Bloomberg Surveillance TV: April 15, 2024

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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business App. John Kirby, Admiral Kirby,

I won't speak for the Israelis, I think you can understand that. I believe the war cabinet is still deliberating and making their decisions. The President had a very good conversation with the Prime Minister right after or towards the end of the attacks on Saturday night, and the President was very direct that this was a.

Huge success, that Israel can be.

Proud that it doesn't stand alone, and that it has superior military capability. Iran utterly failed and what they were trying to achieve, and that that success alone sends a strong message to Iran and to the region about Israel's place there.

So could we just define success? How can we define the weekend's events as a success. To see the first direct strikes coming from Iranian soil on Israel, how is that a success in any way shape or for.

Let's talk about what didn't happen.

Hardly any damage and the only impacts were to an air base in central Israel, no real casualties except sadly, a young civilian girl was critically injured. In the vast majority, as the IDF have said, ninety nine percent of what Aroon threw up in the air, drones and missiles never landed either it failed or actually got shot down. So that's what didn't happen. And what did happen was Israel proved it has superior military capability and just as critically,

I think that's significant.

You're talking about a successful defense. I think a lot of people also focused on the unsuccessful deterrents. The President said, don't and they did, and we're trying to work out, Admiral Kirby, in what way the US is able to influence Iranian behavior.

Well.

The President prepositioned military forces in the region, which allowed for that unprecedented successful defense. The President met with the G seven leaders yesterday to talk about a unified diplomatic response and to consider other options and alternatives to try to hold Iran accountable for what it did on Saturday night. Iran is increasingly isolated in the world, certainly in the region, and Israel has proven that it has friends.

If Israel does not respond, is the new status quo that Iran can strike Israel from its own soil and there won't be a retaliation.

Again, I can't speak to that, Amory.

That's going to be up to the Prime Minister in the War Cabinet to make those decisions.

We respect that it's a sovereign nation. They have to make those decisions.

There's lots of reporting that the Biden administration that was verbalizing to these really that they do not support a counter strike. Isn't that in the sense taking one of those tools out of the toolbox and brandishing it to the world.

The tools that we took out of the toolbox were pretty significant on Saturday night, Amory, ballistic missile destroyers in the instrument helping shoot down ballistic missiles, fighter aircraft in the air, other partners participating. There was a lot of tools in the toolbox, and there's no question that Iran recognizes the coalition that was put together to help Israel defend itself. Again, I can't speak for what either side will do going forward. All I can do is speak

We've had sixty tons of arsenal fired upon Israel directly from Iran. We've had six months of Iranian backed who Thi's hitting as well, trying to hit even US vessels in the Red Seat and disrupting global trade. We also had an uptick of uranium enrichment by Iran. So to get to this deterrence, what is the US willing to do? We have sanctions in place, is the United States willing to enforce them?

We have been enforcing sanctions, I mean, my goodness.

In the three and a half years of this administration, we have implemented more than fifty sanctioned regimes, targeting more than five hundred entities and individuals. And again I won't preview coming sanctions or anything like that, but I can tell you that additional sanctions are certainly not off the table in terms of holding Iran accountable.

And take a look at.

The additional military resources that President Biden has added to the region even before October seventh. This is something that he's been keenly focused on, and as we saw from Saturday night, Iran is increasingly isolated on the world stage. They are increasingly making it harder for anybody in the international community to be sympathetic to any of their inimical interests.

There Again, I think we've done a lot.

We'll continue to look at our options going forward, and I suspect that we'll continue to hold Iran properly accountable.

Analcarry how are they isolated? They had a call with the Saudis. They're sending all their oil to China, They're sending Shaha drones to Russia. In March, Iranian oil output hit a five year high.

Where is the enforcement.

There is enforcement of the sanctions. Memory again, this is one of the most heavily sanctioned countries in the world, and we're going to continue to look at our options going forward to hold them properly accountable. As sanctions are certainly not off the table, neither is going to making sure that we've got the capabilities in the region and we do to toward some of their destabilizing activity. You talked about the uranium enrichment when the previous administration pulled

Sort of breakout capability.

The President obviously tried, We tried, but Iran was not negotiating any good faith to get back into that Iran deal.

But he also made clear that we will not allow Iran to achieve a nuclear weapons capability.

We prefer to do that through diplomacy, but if not, we've got other options available.

What's diplomacy, Bob Malley, the Iranian envoy is still under investigation. Who is leading these diplomatic efforts.

As I said, the diplomatic efforts to get them back into the Iran deal are no longer being pursued because Iran wasn't negotiating in good faith, which is why we're going to make sure we have other options available to us to prevent them from achieving a nuclear weapons capability.

Admiral one question, and Amory did touch on this, this question around what the response could be to Iran seizing a vessel in the Straits of Hormu. Is the idea of freedom of the seas. What's the US's response to that, given the fact that a lot of companies have already started to rejigger some of their trade routes and bacon extra costs as a result.

Yeah, I had a little trouble hearing you over the lawnmower there, but I think I got the gist of the question. We certainly condemned this most recent maritime attack. This is a tack that the Iranians have used.

In the past.

We have, when able, been able to interdict, been able to try to afford other such maritime attacks, not all of them, of course, And we are also making a concerted effort over time, and we have been somewhat successful in intercepting goods that the Iranians have been trying to ship by sea to some of their proxies in Iraq and Syria and certainly the Huthis Iverner.

One thing that a lot of companies are saying, a lot of executives is that they do have to make contingency plans because they aren't sure that there can be such safety and you've seen insurance costs go up. Is it appropriate for the US for Israel to more directly respond to Iran at some point, just not now.

Again, I can't speculate about future operations one way or another, or future decisions that we might have to make. The President has been clear we're going to hold Iran accountable for their destabilizing activities. He's also been clear we don't want a war with Iran. We're not looking for another war in the Middle East or is to see the conflict that's currently underway in Gaza broadened or deepened across

You and a fine now with a low mama, So we're gonna let you go. National Security accounts, SOL Communications advice that John Kirby, John, thank you, Sir Admiral Kirby. We appreciate your time with this amount of table together with Shanati KPWC. TELLMA show tell me you've had a few minutes to go over this one. What's your reaction to this?

So Our feeling is it's two things. One is it's what's happening in the industry. So there is a rebound that's happening in investment banking. Investment banking was on a real downturn over the last prior twelve months, and what you see at Goldman is not even full power. I mean, we still think the industry, broadly speaking, is probably operating around seventy percent of what we would think is typical.

So that's number one.

Number two is I think it's a big moment in the Goldman reboot. They also sold green Sky in the quarter, which is putting some of their consumer efforts behind them and they're going to focus really on what's been the core of the company over the long term. We've been

Something that Sheanali said that really stands out because it seems like of banks are implying the same thing in their numbers, use a balance sheet. We're hearing that again and again, using their balance sheets more aggressively. Is this the new model kind of going back to the old one as they try to compete with private credit and private asset managers, they got to use their balance sheets and they find ways to do it even with all.

The regulatory Well, I think that that's going to be key because we've just gone through a moment where the banks in general of lost market shared to non banks, and I personally believe in a five percent yield world with a flat or inverted yield curve, it's going to be harder to get financing than when money was free

Forgive me, there were years when a lot of these bank executives were saying that they can't do this, that they are hamstrung, their hands are tied because of financial regulations.

What changed, well, I believe me.

I don't think any bank's going to stay outside of the financial regulations. I think it's just core blocking and tackling, which is having reliable acts. I think what's changed is the other markets aren't as easy. So zero interest rates meant that it was very easy for non banks to be able to raise financing to be able to enter the market. It's going to be harder for non banks

You said you like Goldman's action.

Olie was talking about how Ted Pick his whole business has been really the trading and potentially we'll read through Morgan Standing tomorrow.

What other banks do you like?

Well, we like Truest. It's one of our favorite ideas. It's one of the biggest banks in the nation. They sold their insurance broker for a whopping price recently they're going to trade in. What you don't see now is that they haven't put the gain into their financial statements yet, so the stock's really trading around one fifteen intangible book, which is a very low valuation for one of the best banks in the nation. It's got a five point

When you look at the loan market at the moment, what do you make from it? Because know your notes you talk about the seasonality is low.

Slow, it's slow what we're seeing, and all the results that have come out loans have actually been a little bit lower than we expected. And when I watch, you know, look, we've had three now four banks report our firm files two hundred and twenty five. We got a long way to go. But what do I think. I think delay in the pivot. So our bull case on the stocks and we're market performed, So the bull case we're pretty balanced.

How aligned to you with the gloom of Jamie Diamond. I've a JP Milkan What did you make of the caution from him on Friday? Typically we're all used to sort of beating race, beating race from JP Milkan. Then on Friday things kind of changed. What do you make of that?

There are still big macro risks in the marketplace. And I'll tell you when I talked to bank management teams, it's almost like I feel like I'm having a credit analyst discussion more than an in equity analysts discussion. They're very focused on their own balance sheet. I think strength and stability seems to be a bigger presence in the strategic boardroom of these banks. They are building these banks to make sure they can withstand any challenge.

And Tom, if you look at the way Goldman and Morgan Stanley have been trading, they've been bears. Morgan Stanley's down more than seven point five percent over the last twelve months.

Does it deserve that?

Are these kinds of investment banking and trading businesses is just something people don't want to pick up on in this environment.

I think for Morgan Stanley it's just a preference for Goldman Sachs. For us, we had been really bullish on Morgan Stanley.

We pulled back.

It's just the dynamics of what's happening in their own earnings at the moment. We just think there's more upside because there's more delta coming at Goldman. They can do a little bit more self improvement, and so we like it more. But so we're a market perform on Morgan Stanley, but think it's a fine company. We just think the dynamics don't have as much delta to them.

Chanie pass like that alongside tell mi shall I kyped up? You just like to read the Number's just the ren things sumptionalty quickly, bait bait bait. How would you frame it any other way? The gold sacks this smalling.

There's no other way to frame it.

Remember they've only been training at one point two times book value. Heading in today Morgan Stanley's at one point five. It sets the bar super high for tomorrow. And remember there's a big cloud over Morgan Stanley with a lot of questions about the investigations that they're facing. They haven't said anything yet, and so the earnings are one thing, but then the story is also going to be equally important heading into our.

Let's got to score U up on the board again and just look at MOK and Standley and gets winning Sat. Tomorrow morning in the pre market, it is positive off the back of what you're saying on Goldman sacks. Goldman up by three point four percent, just beats across the board, and we totally so briefly about the night, sure of the upside surprise, let's just sit on fixed sounds and trading revenue just for a bait longer. Full point three

Beat, and it really raises a question, Okay, they're using their balance sheet more so that means they're making directional bets or taking things down in a market that might look like it's liquid but may not be as liquid. And then it also raises this question about just how much they're taking share from some of these other companies just in terms of private asset managers, which is something a lot of people have talked about.

But also to remember, we don't have Credit Sweee anymore. So a year ago, Credit Suite disappeared overnight in the ubs. So when you look at the statistics, I believe that market share was pretty much captured by many of the biggest other banks. So I think that's also on a year over year basis been somewhat of a.

So when Aschinali, is the pinketting bigger or did they just take someone else's slice? So you said that slice belong to Credit Suite.

I would say amongst probably others, I would say they're getting a bigger piece of the slice. Because while I do think and I think Morgan Stanley will benefit tomorrow from the market just being better. And believe me, is someone who operates an investment bank, I pay attention to league tables and market share, believe me. So the biggest firms have probably picked up the most share, and it's a few firms who have done that, and Morgan Stanley and Goldman would be in that bucket.

What's good for Goldman Sachs isn't necessarily good for Science Bank for some of the others that are smaller regional banks. How much is the gain of big banks the loss of regionals.

Well, well, they tend to do different things, so the net interesting income world that they all live in is somewhat similar. It's the investment banking piece that really is the big delta that we've been talking about. So as we get away from banks that report that don't have that, they're going to be war attuned to what's happening in the interest rate environment. The good news there though, Li says that six months ago we would have been talking

Now.

It's the cost of those deposits. And we're waiting for the Fed to cut rates a little bit to take some of the heat off, because you know what, US treasuries are really competitive for bank deposits. We need the US treasury rate to back off a little bit for the banking industry to do a little better. And it is actually all about deposits more so than loans.

When you say we're white saying you made the banks, because for the rest of us with money on deposit, we're not.

We're to poss on hid by bills. Final time.

You know, I make it.

Happen on wine. It's easy to do.

Tema shot, Thank you.

So consumer spending has been strong. I think it is driven by strong fundamentals. Job growth has been solid, We've seen real wage gains. We're in a pretty strong economy with good growth, So yes.

It's part of that story.

But you know, I think what we're realizing is we're getting a nice tailwind from the supply side of the economy, good labor force growth, strong productivity, good real wage gains.

So with that, I think, you know, consumers are spending.

What's the thinking in your office and among your colleagues about does this last or is this a surprise that you think could go wait at any minute.

Well, one thing that makes it really hard to forecast is we're still feeling the effects of the after effects of the pandemic and Russia's war in Ukraine and all the things that have happened in between. So we're definitely still seeing an adjustment process by the consumer in the economy overall.

But you know, overall, I think that.

The economy will continue to grow at a solid rate this year, probably not as high as the three point one percent we saw la year, but something like two percent or around that. So I feel like we're still in a good place, probably not as rapid growth as we saw last year.

Speaking of international events, I have to ask you the Middle East going on right now, how do you think about the economic and policy.

Implications of these events?

Right so, obviously we're watching this very carefully. I think the primary way you see it through is first of all, through commodity prices, but second is what we think of as a flight to safety, where investors, when they see risks in the global economy, they tend to bring money to the US dollar, and that tends to push yields down somewhat. Right now, I think, you know, markets are

When you think about what the markets are reacting to and what could come out of this, is this more of an inflation worry or a growth concern.

Well, it's really hard to say.

It really depends on how the situation evolves right now. I don't think of this as maybe in the near term it could be effect of financial conditions and commodity prices. As I mentioned, I don't see this as a major driver the overall forecast or outlook for economic growth or for inflation.

Speaking of inflation, CPI came in much hotter than expected and sort of freaked everybody out on Wall Street and market sort of took that as a turning point in Fed policy.

Do you see it that way?

I don't see it as a turning point. I think that you know, we've saw inflation come down.

Maybe quicker than we expected. Last year.

We definitely saw really lower readings and inflation in the final six months that I never thought that that was going to stay that low.

That was unusually low.

We're now seeing some a little bit unusually high readings. Overall, I think the picture is one of the economy is getting in better balance, we still have a strong labor market, and we're seeing inflation gradually come down.

Now.

I do think that, you know, for me, what do I see in the data, well the economy, and then you pointed out the retail sales today, but more broadly, the economy continues to be strong again. I think we're being helped by strong demand and supply, and those are helping growth, and we're seeing you know, inflation come down a little bit slower than expected, and so you know, I think markets are taking all that information into account

Even those who've thought about what PCEE might be after the p p I and cp I say inflation isn't coming down rapidly anymore, but you do have the strong growth, you have very low unemployment. Why cut rates if the economy is doing fine at this level.

Well, first of all, I think Monte policy is working at the rates that we have now, So I think I think Monte policy is in a good place over the past six twelve to eighteen months, we've seen all pretty much all the measures of imbalances in the labor market, and our economy received many of them back to levels we saw in twenty eighteen or twenty nineteen. So we're seeing the you know, restoring balance in the economy. We

The progress towards our goals.

So that's how I'm thinking about it, and we'll just have to keep watching the data and make the decisions based on those goals.

Well, is your base case that you will cut rates this year?

My own view is I think that with inflation continuing to gradually come down, and I guess I would say gradually is the operative word here, and with the economy remaining strong, I do think that given where the level of rates are, real interest rates now are considerably higher than they were before because inflation has.

Come down quite a bit.

So we will need start a process at some point to bring interest rates back to more normal levels. And my own view is that, well, you know that process will likely start this year, but again it's going to be driven driven by the data and achieving our goals.

So it's possible you don't do anything this year.

Well, again you're asking me to speculate and what they will happen more And you know, right now, I think Monte policies in a good place. We're seeing the progress. We're seeing progress. It's a bumpy road on the inflation front, and we'll just have to figure out how to best adjust policy as needed to achieve our goals.

Now, you mentioned the real rate is policy tight?

Now, I do think we have restrictive monetary policy.

I do think policy is tight.

So what do I look for Because the economy is growing, it grow over three percent? You know, we're adding about two hundred and seventy five thousand jobs over the first three months, So that seems like an economy that's really

Are all moving in the right direction.

Stance in MANTE policy has really been an important driver of restoring balance to the economy and helping bring inflation towards two percent.

What's left with inflation?

Is it something that you can affect or are these non interest rate responsive sectors?

You know, MANTE policy can affect inflation in the economy. It works through multiple channels, so there are some sectors that maybe are not as intrasensitive, but the economy is interest rates sensitive. We've seen that over the past couple of years as we've moved from an accommodated.

Policy to a restrictive policy.

So Monte policy is working. To expect it to continue to work to bring inflation down.

You're going to see it, you know, show up.

In different parts of the inflation rates, you know, goods versus services and things.

But over the past year year and a half we have.

Seen a broad based declining inflation in all these categories. It's just that we haven't gotten all the way to two percent, and we just need to keep policy in the right place to achieve that two percent goal.

The question I always ask is what companies telling you these days about their hiring plans, about what they're having to pay, and about inflation, whether they're raising prices or having to pay higher prices.

Well, clearly, if you asked me this question a year or two ago, that's all they would be talking about. Price increases, compensation increases, the challenges of hiring employees. Today, I think those you know, those comments are still out there a little bit, but far less than before.

We're hearing from our context.

You know that it's easier to fill positions than it used to be. Wage compensation pressures are less, and price pressures are are less. I think that's consistent with what we're seeing overall in the data.

You're the potential growth guy. Has potential growth moved up?

You know, I am being getting more optimistic about potential growth in the economy.

I think for a couple of reasons.

One is, you know, through the pandemic and everything that happened after that, I, like most people, had concerns that the supply side of the economy had suffered, you know, damage the labor force and in terms of labor force and participation. And you know, as we've watched the data over the past two years, we've seen an increase in labor force participation, increase in labor force growth, and we've

A question for all of our friends around us on trading desks. You had a briefing on QT at the last meeting from the FED staff and members, according to the minutes, generally agreed that it should start soon.

Does that mean May or does.

That mean June.

Well, I think we said fairly soon, and the you know, I think that the reasoning for slowing the pace of reduction or balance sheet makes a lot of sense.

It's a prudent course of action.

We are decreasing the balance sheet quite rapidly, and by slowing that we'll have more ability to monitor, assess, and analyze as we get eventually to an ample reserves kind of world that we're aiming for. Everything is going with the balance sheet. Everything is going exactly as planned. Things are going well. When we decide to slow the pace of the balance sheet, that's a decision for the committee.

No decision was made at the.

Last meeting, but obviously we'll get together relatively soon and discuss this further. But to me, this is a sign of success of the plans we laid out almost two years ago to reduce the balance sheet. We've had very little disruption in markets. It's worked exactly as planned and we're just executing on that plan and that's going very smoothly.

So QT could come before great boots.

These are really separate issues.

I mean our shrinking the balance, we're focused on getting to ample reserves. On monetary policy, we're very focused in achieving our maximum employment and priceability goals. Those are different objectives, those instruments can, obviously in different times, in different ways.

This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, and geo politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app