Banks Are Facing a 'Toxic Cocktail,' Kass Says

and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course, on the Bloomberg To begin this morning with Peter Hooper. He is the chief economist at Deutsche Bank and he's with us here in our Bloomberg eleven three oh studios. Let's travel to uh western Portugal if we could hear to begin Peter into

the goings on there. Over these last couple of days we watched with interest is Marito Droggy spoke about the employment picture in Europe, about the inflation picture as well, and saw him and the ECP try to walk back some of what he said. A great lead on a Bloomberg news piece this morning. This is what it sounds like when doves screech. What happened what do we learn about the way that central bankers communicate here over these last couple of days. Well, central bankers obviously have big

impacts on the market. And uh, Mr Droggy had to correct perceptions a little bit yesterday, people getting a little interpreting him as being a little bit more hawkish than I think he wanted to be. Uh he said, Uh, no, we're going to take our time and moving towards balance sheet normalization this sort of thing. Um. But uh, certainly, certainly, I think that the sense that my my colleague George Surveyalis has come up with something very unusual. I mean,

central banks don't normally coordinate on policy. I mean, if if at most you have some some moving in contain because the data are moving together across countries. Uh, and and they happen to be moving in the same direction. But but the the sense that Mr Droggy, I guess introduced the word coordination in his text. Uh. We wonder if we're gonna get a little pushback on that as well, now from him or for from some of his colleagues.

But it's an interesting possibility. I think. Certainly, certainly the data have been have been suggesting there's room for that two sets of headlines coming out now as we interrupt, Dr Hooper of Deutsche Bank. This in the corporate world. David, I don't know if you've got these up on your screes. David has is faster, But what is that? Why does David Gurry have a better A few dollars? You know, my computer is like the original one Mike made years ago.

Sky TV, is this gonna happen? Sky shares a race gains united inclination? Yes, the UK government inclined to refer the Fox Sky bid to to regulator. We were ex acting some word on that this morning. Indeed we did get that, and then uh, some news here about right eight and Walgreen's boots as well. They're mutually agring to terminate their merger. This has been something that's been undulating churning here for for many months. Five billion dollars. Absolutely,

they're gonna do. Walgreens rather is going to authorize at five billion dollars share buyback program out of this, Walgreens will pay This is a kind of fee Peter Hooper would pay someone five million dollar termination fee. Wow. Yeah, Walgreen's at Walgreen's buying stories and assets and right aight for five point one eight billion dollars in cash. A couple stories will be following throughout the morning Berg surveillance. We won't make a Dr Hooper comment on why why

don't you continue here with the David? It's almost schizophrenic? Is that the right world? You know? The action of bankers? Yeah? Exactly. Let me ask you here sort of what we heard you talking about the the the influence of Mr dr speech a couple of days to go back in train. He talked about the employment picture, the challenges facing European employment, how that dovetails with with inflation. What did you make

of what he had to say there? In other words, there seemed to be some positive indications about sentiment in the Eurozone, positive indications about where the employment picture he's had it, but he still seems not satisfying. Well. I think the main reason not satisfied is inflation has been a little on the soft side, pably, and that's that's the key. That is. Ultimately, the ECB is objective, UH, and the employment picture of obviously feeds into that, and

growth is important. UH. Growth has been doing pretty well, and the prospects there for for continued advancement and the one and a half two percent range over the year head seems seems reasonably good and the labor market likely

picking up with that. UH. I think the interesting point is that he's suggesting that the softness and of inflation that that normally would keep a central bank like the ECB very much at bay is viewed as being transitory, which is the same kind of message you're getting out of the Fed. UH. And I think these these central banks generally are feeling we've been at these uh, you know,

emergency floor levels for for quite a while. UM. There is a little bit of growing concern on this side of the Atlantic about financial stability issues may be associated with that. So UM, I think, yes, it's a little bit of a mixed mixed message out of out of Europe. But overall, this is a central bank that we think will will be UH tapering further round the end of this year and and progressing with with at a much slower pace, lagged a long behind the Fed, but is

moving in that direction. Let me ask you about that descriptor transitory. Something that we heard from Cherry Yelling after her after that rate decision during her press conference, she said it many times are we certainly in the statement as well, do you agree with her on that point? Is it? How hard is it for her to defend the transitory nature of the inflationary headlines we're seeing here in the US? Well, UM so so the recent surprises

of inflation, what what what's been driving that? UM? In March we had this this huge drop in in cell phone services service charges UH with with the BLS, UH, I think probably struggling a little bit to catch up on on some quality changes there and and maybe there was an unusually large observation. Since then, we've we've we've seen certainly in the CPI significant decline and in UM doctor's fees for example, medical health healthcare inflation has come

down after after rising pretty pretty strongly. So you have this sort of a natural correction to slow down from from a very large increase previously. And that's I don't see UH pressures on healthcare inflation diminishing with the baby boom generation continue at age. I think that overall is gonna be so so uptrend. There other areas, uh, we we we had we had a drop in in apparel inflation, good inflation, and surprised a little bit to the downside.

Apparel inflation had again risen well above where the producer prices had had been running. There they're catching up now, uh. And then and finally a little bit of a slowdown in in um rental inflation. Uh. Housing housing inflation, if you will. That is not a friend that we expect to continue either, because vacancy rates are low. So all

of these factors, say transitory. Peter Hooper, thank you so much, very generous of your time, and again thank you to your colleague George Serveills for joining us in London earlier this morning. Dr Hooper is with Deutsche Bank joining us out. Doug cast Doug, I'm in therapy. It's no other way to put it. It's fun to watch the Yankees. If you had more fun watching your dreaded New York Yankees and years the greatest, the most fun I think I've had probably in ten years, you know. And and you

saw it developing. You saw a bunch of young players being developed. And even Jim Palmer in our disc in our interview on surveillance a couple of months ago, was bullish on the Yankees and parish on the Orioles. Within this last night was exciting and yeah, I sent you an email. You noticed the standings as we have this interview winning percentage points FY three New York, always providing good notes to us. Why you keep your finger over the red button that would be the exit cast button

anyway source for a global audience. This is exciting. And just one more comment on the baseball thing, Doug I said last year the Doug cast seats right by Joe Girardi to the left of the dugout, and there was this big lummox out on the on deck circle. And you have guys seen this. Rookie baseball players need time to lose the panic of OMG, I'm here and that's what we saw. Were there and judge for this year

to last year, from last year to this year. And now you got this whole youth, this this kittie corps coming up. It's amazing and our judge, it's a remarkable. You've been wrong, Doug. The bull market continues. When does this at last Friday? All the gloom and you're not writing gloom crew emails? Describe the nuance of your caution on this bull market versus the usual doom and gloom stuff we all read well I think, I you know, the issue to me is not how high the SMP

is this morning. The issue to me is how long the markets will stay this high? And I think to understand what's happened, what's happening today, we have to understand what's happened in history. And the fact is that very few active managers were able to deliver alpha over the last decade or so, and you saw it. They were not protected in the large drawdown in two thousand seven nine,

for example. And the public looks at these outcomes and says, why they Actually, I pay higher fees to managers who can outperform or can identify specular blowoff or an imminent draw down of major magnitude. Let me just stay fully invested. Them might as well be in an e T F

or an index fund. So since two thousand and seven the Great Recession, basically passive activities and indexing has risen from about eight percent to almost and um as you shift assets from active managers to passive managers, they buy an index. Since the index is capital weighted, it means more and more money is going into fewer and fewer stocks. And we've seen this before, and so have you. Guys. We saw it when I enter when I graduated business

school in the early seventies. With the nifty fifty stocks, you outperformed only if you continued to go into them. If you were a growth stock manager in the late ninety nineties, you were. If you weren't buying the net stocks you under perform, you were fired. More and more money went into fewer and fewer stocks. NAZDAC ultimately declined by so you have a similar case today with the fang stocks. More money, more and more money is being deployed into a narrow and narrow area. In each case,

this trend doesn't end. Well, let me ask you about the deal that we saw scuttle this morning between Walgreens and Right. What's your takeaway from what happened there? Does it does it sif the insight in teach for you into the regulatory landscape? Does it taste just specifically about the sense of this deal in and of itself. What's

your take on what we saw this morning? Well, I would say not with regard into that deal David individually, but I do think that the political and regulatory landscape UM is moving unfriendly towards the market leaders. The fangs owing to obviously a market dominance, and you look at saying Amazon. The question is to me, and I've written on the street about this over the last month since

the whole Whole Foods view was announced. The question to me, is Amazon a company that's providing lower product prices to the consumers or it is or is it creating jobs and the destroyer of our economy? And I think you're gonna hear a lot about going forward. Within all this is use of cash, which is a fundamental concept. And I might point out to those younger that Mr Kass has a little bit of experience and securities analysis. We're seeing it with a vengeance of the banks. Can do

you have the courage to short the banks here? Doug? Actually, I just showed it UM this morning in pre market trading Bank of America City Bank in JP Morgan's on the ramp, and it's probably a trade look. I think the I followed the industry since I was a Nati rat and wrote a book called Citi Bank with Ralph Nader, and while I was finishing my MBA at Wharton. This is an industry that UM has de leveraged and has a low return on assets and is barely earning its

cost of capital. Its valuations have risen dramatically, and the industry faces three dominant headwinds. Lower credit demand's going forward, a flattening yield curve, and low absolute interest rates. And this is that this is could potentially be a toxic cocktail. While the market is rejoicing this morning, well, I have a toxic cocktail with Fortress Moointing Hand. Good morning, Mr Money,

And I know you're listening. Operating income at B A C has gone twenty four heaven and somebody's modeling out for next year thirty two billion large. I mean is a growth vector. Maybe it's not a diamond growth vector, but it's a Moointing hand growth factor. How do you short that growth factor in operating a little bit of h that's a little bit of data money, because you have to go back and see what the disaster was the five years prior to that, and you think we're

going to revisit that disaster. I don't think we're gonna revisit I think the stocks are more than fully priced relative to their projected returns on equity. When you when you let me ask you, we we're talking about regulation here just a moment ago. We're gonna talk about stress tests a little later on on the program, But what is what we've seen here over these last two weeks. These two rounds of stress tests tell you about the

health financial sector here in the US. The UM financial sector is um as relatively strong, especially visa v the pre Great Recession crisis and oh seven or nine UM, But so is the the industry's earning power. It's much lower. Doug Folding here, what share Yellin's doing in central bank? You do that it's not just all equity analysis for

mr cast. We've had a real shift in the last two days, and really, for the first time since I can remember, it almost looks like a coordinated hope and prayer by bankers that inflation or disinflation will migrate into some form of greater inflation. Do you agree with the coordinated action of banks in their discourse in a rhetoric or does that end up being market volatility. I think that they're going to coordinate in terms of tightening. And

what I really don't understand is the markets of bulliance. UM. I understand the bulliance following a period of historically large monetary large s I don't understand. I don't envision a positive response in the fullness of time from Tighten. It just doesn't follow. Um, I thought you were getting at something quote Yellings quote on Tuesday. Yeah that no more

financial crisis. Yeah yeah, I mean it's remarkable. It's I did a piece entitled some really stupid Things undered by some really smart people on the street a day ago, and it's kind of a humble reminder David and Tom of how dim our visions are. We talk about the markets bulliance right now. Um, the fact as many sectors have gone down, many shorts have been quite successful in two thousand seventeen, and we live because of the domes of passive investing in quant strategies in the market without

memory from day to day. Well, let's come back with memory and talk to Doug Cass, the Sebris Partners and lots to talk about. I think we should do a little more, maybe investing one oh one, which is in a log normal world, how not to lose money, which it maybe of sport with a sun investor wisdom on how not to lose money. Douglas cast Sea Breeze Partners. Doug is a guy named Van Tharpe, who wrote a really important book and in it a jewel of a

chapter years ago on what he called position sizing. I call it in my lectures the how much idness, which is something nobody ever talks about, which is you decide to do this long, this short, and the real art is how much do you put into the trade? If you've been short and you've been in a long bullmarket, how do you not get wiped out? How does Doug Cass do the how much idness when you commit to

a trade? Great question? Um One of the things. First of all, position size is a function of your time frames and also of your risk appetite or risk profile. I personally, personally, I am a very conservative short seller. Um so I relatively small positions, particularly against my core investment long positions as well. I do a lot of synthetic puts. I short stocks and buy out of the money calls. So what does that do for me? That, basically, um um allows me to quantify the risk I have

not only in each individual short but in my entire portfolio. Essentially, I'm paying for the privilege of protecting the short position, and that worked out obviously very well for me in seven and two thousand seven to two thousand nine, and I suspect when the markets finally do break as they always have historically, it will work out going forward. Doug, how much is the price of oil right now shaping your investment outlook? Well, something that no one early is

talking about. I'm of the view that not only stocks are over priced, but so are bonds and UM. I believe that the tenure is based upon my calculus is projecting a real growth in the domestic product and domestically

UM and that's too low. UM. And the recent decline in the price of oil going as Dennis Gartman our friends says, from the top of the left chart to the bottom right is historically at least that's what I learned to business school and used to work in the seventies and eighties and nineties until Quan Trating took strategies took over. That's a stimulant to growth. When you when when you you mentioned Whole Foods a little while back, I want to ask you about that deal, in particular

what it says about the direction of retail. When that news broke, Tom and I were scrambled just to figure out what directionally that that means when when Doug has breakfast at mar Lago, I forgot about that the avocado omelet. You know he wants a blue free Whole Foods avocado. Yeah, that's the way it is. You know, I was. I actually had dinner when the when the President of China was there, you were there? Did you conduct foreign policy with everyone else there? For the briefing? I was with

a high level I do have Republican friends. I was with a high level exclusive. But Doug, what does that say to you? Doesn't know that direction to retail? What is the Whole Foods Amazon deal say to you? Well, the disruption continued, but you know I would questioning. I would question and suggest we are approaching peak Amazon and Pink Fang for the reasons I mentioned UM as well as you know the growing political and regulatory risk of

these companies face. Look at look at the advertising. Could for a second, Facebook and Google have approximately of online add dollars going to them. UM online advertising accounts for roughly of total advertising today, so multiply point eight times, and that means they have roughly those two companies have total advertising in this in this country, and that's probably in the process of speaking. No one's talking about that much. Tug one fund a question if if we could, when

do you cover a short? If we get to down, do you change your view? Mean, how do you flip to being a bull? Well, I'm not flipping to being a bull. Um. You know, I am concerned about increasingly

about sector risks. I'm concerned about a higher percentage as I mentioned of assets and then index funds, and I'm worried that both quant strategies and passive and thing which has been a stabilizing influence and the tall wind for the equity markets will become destabilizing influences because fear ultimately will enter the marketplace. We probably don't know what the specific catalyst. And all you all you have to do is ask two words at that point, to whom are

index funds and ets going to sell to? They don't carry any cash reserves, and active marriages who have diminished in size, most of them aren't carrying high level of liquidity for fear of business. The last margin the development of potentially a perfect storm. Okay, a perfect storm, yes, that defines the New York Yankees does thank you so much? This is Bloomberg runch you by Bank of America Mary Lynch. With virtual reality, virtually everything will change. Discover opportunity is

in a transforming world. Be of a mL dot Com, slash VR, Mary Lynch, Pierced Fenner and Smith Incorporated. We love to get in guests when they're wrong, beat them up, make them clear that we keep scoring Bloomer surveillance, and every once in a while we're afforded the luxury of a victory. Let Charles Peabody is one of the deans of bank Analysis UH on the street and you need a major victory left Charles a year and a half ago. Charles Peabody said, not now, but a year and a

half from now, the casts bigott will turn it. We that's what we're observing in the last forty eight hours right, definitely, and and and I was even more conservative than most street analysts on the c car Copita return requests. So um it beat all expectations within this is the durability Doug cast was just on with us UH cautious on

banks for a set of good reasons. You would push against that, I believe and say their cash machines are they their own internal a t M machine from a CAPO perspective, they do have excess capital, and that was the state. But on the P and L you have to sort of split the regionals and the money center

banks and the brokers. I think you're gonna see very weak second quarter earnings out of the brokers and money center banks because the capital markets have not been very robust, and that's going to lead to a lot of estimate cuts and I think more to come in the second half of the year could be importantly here, Mr pebody nudging towards the world of Doug Gass, which is a scary thing to say. Can Jamie Diamond keep double digit dividend growth going five year dividend growth? Is this a

single digit world for Mr Diamond? I think it is a single digit on the dividend for him. He's pushing up against that soft cap of a thirty percent payout ratio of earnings. So now to wrote to raise the dividends function of your earnings power, and it's tough to grow earnings double digits well, particularly here with the Domino GDP. We just I said, what's your single best buy. We're gonna come back and talk to you more about banking,

but do you have a single best buy right now. Well, you know I don't have by rated stocks at the moment um just because of the weak earnings outlook. Um, but there's no question that City group hit the ball out of the park um in this capital. Let's do that. We don't talk enough about Mr Corbett. Let's let's come back with a trust Peopody and talk about I don't say that David I saw him. Do you know? I

got the banker wave. The banker wave David is when the bankers see me from forty two feet away the way, you know, like like they got four handlers around him. No, don't talk to him. I got I got the Corbett bank. You know it's a banker wave. It happens. Wait, Larry Fink doesn't give me the banker wave, will actually come and talk to me? The banker I Joe Joey and Joey Vangelista wants crushed Jamie Diamond's elbow. Screet, don't talk

to jamis Joe That hurts Anyways, it's fun the banker wave. Yeah, we'll come back with Charles Peabody truly excellent on the major in the regional banks and get some wisdom and perspective. David Garrett and Tom Keane here in New York in eleven three Studio, So with Charles Peabody, Great to have you with us. You're talking about the banks. Let me start just by asking you broadly about these stress tests. We've just been through them at this point now a

few years into them. How much have they improved? How how much they telling you about the health of the banking sector? Oh, dramatically improvement? Um. I mean, the amount of capital that they returned in this exam was way beyond anyone's expectations. And they still have excess capital. So you know, returning a percent of your net income is

probably going to continue going forward. How much do they stand to change you as you survey if you look ahead here to what the regulatory landscape could look like six months a year out, are we going to see a different kind of test going forward? You know, one could argue that this test showed some leniency from the

regulatory community and that may continue under Trump. But caution about getting too far ahead of yourself on that front, because I think financial legislative reform is probably dead in the water. Into healthcare and tax reform, and we get through the midterm elections, so it's not going to happen until nine the earliers. If you look at regulatory fiat reform, that's the way it's going to occur. But even there, the process is you've got to get the nominees in place.

You're not going to get confirmation hearings probably until early eighteen, and then you've got you know, and not notice the proposed rulemaking the hearing periods. You're probably not gonna get formal rules changed until early two tho nineteen. On the regulatory fiat front, where are we with the regionals? We have a huge wrong bias here two six or seven big banks. Where are we on the regionals right now?

Do they have a place in the future of banking? Well, you know, at compass point, um, the position is very constructive on the regional banks. Um. Now they are you know, they're going to benefit from the steepening neal curve um and from you know, the rate hikes if that continues. Um. The problem is the loan growth remains fairly in na make at three percent. And that's that's the problem I'm

having with banks in generalists. I'm just not seeing the economic activity either in the lending markets, where the capital markets, and so you know, there's only so much cost cutting you can do. And we're probably on the other side of the credit spectrum where credit costs now are going to rise, so you need much more stronger revenue growth. Ok, that's right where I wanted to go, and then I

want to go to City Group. Then are we going to see nominal GDP or better revenue growth or is it going to be we must merge and combined because we don't have five or six or seven percent revenue growth. I think in the muddle through economy that we seem to be having a one and a half two percent GDP growth. You're going to see much more of a combination of firms take place at the regional bank level. How is Mr Corbett's challenge different from Mr morning Hans

or Mr Diamond's. Well, he's transformed the bank from what was really a consumer led orientation to much more of a corporate led orientation. As you know, Corbat and Freeze both came out of Solomon Brothers, and that's where they're more comfortable taking their risk so that the challenges can they improve their capital markets positions, particularly on the equity side. Do they have a desire to do that or are they so far behind they can't catch up. No, they

have a very strong desire to do that. I mean, they've got an excellent thick franchise fixed income currency franchise, but their week sister on the equity side, and they've been pushing pretty aggressively on the equity side up their position. How do they do that? Do they do it with a global projection? Do they do it with marketing and brandy? Do they do it by retaining? Do we get into a body war which no one's expecting. The body war that I'm seeing is that they're being much more aggressive

in the bidding, for example, on the equity front. What do you mean by bidding? Bidding for what? Deals? From deals? For example? On the equity side. Right now, we're seeing a lot of equity issues through what we call block overnight deals where you you buy the deal at four pm and you try and sell it out before it's called blue Apron is what we call not going well this week. I believe Goldman's lead has been set in

the dinner tables, Mr Mr Corbett. It's only it's seamless and and we saw this happen in fourteen and early fifteen, and then all of a sudden the markets fell in the second half of fifteen and City got hurt in the fourth quarter because they were trying to do that. Um. So it's a question of managing the risks. Um they have managed them well so far. I mean there's a guy over over overlooking all this, who's who was pretty important, a guy named O'Neill out of Hawaii. How's Michael O'Neill done?

And giving Corbett the chairmanship guidance to reframe the disaster that it was. I think they've set out a very constructive strategic plan and Corebat has been executing on that. It's taken longer than I think anyone answer. They need retail, they need cards and and that's the big growth story for the second half of the year is that we're going to see the card business. Am I gonna get a hundred thousand dollar visa hundred thousand mile visa card

out of City Group? That's all they want to know. That's what has come down to, right And by their own admission, they had under invested in that card business. And about two years ago they started really pushing that card business and and now we're starting to see a payoff in the second half of the year UM. But it's coming at a time where there's an inflection the credit costs and all these banks are having to raise their assumptions of of credit costs. Question is how rapidly

do they rise versus where David Guru lives. There six branches on the corner. It's called over banking. The City Group over banks. Are they over branched not? City Group does not have the branch structure that a b of A or JP Morgan has in the United States, in New York City and in certain pockets they do. And that's their strategy is to target urban areas. We're talking about blockchain and bit coin and cryptocurrency literally on on

the program. When you look at when you look at all of the banks, who's best positioned uh to to embrace technological change in the industry, Well, I think J. P. Morgan and Jamie Diamond in you know, years ahead of the other major banks and investing in technology UM so I would say that they probably have the advantage. But everyone's you know, investing in digital um technology right now, and they're all going to end up in the same place.

How big of a way our student loans. We're talking about delinquencies on the show yesterday, the prospect for more than an auto loans and in student loans. When you when you look at the big banks, how much of a weight is that on them. It's a non issue. Yeah, I mean even auto ending, where they're obviously going to be problems in the subprime area, it's less than four percent of their loan exposure. It's not going to move the needle. The needle is going to be moved by

what happens in cards. The student loans and autos really aren't going with the needle. I'm glad you bring this up, because this is why I wanted to bring this up in my brain. Froze. I'm still getting over talking too much Inkee baseball, Doug cam So you know this is what we do, folks. People go, well, you if you have someone from the Cato Institute on, you have to have some leftists on to balance. That's what we're doing,

your folks. We had casts on who loves at Yankees and Peobody who's got a retired number out at Fenway Party went to so many games as a kid. People forget that City Group is seventy billion in revenue and JP Morgan is a hundred billion in revenue. What the tenth of a trillion dollars? My number one complaint, Charles, is the media and so much of the public don't realize how big these things are. Are they too big to fail? Thank you, Andrew. Oh, they definitely are too

big to fail. And and that too big to fail concepts still exists worldwide, as we just saw with the Venetian banks in Italy. Um, they had to be bailed out at the expense j P. We're gonna be allowed to buy us by European banks? Why not? I think that concentration of power would be dangerous. Um. You know, I think we need large banks to compete internationally, but do we need large banks in every single continent? And

they learned this the hard way. I mean City Group pre Corbett learn this in Mexico, right, Yeah, I mean they've struggled with their Banner X franchise, and and that's one of the areas that they're trying to beef up and invest in. And there should be a payback presumably next year. There are actually already starting to generate some positive operating leverage in Mexico. What's the message that the takeaway that you have from what we saw in Italy

and Spain about the way that government's intervened in those banks. Well, as you know, there were subtle differences between what happened in Spain and Italy. But um, to me, it's that the rules are going to be changed to affect a process that disrupts the markets the least and all of these you know, regulators are looking at markets and are worried about markets and the and the feedback mechanism if markets go awry. Charles, people do to thank you so much.

Congratulations and figuring out use of cash long before others here. Um, I should point out I have no ownership of financial shares. David leverage cash triple average, the double leverage, double leverage cash cash fun. It's been great. I mean, the markets are terror. You can't make money in stocks, folks, what a joy and timely jab with us. Daniel Jurgen, who is known for oil. I just sold six copies of the book The Prize, which came out. John D. Rockefeller

read it. Um. It came out a few years ago, and I said to some youngsters in the oil business. I said, you can't do your business unless you read your in the prize, and of course, uh, the Quest, which I'll call an update highly readable sandwich. In between it was The Commanding Heights, which is a book I throw at people too often, the Battle for the World Economy, and um the Royalty check I get annually from Oran. It's awesome on that, Dan Jurgen, in honor of Lord Patton,

who I spoke to today of kiss Hong Kong. Mr Jurgen joining us, and I quoted to Lord Patton Jurgen from Commanding Heights in Hong Kong, it's seen the particular advantages of location and the accident of history that had brought enterprise and investment to ninety nine. And then you go on brilliantly to say the classical liberal system in the colony compared to what was going on in the United Kingdom. That was really I remember that years ago in your book. Give us an update on the experiment

of Hong Kong. Is it working well? Hong Kong stood out because it was such a vibrant center of global globe markets and capitalism and contrast to mouse China. But of course, the world has moved on tremendously since then, not only the rest of Asia, but China itself. Is U such a economic powerhouse in such a center of

the world economy. I was thinking just the difference between UH when the handover of Hong Kong occurred to China, two systems in one country and a degree China not yet joined the World Trade Organization, and there wasn't the sense that there was UH the G two, the United States and China. But now China has so much more of a preponderant role in the world economy. Do they

play with a fair deck? I mean, the President the United States gets upset about other countries and then maybe he's got a bit of a zero sum architecture there in defense of the President the United States, Is China playing with a fair capitalistic commanding heights deck? Know that they play with it? Used to be socialism with Chinese characteristics, as a as Dung show Ping put it, And now I guess you would say it's capitalism with Chinese characteristics.

It's clearly the state has a very big role in the economy and UH. I think it's striking to me when I've heard American CEOs talk in the last few years, they're feeling that they don't have the same access to the market as as as their Chinese competitors. So, uh, it's it is. It is still a different system. Hong

Kong was a place to go. I wonder if you were talking to a recent graduate of your alma mater thinking of moving overseas, would you counsel moving to Hong Kong here in the year two thousand seventeen doesn't have the same sense of dynamism and opportunity that it had back then. I think it would be one of the locations, but it would not be you know, it would not be the standout location. I mean, going to Asia makes

a lot of sense. Uh. You know, you might say go to Shanghai, or you might say go to bay Jing. I'm struck, you know. I remember in the late eighties too, you'd see a lot of young people went to Japan because Japan was going to be number one, if you remember the title of that book. And now, of course you go to Beijing and you see so many young Americans, many nationalities there and with a sense of vibrancy that is in the overall Chinese economy and the recognition of

how important China is in the global economy. The number of students who study Chinese, of course at universities has just shot up. Don't you're gonna help us understand what we saw in Saudi Arabia a couple of weeks ago, the the the institution of a new heir apparent in the kingdom there. You know the region so well, the history and the politics of it. What should we what should we uh take away from what we saw there

in Riot a couple of weeks ago. I think we should take away that Mohammed ben Solomon, who was the deputy Crown Prince and promoted to Crown Prince, is a

person who's really in charge of the country right out. Uh. He has a defense portfolio even before he moved up, the economic portfolio, the oil portfolio, and uh he's the author, he's the driving force behind this vision which is seeking to to sort of move the Saudi economy into into you know, in a sense we've been talking about Asian to a more modern, engaged economy that isn't just based upon oil. It's a very big job to do that

isn't so far away. How big you mentioned all of the breadth of his portfolio, and we're interested in the role that oil plays in that. Of course he's talked about moving away from the kingdom's reliance on on oil. Uh, how how well to pace is that transition going? How how how far along are we in that transformation? I think it's it's still it's still very early days. And it is interesting that I mean in the crucial to it. I mean the ideas that versify the economy away from oil.

In order to do that, you need oil. You need to sell a lot of oil to rate the income to do what they want to do. I think it's still very much in a phase of getting getting getting ready, trying to get things into place. And of course, um, with oil at forty five dollars, it puts a lot more pressure than it would be if oil is sixty or seventy dollars and more urgency. What do you learn

from your consultancy? What do you learn from the PhDs and petroleum knee deep in this and linking it into economics, what's the insight Dr Jurgen that you hear seminar after seminar that matters well? I think, um, because I think

about the research we do at h S Market. I think I just came back from Detroit, where we did we have a sort of a study group involving a number of companies on our own experts called Reinventing the Wheel, trying to understand how transportation will change, how what type of vehicles people move in will change. And I think that's obviously I find everywhere I go that's on the minds of a bil global oil industry, as it is of course the automotive industry and a tech industry that's

kind of convergence of them. I think the other big questions are the kind of the perennial questions understanding, you know, the overall forces of supply and demand, and and how the rest of the world is accommodating to this new force that has emerged out of US innovation basically, which is a shale oil and shale gas. And I was struck as I've been traveling in around the world in a way other countries almost first of all, see the change in the U S energy position more dramatically than

we may do. And secondly, the growing recognition that the shale industry and the way it operates is a major new force in the in the world economy. Let's come back and talk a bit about the shale economy. Let me ask you one question though, about what you were just mentioning there. Your trip to Detroit. Is our imagine a two bridled, not unbridled, but bridled. When we think about the future of cars, we think about autonomous vehicles

and driverless cars. Are you are you foreseeing something when you imagine what the future of ground transportation looks like? What do you foresee happening? Well, I think we've learned again and again that you know, these kind of things that to change can happen in ways that you don't expect and don't see. I mean, it's the tenth anniversary of the iPhone, who imagined this whole new economy based

upon Have you predicted that in the prize? I was in an event last week the Prime Minister Motive from India and he was saying how India is in, as he put it, in a digital mood, and he wants to move everybody to online banking, out of out of the cash system, although after what happened in Ukraine, you

may want to think twice about about doing that. So I think we're we find that, you know, you really do have to use kind of realistic stories about the future scenarios to try and to see what are the kind of going to be the milestones on the way to how the transportation system changes. But I think I would say, I would say that there's such a focus on this that this wasn't there two years ago. I guess I want to go here. Uh, doctor, you're going

more towards your wonderful book to quest. I picked it up. I was like, yeah, yeah, you know, like a big deal and it's highly readable about the new world of hydrocarbons. Doctor, you're gonna where are the big oil companies in ten or twenty years. They're not dinosaurs, but what are they? I think they will become, first of all, more gas companies, more focused on natural gas. Uh. Secondly, I think you

see the big companies hung back from shale. They left it to the independence, and I think they now see that shale needs to be part of their portfolios because of the flexibility. It gives them to sort of flex their systems up and down as the markets change. But I think they're all going I think back to ours Syahweed conference a couple of months ago. I think they're all going through a sort of soul searching about, you know, what what kind of energy transition is at hand and

what their role in it will be. So uh, I think you know, they'll still be there. There'll be large players. World demands still I think over the next ten or twenty years will continue to grow, but they are kind of looking at how much do they need to move into other parts of this sort of value chain and energy. I would say that other big thing is gas. Really they you know, they start to refer them to selves as gas and oil companies rather than oil and gas companies.

As we look here at oil in the mid to high forties, I wonder if you think we're facing more bankruptcy is not the major oil corporations, of course, but in the industry as a whole. I think that we you know, over a hundred companies went bankrupt after the twenty fort when prices really started down. Uh. Their assets remained there, just the companies went through reorganizations in some form.

I think that the companies have generally re engineered themselves, uh for to operate at a much lower cost level. When this when the prices started to collapse, the end of the assumption among many was it at seventy dollars. These companies disappear. They have now re engineered themselves to work at forty to fifty dollars a barrel. So I think there's a much greater resilience there in the system. Obviously, the closer you get to forty, the more the more

pressured creates on these companies. But I think and what we see we just didn't analysis look at the whole cost structure of the industry around the world. You see this kind of re engineering to operate more in a kind of fifty dollar world. And looking back on a hundred dollars is uh it was a few years ago was seen as a new normal. Now was seen as an oberration. I want to up the script. Uh, DR, you're going, which we can always do for you. You

and I are at Davos. What people don't know is there's a valley as we look out to the right side of our TV set, and it's a glacier there. That's I think in five or ten years, DR, You're going to glacier will be on our set the way it's coming down the mountain. There's a glacier iceberg in Antarctica right now, that's the size of Delaware or something. It's going to break off, and nobody knows what's going

to happen to it. Give us an update on your thoughts on climate change, in your thoughts on the calculus of climate change, the rates of change of climate change, I'm not a first thing I have to say is I'm not a client scientist. So uh, but you read it and everybody knows you come on, right, So I think that, um, you know, the recognition is that you know the climate is changing. Uh, there's a wide spectrum

of alarm at how fast it's going to change. Yeah. Uh, and it's I think you see, Uh, if you look at the oil industry, you see a number of the major companies now in favor of a carbon tax to kind of give a kind of predictability to future investments within that in the the auction process, and now it hasn't worked in Europe. And that is the rate of change of all this is this all happening faster than we thought? Is? What is climate change happening faster than

we thought? I don't know. I mean, it's been so heavily studied that I don't know if you can say that the pace is faster than we thought. I mean, you know clearly the carbon levels are higher, and we're much more conscious of change. I saw that the Chancellor mercle just today reenforced that all the European countries remained committed to the Paris Agreement. I think the other aspect of it is that, you know, the energy base is changing. There is a growing role of renewables, wind and solar

now or eight percent of our electricity. Does it change the sense of system for going to renewable energy? That is, if you have an administration that isn't backing it to the degree the previous one was, Is that change what companies are investing in? Well? I think that the in the US, I mean, obviously the real focus was on Paris and whether we were in or out, and with all the repercussions that people have on different sides of it.

But of course Paris did not commit countries to specifics things. Was that they said they do these things. To me, what stands out is, uh, well, two things. One Trump administration he said that he was going to back out of Paris, and so in a way it shouldn't be a surprise that that he took the US out of it, or seeks to take the U S out because it's

a long process. But I think what's really significant is the tax incentives that were put in at the end of and we think that as a result of those, two thirds of the new electric capacity will be wind and solar. And that's a that's a change, and that's going to happen. Whatever. We have to leave it there. Dan, You're gonna thank you so Much's never enough time with Dr Jurgen read the quest. This is Bloomer David Girl.

I am in such shock I can't speak. It is so unique in the history of the nation to have a Chairman of the House Ways and Means Committee actually show up on time for a radio interview. I believe that's the first. It goes back at least to Madison and maybe as far as Washington. And we thank the Chairman of the House Ways and Means Committee, that is one Kevin Brady, the congress from the eighth District in Texas.

That's Montgomery County, Walker County, just north of Houston. If I'm not the mistaken joining us on our phone life this morning, is no more important person to talk to on the issue a tax form in particularly than Congressman. Pretty great to have you with us this morning. Thank you for that intro, the Madison reference. So I'll take it. We'll see where we go. Let me ask you for Let me first ask you about the calendar here Congress approaching the July fourth recess. Say you guys come back.

You've got about ten legislative working days, if I'm not mistaken, and then it's onward to the August recess. How worried are you at this point about the compressed congressional calendar? Look, Um, I'm not look it. Uh, we know what the schedule is. Um, I'm confident. Frankly, the Senate is going to resolve their differences and deliver on healthcare reform. I know our challenge in the House going forward is to finish this budget and move that to the Senate because that budget is

really key to tax reform this fall. And so look, um, it is a tight schedule. I think we can can meet it. Let me ask you a question here about where things are added when headed when it comes to tax reform. I wonder if you'd be open to an overhaul that would include maybe temporary cuts on the individual side, but permanent changes for for those on the corporate side.

Are you willing to weigh that or consider that this point in light of where we are so right now, I'm focused on bold, permanent tax reforms that dramatically simplifies the code, really lowers rates significantly for job creators in in in middle class families, but as as importantly leap frogs America from I think roughly thirty feet in the world into the top three for competitiveness. And we're we're focused on that permanence because we think that's critical for

for companies making the investment decisions they create jobs for families. Uh. Carsman, Robert Capital of the Dallas fed of the People's Republic of Texas just told me that all of this uncertainty in the land of Brady, Uh is gonna dampen economic growth? Is the uncertainty of your Washington getta dampen or slow economic growth in Texas? Well? No, I don't believe it will. Um. In fact, back home, Um where I spent a lot of time we lived back in the woodlands to northeastern

Um where people are families and small businesses. See, they're very excited about tax reform. They feel like we're going to get it done. Uh. It makes him more optimistic about this year and next going forward. And so I think in the world of politics and anguishing over every different phrase and word, you know there's uncertainty. But I think, um business is large and small feel confident we're going

to get this done. I listened with interest a couple of weeks back when the House Speaker Paul Ryan spoke before the National Association of Manufactories in Washington, d c. And the news so much as I could ascertain what it was that he placed a deadlight on getting this done. He said, let's get tax reform done here by the end of the year. I was struck by the urgency in that statement. Is your sense of urgency is his

being matched by the White House? Would you like to see the White House doing more to make this the paramount issue for him? So it is in my experience with President Trump's tax team that urgency is clearly there. They know what were the economy is struggling, they know we're falling behind. Is the timetable we've set and I haven't seen anything yet that knocks us off that timetable. I don't anticipate one, so I share that urgency and

I believe that the wine house does as well. You know, David, I want you to continue here with a chairman, but I want to make clear folks who need a surveillance correction. Chairman Brady talks about the woodlands and it sounds like he lives in a pup tent outside Houston. I just want to point out to everybody that you can get for five hundred forty five thousand dollars, five bedrooms, three plus bass David, this thing is the size of Brooklyn.

I mean it's these houses are ginormous where Chairman Brady lives and Frankie, that's part of the competition that Texas wins at. You can almost afford the stuff you can't talk about. Affordable housing is one of our strength in Texas. And with low tax and no income tax, you're killing We're moving the show to Texas. Let's go, Chairman Brady.

Let's let's talk a bit about the conversations you're having with the White House about the border adjusted tax that you've embraced, that it's a central part of the plan that you've devised with the House Speaker you flow to the idea of a five year phase in for a border adjusted attacks. What's the case you're making to the White House? Now, get us up to speed on where things stand when it comes to the conversation over A B,

A T. Yeah. So here's one of the We we have several big challenges in tax reform, and one of them is how do we stop businesses from continuing to leave the US. More importantly, how do we get them to reconsider their supply chains to terms what can be brought back the United States? Because our current tax co clearly tells them move it elsewhere, and so our proposal

on border adjustment matches our competitors. Basically is equal taxation in the US, and by lifting the mad Americat tax a level playing field abroad, it is a bold change and I recognize that, and that's why the five year phase in was is proposed to dress what we believe are valid concerns about making sure there's plenty of time for the dollar to dust in all of that. But bottom line is whether border adjustment is in the final product or it is set aside for further study, the

problem still persists. How do we stop companies from leaving, how do we bring them back? And so we're having a really good discussions in the White House and Center on how best to solve that issue. And we're I'm just telling you, We're going to stay at the table with President Trump's team and Senate Republicans until we solve that principle issue. Sherman Brady got one more serious question for you before you get on with your productive day.

You you, more than anybody we speak to h knows the upset of parents and families broken apart and by violence. And that I'm begun calling the opioid epidemic the heroin opioid epidemic because I don't think anybody listening in the real world knows what opioids are. You're in a leadership position. What does Washington need to do to help Woodlands, Texas a rich place or the poort place you know better than me in Houston. What does she didn't need to

do about the heroin opioid epidemic? Well, it is an epidemic, and we've seen we've we've worked to close down pill mills in Southeast Texas and there's one point four hundred of them in the Houston region, all of which drive that epidemic. It's going to take several concerted efforts, and one of them, frankly, is in healthcare. I was pleased to see the Senate ad some more funding to address this in the healthcare bill that they have the House has already in Senate has acted in some other ways

as well. But but what I'm what I'm actually really pleased about is this has finally gotten the attention it deserves, both up here in Washington and back home as well. And so I this is this issue isn't going to go away, and we know we've got to act. Chairman, Thank you so much, Uh, David, why don't you exit the chairman? Chairman Kevin Brady there the chairman of the House Ways and Man's Committee from the eighth District in Texas.

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 Keene, David Gura is at David Gura. Before the podcast, you could always catch us worldwide. I'm Bloomberg Radio. Runt you by Bank of America Mary Lynch with Virtual Reality virtually everything

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