Consumers Are Really Driving Banking Industry: Leon

Wals Fargo came in a little bit worse than expected. That's stockdown about four percent today. Let's dive into some of those numbers. Ken Lee, Owned, director of Equity Research at c f R A Research, joins us on the phone from New York Can Thanks so much for joining us. Give us your takeaways here from the first batch of

earnings coming from the big money center banks. The consumer is really driving banking and those with strong large franchises such as JP Morgan or even Bank of America Tomorrow are are really growing those business both in terms of loans and also why the card business UM City UM had strong results, not as strong as JP Morgan, but you know, Well's Fargo is still disappointing. Today we reiterated our buy on JP Morgan and our cell on Wells Fargo with a new CEO, It's gonna be a long

time before we see the transformation. They have twelve different federal regulatory examinations, including the asset freeze from the Federal Reserve. That means that their long growth was only up one percent. Uh, we have a flat rate environment. Banks typically have half the revenue coming from net interest income, so the other businesses are really important. But if you have an ascid freeze like Wells Fargo, Uh, the non net interest incomes

down sixteen percent sixteen percent to the fourth quarter. So we're staying with our cell on Wells Fargo. I'm I'm struggling to understand. You see, the consumer is really driving everything. Jamie Diamond of JP Morgan saying the same thing. And yet their consumer lending book actually there, their new loans underwritten actually declined. Can you square that? Yeah? I can?

And what's driving um the consumers? It's actually it also includes small business loans and uh, they're expanding into twenty new markets. UM. Small business loans are driven not by e commerce but by face to face and for the US economy, that's really what's driving job growth and businesses um In terms of the consumer loans, uh you know, being so much flat, you know, yet strong comps a year ago, but for all of two thousand nineteen, you know, it was up strongly. Ken, I'm looking at the JP

morgan and the City results. Both had really strong uh fick trading, fixed income, credit commodities trading results. Is that just a byproduct of easy comps from a week fourth core last year or was the market that much better here in this fourth quarter than Thanks for the question, and it's easy comps here over year. The sequential from third to fourth quarter was kind of flatter up two percent. This is why our investment plan with the with the banks is go for the JP Morgan's or a Bank

America at large banking. We get Goldman tomorrow. They're going to have strong also trading results in sick. It's not going to happen for each of the quarters. In so it's it's kind of because of the week fourth quarter of two thousand eighteen, not the strength of the fourth quarter of two thousand nineteen Ken It's interesting a lot of people were saying, what is the upside of the financial sector, and that's why we've seen the underperformance through

the rally of the past number of years. Seems like there still is a lot of upside. If you look at the fourth quarter, Uh, do you think that it is an achronistic or just sort of uh, you know, a one time deal. Uh that we got a quarter like the one that we got in the fourth quarter with easy ums, with a rally and risk assets, etcetera, etcetera, and not necessarily something that can be sustained. So um.

Talking about stocks that diversified bank stocks, the larger ones were up over thirty Most of that came in the fourth quarter last year. We look ahead to this year, we see some separation of the large banks. So looking at the fundamentals matters. So long as we have a strong US economy, job growth, that's going to drive the consumer. When we look at is there a distressed industry where it's alarming? Uh, possibly an energy but right now, you know,

the non performing loans for the large banks is very small. Um. Again, then you look global, Uh, certainly city has more exposure with more revenue coming from outside the US, from Latin America and Asia. We prefer to stay with the U s so UM. I think for an investor, the import and point is the stocks are always cheap to the SMP five there trading at about eleven or twelve times earnings.

The smps up you know, mid twenty times earnings, and I think there's interest to look at these stocks because on the relative valuation they appear to be attractive. So can the big money center banks. Investment banks have had a good run over the trailing UH twelve months. Howbout some of the regional banks. Is that a place where maybe investors can find some value. UM, there is value, but regional banks have a very different profile. They don't

have capital markets except from maybe a US bank. UM we do like USA Bank, but they also have a very much higher percentage of commercial loans to total net revenue. Commercial loans also includes UH real estate and UH for for the regional banks. UM. You know, when you look at where there could be risk would be in over to oltment of the office real estate market. We don't see it yet, but when you got thirty of your toiling net revenue is coming from real estate out of

your total commercial loans. You know, that's a higher risk exposure than you're going to see what the money center back. And one thing that I thought was interesting with cities earnings in particular was that their expenses went up, and I had to do with their personnel costs as well as their technology investments. Do you view this as a good sign or a bad sign? If you're not investing with technology, then you're gonna be a You're gonna be a loser out over the next few years. And it's

the question of where they're putting it. City has a very concentrated business in the US. You know, they're only in a handful of state, so this is going to their networks on the consumer side in Mexico, Brazil and also Asia. Uh. They also are investing in their global corporate network work as well. Um the new hires. I think they're trying to regain some share in the equity underwriting business, so it's more bankers. Nobody wants to be in trading, and I think that's the theme you're gonna

see all week. Even though you saw that easy comps on the thick trading um and equity trading would regulated capital no one really wants to be in trading. They want to move into more stable, recurring businesses, whether it's credit card or wealth or asset management. Ken Leon, thanks so much for joining us. We appreciate your comments on the banks. Kenley, owned, director of Equity Research at c f R A joining us on the phone from New York.

Let's get straight to column that I thought was really interesting from Bloomberg Opinion and joining us now is Mark Gilbert, who is who at the column, and it was about black Rock and a recent push that they have made to change their investing criteria to account for climate change.

What was sort of the nuts and boards of this change, Mark Well, Larry fink Is annual letter to chief executives published today basically said there's a fundamental reshaping of the financial world going on as as the climate crisis becomes front and center. UM. So black Rock says it's going to put environmental, social and governance issues and sustainability at

the center of its investment approach. UM. In practice, that means basically doubling the number of E s G exchange trade of funds it offers, its planning to increase the amount of allocates to so socially responsible investing basically tenfold

in the coming decade. But in practical terms, because black Rock, which manages seven trillion dollars, is the world's biggest fund manager, because so much of it is wrapped up in basically index tracking products, in practical terms, a lot of that investment assets is not available to basically participate in this push against climate change. So, Mark, we've been hearing more and more and more about e s G investing, social investing,

sustainable investing. But boy, when Larry Fink and black Rock put their name behind it, it really amps up the conversation. What's the trend been in s G investing? It's massive.

I mean, in the past two years, my inbox, my email inboxes just inundated with initiatives with a new growing awareness that look, it's not climate change, it's a climate crisis um, and that the fund managers, because they're the main allocators of capital in the world, they're at the forefront um of the fight to persuade companies and to force boards to pay more attention to their greenhouse emissions

and to basically save the planet. Well understood, The question here is to the s G strategies effectively uh put into place some kinds of measurers to aliorate the situation. Or is it sort of uh cover up, not not cover up. That makes it sound illicit, but it was you know something where it's basically it looks good, it's putting lipstick on a pick. Is there an element of that?

There's an element of green washing? Shure e s G is a key factor for millennials, for example, for the younger class of investors, who every film manager wants to get on board early and they're saving career um and basically lock them in for life, so that there's an

element of green washing. But there's also a serious undercurrent to this which has grown over the past couple of years, which is that Look, one of the things Larry Thinks says in his letter is if you don't know what the future is going to be for let's say flood insurance, then how can you issue thirty year mortgages. If you don't know what the climate costs are going to be for cities, then how can you lend them money through

the municipal bond market? So clearly the climate change is affecting the world of finance in a fundamental way um, and that is forcing investment funds to pay attention in a way that they haven't done before. So, yes, there's an element of dream washing. Yes there's an element of me too, of being seen to be doing the right thing.

But I think underpinning this is a genuine fundamental change in thinking about what is needed to save the planet, because, let's face it, there's no point having returns of seven eight nine percent of there's no planner to enjoy them. In Mark's is there any sense you mentioned returns? Do we have any data yet to show whether E S G investing, whether I sacrifice performance to amp up my E S G factor. I can show you returns that prove that it's fantastic for your returns, and I can

show you studies that show it's absolutely detrimental for your returns. Um,

the jury is still out on at one thing. Cliff Cliff hasness of a q R. He argues that if you're not losing returns, then you're not really doing the job of socially responsible investing, because you want the companies you punished to pay more for their capital, that in turn would lead to higher returns for those willing to lend to them, and so you should be willing to sacrific five stold returns if in fact you want to force those companies to do more in terms of their

greenhouse gas emissions. And I have some I have a lot of sympathy for that few. There's another issue here, which is that, Okay, the millennials, they say they want a s G, are they willing to pay more for it? You know, the the rise of exchange of trade of

funds has pushed fees down all across the industry. But if you want those exchange traded funds to be actively engaging with boards, that cost money, and it cost time, and that means that the low fees that have been enjoyed in ETF so far probably aren't sustainable if you want that those trillions of dollars of capital that are in index tracking funds to be available to engage with boards.

Done a second, are you saying that basically black Rock doesn't have enough it doesn't have enough resources to be active on the boards of some of these companies to affect greener changes without higher without higher fees. Two thirds of that seven trillion of assets are and in next tracking products, and that the drive to you know, the doubling we've seen in e t F s two seven to two seven to well normal six trillion dollars in the past five years has been driven up mostly by

lower fees. And if you're charging lower fees for an index tracking product, then you can't allocate the staff on that asset to go and engage with the boards. It's simple maths. So, Mark, what I noticed store in my career is that E s G investing really seemed to begin or grow or take shape in Europe and then

moved to the US too. Why did that happen? Europe still ahead on this issue that the European Union is going to come up later this year whether what it calls a taxonomy, a set of criteria which is designed to avoid the greenwashing issue. It's designed to set standards for what counters in the s G funds. It's designed to set standard for what counters a green bond. M Europe has just been been ahead of this game. I'm not really sure why. Culturally, I guess we're just that

much more in hune with the environment. Mark Gilbert, thanks so much for joining US market. Mark Gilmbert is a bloomber view calmness. Joining US from London. You can read more of Mark's work, Bloomberg Opinion work and that of other Bloomberg Opinion writers on the terminal by typing an O, P, I N GO or on the web Bloomberg dot com slash opinion. They have just some great work. Well. Overnight yesterday afternoon, the US said that it was no longer

considering China a currency manipulator. Why whatever labeled China that in the first place still remains unclear. Why I decided to strip it of that label is much more clear as we head into the final stages of the Phase one negotiations between the US and China. Joining US now Damian sass Our, Chief Markets correspondent having to do with emerging markets for Bloomberg Intelligence here, uh, particularly the debt side of things. Can you make sense of what what

of this in any way, shape or form? Well, I think the way we have to begin is because I mean, look, there's three criteria that the United States government mandates for some for a country to be deemed the currency manipulator one and each have a trade surplus with the U S that's greater than twenty billion U S dollars China

did satisfy that criteria. The other two, that being a current account surplus um in access to two percent of GDP and persistent one sided effects intervention um really didn't materialize. And so, yeah, you're absolutely right. It was a little bit of a mystery as to how the U s actually labeled them in the first place, but it's not a really big mystery because they labeled them literally the day after the UN broke above seven. So it was

more political than anything. And I think the Trump administration is really using this designation as a way to kind of force the hand of other countries. All right, so does what's the practical implication of the US labeling China manipulator? And then I guess removing that classification, was there any practical in the global trade scheme of things of all?

None whatsoever? I mean, the only thing being labeled the currency manipulated by the US means you can't be involved in government procurement contracts, right, which China was never involved with anyway. So the impact on China is not so much. I mean, what's interesting though, is not so much who is labeled the currency manipulator or not on the list.

This this round like Thailand. Thailand was not on the I mean, they have been actively intervening in their currency to protect the box from appreciating for the better part of the last year, yet they were not on this list. Others who were Switzerland, the Netherlands, Germany. The qualitative statement of accompany that currency manipulator, Well, it was more about about them saying that they need to stimulate a fiscal stimulus. There's not an a fiscal stimulus relative to what they

should be stimulating. Um. With regard to Singapore, their savings rate is too high, so they're labeled the currency manipulated. There's all sorts of different you know, kind of a qualitative assessments around these countries, and so far the United

States is concerned with regard to China. The interesting thing here is there's a need for greater trend parency between China's policy banks and their fex activities, which obviously makes sense and at least now we're just talking a little bit earlier about the massive CNY option volumes that have been going through over the better part of the last two days. We saw thirteen billion rnimbi options trade yesterday.

Really discussing this with me I want to shift gears are a little bit away from the options trading, which is interesting in light of the fact that there wasn't a lot of actual movement in the actual price action. I am wondering about some of the numbers in the data that we got this week about trade and just where it's been rerouted in China and some of the potential consequences to the economy of the ongoing trade skirmish.

I think it's interesting that they've actually offset the entirety of any impact with the U. S Can you talk a little bit that, Yeah, so you trade with the US, I mean, like, first of all, trying to announced a trade balance overnight expanded to about forty billion dollars. US exports and imports both surprised to the upside. Trade with the US, however, down eleven for the full year twenty nine. It was the EU and the a C in the

Southeast Asian Bloc that picked up the slack there. So you know, it's it's really as you say, it's about um a rejiggering of trading within the Asian bloc, right, and so if you know trade with the US is indeed gonna you know, decline or remain at lower levels

than they have been in the past. It makes perfect sense that you would see trade with Malaysia, Indonesia, Thailand and so forth go up simply because those are the countries that the US is probably gonna do more business with, So they're going to serve as a bit of a conduit into China, if you follow me. So yeah, look, I mean, I think I think the trade data was interesting.

I think it was um it was good. But we have total social financing data coming out of China overnight, and that is going to be for me, far more important because that's if we don't see long term corporate lending pick up in China. I think you're gonna see a lot more PBOC stimulus throughout the better part of this year, and that might not necessarily be a bad thing.

It would obviously be good for foreign holders of China government bonds, but I can't see that being necessarily a really good thing for a lot of local equities in China. So we are presumably getting a Phase one trade deale signed tomorrow. We've not seen anything on paper, so we're as Michael McKee said, he's not even gonna think about it until he sees it on. We may never know. You have to really something, don't that right exactly? So I mean, did the merchant markets care about this or

is this kind of much do about nothing? You know? I mean I think they would care a lot if nothing got done, But right now it seems fully priced to me, Paul, And you know what I'm really more focused on. I'm really more focused on, um, the EU and you know, um we have Mr Hogan, you know, the EU Trade Commissioner in the United States today meeting with Lyon Heiser, and you know, this is about autos,

this is about big ticket sales, is about durables. And so for me, I'm interested to see how that goes because if indeed China is not going to Trump's whipping boy for the better part of you know, this election year, and his focus shifts to the European region, that would be obviously interesting in the impact on a lot of the euro denominated emerging market countries in my universe, poland Hungry check. Obviously that wouldn't be a good thing from

any of those countries. Just real quick. Here, A lot of people are saying that the Chinese consumer is showing signs of strength again, or at least stabilization, just real quick buying that, you know. I mean, we've talked a lot about and you know, I came here prepared to talk about China defaults with you, and you know, it's really interesting to me forget about the consumer because for me, you know, come on, I mean, I did it just

for you. But I mean I mean Kinghai Provincial, Taiwu, Dandong Port, I mean, I've been following some of this very honestly. I actually met the former Traman Wangwa Ling of Dengong Port back in the days, the biggest port in northeastern China, kind of by North Korea. And my goodness, the forceful ruling that came out of Leona Ling Province, I'm sorry if I'm uh pronounced that. Well, it was such a bad ruling for creditors and investors in that issue.

I mean, if we see more of that, this is gonna be uh it's it's basically going to deter a lot of officer investors from participating in their local credit markets, which is not good for the China consumer. Damon. I've got to say, we have to have a two hour special. Yes we do, Yes, I'm sure he's got a podcast

we can probably listen in. Damien sass Our, chief Emerging markets credit strategists for Bloomberg Intelligence, giving us his thoughts on we're getting some trade discussions and trade manipulating currency manipulator discussions between the US and China. But of course tomorrow signing the Phase one deal between the US and China, it's got to be good for markets. Well, the gig economy has really been a new development over the last ten or fifteen years. Forty eight percent of millenear workers

say they earn extra income on the side. According to a new bank rate dot com survey, Explosion an Opportunity ses terra on more people across different generations into side hustles. Gen xers of baby boomers said they've engaged in the gig gig economy. It's not just uber and lift, it's also impacting business such as jewelry and accessories. Jessica Harron is a founder and chief executive officer of Stella and dot based in San Francisco, but joining us in our

Bloomberg Interactive Broker studio. So, Jessica, thanks so much for being with us. Tell us a little bit about Stella and dot. What is the company? What do you guys do? Well? Thanks for having the Stelling Dot is a mission driven company created to help women earn flexible income in a modern way. We do that by paying commissions when people share our products across our three brands in fashion, skincare, and accessories, and we are now modernizing to make that

even more digital than ever before. So basically, if somebody shares something on social media and it gets sold or it gets you know, some kind of uh gaining popularity, they get a commission. They do if people shop their link. But we also power pop ups with our point of sale system, so they have one powerful platform where they can share both in person and online. In order to pay a real bill, they need to be able to

generate enough sales. So now we have a waited for them to do that across our brands and categories and whether they want to sell in person or online, adding real value to the customer. How big is the commission up to and it's paid weekly, which is dramatically different than what you might do in typical affiliate marketing where you get a very small percent thirty days later. All right, so how many people give us a sense of your company, how many ambassadors do you have and gives a sense

that kind of the growth of your company. Well, we're over a hundred million in revenue and we have over thirty thousand independent ambassadors that share our product largely part time, so they do this on top of another full time job or part time job, and it's a way to get an extra one hundred thousand dollars a month, even though we have people who earn full time income into it much more. Really, people look at this as a way to augment the fun in their life and money

in their life. And this is so interesting to me on many levels. Number One, how this replaces advertising because in some ways, uh, there was sort of the social sort of embedded advertising of ambassadors, sort of going to parties people who are popular, getting page to use a products. Does this kind of replace that in a way, and you could do it with less time and not having to go to the party and just sort of message

a link and call it a day. We really innovated our classic direct sales business model and did away with complex play plans and really built solid technology so that people can add real value by texting personal recommendations and making it shoppable. In addition to doing pop ups. People still do like to get together in person, but more and more they want to interact online and not be dependent on you know, posting on Facebook or things like that,

but like real personal service. So yes, it is a modern day version of how people can earn but without having to be a social media influencer, create your own content or ship your own product. So Lisa and I we see economic data every day, and one of the pieces of economic data is this the unp woyment rate. Is that you know, sixty year low. Does that make it difficult for you to find ambassadors if they're already fully employed. Economics is my background and my point of

passion and why I wanted to do this. I so firmly believe that women are still underserved in the gig economy at full employment, because if you look at what's happening, if you look at millennials, half of them have a gig.

But if women, they're seventy primary caregivers and they're half of them are doing gigs in childcare and dog sitting, earning wages they could have earned before they had all that college debt, which they have much more so than their previous generation, so their wealth is lower, they're not saving for retirement, so a second gig is necessary even

at full employment because it's stagnant wages and underemployed. So this strategy has been used by other companies, and thinking of Avon in particular, right, I mean, in another era before texting um or herbal Life also kind of tried to use a network of place. I see you just sort of be like, don't comparis to please but different.

But what makes a difference between a successful business model and something that basically encourages someone to put some money up front and then go out there and make it. You know? So I got into this from an e commerce and technology background, and I never thought I would do something and what people assume is the direct sales space because I thought of it as a parent scheme. But what I realized what drives that. It's really pretty simple.

Are you trying to encourage the people to shop and store inventory or are you actually de risking and not requiring them to buy and simply paying them when you ship direct a customer. If you remove that channel stuffing inventory thing, it has nothing to do with those other types of businesses. Our business is really about having no risk, low cost to capital, and we also make it learn and earn. We do financial education for women with self

made University talk about savings, smart business skills. So we're on the other extreme of wanting to make sure there is a protection in there. Is there a turn to your absolutely are are you don't if you think about it as seasonal word our part time work. We have

teachers that on lead do it during the summer. We have people that come in to pay for a bill and then transition because it's low costs to start, easy to make fast cash, and then they will pick it up and put it down to suit their life needs. So interesting, Yeah, it really is a fascinating model, and it's interesting in light of just how many people out there are doing second and third jobs. If you can do it on your phone, it make a lot easier

than to actually go somewhere. I always wonder when I walk into a Starbucks there's people sitting on their computers. What are they doing? Well, they're just if you're just going to scroll Instagram anyway, you might as well be making money and you might MICUs. We'll be earning something doing something you love Jessica Harron, thank you so much

for being with us. Thank you for having me. Jessica Harrod is founder and chief executive officer of Stella and Dot, normally based in San Francisco, but joining us here in our Bloomberg Interactive Broker Studios. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa bram Woids. I'm on Twitter at least Abramo. It's one

before the podcast. You can always catch us worldwide on Bloomberg Radio