Trade Uncertainty Means Volatility Is Here to Stay: Clay Lowery

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. Our next guest, Clay Lowry, is managing director of Irack Creek Global Advisors, based in Washington, d C. Mr Lowry previously was the Assistant Secretary for International Affairs at the US Treasury Department from two thousand and five to two thousand and nine. He also chaired the Committee on Foreign Investment in the United States. Now. This is the committee that takes a look at international mergers and acquisitions that may

or may not affect national security interest. Clay Lowry, thank you very much for being with us. First, tell us what you're telling your clients, if you don't mind, because you advise multinationals as well as financial institutions and investors, what are you telling them about the on again, off again, on again trade dispute, trade tariff dispute and confrontation between

the United States and China. Thanks for having me. And uh, the essential thing that we've been telling people is to keep your car seats buckled because and you see it every day. I mean, there's it's slightly different every day about um, how we're how the administration and to that matter, the Chinese are retaliating, how each of that is going

to to work. And so this is actually just increased volatility. Um. We've see that in in in the markets, which um are not necessarily about the clients I have, but UM, but you see that also and just kind of how our sales going to be done, how is investment and trade flow is going to be affected, and all of this right now is there's a lot of uncertainty. And so that's all we've just basically been saying is just

prepare for more uncertainty. And I think that you see that with even the rhetoric coming out of the White House. It kind of changes a little bit every other day. And so that's kind of there's nothing else to prepare for outside of uncertainty, because that's what you have, alright, Clay, So our s buelts are buckled. We are duly prepared. What I would want to know from you. You were formerly the Assistant Secretary of for International Affairs at the

US Treasury Department. I'm wondering, can you offer us any insight into the mechanics of imposing tariffs and what that would entail so that we can have a better sense of what would have to happen for some of the proposals to be made a reality. Well to impose tariffs. I mean, they basically outlined, the administration, that is, has outlined what they would like to do in tariffs. There's

going to be a public comment period, um. And if they decide to go forward with these tariffs, and they you know, I assume that they will listen to public comment, um. And uh they're obviously they say that they're trying to also have negotiations with the Chinese. UM. But if they put the tariffs on, then they basically it will be at tax I mean on imports from China on specific items. Uh. They've outlined items that they would put a tax on. And uh, once they do that, when they start coming

over the border, they will have to put it. They have to pay a duty the importer and at least economically speaking, the importer would pass that on as it goes down the line. Presumably that would either affect businesses or consumers UM on those products that actually received that tax. Clay Lowry, what about the importation of Chinese investment dollars into the United States? Now, thank you for the that UM,

So that one is a little more uncertain. So they UM in the President's memorandum basically outlining this, they said that they were going to give the Treasury Department sixty days to kind of report back on how they would like to do see investment restrictions, UM, and we assume their investments restrictions. Actually, the words they use the memorandum are concerns about Chinese investments. So these are not national security concerns. So national security concerns are handled through a

different mechanism, which is called Scythius UM. This is about um in uh restrictions on specific investments that are outside of national security that the Chinese are making. Now that the issue here is this is not something the United States has really done much of effect. I can't remember an example in which we have done it, outside of maybe if it's like a kind of a rogue regime

like Iran or something like that. So Because of that, I think it's become uh the Treasure Department and others in the administration are working on what a how do you do this? What's the AUTHORI do you use? Um? Uh, what are the legal implications if you use various authorities? This is very different than tariffs, because tariffs we've we've done throughout our history. Investment restrictions is a very different mechanism.

Do you get the sense, based on your conversations with people who are in the administration or in the Treasury Department, uh, that President Trump has a lot of company in his sort of declarations of proposals for the tariffs. Do you mean support from from from people who are inside the administration, from people who are sort of uh career people and see this as possibly helping uh, sort of even the playing field. So I do think I think, actually, I

mean go beyond the administration. I think that if you talk to a lot of people on Congress, within the administration, even the business community, and uh the kind of academic think tank community, I think that a lot of them would say that they have a lot of sympathy for what President Trump is trying to do. They believe that China has been a poor actor in a number of areas on trade and investment, and so um, there may need to be some there's a desire for some sort

of uh more dramatic action. That being said, I think that you would also hear from a lot of people that that there's two major missing elements to what the president has tried to do. First is, um, there doesn't seem to be a strategy. What is it you want to achieve? Is it? Is it? I mean the President talks about lowering the trade deficit. That's kind of a strange way to look at things. Is the idea to basically, we want more market access for China, we want China

to treat more fairly. What is it exactly they want to achieve? I think the Chinese are confused by that, but I actually think that by the way, the business community is totally confused by that. And then secondly, um, is it would have made more sense And in fact, you saw Larry Cudlow even saying this this morning, let's try to build a coalition around us. There's a number of countries around the world who are concerned about how

China has been interacting on trade and investment. But the administration, which was warned about this over and over and over again, go out and build a coalition. There are others that are with you. What did they do? Instead? They attacked those same countries on steel in uh and aluminum tariffs which have which are supposed to be about national security, and yet they attacked the countries that actually help us

on national security. And then secondly, they didn't go around building a coalition against China so that China got the message. It wasn't just the United States that had a problem with China, it was actually the international community at large. And for whatever reason, the administration decided not to take those tactics. But maybe maybe that maybe given what you saw from Larry Cudlo, maybe he's deciding that this is maybe they need to make a small change and how

they're d to approach the president strategy. Clay Lowry, thank you so much for being with us. Clay Lowry, Managing director at Rock Creek Global Advisors, former Assistant Secretary for International Affairs at the US Treasury Department. In an era when electronic trading is moving into everything from bonds to currencies, Goldman Sacks has been steadily trying to chart out a new identity for itself and the latest is a move into commercial banking. UH, territory frankly dominated by JP Morgan

and other behemoth banks. Showing us now to talk about that is Brian klein Hansel. He's an equity research analystic managing director at Keith, Briette and Woods in New York. Brian, thank you so much for being with us. So I just first want to get a sense of what Goldman Sachs is trying to do with commercial banking and what's attractive to the bank about this business. Yeah, thanks for having me Sea. What Goldman is looking to do is really too deepen the relationships that they have with their

corporate clients already. So the relationship that they have today is more from an advisory perspective when you think about advising on potential M and A UM, and what they're trying to do now is be more of a bank to these corporate clients. By that, I mean looking to do more lending with these corporate clients UM as well as capturing deposits that these corporations may have. So there really are trying to build out the bank around this

existing relationship. So UH, one question is why. I mean, the other banks have such a toe hold into this, and notoriously, lending is a capital intensive business that kind of moves away from the M and A and the investment banking that Goldman sax is known for. Yeah, that's a good question. We also have as well. I mean, really point of time that this what Goldman laid out was a strategy to increase revenues. It was one environment when revenues were challenged, so this is one way to

grow revenues. But it is a very competitive UM industry overall. In commercial banking. It's an area where Goldman Sachs themselves have little history relative to the other big banks that kind of dominate the space. So it is an area we could potentially see incremental revenues come through. It's just it's going to be a very hard, hard fought to win those type of revenues. So the other thing it does it helps UM act as a ballast relative to

the trading business. Volatility over the last five years has been fairly low UM, so this is an area we could see recurring revenues come from with less volatility that you do in the trading business. So you can see how it could make sense longer term. It's as we do questioned their ability and executing the strategy long term. Can you speak specifically about David Solomon and what he

things to this strategy. Well, he does have a background in a lot of the areas, so he comes up to the advisory side in the investment bank, so he does have a lot of relationships with the senior executives at these corporations. Um. Where it fails to see there's a bridge right now is that a lot of these decisions are made by treasurers. So we'll have to see if he can bridge that gap between the CEO down

to the treasurer um. But he does have a background within the investment bank and have the relationships with the corporations themselves, so that's the positive. And a lot of the other new strategies, he does have a foot and a lot of those strategies, whether it was the Marcus initiative, which is their kind of retail consumer lending platform, so he's been more of a key proponent for that platform.

So a lot of the areas where the bank has been trying to grow outside of the traditional trading UM channels are areas that he's either helped to develop or where he's worked previously, so he does have a good background in these businesses. You know, Brian, I'm struck by this that Goldman Sachs is expanding into new territories, whether it's the markets platform that focuses on consumer lending, or

whether it's commercial banking. And this sort of is echoed by Jamie Diamond over at JP Morgan with the investor letter that he put out, which basically says, we're expanding everywhere, anywhere you can go, we want to be There is there a concern at all on behalf of analysts like yourself that some of these banks are perhaps moving outside their wheelhouse and getting too diffuse and possibly could increase the risks of underperforming more broadly as they expand. Yeah,

I mean we think there is. I think Goldman is a fairly good example of expanding into the consumer business at a period where you've had generally what we consider benign credit conditions, meaning that you're not taking a lot of losses on the loans that you're making in the consumer business. Um, but that's been fairly you know, five

years of low losses. That could change at any point in time, and if you don't have a history in that business, it could all of a sudden become very challenged to matt manage credit managerings being its revenues in those businesses. So it does seem to be what we

would call late cycle growth in the consumer business. It does raise yellow flags at this point, not necessarily red flags to us and to investors, but it is an area where you're trying to grow um and we would argue that they're trying to grow aggressively in an area where there is little history for the company. So I mean, certainly is a yellow flag at this point in time.

Just a quick point Brian that if we see increase in interest rates, won't this help the bond trading business, And in a sense Goldman Sachs looking to expand in areas that maybe it is a little too late to the party and maybe just focus on what it does best and wait for the cycle to turn. I mean, it certainly could. So. A lot of the revenues are generated in the bond trading business are based on the steepness of the Yelk curve. So as long as the long end keeps moving, us the short term rates and

that's generally a positive for the trading business. That also could mean I think we want from a corporation perspective is are they committed to this business? And that's exactly to your point. If you see a big pick up in trading revenues, are they going to still want to maintain these lending relationships in this commercial banking relationship blogger term or really simply switch back to being more focused

on trading. I think at this point in time, the fact that they really haven't built out the commercial bank, I think it's gonna be a challenge for them to grow commercial banking clients as a result. And I think that's the risk, and I think all the corporations will be asking the same question, is you know how what it are you to this business that you want to take our um business from us. I want to thank

you very much for spending time with us. Brian Klein Hazel Handel is equity research channelist for Keep Briette and Wood. Speaking about Goldman Sachs right now, I want to turn our attention to Hugh Son, Bloomberg Finance reporter. He just wrote a phenomenal story for Bloomberg Markets Magazine which we're

gonna get to in a second. But before we go there, Hugh, I know you've got a deep knowledge of JP Morgan, and given the fact that they just had their annual meeting and released their annual letter to shareholders, you know, what's your big takeaway for what JP Morgan's goal is in the year ahead? And this solidifies UM. Thank you for having me. This solidifies UM something that I've been that's been sort of coalescing in the back of my mind for a little while now, which is UM. You know,

they're they're the aggressors in this space. UM. So for an example, UM, JP Morgan. You know, they gave some comments about what they were gonna do with UM online, brookeradge and UM. This is on their investor day Febru and all of a sudden you see Charles Schwab and a few other UM sort of broken stocks UM move up by five percent. And that's because the markets interpreted that they weren't going to aggressively go into UM. You know, UH free online robo advising just one example of you know,

of their impact in the market. So wherever you look in finance, they are the aggressives, whether it's deposits, fixed income, credit cards, Trust Advisory. I could go on and on, and in my mind what was coalescing is just sort of this idea that they are kind of becoming the Amazon of of finance. Okay, they want to be the Amazon of finance. Can we say that there are a variety of competitors who might have a different view about the um in the banking space, Well, I mean there

are City Bank there as well as Fargo. There's a Bank of America, Morgan Stanley done very well with their wealth management division, which is now trying to get to commercial banking. I bring it up only because you know, we've heard before about the one stop shop. Absolutely, and you should be skeptical. Sure, yeah, And you know, I note that one of the quotes from Jamie Diamond is talking about bureaucracy, right, and he's not a seemingly not

a fan of bureaucracy. And I mean, I gotta say you ever hear anybody say that they are a fan of bureaucracy, that they think it's just wonderful and great and it helps me wonderful businesses. Well, how are you going to manage all these wonderful new initiatives if you don't have a bureaucracy that can actually execute. Yeah, I mean so a lot lots of good points. I would say there's a reason why, um, other other members, other financial players are watching Jamie Morgan and and and it

stems from a lot of the adventus they have. They have the highest r o E, they have most deposits. Um, they have Jamie Diamond, who's you know who doesn't He doesn't deliberate before entering markets suggressfully at times as much as others. Um as an analyst talk to relate to me, you know, he says, other other banks are happy to let JP Morgan go first in some instances. And so you know, um, whether or not you know the other the other banks, it's not as that they're going to

go away. But the JP Morgan, if you look at you know, if you if you read the letter, they see opportunity everywhere, even in places they're they're already number one. What does that tell you? That tells me if they want to rally their troops and have some ambition as they plow forward and take over the world. I do want to I do want to get a sense though you know, they have brought ambitions in China or Asia Born broadly, they have brought ambitions even in fixed income

currencies and commodities. UH, in wealth management they want to manage money for very rich people. Who doesn't UM, But I do want to talk a little bit about some more fundamental challenges that JP Morgan faces along with the rest of the banks. And this goes to really what you wrote about, uh in the Bloomberg Markets article, which is the technological infrastructure of these banks is becoming increasingly crucial.

And in that race, who's winning? So yeah, I mean that the story we wrote, UM, you know, sort of an epic tail UM and it's online right now about the arms technological arms race in you know, arguably the most iconic trading market UM in the world, which is the stock market. UM. This is another instance in which the advantages of scale become greater and greater over time. UH. And and one reason why people are concerned about Japan

Morgan's entry into the space. UM when you have when you have a leading you know, so it's sort of top The thing that's said is that only people in the top three inequities make any money. Why is that? That's because if if you're not on the top three you're essentially subsidizing the business. And in order to spend enough money in enough money on technology to remain current, UM,

you need to be making a lot of money. And if you're not in the top three, you're you're essentially not clearing the hurdle to make enough money to invest to be relevant tomorrow. And that's what you've seen happen to a lot of players. Top players like Credit Sweets, who was maybe number two or number one just a few years ago, fallen a lot since then. UM. JP Morgan is has you know, grown by leaps and bounds, UM in this space. You know, Goldman Sacks was number

one just a few years ago. They had thirteen billion in inequities revenue in two thousand and nine, I want to say a high water mark. This last year they had about half of that. What did Jamie Diamonds non JP Morgan chase ambitions? You know, I mean every time he he goes, he rattles off on these long, you

know letters about what the United States should do. UM. You know you have to think and ask yourself, as this guy eventually want to be president, and UM, you know he said on the record, you know, look, I I'd love to be President's never gonna happen. I'm not gonna run. And so you know, you think he's going to be involved in some way in in the public discussion because he seems to be and it seems to be genuine on some level that he's passionate about these

big picture problems that that the country faces. So just just moving forward with respect of the technological arms race. UM. Do you have a sense of who's winning? Yeah, look so JP Morgan UM. In many ways, it's it's a three way race between JP Morgan, Goldman Sachs, and Morgan Stanley.

Morgan Stanley has for the past few years been number one because they have this lineage UM in essentially the type of technology, the type of trading that has become in vogue as you know, quants UH quant hedge funds are really the only UM asset class taking in tons and tons of money in the past few years to signal rentech. Those guys have just amazing track records UM and so Morgan Stanley was best position for that, and JP Morgan came in a few years ago decided to

make a huge investment. You know, people talk about JP Morgan like they're the army. You know, when they want to invest, they're going to do so and come in guns blazing. And then you know, golden sacks never count golden sacks out right. Those guys are you know, or devious. And when they decide to um turn around and and and and strategically shift, they're going to commit to it. And so between those three they're all making huge strides right now. It's Morgan Stanley and JP Morgan who you

are priming with if you are a quantitedge fund. Thanks very much for being with us. Hughs On, our finance reporter for Bloomberg News. You can follow Hugh on Twitter at Hugh Underscore on s o N. Peter Lynch, famed investor from Fidelity whose book One Up on Wall Street taught investors about something called invest in what you know. Sir John Templeton, famed investor, described the maximum point of pessimism as something as a psychological ally in his investing thesis.

Here to help us talk a little bit more about these topics and how to apply them to your portfolio and to making money or rather not losing money, is Cole Smeed. He is managing director and co portfolio manager of a SMED Capital Management. They are based in Seattle. He helps to manage more than two point two billion dollars of customer assets. Cole, thank you very much for

being with us. Maybe just draw on both of those famed investors and their description of how to use what some might describe as common sense without common emotion when it comes to investing. Well, yeah, I mean and Lynch and in Templeton are you well thought of, But there are many other investors that have applied, um to your point, PIM good psychological discipline in investing. Um, the most common thing we would say as a firmer, I would say it as as someone that that works in this field. Um,

you have to be willing to do something different. So you know, even if you, as Lynch said, you know, you invest in what you know, Um, you want to get a good price and that usually has to be something different. So um. So it's the beauty of it today is in many ways the field is just as new as it's ever been because of what most people think are the roadblocks to be a successful stock picker, as Templeton and Lynch were. Okay, so let's talk about why you think it's successful or it's a good time

to be a stock picker despite some of the roadblocks. Yeah, it's a great, great question, Lisa. I'm actually gonna, I'm gonna, I'm gonna put a shameless PIM plug in here. I was listening to the surveillance. I think this is about six seven weeks ago. Pim. You'd recommended a book by the title, uh it was called The Heart of the Matter, Okay, and talked about kind of the risks the doctors had taken in the in the fields and the study of the Heart. And I read it and it was a

great book. I appreciate the recommendation. But one thing that I pulled out of it, there's a great picture of today. In the eighteenth century, one of one big problem was when people get aneurisms, how to deal with those. In the eighteenth century up until about seventeen eighty, we dealt with those by two ways. We either um one blood let or two. If it was aneurism you've got in your leg, we just you know, we would effectively cut off your leg. We'd amputate it. And that same thing

as going on in the investing field today. For example, we are blood letting blood letting was done to reduce pressure and effectively reduced workload. Welcome to passive investing as its practice. It doesn't mean it's improving the the underlying patient's health, but it's accepted much like blood letting was in the eighteenth century. The other thing that we're doing today is institutions have cut themselves off from public equities altogether.

I call it institutional amputation. The question, though, is is it helping the underlying investors to meet their needs or the institution to meet their goals? And and it doesn't spell as though it is. Well Cole all right, First of all, thanks thanks for the comment about the book, and I'll give you a couple others. The Heart Healers is another great book by James Forrester. Uh. The other book,

The Matter of the Heart, is by Thomas Morris. And one of the things that I took take away from both of those books is we're talking about people who are mavericks and misfits because they are willing to do something and to behave in a way that is not conventional, because they are willing to take risks that then result in some empirical response. In other words, it's tested in the real world. And you know, we like to say they eat their own you know, cooking. In that case,

it's meat capital. What are you people doing right now perhaps to take advantage of all this volatility and the downtrend that we're seeing recently in docks. Sure, So so to what I call it, what I cavy out this under is I put it under the heading of how can we improve the health of the underlying patient, or, as John Hunter did with aneurysms, how can we improve the quality of life. So, for example, um, if blood letting is what some people would do, let's examine blood

letting today. In effect, blood letting is nothing bigger than a big tech bet. Okay, if big tech does not do wealth for blood letters, returns will be very poor. So there's kind of too risk one that they could

do poorly in returns. Uh. And in those big cap tech stalks that are well liked, well adored, well followed, well covered by the street, and something that is not unique, as you pointed out, it's not different, um, But the flip side would be that you'd have to be asking for a greater encore than they've just had, the problem is, if you look statistically speaking, Um, you know, they've had quite a great run. And the question is how how often does that happen? You know, these things are cycles.

Humans are humans. So I'd say from from that context, it just doesn't look like it's improving the underlying health of the patient or the quality of life versus. Hey, let's go into places like retail in media, which is getting excoriated in this environment despite the volatility you mentioned.

There's merit there, there's there's there's returns that could be had, but you have to be willing to not blood let in this market environment, which, as we can see, you know, the flows are just horridly the opposite way that people want to blood let. And the question is how often does everybody want to do something does it benefit the

underlying client? I want to push back a little bit because the underlying patient, frankly, has done brilliantly by investing in e t f s and passive funds, the track equities and risk your debt over the number of years. So I'm just trying to figure out, you know, how do you convince people that now is different when frankly, active managers have been saying that for years. Yeah, well,

when we you can track. This is Dalbard produces studies looking at what does the active investor do versus what did the passive investor do over the same time periods and the longer the time period. Dal Bar's work shows that the active investor one when and that what they're tracking is what did the underlying client do, not necessarily what the funds did and or if they poured in the top they pulled out the low that affects the

investor return. Um So, so the longer, according to dal Bar study, the longer the duration of the investor, the more alpha they gained over being a past investor when they chose to be active. Okay, so we work in long duration time periods. I know no one that is trying to invest for the next three years to fulfill their needs of their life. We're talking ten you know,

in my case, god willing fifty plus years. But I say that because you know this idea that um you know, oh it's for example, dal Bar studies show that it's worked better to be a past investor last three years. So my question is that that's just a placebo effect. The old thing is, do not confuse uh, do not confuse brains with a bull market, and I would argue, much like you said, it's been great returns. The only problem is wearing a bowl market. What does a tough

market look like? And the question is is the blood letting going to be the appropriate thing for people to do in a terrible market? Cold Smide, thank you so much for being with us. Cole Smide, Managing director and co portfolio manager at Smide Capital Management, with two point two billion dollars under management, making the case for active investors. Thanks for listening to the Bloomberg P and 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 Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.