This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. Jered Cassidy joins us. He's a large cat bank analyst at RBC Capital.
Marcus the decades of experience. What will the cost reductions be, Gerard, I mean, I get they're gonna come out and they're going to manage that.
But it's twenty.
Twenty four beginnings with this earnings report, a year of cost reductions for these major banks.
Tom, I think they will be an increased focus on reducing costs, no doubt about it. The banks are striving for positive operating leverage, and as you know, the net interest revenue numbers will start the year of on the weak side because of the margin pressure that the banks are experiencing. We expect that to inflect though sometime in the first or second quarter or twenty four. But to your point, we do expect to see further announcements of downsizing of personnel.
We've already had some announcements, as you know. P and C is an example. Of course. City Group's got a big restructuring going on.
So yes, Tom, we do expect to hear more about reducing costs.
So good Friday, folks, I zeld In Offspring, Jared Cass and you know Zell Works. How's a digital banking battle? Who is winning the digital bank wars?
Tom?
All of the major banks have incredibly good digital products. You know, when you think about the introduction of the iPhone back and I think it was seven eight, it really has transformed banking like so many other industries around the world, especially on the consumer banking side. But as we know, you can buy a very strong product off the shelf, which allows the smaller community banks to compete against the likes of Bank America and JP Morgan.
With the digital product, and probably as.
You know from your own personal experience, is only a handful of app or transactions we do on the phone, so you don't need all the bills and whistles. It's like the old VHS machines, Tom, we only use them to play tapes and maybe record, even though they had all those other bells and whistles on it.
Changing the digital apps.
He's he busted my jobs just a little bit. He knows you have no clue what we're talking about.
I remember VHS, Tom, I was around for VHS. Well, that's good, Jp Morgan, you are a bank for America. Just around the corner. Before we get there, Jared, let's talk about how to navigate these numbers from BFA. The one time items are anticipating how to really get a sense of the underlying business, the strength of the underlying business, what we look for.
That's true, John, We're going to obviously, you know, exclude the one time items. Everybody's going to have the big FDIC charge you might recall from what happened last spring with the failures, So that's a one time item that the banks will incur. But it's really going to come down to the core numbers, and that's going to really focus on two areas, the ninja's.
Revenue growth and fee revenue growth.
And within the fee revenue growth, of course, with the big universal banks, we're going to be very focused on the capital markets numbers, especially for read throughs for next week when Goldman and Morgan Stanley report.
I've has been really soft. You know that, Jared. I'm just wondering where the pie hasn't been getting bigger, which bank has been getting a bigger slice of that pie? How are they out performing relative to other banks? Who's winning?
Yeah, it appears that Bank America is showing the best improvement of taking a bigger piece of the pie. It's somewhat difficult on the trading side to really get a good handle on who's got the better market shares. The Geologic numbers help us on the investment banking side because those are public, they reported numbers, and those are good
estimates that Theologic has. And in that area, the dominant players, of course are Golmen, Sachs, JP, Morgan Chase, and so we'll see if Bank America or City can creep up in their market share in that area as well.
Jero, are you going to undersell their success here? I always it's not a joke, folks. I'm serious about it when I say they almost have to apologize for their concentration and their success down the income statement. Is it the same old, same old this time around with these four reporting.
I would say that they are going to be very straightforward about the efforts that they're doing, the success that they're having, but also pointing out Tom that they're not only making money for their shareholders, but they're really investing in their communities. You know, the banking industry never really receives any credit to the amount of volunteer hours and money that's investing that they donate to communities around this country.
And so it's that win for everybody when these banks produce strong numbers, and they have been producing strong numbers, these big four banks, and I expect today we'll see some really impressive numbers.
Jared, I believe this, and I've said this from the day I walked to the Dorrit Bloomberg. We don't understand how big these people are. I just added up an approximation of how many people they have. Some together, these four banks are nine hundred eighty nine thousand plus employees. A lot of that's retail banking. Where's that statistic? In five years, it's.
Going to be interesting.
I think that number, depending on how well they can grow, will probably be flatted down because of the expectation over the next five years of increased use of artificial intelligence to really make the banks more efficient and more profitable.
But nobody should expect those.
Numbers to be down twenty to thirty percent because of new technologies these companies.
It's a people business time.
As you well know, financial services is generally a high touch business in many areas.
There is opportunities for digital.
Banking as we as we know, but it's not a total elimination of the human touch, which is an important part of banking.
Jared to stay close said type. We've got some numbers in just a moment from Bank for America and JP Morgan Wels, Fargo City, all coming up later this morning going into it. If you are just joining us, welcome to the program. It got to futures on the S and P five hundred just slightly negative. We're down by zero point two percent. The tension in the Middle East continues to build. Crude is up by more than four percent, seventy five dollars on WTI on brank crude we are
in the eighties eighty dollars and about seventy cents. With us around the table to break down these numbers on please to say it's Bloomberg stionnale bassectionalite, four big banks, four different stories. What are you looking for?
What is going to turn around the story for Bank of America? I think is an interesting question we started there. Can you imagine, John, that capital won last year was up forty two percent and Bank of America only up two percent?
Right?
Because people are borrowing on their credit cards. If you think about it, on one hand, it's that strict balance between being able to borrow and being able to not lose money on those loans.
Okay, But to be careful here, moynihan has to come out today. Does he have to address not concerns or fears that overdoes it, but just a study of Bank of America's liquid in the insolvency position?
Well, he does not, because Bank of America has really taken care of that problem over the last decade, haven't they. And you know, you could make an argument that investors maybe want Bank of America to take on more risk. Remember, they have piled a lot of their balance sheet into bonds when yields were next to nothing, and so they
have had that money tied up. That balance sheet is starting to roll off quite a bit, and you're starting to see their health maturity, losses starting to shrink as well as rates rise, so the or rates come down rather so they want them to put that money to work. Remember, their average fight go score is higher than some of these risky borrowers here, But does that mean they want them to lend harder? I think this is the balance question of the banks, especially as delinquencies start to rise
on credit cards. How much risk are you really willing to take on as a bank?
Today will be all loving kisses. What happens in February. Do we see a lot of right sizing and rationalizations. Do we see announcements or is it dribs and drabs through the late winner.
We've been talking about this, the calling. We have seen stricter callings right at the end of last year.
The media too.
It is brutal. It's absolutely brutal. And remember we saw so many job cuts last year. The hope this year is that things start to turn around and they can keep more people on staff. To Gerard Cassidy's point here, you did see Bank of America gain little share in investment banking, and they also bank in the middle market where a lot of banks don't have that wide American footprint and deals happen faster when they're less than ten billion dollars.
We've been talking about banks for the last fifteen minutes. Haven't mentioned last sprink? Have we left that all behind?
Now?
The bank facty is of nine months ago.
Yes, I mean in the sense that you are going to see those FDIC charges. But the idea of the severe crisis that the people felt back in March, they don't feel that now. But we do see pain still and you'll see that in places like commercial real estate. By the way, you'll also see it in places like auto and credit cards that could get messy in the coming quarters, as we see from FED studies that delinquencies are rising.
They all come out with their different power points. What's the first thing you look for?
I mean, they're like forty two pages.
Let's say, what's the first thing Chanelli Bessett goes to.
I go to You and I both do this. We go to the returns. At the end of the day, it comes down to the returns on tangible common equity. It comes down to the returns on equity. It's the best clean way to gauge the banks.
But the profitability it's basically except for city group, big double digit, right is that there.
Again everybody else is wavering against that double digit number. And it comes down to the costs as well. Those returns can't be gauged if you can't keep your costs
under control. Interestingly enough, Bank of America had made that great move to increase their minimum wage to twenty five dollars per person in the next year or so in the next couple of years, so they do have a cost base, a big employee base that they have to contend to while also managing how to bring in more net interest income at a time where people are over extended on loads.
I don't think we've ever done this job.
It's six forty four Wall Street time, and we're waiting for four separate button pushes.
It's six forty five.
This is his fault?
Whose fault is it? I remember that time Bank of America came out at five forty five in the morning.
But Jared Cassey, he remembers when there's carrier pigeons, I mean, you know the pigeon. That's how the bird would fly up from New York to Boston and he'd be a tucker Anthon can chest out with a big net out the window to.
Capture the booby to run again these numbers in the next five ten minutes. Shinale just quickly briefly what you make of that black Rock tail this morning.
Blackrock has been struggling to grow its alternatives business, and to do it in infrastructure is one place it makes the most sense. If you think about their competition now it's Brookfield, and you will wonder if they will dig deeper into those other alternatives like private credit that you've seen others really dive into.
Would you suggest that we're going to be very careful here with the time folks will give you the banks the moment that come.
Out, John'll do that.
I'm fascinated if this was a bidding war, I mean Gatwick, who as Canal, whatever it is, there's different there. And the basic idea to me is everybody else must have been bidding as well, right.
These alternative asset managers. When I talk to folks in the market, they're all up for sale.
Everybody is up.
Everyone is because now.
Money costs something and everybody's for song.
And scale matters. Unfortunately, scale matters, So if you're not big enough, then you're not invited to the Party.
The push into private markets has been absolutely phenomenal. I want to bring back into on cassidy if ABC as we wait for these numbers from JP Morgan and Bank for America to add the competition private markets deep Bankking, these guys starting to eat the lunch of some of these big banks on Wall Street.
I would say, John, they certainly have increased their competitive positions because many of the big banks that are regulated by the Federal Reserve, the controller of the currency, they've been de risked following the financial crisis, as we all know, the Fed made a push to de risk the large banks, and that's what's happening. But all in all, the shadow banking industry has been around, as we all know, for forty years, and it has taken over a very large
position of providing financing for companies in this country. It has intensified more recently as you pointed out, John, and so the banks are competitive, but the private side has certainly taken a leg up more recently.
Take turn out the numbers TWOP for BFA. Let's get to those numbers. There's a couple of one time items in here that you need to strip out to really gage the underlying business. You're not getting a full of picture of what's dropping the stockcase right now we down five five percent.
They missed on a lot of critical figures here, going down to the core item here, for example, in trading, where you've seen them really punch above their weight, they did come in below estimates on fixed income as well as total sales and trading revenue. Importantly, also, they came in below estimates on net interest income. This is what we've been talking about their ability to bring in lending money at the time when you do see consumers still borrowing.
Are people going to slow down their borrowing activity if they feel overextended? The outlook for that is really important here as we wait for further communication from executives. Here provision for credit losses, while that came in below estimates, John, you did see charge offs come in above estimates, which means loans are starting tour just a little bit more than Wall Street expense.
As the statement comes out, John, and is a generalization here in Shanelle and Gerard of the pros on this return on average tangible common equity goes from fifteen ish to thirteen for.
Bank of America. So there's that key ratio ebbing away a.
Little bit Wellstanka coming out as well. But let's just sit on the training numbers out of Bank of America, just for Abate Shinali four Q trading revenue as you point it out, three point seventy five billion, the estimate three point eighty four FICK trading. Can break it down from fick trading to equities trading, Fick trading coming in at two point two one billion, the estimate two point four, equities at one point five to five the estimate one
point full four. What would you read into that? Right now?
They had zero days of trading losses. On one hand, that is great for a bank. On the other hand, remember prime services, the ability to service asset managers and hedge funds super competitive. Goldman has been trying to eat away at everyone's share and so watching into next week how trading falls across the pack will be important. How much risk are you willing to take on in this volatile market is a question for these question.
Surely global markets.
Bank of America is zero trading loss days in twenty twenty three. Is that good or bad? I mean, I mean, I guess they're bragging about that. What does that really mean they took no risk on their desk.
It is a good thing.
You don't want to see these banks losing much money. But to your point here, at this point in time, can you afford to lose a little bit of money? That is a big question here. It's a tough, tough balance. You have to remember we're living in a time where non bank market makers are gaining a lot of share. Look at those Jane Street numbers, for example Citadel Securities. We don't know what they look like for all year.
And remember, guys, trading activity bounce back at the end of last year, and so Bank of America is competitive positioning. We have to wait for everybody else's numbers, but you want to see if they are kind of holding their ground against the big guys.
More numbers, Wells Fargo, I promised you those just briefly. Four quarter revenue twenty point four eight billion, the estimate twenty point three five. The stock is down by two point six percent. JP Morgan up next. We'll go through this piece by piece. Four Q Investment Bank in revenue one point five to eight billion, the estimate one point seven two. We talked about trading revenue over at Bank of America. Let's do that at JP Morgan as well.
E Grete salsand trading revenue one point seven eight billion, the estimate one point nine to three. FIT comes in at four point zero three bid in the estimate three point eighty four. There's a ton to get through here with JP Morgan. Just the early stock reaction down four percent. Nalie, what do you see?
Yeah?
The interesting thing here is investment banking is not jumping back as quickly as anybody expects. Remember, even if dealmaking came back at the end of last year, you're not seeing the banks clip those fees yet from this activity. It takes a while for those fees to float in. Remember equities also below estimates. This is another competitive place on Wall Street today. Fees have been light the last couple of years, but that's a place that investors are
expecting a bounce back as well. Fick came in above estimates, whopping four billion dollars, but is it enough to offset weakness elsewhere? We're keeping an eye on those provisions as well. Remember a JP Morgan a first glance, they're coming in above estimates for the provisions. Do they expect the environment to be weakening a little faster than investors expect.
Burd at the bottom of the very clear JP Morgan report. This is not c if the institute worked Fortress principles. Book value up sixteen percent, tangible book value up eighteen percent.
Fortress Diamond a bit of commentary from Jamie Diamond himself. The JP Morgan CEO race may be higher the markets expect. Inflation maybe stick here the markets expect. We've had these kind of warnings from Jamie Diamond over the last year or so. John Cassidy has had a bit of time to go through these numbers, tons of numbers here out wows Bank for America. JP Morgan put it all together for us. What's the story.
It's certainly complicated because of all the one time charges, as we touched on a moment ago. But what caught my attention already is that the credit quality picture for the banks was strong in the quarter. For example, in Bank America, the provision for loan losses was less than expected. In the charge offs in our estimate were a little better than what we were anticipating.
And so I think that's one of the messages for investors.
When you talk to investors everybody is very concerned about the outlook for credit quality for the banks, and it it looks.
Like it's shaping up toward the end of the year to be pretty strong.
But the investment banking results, capital market results are coming in lighted and expected.
As you guys have pointed it out.
Edgier artists not the fine print, but it's on the edge of fine print.
This is JP Morgan.
Average deposits flat are down three percent excluding their first republic soiree. How do these banks react if yields come down and the money market fund wall migrates back to them.
Tom, That's an interesting observation.
The read intermediation back into the banks could certainly happen because, as you pointed out, the money market mutual funds, they're tied very tightly to the Fed funds rate. So if the Fed was to cut Fed funds this year, the money market mutual fund yields fall, the banks are a little slower to bring their yield them, So you could see that put JP Morgan and the other big banks,
as you know, are confronting quantitative titment. As we recall, under quantitative viasing in the pandemic, we estimate that the Federal Reserve pump four trillion dollars of deposits into the banking system and now they're taking them out, and that's why you see some of these deposit numbers down.
Let's bring James Gorman retired into this film, Morgan Stanley Shaneli bask with that important conversation recently at JP Morgan Wealth Management Roe of thirty one percent.
That's the jewel of each of these banks. I mean, they all want to be James Gorman. Right.
It's incredible what they're bringing in in terms of margins from these asset and wealth managers, and it is worth keeping an eye on. But again, Tom, if they can't make money at these other businesses, it does damp in the story for even the profitable parts of the business.
We'll have a city group later in the hour. They're making tons of money at their treasury and trade services business, but markets, investment banking are lagging, and credit quality they're below Gerard's estimates, but they're broadly over the estimates of all Bloomberg estimates combined on average and on costs. Can you imagine JP Morgan, which is among the best at cost control here for such a large bank really able to keep a handle on their numbers here on their returns.
They're even above estimates here on non interest expenses. So keeping these costs under control for the top four consumer banks is going to be a very interesting balance.
This year, we're down across the board on these full banks by a little more than two percent. Jared's slightly unfair of me to ask this question, given you've only had about twenty four minutes to look at some of the numbers. In fact less than that, I think you've had about fifteen Based on what you have seen. Who won the quarter?
I would say that it's hard to say, but JP Morgan's numbers look pretty dune good. I'm interested to dive into the Wells Fargo numbers because they have been making real inroads into those trading and capital market areas that has been very beneficial to the any area. But overall, the important part John, as we go through these numbers is going to be what the outlook is for twenty
twenty four. So I know we're going to focus on the earnings calls to hear what the guidance is for twenty twenty four and if we are in for a soft landing, and the Federal Reserve is finished in raising church and interest rates.
All four of these banks are going to.
Be winners in twenty twenty four as their business benefits from those types of conditions.
Jared, thank you, sir for the anticipation of these numbers and the reaction to them this morning. Jared Cassidy if RBC Capital Markets, he's tant and rusted joined us right now, director of Equity Research at CFRA. Can you've had some time to pour over the numbers. Good morning to you, sir. What stands out for you?
Well, I think first on bank stock prices, they're really consolidating. If they're a big move in the fourth quarter, and looking out to twenty twenty four, it's not going to be a V shape, if you will, strong recovery in
any of the areas. But overall, what we're seeing is stability, and stability is going to lead to growth, loan growth, Net interest income just doesn't fall off the cliff when rates are cut, mostly because it's the spreads as it was talked about earlier, and I think overall it's the inflection point in investment banking going into twenty twenty four, there is significant backlog, particularly from the private equity firms, to monetize those investments into the market, which would benefit
the banks for investment banking, for underwriting.
And m and A.
Additionally, banks are going to be conservative in their message with analysts today, mostly because we expect to see.
Tighter regulation by the end of this year.
And you're going to hear the term both from banks and from analysts about capital bill.
That's going to be the clear message.
Kley and Jane Frasier out later with two hundred and forty thousand employees. I tried to add up the combined four bank employees and came up with over nine hundred thousand employees between the four. You've covered this for decades. Where's their employee account in five years? I mean, is this a shrinking business or do they just keep on keep on going.
Dank Fraser is doing a great job on a transformation, but for investors, transformation is a multi year story with bumps, and I think for what will be the headcount for a streamlined city group as we look at it two to three years out is perhaps going to be ten to fifteen percent lower. There's a whole list of businesses that are already announced as sold and consumer outside the US. So I think what Jane Fraser is looking for is execution.
And I think by pre announcing, if you will, those one time chargers, they want to show what that runway is of this transformation.
What is that runway? What will we learn in the hour from Jane Fraser.
I think what Jane Fraser is going to articulate is that city has some very durable businesses that have very reliable recurring revenue, whether it's in corporate or treasury services and payments. And then when they look at the other businesses where maybe they had only one eye on the business, They're going to reinvest in wealth management along with selective areas of investment banking. But this is going to be
a streamline bank looking out two to three years. I would say, though there will be bumps along the way. We had that same narrative with Wells Fargo. They're in a better position today than a few years ago. So I think for Jane Fraser, it's just really showing that the strategy is beginning to work. It's not going to be a turnaround. Just in twenty twenty.
Four, Kenley on there of Cflight joining US now is Norman Rols, senior advisor on the Transnational Threats Project as CSIS, and former senior US intelligence official Norman Good morning to you, sir. The first question from US this morning, overnight and through this morning was that a strike on Houthy rebels or a strike against Iran.
Good morning. The attack was a strike on Houthy rebels. It is a attack consistent with the administration's plan to have a gradual escalatory approach to the region. It certainly will degrade Hoothy capabilities. It's unclear to the extent those capabilities will be degraded. It is unlikely to deter the HOUTHIS from future attacks, although the HOUTHIS will likely calibrate those attacks in discussion with Iran to prevent a more significant regime to stabilizing response.
Mister Rowland Nicolas Smith in the Telegraph as a really terse essay on the actual missiles that the Huties have, and what I read out of it is this is I see the stereotype of the media that this is a bunch of terraces off on a desert island.
That's not the case. They have very sophisticated missiles.
For example, the USS gravelyes there the aarli Berg destroyer, and they've got some missiles here of real capability, including ASBMs. Do we underestimate their sophistication.
No, And in fact it's a well known fact among the governments of the region in Europe that Behuthies have acquired powerful missiles and more importantly training from Iran and in Iran on those missiles to make them lethal threat to the region.
What is the difference for our ships at sea at the Red Sea and frankly outside the Red Sea today, now that this attack has occurred by.
The Allies, what's the new risk to our sailors.
Well, the Houthis are certainly going to sit back and say what do they have left, what has been damaged?
How can they disperse and use other tools?
We have to remember the Houthies still have a vast drone fleet, probably some missile capacity of drone boats and also naval minds. Now, a naval facility was struck as part of the attack profile, but that doesn't mean that we have taken out all of those capabilities, and the Houthis again can use those as long as they keep the nature of the attacks below the level that would cause a very significant counter strike.
The Norman This effort has been led by the United States and the United Kingdom. What do you think we can learn from the countries who were involved and the countries who weren't.
Well, the United States and the United Kingdom as usual or very close partners, and their intelligence and military authorities would have coordinated very closely over the weeks prior to this. Within the region, we had support from involvement by Bahrain and the European Union from never That doesn't mean these other countries weren't playing different roles for security in the region, but for their own political and security reasons, they could
not involve themselves in the attack. And frankly, the United States and the United Kingdom had more than enough ordinance to undertake these activities. Between our missiles, the US submarine and the four typhoons launched from Cyprus.
Can you take us into RIHANNT and give us a deeper understanding of how Saudi Arabia will be thinking about this moment.
Saudi Arabia has issued a muted response calling for restraint from all parties. The Saudis will probably be pushing a diplomatic initiative to send eturn messages to the who theis and to the Iranians. I'm not sure the impact of that, but the Saudis also have to recognize that if the conflict were to escalate, it would impact their security issues. And the international community has not shown much appetite for working against Yemen in the long term, so they have
to be careful. If you're going to involve yourself in Yemen, what's the plan, how does this end? And are you going to be with us as long as takes and the United States and Europe have not comonstrated that interest.
Norman Road Bahrain near Cutter Sandwich, between Kuwait to the north and Uae Dubai and Abu Dhabi to the south, that the Persian Gulf the Arabian Sea, I should say, I'm looking at berin what is their relationship to the other Arab states? Are they alone this morning or are they acting in support with the support I should say of the other Arab nations.
Well, there's no opposition to Bahrain's activities. Bahrain is not the largest country in the region, but it consistently shows significant leadership on issues ranging from the Abraham Accords on opposing what hamas did on October seventh, and on its support with allied and partner military activities. The Naval nav sent Our Naval Command center in the region is located in Minama, and the Bahraini leadership is a very supportive and reliable partner.
What is the level of our intelligence this morning? You've been so good at outline to us. How we know what we know? That's always worry.
Do we have good intelligence after these attacks?
The nature of the attacks demonstrates a clear and good understanding of the locations from which attacks have taken place. We have infrared satellite capability that, according to press reports, allows us to understand whence attacks originates. So I'm confident that the intelligence behind these attacks and subsequent Hoothy operations will be good and consistent with the past.
I'd love your interpretation of a headline we got in the last hour or so, Norman. I wonder what you think about this when you hear the Hoothy say that all us UK interests are now legitimate targets. Norman, what does that mean?
Huthi rhetorica and Iranian rhetoric will remain defiant and strong, But again we're likely to see Hoo they attacks against shipping in the in their neighborhood. There reach is really not far beyond that. But again they are going to want to calibrate this for their own domestic audience and for the region as they move forward without again and we're getting another major missile response, particularly one aim at their leadership. This response was tactical in deterring and degrading activity.
It was not strategic. It was not aimed at leadership or destroying all Hohothy military assets. And again we're managing that escalatory ladder and the administration of London or doing this carefully.
The administration and Westminster will have to manage the domestic reaction as well.
Norman.
This came from Richard Sunak, the British Prime Minister, describe the hits on Yemen as limited, necessary and proportionate after weeks of dangerous and destabilizing attacks the elector, and I think domestically within the United States, within the UK, they're going to be increasingly worried about their countries, their nations
being drawn into this tension in the Middle East. Norman, would you describe what we saw overnight through this morning as a one off where we set in the stage for a repeat of this through the next few weeks.
The British Prime Minister's statement is accurate and crisply said.
We hope it's.
A one off, but that's really up to the Hoothy's I think what we have to look at is whether a Hoothi counter strike will be a symbolic meant to show defiance or really something that indicates that they haven't got the message. If the latter is the case, there will certainly be a broader strike by the United States, probably the United Kingdom, but again it'll be carefully calibrated to move up the escalatory ladder. Neither Washington or London.
Or industry in an all out conflict in the region.
And Norman I Ran and who is at the moment, You're comfortable that there is some kind of distinction between Iran and Hoothy rebels, because a lot of people struggle with that idea.
You will note that in the US statement on the attack, Iran is not mentioned, although in any explanation of the attack and the problem said, Iran is always described as being behind this activity. Iran will attempt with difficulty to deliver new weapons and provide support to the Houthis, but the naval capacity in the region will likely disrupt that.
I think the broader problem is going to be the capacity of Iran's embassy and the people involved provide intelligence and counsel to the Huthis as they deliberate their way forward. But that's the nature of the relationship between Iran and the Huthis.
Norman, We're very lucky to catch up with you, sir. Thanks for your time. Norman rule there a CSIS.
We are going to turn now to Mohammed El Area and at Queen's College, Cambridge, and it is on economics, finance and investment, but today it's on something different after the attacks we saw overnight against Huti revels and terrorists and of course their relationship to Iran. Muhammad, this goes back to Albert Harani and what we all learned about the history of the Arab people Byreen is one of our allies.
Here.
Would you suggest that the Arab nations are in support of this, how I'd attack on these rebels?
I would suggest then nervous. You saw a statement by Saudi Arabia that is warning against escalation, and the concern here, Tom is that other proxies. Other Iranian proxies in the Middle East will see this as a reason to escalate what's going on in that region. So that's why you hear concern from the air countries. The last thing anybody wants is an escalation that becomes region wide.
Which institution can create a dialogue between Tehran and a Western world word.
I think first you need to see a cessation of hostilities in Gaza. That is a Greek condition. There won't be the ability to get people talking in a broader sense in the region until you get a cessation of hostilities in Gather. Once you get that, then you know that the relationship between Saudi Arabia and Iran has improved. You know that the UEE plays a critical role in conversations among countries in the region. So there are parties that can help, but you need to precondition first.
Mohammad, you warned in Projects Syndicate recently not to extrapolate out the favorable trends that we finished last year with. Is there something that's developing in the Middle East right now that you think is a direct threat to that.
It's one of the things John, I mean, my major concern is that if you look at the three systemically important regions in the world economically, the euro Zone, the US, and China, all three are having issues growing in a robust manner. The US is the exceptional there, but even the US now is facing lower household savings, higher debt. China needs to fundamentally change its economic models, and we know that without a healthy Germany, Europe is going to struggle.
So if you actually look at who is the locomotive of growth, it's very hard to point to one locomotive. It's hard to believe that the US will be able to maintain what it was very impressive growth ways now. Put on top of that the geopolitical concerns, and that's why this recency bias, where people simply extrapolate what was a surprisingly good year from last year, is something that we have to guard against.
So you're questioning the resilient growth story, are you also questioning the disinflationary trans muhammad that has started to develop over the last twelve months.
Yeah, I smiled when I heard the conversation before I came on that you know it's disinflation ahead, It's not We're going to see and we already are seeing cost push pressures in the pipeline. That's two. In particular, what's happened to navigation in the Red Sea is directly and indirectly increasing inflation pressures, directly by hiking input prices, indirectly by causing shortages that then influence other prices. And then
we have the labor market issue. We have high labor costs coming through the pipeline, so you've got cost push pressures coming in. I suspect we will see inflation at the CPI level get stuck at three percent, and then the Fed is going to have to make a difficult decision. I either tolerated for longer and I was encouraged by John William's use of the word a longer term inflation target is two percent, or try to reduce it to
two percent too quickly and risk the wheel economy. But this notion that immaculate this inflation is going to continue is something that I find very hard to reconcile with actual data.
Muhammad, you really challenge that theory. I think that we get a lot of people on this program, and I know you tuned in and you've heard them say it that the economy is rebalancaying. This will continue. You just give it time, we'll get there. You push back against that. I hear other people say things haven't changed, we will go back to the pre twenty twenty economic regime, low and stable inflation, growth in and around two percent. You
really believe something has changed. What are the issues that you can point to, Muhammad, that you think have fundamentally changed since the pandemic.
So I think it has fundamentally changed since what work was before the pandemic. Coming out of the global financial crisis, we had major balance sheet damage and that resulted in a decade of insufficient argugod demand. There simply wasn't enough demand.
In the system.
And when there isn't enough demand in the system, you pump in liquidity from the monetary side, from the fiscal side, and you don't have to worry about inflation. You boost up asset prices and you get some growth response, but nothing really exciting. That was the story before the pandemic. Coming out of the pandemic, in addition, well, in addition to the pandemic disruptions, we have four factors that are leading to insufficient aggregate supply. So it's a fundamental change
in the macro environment. So what are those factors. We have fragmenting globalization, which means that supply chains are starting to be determined by geopolitical and not just commercial reason. We have companies themselves looking for more resilience balance sheets, more resilient supply chains after what happened during the pandemic. We have a significant transition on climate, and we have the labor market also where labor force participation has not
gone up as much as all of us wish. This is a world in which we are frat trial to begin with on the supply side, and then you get the original shock. So that is a fundamental.
Change, Muhammad. I'm not going to be at Davos.
I'm going to be watching QPR at Watchford this week and we're looking forward to.
That, Mohammedan.
But I'll be there, Mohammad.
If I was in Davos, my banner for the year would be its cost of carry Davos. What's fundamentally changed off of you're good analysis there moments ago, is all of a sudden money costs something. Every single business and family out there has a new cost of money. How's the world going to change a year out with this new new After the free lunch of the last decade.
Yeah, and the issue is the legacy of the free lunch. I think on a flow basis, we can deal with the higher cost of money. The problem is the stock. And we know there are three major areas that somehow have to refinanced and you've got to get volume back. One is the US housing market, where the higher mortgage rate is just stopping people from moving and it's very hard to get onto the housing ladder right now because you're not getting the flow you need. Second is commercial
real estate. There's a trillion plus that has to be refinanced, and some of it cannot be refinanced at what is assumed in terms of value. And then the third area that needs to do is we have a wall of corporate maturities coming up in twenty twenty five and companies normally try to get ahead of it. So if we can deal with the stock issue, with the legacy of this borrowing that occurred when rates were artificially low, we can deal with the flow aspect. The flow aspects, Tom,
don't worry me. We just have to deal with the stock.
Mahammed, We'll continue this conversation. Do you want to tell Tom about QPR or should I.
No, I really don't want to get depressed and start crying on it.
Zone TK relegation zone.
Couldn't the Jets be relegated?
They are like the Jets of English football in the championship.
Real now, and there's a level below them.
They can go down a league. Yet this is not looking good for QPR.
Well, you know, mister Ruberstone's room to be looking at the Baltimore.
Else if they get relegated. Can we get some kind of consortium together and take out QPR.
Yeah, that's what you know. Get some movie in the unio thing you could go over and I could.
Go and coach the team or something. Anyone at QPR wants that? I'm not sure.
Either.
The brilliant Mhammadalarian of Queen's College, Cambridge. The NFL reporting it's best rating since twenty ten. Ninety three of the top one hundred TV broadcast last year NFL games and it's not just YouTube. Pecre't getting involved this weekend said to broadcast their first playoff game the NFL, signaling a shift away from linear TV. Michael Nathanson and Muffett Nathanson wank in writing quote where the history of linear TV
has been written. A sad and sorry chapter will be dedicated to how such a once great business was supplanted by a model that wasn't nearly as good for anyone. Michael and Police to say, join us right now, Michael, great to catch up with you. Say let's discuss it. Let's talk about the sport itself, the dominance of football in this country. What's everyone else getting wrong?
Yeah, American football? What else is getting wrong? It's a perfect sport for a TV right.
You have.
You a set of games, very predictable every week. It's a short season, every game matters, and sports gambling is growing very quickly, so it's a combination of it. It's easy to watch, you can bet on it, and we have national storylines.
Right.
The teams are now nationally followed in a way that when Tom and I we are wasn't the case. It was a regional sport and now it's national in terms of fandom.
Michael's watching Digita, reading Digita, I should say about the complete total dominance of mister Moran's YouTube. And I'm absolutely fat You've been so far out front on this with Craig Moffatt. Is anybody down the road, you going to compete with the two consolidated giants YouTube and Netflix.
Amazon. So it's interesting people have always said content is king. I think the past decade, what's what we've seen now as the platform is king, and I pulled Amazon, Netflix and YouTube as the future leaders in this industry right, current leaders in the future. And the challenge for media companies is how do you play in that world?
Right?
How does your content resonate in a world where you have these massive platforms with so much choice?
And this is this is the challenge the next next decade.
Michael, we got to make some news here, so let's get to it. It's a Friday. You need Nathanson news right now. Paul Sweeney modeled out yesterday the idea of ESPN with a forty percent lift. I believe an expense they have to pay for all this sporting activity. Is mister Eigers setting up ESPN for an immediate sale to Amazon.
You know, he has flowed the idea of finding minority partners. I don't think he wants to give it up at this point in time.
He's flowed to.
Partners from the platforms, from the leagues, maybe some of the third parties. I think Disneyland wants in the sports business and they just want to find some funding to help them get through. We have wondered for a while now how ESPN is a better business going forward than it's been. Costizing work cutting continues to slide. So we've been writing lately. We'll started this a couple of weeks ago time with you, is that we think streaming and
they've not had a good streaming run here. They need to focus more energy on streaming and less on ESPN, and we'll see if they listen to us.
Just to me is like the interview of the Year John, and it was Daniell leave you and you in London, And at the end of that interview I was standing there folks off the side having a pre cocky eil tang And the answer is John is he said, well, we just we don't really want to win. We just sort of want to compete and have again entertainment. I'm not hearing that from Nathan center Iger. It's totally different over here about winning.
Let's talk about the sport, Michael, how do you break it? I think you break it by airing playoff games on streaming platforms that people don't have. I asked my producer Jamie this morning, simple question. You have a producer, Jamie James, fantastic, you don't get to share it. One atturn to Jamie Michael and I said, how do you watch the football? Win's it on? And he gave me an answer immediately. I said, how do you watch the baseball? Win's it on?
Couldn't answer the question. He's a basketball fanasaid, when's the basketball on? How do you watch it? Couldn't answer the question with a direct answer. That's the problem for all these other sports. And a great example of that is Boxinc. They have killed Boxinc. This used to be something everyone used to watch together. It's not anymore. It's buried on a streaming platform, whatever it's called. I don't know. I like boxing and I don't pay to watch it. Michael,
are they about to break it? You talked about the loss of the experience, and I'm with you. They're killing git. They've got success. Are they about to break it?
Yeah?
John, I'll break news on the air with you. I totally agree with you. It makes me so angry as a consumer and an analyst that this is one of This playoff game is probably the top game of the weekend. Right, And when I got my show the schedule when it came out, I'm like, wait, they're they're putting the Dolphins Chiefs on Peacock. So we have to pay six bucks more a month together for one night. That's just outrageous
to me, right, it just is. And I think it's greedy, and I know why comcasts are doing it in Peacock.
I think the.
League is overreaching here and they've done an amazing job navigating the entire pragmentation media.
But I think you're right, John.
I think there's a feedback group which says these guys don't care about the fans. They're in it for the money. And it's just loud and clear by having the best game of the weekend on Peacock. And I totally agree with.
You, Michael, because the numbers simply don't work. I've heard TV executives talk about this. The problem with sport is that you build out the asset, but you never own it. You have to lease it. You get a four or five year deal. I just wonder whether the numbers really work anymore. It was always about grabbing that appointment of view. There were very few left, Let's go to Sports Live TV.
All that's left is sports and this right here broadcast news. Michael, I just wonder the future of that given how much the asset now costs.
That was interesting, John, when you're nighted one hundred million homes in America.
It was a great model.
But as holmes start to slide, the cost of sport keeps going up, the cost of and the revenues keep coming down or flattening, so it doesn't work for every sport. The NFL is key because for five months out of a year it maintained the PTV bundle. That is the difference, right, Hockey, as much as I know, hockey is small. Baseball's become, you know, a small.
Sport in America.
But the NFL and Collegetable are different.
I think those two models great for the time being. For the time being, right, they.
Hold Michael, you and Craig Moffett on the high ground. I'm predicting that we would cut the cord. I'm going to give credit also to your good competitor, Rich Greenfield for being out front in this as well. I want to talk about the new cord cutting, which is the churn model, A six percent churn and what that means for finance of our entertainment. To me, that's a ginormous number because I think over thirty six months a business plan that you lose eighteen percent of your people, am I right?
Well yeah, you know, Tom, the chart is actually six percent a month percent of these services.
So think about that, right though.
In you know, over a couple of years, let's say a year and a calf, you can turn your entire base out. The streaming model does not work as built today. That's where you're seeing all these bundles come together because as Craig Craig's been on this from day one, there was nothing better. I mean twenty years ago, there was nothing better than the PTV bundle because you don't have to compete for customers. The customer is given to you
by the cable operator. You just had to make one good show or quarter to get paid by the cable operator. In this world, you need to constant, constant hit cycle. It's impossible to do so it churns off the charts. The model, you know, Netflix has surprised me. We've been a bit of a doubt or on Netflix's model, but it's just worked their way so well, the number two position is not very pretty if you look at Disney in terms of the economics for those two and a
half dollion dollars last year. You need to cut churn. And the only way you could schurn is by bundling with other people or seeing competitors die.
That's where you are.
I know, your single best buy is the New York Yankees with one soda.
What a gift that is.
But in the finance, in the stock market, Michael Nathanson, what's your single best buy right now?
Well, it's funny. Our Centle best buy was actually a short call on Roku. So, like you know, we've been pushed. We've been very, very aggressive.
On Meta and Alphabet in the past fifteen months.
So we still like them, but it's getting harder and harder to see the you know, it was a home run a year ago. We were saying that immediately we've been buying Disney. But for Disney, I feel like the pressures on them to now prove the case for streaming right. So so our best call is shorting Roku here, which is, you know, a call on the state of streaming, right That's that's our the call of the year. We do this every six months. We update our call. Today for me, it's Roku on the cell side.
Love this, Michael Estae again soon Michael Nathan's and the have Muffet NICSNS and thank you, Buddy.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. Bloomberg dot Com, the iHeartRadio app tune In.
And the Bloomberg Business app.
You can watch us live Bloomberg Television and always I'm the Bloomberg Terminal.
Thanks for listening. I'm Tom Keen, and this is Bloomberg