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Alex see you alongside Paul Sweeny and John Tucker. Let's go back to that ism manufacturing data because an ism manufacturing and read on the employment side was what really preceded that weaker jobs report that we saw in August, So it might set us up then for this Friday and the jobs report. Tim Fury is a chair for the Institute of Supply Managements Manufacturing Business Survey Committee. Hey Tim, it's great to see you. So is this number good? Is it bad? Is it the same?
Well?
Good morning, So you know, I think it's a little bit of a misnomer. So you know, we came in a little bit lighter than people thought. We're a little bit better than last month. But if you look at the three elements demand, output, in in puts, the biggest reason for the lack of slowing down even further is the fact that our manufacturing inventory number came up surprisingly.
So overall demand is still elusive. It's hard to find. It's still not there.
Okay, fine, backlog is still contracting, not quite as bad, but it's still pretty bad.
On the input.
Side, we had suppliers are living a little bit slower, but not a big deal, probably stable month a month. The big surprise there was really manufacturing inventory is popping up to fifty point five when it's been historically.
Forty eight or less.
So, but I think that's really a timing issue between reduced output and trying to slow down the inputs, because the real story here is on the output side, with production coming down again for the third straight month, which really means revenue.
Good surrogate for revenue, And as you.
Mentioned, Alex, the employment numbers is continuing to sag and in fact, in this month's evaluation, almost sixty five percent of our force reduction actions were layoffs, which are the highest number we've seen so far.
Tim.
When I'm looking at the ISM manufacturing data, what am I looking at? What industries are most notably represented in that data?
Point?
Well, the big six are you know, your first one is chemical products, and you have transportation equipment, You've got computer and electronics, food and beverage, those two are kind of intermixed. You got fabricated metal products, machinery, and those are the big six. Those make up seventy percent, seventy two percent of manufacturing GDP, so you know, they're pretty strong drivers.
And if you look at five of those top.
Six, the inventory number actually broke fifty, which we haven't seen in probably a couple of years. So I really think it's a timing issue. We weren't able to slow down the inputs as fast as we really wanted, and I.
Think it will self correct itself. So if you take that.
Number and you do a normalization where it would have been based on what's happening last month, you're probably down that same range that we were at last month. So you know, the summary on this is is that don't really see demand coming back before the end of the year.
It's a combination of interest rates.
We got good news last week, obviously, but there's a lot of other issues here around the election that are really coming to play now. People are they're really holding back waiting to see which party actually tastes control and how significant that control will be. Demand is the problem has been the problem inputs are kind of overwhelming the output side. The output sides continuing to sag. So not a great story here, but you know, no big surprise.
We saw this coming last month.
This report pretty much validates where we were last month, and that is that manufacturing and slowing down. It's not in a super dangerous category yet it's in a yellow area. We had fifty three percent of overall manufacturing GDP contracting, which was better than last month at eighty four percent.
I think it was. So, you know, not a great report, but not catastrophic either, but.
Great, great insight and really helps set us up and understand how we are headed into Friday Jobs Friday. All right, Tim, thanks a lot. Tim Fiory, chair of the Institute for Supply Management's Manufacturing Business Survey Committee. So then it's surprise that you still the S and P off by one point two percent. There may be some other factors obviously going on in that, but it also explains the continued dip.
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This is Bloomberg Intelligence Radio. We are broadcasting to you live from Interactive Broker Studio right here in Midtown Manhattan. And if you are listening in Boston, our new home starting today will be ninety two nine FM Bloomberg Radio moving to nine to nine FM in Boston starting today at Newton So follow us on that, all right. Going to the markets here, we're right around the lows of the session. I have read so many notes about how bad September is for equities. I'm very much not surprised
by the downdraft today. Grace Lee joins us now. She's a senior portfolio manager at Columbia Thread. It'll joining us from Boston, Massachusetts. Grace, do I just you know, glaze over today and say yeah, okay, seasonality whatever and move on? Or is there something real going on here?
Well?
Alex, thanks for having me.
I think we when when you look at August, August was actually pretty strong. So uh, you know, when we come back from vacation and people are kind of back to reality and looking at what is historically a not so great month for stocks. I think, I think it's worthwhile, but this is not anything to be alarmed about. It's it's a bit of a breather and the market certainly need some of that every once in a while, So overall, not not particularly concerned. It's I think it's somewhat normal.
And and again there there is still green on the screen as well, So it just depends on where where people choose to look. So I think there's there's a number of defensive type names that are doing holding up just fine, and even in a tough market today, in a.
Tough market like today, or just in general here as we head into the last few months of the year, am I still banking on the big tech stocks grace or should I be looking for other areas in the market, other sectors, maybe for value?
Yeah, I think as a value manager myself, I always think value is an interesting place, but in particular given that, you know, I think tech has certainly done very well and continues to post very strong numbers. But I think if you look at some of the estimates.
For the non mag seven stocks, those are projected to do somewhat better in the second half of the year, and I think We've already seen the broadening of the market, you know, with sectors like utilities and reads posting double digits in the last couple of months. Ever, since that big July CPI print came out, I think that really shifted the tone of the market to people looking forward to the first rate cuts.
So before you move on to sort of what other stocks are good, did you mentioned tech? However, everyone still wants to own AI. So on days like today, like do you buy the dip in video or do you just sort of like hold those tech positions of where they're at and then put the new money to work somewhere else, like in consumer or staples or something.
Well, I think a lot of people are spending a lot of time wringing their hands over how to be positioned in in the big tech stocks like in video.
You know, I think.
There's still I think most people probably have enough exposure at this point. You know, I think it's probably wise to look at the other sectors where people have not you know, they go to them every once in a while, but I think people need to really change their habits
a little bit. It's been a always return to growth, you know, after some of these shakeouts, and you know, maybe people need to stick a little bit more to the center or more toward value, especially as we are seeing rate cuts and some of the sectors that have been parked by that are poised to do a lot better. And that if people are concerned about recession or so then you know, you do have a little bit more room in defensive names.
To hold up so grace. As a dividend focused manager, if Tim Cook walked into your office today, what would you tell him about or what would you what would you suggest to him about a dividend policy For a company that's got you know, one hundred and fifty billion in cash on the balance sheet, one hundred million dollars for free cash flow every year, what kind of advice would you give him vis via a dividend policy.
Well, I think it's up to every management with that type of cash flows. It's always welcome to have, and I think it does broaden the investor base quite a bit when you have a reasonably meet full dividend and you're still able to invest plenty in your in your business in order to grow, you know, but it's it's
it's a different balance for all all types of companies. So, you know, but I think certainly dividend investors would welcome, you know, an increase in any of the big tech names if they wanted to to increase their dividends.
I don't know, Paul, what would you say.
I would say, give me a two and a half three percent dividend yield. And I've said this one already said university and campus. I've told him. Then he just kind of.
Brushed me on.
He says, okay, thanks, Paul, Bye bye, I see you later. Okay, So great's final word? If I want to get defensive here, what's my best bet?
Well, we still think that that some of the real estate stocks actually look pretty interesting were we've been involved. But uh, you know, the other day I looked at a couple of them, and they still look very attractive in terms of absolute historical valuations and and getting the tailwind from rake cuts. They've been probably some of the most pressured names of the last couple of years. So I think, you know, you've got names like Simon Property, which is the big mall owner.
That is trading at fifty two week highs but is still.
Not extremely expensive and really is very well positioned overall. And still has I think close to a five percent dividend yield, so we think names like that still have room to go.
Grace, thanks so much for joining us. Really appreciate getting some of your time.
Grace Lee.
She's a senior portfolio manager at Columbia thread Needle in Boston.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple car Play and Android Otto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
Happy Tuesday, Everybody. Alex steal Here alongside Paul Sweeney is Boomberg Intelligence Radio. We bring you all the top news and business, economics, finance, and politics. There are lens of our Bloomberg Intelligence folks. They cover two thousand companies and one hundred and thirty industries all around the world. We also tap our deep resources coming from Bloomberg News and print to cover all the top stories. Now this caught
my eye over the weekend. I try to check out when I'm on VAK, but this one I really had to read in because Volkswagen is turning on Germany that the company is considering factory closures in Germany for the first time and it's eighty seven year history. Not only does it part with this tradition, but risks of feud with unions in a step that truly reflects the heartache that is happening within the European automakers. So we want to get more on that with Stefan Nikola, European Automotive editor,
joining us from Berlin, Germany. So many layers to this stuff on. But are they going to are they going to cut factories or is this like a threat to the government or something.
Well, we don't know for all, but what we know for sure is that a lot of car makers in Europe are having issues, and Volkswagen is right at the front of that. There is over capacity in Europe. Car sales never really returned to levels before the pandemic. EV sales growth is slowing, and we have new competitors like Tesla, like some of the Chinese entrants that make their life difficult. So you know, it could very well be that one or even more factories we'll have to close.
Stefan talk to us about that Chinese competition, because there's no Chinese cars to speak of here in the US. Talk to us about how it is in Europe.
Yeah, of course, in the US, the Chinese can't really make an entry because of the tariffs there and the trade tensions. The EU has answered, as you know, with its own set of terraffs. But you know, the Chinese car makers have started to expand here in Europe since early last year, and the big brands by d MG, which is now owned by a Chinese company, Jily, but also some of the smaller ones are offering electric but
also combustion engine cars at a discount prices. So they're really you know, producing very cheaply in China and selling at a quite affordable and competitive competitive price here in Europe. So you know, they're making in roads. They represent about ten percent of new sales, so a significant you know, competitive competition already, and they have plans to expand more produced locally even so, yeah, it's only going to get more intense competition here in Europe.
What I don't understand is my impression of just working in Europe is that unions really rule the roost. I mean, where unions allow this, Like, what what's that dynamic?
Yeah, it's a it's a difficult dynamic to say the least. Unions will fight this, that's obvious. They will try to sweeten any deal. You know, no company in Europe that has a major union presence will be able to do this on the cheap, So folk Sagen will have to pay sort of considerable uh you know, payoffs to any any.
Workers it will let go.
But of course unions also understand that the European automotive landscape is changing, that label costs are relatively high in countries such as Germany, but also Belgium, where an Audi plant might go. So it's a fine fine line that they have to to walk. But for sure they will not go down easily on this front. And and there's there's gonna be hard negotiations to come in the coming months.
All right, Stefan, thanks so much for joining us. Stuff on Nicola joining us. He's European automotive editor for Bloomberg News. Joining us from Berlin, Germany via zoom Again. That looks like tough times in the European One of the questions I have just thinking about the longer termanys why are they not buying as many cars as it did pre pandemic? Are we not the same here in the US. I mean, I don't know.
Oh, I don't know. Let's see you. I feel like I should know this off the top of my head.
But I just I mean, I know they're not.
Yeah, I'm looking, so I'm like.
I mean, what are you doing if you're not buying a car? How are you getting around? I mean, like me, I go my Vespa scooter.
Maybe in Jersey, maybe talkers don't. Maybe you just don't have as many. So I'm looking at where we're are in cars. We're not where we were pre pandemic. Yet we're definitely not where we were during a spike during twenty twenty one, but also not during the pandemic, but not by a terrible amount. I just think it's it's also more about the cars that they are selling in terms of say, evs are just not profitable, so they have to spend all this money and then they don't
get the money back. Like that seems to be sort of the issue and how Germany then deals with it. But that was a story that really caught my eye.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa playing Bloomberg eleven thirty.
Ale Steel, Paul Sweeney live here in our Bloomberg Interactive Brookers Studio, streaming live on YouTube as well YouTube dot Com search Bloomberg Podcast. That's where you'll find us. And if you're listening to us in Boston and in New England, our new home starting today will be ninety two nine FM Bloomberg Radio moving to ninety two nine FM in Boston starting at noon today. How cool is that? That's a big stick up there, So that'd be good for our friends up there in New England. Marvin Lowe, he
joins US senior Global market strategist State Street. He's up in Boston. He's all fired up for that move to ninety two nine. Hey, Marvin, I got what is it? You're in the marketplace here? I mean, twenty nine companies hitting the bond market today. What does that tell you? You know what?
I didn't realize that the calendar was that heavy. And it's interesting, right, especially if you think that the FED is going to start cutting that, you know, corporate America. Corporate treasurers are just marvelous at really understanding the markets in a lot of ways better than we do because they're they're trying to figure out how to how to deal with their funding costs. There must and and and I think we're seeing that in some of the price actions.
There's got to be an increased amount of recessionary concerns making their way into the market, because for them to want to come in when they know rates are are likely going lower must mean that they're worried about access. And that's, you know, that's the telling market narrative, if you will.
So what do you think that the potential for upside or downside is for them? I mean, we have some key risk events, right, so where is the where's the risk profile at this point?
Yeah? For sure.
I mean the data this week is is top tier. We're going to get a real perspective on this twenty twenty five versus fifty. You know, we'll get a sense of if.
Bad is good or bad is bad, if.
You will, you know, I think the real data point that's going to define what this quarter looks like is that job's number and whether or not kind of the slowing that we saw at the end of the summer, at least with the July job support which kind of set off kind of the recessionary concerns. Is actually the trend? You know, are are we really slowing the jobs market to the degree that you know that one hundred and
fourteen thousand print last month indicates? And if we are, then the som rule and everything about recession is a legitimate market concern kind of going into the end of the.
Year, Marvin, for better or worse, it's is an election year. How does that typically factor into your calculus or do you kind of try to put that to the side.
You know, I try to put it to the side. I mean, it's close. We know how heated this election is. The FED itself kind of changed their November meeting to Thursday rather than Wednesday in the event that the election has created a lot of market volatility, So you know, you have to take it seriously. The data leads us, however, in terms of what the reaction function from a financial
conditions perspective is. So we're more focused on non farm We're more focused on what the data is telling us and whether or not what seems like a fairly aggressive rate cutting path that's expected for the FED this year. You know, four cuts this year potentially might be underestimating the economic weakness, but the data is going to guide us to the answer around that.
So already with one hundred basis points, we're looking at one fifty basis point cut. It sounds like you're of the mind that we should and maybe have more than that if there's more economic weakness.
You know what, I'm still in the camp that's a very methodical one per meeting through the end of the year makes sense. I'm still in the soft landing camp. But in terms of market pricing, if you're not worried about reacceleration of debt, the only other part of the discussion is that the economy performs worse than expected. And from that perspective, you know, I think that the market is going to price in a little bit more and could probably get more aggressive if the data really starts
to move in that in that direction. We're not in the camp of that. We haven't really seen it. The jobs market still looks like it's creating a decent amount of jobs to kind of keep the consumer engaged. But every data point is live.
Marvin, You're a senior global macro strategist, Where do you see the macro opportunities on a global basis these days?
Yeah, you know, I think I think on the currency side of things, some of this dollar weakness probably went a little bit too far. I think kind of this volatility that we're seeing within the markets are going to uh provide an opportunity to buy the dollar at least against maybe some of thehigher data currencies. I think what we're seeing out of Japan is super interesting. Uada and Japan itself is in a bit of a bind when
it comes to inflation. They should have higher rates, So you know, you kind of hope that that doesn't create the amount of volatility that it did earlier this year. But you know, certainly I think that the market is on edge based on that, and really from a rates perspective, if you don't think the Fed is going to be able to be as aggressive as the market is pricing, or if you think that it needs to be more aggressive, you know that that's kind of your call. There definitely
is curve trades around it. You know, we're in the camp that curve steepening is still a trade that you could put on even if the FED doesn't necessarily reach what the market is pricing right now.
Marvin, I guess my other question, though, is how influential do you think the dollar is going to be to all of this? Because we were talking AMIGAILT. Dilittle, she does technical she also does market research for US here, and she was saying that the carry trade could really also be unwinding again with the yen rally, and I'm just wondering, when you look at that global sphere in addition to the US, how much is hinged on it and how much of the is that US just making a big deal out of nothing.
I mean, the dollar is always the most important currency in the world. Our analysis in terms of where we potentially are with the yen carry trade is that most of it's been unwound, So I'm not expecting a lot of volatility to come along with kind of the stronger yen as we see now. It's ultimately one of the harder things to try to figure out in the market.
You know, for the dollar not to be important, however, really does have to get towards its position as a reserve currency more of an intermediate term type of discussion, and you know, I just don't see the dollar being toppled anytime soon. In US exceptionalism when it comes to our companies and the earnings potential and really the technology advancements that are driven by US corporation still still seems like it's intact.
To me, Marvin, American exceptionalism as it relates to the economy. Is that something you buy and if so, how does that reflect it in kind of your outlook?
Yeah?
I do buy it. I think that, you know, I really think that the companies that are developed in the US in terms of kind of new business models, the ability to find capital, and really an advanced capital market environment that allows companies to not only wind up in the US, but really those ideas to incubate in the US is something that that other countries other parts of the world would like to replicate, but they just can't.
Some of that's because of the reserve currency. It's the fact that we've got the liquidity that allows that to happen. But you know, we were talking about in VideA. Everyone was talking about in video pretty much around the world all summer and certainly last week, that business model. It's it's not an accent that it's here. You know, its founders are not American, and I think that we're going to continue to be able to germinate that type of
business model. She really puts the US in a position where our capital flows benefit from that.
Yeah, but we're the ones with the huge deficits, not that other countries don't, but we're the ones with the ginormous death deficit that's not going to be fixed no matter who's in the White House.
Yeah, yeah, I mean, it's it's it's one of my self box issues for sure. I am in the camp that I'm in the camp that that you know, Washington needs to get it, get it right. They've got to start to acknowledge it the correct way. And unfortunately, you know, all the actors in Washington have weaponized the concept of the deficit to the point that it doesn't exist from that perspective. It's going to be up to the markets to ultimately shutter and get them to focus on it.
But that doesn't really change the fact that the US still has some advantages that you know, we're going to be able to retain. But but hire yields, But I'm sorry, but hire yields are something that we should definitely think about from a longer duration perspective.
Yeah, exactly, like we're kind of stuck with them for a little bit. Hey, Marvin, really appreciate it. Thanks so much. Marvin Low joining us from Stay Streets.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa play Bloomberg eleven thirty.
All right, Alex, you ol BOLSWEENI live here in our Bloomberg in Director Broker Studio, streaming live on YouTube as well, so you can check us out there Bloomberg Podcast. That's how you can search for us, and in Boston ninety two nine starting in just I've been called six or seven minutes noon Eastern time up in Boston, Bloomberg Radio will be a ninety two nine FM. How about that?
All right?
Citadel Securities Jane Street Group, two of the largest market making firms in the US, are on track for record annual revenue halls as they further encroach on the big banks trading territory. Catherine Dodhugherty joins us here. She's a financi reporter for Bloomberg News. She joins us here in our New York studio. Where did these guys come from? Citadel Jane Street? If I'm Fidelity, from I'm a hedge fund X, I'm calling these guys to do my trades right.
So a lot of trading isn't happening by phone, and that's part of the story of how these firms have become so prominent with electronic trading, A lot of it is happening offline or off of the phone. And so these firms are developing algorithms technology that is helping just
facilitate faster trading and that trading. The pricing is becoming tighter, and the banks are having to compete with these market making firms because they need to provide pricing that is competitive and gives their institutional or retail investors the best price for what they're either looking to buy or sell.
How much money are these guys like Citadel and making off of this, like is do they care? Is it a lot for them or what?
It's billions? And these two firms are on track. Twenty twenty two was record years for both of them, and it's looking like twenty twenty four might beat that record year. So for Jane Street that's over ten billion. For Citadel it was seven and a half in twenty twenty two, and that's not close to what the big US banks are making in their trading arms, but it's a significant increase when you just.
Look at the year over year jump.
So for Citadel Securities it was an eighty two percent jump. I believe it was seventy eight for Jane Street. So just the growth is extraordinary, and the banks are starting to look over their shoulder and say, a second, it's not if your b of A or your JP Morgan. It's not your big US bank competitors that you're worried about, or even European. It's these market making firms just looking at the growth and the market share that they're taking each quarter.
If I'm Morgan standing Goldman Sachs, do I care I'm losing this share? Am I fighting to keep this share? Is it a profitable business? How are they?
How would they fight for it? At some point? So there you have to invest.
You have to invest in your people and your technology, and yes they.
Are I don't.
I don't know if they're going to broadcast that they're saying, oh, we're worried. I think that most of them would say we're fine and we're competitive. But if you don't invest in put money and balance sheet into supporting these trading businesses, you're going to lose out. And in terms of the big banks with investment bank with trading, that's a significant portion of your yearly revenue.
So if they don't. Okay, so they say they're investing there, say that they're competing, but clearly that must not be the case in some ways. If you still have a Citadel's Jane Street getting more and more market share, how do you think that this plays out? Like? Who is it more important to?
So the market is also expanding at the same time that these marketing the pies are growing. The pie is growing, So it's the banks are able to make more money and these market makers are able to make more money at the same time. Now the portion of the pie will that change so that the market makers over time take more.
Even as the pie expands.
That's what we're tracking, and it does look like they if they keep up this momentum, it's it's going to become potentially a problem for the big US banks, especially those like Goldman that rely so heavily on their trading as their core money making unit.
Jane Street Citadel Securities. These are private companies right, yes, are there? I mean they seem like pretty good businesses or do they think about going public anything?
So Citadel Securities has said that it would be right place, right time, is kind of what they've broadcast. Their CEO has talked about their expansion, but he said, we're in no rush. It's definitely on their radar.
But they're not.
They're not forced into going public anytime soon. So they would only do it, and they're positioning themselves to go public, but they would only do it when they feel that the market has stabilized that they would get the best pricing. There's not as much uncertainty. I would say going into the twenty twenty four election, it's not the best time right now, but I would after the election, if things have are looked stable, we could see a public offering of Citadel in the next handful of years.
I mean, i'd be huge. I think this would be an enormous IPO.
No, it would, I mean, just based on the financials, their return on equity, it would likely be priced competitively. I would say I'm not the one that I wouldn't be here talking if I was the one doing the financials to see what they would actually fetch if they were to go public. But just looking at the appetite
in the credit market. Jane Street and Citadel both have loans, so that's why they're going to their investors, and these are credit investors to show their growth over time and just the appetite for the debt that might reflect that. In the equity market, they'd also be perceived quite positively.
Catherin Darty great, so I appreciate kath dartiy fan reporter Bloomberg News.
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This is Alex Steel alongside Paul Sweeney, and this is Bloomberg Intelligence Radio. We cover all the tap news and business, economics and finance through our lens of our Bloomberg Intelligence folks. They cover three two thousand, two thousand companies and one hundred and thirty industries worldwide. Once a week. We also tap into our huge arm of resources over at Bloomberg
n EF. It's take it for New Energy Finance, and they go through and they cover commodities, power, transport, industry, buildings, agricultural sectors, technology, sustainability issues. It's all in part of the energy transition, and a big part of that is how we finance that well. Trina White is benef sustainable finance analysts and she joins us now on the role the big banks are playing in the energy transition. Trina, how do you measure that? First of all, because you
can make an argument that, okay, we'll forget it. If you're lending to Chevron then doesn't count, or a big oil company. But those big oil companies also do other stuff in the energy transition. So how did you measure everything along this line?
It's a really great question.
The primary climate impact that banks in particular have it looks a lot different from a real economy company like an oil major or like a steel company. Instead of their operations, it really lies in the deals that they're doing with these companies, So the projects they're financing, the pipelines, the drilling, but also the solar projects and these newer,
cleaner companies that they're helping to access capital. And so how we measure this is through a ratio called the energy supply banking ratio, and this is the proportion of the financing that banks are facilitating toward low carbon projects
and companies to that of fossil fuels. And your specific question on oil companies is a great point because all of those oil majors are also beginning to make investments in clean so will sort of portion the amount of financing that is going to those oil companies the amount that is going toward their low carbon projects versus their existing fossil operations.
So I would think most banks, I'm i can say all banks, but most banks they bank the energy sector. Everybody's got an energy team. Are they banking both the fossil fuels and the new energy? Are they doing both?
Absolutely?
So what we see globally is a ratio of about seventy seventy three percent as much low carbon financing as fossil fuels. So for every dollar going to fossil fuels, about seventy three cents is going toward low carbon solutions in twenty twenty two. Most of these banks have a pretty diversified portfolio. It really depends regionally. So in Canada, for example, where the economy is super tied to energy exports of traditional oil and gas, we see really low
ratios about zero point three zero point four. In Europe, where low carbon is much more developed and there's more of these companies and projects for banks to finance, we see a ratio of about one point eight, so much higher.
Are these banks making stuff on the loans to do the green things? Or is it how do they manage that risk?
So these are definitely still profitable deals. They're not making any real concessions. It's really just are there the companies looking for this financing are traditional companies also looking for labeled like green and sustainable debt to raise as well, So there's not necessarily a ton of control that banks have over the demand.
From this underlying set of companies.
So in many ways it's also an indicator of who their client base is.
So if I'm a banker JP, Morgan and chevrun's my client all on the right, any kind of bond day one. I don't care if it's green or not green, as long as they pay me.
But he's a former banker, by the way, so don't you know That's why I'm saying, that's all about.
That's what we hear from all our clients too.
So but I don't want to hold the you know, the loan on my books. I want to syndicate it out and syndicate the risk exactly. Do I feel okay that there are investors out there the one own new energy debt for example, or new energy financial instruments. Do people want to own that stuff?
There's definitely demand for it.
I mean, we see it with the takeoff of the labeled market, so giving investors visibility into you know, a bond or a loan that's actually labeled as green or sustainable use of proceeds. But in terms of what we hear from banks, it is exactly that they follow where the money is. And so in many ways this tends to be a lagging indicator of what's going on in the underlying real economy.
What other stuff are you looking for within this energy bank ratio, sustainability ratio? Like, what else are you guys focusing on?
So what we would really like to see is both in the banking sector but also in the underlying real economy. This measure of low carbon to fossil fuels more than quadruple across this decade, so to be consistent with one point five degree climate scenarios. So those are you know, models that are put out by the International Energy Agency for example, indicate that we would need to see four times as much low carbon investment as fossil fuels this decade.
So whether or not it's you know, because the banks don't have agency or these underlying companies are not quite raising financing at the levels that we would need to see. We're nowhere near hitting our one point five degree climate targets.
Are there certain banks or financial institutions that are doing a better job of financing the green.
Economy, like European banks? Maybe or not.
There's large variation.
Last year, Santander had a ratio of about two to one, just under two times as much low carbon financing as fossil fuels. Again, it tends to be the North America and the Canadian the US and also the Chinese banks and emerging markets that tend to have much lower ratios.
In some ways, a bank in Texas isn't doing a lot of green energy fuels, but.
Because they have the biggest wind area in the country.
Yeah, yeah, that's exactly right.
I mean, we're seeing a lot of the new tax credits being claimed in Republican states like Texas.
And then also they have like more local banks too, so I would wonder they don't have more. But I'm saying, like I wonder if it's exclusively oil and gas. And also to the point that again, like big oil does do other stuff, so it's just harder I think to break it down in a way that makes sense. But they do other things than just you know, stick something in the ground and get oil out.
Exactly.
Even within the oil companies, there's a big difference in how they're spending their capital expenditures on low carbon infrastructure versus fossil fuels. Like an Exon is very far behind a Nesty, for example, which is investing heavily in their renewable fuels.
Interesting, and do they have to like get loans out to do that or can they sustain it with their own cash.
Flow because they were so profitable in the past couple of years. A lot of these oil companies are financing off of their own balance sheets. So we did see a bit of a dip in these large oil majors raising financing.
I mean, I don't know. I mean I think I would make a loan and I don't care, you know, right, but.
It has to have the right kind of return. That's yeah problem that well.
Yeah, I can figure that out, I know. But I want to make my loan, take my fee, and then syndicate ninety to ninety five percent the loan out to other banks. So I just hold a little piece. Yeah, so I can get back into the clients and I still own your paper.
But then what if those other banks are like, ooh oh is that how green is that? I don't know if I can take it because in my my clients are going to be mad.
So I don't want to go to my syndication desk and I say, can you sell this?
Right?
And these banks see the writing on the wall about you know, how long are they going to be able to do business with these traditional oil companies and so are those companies that they're doing business with?
All right, we appreciate it, Thanks so much, Trina White. Have been a really fascinating conversation.
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