Latest / Bloomberg Intelligence / December Meeting Likely Taper Announcement: Piegza

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December Meeting Likely Taper Announcement: Piegza · 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. Let's bring in Dr
• 0:22
  Speaker 1: Lindsay Piaza. Now she's chief economist for STI Full Financial
• 0:27
  Speaker 1: and we'll start off, Lindsay with your reaction to the
• 0:32
  Speaker 1: FED discussion and and and the and the release that
• 0:34
  Speaker 1: we had yesterday. I want to kick it off of
• 0:37
  Speaker 1: the dots because clearly that's what the market paid the
• 0:40
  Speaker 1: most attention to. But um, Jerome Palace had take this
• 0:43
  Speaker 1: with a grain of salt. This isn't it's not not
• 0:45
  Speaker 1: like a plan. We haven't discussed this and we're moving
• 0:48
  Speaker 1: in that direction. Um, what do you think about the
• 0:51
  Speaker 1: dot plot? Well, I thought it was pretty interesting. We
• 0:54
  Speaker 1: saw actually a number of revisions to the Fed's forecast.
• 0:57
  Speaker 1: Not only did they x but I to the potential
• 1:01
  Speaker 1: pathway for higher rates, but they also increase their expectation
• 1:04
  Speaker 1: for inflation and growth and at the same time, they
• 1:07
  Speaker 1: left their view of the labor market pretty much unchanged.
• 1:10
  Speaker 1: So their expectation for being able to raise rates faster
• 1:15
  Speaker 1: is really predicated not on fears of inflation, but the
• 1:19
  Speaker 1: fact that the recovery is picking up momentum, that it's
• 1:22
  Speaker 1: it's recovering it a faster than expected pace. So I
• 1:25
  Speaker 1: thought this was a pretty positive projection from the Fed.
• 1:30
  Speaker 1: And you know, on the jobs front, on the labor front, Lindsay,
• 1:33
  Speaker 1: you know, the data over the last couple of months
• 1:34
  Speaker 1: has been a little bit disappointing in terms of the
• 1:36
  Speaker 1: folks getting back to work. How do you view that?
• 1:40
  Speaker 1: How do you think the Fed's viewing that is just
• 1:42
  Speaker 1: kind of a little bit of an aberration that things
• 1:44
  Speaker 1: will pick up. That seems to be what they're suggesting. Well,
• 1:47
  Speaker 1: I think the FED was very clear and acknowledging the
• 1:50
  Speaker 1: recent improvements that we've seen in the economy. But at
• 1:52
  Speaker 1: the same time, I think the chairman was tempering the
• 1:55
  Speaker 1: market's expectations to say, wait a minute, we're not entirely
• 1:58
  Speaker 1: out of the woods quite yet. Yes, we've taken big
• 2:01
  Speaker 1: steps in the right direction, but we still have millions
• 2:04
  Speaker 1: of Americans that have yet to return to the labor market.
• 2:07
  Speaker 1: So there's further progress that needs to be achieved before
• 2:11
  Speaker 1: we can talk about reaching that pre crisis vitality. So
• 2:15
  Speaker 1: I think the Fed was very careful to walk this
• 2:17
  Speaker 1: delicate line of yes, applauding the improvements, but also justifying
• 2:22
  Speaker 1: the need for further accommodation going forward. What do you
• 2:26
  Speaker 1: think the ten year yield means that real yielded I
• 2:30
  Speaker 1: think negative seven basis points. Does that change significantly through
• 2:35
  Speaker 1: your end? I think this says that the market is
• 2:38
  Speaker 1: buying into the FEDS inflation dismissal rhetoric, that the market
• 2:44
  Speaker 1: is really buying into the notion that these these recent
• 2:46
  Speaker 1: price pressures will prove temporary and going into the end
• 2:50
  Speaker 1: of the year, in early we'll start to see inflation
• 2:53
  Speaker 1: come back down in line with the FEDS two percent targets.
• 2:56
  Speaker 1: So I think from here the market is signaling that
• 2:59
  Speaker 1: ape Can inflation has already been priced in, and in fact,
• 3:03
  Speaker 1: we could continue to see some downward pressure on the
• 3:05
  Speaker 1: longer end of the curve as we do start to
• 3:08
  Speaker 1: see that reduced price pressures come to fruition or translate
• 3:12
  Speaker 1: into the data. So, lindsay, what's your sense of timing here,
• 3:16
  Speaker 1: as we think about tapering, is going to be the first,
• 3:20
  Speaker 1: you know, act that we will get from this Federal Reserve.
• 3:23
  Speaker 1: How are you thinking about that and from a timing perspective, Well,
• 3:26
  Speaker 1: I think the FED has been pretty clear that they're
• 3:28
  Speaker 1: going to give the market ample notice in terms of
• 3:31
  Speaker 1: that discussion, and once the discussion begins, they're going to
• 3:34
  Speaker 1: again give the market ample notice before a formal announcement
• 3:37
  Speaker 1: is made. So if we anticipate that the discussion really
• 3:41
  Speaker 1: begins around that August September time frame, it's likely that
• 3:45
  Speaker 1: by the end of the year, at that December meeting,
• 3:47
  Speaker 1: the FED initiates a formal announcement that taper will begin,
• 3:52
  Speaker 1: making the actual process of drawing down those purchases two
• 3:56
  Speaker 1: event and I do think this is going to be
• 3:58
  Speaker 1: a very deliberate, very slow, very transparent process over six twelve,
• 4:04
  Speaker 1: maybe even eighteen months period, pushing out to that first
• 4:08
  Speaker 1: rate increase well into which again lines up with what
• 4:12
  Speaker 1: we saw in terms of the latest dot plot with
• 4:14
  Speaker 1: the vast majority of FETE officials anticipating at least one
• 4:18
  Speaker 1: rate hike by the end of What do you think
• 4:21
  Speaker 1: about the housing market, Lindsay David Rosenberg. Obviously he's a
• 4:24
  Speaker 1: bear um, but he says we're in a bubble and
• 4:26
  Speaker 1: it's not hard to understand why. Well, I do think
• 4:31
  Speaker 1: that the housing market strength is very different from what
• 4:34
  Speaker 1: we saw going into the oh seven o eight recession.
• 4:36
  Speaker 1: This time around, it's not being driven by speculative demand
• 4:40
  Speaker 1: or purchases of vacation homes or second homes. This is
• 4:44
  Speaker 1: a shift, a structural shift in demand for homes, particularly
• 4:49
  Speaker 1: outside of the urban centers. Now some of the variable
• 4:51
  Speaker 1: some of the factors are COVID related, but some are not.
• 4:55
  Speaker 1: We see an entire generation of millennials finally deciding to
• 4:58
  Speaker 1: jump into the housing market, and so there is some
• 5:01
  Speaker 1: structural demand that I do think will continue to support
• 5:05
  Speaker 1: this type of growth going forward. So I think it's
• 5:08
  Speaker 1: a little bit premature to say that this is a
• 5:11
  Speaker 1: bubble um. I do think this is more of a
• 5:13
  Speaker 1: long standing structural support that we'll see in terms of
• 5:16
  Speaker 1: the housing market. All right, Lindsay, thanks so much for
• 5:19
  Speaker 1: joining us. We always appreciate getting your perspective here. Lindsay
• 5:22
  Speaker 1: PEEGSA chief economists for Stephi Financial, joining us on the
• 5:26
  Speaker 1: phone from Chicago, and I guess if you're in the
• 5:28
  Speaker 1: market for buying a home, Matt, it might be higher
• 5:30
  Speaker 1: prices for longer. That hurts. That hurts to hear. But
• 5:35
  Speaker 1: the good news is if you're in the market for
• 5:37
  Speaker 1: selling a home, you're gonna probably get a higher price.
• 5:41
  Speaker 1: And I see that Porscha is now putting out the
• 5:44
  Speaker 1: new nine eleven nine nine two in GT three form. Sure,
• 5:49
  Speaker 1: so I would say, anyone who's selling a home right now,
• 5:51
  Speaker 1: seriously consider buying this nine eleven that you heard it here. First,
• 5:59
  Speaker 1: skin over now to Ian Billina. He is the founder
• 6:02
  Speaker 1: and CEO at Token Metrics. He's been involved in the
• 6:06
  Speaker 1: crypto space for uh three four human years, which is
• 6:12
  Speaker 1: like twenty crypto years. He can speak to us on
• 6:15
  Speaker 1: what he's seen in terms of well, let's talk about
• 6:19
  Speaker 1: bitcoin to to start with, Ian, Um, I know there
• 6:23
  Speaker 1: are five thousand, four hundred and sixty eight other coins
• 6:27
  Speaker 1: out there, but you think bitcoin is widely considered still
• 6:33
  Speaker 1: the most important and um expected to be still the
• 6:37
  Speaker 1: most important cryptocurrency in the next decade. Oh wow. First
• 6:43
  Speaker 1: of all, thanks for heaving me to be on So
• 6:46
  Speaker 1: bitcoin right now is the most impromative piturency in the market. UM,
• 6:50
  Speaker 1: it's basically a proxy for the whole market. But we
• 6:53
  Speaker 1: actually take a contragrant viewpoint on this. We believe in
• 6:56
  Speaker 1: the future in the next ten years belong to a
• 6:59
  Speaker 1: crypt Well, we're not over bitcoin. Bitcoin we had the
• 7:02
  Speaker 1: person of our advantage. However, if you see all the
• 7:05
  Speaker 1: growth happening in the space, it's happening in other block chains,
• 7:09
  Speaker 1: for example in DeFi. Right now, Defy has over one
• 7:13
  Speaker 1: billion dollars in total value and over so many type
• 7:16
  Speaker 1: percent of that is happening on Etheria. So well, bitkoin
• 7:19
  Speaker 1: was first and it's definitely the champion of the space.
• 7:21
  Speaker 1: There's lots of innovation happening all over the space. Ian,
• 7:25
  Speaker 1: I'd love to get your view on this one of
• 7:27
  Speaker 1: the issues or one of the I guess the selling
• 7:30
  Speaker 1: points if you will, or when the attributes a bitcoin
• 7:32
  Speaker 1: was it's uh anonymity that can't be traced. But yet
• 7:35
  Speaker 1: we've seen in some of the ransomware nymity. Yes, bitcoin
• 7:40
  Speaker 1: is never was never thought to be anonymous. We we've
• 7:43
  Speaker 1: always known that it is on a public ledger and
• 7:46
  Speaker 1: can be traced by everyone in the world. Well, that
• 7:48
  Speaker 1: was see, that was news to me at least, I guess,
• 7:52
  Speaker 1: and you know, so talk to us about what happened
• 7:55
  Speaker 1: with some of those ransomware and the ability of authorities
• 7:59
  Speaker 1: to kind of trace it and get it back. Yeah. Well,
• 8:02
  Speaker 1: I mean that's one of the miscommunications when it comes
• 8:05
  Speaker 1: to crypto and bitcoin. People think bitcoin is completely anonymous. Now,
• 8:09
  Speaker 1: early on, in the early days, yes, there was dark
• 8:12
  Speaker 1: there was the dark web, so code and all those
• 8:14
  Speaker 1: the farious actors were using bigmoin for crypto in general.
• 8:17
  Speaker 1: For that means, however, the blockchain has been one of
• 8:20
  Speaker 1: the best innovations in the last twenty years. So now
• 8:23
  Speaker 1: regulators and that the police and FBI are able to
• 8:27
  Speaker 1: work and transact and track transactions on the blockchain. The
• 8:31
  Speaker 1: companies out there like chain analysis that helps regulators do
• 8:35
  Speaker 1: just that. Right, So the people think they can hide
• 8:38
  Speaker 1: from bitcoin and blocking blatchin transactions, that's completely false. If anything,
• 8:43
  Speaker 1: it makes it easier to catch somebody. Yeah. I always, uh,
• 8:47
  Speaker 1: whenever I'm talking to a money launderer or a drug dealer,
• 8:51
  Speaker 1: I always say stick to cash, buddy, because everyone in
• 8:55
  Speaker 1: the world can see the blockchain. It's all laid out
• 8:58
  Speaker 1: in the open for you on the web. And I
• 9:00
  Speaker 1: guess some people have strategies of breaking up their payments
• 9:04
  Speaker 1: into tiny little pieces and sending it out to a
• 9:07
  Speaker 1: million different wallists to try and confuse the Feds. But look,
• 9:11
  Speaker 1: anybody with a little time on his or her hands
• 9:15
  Speaker 1: or their hands can can go out there and and
• 9:19
  Speaker 1: chase everything. I want to talk a little bit more
• 9:20
  Speaker 1: about Defy, you know, because blockchain has become so ubiquitous,
• 9:25
  Speaker 1: and I guess the community has now accepted that it
• 9:28
  Speaker 1: needs more stringent regulation or at least clarification on regulation.
• 9:34
  Speaker 1: Is Defy different in that it's more kind of libertarian
• 9:37
  Speaker 1: still in its heart, I would say yes, right, I
• 9:43
  Speaker 1: mean not all the way, but definitely yes. So Defy
• 9:46
  Speaker 1: essentially is taking services that were typically done by the
• 9:49
  Speaker 1: backing industry and Wall Street, and it's letting people now
• 9:53
  Speaker 1: be able to participate in that globally, not having any
• 9:56
  Speaker 1: mod aman, not having to ask for permission from anybody.
• 9:59
  Speaker 1: So take different services such as lending, savings, investing. Now
• 10:04
  Speaker 1: anybody globally can participate in this new economy, in this
• 10:08
  Speaker 1: in this new world of open finance. So to me,
• 10:10
  Speaker 1: this is breaking down barriers. This is breaking down borders,
• 10:13
  Speaker 1: and it's it's becoming more inclusive. Is there a sense
• 10:18
  Speaker 1: um in that in the crypto space broadly defined that regulation.
• 10:23
  Speaker 1: Government regulation is coming and it's something that this industry
• 10:27
  Speaker 1: needs to be ready for. Yes, I believe. So I
• 10:32
  Speaker 1: think for crypto assets to go mainstream, they definitely do
• 10:34
  Speaker 1: need more regulation. For example, today, Uh, the then e
• 10:38
  Speaker 1: t F was perspected by the SEC. And for example,
• 10:42
  Speaker 1: if the et F does get approved, that will be
• 10:44
  Speaker 1: huge for both retail and institutional adoption. So if crypto
• 10:48
  Speaker 1: ever hopes to go mainstream, uh, in a way, it
• 10:51
  Speaker 1: kind of already is. But to fully go mainstream and
• 10:53
  Speaker 1: gave global adoption, it doesn't need to have regulation and
• 10:57
  Speaker 1: compliance were all all regular. It will be happy with it.
• 11:03
  Speaker 1: And you went from um IBM as a technical sales
• 11:07
  Speaker 1: engineer and open source UM Analytics sales executive into UM
• 11:13
  Speaker 1: dealing with cloud essay software is a service UM and
• 11:18
  Speaker 1: then into and then you and then you started token
• 11:21
  Speaker 1: matrix and you have uh apparently kind of a moneyball
• 11:24
  Speaker 1: approach to the way you invest in crypto. Yeah, what
• 11:28
  Speaker 1: about analysis? Could you give us a price target for
• 11:31
  Speaker 1: example on bitcoin year end? Oh? Wow, Well, I mean
• 11:36
  Speaker 1: so we're talking with twecks. We use machine learning and
• 11:38
  Speaker 1: data analytics to help the customers make money. Crypto or
• 11:42
  Speaker 1: rather also prevented from losing money. Um prediction wise, our
• 11:45
  Speaker 1: predictions only go out for about a month or so.
• 11:47
  Speaker 1: But we are pretty optimistic in bitcoin and crypto this year.
• 11:52
  Speaker 1: I'm optimistic all the way into about QUO three and
• 11:54
  Speaker 1: then QUO four to Pree. Historically has not been a
• 11:57
  Speaker 1: good except for maybe in December during Christmas to see
• 12:00
  Speaker 1: them cycle back in right now, forty k. We're kind
• 12:06
  Speaker 1: of in Limbor territory next month, and so we do
• 12:09
  Speaker 1: expect summer somewhere between July and August and September. But
• 12:14
  Speaker 1: bitcoin and it didom to go up because the room
• 12:16
  Speaker 1: is going to have an upgrade, but the bitcoin, I
• 12:19
  Speaker 1: wouldn't be surprised that bitcoin want to do my k
• 12:21
  Speaker 1: okay here, all right, and thanks so much for joining
• 12:24
  Speaker 1: us to really appreciate a fascinating im Bilina, founder and
• 12:26
  Speaker 1: CEO of Token Metric. Alright, So yesterday we had the
• 12:31
  Speaker 1: FED coming in and you know, a little bit of
• 12:33
  Speaker 1: a hawkish view here as it relates to interest rates,
• 12:36
  Speaker 1: and we want to get a sense of what that
• 12:37
  Speaker 1: means for the banks because the banks have had such
• 12:39
  Speaker 1: a good trade here recently and it's been such a
• 12:42
  Speaker 1: good place. So if you want to talk banks, Matt,
• 12:44
  Speaker 1: there's only one person to chat with, and that's Mike Mayo,
• 12:47
  Speaker 1: senior banking analysts for Wells Fargo Securities. Mike, what was
• 12:51
  Speaker 1: your takeaway for the banks that you cover as it
• 12:55
  Speaker 1: relates to what looks to be You know, we're gonna
• 12:58
  Speaker 1: have some ingust rates going up by you three. What
• 13:01
  Speaker 1: does that mean for your call on the banks? Well, Matt,
• 13:05
  Speaker 1: we have several nineteen seventies classics. We had disco, leisure suits,
• 13:10
  Speaker 1: mood rings, and inflation, and I thought those were all gone.
• 13:15
  Speaker 1: But right up front in the four page FED press release,
• 13:18
  Speaker 1: they had the three key words inflation has risen. And
• 13:22
  Speaker 1: then as you said, now now the FED is saying
• 13:25
  Speaker 1: to interest rate increases sooner than people had expected. Um.
• 13:30
  Speaker 1: And you know, inflation can be either heaven or hell
• 13:34
  Speaker 1: for the banks, and it was hell for the banks
• 13:36
  Speaker 1: in the nineteen seventies, and frankly, in UM that was
• 13:41
  Speaker 1: pretty hellish. Uh. Banks had all sorts of losses on
• 13:44
  Speaker 1: securities and derivatives and mismatches between their assets and liabilities.
• 13:50
  Speaker 1: But I think in this scenario, I think it's in
• 13:52
  Speaker 1: the direction of heaven. Banks have really paid a big
• 13:55
  Speaker 1: price for the unusual low level of interest rates. UH.
• 13:59
  Speaker 1: The our net interest margin over the past year showed
• 14:03
  Speaker 1: the biggest decline in a century. And that's because while
• 14:06
  Speaker 1: banks has spent a lot of money gathering deposits with
• 14:09
  Speaker 1: branches and technology and service and everything else, they haven't
• 14:14
  Speaker 1: earned much on those deposits. Are now they can finally
• 14:16
  Speaker 1: redeploy those deposits and the potentially higher yielding securities and
• 14:21
  Speaker 1: and hopefully loans. Let's talk about the big investment banks
• 14:24
  Speaker 1: for a moment, because we had I mean we were
• 14:28
  Speaker 1: we weren't expecting trading to keep up with the same
• 14:31
  Speaker 1: um at the same pace as last year this time,
• 14:34
  Speaker 1: but we've had a number of CEO s um Jamie Diamond,
• 14:38
  Speaker 1: I think Gorman also saying that you know it's time
• 14:41
  Speaker 1: to come back to earth already trading Credit Suite is
• 14:44
  Speaker 1: dismantling their trading business kind of unrelated reasons. But UM,
• 14:49
  Speaker 1: they have said that M and A may make up
• 14:52
  Speaker 1: for some of the loss there. What's your view on
• 14:54
  Speaker 1: on the big investment banks. Well, look from the trading side, UM,
• 15:00
  Speaker 1: nobody expected the levels to be sustained at two pieces.
• 15:05
  Speaker 1: In fact, going into the year everybody said we expect
• 15:08
  Speaker 1: and the way it's playing out is it's going to
• 15:10
  Speaker 1: be somewhere between based on our forecast. So there's just
• 15:16
  Speaker 1: no big surprises there. Um And frankly, corporations frontloaded a
• 15:22
  Speaker 1: lot of their financing earlier in the pandemic and that's
• 15:25
  Speaker 1: a good thing, and trading plays off of that, so
• 15:27
  Speaker 1: less issue was less trading. On the other hand, Wow, mergers,
• 15:32
  Speaker 1: This might have been missed by the market, but Jamie
• 15:35
  Speaker 1: Diamond just said investment banking this quarter could be one
• 15:38
  Speaker 1: of the best quarters they've ever seen. Um So, you
• 15:41
  Speaker 1: know the likes of Goldman, Sachs and JP Morgan And
• 15:45
  Speaker 1: if you think about it, take a step back, every
• 15:48
  Speaker 1: company and every industry globally is in some way rethinking
• 15:52
  Speaker 1: their business model post pandemic, given the acceleration or the
• 15:56
  Speaker 1: second wave of digitization. Um So you have Murders are strong,
• 16:01
  Speaker 1: that's likely to have legs trading its subsiding some but
• 16:05
  Speaker 1: that shouldn't be a big surprise. Mike, what's your top
• 16:08
  Speaker 1: conviction bet right here? I know you've been focusing a
• 16:11
  Speaker 1: lot on technology for these global banks, but what's the
• 16:14
  Speaker 1: what's the bet You're what's the bank you're talking to
• 16:17
  Speaker 1: most of your clients. Well, I don't like using the
• 16:21
  Speaker 1: word debt. It's it's it's a new because we've been
• 16:27
  Speaker 1: a lot of ours dissecting the financial statements and dissecting
• 16:31
  Speaker 1: what management has to say, and on both fronts, Bank
• 16:35
  Speaker 1: America really is surprising. I thought that the CEO Bank
• 16:40
  Speaker 1: America should have been fired um a little less than
• 16:44
  Speaker 1: a decade ago. I went to the shareholder meetings, I
• 16:47
  Speaker 1: spoke up. They weren't always happy about that, but you know,
• 16:50
  Speaker 1: that's what the facts said to me at the time.
• 16:52
  Speaker 1: That never stopped you before, But now, as a fact
• 16:56
  Speaker 1: change so to our conclusions. And now I think the
• 16:59
  Speaker 1: CEO Bank America, Brian Monahan, is really one of the
• 17:02
  Speaker 1: best um and it's really remarkable how he's grown into
• 17:06
  Speaker 1: that position. And there you know, they start off saying
• 17:09
  Speaker 1: responsible growth. Everybody at the company knows responsible growth, and
• 17:13
  Speaker 1: at first I thought it was an empty platitude that
• 17:15
  Speaker 1: didn't mean much at the beginning, but now it means
• 17:18
  Speaker 1: a great deal. Not just to have earnings growth sustainably
• 17:22
  Speaker 1: by not being in the most risky segments. Remember they
• 17:25
  Speaker 1: bought countrywide and how all the mortgage problems, but also
• 17:28
  Speaker 1: means responsible to you know, their their customers and their
• 17:32
  Speaker 1: employees and their communities, and you know they're out front
• 17:36
  Speaker 1: and center saying we're gonna pay a dollar minimum. Ways
• 17:39
  Speaker 1: by the Brian Morning and on the Sunday talk shows
• 17:44
  Speaker 1: talk about cyber security. So what you have here is
• 17:47
  Speaker 1: both UM strategically positioned much better than before. Financially they
• 17:53
  Speaker 1: benefit from higher interest rates three times more than the
• 17:56
  Speaker 1: average bank, and then just from a you know, tone
• 18:01
  Speaker 1: of society, they're they're right on top of it. So
• 18:04
  Speaker 1: Bank America is the name that we've been going with,
• 18:07
  Speaker 1: and they're also one of the best fintech players in
• 18:09
  Speaker 1: the world. By the way, I was talking to UH
• 18:11
  Speaker 1: David Rosenberg this morning, and Rosie said something along the
• 18:16
  Speaker 1: lines of when the housing bubble bursts now, there will
• 18:20
  Speaker 1: be people arguing that we're seeing that we're wait seeing
• 18:23
  Speaker 1: a housing bubble right now, but you've got to admit
• 18:25
  Speaker 1: it's red hot this market. How important is that UM
• 18:30
  Speaker 1: and and how dangerous is that to the big banks? Well,
• 18:34
  Speaker 1: I think what's interesting here is just the degree of
• 18:38
  Speaker 1: collateral that banks have. So you know, when banks have
• 18:42
  Speaker 1: a big crisis, they don't normally repeat the same problem
• 18:46
  Speaker 1: in the next grace, it's right. So the type of
• 18:49
  Speaker 1: underwriting for homes, the type of people who get those loans,
• 18:53
  Speaker 1: the collateral behind that. I mean, you you know, you know,
• 18:56
  Speaker 1: I've lived through the global financial graces and saw how
• 18:59
  Speaker 1: crazy it was. I mean, everyone from you know, kids
• 19:02
  Speaker 1: to dogs to deceive people got application that that's real, right,
• 19:07
  Speaker 1: Florida strippers with five condos exactly. And the crazy thing is,
• 19:13
  Speaker 1: you know, people were like getting credit without everyone else
• 19:16
  Speaker 1: knowing what kind of credit they were getting. It was
• 19:18
  Speaker 1: the best. The banking industry is cleaned up, by the way,
• 19:21
  Speaker 1: if there's if there's risk, it's remember banks provide less
• 19:24
  Speaker 1: than one third of all loans in our economy, so
• 19:28
  Speaker 1: if there's risk of some of these non banked players
• 19:30
  Speaker 1: out there. So when it comes to housing, I think
• 19:33
  Speaker 1: that's fine. I think, you know, areas to watch continue
• 19:36
  Speaker 1: to be commercial real estate offices. That's not a new phenomena,
• 19:41
  Speaker 1: but it's still something worth noting. And look, I do
• 19:45
  Speaker 1: go back to interest rates though, I mean it could
• 19:48
  Speaker 1: be you know, a heaven or hell, and you know
• 19:52
  Speaker 1: hell comes in two forms if you have deflation like Japan,
• 19:56
  Speaker 1: and that's what you know, the bed and everybody was
• 19:58
  Speaker 1: worried about for a number of years. But there is
• 20:00
  Speaker 1: still tail risk for hell, if rates get out of control.
• 20:05
  Speaker 1: And this is something we had a bank conference last month,
• 20:09
  Speaker 1: and this is something that investors we're talking about more
• 20:11
  Speaker 1: than I had heard in like maybe over a decade
• 20:15
  Speaker 1: or two it and um, so that's a sort of
• 20:17
  Speaker 1: chail risk. And if rates went up too much too quickly,
• 20:20
  Speaker 1: then you could have credit issues because then the interest
• 20:24
  Speaker 1: cost for borrows would go higher. So, Mike, you've been
• 20:27
  Speaker 1: covering these banks for decades. Can they earned the returns
• 20:31
  Speaker 1: they earned before the financial crisis? Or is the where
• 20:33
  Speaker 1: is the industry just fundamentally changed on a secular basis? Well,
• 20:38
  Speaker 1: yes and no, Um, we don't have their traditional banking revenues,
• 20:43
  Speaker 1: their traditional banking margins getting back to where they were
• 20:46
  Speaker 1: pre pandemic for a few more years. And that's just
• 20:50
  Speaker 1: the nature of low rates. And frankly, you could say
• 20:54
  Speaker 1: banks benefited from some of the government programs, but they
• 20:56
  Speaker 1: also got hurt a lot by the low level rate.
• 21:00
  Speaker 1: In the other hand, we think banks for making up
• 21:02
  Speaker 1: the difference by improving efficiency, by lowering unit costs, by
• 21:07
  Speaker 1: you know, embracing the tech revolution. And you know what,
• 21:11
  Speaker 1: I went to a tech conference as a bank analyst.
• 21:13
  Speaker 1: What was I doing there? I didn't I didn't understand
• 21:17
  Speaker 1: of what I heard, the jargon it was, it was
• 21:20
  Speaker 1: kind of crazy. But the one percent that I did
• 21:22
  Speaker 1: take away with my aha moment. My aha moment was
• 21:25
  Speaker 1: look at all these other industries that have implemented tech,
• 21:29
  Speaker 1: you know, whether it's retail or healthcare or pick your industry,
• 21:32
  Speaker 1: They've already had their transformation. And so now banks are
• 21:36
  Speaker 1: in the cusp of doing what's already been done elsewhere.
• 21:39
  Speaker 1: So you're not it's not like you're reinventing the wheel.
• 21:42
  Speaker 1: You're just applying what's already been tried and true elsewhere.
• 21:46
  Speaker 1: So when you know the CEO of Microsoft, as Satia
• 21:49
  Speaker 1: talks about the second wave of the digital transformation, well,
• 21:53
  Speaker 1: banks are about to jump on board on that. Mike,
• 21:58
  Speaker 1: thanks so much for joining us. Always a pleasure talking
• 22:01
  Speaker 1: to you. Um, I wish we could spend more time.
• 22:03
  Speaker 1: We could talk to you for an hour. Maybe someday
• 22:05
  Speaker 1: we'll do that, Mike Mayo. UM, they're talking to us
• 22:08
  Speaker 1: about the banks, and as we've said, he's probably one
• 22:13
  Speaker 1: of the most well known banking analysts in in the US,
• 22:17
  Speaker 1: if not the world. Um. There he is the US
• 22:20
  Speaker 1: large cat bank research director, managing director at Wells Fargo Securities.
• 22:28
  Speaker 1: Now I'm gonna bring in David Deeds right now. He
• 22:32
  Speaker 1: is managing principal and senior portfolio strategies at Pepack Private
• 22:35
  Speaker 1: Wealth Management. They have just under ten billion dollars in
• 22:38
  Speaker 1: assets under management. And i'll at first, David, ask your
• 22:42
  Speaker 1: take on j Pal's performance yesterday. How how do you
• 22:46
  Speaker 1: think he handled well, no real moves, but kind of uh,
• 22:52
  Speaker 1: a little bit of a more hawkish tone. Yeah, I
• 22:56
  Speaker 1: think he did a good job. Obviously, it did catch
• 22:58
  Speaker 1: the market a little bit by surprising. You never want
• 23:01
  Speaker 1: to catch the market by surprise. You always want to
• 23:04
  Speaker 1: ease into things. I think they were just a little
• 23:06
  Speaker 1: bit more hawkish than they were just several months ago,
• 23:09
  Speaker 1: by um, you know, pulling forward the potential data, the
• 23:13
  Speaker 1: first rate hike, at least it's reflected in that dot plot.
• 23:16
  Speaker 1: And of course you know talking about that, the next
• 23:18
  Speaker 1: conversation is going to be on the tapering, and I
• 23:20
  Speaker 1: think that caught people by surprise. I think, from my perspective,
• 23:25
  Speaker 1: what was most interesting is the big reason for going
• 23:28
  Speaker 1: slow on normalizing monetary policy is trying to figure out
• 23:34
  Speaker 1: whether inflation is transitory or permanent. We don't have enough information.
• 23:39
  Speaker 1: The Fed doesn't have enough information to make that decision now,
• 23:43
  Speaker 1: So why are they getting a little bit more hawkish?
• 23:46
  Speaker 1: I think the real reason is always goes back to
• 23:49
  Speaker 1: the pandemic. The pandemic is receiving. This economy is on track,
• 23:54
  Speaker 1: and ultimately, if the economy gets to be normalized and
• 23:58
  Speaker 1: interstrates have to get normal realize and that's what they're
• 24:01
  Speaker 1: looking at. Um. But it did catch people by surprise.
• 24:04
  Speaker 1: All right, Dave, given that background, here, did your view
• 24:07
  Speaker 1: of the market, where do you want to be allocated
• 24:09
  Speaker 1: within these markets that changed much yesterday? You know? No, Um,
• 24:16
  Speaker 1: you know, we look at the economy and the data
• 24:18
  Speaker 1: and what history tells us is the most likely pass forward.
• 24:22
  Speaker 1: Not We're not going to base anything based on one
• 24:25
  Speaker 1: meeting by the Federal Reserve. Obviously, this meeting was different
• 24:28
  Speaker 1: than the meeting back in March, so that can change. Um.
• 24:31
  Speaker 1: I think it's clear that the most important factor out
• 24:34
  Speaker 1: there is that pandemic is receding. Obviously, they are concerns
• 24:37
  Speaker 1: about variants and so forth. Overseas not doing quite as well,
• 24:41
  Speaker 1: but I think the direction is very, very positive. We're
• 24:44
  Speaker 1: seeing UM. The only thing that's lagging here a little
• 24:47
  Speaker 1: bit is the labor market. But there are good reasons,
• 24:49
  Speaker 1: have nothing to do with the economy really as to
• 24:52
  Speaker 1: why that's lagging. Obviously, there's some incentives to keep collecting benefits.
• 24:57
  Speaker 1: There's like a childcare. There's some fear of COVID into work.
• 25:00
  Speaker 1: I think all that will get resolved positively. So I
• 25:02
  Speaker 1: think we've got a strong economy going forward, and I
• 25:05
  Speaker 1: want to position UH portfolios to take advantage of that.
• 25:10
  Speaker 1: How do you best position them to do so well?
• 25:14
  Speaker 1: If the economy is getting better, I think you want
• 25:18
  Speaker 1: UH your portfolio to be filled with investments that will
• 25:23
  Speaker 1: respond to that, In other words, a slight cyclical tilt,
• 25:26
  Speaker 1: unless everyone else has done so already. David, right, because
• 25:29
  Speaker 1: you don't want to do that if the prices are
• 25:30
  Speaker 1: too high. Yeah. I think people who own material stocks,
• 25:36
  Speaker 1: who own financial services stocks, who own energy stocks, who
• 25:40
  Speaker 1: are most cyclical stocks, don't feel we're at the peak UM.
• 25:44
  Speaker 1: So I think there is more to go UH in
• 25:47
  Speaker 1: the economy, and UH, for example, of financial institutions are
• 25:52
  Speaker 1: are trading at evaluation trials of the book value and
• 25:57
  Speaker 1: relative to earnings, it's much lower than historically has been
• 25:59
  Speaker 1: the case. So that kind of goes to the question
• 26:02
  Speaker 1: I've had, David, and and given your experience and perspective,
• 26:05
  Speaker 1: I suspect you can have an opinion here. But as
• 26:07
  Speaker 1: we think about these cyclical stocks which have traded so
• 26:10
  Speaker 1: well really since uh last September, that cyclical trade has
• 26:14
  Speaker 1: really been a great rotation trade for a lot of investors.
• 26:17
  Speaker 1: How long do you think that can go on? Like
• 26:19
  Speaker 1: how much legs does that type of trade have on
• 26:22
  Speaker 1: as opposed to just buying Amazon and Apple and you know,
• 26:25
  Speaker 1: looking at it maybe ten years from now. Yeah, you
• 26:28
  Speaker 1: know it's a great question. You know one answer as well,
• 26:30
  Speaker 1: how long did the tech roth stock trade trump the
• 26:34
  Speaker 1: value trade? Um? Almost a decade probably, but if you
• 26:39
  Speaker 1: look back for a hundred years, they're kind of neckonnect
• 26:41
  Speaker 1: maybe a slight actual edge to value. Second, of course,
• 26:45
  Speaker 1: is I think you want to look at the interest
• 26:47
  Speaker 1: rates to explain what's going on today and where things
• 26:49
  Speaker 1: may lie. You know, what's interesting today is the industration
• 26:53
  Speaker 1: coming back down is one five one where we expect
• 26:57
  Speaker 1: the ten your treasury to be when the dust settles
• 27:00
  Speaker 1: and we have a normal economy. I think that is
• 27:02
  Speaker 1: highly unlikely. In two thousand nineteen, we saw the ten
• 27:06
  Speaker 1: year at two point nine, so by many metrics, businesses
• 27:10
  Speaker 1: are saying even more business and they saw pre pandemic
• 27:13
  Speaker 1: in two thousand nineteen, So why wouldn't that Why wouldn't
• 27:16
  Speaker 1: that tenure treasury go back up to two point nine?
• 27:19
  Speaker 1: If that's the case, what are going to be the
• 27:21
  Speaker 1: aspects of the economy that are going to respond. Well,
• 27:24
  Speaker 1: you've got to start with financials. Their most important products
• 27:27
  Speaker 1: as loans, and if the interest rate is going to
• 27:28
  Speaker 1: go up one to one and a half percent more
• 27:30
  Speaker 1: from here, I think that positions them quite well. Do
• 27:33
  Speaker 1: you expect dollar strength now against for example, the year
• 27:36
  Speaker 1: on the pound? Um, I'm just I'm just asking David,
• 27:42
  Speaker 1: because a lot of people have been investing in European
• 27:44
  Speaker 1: equities saying, look, they're they're reopening is to come, so
• 27:47
  Speaker 1: they are going to get that growth pushed that the
• 27:49
  Speaker 1: US got a couple of months ago. So I think
• 27:54
  Speaker 1: that the dollar is not going to strengthen dramatically. Here's why.
• 27:58
  Speaker 1: I think overseas are lagging relative to what we've done,
• 28:02
  Speaker 1: and as they ultimately get the pandemic as well. Under
• 28:05
  Speaker 1: controls we have, I think their economies have respond their
• 28:09
  Speaker 1: currencies will get better ultimately. Of course, I think that
• 28:13
  Speaker 1: although we should normalize the interest race, and they talked
• 28:16
  Speaker 1: a good game yesterday, there's gonna be just trendous pressure.
• 28:19
  Speaker 1: Even though they're independent. There's gonna be political pressure to
• 28:22
  Speaker 1: let things grow, to keep the party going, to keep
• 28:25
  Speaker 1: the punch bowl out longer. That's not gonna be a
• 28:29
  Speaker 1: boon to the dollar until therefore, Um, I think the
• 28:32
  Speaker 1: dollar will we can ultimately. All right, David, thanks so
• 28:35
  Speaker 1: much for joining us. As always, we love getting your perspective.
• 28:38
  Speaker 1: David Dead's managing principal and senior portfolio manager at p
• 28:41
  Speaker 1: PACK Private Wealth Management, located in beautiful downtown Summit, New Jersey, which,
• 28:46
  Speaker 1: by the way, Matt has a hopping outdoor dining scene,
• 28:50
  Speaker 1: particularly on Thursday nights. We're gonna have more coming up.
• 28:53
  Speaker 1: This is bloom Thanks for listening to the Bloomberg Markets podcast.
• 28:57
  Speaker 1: You can subscribe and listen to interviews of Apple Podcasts
• 29:01
  Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
• 29:05
  Speaker 1: on Twitter at Matt Miller three, and I'm fall Sweeney.
• 29:09
  Speaker 1: I'm on Twitter at pt Sweeney Before the podcast, you
• 29:11
  Speaker 1: can always catch us worldwide at Bloomberg Radio