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Consumer Sentiment, Bank Earnings, Litigation Latest · Bloomberg Intelligence

0:02
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0:23
Speaker 3: Let's get right to these Youmish sentiment data. So basically,
0:26
Speaker 3: we're looking at a fall for you Mish for the
0:28
Speaker 3: first time in three months, and you have the high
0:31
Speaker 3: cost of living really offsetting any sort of sanguine views
0:34
Speaker 3: on the job mark, kind of the opposite of what
0:36
Speaker 3: the FED was sort of looking at over the last
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Speaker 3: few weeks. Joan Shue, University of Michigan Surveys of Consumer
0:41
Speaker 3: Director joins us now walk us through the decline here
0:45
Speaker 3: and the whys behind it.
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Speaker 4: Absolutely so, I would point out that this decline is
0:51
Speaker 4: not statistically significant. We should see this as you know,
0:54
Speaker 4: inching down a very very small change. We're still higher
0:57
Speaker 4: than we were two months ago. Being said, consumers are
1:02
Speaker 4: you know, I think reacting to the same data that
1:04
Speaker 4: we saw on the CPI print yesterday. Inflation is slowing,
1:08
Speaker 4: but it's not slowing down as quickly as one would like.
1:12
Speaker 4: I'll note that the long term inflation expectations actually came
1:15
Speaker 4: down a little bit, so, you know, sort of mixed
1:17
Speaker 4: views on inflation, on inflation expectations, and.
1:20
Speaker 5: On labor markets.
1:21
Speaker 4: You know, I think consumers are feeling a little bit
1:23
Speaker 4: more confident this month. We had been seeing a week
1:26
Speaker 4: a bit of a weakening and labor market expectations the
1:29
Speaker 4: last few months, but they did expect the Fed to
1:31
Speaker 4: step in they did last month, and so consumers are
1:33
Speaker 4: feeling a little bit more staple there.
1:36
Speaker 6: How does just interest rates coming down? Is that just
1:39
Speaker 6: too much of a macro Wall Street thing to really
1:42
Speaker 6: impact the UMISH data.
1:45
Speaker 4: I don't think that the FOMC announcement necessarily moves the
1:49
Speaker 4: UMISH data at all.
1:50
Speaker 5: It doesn't really move consumers.
1:52
Speaker 4: That being said, consumers are fully aware of the interest
1:55
Speaker 4: rates around them, and when we ask them about buying
1:58
Speaker 4: conditions for a large large purchases like cars or durable
2:02
Speaker 4: goods or homes, the spontaneous mentions of high interest rates
2:07
Speaker 4: has fallen this month, So consumers are perfectly aware that
2:10
Speaker 4: interest rates are going to have been falling, and fifty
2:13
Speaker 4: four percent of consumers expect interest rates to continue following
2:16
Speaker 4: falling In the year ahead.
2:18
Speaker 5: So this is something that's on the minds of consumers.
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Speaker 3: The narrative yesterday when we got the CPI data initial
2:23
Speaker 3: jobless claims, is that which one is the FED look at, right,
2:26
Speaker 3: higher jobless claims or an inflation narrative, that disinflation narrative.
2:30
Speaker 3: That's not as steep as we had thought. It feels
2:33
Speaker 3: like from the report consumers are looking at those two things. Also,
2:36
Speaker 3: job's okay, inflation not okay.
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Speaker 4: Absolutely, I mean I think that in terms of inflation,
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Speaker 4: and also high prices, that is absolutely.
2:45
Speaker 5: The number one factor on consumers' minds.
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Speaker 4: We have over forty percent of consumers spontaneously telling us
2:52
Speaker 4: that high prices are eroding their personal finances. And it's
2:56
Speaker 4: been that way for quite some time, and so consumers
2:59
Speaker 4: are really concerned about that. With labor markets, you know,
3:02
Speaker 4: consumers are not super concerned about unemployment. They are aware
3:07
Speaker 4: that labor markets have been strong for the last couple
3:10
Speaker 4: of years.
3:11
Speaker 5: They are, you know.
3:12
Speaker 4: Watching their incomes very closely, of course, but they aren't
3:15
Speaker 4: really afraid of losing their jobs in the year ahead.
3:18
Speaker 6: All right, Joan, thank you so much. I really appreciate that.
3:20
Speaker 6: Joanne Shu, She's a Surveys of consumer director for the
3:24
Speaker 6: University of Michigan's they don't make just good football players
3:27
Speaker 6: out there. They make some good economists. It's good economic
3:30
Speaker 6: data out there, and.
3:31
Speaker 5: They make cars.
3:31
Speaker 6: They make cars, but not necessarily at the university.
3:34
Speaker 7: Okay, I see the distinction.
3:35
Speaker 6: See what you're seeing. So that's all good stuff there.
3:38
Speaker 6: So you missed data coming in a little bit weaker
3:39
Speaker 6: than expected.
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4:00
Speaker 7: What's really driving here? Are banks?
4:02
Speaker 3: I mean JP Morgan having like a tremendous move. Paul,
4:05
Speaker 3: you got the KBW bank index also arise in the
4:08
Speaker 3: most since December fourteenth.
4:11
Speaker 7: You've been talking people on morning. Did you find any
4:13
Speaker 7: cracks here?
4:14
Speaker 6: Well, I mean, you know, people were on the call
4:16
Speaker 6: talking about net interest margines, net interest incoming. Finally, Jamie
4:19
Speaker 6: Thymond's like, hey, guys, we put up some great numbers.
4:22
Speaker 6: Just lighten up about this, and that's interesting.
4:24
Speaker 2: I'm with him.
4:24
Speaker 6: I mean, and then I saw the Wells Fargo. Being
4:27
Speaker 6: a former investment banker, I go right to the investment
4:29
Speaker 6: banking lie man, they killed it, yeah, I don't you know.
4:32
Speaker 3: And Rolls Fargo they haven't been able to grow in
4:34
Speaker 3: the same way because the asset cap. So if they
4:36
Speaker 3: killed it, now, imagine when the cap is finally lifted.
4:38
Speaker 3: Someone smiling here.
4:39
Speaker 7: And I don't know if that's a good.
4:40
Speaker 6: Or bad thing.
4:40
Speaker 3: As Alison Williams, Bloomberg Intelligence, Senior Analyst for Global Banks
4:44
Speaker 3: and Asset Managers. Allison, what was your biggest takeaway from
4:46
Speaker 3: these two guys.
4:48
Speaker 8: I mean, things are good, right, and then we got
4:50
Speaker 8: the PPI numbers. I think that's also giving a list
4:53
Speaker 8: lift to the stocks. You know, JP Morgan is fascinating
4:57
Speaker 8: because they you know, beat the interest income. The guidance
5:01
Speaker 8: looks better for fourth quarter, but Jamie making him point
5:05
Speaker 8: to talk down the interest income guidance for next year,
5:08
Speaker 8: and as you pointed out, really just getting annoyed with
5:11
Speaker 8: people like focusing so much on every little thing. He
5:16
Speaker 8: did make comments about the expenses as we were discussing
5:19
Speaker 8: earlier this morning, just pointing out that look expenses are
5:23
Speaker 8: investments and investments in the future. But generally, you know,
5:28
Speaker 8: showing you know, charge offs coming in better than expected,
5:32
Speaker 8: but building the reserve. I think that reflects conservatism. Wells
5:35
Speaker 8: Fargo also, you know they're they're actually releasing reserves. So
5:40
Speaker 8: what that means is that generally a better economic view
5:44
Speaker 8: on a lot of different things. They did build some
5:46
Speaker 8: for card and for commercial real estate.
5:48
Speaker 6: A right one of the many reasons I am not
5:50
Speaker 6: a bank analyst because I focus on all the wrong things.
5:53
Speaker 6: Here's my question for Wells Fargo. Wells Fargo's CEO, they've
5:56
Speaker 6: refurbished more than four and sixty branches this year. I
5:59
Speaker 6: have been in a branch since well before the pandemic.
6:04
Speaker 6: I'm like, mister, I got my app I'm cruising on
6:07
Speaker 6: my APP. I can do everything. Why are banks still
6:10
Speaker 6: have branches?
6:10
Speaker 7: They get cash in your pocket, I see you take
6:12
Speaker 7: it out.
6:12
Speaker 6: Yeah, but I've at four or five hundred bucks because
6:14
Speaker 6: you never know when you're going to walk by a
6:16
Speaker 6: crap game. So talk to us about branches and how
6:20
Speaker 6: they what do they mean for the Wells Fargos and
6:21
Speaker 6: the Bank of Americas of the world.
6:23
Speaker 8: So banks are still building branches there's two reasons. So
6:27
Speaker 8: banks such as like Wells Fargo, Bank of America JP Morgan,
6:30
Speaker 8: there is a cap in terms of what you can buy,
6:33
Speaker 8: so you have to organically build. So any states that
6:36
Speaker 8: they're not in that they think are attractive markets, they
6:40
Speaker 8: are building in those markets. But what they have been
6:42
Speaker 8: doing is reconfiguring those branches, so focusing.
6:46
Speaker 9: More on wealth.
6:48
Speaker 8: So the branch may not be that you know, if
6:51
Speaker 8: you walked into a branch, you might not recognize it.
6:53
Speaker 8: There is a JP Morgan branch in the middle of
6:56
Speaker 8: Summit which hasn't changed very much, but but a lot
7:02
Speaker 8: of the branches and select markets are just making them smaller,
7:06
Speaker 8: more sales focused, focusing more on the wealth management business,
7:09
Speaker 8: so not necessarily your your branch of the day of old,
7:13
Speaker 8: where the focus was on deposits. Hopefully everyone's doing those
7:16
Speaker 8: on their phone because the cost to banks of processing
7:21
Speaker 8: those is pennies.
7:22
Speaker 1: On the dollar.
7:22
Speaker 6: John, you know, you can deposit a check by taking
7:24
Speaker 6: a photo of the check and then.
7:26
Speaker 7: I actually have done that. But there are things like
7:29
Speaker 7: they're doing everything they can to make me go paperless.
7:32
Speaker 2: I absolutely refuse.
7:34
Speaker 7: Really, I want it to be so much easier. Big
7:36
Speaker 7: of a drag.
7:38
Speaker 3: And then you wonder why we make you out to
7:40
Speaker 3: be a curmudgeon, and we're like, we don't do it,
7:42
Speaker 3: you do it to yourself.
7:43
Speaker 7: I fully admit it.
7:45
Speaker 3: What would be your questions now, so we got to
7:48
Speaker 3: this quarter, et cetera, what's your biggest question for JPM
7:50
Speaker 3: and for Wells Fargo?
7:51
Speaker 8: I mean, when is longerth can you get a little
7:54
Speaker 8: bit better? So that is I think one of the
7:57
Speaker 8: benefits of interest rate cuts that you're not sartly going
8:00
Speaker 8: to see in their projections, right because I think they're
8:04
Speaker 8: going to want to see more evidence of that loan demand.
8:07
Speaker 8: Card has been really strong, and the reason why we're
8:10
Speaker 8: seeing reserves for card is really not we have some
8:14
Speaker 8: normalization of credit, but it's really the growth. So when
8:17
Speaker 8: are the other areas going to pick up?
8:20
Speaker 1: You know?
8:20
Speaker 8: The other thing is fees. Fees have been helped by
8:23
Speaker 8: the super strong markets, and I think that's if you
8:26
Speaker 8: look at Wells Fargo's stock today, Yes, that interesting comes
8:29
Speaker 8: softer in the quorder, but next quarter looks fine and
8:33
Speaker 8: the markets are doing better. You know, that's that's not
8:36
Speaker 8: necessarily a question that management can answer, but it's something
8:39
Speaker 8: that we think is going to continue to benefit the bag.
8:41
Speaker 6: I have my checking account what Wells fargos, So I
8:43
Speaker 6: don't think I'm prepared to ask this question. Explain to
8:45
Speaker 6: us what the regulatory and legal issues are still above
8:49
Speaker 6: Wells Fargo and when do they hope to get out
8:50
Speaker 6: from under that.
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Speaker 8: I mean, the so the asset cap is unprecedented. Is
8:55
Speaker 8: an asset basically after you know, if we go way
8:59
Speaker 8: way back to twenty sixteen, they were they were fined
9:03
Speaker 8: for some different sales practices. They had to make some improvements,
9:07
Speaker 8: they weren't making them fast enough. So within about a
9:10
Speaker 8: year or so, they got this asset CAUP which said, look,
9:13
Speaker 8: you're not allowed to grow from where your assets are
9:16
Speaker 8: today until you know, you fix the things that we
9:19
Speaker 8: want to fix. And that had never happened before, and
9:23
Speaker 8: so initially the thought was, oh, this will be a
9:25
Speaker 8: few months. So many many years later they are still
9:30
Speaker 8: working to fix that. And you know, since then, you know,
9:34
Speaker 8: that was a prior CEO. So we had a change
9:37
Speaker 8: at the top in terms of management, we had the
9:39
Speaker 8: board turnover, We've had tons of processes changing. There was
9:44
Speaker 8: a Bloomberg excuse me, a Bloomberg News article recently about
9:49
Speaker 8: you know, sending to regulars, all the changes that they've made,
9:53
Speaker 8: but at this point it makes less of a difference.
9:58
Speaker 8: The Really it really hurt them during the pandemic because
10:01
Speaker 8: they were limited in terms of the deposits they could add.
10:06
Speaker 8: But it is really about sentiment and flexibility. Should there
10:09
Speaker 8: be another big opportunity for them created, they want to
10:11
Speaker 8: make sure that they have that flexibility.
10:13
Speaker 3: And if you talk to management, they're like, it's it's
10:15
Speaker 3: a process, Like they can't give a data or a
10:18
Speaker 3: time because it's about transparency and rules. So like when
10:21
Speaker 3: they keep making the transparency and rules happen, at some
10:24
Speaker 3: point that will be lifted. Thirty seconds. Which bank now
10:28
Speaker 3: that is left to report? Do you think does well
10:31
Speaker 3: based on these results?
10:32
Speaker 8: Gulben Sachs, Golvin Sachs, and Morgan Stanley. So Morgan Stanley
10:36
Speaker 8: is more skewed towards the equity's business right They're trading
10:40
Speaker 8: has more exposure there equities trading super strong at JP Morgan.
10:45
Speaker 8: Those three banks are the top in the business and
10:47
Speaker 8: so we expect to see more strength next week.
10:52
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11:02
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11:07
Speaker 7: So here's a story I don't understand.
11:08
Speaker 3: So it's a great story to then talk to Bloomberg
11:10
Speaker 3: Intelligence about a TD Bank is going to pay almost
11:13
Speaker 3: three point one billion dollars in fines and other penalties
11:16
Speaker 3: and face a cap on its US retail banking assets.
11:20
Speaker 3: This is after pleading guilty to failing to prevent money
11:22
Speaker 3: laundering by drug cartels and other criminals. We got the
11:25
Speaker 3: legal side, we got the business equity side for you here.
11:28
Speaker 3: Elliot Stein is Bloomberg Intelligence Litigation analyst and Paul Goldberg
11:32
Speaker 3: is Bloomberg Intelligence Senior equity analyst. Elliott start with you
11:36
Speaker 3: explain to me the legal story here.
11:38
Speaker 10: Right, So, yesterday TD Bank became the largest bank in
11:42
Speaker 10: US history to plead guilty to money laundry and virations.
11:45
Speaker 10: They paid three billion dollars, which is now the most
11:48
Speaker 10: any bank has ever paid for money laundry and virations,
11:52
Speaker 10: and they are now only the second bank to have
11:54
Speaker 10: an asset cap imposed on them, after well as Fargo over.
11:58
Speaker 5: Six years ago.
11:58
Speaker 10: Although it should be noted that the asset cap on
12:01
Speaker 10: TD Bank is only limited to its US retail bank operations,
12:04
Speaker 10: so it's sort of a smaller asset cap than one
12:07
Speaker 10: imposed on Wills.
12:08
Speaker 6: Hey, Paul, how much does this impact what investors kind
12:11
Speaker 6: of their view of TD? Three billion dollars is a
12:14
Speaker 6: big number, Elliott says, But they got one hundred and
12:16
Speaker 6: twenty billion a market cap, So what do you think?
12:18
Speaker 9: Yeah, all right, Paul, three billion dollars is not a
12:22
Speaker 9: big that big of a deal for them as a bank.
12:25
Speaker 9: They have thirteen percent of capital ratio, and they reserved
12:30
Speaker 9: most of it for most of it already just shy
12:32
Speaker 9: have a few dollars there. The asset cap is a
12:36
Speaker 9: bigger issue, and it's going to impede growth the now.
12:41
Speaker 9: They gave some ins and outs what they're going to
12:44
Speaker 9: do trying to accommodate the new requirements from the regulators.
12:49
Speaker 9: They're going to cut their US assets for those retail
12:51
Speaker 9: banks by about ten percent. It's going to be an
12:53
Speaker 9: additional one and have billion dollar charge. And even excluding
12:57
Speaker 9: that charge, some of the actions that we saw when
13:00
Speaker 9: we ran the numbers, it could be as much as
13:02
Speaker 9: another thirty cents in the earning, So another few percent
13:05
Speaker 9: of the earnings are going to get shaved in the
13:07
Speaker 9: next year. And how long is it going to take
13:09
Speaker 9: to unwind? It's going to take some time.
13:12
Speaker 3: This might be a silly question, Elliott, but like what
13:14
Speaker 3: was what did they actually do and how they actually
13:17
Speaker 3: fixed that.
13:17
Speaker 5: Part of it?
13:18
Speaker 6: Like who launders money anymore?
13:19
Speaker 4: I know?
13:20
Speaker 10: Yeah, so the laundering here was by Chinese drug cartels
13:24
Speaker 10: and other drug cartels as well. And I think what's
13:26
Speaker 10: notable is that TD Bank employees were accepting bribes from
13:31
Speaker 10: these cartels. Yeah, Ale a couple of them were indicted previously,
13:36
Speaker 10: a couple of TD Bank employees. So I think that's
13:38
Speaker 10: what made this sort of a more egregious case because
13:40
Speaker 10: you know, usually with banks, you see that their AML
13:44
Speaker 10: processes are deficient. Here you have bank employees participating in
13:49
Speaker 10: the crimes and that can get imputed to the bank itself,
13:52
Speaker 10: and that's what made it the worst case.
13:53
Speaker 6: Paul Goldberg, I'm looking at the stock kind of you know,
13:56
Speaker 6: flat on the year. What's the call on a bank
14:00
Speaker 6: like TD and maybe just Canadian banks in general.
14:04
Speaker 9: Canadian banks are sort of sitting at the crossroads. Has
14:07
Speaker 9: the Bank of Canada started cutting the interest rates ahead
14:11
Speaker 9: of the Federal Reserve. Here they've done three cuts already.
14:17
Speaker 9: They kind of sitting in between the two worlds. One
14:20
Speaker 9: is the slower growth and risk of actual recession, which
14:24
Speaker 9: is kind of minimized at this point, and the other
14:27
Speaker 9: one is a profitability. The long growth slowed quite dramatically
14:31
Speaker 9: in Canada and somewhat in the US, and their mortgage
14:36
Speaker 9: market is a little bit different than the US when
14:38
Speaker 9: mortgage is repriced to a higher rate, which exposes consumer
14:42
Speaker 9: to a very different risk. And about seventy five percent
14:45
Speaker 9: of mortgages overall, and a lot of them that were
14:48
Speaker 9: issued at a very low rates during the pandemic due
14:52
Speaker 9: to the price in twenty five and twenty six, So
14:55
Speaker 9: a lot of what's going on and what might happen.
14:58
Speaker 9: People are looking at the Bank of Canada how well
15:00
Speaker 9: it can actually prevent that from spilling over into consumer pains.
15:05
Speaker 3: So then based on that, when you take a look
15:06
Speaker 3: at the stock is down by about over two percent today,
15:10
Speaker 3: do we see it was down about six percent? I
15:12
Speaker 3: think yesterday. What part of this is reflected in the stock,
15:15
Speaker 3: How much of the macro Bank of Canada, and then
15:18
Speaker 3: how much of this kind of legal fees, etc.
15:21
Speaker 9: So I think the macro has been reflected in the
15:24
Speaker 9: stock for quite a while because the relative to Peers
15:28
Speaker 9: has been under performing all year, and the story on
15:32
Speaker 9: the whole kind of DML story has been around for
15:37
Speaker 9: over a year as well, so a lot of been
15:39
Speaker 9: reflected as well. I think what people were not really
15:43
Speaker 9: expecting is the asset cap. And even though as Elliott said,
15:46
Speaker 9: it's only the US retail operations, so the assets of
15:49
Speaker 9: those two operations are only about thirty percent of the
15:51
Speaker 9: total bank assets, it's still kind of unexpected and that's
15:55
Speaker 9: what's pressing the stock. They gave sort of claire in
16:00
Speaker 9: what might be the pressure in twenty five, But the
16:02
Speaker 9: question is, and this is kind of goes back to
16:04
Speaker 9: Wells Fargo where every quarterly poll people are asking when
16:07
Speaker 9: they're going to be down with the cap. And we've
16:09
Speaker 9: been out there for seven years already, So what's priced
16:13
Speaker 9: in there in that respect is kind of hard to tell.
16:17
Speaker 6: Hey, Elliet this asset cap, which I just learned about
16:21
Speaker 6: like fifteen minutes ago, and Alison Williams explained it to
16:23
Speaker 6: me the context to Wells Fargos, and now I think I.
16:25
Speaker 2: Know all about it.
16:26
Speaker 6: This seems like a real deterrent for regulators to rein
16:30
Speaker 6: in banks behavior here. I mean, writing a check is easy,
16:35
Speaker 6: they can reserve for it, no big deal. This seems
16:37
Speaker 6: like it could really have some tea.
16:39
Speaker 10: Yeah, and I think it's sort of a new wave
16:41
Speaker 10: of enforcement weapons that regulators are bringing because you did
16:46
Speaker 10: have Wells Fargo's asset cap almost seven years ago, but
16:49
Speaker 10: more recently we've seen the OCC imposed different business limitations
16:54
Speaker 10: on Wells by requiring them to get OCC approval if
16:59
Speaker 10: they're going to expand into new products or new markets.
17:02
Speaker 10: And we saw that with TD Bank yesterday as well,
17:05
Speaker 10: because in addition to the asset cap, if TD's US
17:09
Speaker 10: operations want to expand into new markets or open new branches,
17:12
Speaker 10: they have to get OCC approval as well. So we're seeing,
17:15
Speaker 10: you know, new tools that regulators are using beyond just
17:18
Speaker 10: monetary penalties, which you know, critics say, are you know,
17:21
Speaker 10: just the cost of doing business.
17:23
Speaker 3: Which so for Wells Fargo, part of it is for
17:25
Speaker 3: the broader asset cap lift. It's sort of like you know,
17:29
Speaker 3: when you see it like it's nothing, you can point
17:30
Speaker 3: to that like they're going to fix this and then
17:32
Speaker 3: all will be well that that's sort of just transparency
17:35
Speaker 3: and rules. They have just clean up and they have
17:36
Speaker 3: to do better. What is it for TD It's.
17:40
Speaker 10: Similar to what Wells Fargo went through, but you know,
17:42
Speaker 10: there's no that that's the problem moments sort of exactly,
17:46
Speaker 10: it's up to the OCC. There are steps that the
17:49
Speaker 10: bank has to take along the way, right, They have
17:51
Speaker 10: to put in the plan that the OCC approves, Then
17:53
Speaker 10: they have to implement a plan. Then they have to
17:55
Speaker 10: get a third party independent reviewer to sort of sign
17:58
Speaker 10: off on it, and then that third part already presents
18:01
Speaker 10: it to the OCC, and then the OCC signs off
18:04
Speaker 10: on it. But there's no crystal clear moment. It's interesting, yeah,
18:08
Speaker 10: where it gets lifted.
18:09
Speaker 7: It's interesting.
18:10
Speaker 3: Also, it's like, how do you prove that your workers
18:12
Speaker 3: are no longer taking bribes?
18:13
Speaker 7: Like what is that?
18:14
Speaker 4: Like?
18:14
Speaker 7: What does that look like?
18:15
Speaker 3: Right? No, we promise, Yeah, it's like proving a negative exactly. Guys,
18:19
Speaker 3: a really interesting story. We thank you both. That was
18:20
Speaker 3: really fun. Elliott Stein, Bloomberg Intelligence Litigation analyst and Paul Goldberg,
18:24
Speaker 3: Bloomberg Intelligence Senior equity analyst, talking about TD Bank.
18:30
Speaker 2: You're listening to the Bloomberg Intelligence podcast Catch US live
18:34
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18:38
Speaker 2: Otto with the Bloomberg Business at You can also listen
18:41
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18:44
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18:49
Speaker 3: So we had the PPI which seemed pretty benign. You
18:51
Speaker 3: have nothing really happening in the front end. Long end
18:53
Speaker 3: though still selling off joining us now as Priam isra
18:56
Speaker 3: chief fixed income portfolio manager at JP Moore again asset
19:00
Speaker 3: management joining us.
19:01
Speaker 7: There prea what is going on with the long end?
19:05
Speaker 3: Why the selloff? Is there something fundamental? Is it repositioning?
19:08
Speaker 3: Is it something else?
19:10
Speaker 11: I think it's a combination of a couple of things.
19:12
Speaker 5: So we have this really strong jobs report.
19:14
Speaker 11: Now I know it's one report, it is subject to revisions,
19:17
Speaker 11: but I think the broad based strength of that report
19:20
Speaker 11: I think is making the market consider exactly where is
19:24
Speaker 11: neutral rate? And I think that neutral rate if you
19:26
Speaker 11: were thinking the Feds around two point nine, you know
19:29
Speaker 11: what if it's three and a half, what if it's four.
19:31
Speaker 11: I think that's part of it. So we saw that
19:32
Speaker 11: repricing starting with that report. The other one is we
19:36
Speaker 11: have an election in less than a month out and
19:39
Speaker 11: I think, you know, we can debate, you know, the
19:41
Speaker 11: makeup of Congress, the presidency, but fiscal restraint is not
19:46
Speaker 11: something either party is talking about. Even in a divided
19:49
Speaker 11: government scenario. I think there's a case to be made
19:51
Speaker 11: that the taxes will get extended, a lot of the
19:54
Speaker 11: spending will continue. So I think the market is reassessing
19:57
Speaker 11: that term premium. You know, now we're not worrying about growth,
20:01
Speaker 11: We're worried about what is the outlook after the election,
20:03
Speaker 11: and with all this fiscal question mark out there, I
20:06
Speaker 11: think we're reassessing how much will the FED cut and
20:10
Speaker 11: what should be that term premium? How much more should
20:13
Speaker 11: you get paid if you're giving the government money for
20:15
Speaker 11: two years versus ten years. And I think it's the
20:17
Speaker 11: combination of the two, along with probably some positioning. I
20:20
Speaker 11: think market was long given the previous two payroll reports.
20:24
Speaker 11: We were long into that payroll report. That's why the
20:27
Speaker 11: long end has sold off. I think we're starting to
20:30
Speaker 11: see some value, but before the election outcome and before
20:33
Speaker 11: realizing what's happening on the fiscal front, I think people
20:36
Speaker 11: are going to be nervous to step in and really
20:38
Speaker 11: buy the long end.
20:40
Speaker 6: All right, pria. In terms of credit, how much credit
20:44
Speaker 6: risk do you want to take these days? Because again
20:47
Speaker 6: you can sit in a two year treasury you get
20:50
Speaker 6: close to four percent.
20:51
Speaker 11: Year, right, I think, and credit spreads are tight on
20:55
Speaker 11: any historical metric. You could argue I'm not getting paid
20:58
Speaker 11: up enough for credit.
21:00
Speaker 5: Here's why I'm going to.
21:00
Speaker 11: Argue that high quality credit or owning high quality corporate paper,
21:05
Speaker 11: even with these tidespreads make sense. So two points on
21:08
Speaker 11: that number one you talked about, I can be in
21:10
Speaker 11: the very front end and still earn four percent. Well,
21:13
Speaker 11: we think the Fed's going to continue to cut. The
21:15
Speaker 11: urgency for fifty is clearly not there. But I think
21:19
Speaker 11: a gradual pace of twenty five getting close to a
21:22
Speaker 11: three or three and a half on FED funds.
21:24
Speaker 5: So that front end or money market.
21:27
Speaker 11: Yield where you may have it's felt great to be there,
21:30
Speaker 11: that yield is going to go down over time. Secondly,
21:33
Speaker 11: look at corporate America. I mean we're in a soft landing.
21:36
Speaker 11: This is the time when you should be picking up
21:38
Speaker 11: a little bit more spread. You have to be careful,
21:40
Speaker 11: you know what you're buying. But in the investment greate
21:43
Speaker 11: corporate market, I would even go as far as the
21:46
Speaker 11: high quality high eyel market, so the double be even
21:49
Speaker 11: some single bee look attractive. I mean, look at balance sheets.
21:52
Speaker 11: What are companies doing with the debt that they're issuing.
21:55
Speaker 11: They are not relevering up. This is not end of
21:57
Speaker 11: cycle behavior from corporate America. You know, there has been issuance,
22:03
Speaker 11: but there's it's been taken down really well. The issuance
22:06
Speaker 11: is all pre funding maturities that are coming up. So
22:09
Speaker 11: companies are very smartly trying to push out that maturity wall.
22:12
Speaker 11: So I would say, if you're picking up one hundred
22:14
Speaker 11: basis points in high quality IG investment grade or two
22:18
Speaker 11: hundred in high quality HYGIEL, it makes sense as long
22:22
Speaker 11: as we stay in a soft landing, pick up that
22:24
Speaker 11: yield and.
22:26
Speaker 5: Extend out the curve. You know, maybe thirty years too
22:28
Speaker 5: far out. Five year five year.
22:29
Speaker 11: Corporate bonds I think make a lot of sense as
22:31
Speaker 11: long as we stay in the soft landing and the
22:34
Speaker 11: data or FED policy is telling you that the soft
22:36
Speaker 11: landing should be our base case.
22:38
Speaker 3: It's just so crazy because I feel like in the
22:40
Speaker 3: beginning of August it was a growth scare, and then
22:42
Speaker 3: it was a soft landing, and now there's some talk
22:45
Speaker 3: about are we actually reaccelerating here and the FED is
22:48
Speaker 3: going to have to pause now that conversation, like Bostic pointed,
22:51
Speaker 3: our Ophil Bostic this week, supported that this is just
22:55
Speaker 3: such a weird time, like how do you manage that
22:59
Speaker 3: kind of narrative shift?
23:01
Speaker 5: I completely hear you, Alex.
23:02
Speaker 11: I think the market flips from one narrative to another
23:05
Speaker 11: very quickly every data point base. I think part of
23:08
Speaker 11: it is the FED keep selling us that they are
23:10
Speaker 11: not data point dependent, but there is no forward guidance.
23:14
Speaker 11: And we went from pricing in twenty five to fifty
23:17
Speaker 11: within a week to now pricing less than twenty five
23:21
Speaker 11: at the next meeting. So I think the market's clearly
23:24
Speaker 11: treating FED policy as data point dependent. But here's where
23:27
Speaker 11: it come boils down to the data is mixed. I
23:30
Speaker 11: mean there's some signs of slowing. I think we don't know.
23:33
Speaker 11: I think the last time I was on I was
23:34
Speaker 11: telling you I don't know if we're slowing to potential
23:37
Speaker 11: or below potential. I think we're still in that same
23:40
Speaker 11: place before the payroll report. There you could point to
23:42
Speaker 11: a couple of data points on the labor market, and
23:45
Speaker 11: I think it will come down to the labor market,
23:46
Speaker 11: so watch claims. And here's the bad news on this.
23:49
Speaker 11: We're not going to have very reliable data in the
23:52
Speaker 11: next few months because the impact of the strikes, the
23:54
Speaker 11: impact of the hurricanes. So we're going to have to
23:57
Speaker 11: look at the totality of data as the FED is doing,
24:00
Speaker 11: and then see is it convincingly leading.
24:03
Speaker 5: Us one way or the other.
24:04
Speaker 11: I think the market's overdoing the moves on boat directions.
24:07
Speaker 11: We didn't think a recession was very likely early August.
24:10
Speaker 11: I don't buy there's no landing scenario right now. I
24:13
Speaker 11: think we're slowing we Here's the thing. Soft landings are rare.
24:16
Speaker 11: The FED hasn't really been able to pull it off before,
24:18
Speaker 11: so I think it's understandable why the market's skeptical.
24:22
Speaker 5: But maybe this is the.
24:23
Speaker 11: One time where somehow they're able to cut rates too
24:27
Speaker 11: neutral or to whatever is their estimate of economy's estimate
24:32
Speaker 11: of neutral at the same time as the economy slows down.
24:34
Speaker 11: So perhaps this is the one time where we'll be
24:36
Speaker 11: in soft landing. But I think we should be careful
24:39
Speaker 11: not to swing from one end to the other end
24:41
Speaker 11: the market is and I think that's where we get opportunities.
24:44
Speaker 11: I think if the market prices out any more cuts
24:47
Speaker 11: in the front end, we'd be looking to buy the
24:50
Speaker 11: two years. I don't think the FED stops the easing cycle,
24:53
Speaker 11: but the market can certainly run with the narrative in
24:55
Speaker 11: one direction.
24:57
Speaker 6: Are there any sectors industry sectors that screen well for
25:01
Speaker 6: you given that background?
25:03
Speaker 5: Sure?
25:03
Speaker 11: So there's these growth sectors utilities, for example. It was
25:07
Speaker 11: not necessarily I would have said that that's a growth
25:09
Speaker 11: sector two years ago, and here we are electrification AI.
25:13
Speaker 11: So I think within the investment grade sector, I would
25:16
Speaker 11: say utilities make sense. There's areas in communication, in the
25:20
Speaker 11: high yields space where we think, you know, the sector
25:23
Speaker 11: might have been beaten down a little bit, we think
25:25
Speaker 11: there's value there. Financials now, financials have done well, but
25:29
Speaker 11: we still think that there's value. I mean, I'm going
25:31
Speaker 11: to be looking at the earning and the earning season
25:33
Speaker 11: starting out, and we just got the banks. What I'll
25:36
Speaker 11: be watching is do margins stay strong, because you know,
25:40
Speaker 11: if revenue growth, if the economy is slowing, I mean,
25:43
Speaker 11: we may we're likely slowing to trend or just below trend,
25:46
Speaker 11: not recession. But if we're slowing and companies have already
25:50
Speaker 11: gotten a lot of productivity out of you know what
25:53
Speaker 11: they could do to keep costs slow. It's going to
25:56
Speaker 11: come down to how much further can they do on
25:58
Speaker 11: the productivity side. And so if margins remain strong, I
26:01
Speaker 11: think then there's a lot of sectors you can look at.
26:04
Speaker 11: I mean there's certain sectors. I think you have to
26:06
Speaker 11: look at valuations too. I think many sectors make sense,
26:10
Speaker 11: but if the market's already priced that in, we stay
26:13
Speaker 11: away from that. Industrials in our view look rich from
26:15
Speaker 11: a valuation standpoint, but financials utility is there's a bunch
26:19
Speaker 11: of sectors. Securitized credit, I think people look at CMBs
26:22
Speaker 11: and get nervous. Commercial real estate we look at single
26:26
Speaker 11: family rental housing is still very unaffordable, so people are
26:30
Speaker 11: forced into the rental market. You have a job, you're earning,
26:34
Speaker 11: you're making your rent payment. That's a sector that makes
26:37
Speaker 11: a lot of sense. It's positive cash flow so across
26:40
Speaker 11: the Unlike equities, where I think you have to have
26:42
Speaker 11: a viewed tech, I think in fixed income it's like
26:45
Speaker 11: making me pick between my children.
26:46
Speaker 5: It's hard.
26:47
Speaker 11: There's opportunities in many sectors.
26:50
Speaker 7: We appreciate it. Thank you so very much. We always
26:53
Speaker 7: love when you join us.
26:54
Speaker 3: Priam Israel joining us at JP Morgan Asset Management. She
26:57
Speaker 3: is a fixed income portfolio manager.
27:01
Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
27:05
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27:19
Speaker 6: I'm saying really over the last couple of three years
27:21
Speaker 6: that the regulatory hand of the ghost governments got a
27:24
Speaker 6: little heavier on the shoulders of big tech companies, and
27:28
Speaker 6: that includes our good friends at Google. Jennifer re joins
27:32
Speaker 6: us here. She's a senior at litigation analyst for Bloomberg
27:35
Speaker 6: Intelligence Alecuit. You rights here. If the US Justice Department
27:39
Speaker 6: asks Alphabet's Google to divest part of its business as
27:42
Speaker 6: a remedy for illegally maintaining monopolies in general search related
27:45
Speaker 6: ad markets, we think the dj will probably fail. Jen,
27:49
Speaker 6: what's the thinking behind that? Because there is some increasing
27:52
Speaker 6: talk here that the Department of Justice may in fact
27:55
Speaker 6: ask for some type of breakup of Alphabet.
27:59
Speaker 12: Yeah, and they've suggested that they are going to ask
28:01
Speaker 12: for that will find out mid November. But the reason
28:04
Speaker 12: why I think this, and I'm sorry because I'm going
28:05
Speaker 12: to have to get a little nerdy with you.
28:07
Speaker 1: Yeah, bring it all right, get ready.
28:10
Speaker 12: Here on this judge has adhered so closely to the
28:13
Speaker 12: old Microsoft monopolization decision back in early two thousand, the
28:17
Speaker 12: entire litigation, he said, that is his blueprint, and all
28:19
Speaker 12: through his decision on liability, he cited Microsoft, Microsoft, Microsoft,
28:23
Speaker 12: And what Microsoft says is that the standard for finding
28:27
Speaker 12: that the conduct and here it was these default agreements
28:29
Speaker 12: that Google had to put Search and all basically all
28:32
Speaker 12: the distribution channels right in the Internet. That to find
28:36
Speaker 12: liability you just have to find that it's reasonably probable
28:40
Speaker 12: that these agreements contributed to maintaining the monopoly, to maintaining
28:44
Speaker 12: the monopoly in search. But what Microsoft said is for remedy,
28:47
Speaker 12: if you're going to use divestiture, that standard is much higher.
28:50
Speaker 12: In other words, you need to kind of have a
28:52
Speaker 12: butt four standard.
28:53
Speaker 1: You have to be.
28:54
Speaker 12: Really certain that but for those agreements, Google wouldn't have
28:58
Speaker 12: the position in search it has today. And that this
29:01
Speaker 12: judge said over and over that Google got to this
29:03
Speaker 12: monopoly position by having a better product, not by behaving badly,
29:07
Speaker 12: but by basically innovating and making this great search product
29:10
Speaker 12: that people loved. It got to this monopoly position, and
29:13
Speaker 12: it was only after it attained that position that it
29:15
Speaker 12: behaved badly to maintain that spot. So I think given
29:19
Speaker 12: this much higher standard for what's called causation in the
29:22
Speaker 12: Microsoft case, and this judge is adherence to Microsoft, he's
29:26
Speaker 12: not going to go that far.
29:27
Speaker 3: So that was a pretty nerdy assessment, but I kind
29:30
Speaker 3: of got that that definitely works for me. What about
29:33
Speaker 3: behavioral remedies and and what does that mean?
29:37
Speaker 12: Yeah, I think we're going to see quite a lot
29:39
Speaker 12: of that because the DJ kind of threw in just
29:41
Speaker 12: about everything that's possible here. Behavioral remedies means you can
29:45
Speaker 12: or can't. We are going to make you do things
29:47
Speaker 12: or tell you can't do things, right, it's just how
29:50
Speaker 12: you conduct your business and how we're going to tell
29:52
Speaker 12: you you have to conduct your business. So in this case,
29:54
Speaker 12: very likely it's going to be Google can't pay Apple
29:57
Speaker 12: to insert Google Search as the default behind Safari, can't
30:00
Speaker 12: pay the OEMs like Samsung making the Android phones or
30:04
Speaker 12: require them as a condition to having Google Play or
30:08
Speaker 12: YouTube or some other really desirable app that the OEMs
30:10
Speaker 12: want to pre install. You can't condition that access to
30:13
Speaker 12: Google Play on also putting Chrome or Search front and
30:16
Speaker 12: center and keeping all the other rivals in Browser and
30:19
Speaker 12: Search off the phone.
30:20
Speaker 1: Things like that.
30:22
Speaker 12: Also possibly some data sharing, because what this judge found
30:25
Speaker 12: is that over the years, through the volume of searches
30:27
Speaker 12: Google had, they had the scale to developing become better,
30:31
Speaker 12: whereas bing and Duct, dot Go and some of the
30:33
Speaker 12: other new rivals didn't have that scale and couldn't improve.
30:36
Speaker 12: And that data is super important, as well as the
30:38
Speaker 12: indexing of the web and the crawling of the web
30:40
Speaker 12: and all of everything Google did to create this great
30:43
Speaker 12: search engine. So Google may have to share some of
30:45
Speaker 12: that data with some of these search rivals to help
30:47
Speaker 12: them try to get better timing.
30:50
Speaker 6: I know, you guys bill by the hour, so timing
30:52
Speaker 6: is very important. I just think just screams appeals and
30:56
Speaker 6: years and years and years. But give us a sense
30:58
Speaker 6: of how you think the timing might play out.
30:59
Speaker 1: This is going to take a long time.
31:01
Speaker 12: I mean, I don't think we see any real impact
31:03
Speaker 12: on Google soon, So the final remedies won't be decided
31:06
Speaker 12: till August, so we have a long time before we
31:08
Speaker 12: even know what the judge orders. At that point, Google
31:10
Speaker 12: will be able to appeal. They will appeal, they've already
31:13
Speaker 12: said so. And what they'll do is ask for a
31:15
Speaker 12: stay of this injunction. In other words, just freeze it
31:17
Speaker 12: in place pending our appeal. We don't have to do anything,
31:20
Speaker 12: We don't have to change anything. Usually a company does
31:23
Speaker 12: win that kind of thing, right, If we look at
31:25
Speaker 12: Epic Games versus Apple, where Apple lost on just a
31:27
Speaker 12: very slim piece of that case, and there was a
31:30
Speaker 12: limited injunction that got stayed for two and almost two
31:33
Speaker 12: and a half years. So it was issued in September
31:35
Speaker 12: twenty twenty one, didn't go into effect until this past January,
31:39
Speaker 12: so it was a long time before Apple had to
31:41
Speaker 12: do anything. And I think we're going to see the
31:43
Speaker 12: same thing here.
31:43
Speaker 3: Does this ruling change if someone else is in the
31:47
Speaker 3: White House, I mean, even if it's a President Harris
31:49
Speaker 3: and she takes a different approach to this kind of stuff,
31:50
Speaker 3: Does this change?
31:51
Speaker 12: No, It's absolutely a possibility. Now I tend to doubt it,
31:54
Speaker 12: but it is a possibility because we will have different
31:58
Speaker 12: peak decision makers of the DOJ very likely, and those
32:01
Speaker 12: different decision makers could just decide to discuss settlement. This
32:05
Speaker 12: is exactly what happened in the Microsoft case. After Microsoft
32:08
Speaker 12: partially one on appeal, but at least the order by
32:10
Speaker 12: a trial court in that case to break up Microsoft
32:13
Speaker 12: was reversed on appeal, and later we had a new
32:17
Speaker 12: administration George W. Bush, and the case settled. It's possible.
32:20
Speaker 12: We have heard from former President Trump and JD.
32:24
Speaker 1: Vans. They're both not a friend to Google.
32:26
Speaker 3: They've been pretty It's like this is like maybe one
32:28
Speaker 3: area where both sides actually weirdly agree, but they won't
32:31
Speaker 3: say it.
32:31
Speaker 1: I think that's right.
32:32
Speaker 12: They won't really say it, but I do think they
32:34
Speaker 12: weirdly agree, And I don't really think such a high
32:36
Speaker 12: profile case that either one of them are going to
32:38
Speaker 12: back off and have some slap on the wrist settlement.
32:41
Speaker 6: Remind us what else does Google have out there that
32:44
Speaker 6: would interest you?
32:46
Speaker 12: So we have the ad tech case too, different markets.
32:49
Speaker 12: This is the ad tech stack, right demand side and
32:53
Speaker 12: sell side options for publishers and advertisers to come together
32:56
Speaker 12: and sell advertising on the Internet. And that trial extended
33:00
Speaker 12: at the end of September and that is moving really fast.
33:03
Speaker 12: So the weird thing here, Paul is we could have
33:05
Speaker 12: a decision and a remedy in that case before we
33:07
Speaker 12: have one in the Search case. So you know, it's
33:10
Speaker 12: very which a year ago, September, a year ago finished up.
33:14
Speaker 12: My colleagues's been following that, and he does also think
33:17
Speaker 12: there will be a ruling against the DJ on liability.
33:19
Speaker 12: But just like I see the Search case, he doesn't
33:22
Speaker 12: see the remedy ultimately being a divestiture or some forced
33:25
Speaker 12: sale of let's say Double Click, which is part of
33:27
Speaker 12: the Google ad stack business.
33:31
Speaker 1: So we have that.
33:32
Speaker 12: Europe is also looking at Google obviously, they're looking at
33:35
Speaker 12: the tech stack as well.
33:36
Speaker 1: They've talked about a breakup.
33:38
Speaker 12: I'd be surprised if Europe went that far, if the
33:41
Speaker 12: United States courts don't go that far. But you know,
33:44
Speaker 12: Europe has a tendency to impose really really big fines
33:47
Speaker 12: and we've seen that, so that could still happen down
33:50
Speaker 12: the road.
33:51
Speaker 3: Interesting.
33:51
Speaker 6: Boy, this Lena Kaye person was FTC.
33:56
Speaker 7: But different from.
33:58
Speaker 6: But she's all out there. Yeah she's very aggressive, correct.
34:02
Speaker 1: I mean, yes, very aggressive, especially in merger challenges.
34:05
Speaker 2: Yeah.
34:05
Speaker 12: Yeah, DJ has been less aggressive in the merger challenge side.
34:09
Speaker 12: She has her monopolization cases against Amazon and Meta still pending,
34:13
Speaker 12: but a lot of merger challenges.
34:15
Speaker 7: Yeah, you have to wonder does that like continue too.
34:17
Speaker 3: I mean in that even if she's not had the FTC,
34:21
Speaker 3: when we wind up getting a new president, like say
34:23
Speaker 3: President Harris, Yeah, it takes the Is this still a
34:27
Speaker 3: sea change in how we look at anti trust? Still
34:29
Speaker 3: a sea change of how we look at M and
34:31
Speaker 3: A versus a one off, which I think could be something.
34:34
Speaker 1: I think there's a change.
34:35
Speaker 12: I don't see us going back to where we were
34:37
Speaker 12: five years ago, when it was kind of assumed the
34:39
Speaker 12: most problematic deals would settle with remedy. I just don't
34:41
Speaker 12: see us going back to that. I think more aggressive
34:44
Speaker 12: anti trustforcement has taken root, and I think it's here.
34:48
Speaker 12: Could there be some easing a little bit of less rigidity, Yes,
34:51
Speaker 12: I think that's possible.
34:52
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