Amazon is a Great Competitor, Langone Says

It's not that there's a complacency right now, but we're all enjoying three and a half four whatever the percent g d P is nominal GDP of six make America great again? Seven percent nominal GDP. What's the Wells Fargo forecast for the next six or eight quarters? What's the glide path of economic growth? The live plats for us are slower. I agree with you very much on the complacency of you know, the foreign four percent plus that we're going to see on Friday, the three percent we've

probably seen in a third quarter. But to sustain that over time, you still need the gains and productivity which are yet to appear, and you still need significant improvement in labor force participation rates. What we are seeing some improvement there, but again to sustain that three percent growth. Um, I think the market is a little bit well, I think the market a general is a little bit too

complacent given what I see as conflicts. And you've already talked about this this morning, Tom Oil with respect Iran, the trade tensions that go on, and then the coming shrinking of the Fed's balanche and raising short term interest rates, John Sylvia. On Friday, while other people may have been looking in one direction, we were looking at a report from the Congressional Budget Office, this is the nonpartisan CBO.

They said that new legislation enacted since the release of the February budget would add more than a hundred billion dollars to the deficit. Now this would push it over a trillion dollars. Can you connect economic performance as measured by g d P and how that connects to estimates about what will happen to the deficit if we don't reach that four Well, I mean that that is Indeed, what the CBO was saying is that the deficit rises. Now that surprises people in the sense that, well, wait

a minute, we're seeing a better economy. Shouldn't we have better tax revenue as well in part that that certainly is true. Um, but when you're looking at that differsit it does suggest two things. Interest rates are rising, so the interest expense that goes along with all that federal debt um is going to continue to increase. In second, for CBO, their long run economic objections, uh talk about economic growth more like two two and a half and

certainly not three. So those two problems, the interest expense and the slower growth over time are again combined with the Fed shrinking its balary sheet going to create problems. What do real rates do within this dynamic? I mean, if we've got nominal GDP squeezing down and you're looking for a slow down in inflation adjusted economic growth is well, what do real rates do? And then within that, John your expertise at real wages, Well, again, a real rates rise. Again,

the cost of capital starts to rise. It sets a higher barrier for business investment going forward. And it's not you just not you know, going to be the end of the world, but it does mean the real rates rise, it's going to put a higher bar for anybody trying to invest in terms of expected rate of return. And once again Tom, when you're talking about a slower nominal GDP number. You're talking about the lower returns to what to labor and capital going forward, John, I want to

connect a couple of pieces. One is the g d P, One is tax revenue in the deficit, and then the way the government actually puts its budget together. There's the mandatory spending and then there's the discretionary spending. Just as an example, some portion of the Veterans Affairs budget is going to be moved to discretionary, but they've said, the Republicans have said that they're going to have to find cuts somewhere else in order to balance payments to veterans

who want to take private insurance. Do you see that happening in more categories because of the deficits. Well, I appreciate the government trying to do that, but you know, mandatory is mandatory as far as I understand, And so the challenges when you look at the US budget and again looking at the CBO reports, increasingly most federal and spending now is entitlements plus net interest expense, meaning that that discretionary portion is shrinking and is going to continue

to shrink over time. It's gonna be extremely difficult, you know, to to really cut anything with respecting mandatory spending because those come under the entitlements, federal pensions, disability payments, UM, Medicaid, all those other issues. So again, uh, you know, I would say that you've got a challenge ahead of us again, complacency. Going back to Tom's first point. Uh, yeah, you can enjoy what's going on today, but you cannot be complacent on the outlook for the next two to five years.

What have we learned from the Tax Act? I mean, it's getting to be almost on the edge of ancient history. Although I'm struck John by how many people are running in your don't trust their worthholding right now. They're really not sure what happens next spring. But what have we

learned about the tax active months ago? Well, go back to your own statement, Tom, if you're not sure about your withholding six months or a year from now, or two years from now, if some of these provisions are more temporary than permanent, you're not going to change your permanent behavior. Yes, you'll enjoy fund right now. It will be a good time and the economy is moving ahead, and that's what the Tax Act was supposed to do.

But can that tax program alter the productivity and labor force participation rate over the long run to make a significant difference. So our estimates is probably zero point two to zero point three percent change in potential GDP going forward. UM still doesn't still doesn't get us percent. We're a little bit short at three percent time, John Sylvia, thank you so much. John. I'm gonna say this folks for the first time today, but I'll repeat it throughout the

day tonight, PBS American Masters, Ted Williams. I believe Pim Fox, John Sylvia, we'll be tuning into that. I think somehow know that to be in case. John Sylvia, fall River and Wells Fargo with us today. Goldner Montevali joined us reporting for Bloomberg from Tehran. Goldner, let me start with you as well. Who has Mr Rohani's back? Who has his political support? Is it domestic or is it so important that it's Beijing? Um, that's as It's a good question.

I think it's unclear right now what China's position is going to be. I think Uranians have been very interested, UM to see what Beijing will do in the in the coming months, particularly with the deadlines for the sanctions coming up, because they're very aware here. I think both officials and ordinary Iranians, those who at least keep tabs on the news, are aware of this, this trade war that that Trump and Trump has engaged Beijing, and they're aware of that, and I think they're waiting to see

what China will do. I know that China has already come out and said that you know it, it wants to support the nuclear deal UM and I think it's even gone further than that to say that Trump can't force it from not buying Iranian um oil. But I think in terms of Rahani's domestic constituents and his support here, he's right now under a huge amount of pressure domestically.

People are frustrated with the government here. But I think that their sense that the US and Trump specifically is waging an economic war on the country which will affect their livelihoods, will trump any kind of um you know, any kind of frustration that they do have with the government, which which is pretty high at the momentum gonor. Of course, the tweeter President Trump came hours after President Rohani warned

the US against threatening the nation's oil exports. He also called it the time actually for improved relations with its neighbor, including its arch rival Saudi Arabia. Does this get escalated and if it does, we find out this week or could it escalate in the next couple of months. I don't know, I think again, because of those sanctions deadlines,

there are quite a lot of unanswered questions. And one of the big things that we don't know yet is what the Europeans have managed to do and the kind of rescue package and those mechanisms that they've been trying to secure and to find in order to salvage and save the nuclear deal. That remains the big question mark here. We have to see what happens with that, whether Iran is going to accept it, whether it's going to be enough, and then I think the escalation will posted we start

from there. I have the feeling because Rawhani's comments yesterday were very we were quite strong, and they've been terts recently anywhere because of trumpsactions, but they were stronger than than usual perhaps, and so my prediction is is that Iran is going to take what it will see as the moral high ground in its next response to this tweet, well, thank you so much for your importing from Tehran in Banking PM. There's Keith Briette in Woods, which is out

there far more than just sell side and analysis. They were acclaimed for decades ago. Uh, it is about transactions, about mergers, about acquisitions, combinations as well. And that's a good introduction for the gentleman from Middlebury. Yes, indeed, well, let's bring in Tom Michel. He is, of course with the KBW, a Stephal company. He is well, as you mentioned, really a veteran of the industry, and he is the president and chief executive officer and he directs all business

lines there. Tom, thanks very much for being with us. Just a couple of questions having to do with that idea of acquisitions and mergers. Last week we got State Street and Charles River Systems, People's United acquiring vend Lease, and then you've got a world in which Venmo and Square participate. What's the future for big bank like Bank of America when you see these other kind of tucking acquisitions, there doesn't seem to be a lot of big acquisition,

big takeovers. What's the future for bank like b of A in this context. Well, first of all, good morning Tim and Tom, and it's great to be with you and thank you for having me join you. Uh well, Bank America, being one of the big four, has a deposit market share that is right around ten percent, and as you may recall, Congress past to law that said that no bank can go above ten percent during normal times. I mean, my sense is in a crisis that could be changed, but in normal times, no big bank can

go over ten percent via acquisition. So really the way they need to grow now is organically. And what we're seeing happen at Bank America in particular and the other big banks is their profitability is ramping. And it's ramping because a tax reform. It's ramping because they've really put um the crisis behind them. Uh. The environment is a

good environment. Uh. The in other words, the economy is doing well, and we're seeing them investing a lot into tuck in acquisitions as well of non bank type not not non depositories, as well as making acquisitions and investments in fintech and digital banking. I think digital banking is really going to be one of the themes that's going to be talked about much more over the course of the next couple of years in banking. Do you expect Bank of America to make an acquisition similar to a

square of Venmo. You know, I'm not aware of their specific acquisition plans, but my sense is that they have the wherewithal to certainly do something like that. UM. You mentioned Square and you mentioned Venmo. Those are both terrific companies. UM Bank America, I believe, is one of the seven investors in Zel, which is a competitor to Venmo, Which leads me to believe that that's probably not a likely candidate for them. Doesn't mean it's impossible, but I think

probably unlikely. UM. So they're headed down that path, but just with a different provider. It's their own company. Scale is the word of the day. It's it's you know, if you go to an NBA act, your scale scale, scale, scale, scale, scale scale. Are the regional's going to scale up to join the two big defails? I mean, are we going to have more too big defails size banks? I I don't think we're going to have more too big to fail banks because those banks are so enormous as they

approach a trillion dollars or more in assets. Uh, it would be a lot of consolidation to get there. I think the way the rest of the industry is going to think about it is how do they get enough scale to compete and what business are there regional competitors going to look to be in. Uh, the retail business is going to be one of a business of high benefits of scale, especially as digital banking is being more

and more received by consumers. So you're gonna see over time, I think the retail banking move somewhat away from the branch and more towards the phone and mobile applications. UH. With commercial banking, I think that's a little bit different. That hasn't moved as much and probably would move a little bit more slowly. But I think these regional banks need to stand up and get more efficiencies to compete

with the biggest banks. And now there's going to be an opportunity to do that because of the legislative reform of a few weeks ago, where that fifty billion dollar barrier for heightened regulation has been moved upwards to a hundred or two hundred and fifty billion, depending upon your company. So investing companies like Capital One pm C, I think you know those are fine banks. Um, I'm not. You know, they have I think plenty of they have plenty of scale.

I don't think they necessarily have to need to have to do something. But um, But nonetheless, I'm sure they're always eager to find areas for more efficiency. But I think the super regional banks generally have the wherewithal to compete with the bigger banks. Um. I think it's the smaller banks below them that are going to feel more pressure to get more efficiency. Well, okay, that's come on,

that's Keith Fett. We'll talk for mergers. When the merg do you see always said that more efficiency is more synery synergies? You use that synergies? When does the merger frenzy start timing me? Rates are coming up? When does it click in? Well, unfortunately, you may be seeing it because uh, it's happening slower this cycle than in the past. We went back and checked and I think the most prolific company we found in our analysis was Norwest did

more than fifteen acquisitions in one year. If you went back to the boom years, I don't know exactly what year that was in. But today, if you want the most prolific bank in America, you may do two or possibly three mergers in a year. It is just down because of the regulatory um apparatus that's more stringent than

it has been in the past. So so and then also there are just fewer banks, So you could come in on a Monday and see a merger Monday in the past and there'd be a series of bank acquisitions. There are a quarter fewer banks in there were during the crisis. So so it's gonna happen, but at a more deliberate pace in my opinion. Uh. And I think the big big bank mergers are going to probably happen very slowly. I don't think there's going to be a

sudden boom um. I think you're going to see it more in the regional banking space where probably the need for efficiency is is greater and scale is greater. You said need for efficiency. That leads me to Deutsche Bank. What do you believe is going to happen at dB? Well, you're really getting him in trouble this morning. Well help us of Deutsche Bank and particularly Deutsche Bank New York,

Mr Michell. I think if you look at the valuation of the stock, you'd see a trades um at a at a big discount to books um and and it is below its peers, um and I and I think that that tells you that greater changes ahead. UM. I don't have any particular insights as to what I think is could happen, other than the fact that the bank

needs to do something. The current status isn't working. Uh. And I think it's very hard to be a national and a global champion if if your stock is trading like that, So there's going to be a need to take strategic actions. Um. I Also one thing I will comment on just generally, not not just for Deutsche Bank, but the the American banking regulators responded to the oh seven o nine crisis by selling troubled big banks to even bigger banks. I don't think that's going to happen

next time. Uh. I think that, and that's partly how the big global cities in the US got to be so big. Washington Mutual, bear Stearns ended up in JP Morgan's hands, wakovi A Wells Fargo's hands. So I think, what's gonna happen and those banks. It might have been the right thing to do at that time, But I think as as I've heard the policy discussion, I think that someone like Deutsche Bank, if there is a combination. I don't think the idea is going to be, let's

find a single buyer for the whole thing. I just don't think that's gonna happen. To Michel, thank you so much, greatly appreciated. Chief Executive Officer, K B. W. Keith Branton. Wood's a stiff a company we're celebrating. I love capitalism. An American story. Ken Lan Going, co founder of home g built on the cover PIM A nostalgic photograph, a well Ian, a wreck Wellian photograph. I would say, kenn is that is that you with a shovel that kids

better looking than I was? Okay, and I think they has a little eyes to have dark here well not now now I have no here. But that was my physique. That was pretty much it. The only thing about that picture and I lost the argument was we didn't use long handles shovels, shovels and construction. We use short handles for the handle, yes, yes, yes, exactly, but they for the for the layout, for having the kids standing and putting his foot on a shovel and having the babelhold

a long handle, That's why they did it. But but other than that, it's it's exactly what I was. I have to go to work with a pair of jeans and work shoes and a T shirt. Yeah about now, I want to I want I want you to talk a little bit if you can, about walking away from deals and walking away from people that you do not feel you can do business with, because sometimes it seems those are the best decisions, and yet they go unsung.

Tell us about walking away from deals. I have an expression, the best deals I ever did were the ones I didn't do. Okay, my bet on deals is essentially a people. When when I my nose tells me that I'm getting in with a group of people that I might wish

I hadn't, I walk away. I walk away because when I look back at at the opportunities I've had, whether it was Bernie and Author and Pat Barrett Home Depot or Ross Perow and Mitch Hart, Tom Marcus, Tom Walter, all those guys at the d S, Derek Smith and Doug Curland at choice point, when I look at all of these deals that became usually successful of Pat Lexico, ration, Garriyer, Olbraham's brother Stephen, his brother Michael, these are people that

that every time I've gotten near them. We've certainly had business problems at every case, but the culture and the character and the integrity the people allowed us to be objective in addressing challenges and problems we had. So I, you know, every time I looked back at a deal where it didn't work out very well, it was always me overriding my judgment about the people in the business. For example, we have a textile company called Unify, and the guy that ran at allan Mevin. I made my

mind it before I met him. I wasn't going to do the deal, and then when I met him, I changed my mind because I knew this guy would move heaven and earth, and that's exactly what he's done. He built a fabulous company and it's still in business today. Every all of its its competitives, for the most part gone, Cone Mills, Brownington Industries, you name it, they're all gone.

And and here's all Unifi. I just chuck it alof And so I can't stress enough the importance of the values and character and integrity of people you're in business with. There's one example in the book. I'm just wondering if you would expand on the name that a lot of people may have forgotten Sandy Sigloff. Yeah, no, Sandy Sigaloff was a man. He's now dead. May a soul rest in peace. I'm not sure I really mean that, but anyway, may a soul rest in peace. Sandy sigalaw few people.

I'll give you a simple philosophy. Yet, if he determined that he wanted to let you go, whether he fired you or he just said, look, we don't need you anymore, he would tell people that it wasn't just enough to fire them, you had to destroy them, because if you didn't destroy them, they might come back one day and hurt you. And uh and you know that that told me a lot. That told me a lot about his emotional attachment to people. I I have been blessed my success.

It's largely because of the talent and abilities of people I was in business with. I had something to do with it. But I'm saying to you, and I meant what I said in the book, I'm not a self made man. I am not a self made man. I say that not with any degree humility, but I say it in candor and honestly. Ken, what does retail do about Jeff Bezos and Amazon. I mean the time we've got left with you and I love Amazon is game changing? What what? What does? How does retail respond in a

constructive way within capitalism? To Mr Bezos, Well, first of all, remember this, and there are two things that Jeff has got that to me make him a player. Number one, he's brilliant and number two he's humble. And boy, that's a winning combination. Of my book. Amazon is making Home

Depot a better company, Believe it or not. Why because maybe we might have offered our custom is the alternative sitting on their butts and the houses and shopping, But I don't think we would have the intensity that we have now in making the online experience an opportunity for those people who want to shop from their home or who want flexibility and how they shop. And what are we doing? For example, we've announced we're gonna be spending

eleven billion dollars over the next three years. We're bringing talent, and we're bringing in a thousand software engineers into home people. This is a retail company. So so Jeff, to me, is God going to make you dramatically improve your game or you're gonna be gone? What's it gonna do? About rents. I mean, you've got your whole medical practice here in New York and your philanthropy that you've done for the medical business, except most of those blocks around your landing

combine have empty storefronts. Does real estate adjust in New York? And frankly, Kenton Langon nationwide? Does real estate a just I'm not sure that. I'm not I'm not sophisticated enough regarding real estate. I will tell you this that if you provide a service to customers, and if you do it in a competitive and in a constructive way, you'll

do business. You'll do business now, whether it's a delicatessen, or whether it's a small boutique clothing shop, or whether it's a I'm investing right now with some ladies who have a line of shoes called Margot and and I know one thing right now, they're offering a quality product at a very competitive price in a very unusual way. Jeff Bezos to me or Amazon or for that matter, Costco or b JAS or Sam's Club, all of us are going to have to raise the quality of our game.

And all I can say is the the the consumer will benefit by it. I think, Jeff, the intensity of our effort in online selling at home depot is nowhere is where would have been had Amazon not existed. Amazon has forced us to say, hey, wait a minute, we gotta be on our game here as well as in the stores. So I think a great competitive will make you better. If if you're a competitive you know a lot of people roll over and die, well, and roll

over and die. What why he I'll give you. For instance, the originator of a discount concept was a man by the name of Harry Cunningham who was running a chain at five and dime stores called ss Kresky, and he opened up Talmart. And when he opened up his first Talmart, it was a man by the name of Sam Walton who was running four or five Ben Franklin five and dime stores in northwest Arkansas. Kmart's gone. Walmart is the biggest. What I'm telling you is it's the people. Yeah, but

it's as Sears savable. I mean if kmart did it with a blue Light special in price and Sears no, no, no, no no no no no no no. They didn't evolve. They brought it when they when they had the Blue Light Special and the Hey Shoppers and all these and that was fine, but you better obsolete yourself or somebody else will obsolete you. And that's what happened. Look look at Walmart. Walmart today is a generali Look at the fight they're gaining. Now. Look Amazon has done following them.

Remember the movie Torritora Tora, and and and and the Japanese adal steaming towards someplace before they hit Pearl Harbor, and he said, I I'm afraid we've awakened the sleeping giant. This is what's going on in America. You're either gonna rise to the challenges of Walmart or you're gonna be out of business. Lan going Thank you so much. I love Capitalism an American Story, Mr Landing. It is a

spirited book. It is very conversational and it's a good quick read for those that want to get the braining gear really pim and within the history there that Mr Lang talked about. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio