P&L: How Donald Trump May Save Banks Billions

Well to answer some of those questions or possibly give us some insight, uh Silla Brush, a Bloomberg News reporter covering regulation, wrote a story with the headline Trump may save banks billions by disrupting global rules. We want to bring in Silla Brush himself to explain which rules are at greatest risk of getting rulled back. Silla, thanks for joining us. Great to be with you. So what do you think is most at rich? Which provisions are most at risky? It rolled back to give banks more leeway

at this point. So one of the interesting things it's in the focus of this story is about a whole range of rules at the global level that aren't yet actually on the books. So It's an interesting situation where regulators at the global level are trying to finalize these new standards, and yet this election has just occurred and Donald Trump, president elect, wants to in his own words,

dismantle financial regulations. So for rules, uh that are aren't even on the books, it just makes it at least perhaps much less likely that they'll ever get on the books. So it's a different question than rolling him back, which he very well may do. For plenty of rules that are already you know, on the books in the US, can you describe some of the controversial rules and what they might do to the bank stocks and to their

ability to generate profits. So some of these rules that regulators have been spending the better part of the year at the global level trying to to finish off, are you restrictions on banks ability to use their own internal models to basically decide how risky various types of loans, corporate corporate securities, bonds, and other assets on their books are. And these are very complicated models, but they they're basically

used to determine how much capital banks have. So you know, if these don't if these new restrictions don't come on for banks, in the US or around the world. Then you know the warnings from the industry where that these these rules could cost billions of dollars, in some cases hundreds of billions of dollars, and they were generally going to be softened over the They were getting softened over

the course of the year. But now there's this big question about whether these rules actually make it on the books. Well and talk a little bit. I mean Donald Trump is is going to be the president of the United States, uh and potentially could soften rules in the United States. Why would this have such a big effect on global regulation?

So the US, UH, you know, there are these you know, several different bodies at the global level that try to set standards UM that work across around the world, that basically set minimum standards that every nation jurisdiction has to comply with. The idea general ideas that they want to prevent regulatory arbitrage banks moving from one jurisdiction to the next because the rules are softer and easier. UM. The US has several seats on these tables, at these international tables,

and they help set the rules of the road. So you know, if these rules don't get put on the books and they aren't sort of enforced and implemented. Then you start to get serious questions about you know what what the sort of power of these international bodies is. It's too early to answer those questions really, but it certainly raises the question as far as domestic banking goes, can you give us any side into what are the

hot button issues for domestic banks? For domestic I mean the US banks, so that we've already seen sort of big concerns about you know, what will happen about the Consumer Financial Production Bureau UM, and that affects you know, a whole range of domestic banks and mortgages and credit cards. And you know whether Congress at at Trump's sort of direction or encouragement UM starts to change sort of the CFPP is ability to make make rules and and crack

down on the industry. UM. That's a major area. UH, that's already popped up since the election. It is a bond blood bath out there. Will this continue or is this time when we finally see yields peak and then stabilized. To answer that question, I want to bring Eric Stein, co director of Global fixed Income at Eaton Vance. Uh. Eric, thank you so much for joining us. What do you think is this? Is this the start of a larger trend, a larger bond sell off, or are we going to

hit some kind of equilibrium here where yields stabilize. You know, I think it certainly could be the start of a larger sell off. You know, do I expect to see the sell off like we've had basically, you know, every day? You know, we had the bond market effectively closed on Friday for the Veterans Day holidays. We've really really had

three trading days post the election. We've seen a significant sell off all of those days, really significant sell off in the bond market since just about the time that the President elect now Trump gave his speech about three am Tuesday evening going into Wednesday morning. So I think most of the sell off, though, has been an increase in inflation expectations. If you take nominal treasuries and break them between inflation expectations at real rates, there's been some

increased on the real rate. A lot of it's also been an increase of inflation expectations. What are you advising clients to do, just sit tight and wait and see what happens, or is this the time. If you have got if you have gains in the bond market, take

the gain and wait for a better time. You know, I'm somewhat biased, but you know here at the advance we do run a number of flexible portfolios or global macro strategy are short teration strategy can come fund funds that can short funds that can profit from higher rates or a stronger US dollar, higher inflation expectations. I think, you know, if you think broadly in markets, you know we've had declining interest rates. Um, you know, we had

inflation expectations that got the very low levels. Now those were picking up even ahead of the election. But I think it's you know, we may be in for a very different bond market given that we're certainly going to have a larger fisc CO response that should lead to higher inflation. Whether or not leads to higher growth I

think is still to be determined. Um, but I think you know, potentially there is higher growth if we get some stuff on the tax and regulatory side along with some targeted um infrastructure spending, and if we're a new growth and inflation paradigm, we should be in a new interest rate and inflation expectations paradigm as well. Okay, so Eric, since you have a flexible mandate, you can go in and buy at this point. At what point do you

buy a thirty year bond at three yield? I want to I want to see it keep backing up from here, to be honest, or see you know, a change in what people are expecting in terms of the fiscal stimulus um that we're that we you know, may be getting next year. How do you even plan though? How do you how do we even we have no facts? Right well exactly so to me, you know, when this election occurred, that was certainly surprising. The way I thought about it was, Look,

the distribution of outcomes has widened. So if you said, if we if if Hillary Clinton had been elected, and we kind of have a continent continuation, I should say, of the same policies, then we'd probably be in this kind of muddle through one and a half two percent

not terrible but not certainly not great growth environment. Now with President elect Trump now being ready to take over beginning and Jane or of seventeen to be a distributions wider, if we get two massive amounts of protectionism, that's that's probably a higher probability of recession that we would have

had frankly under Hillary Clinton administration. However, if we get tax and regulatory reform and some target infrastructure spending, that's significantly higher probability of two and a half three type growth. And I think the way the markets looking at and I think this is correct, is we're going to get more of the tax, regulatory and fiscal side. The protectionism side, it's still to be determined. So I certainly agree with

the tony of your question. No one really knows, but I'd say right now the distribution of outcomes is certainly a lot wider than then, let's say, what it was a week ago pre election. Eric, you think that the increase in yields will have any effect on bond issuance

by corporate borrowers, Uh, you know, certainly. I think bar you know, Barros to some extent have been, you know, of all types of instruments, you know, emerging market countries, corporates have been, you know, to some extent expecting higher rates. I don't think anyone is expecting, you know, higher rates in the exact manner, uh, and kind of speed that we're getting them now. But you know, to the extent that they think we're going into a lot higher rate regime,

which I don't think people really think. But um, you know, maybe they want to issue quicker um and and kind of get that out the way. With the extent that you know, they want to be a little more tactical and wait till markets will will settle down. Um you know, maybe maybe then they would wait. But certainly, at some level, uh, it gets it gets to be significantly more costly. That being said, rates from a historical perspective, uh, and even from where we were a couple of years ago, are

still at very low levels. It's just that they've they've rallied, you know, really since the July time period, they've they've sold off pretty significantly, obviously accelerated that sell off since the election outcome. Eric, We've seen a lot of bonds sell off. We've seen investment grade corporate bonds, we've seen emerging markets debt, and of course treasuries, which asset class with in fixed income. Do you think is the most

dangerous right now? Most most dangerous it's to me probably it's probably still to some extent treasuries, um, just because the nominal treasuries I should say I like tips. I think tips are good places to be if you do them on if you buy them on a treasury hedge basis. I think you know US treasuries to the extent you know, as I said earlier, we're gonna we likely are gonna have higher inflation. We're going to have more fiscal easing, which is, you know, whether it comes from taxes or spending,

were likely some combination of both. That means more issuance and some more issues should we hand the treasury market? And if we get more economic growth, which I think is certainly not a given, but the potential for being in a higher growth regime, uh certainly exists. Um, you know, then those are three bad things. More growth, more issuance, and more inflation are all bad for nominal holders of of U S treasuries. What if you could speak to

the issue of high yield debt. There's been a big sell off just looking at the eye shares iebox high yield et F. He's taken a looking down about four and a quarter percent since the beginning November. What about high yield? Yes, so, I mean certainly the you know you've seen across you know what I'll call kind of the riskier credit asset classes. So whether it's high yield

or emerging markets, you know, what interest rates. If interest rates are just going up from kind of a real rate perspective, just the economies growing a little bit faster,

that that doesn't hurt those asset classes that much. But I think given the kind of shock of the interest rate move, which to me is again a combination of potential for more issuance, uh definitely more inflation as well as potentially higher real growth, I think you're you're you know, you're gonna see some dislocation and credit markets you're seeing it right now, and high yield you're seeing is seeing

in emerging markets as well. So I think you know, at some point they're certainly gonna be opportunities in those asset classes, whether on an absolute, uh you know, kind of standpoint, or kind of relative to to U S. Treasuries. So real quick, what do you think is the best bet right now? Best bet? So, as I said before, I like tips versus um, you know, I like tips versus U S treasuries. I also h you know, I also like so floating rate asset supporting right bank loans

clos those are attractive. Also, certain types of mortgage backed securities IO interest only mortgage backs that actually have a negative duration. We have some of those bonds in our short duration Strategic Income fund. Um. You know, those have been performing well over the past couple of days. Thank you very much for spending time with us. Sarah Stein, as a portfolio manager and co director of Global Fixed Income for EAT Invents, helps to manage over three hundred

billion dollars of customer assets. He is based in Boston. Samson Electronics, it wants to get into your car, and it's spending eight billion dollars to do so. It has agreed to buy Harmon International Industries. And here to tell us more is Alex Sherman, Bloomberg's Mergers and Acquisitions and Deals reporter Alex Sherman. Always a pleasure tell us about this,

uh recently announced deal to buy Harmon International. I mean, I know we keep talking about the car, but is Harmon just uh, you know, about automobiles or it is? Is it also about audio? Yeah? So I mean if you think back, you know a few years now, maybe even decades ago, Harmon was all about audio. The BBL for sure, audio home system, home audio system card exactly. It has gotten recently, it has moved much more into the connected car area. And that's for sure why Samsung

made this deal. Uh. You know, obviously everybody knows Samsung for mobile phones. People might be surprised that, uh, they own about half of memory chips and cars, so they're already there to some degree. Uh. And I feel like Samsung must have made the decision that if they really want to get into uh you know, audio and and and sort of full unconnected car, acquiring Harmon was the way to do it. Because this game is all about scale. They realized they probably gonna have to compete against Apple

in the next decade or so. Apple has sort of gone back and forth with about how they want to get into the car. It seems like they're going to do something. Whether that means an acquisition or go it alone still to be determined. Um, but this is a way for Samsung to sort of be a first mover here. Uh. So you know, it's a fairly big price tag eight billion dollars. From my understanding and reporting on this, Uh,

there were some other potential buyers out there. Um, we don't know who they are yet, so I will try to keep doing reporting and if we can get a little bit more clarity on who they might be, they are likely to be other large tech companies because more

of the auto guys eight billion dollars is a bit rich. Well, okay, so Samsung is a South Korean company and Harmon is a US company based in Sanford, Connecticut, which raises the question that you addressed in another story, uh, that you co authored with Jonathan Browning, uh, looking at how some Chinese companies are getting advice to pump the brakes on cential deals in the US. In other words, wait, take your time see what President elect Donald Trump's policies are

before making a move. Can you tell us a little more about that? Yeah, So I've spent the last the latter part of last week talking to dealmakers and simply asking them a straight up question, you know, what does the Donald Trump election mean for this inbound Chinese to us? Specifically? Uh, you know, over the next four years or so, which we should say has been going gangbusters. So that's sort of why I asked. It's a volume for Chinese m and a inbound to the United States is up like

over last year. It really was getting off to sort of a rocking start at the beginning of the year UM, and obviously they're like, it doesn't It doesn't take a rocket scientist to think that maybe this may slow down, considering how outspoken Trump has been about basically curbing UH businesses leaving the United States and going to China. And that's exactly what would happen in many of these cases China.

If China was to come in and buy US target, at least some of that business, you'd have to think would be rerouted to China. So my answer was sort of split. I had at least three advisors um to deals meeting bankers or lawyers tell me that they are advising their clients to pump the brakes and say, well, we don't really know what this means yet, but you'd be wise to at least figure out what it means

before moving ahead with some large US acquisitions. I had several other deal makers tell me that no, you know, it's sort of industry specific, maybe, but we are not seeing a slowdown yet. Chinese buyers still want to get into the US. They have a lot of money to spend UH, and because of the uncertainty, maybe they're not convinced that a Trump presidency will necessarily mean that they

can stop making large US purchases. Alex Sherman, just to focus on deals that we already know about in addition to the Harmon International deal by Samsung previously, I know that you have reported on the Qualcom deal to acquire an XP Semiconductors that was a thirty eight billion dollar deal. During the summer, Soft Bank of Japan purchased arm holdings for thirty two billion dollars. Are there any more chip

companies or those kinds of companies left to buy? Well, the world is getting smaller, but I would say the short answer is yes. I still continue to hear that sort of everyone is talking to everyone in chip land. This is something that was enormous and it has continued on to some people really push the envelope with me

and say, you know, anything's possible here. So Uh. Some companies that we haven't really seen move yet, our Texas Instruments, Uh, they haven't made a big acquisition at this point, intel Bot Altera in early they that integration process is probably to the point now where they could buy something else as well. So yes, I would say we should probably expect a few more mega chip deals of the next year or so. Alex Srban, thank you so much for

being with us. Alex Sherman of Bloomberg News on the latest mergers as well as the conundrum of what Chinese companies should do in light of the Trump presidency. Taking a look at what's going on in the world of dividend paying stocks. Eric Irvine is the chief executive of Reality Shares, and Eric, thank you very much for being with us. Dividend paying stocks have been very popular with investors because bond yields have been so historically low. What

is their outlook now? Yeah, well, I think it's important to distinguish between, first of all, dividend paying stocks that are focused on yield and dividend paying stacks that are focused on growth, because that's been a tailor of two markets. Indeed, the high yielding stocks have been single best performing sectors or segments of the U S stock market since since the first part of the year, all the way through the end of the third quarter, and now they're almost

the single worst performing segment of the of the XMP five. Wait, we just just back up. Can you explain the difference? I mean, basically, you're talking about the dividend paying stocks like utilities or things that are just steady as you go, versus the dividend paying stocks that are dependent on um. The more you sort of the more the economy grows, the bigger the dividend will be that you'll pay. I mean you're basically putting those into two different categories, correct, Yeah, exactly,

like think of you. I think it's perfect to point out utility. So take a utility who's not really growing their earnings. They've they've got their user base, they've got their their customers, they're not really raising prices. They're just focused on continuing to maintain the business and maintain the income. So that business is going to pay out a high portion of its income in the form of a dividend, and it's going to be fairly stable. Maybe the yield is as high as three and a half fo in

that category. Now, contrast that would say a Starbucks who is growing its earnings, growing its business, and not quite paying out as much of those earnings in the form of a dividend, but still paying a nice dividend maybe one one and a half to two. Starbucks is going to be growing its dividend over time versus that utility company which is just going to maintain a stable dividend. Yeah.

But having said that that, the idea that Starbucks and other companies will grow the dividend, that's as much a hope and a prayer as it is a contract enforceable payment on a bond. Correct. Yeah, exactly, and and so welcome to the investment universe. Right. Every everything is really comes down to do you believe this company is going to continue to do better in the future based on really what what we value most, which is earnings growth? So can they grow their earnings in the future. If

they can, likely that dividend will follow. And that's the same equation or question everyone asks, even if they're investing in the SMP five index fund, is can companies in the SMPF grow their earnings? Otherwise I'll go home and take my ball in play somewhere else. Really, so, Eric, you're you're the CEO of this company, Reality Shares. Uh, You're based in San Diego. Before that, you're at Morgan Stanley for for fourteen years, and you built a group

to help people manage their money. Um, are you talking with clients right now? I mean, do you get a sense of just how skittish people feel and uncertain about the future. Yeah, I think so. And it's it's kind of ironic too, because you get a lot of complacency. We've had, you know, seven now going on eight years of positive SMP five type returns, and I think a lot of people have in a way forgotten about market

corrections and how severe they can become. It's um, you know, we all have short term memories when it comes to that. But well, just to that point, I mean, it's sort of I've got to say, I've been very confu used as bond sell off and stocks rally, at what point are people who are investing in to your point, the dividend paying stocks are even just stocks broadly going to say, you know what, we're worried about losses again, we're gonna go back to bonds. They're paying a little bit more.

At least we can learn something. Well, I think you've already started to see that, especially with these high yielders, like utility sector was the single best performing sector up until end of September almost I think at the high they're in September just on a year today, basis not exactly your Grandma's utilities toock right, and now they're only up about six percent on the year, so they've already given up nearly ten that's like three and a half

years of dividends wiped out in the course of just two months. So I think that's the that's the start of of that kind of flood out of these high

yielding stocks and into say the bond market. Now that's not happening in the growths of those dividend growers because those were basically ignored for the first part of the year to barely keeping up with the SMP five, and now all of a sudden, the industrials, the consumer discretionary stocks, those are the ones that are really moving kind of post election here, Eric, based on your experience, is there a particular percentage yield that causes more investors to flee

stocks and go into either treasuries or c d s. Is there a point where people say, you know what, I'm willing to forego X in a company that's raising its dividend, but I'd rather go buy a triple tax free muni, or I'd rather go and buy a thirty year that's paying who knows, maybe six. Yeah, it's Um, it's not as simple as it used to be. It used to be where if if you were able to earn a yield that was higher than a treasury in

a stock, do you take that all day long? And that the last five years or so have kind of confused that issue, where as bond yields have have swayed back and forth beneath the SMP yield, that's and the real trigger point. But right now what you're seeing is with that kind of the SNP at around two, if we start to see bond yields creep, then by bond yields, I mean the tenure creep above that two to two and a half, three and beyond, I think people will

all of a sudden, yeah, there we come. And I remember back to the days when you know, no client could ever or whatever even dream of buying a municipal bond that paid six percent tax free or less. And then it was five percent, and then it was four. And now I think people would you know, kill for a stock or i'm sorry, bonds that would pay something over three or four percent? What do you think is

the best bet from here to your end? We think it's the growth of those stocks that are just healthy, good, solid businesses with modest peas they can grow there, Um, Nike, Starbucks, some of these like Coca Cola, ge MasterCard, Visa, some of the just just a good alid growth companies that are out there that haven't really been given in. You consider master Card a growth company as well as Starbucks. I mean, are they growing at those double digit multiples

that would justify the price? Actually they are. And and again you know these are companies that have been around for a long time, but they continue to grow those those earnings and cash flows. And again with the growth, we focus a lot on free cash flow because we're so focused on the dividend and that the ability to

grow the dividend. But but that free cash flow growth has been double digits and it's one of the few pockets of of the SMP, Like I say, where you can actually find double digit earnings growth in a lot of these areas, and it's not easy to do with multiples as high as they are. That's the other thing is I'd say back off of the gas pedal and and just if you if you're overweight stocks right now, maybe now the time to just back off a little bit and think about other alternatives that might be a

little bit more hedged. Eric Van, thank you so much. Eric Ivan is chief executive officer at we led Shares, talking to us from San Diego. Thanks for listening to the Bloomberg PI and L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.