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Fed Is The Most Frequent Murderer Of Economy: Bianco (Podcast) · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
0:08
Speaker 1: Along with my co host Lisa Brahmowitz. Each day we
0:11
Speaker 1: bring you the most important, noteworthy, and useful interviews for
0:15
Speaker 1: you and your money, whether you're at the grocery store
0:17
Speaker 1: or the trading floor. Find the Bloomberg p m L
0:20
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Paul,
0:33
Speaker 1: A lot of people have been asking how realistic is
0:36
Speaker 1: it for a recession in the United States this year,
0:39
Speaker 1: and a growing number of investors are saying it just
0:41
Speaker 1: doesn't look that likely, especially with earnings looking as good
0:44
Speaker 1: as they are. It's you're right, and you know. What
0:45
Speaker 1: we've been talking about, certainly over the last several weeks
0:47
Speaker 1: is that the US economy seems to be you know,
0:50
Speaker 1: a beacon, if you will, relative to China, relative to say,
0:53
Speaker 1: some of the data we're seeing coming out of Europe um.
0:56
Speaker 1: So the question is how long can that last? Yeah? Definitely.
0:58
Speaker 1: So let's bring in Jim b Uncle, president and founder
1:01
Speaker 1: of Bianco Research. He's also a contributor to Bloomberg Opinion
1:04
Speaker 1: based in Chicago. Jim, thank you so much for joining us.
1:08
Speaker 1: What's your read on the likelihood of her session this year.
1:11
Speaker 1: I think it's a lot higher than people are discounting.
1:15
Speaker 1: And I think the reason is is that most of
1:17
Speaker 1: us are looking at the wrong metric. Ben Bernanke, when
1:20
Speaker 1: he was on the DS with Janet Yellen and j Paul,
1:24
Speaker 1: said that economies are murdered. So let's stop measuring the
1:28
Speaker 1: economy's cholesterol level, blood pressure, or heart rate, or it's
1:31
Speaker 1: GDP or retail sales or payrolls, and let's look at
1:35
Speaker 1: who's walking around with a murder weapon that's going to
1:38
Speaker 1: kill it. And high on that list is the Federal Reserve,
1:40
Speaker 1: with their intention to raise rates and reduce the balance sheet.
1:44
Speaker 1: They are the most frequent murderer of economies. Janet Yellen
1:48
Speaker 1: said that on the DS January fourth. Jim and so
1:52
Speaker 1: I'm afraid that they're going to do what they've done
1:55
Speaker 1: so well in the past, kill this economy. But even George,
1:59
Speaker 1: even even esther word has come out and beIN dovish
2:02
Speaker 1: when it comes to raising rates. Every single Fed member
2:05
Speaker 1: has come out and basically said we'll be patient, we'll
2:07
Speaker 1: chill out. So I likely is it. I mean, their
2:10
Speaker 1: murder weapon is looking a little bit more like a
2:11
Speaker 1: spoon than a machete. That's true. And a month ago
2:15
Speaker 1: they were intent on doing the equivalent of five rate hikes.
2:20
Speaker 1: I think we need to go back and remember that
2:21
Speaker 1: a month ago they said they were going to do
2:23
Speaker 1: two rate hikes and they were gonna have the balance
2:26
Speaker 1: sheet on automatic pilot to cut through the chase. With
2:28
Speaker 1: the balance sheet, I think Wall Street thinks that's like
2:31
Speaker 1: another two or three rate hikes. So they were looking
2:33
Speaker 1: at the FED saying four to five rate hikes with
2:35
Speaker 1: two of them on automatic pilot, and that's why the
2:38
Speaker 1: market freaked out. Now they're backing off of it. If
2:41
Speaker 1: the markets recover, I'm afraid that they're going to go
2:44
Speaker 1: right back to reducing the balance sheet on autopilot two
2:47
Speaker 1: more rate hikes. Markets are irrational. They had their little
2:50
Speaker 1: hissy fit, and now we're right back to where we
2:53
Speaker 1: were in December, and then the markets will struggle one
2:55
Speaker 1: more time. So, yes, they're off that now. I'm just
2:59
Speaker 1: not so they will be when we get to April,
3:01
Speaker 1: May or June. So, Jim, what do you mentioned the
3:03
Speaker 1: balance sheet? What do you think? And I know you
3:05
Speaker 1: don't have a lot of confidence here and what they
3:06
Speaker 1: and what they say but what do you think the
3:08
Speaker 1: FED will do with its balance sheet in I think
3:12
Speaker 1: that for now they're going to continue to reduce their
3:14
Speaker 1: balance sheet. I think that the next level of turbulence
3:18
Speaker 1: and markets, if we get one, let's say, if we
3:20
Speaker 1: get one, they'll start to reconsider that. I think the
3:23
Speaker 1: fundamental problem here is the FED things that to use
3:26
Speaker 1: j policie. This is watching paint dry, this is technical.
3:29
Speaker 1: Everybody's eyes roll and nobody cares about this. The market
3:33
Speaker 1: thinks this is another form of tightening. And if the
3:36
Speaker 1: markets start down again, stocks retest their December lows, I
3:40
Speaker 1: think that then we might see them back off of
3:42
Speaker 1: the balance sheet. I had to guess. I think that's
3:45
Speaker 1: what's coming, that we will get a retest and they
3:47
Speaker 1: will start to rethink the balance sheet. But they're not now.
3:50
Speaker 1: They still plan on going fifty billion a month. Okay. Well,
3:53
Speaker 1: the other aspect, the other murderer of financial cycles tends
3:57
Speaker 1: to be financial and balances, as according to Jenny Yellen
3:59
Speaker 1: and you. I lighted this recently in a note, and
4:02
Speaker 1: I'm just wondering on that side of the equation, is
4:05
Speaker 1: there an issue, Uh, there is an issue to the
4:09
Speaker 1: extent that we have seen, you know, to use a
4:12
Speaker 1: Wall Street parlance, a drop of liquidity, that markets can
4:16
Speaker 1: be moved around with less and less money than they've
4:18
Speaker 1: ever had, and that could create some kind of a
4:21
Speaker 1: problem as far as financial and balances go. If you're
4:25
Speaker 1: looking for him in the US. No, I don't think
4:27
Speaker 1: that the US is outrageously undervalued or overvalued. I do
4:31
Speaker 1: think though, if you look overseas, especially to China, their
4:35
Speaker 1: market is very vulnerable. They could see US moon that's
4:38
Speaker 1: the second largest economy. They have problems. Everybody's going to
4:41
Speaker 1: feel it. And I still think that Europe is not
4:44
Speaker 1: out of the wood yet. So if there's a financial
4:45
Speaker 1: and balanced coming, I still think it might come out
4:48
Speaker 1: of the rest of the world, not necessarily the US.
4:51
Speaker 1: And within the US, I do think we have a
4:53
Speaker 1: bit of a liquidity problem. It's not debilitating, but it's
4:56
Speaker 1: definitely worth mentioning. So Jim, at the risk of going
4:59
Speaker 1: someplace we maybe should not go, let me just ask you,
5:02
Speaker 1: what are your thoughts on Chairman pal Do you view
5:04
Speaker 1: it as just a lack of leadership or just not
5:07
Speaker 1: having a principle to stick with you know, um, I
5:12
Speaker 1: was really excited when he came in and I was
5:14
Speaker 1: really having high hopes for him, and he's been a
5:16
Speaker 1: bit disappointing. I think the mistake that Paul is I'm
5:20
Speaker 1: going to go into my mind reading mode right now,
5:22
Speaker 1: is that he is not and he is not a
5:24
Speaker 1: PhD in economics. He's trying to act like one. And
5:28
Speaker 1: I think the sooner he stops, the better off. With
5:30
Speaker 1: every speech he gives, he flip flops from Davish to Barish.
5:34
Speaker 1: He flip flops four or five times since October, and
5:38
Speaker 1: he gives us no idea where he really stands on
5:41
Speaker 1: any of this stuff. And we're reduced to looking at
5:44
Speaker 1: the transcripts from five years ago that were released last
5:47
Speaker 1: week to try and discern what Paul thinks today because
5:51
Speaker 1: we can't figure out from what he's saying today. So
5:53
Speaker 1: I I've been disappointed. I understand he's knew with the job.
5:57
Speaker 1: I understand he's gonna have to grow into the job
6:00
Speaker 1: at j b J. Quit trying to be doctor j
6:03
Speaker 1: PhD in economics. You're not one, and that's why we
6:06
Speaker 1: like you, and stop being that, and I think you'll
6:09
Speaker 1: be a much better fed chairman. Well, if J. Powell
6:11
Speaker 1: is listening, he will now go and look at a
6:13
Speaker 1: mirror and say I'm good enough, I'm strong enough, and
6:15
Speaker 1: gosh darn it, people like me, and perhaps he'll be
6:18
Speaker 1: a little bit more consistent. Jim, I do want to
6:19
Speaker 1: get your sense on the ten year treasury yields, because
6:22
Speaker 1: we have seen a tick up, we've seen the curve
6:23
Speaker 1: widen a little bit, a little bit of steepening, moving
6:26
Speaker 1: away from sort of the mirror inversion spots. Do you
6:29
Speaker 1: expect that stepening to continue to expect to see the
6:32
Speaker 1: long end sell off? In other words, thirty year yields
6:34
Speaker 1: rise mot Moore as well as ten year yields. Yeah,
6:37
Speaker 1: I do expect them to go up at least over
6:39
Speaker 1: the next you know, couple of weeks or months. Let's
6:42
Speaker 1: draw this a little bit bigger. If you look at
6:44
Speaker 1: a chart of the yield curve, or you look at
6:46
Speaker 1: the chart of the tenure yield, or you look at
6:48
Speaker 1: a chart of the S and P five, or you
6:50
Speaker 1: look at a chart of crude oil, you're looking at
6:52
Speaker 1: the same chart because they're all moving up and down
6:54
Speaker 1: together right now. Because we're being driven by this macro
6:58
Speaker 1: fear of recession, atical instability trade, all that mixed up
7:02
Speaker 1: in the one so I think that we are probably
7:05
Speaker 1: going to see more recovery in the market. Stock market
7:09
Speaker 1: goes up, crude oil goes up, yields go up, the
7:12
Speaker 1: yield curve whitens. All of that will happen. The question
7:15
Speaker 1: is when will they start trading like their own individual
7:18
Speaker 1: markets instead of just variations on the same theme. I
7:21
Speaker 1: think that's still a few months away at the earliest,
7:24
Speaker 1: because I still think there's there's this fear of what
7:27
Speaker 1: could be coming next, So higher yields, higher stock prices.
7:31
Speaker 1: Still think if you get into later this year, there's
7:35
Speaker 1: a chance we might have a retest. I'm putting my
7:37
Speaker 1: technical analysis had on. It's rare to see us sell
7:39
Speaker 1: off that hard or yields fall that much without at
7:42
Speaker 1: least attempting a retest of that. I still think that's
7:45
Speaker 1: to come, But for the next several weeks to months,
7:47
Speaker 1: I think it's gonna be higher yields and higher stock
7:49
Speaker 1: prices and just ten seconds. Jim recession odds still low
7:52
Speaker 1: in your sense, Yeah, I know, I'm gonna put him
7:55
Speaker 1: at forty five, just a little ottle than a half
7:57
Speaker 1: because I still don't trust the They've got the murder
8:01
Speaker 1: weapon very good Jim. Thanks very much, Jim, We appreciate it.
8:06
Speaker 1: That's Jim Bianco, president and founder Bianco Research. Uh not
8:10
Speaker 1: shy to kind of lay well, put the blame where
8:13
Speaker 1: you think it should lay. Yeah, Jim doesn't mince words
8:15
Speaker 1: of love it boy. I am. I like to eat
8:33
Speaker 1: out as much as the next person. UM. I don't
8:35
Speaker 1: think my tastes are over the top. I think I'm
8:38
Speaker 1: very mainstream. But it's interesting. Here in New York City
8:41
Speaker 1: it's harder and harder to find a reasonably place price restaurant.
8:45
Speaker 1: I suspect that might be true in other large markets. UM,
8:49
Speaker 1: give us some color on this. We have Peter Elliott.
8:51
Speaker 1: Peter's the editor of Bloomberg Reserve UM, and he has
8:54
Speaker 1: written some really cool stuff about what's going on in
8:57
Speaker 1: the fine dining segment of the is and sound. What Peter,
9:00
Speaker 1: what have you found? Good morning? Um, there's no doubt
9:05
Speaker 1: about it. Uh, what what you sew? What you reap?
9:10
Speaker 1: Rents are high from Williamsburg to Chelsea, from Chelsea to
9:15
Speaker 1: the Upper East Side to London to Paris to Rome,
9:19
Speaker 1: and that effects what restaurants have to do in order
9:23
Speaker 1: to make back anything like a return. And that is
9:28
Speaker 1: turning out to be a very, very big problem for restaurants.
9:32
Speaker 1: Um from eleven Madison Park to you know, to Shake Shack.
9:37
Speaker 1: It's it's that wide a span. Basically everything in food
9:42
Speaker 1: right now has to do with the bottom line of
9:45
Speaker 1: what they pay in rent. And you're just gonna wind
9:47
Speaker 1: up paying for that when you get your credit card statement.
9:50
Speaker 1: So let's talk about prices. I mean, what type of
9:52
Speaker 1: entree pricing are you talking about to make a restaurant
9:55
Speaker 1: viable in an expensive city like New York. I am
9:57
Speaker 1: so old. I remember sitting in the studio, you know,
10:01
Speaker 1: in my twenties, I wish a young maren Um, you know,
10:04
Speaker 1: and we would talk about the twenty dollar entree, and
10:07
Speaker 1: then we talk about the twenty five dollar entree, and
10:10
Speaker 1: then the thirty you know, you know, before Charles primary
10:13
Speaker 1: of you're talking about forty eight dollars, you're talking about
10:16
Speaker 1: sixty dollars. There's really no limit anymore. Um it really
10:21
Speaker 1: it used to be like one of those New York
10:23
Speaker 1: Times features stories and then a Bloomberg feature story. But
10:26
Speaker 1: now you're paying just to sit down at some sushi restaurants.
10:30
Speaker 1: You're not even talking about an entree cost you're talking
10:32
Speaker 1: about the evening that starts at three fifty dollars or
10:36
Speaker 1: you know, to go to Massive, But those are the
10:38
Speaker 1: high end. Now it's the middle thing. I'm on a
10:41
Speaker 1: I know you'll all support the difficulty of my life
10:44
Speaker 1: when I tell you I am on a mission to
10:47
Speaker 1: find sushi that doesn't cost a thousand dollars. Just when
10:51
Speaker 1: I sit down. My heart's bleeding for you that you're
10:54
Speaker 1: struggling to find suh. It's just amazing in a world
10:58
Speaker 1: that where we're running out of fish. And that's one
11:00
Speaker 1: of the things New York is a particularly bad trap
11:03
Speaker 1: on the sushi front because you can get reasonably priced sushi.
11:07
Speaker 1: Listeners out there, Please feel free to message me Peter
11:10
Speaker 1: Elliott and Bloomberg dot net. Let me know where you
11:12
Speaker 1: can find decent sushi that's not machine sushi that does
11:16
Speaker 1: not cost three fifty dollars just to sit down, so
11:19
Speaker 1: you can say, oh, um, it's become he is so spoiled, Paul,
11:27
Speaker 1: take me down, all right. So just just you mentioned
11:30
Speaker 1: eleven Madison Park and and and that's a restaurant. I
11:32
Speaker 1: used to work in that building back in a prior life.
11:35
Speaker 1: And when that restaurant opened, it was a good restaurant.
11:38
Speaker 1: We could actually eat their junior investment bankers could go
11:40
Speaker 1: to go down and actually eat there and up blow
11:42
Speaker 1: our our our budget. What's happened to that restaurant? Well,
11:46
Speaker 1: starting back where where you were, then you could probably
11:48
Speaker 1: also walk in and say, Hi, I work upstairs. Could
11:51
Speaker 1: I have a table? And they probably said yes. No,
11:53
Speaker 1: they probably say credit sweez, get in line. No, it's not.
11:59
Speaker 1: It's a very difficent a restaurant because it has become
12:02
Speaker 1: a destination restaurant. So Love in Madison Park clever bunch
12:06
Speaker 1: of guys in the sense that you know, some parts
12:10
Speaker 1: of the food business are like fashion. So that's the
12:12
Speaker 1: tour end of their business. Nomad is their their middle restaurant,
12:16
Speaker 1: made nice as their lower end restaurant. They even do
12:19
Speaker 1: food trucks in Los Angeles. They've done some pop ups
12:22
Speaker 1: in the Hampton's. So they have a very good and
12:24
Speaker 1: very broad business model. Love in Madison Park doesn't make
12:27
Speaker 1: money for them, and and and I worry for them
12:30
Speaker 1: in the sense that someday somebody's going to make them
12:32
Speaker 1: pay market rent for for that spot. So a destination
12:36
Speaker 1: restaurant doesn't really have time for a guy like you
12:39
Speaker 1: coming down from you know, of down from upstairs restaurant. Yeah, well, Peter,
12:48
Speaker 1: I'd love to get your feeling and how many restaurants
12:50
Speaker 1: can survive as destination restaurants. In other words, is the
12:53
Speaker 1: world shrinking dramatically as rents go up and there could
12:56
Speaker 1: only be so many you know out there they can
12:58
Speaker 1: afford to reject. It's January, you you you you heard
13:02
Speaker 1: it here. I would go on the record and say that, like, uh,
13:06
Speaker 1: the era of the Omakase restaurant, the era of the
13:09
Speaker 1: French restaurant, the era of the you know, I do
13:12
Speaker 1: think the era of the fixed menu Blanca eleven Madison
13:18
Speaker 1: Park model is ending for the simple reason that there's
13:22
Speaker 1: very few people who have that kind of money and
13:26
Speaker 1: and who are willing to sit down for three and
13:29
Speaker 1: a half hours to have fourteen courses. I think that
13:33
Speaker 1: was a very big thing in the past, you know,
13:35
Speaker 1: the past era, if you will, of our lives in
13:38
Speaker 1: the food business. My life in the food business. Uh.
13:41
Speaker 1: And certainly it's very hard for me to convince a
13:44
Speaker 1: Bloomberg client to sit down for that amount of time.
13:47
Speaker 1: So they want quicker, easier options, which is why shake Shack,
13:51
Speaker 1: which has a familiar relationship with the love in medicine Park.
13:54
Speaker 1: Believe it or not, UM is where the money is,
13:58
Speaker 1: to the extent there's any money in the resta on
14:00
Speaker 1: business at all. All right, So what are the rest
14:02
Speaker 1: of us doing if we want to go out in
14:04
Speaker 1: New York or London or other major markets that are
14:07
Speaker 1: experiencing some of these real estate issues. Where do we go?
14:10
Speaker 1: What do we do? Is there still a market for
14:12
Speaker 1: us out there? There's absolutely a market for you out
14:16
Speaker 1: there and many many others. And where where I am
14:19
Speaker 1: seeing the trend move for twenty nineteen is that a
14:22
Speaker 1: lot of these restaurants and eleven Medicine is part of that.
14:24
Speaker 1: They're getting a lot of They're getting a lot of
14:25
Speaker 1: pressure from us today. Is um restaurants like upland restaurants
14:30
Speaker 1: like you know, um um, what's it called Hillstone on
14:34
Speaker 1: lexing to have to that have branches which are really
14:37
Speaker 1: a notch above you know, commercial what we call Musso's
14:41
Speaker 1: in the trade, multi unit full service operators in our
14:44
Speaker 1: days used to be Denny's, you know. And obviously we're
14:47
Speaker 1: not going to get a guy like you to go
14:48
Speaker 1: to Denny's. And I can't see taking Lisa there either
14:52
Speaker 1: not that. Hey, you're talking to a guy who just
14:56
Speaker 1: went to Chick fil A. I loved it. I thought
14:58
Speaker 1: it was great. But remember what shake Shack did was
15:01
Speaker 1: say here's a slightly better burger for slightly more. And
15:05
Speaker 1: so restaurants are learning the hard way that a Hillstone
15:09
Speaker 1: or an upland you can get much better food, um
15:13
Speaker 1: for a little bit more, and you don't have to
15:15
Speaker 1: do maybe, you know, maybe save the the big prefect's
15:20
Speaker 1: menu experience for a once a year thing, an anniversary,
15:22
Speaker 1: or a special occasion. So what about all the billionaires
15:25
Speaker 1: because the number of those has risen dramatically. When Jeff
15:28
Speaker 1: Gunlock took to Twitter complaining that his breakfast spot was
15:31
Speaker 1: raising prices by Temper said this week, but I'm just
15:34
Speaker 1: wondering where do these billionaires eatum? Billionaires eat restaurants that
15:38
Speaker 1: have worked out how to how to shape this um.
15:42
Speaker 1: You know, the the ulto morea group springs to mind.
15:45
Speaker 1: The Marea on Central Park South probably see more billionaires
15:49
Speaker 1: sitting at at those lovely corner tables than probably anywhere
15:52
Speaker 1: else in New York. Um. They tend to want to
15:54
Speaker 1: go to safe places where the food is done by
15:58
Speaker 1: you know, it's that's really the thing. The era of
16:00
Speaker 1: Danielle Cafe Bulu in the city is another great example
16:04
Speaker 1: where you're pretty much consistently going to get the same
16:06
Speaker 1: thing every time. But it's expensive. Memour is not a
16:10
Speaker 1: cheap place to go. Um. Still, it has the kind
16:13
Speaker 1: of cache that is good enough for billionaires. Well, Lisa
16:16
Speaker 1: knows that. I'm all about the power of lunch. And
16:18
Speaker 1: so that was the Four Seasons restaurant for years. They
16:25
Speaker 1: forced to move or they moved from the longtime iconic
16:28
Speaker 1: Seagram's building. Was that also a rent economic issue? No?
16:32
Speaker 1: In that case that well, it was, uh, we might
16:35
Speaker 1: have to we might have to open a bottle to
16:37
Speaker 1: have this conversation. Let's you know, if if Paul's going
16:41
Speaker 1: off for is three martini lunch, then we better get started. Um.
16:45
Speaker 1: That was a very interesting real estate based story. So
16:49
Speaker 1: the Secret building was bought by A b Rosen and
16:51
Speaker 1: rk R Holdings, and that's their thing. They buy fifties
16:55
Speaker 1: modernist buildings like lever House across the street, and that's it.
16:59
Speaker 1: That's forced reasons lease was up. He wanted new operators.
17:02
Speaker 1: The Four Seasons moved to a new space and is
17:04
Speaker 1: you know, doing well or depending on how you like it.
17:06
Speaker 1: Justin about forty seconds here, I'm wondering how much has
17:10
Speaker 1: Wall Street pulled back on the power lunch and on
17:12
Speaker 1: expenses and how is that affecting the restaurant industry hugely,
17:16
Speaker 1: um Wall Street. As first of all, the power lunch
17:19
Speaker 1: thing really is over. It's more like the power breakfast.
17:21
Speaker 1: We have power soup here. There you go, power yoga,
17:25
Speaker 1: power yoga, and and lunch is really a thing of
17:27
Speaker 1: the past, which is why the sweet Greens of the
17:30
Speaker 1: world do so well. Plenty of billionaire gets sweet Green. Yeah.
17:33
Speaker 1: So so in other words, that that's affecting absolutely, And
17:37
Speaker 1: and companies are really really cracking down on those lunches,
17:39
Speaker 1: so you have to be or dinners and their expenses.
17:42
Speaker 1: So it's it's restaurants can't even depend on those kind
17:45
Speaker 1: of figures anymore, and more of them are actually investing
17:48
Speaker 1: in restaurants themselves. But we'll talk about that next time. Absolutely,
17:51
Speaker 1: Peter Elliott, perhaps over dinner if you want to partner. Absolutely,
17:55
Speaker 1: I saw what you did there. Trying my heart is
17:58
Speaker 1: Peter Elliott, who has the best job of Bloomberg reading
18:01
Speaker 1: and dining at the best establishments out there. He is
18:06
Speaker 1: searching for some good sushi that's under a thousand dollars.
18:10
Speaker 1: If you have ideas, you can email him. So, so
18:25
Speaker 1: let's dive a little bit deeper into Morgan Stanley and
18:29
Speaker 1: some of the other banks and investment banks results we've
18:32
Speaker 1: we've heard this week. Joining us on the phone is
18:34
Speaker 1: Ken Leone, Global Director of Industry and Equity Research at
18:38
Speaker 1: cf R. A. Ken, welcome, I wonder if you could, uh,
18:42
Speaker 1: you know, we just had Morgan Stanley this morning streets
18:45
Speaker 1: not liking the numbers. What did you see? So Morgan
18:49
Speaker 1: Stanley disappointed relative to their peers and and also coming
18:55
Speaker 1: off a strong third quarter. They're pretty much washed out
18:58
Speaker 1: with probably the weakest quarter of the big six of
19:01
Speaker 1: the large banks. So we had, you know, if you
19:04
Speaker 1: look across the board, let's start with just the thick
19:06
Speaker 1: business and and just the trading in general. We've seen
19:09
Speaker 1: equities on the street this quarter generally pretty good, but
19:12
Speaker 1: it was really the fixed income, currencies and commodities. So
19:15
Speaker 1: talked to us about the trading desk Morgan Stanley and
19:18
Speaker 1: how were they you know, you know, relative to your
19:20
Speaker 1: expectations relative to their peers. It's a good place to start,
19:24
Speaker 1: and when we look at trading, equity was flat UH
19:27
Speaker 1: even though with all volatility, maybe investors were on the
19:31
Speaker 1: sidelines in December, UH sick, particularly fixed income with UH
19:36
Speaker 1: rate and credit products UM just didn't really work well. Essentially,
19:43
Speaker 1: Morgan Stanley took client trades and it didn't help them.
19:47
Speaker 1: That was down UM. In other words, they lost money
19:52
Speaker 1: making incremental bets on whether the price was going to
19:55
Speaker 1: go up or down on assets they took on for clients. Yes,
20:00
Speaker 1: all right, I wasn't that their job? Though? Well, I mean,
20:03
Speaker 1: actually this is this is a big debate right at
20:04
Speaker 1: one point, what's the what's the cross overly between prop
20:07
Speaker 1: trading and making markets? You know, banks trying to get
20:10
Speaker 1: out of the market making business because it can be
20:12
Speaker 1: a loss industry, as we're seeing out with some of
20:14
Speaker 1: these results out of bond trading. But what I'm wondering,
20:16
Speaker 1: ken from your perspective, the battle of the behemos. We've
20:19
Speaker 1: got Morgan Stanley versus Goldman Sachs, and they've kind of
20:21
Speaker 1: pitied themselves against each other when it comes to bond trading.
20:24
Speaker 1: Goldman zach saying we're doubling down. A few years ago
20:26
Speaker 1: Morgan Stanley say we're cutting back, and Morgan Stanley has
20:29
Speaker 1: one quarter after quarter after quarter until now do we
20:34
Speaker 1: take anything away from that at a time when Morgan
20:37
Speaker 1: Stanley's market capitalization is now declining beneath Goldman Zachs for
20:41
Speaker 1: the first time in many months. Absolutely, and the delta
20:45
Speaker 1: changed for Morgan Stanley just wasn't anything else they could
20:49
Speaker 1: do proactively for fourth quarter. Goldman Sachs totally different story.
20:52
Speaker 1: For the last nine months, they've been moving into the
20:56
Speaker 1: traditional corporate treasury where they had low market share versus
21:00
Speaker 1: the investment segments such as UM hedge funds and prime brokerage, etcetera.
21:05
Speaker 1: So the ability for Goldman Sachs now with new leadership
21:10
Speaker 1: from investment banking, is bringing that into better integration with
21:14
Speaker 1: the trading desk UH and that speaks to better performance
21:17
Speaker 1: from Goldman Sacks yesterday versus Morgan Stanley today. So can
21:22
Speaker 1: being a longtime wall streeter or myself. And when January
21:25
Speaker 1: comes around every year, I think compensation, Um, how did
21:29
Speaker 1: Morgan Stanley do in terms of their compensation or compensation ratio?
21:33
Speaker 1: How are they doing on the cost side? So UM,
21:37
Speaker 1: the capital markets, investment banking and perhaps some trading uh
21:41
Speaker 1: they did well, but you know, significantly in their large
21:45
Speaker 1: wealth management business there were compensation adjustments related to deferrals UM.
21:51
Speaker 1: James Gorman spoke to the risk of having such a
21:54
Speaker 1: high level in deferred UM compensation, so they took that
22:00
Speaker 1: adjustment in this quarter. But I think wealth management also
22:04
Speaker 1: was affected by lower market levels. They didn't say today,
22:08
Speaker 1: Goldman said yesterday that in December, when you have lower
22:12
Speaker 1: market levels, of effects seas typically one month later, which
22:16
Speaker 1: would be January. So I want to talk a little
22:18
Speaker 1: bit about Morgan Stanley's path forward because one thing that
22:21
Speaker 1: James Gorman said on the earnings call is that they
22:24
Speaker 1: are thinking about acquisitions now after being sort of added
22:28
Speaker 1: that game for a while. Can you think of some
22:31
Speaker 1: smaller investment firms or banking firms that they would be
22:35
Speaker 1: looking to buy. I think it's more creative and disruptive
22:39
Speaker 1: than that Earlier in two thousand and eighteen we saw
22:42
Speaker 1: JP Morgan Embrace, Spirtshire, Hathaway and Amazon. It was interesting.
22:47
Speaker 1: City kicked off this week Monday and Friday. Before that,
22:51
Speaker 1: they had an announcement about Value Act with now having
22:55
Speaker 1: formal discussions internally UM. On Friday and I think where
23:00
Speaker 1: that's going looking at value act is large banks see
23:04
Speaker 1: changes in terms of digital and also in terms of transactions.
23:08
Speaker 1: So partnering with UH financial service companies or technology, I
23:14
Speaker 1: think it's gonna be a big part of the two
23:16
Speaker 1: thousand nineteen story. Okay, So which companies would be a
23:19
Speaker 1: sort of game for Morgan Stanley, So you know, generally,
23:24
Speaker 1: I think it's going to be strategic um not necessarily
23:28
Speaker 1: where they make um large acquisitions. I think tactical would
23:33
Speaker 1: be anything that helps them in terms of software development
23:37
Speaker 1: for trading, but but then also for their growing business
23:41
Speaker 1: and wealth management, which might also be moving more into
23:44
Speaker 1: retail consumer banking, like more like Goldman Sachs. All right,
23:50
Speaker 1: thank you so much for being with us. I'm just
23:51
Speaker 1: trying to imagine, are we talking Aladdin? Are we talking PayPal?
23:56
Speaker 1: But I guess we shall see. And it's a sort
23:59
Speaker 1: of an interesting idea that financial technology is the place
24:01
Speaker 1: where a lot of big banks are looking to add
24:04
Speaker 1: and if it's not add in in wholesale form in
24:07
Speaker 1: the traditional sense, it's at least partner on some kind
24:09
Speaker 1: of concrete sense. Ken Leon, thank you so much for
24:12
Speaker 1: being with us. He is Global director of Industry and
24:14
Speaker 1: Equity Research at cf are A Research. Definitely, the battle
24:18
Speaker 1: of the behemoths is fascinating to me because they took
24:21
Speaker 1: such different tax Morgan Stanley and and and it's very
24:24
Speaker 1: much in the hallways of both Morgan standing Goldman Sacks.
24:27
Speaker 1: They're looking at each other every single day. And today
24:29
Speaker 1: Goldman Sachs is wearing a smile. Morgan Stanley not so much.
24:46
Speaker 1: Right now, I want to remember a legend of the
24:49
Speaker 1: investing industry, Jack Bogel, who died yesterday of cancer at
24:52
Speaker 1: age eighty nine, really transformed the way people paid for
24:57
Speaker 1: their money management. Joining us now, Ben Steveerman, personal finance
25:00
Speaker 1: editor for Bloomberg News here in our Bloomberg in Active
25:02
Speaker 1: Program studios. So, Ben, can you give us a sense
25:05
Speaker 1: of just how pivotal Jack was in the entire creation
25:09
Speaker 1: of indexing and lowering fees for individuals. Yeah. When the
25:14
Speaker 1: first index fund launched by Jack Bogel, it was he
25:18
Speaker 1: really launched the first one that was accessible to everyday investors.
25:21
Speaker 1: And when that launched, it was a flop. And he
25:23
Speaker 1: really the eighties, right, It was the mid seventies, and
25:26
Speaker 1: it wasn't until the late eighties that it really started
25:29
Speaker 1: to perform well and attract a lot of assets. Um.
25:32
Speaker 1: So he's stuck with it for basically ten years when
25:37
Speaker 1: a lot of people were doubting this idea. It had
25:39
Speaker 1: a lot of support among academic economists, but people were like,
25:41
Speaker 1: this doesn't work in theory. Go go invest with Peter
25:45
Speaker 1: Lynch of Fidelity, You're gonna do so much better. Um.
25:48
Speaker 1: But then something started to change and um. The other
25:50
Speaker 1: thing that he was basically he was doing was cutting
25:54
Speaker 1: fees um. And whenever Vanguard would become more efficient, they
25:58
Speaker 1: use a lot of technology, they would pass the savings
26:01
Speaker 1: onto their investors. And as it got big and became
26:04
Speaker 1: this big player, people forget. Now we're in this world
26:07
Speaker 1: of few wars where everybody is competing to offer the
26:10
Speaker 1: lowest cost product. That that's a pretty recent development, and
26:14
Speaker 1: for a long time it was only Vanguard that was
26:16
Speaker 1: really pushing that conversation. Yeah, it's been you know, one
26:20
Speaker 1: of his lasting legacies will be the structural reduction in
26:24
Speaker 1: fees in the mutual fund industry. So I can't imagine.
26:27
Speaker 1: I just wonder how his over the years, how have
26:29
Speaker 1: the mutual fund giants and his competitors viewed Jack and
26:33
Speaker 1: viewed Van van guarders this. You know, it's obviously not
26:36
Speaker 1: in their business interests. What what he was doing last night?
26:39
Speaker 1: I was talking to Jeremy Grantham, the legendary investor, and
26:43
Speaker 1: he was saying that, uh, Jack Bogel was a royal
26:47
Speaker 1: pain in the bottom for for the people in the
26:49
Speaker 1: investment industry. A lot of people didn't like him because
26:51
Speaker 1: he basically took money out of their pockets. He was amazing.
26:54
Speaker 1: He would go to investment conferences and he would tell
26:57
Speaker 1: a room full of financial advisors that you're all overpaid
26:59
Speaker 1: and taking way too much of your client's money. He
27:02
Speaker 1: really had no fear about that. We had the honor
27:04
Speaker 1: of speaking with Jack Bogle in December of take listen
27:07
Speaker 1: to what he had to say about e t f s.
27:09
Speaker 1: You know, we have day to hear that shows that
27:12
Speaker 1: e t f have had in the last ten years
27:15
Speaker 1: a four point seven percent annual return and the traditional
27:18
Speaker 1: index fund about a seven point one percent annual return.
27:22
Speaker 1: There was the e t f have not worked out
27:24
Speaker 1: well for investors. I don't know why nobody knows this.
27:27
Speaker 1: So in a decade, the traditional index funds up about
27:32
Speaker 1: cumulatively and the e t have about. I mean, that's
27:36
Speaker 1: not that's not a strong record. So even though he
27:38
Speaker 1: basically laid the groundwork for the entire et F complex,
27:42
Speaker 1: not very positive on the actual funds. He didn't understand
27:45
Speaker 1: why anyone would want to trade, uh intra day, He
27:48
Speaker 1: just didn't get the idea. He thought, you know, put
27:51
Speaker 1: money in the market by hold wait patiently as your
27:54
Speaker 1: market return comes in. Why are you getting fancy with
27:57
Speaker 1: this and that? And that any temptations into trade would
28:00
Speaker 1: be bad for clients. You know, it's interesting you look
28:03
Speaker 1: at the amount of money that is going into Van Guard,
28:05
Speaker 1: I mean their assets under management of four point nine
28:08
Speaker 1: trillion in Malvern, Pennsylvania, outside of Philadelphia. You think about
28:13
Speaker 1: that kind of assets in the management you his, but
28:17
Speaker 1: that none of that or not much of that really
28:19
Speaker 1: accrued to him. He wasn't one of those bigger than
28:20
Speaker 1: life mutual fund managers like Peter Lynch or a hedge
28:23
Speaker 1: fund manager like we see around over the last twenty years.
28:27
Speaker 1: Kind of a modest guy. Yeah. Yeah, And I think
28:29
Speaker 1: he gave a lot to charity as well. He really
28:33
Speaker 1: um he seemed like he lived his principles, which was
28:38
Speaker 1: this industry needs to put clients first needs to put
28:40
Speaker 1: investors first. So just looking forward, his legacy will be
28:45
Speaker 1: having basically killed off fees. Right. I'm just wondering, from
28:49
Speaker 1: your perspective, how long lasting have we already seen that
28:52
Speaker 1: progression take place or are we in the early inning still?
28:55
Speaker 1: Oh no, what well? I think that he was he
28:58
Speaker 1: won basically. I mean I think that we're now at
29:02
Speaker 1: the point where we're wondering how big index funds can
29:05
Speaker 1: get before the market before they're sort of like an overcorrection.
29:09
Speaker 1: You know, how much how much index assets can we
29:12
Speaker 1: take um Because you look at endowments, you look at
29:16
Speaker 1: pension funds, you look at the under performance in the
29:19
Speaker 1: hedge fund industry. Um, Jack Bogel, doesn't people just the
29:26
Speaker 1: numbers themselves. Keep making Jack Bogel's argument for him even
29:29
Speaker 1: when he's on around. Ben Stevehman, thank you so much
29:31
Speaker 1: for being with us. Ben Steve froman personal finance editor
29:34
Speaker 1: for Bloomberg News, remembering Jack Bogel, who arguably did more
29:38
Speaker 1: to the industry of asset management than anybody else, I
29:41
Speaker 1: would argue, and certainly for the individual investor, made it
29:44
Speaker 1: affordable and provided fantastic performance over the years. Thanks for
29:50
Speaker 1: listening to the Bloomberg P and L podcast. You can
29:53
Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or
29:57
Speaker 1: whatever podcast platform you prefer. I'm pim F Box, I'm
30:00
Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
30:04
Speaker 1: It's one before the podcast. You can always catch us
30:07
Speaker 1: worldwide on Bloomberg Radio