Analyst Mike Mayo: Banks Are On the Road To Record Efficiency

the move. I'm looking at some of the big money center banks on a you today basis up anywhere from fifteen to uh. Good moves for a long time beleaguered group. Let's see what's moving this group. We talked to Mike Mayo, of course, senior banking analysts at Wells Fargo, joining us on the phone from New York. Mike, thanks so much for joining us here. Nice move here for the banks. Love to get your take on the group. Uh sure,

and thanks for having me on. I'd say we have more confidence that banks are on the road again to the pre pandemic returns evaluations they had before the last year year and a half, and we think banks are on the road to record efficiency. They're demonstrating resiliency through this recession, and they're showing that this is not your parents banking industry. I mean, it's night and day versus the past recession. If you remember the last recession, the

global financial crisis, what a mess for for banks. I mean, but instead of out of control credit costs, now you're seeing banks actually release reserves for problem with credits. They are still sobering times. Look, you have individuals and companies you know, likely to go bankrupt having difficult times, but it's just not as bad as expected, and banks have gotten ahead of that. They're not being so Mike, They're

not being brazen and releasing reserves. You think they're genuine genuinely, isn't such a huge risk of you know, cascading bankruptcies that Joe Stiglitz was warning about last year. That's correct,

and banks have been pretty conservative. I mean, it was the biggest build up of reserves for problem loans in the history of banking in the first half of last year, and in the fourth quarter they released only about you know that, So you still have you know the other of reserves to to you know, cushion against different losses and another change versus the last recession, banks issued all kinds of new equity to show up the balance sheets.

And now like literally as we speak, banks are allowed to buy back their stock after the most stressful bed stress tests in history in December. And then instead of the big charges and mishaps and problems that banks caused, now this time banks are more a part of the solutions. So it's really uh, you know, I think reform school worked for banks. You know, thank your regulators for you know, making banks shape up and have more liquidity and capital

or resiliency. And and there's this, it's a very technical phrase called level three assets. These are assets that are hard to value and you you kind of value on your own, UM. But you know, these level three assets are down from the last recession. So that's just one area of one example of how banks have really reduced risk and showing much more sustainable results. And I'd say, nowhere do you see this more than Bank of America.

Remember Bank of America was the poster child for mortgage problems after they bought countrywide very ill time deal will go down in history is one of the worst acquisitions ever pursued by a bank. UM. But you know, our view is that maybe because I read the book Sapience. But ten thousand years ago was the agricultural revolution? Well, well, Bank of America's has had its own personal agricultural revolution.

They've gone from hunter gatherers to farmers. In the past, they would kind of hunt for a new mortgage or gather a trade or season acquisition. And now they're like farmers are cultivating relations ships, They're they're reading what they sew. Are they do this year and year out? Much more disciplined, sustainable than you've ever seen before, by the way, So what are the crops that that matter most? In that case?

I mean, we've seen interest rates go off. That's good for net interest margins, right, we have forecasts for volatility continue and equities and FX so uh and obviously in fixed income, so that's good for for trading and um M and A. Everyone I talked to says this is gonna be a better year for M and A as well. And last year wasn't even that bad considering the pandemic. What's the most important, Well, for I'm gonna give you the general answer, and then that's specific. It's not you're

asking the question wrong. You're asking a question like it was last century. What are the most important crops for for banks? So at least like a bank American JP Morgan and from the big banks now and the question is what's the most important meal, What's the meal that's going to satisfy the customers? More so, it's more of

a relationship approach as opposed to a product approach. Now, I will answer your question of having said that there are certain areas that are growing faster than others, and capital markets are stronger for longer. You've heard uh, just this morning. JP Morrigan's chief financial officer expects meniateuly stronger

trading year every year, meniately better investment banking year every year. Uh. You've heard other banks UM say that the backlog for mergers is that a record Goldman Sax has said that record year to day um uh, equity underwriting and I p O s So capital markets are are here for long, Mike. That's really do do investors does the market Mike typically play a similar multiple for capital markets earnings as they do for the bread and butter net interest income earnings. No,

And that's that's a fair question. Like a lot of times investors think of it as one time but these are once again going back to the idea of a relationship, and so you might be getting a doing a trade with the customer one time and doing a little more lending with them another time, and doing some prime brokers a third time. But so that's why the steeper yield curve that helps the net entrance margins and spread revenues

that's likely to stay around for a lot longer. So the fact that you have the highest UH ten year treasury yield in a year that is significant. As Bloomberg reported yesterday, banks at a fourteen year high yesterday, and part of that certainly is on the steeper yolk curve, higher rates, and that certainly helps the bread and butter traditional banking activities that banks have done, you know, for

the last couple of hundred years, um. So that you get the spread revenues doing better at least for a little longer, you get capital markets doing well. But underlying all of this is technology, and technology is helping banks to control costs like they've never done before. Going back to the the Bank of America, Bank of America is a digital bank banking leader. They're one of the best fintech companies in the world. Um, they have over four thousand patents.

They had a record number of patent last year. And you know, I I joke maybe they need to move their headquarters from Charlotte to Silicon Valley to get more credit for what they've been doing. But this is what they've been doing behind the scenes, you know, before the pandemic. During the pandemic, they've actually shined U through the pandemic because digital banking usage has really accelerated as a result

of a change in customer behavior. So I don't know if you were going into branches before, but certainly during the pandemic, Uh, you and everybody else you know started a youth digital banking a lot more so the laggards I finally jumped on the digital banking fanwagon, and that allows uh, the large banks to close more branches uh as people use more digital banking and makes sense. So I guess that's part of the problem here here, Mike. I mean, I'm in Germany, which is you know, which is?

Initially I would ask the question about which is more important, because you know, Christian Saving wanted to go a lean on corporate banking and lending and phase out trading as an important source of revenue. Now it's gone the other way. I know you cover US banks and I see that you have overweights on almost all of them, or more than half, let's say, right, but only underweights on a couple. What are the US banks doing right or what is the setup that allows them to be stronger than than

Germany's banks or Europe's banks? Is it the technology piece? Is it the fact that they're not as um that they're not as the US isn't as overbanked. Well, I'll start with the last global financial crisis, and the US banking system certainly recapitalized stronger and faster. So if you look at the level of capital of US banks, it's it's stronger. The second thing would be, UH, cost control. There's a greater flexibility of US banks to go ahead and UH do what it takes to control costs. And

sometimes that does relate to personnel. UM, so the uh you know, it's painful in the short term, but it can allow for growth longer term. And I say the third thing would be capital markets. And the US has a deeper, wider capital markets then in Europe, and you've seen the five largest US banks continue to gain share.

So that's City Group, Bank America, JP, Morgan Morgan, Stanley, Goldman Sachs continue to gain share against the big European players like UBS, Credits, REEF, HSBC, Barclays, and Deutsche Bank UM. And so that's that's that's kind of across the board. So I'd call it the differences the three fees of capital costs and capital markets that are differentiating the US banks versus the European banks. Hey, Mike, thanks so much for joining us. We really appreciate getting your thoughts here.

A good move here for the banks. Great to get your perspective. Mike Mayo, senior banking analysts at Wells Fargo Security. We just heard a couple of stories about the real estate market. It is hotting up, as the British say, um, and let's bring in best Freeman to talk about this for a second. She's the CEO of Brown Harris Stevens in New York City. Best Um, I am shocked that the market is getting so tight. Zillo is actually going to offer people cash on five thousand homes if they want.

This estimate could be a little low, but it still seems like, Um, that's the sign of a little bit of froth. Yeah, I mean in New York City is definitely what was the word you said, hawking up? I like that, I might have cotton hotting they say, instead of heating up, they say hotting up, it's hawking up. Well, in New York City is definitely doing that. As far as zillo AND's estimates, you know, in New York City,

that would not work. And we don't use that sort of format because you really do need people in the process because, as you know, New York City, for the most part, the housing stock that you can purchase is comprised of cooperatives, which require a human being to help you walk through the process. So's estimates might work and more like a team of human beings, right and some lawyers exactly, it's a it's you know, you have to give a financial portrait of who you are UM as

a corporation. So's estimates work in some places, but New York City would not work. UM. But the market we're very um optimistic because we had one of the strongest januaries in five years for the luxury market for properties over four million dollars. And so New York City is starting to re emerge. UM and so we're feeling pretty good about that. My financial portrait is more like a crayon drawing, which is why, which is why I need

to work somewhere else. Best talk to us, you know, there is this I'd love to get your thoughts best on kind of this broader theme of Okay, maybe it's not the death of New York, but New York is not going to be post pandemic. What it was pre pandemic in terms of commercial real estate, vibrancy, business, uh participation in the city, and that is likely to spill over to the residential market. How do you take that narrative? No, I mean you're this is true. I mean we definitely

got hit very hard during the pandemic. We were shut down, you know, urban centers were, but we were kind of the epicenter, so you know, everything shut down, Broadway restaurants and all of that. Um. But of course, when we come back completely, we will be a different type of New York. But I would argue a better type of New York, um with different ideas and new creative thinking and that sort of thing. But um, it's going to take some time. I think there are a lot of

issues that we have to wrestle with one. Besides the vaccine rollout, which is very important. UM crime, we have to you know, make sure that we are addressing uh crime and make sure it's a safe city and taxes. You know, we do have some political headwinds here in New York City. There's a lot of city council seats that are coming up in June, uh, something like thirty odd seats. You have the controllers race, the Mayor's race, and so all of those things are really important for

the future of New York City. I'm not worried about us bouncing back. People want to be here. It's the best city in the world. But I think people need to start to get involved and pay attention to the political landscape, um because otherwise, you know, you're gonna have a piano tear at tax for example, and that would be very um detrimental to the city. So I grew up on ninety answer damn in the seventies. Um, New York to me looks incredibly safe. But I hear more

and more talk about crime. Is that really an issue in Manhattan? You know, Look, it is an issue. It's definitely picked up. Even the percentages show it, and the subway ridership now I think is down se um, so there is some of that, and you're seeing more homelessness and that during the pandemic was you know, all over the place. And that's really important because if we don't have a safe city, we're not going to have sixty million tourists a year and people who want to not

want to buy here. So crime is certainly an issue and it needs to be addressed. And we need to not have slogans like defund the police, because I don't think that helps us. I think we want to you know, work with the police and you know, uh maybe educate the police and help the police. We want to protect our citizens and have a very safe and vibrant city

as we have had in the past. So best that the Bloomberg HQ here in New York is at fifty eight and Lex And as we look out our window, we see what I deem these silly towers that reached to the sky. And a lot of that demand was from international buyers, particularly China. Where is the international buyer vis you know, as it relates to New York City. No, I'm not seeing any of them, uh, you know, with the travel restrictions and uh, a lot of other challenges. Politically,

we have not seen international buyers at all. In fact, I was at a project yesterday and you know they have had no international buyers and their own sold out. Um so it's been mostly domestic what you're seeing lately as of late. Um the purchasers here are all just like from west coast to east coast or coming from the south. I mean we're having a mixture. Um So, I think it's gonna be a while before we see

that re emerge. What about the bourge out of New York though, I mean, especially in the age of social distancing, don't people want to have outdoor space? You know, um three thousand square feet? I mean, isn't Isn't that what they're looking for now? I mean that's you know, look, you have to have a lot of money to be able to afford three thousand square feet, and the a lot of you know, the average New York who was raising a family here, have kids going to school here,

they can't afford three thousand square feet. Um So they are reimagining the space. Maybe they want a little outdoor, maybe they want a home office. Um So people have done that and undergone some changes, um and Brooklyn is still doing extremely well because there's a lot of townhouse inventory there. So you know, people have moved around a little bit. But I right to have a lot of friends who have moved and they want to there in Palm Beach or Connecticut and they missed the city because

it's born in other places. Hey, best, thank you so much for joining us once again. We always appreciate it. Best Freedman, CEO, Brown, Howard Stevens, Greig Jerry, thank you so much. We appreciate it. Well. Big big news coming out of Australia as it relates to the digital news business.

Australia just passed a law making Facebook and Google actually pay for the local news that is generated by operators within Australian question is well other countries follow suit and what does it mean for these big digital media companies. For that answers to that, we go to Jim Manners and he's the CEO of Social Flow based in New York. UM full disclosure. Social Flow is a platform used by Bloomberg for social media purposes. Jim, thanks so much for

joining us here. So it seems like a big deal because todate Google Facebook, other digital players have generally received their news at little to no costs. So what does this mean? Yeah, it is big news and I think it's a win for both parties. The Australian government who has pushed more dollars the publishers and is able to say that they took on big second one and that's great for them. But Facebook made its point as well.

They preserved their right to just stand news content again that they did very briefly in in this negotiation, rather than submitting themselves to forced arbitration, and they made it very clear to other countries around the world who were watching very closely, that there's a point past which they're not willing to go. So, you know, there aren't many negotiations where you can you can claim both sides wind, but this is one I think they did. So how

does this work? Um? In practice? I mean, if I put a New York Times story on my Facebook page, um, Facebook has to pay the New York Times to show it to my uh to my friends. Well, actually, so it's in Australia. This is fairly interesting. It's specifically Australian media organizations. That's obviously what the Australian government's move is interested in so you're talking about News Corporate Australia and

other big media companies. Facebook is effectively paying them a licensing fee, and so what the law says is that they have to reach some kind of licensing agreement working with each other. And if they don't reach a licensing agreement, that's where the requirements of the law kicked in. It doesn't affect you as a user. It doesn't affect the New York Times, you know here in the United States. The real question though, as you said, is what are

other government's gonna do. And you can see EU and Canada, uh, you know, being jurisdictions where they might follow the Australian approach. I'm not so sure that that approach would fly here in the United States. It's a little bit too much government picking winners and well or Jim, does this Does this mean that Australians are now going to have a much bigger exposure to foreign media? No, I don't think

it does. Interestingly, you know what Facebook has said all along is, you know, media companies choose to put their content on Facebook, whether it be an Australian media company or foreign media companies, They of course have algorithms that can bubble content up or down, and we see that all the time with our media clients. You know, the reach rises in the reach balls. And that's been one of the criticisms as well, is it's so unpredictable what

Facebook does. But there's nothing in this law that requires, you know, that reach to be any higher. There are some requirements of that disclosure of algorithms, and and those don't think to be talked about a lot. I think that's in practice gonna be a lot harder than what they were hoping for in theory. So, Jimmy, is this a risk to the economics of a Facebook, of a Google. You would think it would be if it was uncapped. You know, every company is going to be wildly reluctant

to take on an uncapped liability. And I think that's what this forced arbitration looked a little bit like. But they've gotten a lot of certainty here. They have preserved their right to just walk away if the if the stakes get too high or the cost get too high. But Facebook made some news this morning, I think it was they said they were going to commit more than a billion dollars over three three years but I mean, your Facebook is a seven and fifty billion dollar company.

This is very much a constant doing business. It's a it's an acceptable cost for both Facebook and Google, and I think as long as they can keep it in the low billions of dollars, which sounds like a lot of money, and it is. But the Facebook and Google, you know, it's really not that much money. Except to your point, Jim, this is only one country and others. I mean, I'm in Berlin and I've had conversations with Matthias Duffner, who runs Axel Springer Um. They published build

Uh newspaper, among many other publications. He has complained about the fact that Facebook and Google use their content without paying them for it. So does does Germany look at this too? Does does the US look at this? Yeah? Well, so definitely Germany and and more broadly the European Union are going to look at this. I think that's probably the jurisdiction that would be most likely to copy the Australian approach, and perhaps Canada as well. I just don't

see that working in the US though. More practically, I mean, you've got literally the government taking the role picking a winner and a loser. In a commercial negotiation via for starbitration. As polar rights as our politics are in the US, and as as strong as some conservative beliefs are, is that really a role that you want government playing. So I don't see that approach applying here, but I very much think that the European Union is watching closely and

may very well choose to follow Australia's approach. So, Jim, you follow these, you know, the social media technology space closely. What do you think the regulatory risk is for a lot of these companies? You know, we've over the last couple of years, we've seen CEOs of some of these big tech companies hauled before Congress that testify about various parts of their business. You know, we now have a new administration in the White House. Um, what's the expectation

on Silicon Valley. Well, without a doubt, it's got to be anti trust, right. The facebooks and Googles and Amazons and Apples of the world are giant companies. I mean, they are the standard oils of of this this century and and this decade, or the A T and T s if you want to go back to that, Um, that analogy so clearly antitrust not just in the US, but also in the EU for instance. It's got to

be a giant concern. And that leads to the point this this Australian you know, sort of the debate and negotiation UM is a commercial negotiation wrapped inside of a public relations battle. I mean, there's a question about how much money goes to who, and that's very important obviously to the Australian media. But the larger point to Facebook and Google is that public relations battle because ultimately that's

what affects the antitrust action from government. So I wonder if then, uh, Facebook or Google could be broken up When you say anti trust, that's what I think of. UM. Is that a possibility? Yeah? I think it is, and and that's probably the biggest concern. So let's think about this. Facebook will start with them. They own Instagrams, they own what'sab and so it wouldn't be hard to imagine some kind of antitrust requirement that would force them to divest

one or both of these. Google and the stably owned YouTube just to pick one example. They also have owned what was formerly called Doubliclick, which powers a lot of the advertising on Google and on YouTube. So there are certainly elements of each company that you could imagine being on the table in an antitrust type conversation. Obviously, neither a company would be in favor of that divestiture. You can expect them to battle consider place. But I don't

think that will unfold quickly. But over the next you know, one to three years, might we see those kinds of discussions. I think that's entirely possible. H M, thanks so much for joining us. We appreciate it as always. Jim Anderson, CEO of Social Flow, giving us his thoughts on what we're seeing coming out of Australia from some little bit of a increased regulation there as it relates to some

of that local news. And you know, Matt, I could see the European Union probably thinking about this might be an opportunity for us to maybe assert a little bit of a control over our content. It's coming out of Germany. You know, for the last ten years at Saint Paul, you've been the person I go to when I'm when I'm wondering about media properties. So what's your take on Facebook and the possibility of a breakup. I don't think that the breakup is likely, but I think it's the

in terms of any new deals. Uh, any anti competitive behavior is going to be looked at very closely. So I think the overall light touch that the U. S. Tech industry has enjoyed over the last forty to fifty years that I think on the margin is changing and they need to be positioned for that. Oh man, you're gonna get canceled if you call us that. That's not got that's dangerous. UM. But I want to bring in

another boy right now. Barry rid Holds joins us UM from what Holds Ridholes Wealth Management, also the host of course of Masters in Business, the podcast that's grown so popular, and Barry, I gotta start with one of what I think is one of the most interesting stories UM. Today, Deutsche Bank did a survey of, you know, potential recipients of the four d and sixty five billion dollars indirect stimulus that's expected to come soon thirty seven percent. So

they want to put it directly into stocks. And as I watch game stock rise again today, I wonder, is this, uh, you know, Charlie Munger has said this is a dirty business, a dirty way to make money. It's gambling. Is this a problem. Um. Well, there's two questions in there, one about the stimulus of the second about um the gamification of of trading apps. And so from the stimulus perspective, we can't let the perfect be the enemy of the good.

We know that there's ten million people unemployed, there are lots and lots of people underemployed. It's still going to be a quarter or two before we can even hope to beginning back to normal, and lots and lots of people are finding themselves both food and healthcare and secure. And this is to resolve some of that which will

resolve from the pandemic. So is it going to be perfect. No, But that's the nature of federal government rescue plans is there are always going to be people who don't deserve what they get. I you know, those surveys are always terrible. In my firm, we put people through a form of a risk tolerance survey. It's almost pro former at advisory firms. But all it ends up telling us is what the markets done over the past couple of months. It doesn't

really give you insight. And so thirty percent of people say they want to put some money into stocks. What that tells us is not what their real intentions are, but the fallmo surrounding recently rising markets and let the market to take a fifteen or twenty dip and that number will drop to far, far below thirty. Hey, Barry, we just had Mike Mayo on bank analyst at Wells Fargo Securities. Uh, you know, really constructive on the banking sector.

You know that interest margin improvement with the steepening of the yield curving, really strong capital markets activity. What's your take on the on the bank stocks? So so you said the magic words, steepening of the yield curve. You know, when you're a bank, you could borrow from the Fed at FED funds rate and then lend it out at

prevailing rates. And people don't realize when all rates are close to zero, there's not a whole lot of fat there for banks to make a lot of money when you look out on the other side of the valley of the pandemic. Once we're all done sheltering in place and working from home, which surely is sooner rather than later. But even if some of the more conservetive estimates put us in September October, well that's a couple of quarters

from now. I'm not in the inflation camp. Um. We certainly should see in freely or we should see inflation normal lies, and there'll be some transitory increases in prices. There's a lot of spot shortages of goods as as

manufacturers start to ramp back up again. But you know, all these factors are suggesting that there's a big, fat change coming that's gonna very much accrue to the benefit of banks from from the yield curve and improving economics and just seeing that ten million unemployee start to head back towards you know, a more normalized rates. As this externality passes banks, I can I can buy banks doing well because everything is going to go in their favor.

The yield curve, volatility is expected to remain or even increase in risk assets, so they can trade a whole bunch of stuff around and make money off of that too. M and A is supposed to be strong again this year. UM. I gotta take issue with the inflation called transitory. I mean all the prices is that I see going up on UM commodities, for example, copper and lumber and oil. I can't imagine gold. I don't see it going up

and gold, but you don't. You don't need gold to rebuild Texas, right, you don't need gold to um to to triple or quadruple the ev fleet. Gold isn't necessary to put in chargers. I mean, infrastructure spending isn't going to be buying gold. I'm I might myself all of this stuff barrier. It seems like we're gonna need more of it. I mean, as governments are trillions and trillions of dollars, they're gonna be buying copper with it. Absolutely so.

So you're coming out of a year plus of a forced lockdown in all sorts of things that have normally taking place. You you and you're starting we see spot lumber shortages, and I'm the middle of a kitchen renovation that was supposed to start March. I'm still a waiting from my refrigerator doors to show up eight months later. Like all these things are taking much longer because it's hard to restart an economy after you lock it down

for a couple of months. That said, um, when when you see all the different things that we're going to be spending money on, that that's why I say say this is transitory. Overall, for the past three decades, the dominant economic inflation has been deflation. You have between technology making the cost of digital goods cheaper, automation and and logistics making the cost of physical goods cheaper, and then global labor arbitrage making everything cheaper. Deflation is your background

um driver. With these periodic spasms of inflation. I wouldn't be surprised to see a pop in inflation higher from where we are, But it looks like it's going to be transitory. It's not gonna take twenty years to rebuild Texas. It will take a couple of years. Yes, there are massive infrastructure needs in the United States, but those aren't get it done by tuesdays and here and here. Germans do spend decades rebuilding stuff. I mean it took us

two decades to build the Berlin Airport. So so generally speaking, the US has moved from a infrastructure leader to a giant laggard we we once were. The Look at the Interstate highway system built under Eisenhower and how it's been starved of maintenance funds, and it's bridges and tunnels and

rails and airports and go down the list. There is nothing preventing the Biden administration from saying we want to do a ten year, five trillion dollar infrastructure build funded if they're smart, with fifty a hundred year bonds while things are as cheap as they are now, and that is not necessarily inflationary because it's it's gonna be over a decade, and it's what we should have been doing

over the past thirty years. Maybe part of the deflation we've been experiencing is our failure to do what most countries countries do, which is take care of their infrastructure. Will so beyond and so Barritt, hopefully there's some bipartisan support for that. But as we think about inflation, you're really not gonna have a meaningful inflation and in this economy unless you get wages moving higher, and they were starting to do like starting at yeah exactly, they were

starting to do that prior to the pandemic. What's your view on kind of kind of the labor market and wage growth, So so, you know, we've seen a really interesting experiment take place, um both on the minimum wage side but across the board. And I know it's one but when you trace the history of what's taken place with median wages in the US. We are still shockingly feeling some of the effects of the Great Financial Crisis

of o O nine. We saw a number of people lose their jobs and subsequently get different jobs that paid substantially less. There is a massive underemployment issue in the United States that we don't really talk about. And you're not going to get the sort of wage push inflation that was an epidemic in the seventies and what people traditionally think of as one of the key drivers of inflation. As long as twenty or thirty or maybe it's even of the country is underemployed. You know, we're gonna we

got to leave it there. Unfortunately, because of time, we'll get you back, certainly of very quickly. Bary rit Hults of Bloomberk Opinion calumnists and founder and chairman, chief investment officer of rit Hult's Wealth Management. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Lern nineteen seventy three on Fall Sweeney. I'm on Twitter at pt

Sweeney Before the podcast. You can always catch us worldwide at Bloomberg Radio