Latest / Bloomberg Intelligence / MUFG's Brown: Biggest Risk is Italian Banking Meltdown (Audio)

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MUFG's Brown: Biggest Risk is Italian Banking Meltdown (Audio) · Bloomberg Intelligence

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  Speaker 1: Global business news twenty four hours a day at Bloomberg
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  Speaker 1: This is a Bloomberg Business Flash from Bloomberg World Headquarters.
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  Speaker 1: I'm Charlie. Public of Brexit selling continues on this Monday,
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  Speaker 1: the Dow, the SMP, NASDAK all declining. Let's head right
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  Speaker 1: over the first word Breaking Views Desk four, Today's afternoon call,
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  Speaker 1: and here he is Bill Maloney. Good afternoon, Charlie. That's right.
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  Speaker 1: The breaks that followed continues, with it DAL currently down
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  Speaker 1: two hundred nine points, SMDs dropped forty one and NAZAC
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  Speaker 1: declines a hundred and twenty three. The SMP five hundred
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  Speaker 1: dropped back below the two hungine moving average for the
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  Speaker 1: first time since March over in New York. Germany and
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  Speaker 1: France each fell three percent. Italy slipped three point nine percent.
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  Speaker 1: The United Kingdom was cut to double A from triple
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  Speaker 1: A by s MP back In the US A small
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  Speaker 1: cap six hundred falls twenty two points, and the US
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  Speaker 1: ten YELL dropped to one point for six percent. Eight
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  Speaker 1: out of tennants to be sectors are lowered, led by
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  Speaker 1: losses in financials, materials and energy utilities and Telecom gained down,
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  Speaker 1: transports fall three point two percent, and as a biotech
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  Speaker 1: dropped eighty points, and the vix is down by nine
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  Speaker 1: point four percent. Leaders to the downside of the down
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  Speaker 1: included American Express, DuPont and JP Morgan, Small Games for
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  Speaker 1: Verizon and J and J. Western Digital sank twelve percent.
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  Speaker 1: Seagate dropped ten percent, while Dr Pepper Snapple outperformed, gaining
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  Speaker 1: four percent. Live from the First Bacon News to de
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  Speaker 1: Scot Bill Maloney, Charlottean, all right, thank you very much, Bill,
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  Speaker 1: And do hear live breaking news over your Bloomberg type
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  Speaker 1: squawk el sq you a w K on your terminal.
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  Speaker 1: I'm Charlie howled. That's a Bloomberg business flash you're listening
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  Speaker 1: to taking stock with Kathleen Hay and pin box on
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  Speaker 1: Bloomberg radio stocks selling off the United Stays around the
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  Speaker 1: world for that matter, second day in a row. The
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  Speaker 1: bond market is on fire, certainly with the US Treasury
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  Speaker 1: market with the third year bond up about three points today,
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  Speaker 1: the yell down below two point three per cent. I
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  Speaker 1: could go on and on about the big moves in
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  Speaker 1: these markets. Is this going to last? Our markets overreacting
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  Speaker 1: or are we heading for some kind of crisis that
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  Speaker 1: could keep markets up ended for a while and economies
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  Speaker 1: as well. Joining me now right here in our New
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  Speaker 1: York studio is Brendan Brown. He's chief economist at m
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  Speaker 1: u f G in London, that's ground zero for the
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  Speaker 1: bregsit vote. But he's here in New York with us today. Brendan,
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  Speaker 1: welcome to the show. Thank you. So, uh, let's start
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  Speaker 1: with the market reaction. Is it overdone? It's difficult to
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  Speaker 1: say it's overdone, because there are all some really bad
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  Speaker 1: scenarios out there, um and one in particular we see
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  Speaker 1: focused on is a possibility of some sort of Italian
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  Speaker 1: banking meltdown. And of course, given the possibility with the
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  Speaker 1: euro or EU may not even be here in a
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  Speaker 1: few years time, it's reasonable euro falls in value, a
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  Speaker 1: dollar stronger, and a big spike in the dollar is
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  Speaker 1: not such great news for US corporate profits. So there
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  Speaker 1: is some there is some rhythm behind this. You wrote
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  Speaker 1: quite quite markedly, quite impressively, something I think everyone's been
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  Speaker 1: wondering about in a recent note actually on Friday, that
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  Speaker 1: the UK referendum result is not a Leman moment. It's
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  Speaker 1: not two thousand eight all over again. If I may
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  Speaker 1: put some words in your mouth, but it is is
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  Speaker 1: the start of a European journey away from the failure
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  Speaker 1: of the EU. How do you know when something is
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  Speaker 1: a Leman moment or when it isn't well? A Leman
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  Speaker 1: moment would be characterized by terrific liquidity pressures, and what
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  Speaker 1: we're not seeing UM today or Friday is a shortage
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  Speaker 1: of liquidity. What we are seeing as a fairly I
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  Speaker 1: think judicious re pricing of assets UM to take account
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  Speaker 1: of some of the dangers ahead along a route which
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  Speaker 1: may end up well for Europe and the world economy,
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  Speaker 1: but there are dangerous from getting here to that final destination.
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  Speaker 1: If this is the beginning of a European journey away
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  Speaker 1: from the failure of the EU, is that your conclusion
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  Speaker 1: is that your view that how are painful breaks? It
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  Speaker 1: may be it is the right path for the UK
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  Speaker 1: to take. I would put it this way that the
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  Speaker 1: the EU had failed in three or four fundamental respects.
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  Speaker 1: UM didn't deliver prosperity, it delivered monetary failure, it increased
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  Speaker 1: political geopolitical instability, and it didn't deliver political democracy. So
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  Speaker 1: the UK, in deciding to move away from that were
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  Speaker 1: there were very powerful grounds and and and reasons for
• 4:45
  Speaker 1: hoping that a better future would lie going along an
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  Speaker 1: independent route, and that that independence may in turn shock
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  Speaker 1: Europe into something better. Now, none of this is for certain.
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  Speaker 1: There are dangers, and ultimately people have to decide themselves
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  Speaker 1: as to whether the risks worth the candle of the journey.
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  Speaker 1: But there were definite reasons for thinking along that way
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  Speaker 1: and and and hoping for a better future. You have
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  Speaker 1: spenttioned the possibility of banking meltdown in Italy, and of
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  Speaker 1: course the weakness of their banks has been an issue
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  Speaker 1: for some time. France has its own issues, strikes and
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  Speaker 1: you know, struggles with its economy. Uncle Merkel now is
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  Speaker 1: going to be left without the UK in the EU,
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  Speaker 1: two of major major partners within the EU with their
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  Speaker 1: own difficulties. How does she respond? What does all this
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  Speaker 1: mean for her future? Well? I think the pressures on
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  Speaker 1: on Angela Merkel are tremendous from inside the German political system.
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  Speaker 1: Even ahead of this, we saw support for the anti
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  Speaker 1: euro Party rising where they were getting fifteen percent of
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  Speaker 1: the vote in recent regional elections. And given Philip now
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  Speaker 1: of seeing the UK having voted for Brexit. Um one
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  Speaker 1: can only imagine that support is going to rise, particularly
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  Speaker 1: as without the UK budgetary contributions and as you say,
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  Speaker 1: Germany on its own, the prospects are Germany is going
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  Speaker 1: to be having to finance this much more than previously
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  Speaker 1: relative to the other partners. So as the anti euro
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  Speaker 1: vote grows, I would imagine that the precious within Merkel's
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  Speaker 1: own party c DU for Merkel to take a harder
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  Speaker 1: line on European bailouts and on immigration is going to increase.
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  Speaker 1: So ultimately, because the CDU does not want to see
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  Speaker 1: more and more support being taken away by the far right,
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  Speaker 1: we have to get some of that support back ahead
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  Speaker 1: of elections next year. So the Mirkel's going to either
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  Speaker 1: have to go along with this mood of harder line
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  Speaker 1: towards easy being not too many bailouts, more more control
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  Speaker 1: of immigration or or or yield power. And I think
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  Speaker 1: that's what we're going to see. And that does open up,
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  Speaker 1: of course, a conflict with the rest of the EU
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  Speaker 1: and with France, and I would imagine retentions are going
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  Speaker 1: to grow on that critical access between France and Germany.
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  Speaker 1: Let get one more quick question before we continue this
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  Speaker 1: conversation just a moment. What's the worst outcome in all
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  Speaker 1: of this for the financial markets right now? The worst
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  Speaker 1: outcome I could imagine in the in terms of the
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  Speaker 1: next few weeks would be an Italian type um banking
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  Speaker 1: meltdown and concern that because of the German situation we described,
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  Speaker 1: where isn't going to be for support for them. We're
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  Speaker 1: gonna continue this fascinating conversation with Brendan Brown, chief economist
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  Speaker 1: at m uf G in London, joining me in our
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  Speaker 1: New York studios today here at Bloomberg World Headquarters, Italy,
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  Speaker 1: the Spanish elections, the Bank of Japan trying to cope
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  Speaker 1: with a sergeant Yen that causes great difficulties for them
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  Speaker 1: as they try to stimulate the Japanese economy. All this
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  Speaker 1: and more coming up. I'm Kathleen Hayes taking Stock on
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  Speaker 1: is taking stock. I'm Kathleen Hayes, my close pim Fox
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  Speaker 1: on vacation, the Brexit vote, a political earthquakes, sending reverberations
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  Speaker 1: across Europe, around the world. We're gonna be looking at Italy,
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  Speaker 1: Japan and more right here on Bloomberg Radio. Now we're
• 8:37
  Speaker 1: gonna toss that over to Charlie Pellett. He's in the
• 8:40
  Speaker 1: newsroom with a Bloomberg Business flash. Thank you very much,
• 8:44
  Speaker 1: Kathleen Hayes. Those aftershocks include continues selling in the US
• 8:49
  Speaker 1: equity market, with the DAL, the SMP and nastac Hall
• 8:52
  Speaker 1: extending Friday's declines. Right now, the SMP pine hunted in
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  Speaker 1: text down forty three points of n a drop of
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  Speaker 1: two point one percent. Those aftershocks reverberating across financial markets
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  Speaker 1: after a weekend of political turmoil, the pound extending its
• 9:09
  Speaker 1: record sell off right now, we've got the NASDA Compositive
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  Speaker 1: Index down one eight declining two point seven percent down,
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  Speaker 1: industriels down three oh two, a drop of one point
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  Speaker 1: seven percent, sm D down two point one percent, the
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  Speaker 1: ten year up thirty one thirty seconds, looking at the
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  Speaker 1: yield now of one point four or five percent, Gold
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  Speaker 1: up nine eighty ounce now to thirteen thirty two again
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  Speaker 1: there of seven tenths of one percent. A Bloomberg exclusive
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  Speaker 1: this morning, as we sat down with the former Chairman
• 9:39
  Speaker 1: of the Federal Reserve, Alan Greenspan, he was on Bloomberg surveillance.
• 9:43
  Speaker 1: He talked at length about last week's UK for referendum
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  Speaker 1: and what it means for the future of the United Kingdom,
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  Speaker 1: significant renewals, Scotland and I'm almost certain school. It was
• 10:01
  Speaker 1: part of a Bloomberg Breakfast conversation hosted by Bloomberg N
• 10:06
  Speaker 1: one in Washington, d C. So again, taking a look
• 10:09
  Speaker 1: at what's happening with US markets, we've got crude oil
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  Speaker 1: slumping two point three percent, down one ten of arrol
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  Speaker 1: forty six fifty five right now. On West Texas intermediate
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  Speaker 1: crude grant is at thirty two, a drop there of
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  Speaker 1: two point three percent, and the SMP five hundred index
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  Speaker 1: down forty one to a drop of two. Tow industrials
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  Speaker 1: now down to a decline of one point seven percent
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  Speaker 1: at three thirty two on Wall Street. Now, let's take
• 10:38
  Speaker 1: a look at other news from around the world right
• 10:41
  Speaker 1: here on Bloomberg Radio. Thank you, Charlie from the Bloomberg
• 10:46
  Speaker 1: News Room. I'm Jill Schneider. This news update is brought
• 10:49
  Speaker 1: to you by the Jeep Grand Cherokee, the most awarded
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  Speaker 1: with its luxurious interior and legendary four by four capability.
• 10:59
  Speaker 1: Drive on at your local Jeep dealer today. British Prime
• 11:02
  Speaker 1: Minister David Cameron says the UK will not trigger formal
• 11:06
  Speaker 1: EU EXITOX at this stage. He says the RAF random
• 11:09
  Speaker 1: result is quote not the outcome I think is best
• 11:11
  Speaker 1: for Britain, but says the result must be respected and
• 11:14
  Speaker 1: implemented in the best possible way. Britain is leaving the
• 11:17
  Speaker 1: European Union, but we must not turn our back on
• 11:19
  Speaker 1: Europe or on the rest of the world. The nature
• 11:23
  Speaker 1: of the relationship we secure with the EU will be
• 11:26
  Speaker 1: determined by the next government, but I think everyone has
• 11:28
  Speaker 1: agreed that we will want the strongest possible economic links
• 11:31
  Speaker 1: with our European neighbors, as well as with our close
• 11:34
  Speaker 1: friends in North America, the Commonwealth and important partners like
• 11:37
  Speaker 1: India and China. Cameron says there will be no immediate
• 11:40
  Speaker 1: changes for EU citizens now living in the UK. Hillary Clinton,
• 11:44
  Speaker 1: on the campaign trail in Cincinnati today, took the stage
• 11:47
  Speaker 1: in a first joint appearance with Elizabeth Warren. Clinton praised
• 11:50
  Speaker 1: the Massachusetts senator law, offering a harsh critique of Donald Trump.
• 11:54
  Speaker 1: She exposes him for what he is, temperamentally unfit and
• 11:58
  Speaker 1: totally unqualified by to be president of the United States.
• 12:06
  Speaker 1: Senator Warren called Clinton a fighter who has never backed down.
• 12:09
  Speaker 1: The Stone Wall in has officially claimed its spot in
• 12:12
  Speaker 1: American history, The site of the nineteen sixty nine riots
• 12:15
  Speaker 1: that launched the gay rights movement, was recognized as a
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  Speaker 1: national monument in a ceremony today. Global News twenty four
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  Speaker 1: hours a day, powered by more than twenty hundred journalists
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  Speaker 1: and analysts in more than one twenty countries. From the
• 12:27
  Speaker 1: Bloomberg News Room, I'm Jill Schneider. This is Bloomberg, Charlie,
• 12:31
  Speaker 1: and we thank you and again recapping a forty point
• 12:33
  Speaker 1: loss now for the SMP five hundred index at nine
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  Speaker 1: down two. I'm Charlie Pellett. That's a Bloomberg business flash.
• 12:44
  Speaker 1: You're listening stock with kath on Bloomberg Radio. Problem with
• 12:50
  Speaker 1: any kind of big move in markets, particularly when you
• 12:54
  Speaker 1: see a move like the British pound where it fell.
• 12:57
  Speaker 1: Uh had his biggest drop on Friday since the Japanese
• 13:02
  Speaker 1: yen on Friday, also coming within six n of the
• 13:05
  Speaker 1: point where Prime Minister Amy jumped in with his three
• 13:08
  Speaker 1: pronged stimulus plan three years ago. The problem is that
• 13:10
  Speaker 1: you really don't know what one move can mean for
• 13:12
  Speaker 1: the markets more broadly, and is the Brexit vote reverberates
• 13:16
  Speaker 1: across Europe. I'm continuing my conversation with Brendan Brown. He's
• 13:19
  Speaker 1: chief economist at m u f G. Brendan, you just
• 13:22
  Speaker 1: mentioned Italy and it's banks. This has been a festering problem,
• 13:26
  Speaker 1: but it seemed like it like it kind of float
• 13:28
  Speaker 1: along right with the rest of the EU. But the
• 13:30
  Speaker 1: bank stocks in many countries, but particularly Europe, have gotten hammered.
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  Speaker 1: What does this mean totally? What's going to happen well
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  Speaker 1: Italy in many ways is the most exposed banking system
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  Speaker 1: to sovereign debt and also to bad loans, and Italy
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  Speaker 1: has been gaining from the fact that of the QI
• 13:50
  Speaker 1: operations by the ECB and all a cheap funding. In fact,
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  Speaker 1: many German voters are sort of cynco draggy in his
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  Speaker 1: position is ec BE chief has been using the e
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  Speaker 1: c B basically to help Italy, and and that's true
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  Speaker 1: to a considerable extent. When when when you look at
• 14:08
  Speaker 1: the numbers, so now, with the pressures being very much
• 14:12
  Speaker 1: towards EU disintegration and possibly a harder German line as
• 14:16
  Speaker 1: we've been discussing a few minutes ago on ECB funding,
• 14:20
  Speaker 1: the question really does rise as to whether this Italian
• 14:23
  Speaker 1: situation is sustainable or whether the banks are going to
• 14:28
  Speaker 1: have to face a much harder environment. Look at that
• 14:31
  Speaker 1: mean for Italy? What could it mean for the EU?
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  Speaker 1: Is this what you're going to see? Are these are
• 14:34
  Speaker 1: kind of stresses that pull the E together because somehow
• 14:37
  Speaker 1: they all come together and help Italy? Are these are
• 14:39
  Speaker 1: kind of things that pull up further apart? I think
• 14:41
  Speaker 1: in the present climate it would pull apart because the
• 14:45
  Speaker 1: German electorate is all very already very intense and upset
• 14:49
  Speaker 1: about the amount of funds which have gone onto this project,
• 14:52
  Speaker 1: and seeing British example of being able to walk away
• 14:54
  Speaker 1: with it, walk away from it, the question is whether
• 14:57
  Speaker 1: why shouldn't Germany be able to do the same thing.
• 14:59
  Speaker 1: Now certainly allowed voice in Germany over the year saying
• 15:02
  Speaker 1: just that. Let's look at the Bank of Japan. Last
• 15:04
  Speaker 1: night in the New York early in the morning in Asia,
• 15:08
  Speaker 1: we learned that there was an emergency meeting being held
• 15:11
  Speaker 1: with the Bank of Japan Prime Minister Abby and his
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  Speaker 1: many of his members of his cabinet to look at
• 15:16
  Speaker 1: this distress on the end and what it could mean
• 15:18
  Speaker 1: for their markets, What does this surge in the end
• 15:22
  Speaker 1: mean for their economy, for their policy going ahead. Well,
• 15:25
  Speaker 1: what one has to realize first of all is that
• 15:27
  Speaker 1: Japan has a huge net investment position in European bonds,
• 15:32
  Speaker 1: with Japanese investors over the last ten years or more
• 15:35
  Speaker 1: have basically been piling into the so called high coupon
• 15:38
  Speaker 1: European bond markets. So when they see anything like this
• 15:42
  Speaker 1: happened and the unknowns as to how the brexits going
• 15:44
  Speaker 1: to emerge, they all rushed to hedge. And so you
• 15:47
  Speaker 1: seem tremendous upward pressure on the yen dutifous hedging by
• 15:52
  Speaker 1: japan UM institutions. Now on top of that, when you
• 15:56
  Speaker 1: get for yen rising, this is bad news with Japanese
• 15:59
  Speaker 1: stock market. In the stock market for in turn increases
• 16:03
  Speaker 1: risk aversion, and in turn that means less capital leaving Japan.
• 16:08
  Speaker 1: So a sort of a sort of a whole vicious
• 16:10
  Speaker 1: circle here developing. UM. And of course our be economics
• 16:15
  Speaker 1: is founded on the two principles of using monetary policy
• 16:18
  Speaker 1: to boost the stock market and to appreciation to appreciate en,
• 16:21
  Speaker 1: both of which now have gone completely into reverse. UM.
• 16:25
  Speaker 1: I don't I if you ask me what's going to happen.
• 16:27
  Speaker 1: I think at some stage it's going to be intervention
• 16:29
  Speaker 1: by by the government of Japan. Currency market intervention. Currency
• 16:32
  Speaker 1: market intervention. But it's so important to stop all of
• 16:34
  Speaker 1: this andthing well at working the latterly if it's we
• 16:37
  Speaker 1: have to join them. I think ultimately their first intention
• 16:40
  Speaker 1: would have been to do this jointly with the United States,
• 16:43
  Speaker 1: but there's really no prospect of the US joining in
• 16:45
  Speaker 1: any intervention, so the Japan would do this unilaterally. Dollar
• 16:51
  Speaker 1: gold What does all this mean? Keep buying into the
• 16:53
  Speaker 1: paling into the gold. What about the dollar? Well, by
• 16:57
  Speaker 1: to go do you have to think that here the
• 16:59
  Speaker 1: second biggest currency in the world, Euro is now now
• 17:04
  Speaker 1: it's an EU currency, and yet we don't know where
• 17:06
  Speaker 1: the EU is headed or whether you will even be
• 17:08
  Speaker 1: here according to some extreme scenarios within a few years.
• 17:12
  Speaker 1: If we really see pressure between Germany and France building
• 17:14
  Speaker 1: up so that that that means that investors should that
• 17:20
  Speaker 1: there were no longer in a multi currency universe anymore.
• 17:23
  Speaker 1: They have to think seriously, but from only alternative to
• 17:26
  Speaker 1: the dollar is gold. So it makes sense that gold
• 17:29
  Speaker 1: is pushed up here as as a result of these happening,
• 17:32
  Speaker 1: and the dollar of course gains as being the only
• 17:35
  Speaker 1: fat money which is not negative interest rates and doesn't
• 17:39
  Speaker 1: face some sort of existential risk or exploding budget deficit
• 17:43
  Speaker 1: risks such as we have in Japan. Brendan Brown for investors,
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  Speaker 1: are we gonna look back in five years and say, wow,
• 17:49
  Speaker 1: that that's when it really all turned. That's one that
• 17:51
  Speaker 1: was the beginning sort of the the end of the world,
• 17:54
  Speaker 1: but still big, big negative moment for markets. Uh, you know,
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  Speaker 1: between the Brexit vote, between eight point seven trillion dollars
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  Speaker 1: worth of negative bond yields around the world. Is this
• 18:03
  Speaker 1: an ominous sign? I think the most ominous sign I
• 18:07
  Speaker 1: would look at in recent months has been this steady
• 18:11
  Speaker 1: decline in Tokyo. I mean, Tokyo is the second biggest
• 18:14
  Speaker 1: equity market in the world, and it's it's crashed by
• 18:17
  Speaker 1: around That has to be a warning because very often
• 18:21
  Speaker 1: when you look at global asset price deflation, it's it
• 18:24
  Speaker 1: doesn't all start at once everywhere. You normally get a lead,
• 18:27
  Speaker 1: a leader at the same time as other markets may
• 18:30
  Speaker 1: still be going up. And I think that's what we've
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  Speaker 1: seen in the first six months of this year. But
• 18:34
  Speaker 1: it does make one much more anxious. I think about
• 18:36
  Speaker 1: what follows Brendon Brown. But you know, you're less anxious
• 18:39
  Speaker 1: if you have a sense of white what might be coming,
• 18:41
  Speaker 1: because you can prepare for Thank you so much for
• 18:43
  Speaker 1: joining us. Brendon Brown is chief you as economist. Excuse me,
• 18:46
  Speaker 1: he's chief economist at m u f G based in London.
• 18:50
  Speaker 1: Joining me. Kathleen Hayes on taking Stock on Bloomberg Radio today.
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  Speaker 1: We are filling to tell you a moment of the
• 19:09
  Speaker 1: coming up on Bloomberg Radio, which is I'll look at
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  Speaker 1: the stock market right here,