaker 1: economy unless you get wages moving higher, and they were
32:27
Speaker 1: starting to do like starting at yeah exactly, they were
32:31
Speaker 1: starting to do that prior to the pandemic. What's your
32:34
Speaker 1: view on kind of kind of the labor market and
32:35
Speaker 1: wage growth, So so, you know, we've seen a really
32:39
Speaker 1: interesting experiment take place, um both on the minimum wage
32:43
Speaker 1: side but across the board. And I know it's one
32:48
Speaker 1: but when you trace the history of what's taken place
32:52
Speaker 1: with median wages in the US. We are still shockingly
32:58
Speaker 1: feeling some of the effects of the Great Financial Crisis
33:01
Speaker 1: of o O nine. We saw a number of people
33:04
Speaker 1: lose their jobs and subsequently get different jobs that paid
33:09
Speaker 1: substantially less. There is a massive underemployment issue in the
33:14
Speaker 1: United States that we don't really talk about. And you're
33:18
Speaker 1: not going to get the sort of wage push inflation
33:21
Speaker 1: that was an epidemic in the seventies and what people
33:26
Speaker 1: traditionally think of as one of the key drivers of inflation.
33:30
Speaker 1: As long as twenty or thirty or maybe it's even
33:34
Speaker 1: of the country is underemployed. You know, we're gonna we
33:38
Speaker 1: got to leave it there. Unfortunately, because of time, we'll
33:39
Speaker 1: get you back, certainly of very quickly. Bary rit Hults
33:42
Speaker 1: of Bloomberk Opinion calumnists and founder and chairman, chief investment
33:45
Speaker 1: officer of rit Hult's Wealth Management. Thanks for listening to
33:49
Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to
33:52
Speaker 1: interviews with Apple Podcasts or whatever podcast platform you prefer.
33:57
Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Lern nineteen
34:00
Speaker 1: seventy three on Fall Sweeney. I'm on Twitter at pt
34:03
Speaker 1: Sweeney Before the podcast. You can always catch us worldwide
34:06
Speaker 1: at Bloomberg Radio