Bank Stock Weakness Is Signalling Upcoming Downturn: Peabody

he is the president of Portalis Partners. Charles, a pleasure to hear your voice, tell us your impression about the results of three of these three banks, and then maybe extrapolate into some of the other earnings that we're going to receive. Sure, I mean there's a wide dispersion in the results. I mean JP Morgan had a very at very robust quarter, UM City was sort of weak, and

Wells Fargo was disappointing. UM but on average, what you're getting out of this quarter is maybe two revenue growth year over year, which is I think pretty anemic given you know, higher interest rates, deregulation, tax cuts, four GDP etcetera. And I think that's the disappointment here. Okay, so what could they have done to show and what does this mean?

I'm sorry to say that again. What does this mean for it to be for for for grows to be more nic given all of the positive headwear, positive tail wins. I mean, what does that mean to you? I think that's why we've had multiple compression over the last six months. In other ways, we had this multiple expansion last year when earings really weren't that robust. We're getting, you know, a better bottom line earrings, but not a better revenue picture.

So the formula that the bank industry is using is taking low single digit revenue growth, turning it into mid single digit pretext income growth through positive operating leverage and benign credit costs, and then taking that mid single digit pretext income growth and turning into double digit net income from tax cuts and share buy backs. But the latter two items are financial engineering techniques, and no one's going to pay a premium for that. You need better revenue growth.

How are they expected to do that? Charles? Is the business of banking changed and are these bankings for banks responding to it? Well? I think revenue growth is going to continue to disappoint and and so we're in what I call end of cycle economic dynamics, and that means you started to look at the second derivative, and the second river means what's happening to the rate of growth of the key line items. So revenues probably are going to slow, credit costs are going to pick up, and

expenses can't be cut anymore. They're being well, you know, maintained, but it can't be cut. So I think you're at peak profitability. Well, Charles, just follow up on this then you know you've I'm sure you have seen and read about all of the different financial technology companies that have either raised money or have really created a whole another financial system in parallel to the traditional banking system. Is all of that market value value that the banks could

have taken for themselves if they had been more entrepreneurial. Well, they are making a push. If you're talking about digital banking, they are making and that's where a lot of the expense growth is related to UM is their technological investments UM. So banks are trying to UM keep up with the

non banks. I think over a full business cycle, you're going to see a greater fallout in the non banks than you will in the banking industry, and that's maybe where they start to regain some of the market where they've lost in the non banks. That's fascinating, by the way, because a lot of people have said that the risk has moved to the shadow banking systems. So perhaps when that risks manifests itself and the shadow banking system ends up getting a little bit more afraid than the big

banks can come back in and take market share. I'm just worrying. I want to dig a little bit more into the nitty gritty, particularly with Wells Fargo, because it's shares are getting penalized more than others. Down actually up from the earlier losses, about down nearly two percent. Now, Um, do you think that we're seeing a bottom for this bank or is this sort of a signal of more pain ahead. Well, from a fundamental point of view, I don't.

I've been on the side of the equation that the revenues are going to be the big disappointment, and revenues this quarter, you back out some non recurring items were down four and a half percent. Every year. Um, you know they'll execute on their expenses. Credit costs will creep up, but the revenue is where they're going to disappoint. Um. Now that said, one thing, I want to differentiate between

the fundamentals of these banks and the stocks. The stocks have undergone tremendous multiple compression over the last six months. I think there's going to be a summer bounce, but that bounce is probably within a developing bear market, where the January highs were the highs. When you say developing bear market, developing bear market in all stocks are financial stocks, well, financials specifically, they tend to underperform in the last twelve months of a bowl market, and I think that's kind

of where we are in the economic cycle. Last twelve months of a bowl market. Bank stocks have always underperformed in that period of time, Right, Are there any specific bank stocks that you believe will perform better than others in this perhaps relief rally that you describe. Yeah, I think JP Morgan had a very solid result, and you know, the fund a line fundamentals can be bought. I think the poor tends well and I've been wrecked coming on

a trading basis buying Goldman sachs um So. I think you're going to get some kind of rebound in the capital markets part of the business over the summer. I mean, if you look at the pipeline for um M and A activity and for underwriting, it's very strong and and that's where you saw the big beat this quarter UM was on investment banking. Are you saying that you think that there's going to be an economic downturn downturn within the next twelve months. I think that's what the stocks

are telling you. Um I mean, if you look at the bank stocks, they've underperformed. I'm talking about the large cap money center and even the g said regional banks like P and C and U, S, Bann Corporatewell Spargo that they've underperformed the last six and twelve and eighteen months. Now. If you if you were to do on Bloomberg, you know that comp function equity, you City Group Equity Camp, and look at how it's performed. It's been an eighteen

months underperformance now. So I'm wondering just whether this is using financials is another proxy for the yield curve, Whether people are looking at the fact that the yield curve is compressing and that's what's driving bank stocks down. And both of those things are taken as the same sign. I mean, is that is that kind of what you're seeing right now? Yeah, But you know, everyone seems to be fascinated with the two tens part of the yield curve.

I think the short end is the more important. Fundamentally. I can understand twos tends being a psychological and importance because of the implication of a recession, but fundamentally the short end is more important. And and towards that end, you know, Bank of Ozarks had a very interesting UM conference called yesterday and which they talked about how the deposit beta was now rising faster than the loan beta. That means deposit rates aretin rising faster than loan yields

are rising, and that's squeezing the NIM. And that's what usually happens at end of cycle periods. The NIM the net interest margin correc So when I talk about rate of growth this quarter, as I said, you're gonna get maybe two revenue growth on average, but that's going to be composed of mid single digit net interest income growth but flat the income. And so it's that net interest income that's driving total revenues. But the signs are there that that net interest income growth is going to slow

in future quarters as the deposit data picks up. Charles Peabody, thank you so much for being with us. Charles Peabody, president of Portala's Partners in New York. President Trump is gearing up to head over to Helsinki, where he is going to be meeting with Russian President Vladimir Putin. What's he got to talk about? Let's ask that's somebody who might have some ideas. Ariel Cohen, Senior Fellow at the Atlantic Council in Washington, d C. Joining us. Now, so, Aria,

what do you think he's going to talk about? Well, there are three or four key subjects to discuss. Uh. The United States and Russia came to blows in Syria. Actually, the United States troops killed up to two hundred Russian mercenaries in Syria that crossed the red lines. This is unprecedented since the worst days of the Cold War. Uh. Secondly, we need to understand other Russians going to play ball

on getting the Iranians out of Syria. This is what both the United States and our allies Saudi Arabia and Israel really want to accomplish. Furthermore, going into the former Soviet Union. UM, we have deep disagreements with Russia about Ukraine and the annexation of the part of Ukraine which is called the Crimea, the Crimean Peninsula in the Black Sea. U.

Mr Trump said that Crimea is Russian because they speak Russian. Well, in fact, they speak Russian because the Russian Empire and the Soviet Union ethnically cleansed the Crimea from its indigenous population, the Crimean Tatars, and now are pouring in resources to an exit. Uh. Finally, there's plenty of issues to talk about energy and arms control. So if both leaders have the bandwidth and come to serious agreements, I will be

the first one to applaud. Unfortunately, judging by previous interactions of Mr Trump with other world leaders, I'm not so optimistic. Ariel. I wonder if you could speak a little bit about the politics of energy inasmuch as Ukraine is the big transit point for European imports of Russian gas and oil, and also maybe speak about the relationship between Turkey and its energy needs. Well, you're hitting all the all the

nails on their heads in two short questions. Uh, let's go north to south the Russians are constructing a pipeline called North Stream too, which will boost its exports of natural gas to Germany and other countries in Europe, like Polland by fifty five billion cubic meters a year. That's a huge amount. Currently Europe is importing hundred and sixty billion cubic meters, so this is an increase by over putting Germany at of its natural gas coming Trump Russia

if and when this pipeline is UH finished. So Mr Trump told the Germans that they'll be better off um importing liquid liquid fied initial guests from the United States. Theoretically he is right. L n G is more expensive, and the German business is pushing to expand their dependence on Russia and uh frour Merkel is rolling with the blows and she is dependent on the German business. Uh. Furthermore, Ukraine, the Russians are trying to bypass it all together and

stop pumping gas through the Ukrainian system. This is a system that was built during the Soviet days and for that purpose, they're also building a massive pipeline into Turkey. This is for Turkish internal consumption as well as for re export to Europe. They're also maybe building one pipeline under the Black Sea, on the bottom of the Black Sea to Bulgaria, and that's also for exporting to Europe.

So there's a lot of commerce issues here. I think probably the most salicious point is will President Trump speak with Vladimir Putin about meddling in US elections, especially heading into the mid terms here? Do you think that's going to come up and pass? Believe more importantly, who's going to be in there with him? That's question? Uh. Mr Trump already made it known that he wants a he wants uh, four eyes only in the room, maybe with a translator. And then the question, of course is it

going to be our translator or a Russian translator? If it's going to be only uh, putting Trump and the Russian translator, I would be very nervous, and we would need a record. Where did a tape of that? Trump?

Isn't the tape? Isn't it? But this all right? I'm gonna leave that that comment there, But but I do if this sort of raises a bigger issue, which is, um, what sort of precedent is there for a US president to meet with the Russian leader who is heading a country that has had been our adversary for a while without sort of some kind of concrete security plan that we know of. I mean, how much how much of

a national security concern could this pay? UM? I am actually reluctant to get into that um for different reasons. But I would say that the good governance is transparent and transparent can be transparent and classified, but it has to be transparent on the highest level of our government. So the National Security Advisor should be there, uh, probably his chief of staff, maybe their Secretary of Defense, maybe

they're the Secretary of State at least just for the starters. Uh. And probably the Special Assistant of the National Security Council, Dr Fiona Hill should be there as well. But if he wants UM a one on one meeting, that it's possible. There are presidents of such meetings with other heads of state UM. But again we need to keep a record of that. It goes into the archives. Uh, and it has to be also analyzed. And I must say Mr Putchin is always very very mediculous in preparation to this summits.

For example, I was told while visiting Russia that the dossier on Mr Bush President Push ran hundreds of pages, and Mr Putchin of course read all that, and then he told the Bush the story of his secret baptism. And then Bush came famously with this line about looking into Putchin's size and seeing his soul. Well turns out that that may or may not be true about the baptism. And uh, Mr Putchin, of course, by his background is an intelligence office. We got to leave it there. Ariel Cohen,

thanks very much, senior fellow at the Atlantic Council. Speaking about NATO, Russia and Vladimir Putin, the President of Russia, well, President Donald Trump and British Prime Minister Theresa May hold a press conference that the tackles a variety of issues, including shared security concerns and upcoming meetings with the President of Vladimir Putin of Russia in Helsinki between the President, between Donald Trump and the Putin. Brexit also taking up

quite a bit of everyone's time and thoughts. And Terres Raphael is our Bloomberg opinion editor covering European politics and economics, and you can follow Terres on Twitter at Terres Raphael one, and she joins us now from London. Terres just to put aside for a moment the news conference that we were able to listen in on what is the white paper that was published by the government of UH Theresa May.

What is the White Paper specifically mean for companies such as air Bus or Rolls Royce international companies that do business and our headquartered in the UK. Well, the White Paper, as you know, is the first real detailed, uh sort of spelling out of what Theresa May's Brexit would look like.

And for companies it comes as um I would say a little bit of a relief because it means that there will if it's if it's accepted by the EU now and we have to remember this as an opening position in a negotiation and that you might not accept it, but it's asking for a sort of free trade agreement in good so it would mean that manufactured projects and the supply chains that these companies rely on so much would be uninterrupted under the deal that Theresa May is seeking.

Now that may not be the deal that she gets. It also doesn't apply to services and financial services. There's a whole sort of other level of uh you know, detail and complexity to this. But though a lot of companies i've it gets if if they were to get

a Brexit on those terms. Um, I think they would at least feel that, you know, that that things would uh maybe be not as they were, but they would not be as catastrophically, um, you know different, and you would you find businesses at least happy to accept that. Terry's one thing that struck a lot of people is that as the UK goes through with these Brexit negotiations, President Trump has inserted himself into this and clearly tried

to endure himself to Boris. Johnson had some harsh words for UK Prime Minister Theresa May and I'm just wondering you were to call him talking about why President Trump has sort of a vested interest in this? Can you give us a sense of that? Yeah, I mean, it's just been the most amazing drama because Trump has come to Britain. Even before he came here, he was sort

of describing Britain is in turmoil. His ambassador has been giving interviews saying he's, you know, really disappointed in the defeatist attitude of the Brits towards Brexit and why don't they take inspiration from Trump? And you know, as an American, you might say, well, why does Trump care so much about Brexit. What's in it for him? Um? Is it? Is it a trade deal? Well, you know, the trade deal it's much more important to Britain and to the Brexitters,

and it is to the United States. Britain, um, you know, only accounts for a small share of America's trade. But Trump does have an interest in Brexit, and he's had that interest from from the time of the campaign, where

he followed it closely. When the Brits did vote against all odds, against all predictions, to lead the European Union, Trump immediately, uh latched onto that as a you know, vindication of his own populist policies, as a sign that, you know, things were going to go well in his campaign, and he was proved right. And he said in the press conference very interestingly he said, I think Brexit happened because of immigration, and that was one of the big reasons I got elected as well. And uh so, Trump

I think identifies with the Brexit movement. Brexit is not going well, and the question is whether that sort of pre figures, um, you know, some some shakier times for Trump at home. That's that's fascinating analysis, but sort of counterintuitively Alex Wayne, who is a Bloomberg News reporter and editor.

White House team leader, also came on radio earlier today and said that actually, in a sort of counterintuitive result, the more that President Trump beats up on Theresa May, the more she gained support because people in the UK really don't like President Trump. Do you see it the same way? Well, I think that's partly too. I mean there is a huge he's hugely unpopular here. However, it's

it's interesting because the Brexitters are really hard Brexitters. You know, they don't really care who's saying it, but they take a lot of heart in what he said when he says, you know, you've got to close the borders. This is a really simple deal. You just say no to the EU and you walk away and you know, you take back control. That is you know, that is that's the song sheet they've been singing from. So they're very happy to,

you know, have him come and say that. The Sun had this huge which is a tabloid newspaper here with a lot of a lot of readers, had a big headline you know, um May has wrecked Brexit. US deal is off and Trump then walked it back in the news conference and said no, no, you know, Theresa May is a great leader, and um so I think it could cut both ways. Um, I think it could. It could read down to maze benefit. But at the same time, you know, Brexitters like that he's saying the same kinds

of things. They're saying, this is easy, we can do it clean. May's messing it up, so they like that message. Terres, just in about thirty seconds are assets in Britain on sale. The pound sterling has lost eight and a half percent against the dollar since April. I mean the uncertainty is is clearly weighing on investors minds, and I think that's

going to continue for time. I would say that what we're waiting for now is what the EU responses to that white paper, and if the response is very negative, then yes, I think assets will be on sale and they'll go cheaper. I want to thank you very much for being with us. Terres Raphael is Bloomberg opinion editor covering European politics and economics, joining us from London. You

can follow Terres on Twitter at Terres Raphael One. Well, it was supposed to be a done deal, a T and T, and it's a purchase of Time Warner for more than a hundred and seven billion dollars. UH. The deal was actually completed in June, but the Department of Justice may have other thoughts. Here to tell us more is Marianne Halford, a global media and entertainment strategist at O C and C stred A G Consultants. Marianne, thank you very much for being with us. Can you just

explain to people? I mean, you know, you try to look up what Time Warner shares are doing and you note that, of course they don't exist anymore because the deal has already closed. Is this unprecedented? Why would they do this? Good question? Um, I think this is a long shot. I think this, though, bespeaks uh an attitude or a new attitude towards vertical mergers coming out of the Trump Justice Department. And UM, clearly they don't want to give up a fight here, even though it is

a major long shot. I think it's highly unlikely that they'll be able to prevail here. I point to the General Council statement yesterday. The court's decision could hardly have been more thorough, fact based and well reasoned UM, even in an appeals court. Although I guess um they're hoping that some of the liberal judges that may be ruling on this uh might given to some UH concerns about higher prices. I still think it's going to be a

long shot. I think this has more to do with UM Comcast at the end of the day in a certain way. UM. We know Mr Trump is or President Trump that is, is uh UM a good uh friend of Mr Murdoch's. We know Mr Murdoch would very much like to be acquired by Disney, not Comcast. UM. This is definitely a warning bell, if you will, to Comcast um about them continuing their fight to try to pursue Fox. UM. That's one of the things I'm musing this morning. Okay, well, so, Marian,

there there two sides to this. There's the legal case and then there's sort of who is sort of calling the shots with respect to the Justice Department's decisions here. UH. There was some kind of conspiracy talk that perhaps the appeal was done specifically to get to the Appeals Court

in Washington. You see where Brett Kavanaugh, the nominee for the Supreme Court, sits Um, do you do you buy any of these arguments or do you think that the President is personally involved or do you think that this is just purely a sort of issue with vertical mergers. You know, in this administration, one never really knows. Um. I can't imagine that the President wasn't involved in this decision. Um.

I just can't imagine that he wasn't. Um. And you know, it is unprecedented to see uh a Justice department going after vertical mergers. It's very interesting that the Disney Fox UH merger failed through the Justice Department. A horizontal merger which is generally UM challenged. Vertical mergers are not necessarily challenged. UM. I think you know, these are players in the media specter and Mr Trump likes the media world and he likes to be a big voice. So I can't imagine

that he wasn't involved in this decision. Could you just expand a little bit more on what you mean by this having to do with Comcast and it's bid or the assets of Century Fox. And now we learned, of course that they have increased their bid for a Sky broadcasting the British PAYTB operator. Right again, I don't have any data to support this. This is just my hunch and my speculation. Here, and I've also talked to other

friends in the industry who also think the same. UM. We know that the Murdoch Trust or the Murdoch family has definitely shown a preference to the Disney merger, which is a horizontal merger. UM. A Comcast UH Fox deal would be a vertical merger. UM. Clearly, one of their statements back in December UM, when the initial Disney deal UH was done, UH, they said that they did not favor a Comcast deal because of the concerns as it

relates to UH regulatory risk. UM. We knew that Comcast held off making a formal bid until after the A T and T decision came down. Within twenty four hours, Comcast did enter into the bidding war. But Comcast would be a vertical buyer. So I just think the timing is interesting, UM, and particularly given that I think it's still going to be a tough, tough fight to get this overturned. UM. It's just so I'm really looking at

the other timing going on in the market. I do think we'll see Comcast really fight hard to get sky UM. I think I think Comcast needs sky UM, and that's probably going to be where they shift their focus right now thirty seconds. Is it common practice for the president to insert him or herself into the anti trade decisions of the Justice Department? Well, his name wasn't rough Fronts Tier. Um. These are all people that report to him. But again

I'm just speculating them, you know. Probably, I'm just wondering whether that's common for administrations to have a more very direct role in deciding antitrust policy. Not generally. Not generally. I mean we have seen it at certain points in history. Certainly back in the sixties. There are a few decisions UM, particularly think believe related to some steel mergers. UM. There have been some as related to security concerns UM for the United States. But I think in a case like this,

it's very unusual. Marianne Halford, thank you so much for being with us. Marianne Halford, global Media and Entertainment strategist for O C and C Strategy Consultants in New York, A T and T shares responding to the Department of Justice's decision to appeal the the the decision that they had shares down to percent. Thanks for listening to the Bloomberg p m L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform

you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramowits one before the podcast. You can always catch us worldwide on Bluebirg Radio