Gorman's Model Reaps Rewards for Morgan Stanley: Whalen

banks right now, and that is Chris Whelan. Chris thrilled to have you. And you heard what some of Mr Pruzan said. You know, obviously there's going to be a good face put forward, but what are the problems that you see being stored up in the banks for down the road when some of all of this gets sorted out. Well for Morgan Stanley, you know, it's a great quarter, Bunny, and I think they are one of the few franchises this quarter that are reporting up revenues across the board.

Um As John was just saying, he doesn't have a lot of credit risk and interesting he didn't talk about it, but one of his great strengths is that bank holding company doesn't have to go out into the market and raise net funds. They have such a big deposit base now that they are actually a net provider of funds among banks. So totally different from Goldman Sacks, which has a very high dependence on the money markets to fund themselves.

So asset management, the strong investment bank. Plus they have liquidity in the background, which is great. Is that part of the reason why they bought eating Vance though, Chris, is that to make sure that that stays the case. Well, he Advance gives you two things. Funny, it gives you the a u M assets under management, which generates fees. That's a very stable leg for the stool, you know,

think about it. He has cash, he has the asset management business which pays you every quarter, and then the sc investment bank, which can fluctuate. Right, So they get the assets under management. But with that a u M comes deposits from those high network customers. And remember Morgan Stanley has got a very broad wealth management business. They don't just have very rich people. They have all sorts

of people different from Goldman. You know, a trillion in a u M at Goldman and over a trillion now in a um at Morgan Stanley are two different businesses, very different profile. The bank that had always been the bank of you know, the Vault if you like, the Fortress bounce Sheet, had been JP Morgan is Morgan Stanley is sort of giving them a run for their money at this point. No, no, no, Jamie Diamond's got well

over two trillion dollars in court deposits. Morgan Stanley is a little shy of a trillion until lass it's funny, and it's about forty funded by bank deposits. So in other words, their banks inside Morgan Stanley can lend to the broker dealer on an arms length basis. You know, they have to be priced like the market, um, but that's a huge advantage. It's huge. Now Jamie Diamond is like a country. He has so much going on inside of his bank. Oftentimes the payments don't leave the bank,

it just goes from one customer to another. So he's an island of liquidity like all of the top four. But Goldman and Mortgage Stanley are more broker deal are still than they are bank. That's the key thing to remember. So we'll get to well as far ago maybe at the end, because it's a slightly separate case. But what

about Golden Sacks this year? Is Goldman feeling a little bit of pressure even though they also had you know, a great quarter of course, you know, it's great to see them hit one out of the park like this, but they are the last dinosaur in the line. You know, if you ever watch the Animal Planet, the one at the end is the one the t rex seats. So in terms of funding, in terms of volatility of the business, I think Goldman is still very vulnerable as his city.

Those are the two at the back. The rest of the group is doing better, and I think, you know, God bless Jim Gorman. He had a lot of people criticizing him, but he's ended up creating a business that kind of looks like the U B S is any other big European asset managers. But he's got a world class investment back. So it's a much more balanced model, I think than a lot of his competitors. So talk

to us then about City. It's been a decade at this point, Chris, and it looks like it's going to have to need some kind of i don't know more, if not restructuring, massaging. There's going to be a new CEO to try and do this. She was present the last time there was a restructuring, so she knows exactly what's going on inside the bad bank and the big good bank and in the units that have spun off and so on. We would your prescription for cityv Well.

City suffers from the h of sandy while you know, uh my core back has done a great job of turning things around, but he was the first competent CEO of that bank had had in fifteen years. And again Jane Fraser, great operator. She's touched all the relevant parts of the bank, and I think she's got to just try and work with her board to fashion a business that makes sense. You know, they're not really much of a U S bank well that you only have about

core deposits inside City. The rest of it is funded like Goldman Sachs in the markets. Their cost of funds is higher and the thing that saves them is the big consumer book because their credit card book has you know, a gross yield in the teens, so that makes up for a lot of sins. But she's got to figure out a way, I think, to get back or buy an asset manager um, so she can compete with the rest of these universal banks. Right, They're not just monolithic

commercial banks with a broker dealer anymore. Funny, everybody wants to have a trillion trillion and a half two trillion in a u M, so they can compete with black Rock, which is much bigger than all of them. So that to me is the competitive landscape. She's got a decent capital markets investment bank. It's not as good as Morgan Stanley. And she's got a great, great advantage in that consumer book because it throws off a lot of income in good times. So that to me is a challenge with

City What do they want to be when they grow up? Okay, because look, you know we've had systems and control issues so you and I were kids. Funny, we've been watching this movie for twenty five years. This goes back to John Reid and when Sandy Wild started buying those non bank businesses, that's where they got into trouble. When you started turning you know, sales offices of Associates Corp. Into branches of City Bank, that was that was not a

good idea. Yeah, I mean, and and so many of the places where these banks were able to make a little extra cat on the side. They just don't exist anymore, right, Chris, You know, currency trading and so on, Like it's just become such a different kind of experience to run a bank. But tell me this. You look at the banks and the quarters that they've had, and yes, a lot of it has come from the capital markets, but you would also imagine by looking at them that the consumer is

extraordinarily comfortable right now. But that's not the case. We just got more initial jobless claims that don't even reflect the problems in California nine hundred thousand initial jobless claims just for last week. Empire Manufacturing is down to ten point five. We had obviously a better Philly fired business outlook and so on, and you know, there's definitely mixed data. But how are the banks going to whether out what's

obviously coming to the consumer if we don't get more stimulus. Well, it's it's kind of a tale of two countries, Bonnie. We have a lot of people who are unemployed now who may or may not have been particularly bankable. If you think of the bomb Americans, they're not big users of credit because either they don't have credit at all or their scores are quite low. And so in this bullmarket you've seen for mortgages, for example, other areas, even

auto autos is doing fine. Um. You know, it's the middle to the upper third of the market and the credit terms. So will the banks feel that, Yes, the ones with big consumer exposure, City Capital One, some of the others. But look at American Express. American Express is almost back up the four times book. Um. So you know, you have to think of it in terms of the segmentation of society, and unfortunately, the lowest income Americans are

the biggest losers. And then you think about the cost that we've put on top of the banks for dealing with consumer issues over the past ten years. Kamala Harris, that's not helpful either, because there's no incentive for those banks to stretch and lend. They could do good loans all day long. You know, if there's anything that's a

reflection of a shaped recovery, it's that, Chris. I mean, it's it's really something to say when you say, well, banks aren't seeing it among their consumers because their consumers are fine. The ones that are suffering can't even get banked in this country and in many other countries too, Chris, I have one more and Funny Freddy. You know, if we get a different administration or just you know, a continuation of the same, what happens next for Fanny Freddy. Nothing,

nothing can happen anyway. But it's just problematic. You cannot detach these things from government support, direct sovereign credit support and expect them to survive. You know, it's just not going to happen. Um. But one thing I do want to leave you with, Funny, is the reason the banks, especially JP, we're able to pause in terms of putting aside more cash for future losses is because of the Forbearance and the Cares Act. The FED has said, well,

those are not delinquent loans. Until those are considered delinquent loans, the banks don't have to put more cash aside for them. So we're pausing. Can that pause be forever? Pause? And well, ohly if we want to become Europeans. I mean, that's what they did in Europe. They used to just ignore nonperforming loans and it was a horrible, horrible mistake on the part of the Meracle government. So you know, that's that's kind of where we are. I think US banks

are in much better shape. They're going to clean up the mess. Fourth quarter will be taking a lot of stuff to the curb, Bunny, Chris. It's one of more sanglent interviews that I've had with you. You seem actually quite positive, which is he I work in a mortgage business. We're going to do four and a half trillion dollars worth the mortgages this year. That's the higher, almost higher than two thousand war, which is a little scary, but at least we have part of the economy that is

going to help pull us out. And housing, I think there's accumulated demand. You have a lot of demographic factors, younger people, one of you know, five families, and you're going outside of the big cities, which I think is great. This is a very good point. Maybe it's karma, the mortgage industry finally getting a bit jp. The banks aren't buying a third party production right now. But Jamie did enough new mortgages so he had almost no net change

in the value of his servicing. I'll guarantee you his servicing book is pre paying a year. Well, that's good, it's it's good given what the mortgage industry went through ten years ago, right, and some of it brought We can have a longer conversation about that some other time, and Chris, we have to let you go, but thank you so much. That is Chris Whalen, chairman of Whalen Global Adviser, is always a pleasure to speak with. Chris. Let's get some more market reaction out of Sapons, who

covers all of the assets for us. She is cost asset reporter here at Bloomberg News, and she's been obviously keeping an eye on equities today because that's you know, what's really sort of moving the most to the naked eye at least. But there's a lot going on, Sarah. In Europe and in the United States with those jobless claims, there is a lot going on and not necessarily what you want to see to bring optimism to this market. So in the United States, jobless claims did come in

at eight hundred ninety thousand. The estimate was for eight d twenty five thousand, and the prior week was also revised hire to eight hundred forty five thousand, So not only just a miss of that estimate, but also an unexpected increase in jobless claims now. As Chris Lowe over at FHN Financial put it, he said, the ongoing decline and claims paid stretching from late April to two weeks ago is encouraging. There he is referring to those continuing claims.

But then he said the increase in initial claims is disturbing. It is difficult to see it and not think there are cocovery is vulnerable, and that really just epitomizes where we currently stand. Yes, we have gotten through the rebound. We have gotten through that initial stage of the v shaped recovery, if you want to call it that. However, the question is now what is next, especially since it

looks like we may not be getting fiscal stimulus. We do see COVID cases rising, particularly you look at Europe right now, where we see record cases in particular countries like Germany, Italy, Australia, the Czech Republic at the same time, or hearing about restrictions in London, curfews in Paris, so not what you want to see. Globally, when COVID cases are rising, there's fears of another wave ahead of the winter and a labor market recovery. In the United States,

seems to be stalling. And with all that said, we still have in disease not far from records. I mean, yes, we're down one percent today and the sack down wanted a half percent and so on, but I mean that's not even that much of a self. Well, that's why it's so important to keep this all in perspective. I mean, I think about the earning season that we are in the middle of. Shirt is very very very early on.

But to this point, the beat rate for US companies that have reported earning so far is about that would be a record beat rate. However, if you look at the average move for a stock that has reported earnings in the twenty four hours post reporting, that average move has actually been about a two percent decline. So even though companies are beating, companies are delivering, it's not showing

up in the stock market. And part of the reason for that is, yes, the fact that many of these estimates analysts had no clue what was going to happen. We had gotten no guidance. It was almost as though we were living in a vacuum, and an information vacuum. And you see that sparity between the estimates and the

actual numbers that are coming out. But when you have markets that are trading at record highs, it is such a different setup than the beginning of the second quarter or first quarter earning season, when even though we got such negative numbers, we saw an unbelievable rally in the stock market of older notes that you read ol day, and I know you so many how many people are pessimistic, Sarah, because of the ones I read, It really doesn't seem short of a couple of mornings here and there, that

people out on wool Street sending out research are that pessimistic. I would say that my read is very similar to yours.

It seems at this point in time, more and more strategists are actually highlighting breadth measures, for example of the market saying that this is a market that has been broadening out that Davis reach Arch, for example, had highlighted this the other day, changing their stance on US equities to become a bit more optimistic, saying that one of their breadth measures had actually flagged and was now positive and pointing to the fact that we are in the

early stages of a true bowl market and that does seem to be what the majority of those notes that I am reading are saying. People are saying, yes, of course there are risks out there. You have an election, you have COVID nineteen. You need to see what happens with the labor market, not just in the United States, but the economy around the world. However, at the same time, if you look at the internals of the market, many strategists are starting to say this is resembling a true

early stage bowl market. I suppose the next catalyst will be the actual election itself. At this point, I mean, yes, we might get something between now and then on breaks it all. Well, it's not likely. We might get some better news on the virus, but you might also get some worse news. So I suppose is that what people are focused on the election coming up, especially considering the fact that nineteen days away as the U S election, that is thirteen training sessions, so it's going to be

here before we know it. It's pretty unbelievable, but I would say still top of mind, and you really can't get away from it. It's just COVID nineteen, especially when you see headlines of what is happening in Europe currently, and also when we see headlines dropping about officials or people involved in the White House or campaigns testing positive as well. That brings it into it too, And it is really what's dictating our lives, businesses, and the economy

at the moment. And I'm sure everyone has seen by now. But obviously Kamala Harris has to stop traveling because AIDS in her front office tested positive as well. So the effecting both sides. We're going to get to tell holes to competing town holds nights. We'll see if we hear anything that might change the narrative, but it doesn't feel

like we will at this point. The other quick things Sarah that I'm watching, and it hearkens back to everybody buying outdoor patio furniture and heaters and so on, is energy prices. They might go up a little, right. It's interesting because when you think about the COVID nineteen pandemic. Originally this was seen as a deflationary force. Now some are wondering if we are going to see pockets of inflation pick up. We saw that in the last CPI

report with used cars, for example. There are certain pockets of the economy that may benefit. Now we will see what happens as we start getting into the winter. Like you said, it would be imaginable that many restaurants, uh, people maybe in their homes are trying to get heaters to use outside. In particular, I have heard that there are extreme backlogs to achieve these because they're in such hot demand currently. But yes, you have to think about

the derivative effects. I bought some p Paine from local hardware store and they're why and I felt like saying, well, it's it's for heating. What else is complaine used for these days? Leave out to your imagination. Sarah Ponzac, thank you, cross Usset reporter here at Bloomberg News and general just genius. Carl Weinberg joins US now founder in chief, international economist of High Frequency Economics. Carl, Let's get straight to the point.

How awful is it out there? What are we going to see in terms of recession in layers or not in layers for the US this year and next year? Most importantly? Okay, well, thank you for having me on vannie.

You know we're looking at a second wave of the virus, and we've maintained the high economics that you can forecast the future of the economy until you know where the virus is going to go, and we don't know there can possibly be a real recovery until we see a cure for the virus or at least a good treatment for the virus, and none of that is at hand.

As the virus spread increases, we're getting increasingly pessimistic in our outlook for the U. S. Economy, especially when you see Europe right now, right, Carl, because so many countries in Europe did do at least partially the right thing, and France in particular just can't keep it under control right now, that's right, Varney. Also in the United States from seeing outbreaks in the heartland of America at an

accelerating pace. The issue is with the virus now and why this is different from what we saw West Springs. West Spring, we closed the economy down, and then we use the same power that we invoke to close it down to open it up again. Right now, the virus is in charge, and the virus shuts down the economy by infection. One worker missing from a factory, sick at a factory closes an assembly line if what that factory

makes is used to make something else. Saying in the auto industry, one part for the assembly line missing shuts down the whole assembly line. And similarly, one students sick at the school closes a whole university or a whole school and keeps kids at home, or one office work they're ill, shuts down the whole office. Right now, the virus is in charge, and we don't know how soon this is going to be brought under control and what kind of economic activity it's going to take out along

the way. Just a quick update for people. COVID is in forties six states right now detectively and that we know of, and deaths around the world have topped one million there at one point zero nine million. New York hotspots are leveling off, but Houston, I see use intensive care units are seeing a surge. Carl. Let's talk about then, what we do know. We got economic data this morning that showed in a jobless claims are just not getting

any better. And that's pretty distorted data right now, and there's lots to not not like out there, including the fact that the stimulus talks are just going nowhere. Yeah, I mean, there's a lot not to like. In this morning's employment claims number claims are are not going down as we like them too. And more importantly, the number of people who are on benefits are going down for the wrong reason. Probably people want it's losting the benefits

that they have. They've lost their all supporter. They're going to lose that all supports from any number of programs. And what this means is that the income hit that we've avoided so far has now started to catch up with us, and it's probably started in July, but it's going to get a lot worse in the next month or two. The next detail sales number that we're going

to see is probably not going to be too terrible. However, we're very grim about what's coming up in the months ahead as people lose their support unemployment insurance and jobs do not need materialize to put them back to work. I mean, we haven't even had a chance to talk to you recently about China, which was the only topic we were talking about for a long time. But China is really receded into the background now in terms of trade negotiations and so on. Given what's actually happening right

around us. What what do you think about at night, Carl, when you're thinking about the economy and the stock market close to highs and the election coming off and so on. What's the most important question for you right now? Any funny you should ask. I was just writing about China for our Notes on the Global Ecountry tomorrow. China's going to print a GDP number next week that's going to

sail about three and a half percent growth. That's not a particularly good number from an historical perspective, but from the perspective of the world at large, that's a pretty darned good result, giving what's going on with this pandemic

in other countries. China right now is exploiting its advantage having also with the pandemic, albeit harshly from a social um um, from a political pressure point of view, all right, but nonetheless they contained it, and now they're using their windfall from having contained the virus to exploit openings in the world economy to step up to the plate, if you will, say, in relationships with Iran and defiance of the US sanctions, with relationships of Africa and other countries,

spreading AID and so forth. China is benefiting from this pandemic and multiple dimensions and so far for whatever reasons that we may not approve of politically or socially they're managing to keep the pandemic under control. Yeah, I mean it sounds pretty malignant. How much hay can bad actors make from the situation that we're in right now, including the fact that we have an election coming up, and you know that's what people are concentrating on. We just

have a few seconds left. By the way, Carl, Well, I agree with you about that money, but measures, some of the measures have been extreme. Then again, if you were living in China right now, commonly would be growing, you would have a job, you wouldn't be worried about losing it, and you wouldn't be worried about getting the disease um. You know, So there are obviously a lot

of costs associated with this. There also true benefits as well. Carl, is always an absolute pleasure to speak with you, and Carl again, we did get to talk a little bit about China, So that's good. Carl Weinberg of High Frequency Economics covering the gownma there from this morning's economic data

to the stock market to what's happening in China. Speaking of the stock market, re seeing just a little relief the dow down only quote unquote just more than a half percent right now, or undred and fifty eight points, the SMP down twenty five points, seven tenths of percent,

and then as DEAC down one percent. It probably bears repeating that we saw initial jobless claims for last week coming in today higher than economists were anticipating, just below nine hundred thousand claims, and we know that there are some problems with California data which is skewing the data continuing claims staying over that one million mark. We do not like to see continuing claims staying over a million for many weeks in a row, but that's what we have.

Nice guest, Christian mcgoon, CEO of Amplify e t F joins us. He's also portfolio of the Amplify online retail et F I buy and for anybody who's looking it up, it's I b U I And that is obviously something that has been involved with Amazon and is involved with Amazon. So let's start off right there, Christian. We've just had primed days this year, an extra prime day. Amazon hasn't released a lot of data, but it definitely released third party or fulfilleries data which was higher. Talked to us

about what you've seen. Yeah, so Prime Day concluded, and you know, once again it was a record Prime Day. This was the sixth annual Amazon Prime Day. Last year, Amazon found about a seven billion dollar kind of sales um UH to two day period. This year, UM, early projections look like it's going to be closer to ten billion dollars about nine point nine billion, with about six billion coming from US versus about four billion coming from outside the US. The average order is up about forty

five dollars per order. The average household spend looks to be about seventy six dollars. Thirties percent of customers surveyed by one data provider show that they're buying holiday gifts. Remember, Prime Day has traditionally been in July. This year it's in October. So um Amazon is able to front run a little bit this holiday shopping trend in the age of COVID, which UM many people believed would make this the record Prime Day, and sure enough, it looks like

it's going to be a record. By about your I Buy E t F generates what at of its revenue from online purchases in normal times? What about right now during the pandemic? What do you imagine that percentage is question. Yeah, yeah, it's definitely increased. So I buy only looks at companies that have se or more of their revenue coming from online retail sales. And you know, online retail still in the US from a market share standpoint, is only six of overall retail sales based off the last US Census

Bureau report that happened this past quarter. That's up from eleven percent. Now, during holiday shopping, we typically see like last year saw a little over twenty of market share going online. This year, early survey results show that it could be an excess of fifty market share. So it's a bang up year for online retail and online retail stocks. I buys get eighty nine percent this year, as in it's as it's focused on online retail, believe it or not.

Amazon is only up eighty two percent, so it's actually trailed. The average online retail stock I buy is actually equally weighted, so it doesn't have this massive waiting to Amazon, which is actually benefited it this year. Absolutely, and you have two billion dollars in US it's across the sweeten e t F that amplifies. So that's really interesting that this is the particular one that you play pobly most close attention to. I want to ask you a little bit

about Colorado Springs if I can. That's your location. I mean, is that in an area that's seen an influx of people during the coronavirus pandemic or just tell us a little bit about what it's like in Colorado Springs right now. Yeah, So we've definitely seen um people migrate down from the larger city in the state, Denver to have a little bit more of quality life in Colorado Springs. We've also

seen an influx of California uns. Frankly, in fact, in the next few months we'll see the first opening of In and Out Burger, which, if you're from California is kind of a staple food there. So um, Colorado is definitely attracting people who now can work in a place that has some great um uh, natural beauty, a lot of different activities all all year for seasons, and um we're definitely seeing a nice population increase, probably due to not only COVID restrictions, but also kind of this work

from home trend. So um definitely part of maybe one of the areas that is a benefactor of of kind of this changing landscape, uh, in terms of kind of physical locating yourself based off your work. Sure, I mean I want to say congratulations, I guess on in an out burger, but there's definitely a question mark at the end of that congratulations. Talk to us a little bit about what the retail environment is like there though, because you must see small businesses, medium sized businesses in town

and in surrounding town. Are they suffering right now or or you know, will they actually almost in some weird way, benefit from this too. Yeah. So you know, there is a larger population kind of trend happening in Colorado, So that is good. But to your point, there's still um some physical restrictions here. We certainly have our mask mandate

that just got extended by Governor polis Um. I know that many of the restaurants, particularly in the Denver area, are in limited capacity about capacity, which is uh, you know, stressing their ability to you know, stay open. Um And overall though it seems like you know, people are adjusting, uh, and you know the economy has um you know, slowed down in some areas, but you know, speaking to a lot of home improvement type businesses, whether that be people

building decks, are doing remodeling, etcetera. They're having record years. Just spoke to several contractors UM who are seeing you know, unbelievable backup. One for example, who's builds decks. UM has now a five month wait for all the new decks they're building out here in Colorado. Uh their previous high was to two months. So um they're operating at more than double their capacity. There's more work than they can handle.

So I think a lot of the kind of home depot um you know type retailers are doing quite well out here. Restaurants are are struggling. But again, you know, we're hoping to get through this, and you know, restrictions have been a little bit more um um, less intense, I guess since the kind of the peak in Corona. But definitely there's going to be some more challenges to

overcome here as we think we get into cold winter. Well, Christian, congratulations on lots of things, honestly, but also on the performance of I Buy Your E T F. Christian Magoon, CEO of Amplify E t S, joining us right there from beautiful Colorado Springs. Thanks for listening to Bloomberg Markets podcast You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Bonnie Quinn, I'm on Twitter at Bonnie Quinn. And I'm Paul Sweeney.

I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio