Bloomberg Surveillance TV: July 16, 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

Hi, John, good to see you. World one day is high energy, so that's going to I think help. We need a lot of US leadership within the world. Another theme from last night that was very clear is the working person in America you know, I'm a nerd, So we talk about median income. Raising the median income. That's what I've worked for for forty years, and that means what's the wage of the people in the middle of

David, if I can match that with a conversation on Wall Street, just to get across the here, there are some conversations taking place about foreign exchange. You know Larry Kudlow than I do. We both know him well. Larry Kudlow would often talk about the strong dollar policy. You don't hear that so much from Senate events. Some might say, you hear the opposite. What do you think is going to change on that front?

We saw in the platform that the US is going to protect the reserve currency status of the dollar. That means defend the dollar. You know, I use the phrase strong and stable dollar. That means fifty years from now, you will know that the US dollar is the stable store of value for the world. That's the best thing for manufacturing because you can make the new investments. I think the key is to create an environment where people

What do you make of the mister Vance talking about and he's questioned j Powell about this as well, the fact that the reserve currency status of the US dollar worries him and the lack of control we have our own currency. Does that bode with some of the members, as Jonathan was saying, in the former Trump administration, like Carrot, Larry Kudlow.

I think the FED made big mistakes. You know I've been reading about I've been writing about that in the Wall Street Journal for well over a decade. The idea of having zero percent interest rates didn't defend the dollar, and it didn't work for getting investment into the US. So you can have a much stronger policy from the Federal Reserve. I think that's some of what people are getting at that the Fed needs to be talking about production in the US as a way to bring down inflation,

David, I just want to understand that. Just give me some more color. How are you thinking about the Federal Reserve? Are you saying they need newer tools, more tools, or are you saying the emphasis should be elsewhere in Congress?

They have lots of tools. They have regulatory, regulatory tools that really affect how lending is done within the country, they're not doing it in order to in order to help small businesses. They need to be thinking about that. Also, the tradeoff between the balance sheet and the interest rates, I think can be done in a more effective way. They don't need to be owning all the bonds of

David, you just sounded like you were saying that you think they should accelerate the balance sheet roll off and get out of the treasury business. And I'm trying to sort of match that up with the prospect of extending the tax counts of twenty seventeen. How do you do both those things at the same time. You know financial markets better than most What was that going to look like?

They all go together and they actually work toward growth. I think if the if they would shrink the balance sheet. Remember the balance sheet has two sides, assets and liabilities. The liabilities that the FED is using to hold all those bonds is short term liabilities. They have this giant leverage to trade on that's lost a huge amount of money,

You clearly have a very clear policy preference, David. I just wondered you have a clear preference on who you would like to run the federal Reserve.

Oh no, that's not so much the issue as the policies. We need good people in strong positions in order to turn the country around. I've written a lot about the need for a full upheaval of policy thinking, and especially the models at the FED. You know, they're still basically operating under the Phillips curve model that in some way you have to have unemployment in order to bring inflation down.

One of the bad things about TV, David is you run out of time, and this is one of those conversations where I needed an extra thirty minutes to get more clarity from you. David. Let's do it again soon. Thanks for making sign for David Malpasta, a former World Bank president. This is two New York Congressman Mike Lauda and Richie Taurus are introducing bipartisan legislation that would increase

Well, we're working through the logistics right now and plan to introduce this week. But the intention here is to ensure that President Trump, President Biden, and RFK Junior, whose family has twice been victim of political assassination, have enhanced security. Obviously, as more information is uncovered about the events on Saturday to day, it raises serious questions about, you know, what

By violence at a rally.

And obviously, the Secret Service has a responsibility to ensure the safety and well being and this cannot be a question of expense or resources. The federal government has a responsibility to ensure the safety and well being of these candidates and to ensure that every resource necessary is available to them.

Congressman, I think many of your colleagues on the other side of the aisle also agree with you. But just from a logistical point of view, how quickly can this bill get passed and then we actually see those resources hit the ground.

Look, obviously this is a question for leadership on getting this bill to the floor as quickly as possible. I'm heartened to see that the binding Administration did move yesterday to get give RFK Secret Service protection after many months of him requesting it, and obviously the head of the Secret Service saying that there's going to be immediate changes

That should have been.

A no brainer in this heightened political environment in which look, we're a deeply divided country and obviously we've seen incidents in recent years, attacks on members of Congress, threats against sitting governors, violence against the former speaker's husband.

So this is.

Critical in this moment that we recognize the seriousness of this the threat, and that Congress acts both in terms of ensuring the support financially and otherwise for the Secret Service, as well as these congressional investigations that are going to get underway next week when we get back to Washington.

Congressman, given we are deeply divided country at the moment. Following that assassination attempt, the now VP pick of President Trump said that this had ties back to Biden. Do you think that kind of rhetoric is appropriate coming from the VP candidate.

Well, first of all, the investigation obviously is underway. We don't yet know the motivation of the shooter, and that will come out in due time, and we should allow that process to play itself out. I think what you know the vice presidential nominee was alluding to in his comments is the continued assertion that Donald Trump is a threat to democracy or a fascist, or that if he somehow wins in November, that therefore American democracy is going to end.

Is destructive.

It's destructive to our country. It undermines our democracy, it undermines our electoral process.

And should stop.

And I think all of us can recognize the need to bring down the temperature several notches to look at the rhetoric that is being used. Both Republicans and Democrats have a responsibility here in this moment of heightened political disagreement, that we really recognize the importance of the moment.

As I said.

Before, our election should always be determined by votes at a ballot box, not by violence at a rally, and all of us have a responsibilit to understand that words matter, Our rhetoric can at times cause harm, and we need to be clear that we're not going to tolerate it. And I think what the vice presidential nominee was alluding to in that is that, you know, the continued effort to somehow say that Donald Trump getting elected is going to destroy our democracy needs to stop and representative.

I mean to be clear, this was of course shocking events over the weekend and deeply disturbing to anyone, but it is not the only case of political violence.

You only need to look back.

Over the past few years, whether it be the insurrection on January sixth, whether it be Nancy Pelosi's husband being attacked. I want to understand from you the temperature read that you're getting at this moment in this country, what you're hearing from constituents. Are we starting to dial down the temperature? Does this weekend represent a peak to you? Or how concerned are you still of this deeply divided rhetoric that continue to hear.

Well, if this doesn't shock our nation's conscience to its core, I don't.

Know what would look.

I've been very clear over the years. I was the first Republican member of the state legislature in New York to denounce the events of January sixth. On January sixth, I spoke out when Nancy Pelosi's husband was attacked in the same way I'm speaking out about the assassination attempt against President Trump. All of us should be universally clear in this political violence has no place in our democracy. There should be no tolerance for it wherever it occurs.

Congressman, appreciate perspective. Thanks for making time for us this morning. Thank you, Sir Michael that joining us now to talk about bank earnings is Chris marronach of Jenny Montgomery Sco. Chris Water for to catch up with you. So we've got a lot to talk about, particularly the rally in small caps in a regionals, but I want to start with the earnings from the big players on Wall Street. First, we've had JP Morgan, We've had City, We've had Bank

Well, nenadist.

Margins aren't really increasing yet, John Amie, I think we have this final quarter where margins bottom.

You know, we're happy that the cost of funds at BNA.

Was only up marginally, so they're still the leader in terms of low cost deposits. I think that yield you're going to get better as things roll over on the upside, but the cost of funds has to come down. That's where the Fed policy, the possible shift and interest rates third fourth.

Quarter could be very useful.

I was very thankful that the criticized loans were flat in the quarter from Q one, charge offs only up one basis point.

The provision was higher.

They could build slightly, but I think overall that was a win as well. But you're not really seeing the big revenue growth on the spread side. Investment banking, as you mentioned, was definitely higher, so no issues there. That was a beat. I think expenses acted well, but no major surprise on the expense front.

Chris, I went through the today gains for the Stokes to some of these major players. If you go over the last twelve months, you can double it. They've been tremendous. Chris, there was something about this environment in the last year that has been particularly good for the bigger players in the financial world. Is something changing, Chris? Why you think things get better for the smaller, the mid sized banks, the more regional players. Sure.

I think on the regional and the smaller players, I think what you have is the cost of funds is beginning to crust. That was the major challenge even before you had the Silicon Valley and First Republic failures last year. I also think that generally speaking, the expense leverage in this business is very good. We've seen banks much more efficient today than they were fifteen years ago, John, and that's a tremendous difference. You know, the cost of technology

The moving regional banks over the last few days has been absolutely phenomenal. Chris. I think We're up by something like eleven percent in just five days. There was a note from City just yesterday from Scott cron Now I'm going to share it with our audience.

Maybe you've seen it.

Overweight US banks, our preferred Trump trade. Easy evaluation sets up, stable fundamentals, lesser tariff risk combined with incremental deregulatory inertia give this sector a good risk reward sets up. It's the conversation at the moment, Chris, how would does Trump's second term influence shape the performance of these stocks?

Well, John, for sure, the regulatory environment's going to shift.

I think regulation can very much have peaked in terms of the banks in the industry. Under a new administration, you would see regulations change dramatically.

I think it would take about eighteen months to really affect the rank and file.

Do not change that quickly just because the head of the White House changes, But it is going to be a perception shift which is going to be anticipated and already is by the stocks. You know, the banks were training at forty eight percent relative multiples last week. Today they're fifty three or fifty four relative pe to SMP. That has a long way to go, because we used to be at sixty six to seventy percent. You know, median reigns for the last ten years, so there's a

We heard jd Vance, the Foreign President's VP pick in the past, talk about big banks, but also talk about regional, smaller banks. He says community lenders. He thinks they operate at a financial disadvantage to the biggest banks. Would that be another reason why potentially put on trades for some of these all are regional players.

Well, sure, I mean I think you have to have a regulatory framework that's going to fit the community banks and it makes it elite.

Easier and less onerous on them.

I think having the trickle down to the same regulation applied to one hundred or two hundred million dollar bank on one that's a billion or two billion dollars is just very difficult to execute. It gets back to the opposite of the expense leverage I was mentioning. So if we can have relief there, that is a tremendous shift I think that is a possibility. I do think it takes time, but that absolutely happens. The small banks are the major lenders in the country. Small businesses are still

That's where community banks really do their best work.

Hik Chris Wonderful, I hear from you, sir, great echo of ey alongside Andrew Husby of BNP Parwaback, Greg, I want to come across the US first. Your reaction to this data is the shaky period for the consumer over or is the jury still out?

What we're doing is just generally more prudence.

I don't think we're seeing any form of retrenchment in consumer spending activity. And this type of June report, which was quite strong across the word, as Mike was just highlighting, is indication that consumers are not pulling back, but they are being more judicious with how they spend, how much they spent, and where they spend. And that's still the reality today despite this fairly favorable report.

Let's not forget we still.

Have a job market that's still adding the decent number of jobs one hundred and eighty thousand on a three month moving average, and wage growth is still around four percent, so combined it too, you still have that income support. It's not any sign of a retrenchment, but it is more prudence.

On the part of consumers.

The Federal Reserve for a while has pointed to the consumer the labor market and said the strength there is a reason to wait. It gives us the luxury of time just to see how the inflation trajectory changes evolves. Greg, do you think they have that time? Can they wait? Can they skip your line? Wait until September.

I think we're not talking about necessarily bringing rates down to zero or cutting rates in an emergency fashion. What we're talking about is really recalibrating monetary policy, and I think now would be optimal to recalibrate monetary policy.

Now that the labor market is rebalanced.

You probably don't need as restrictive monetary polsy. Now that the labor market is rebalanced, and now that inflation is continuing to move to the downside, what you wanted to do is sustain the economic expansion in a low inflation environment.

That calls for a recalibration of monetary policy. I've been discussing this for a few.

Months now, I think now would be optimal to recalibrate monetary policy.

June would probably also have been good as well.

Andel, let me bring you into the conversation, get your first read and whether you kind of agree with Greg here, whether still now is the time to act?

Yeah, I definitely agree with Greg here. This is a consumer that's taking a breather after a pretty solid sprint over much of the pandemic here. So what we've seen in the consumer sentiment data is some fatigue about high interest rates and higher prices. But this is not, as Greg said, a consumer that's kind of rolling over, and the labor market is a key key part of that. Income is still growing, wages are still growing, and really the economy is not really set to really take a dive.

Right The balance of risk around Joel Manday has clearly shifted, and you can see that with the communication coming from Chair and Pal. The focus now, can we say is equally on CPI's equally on price stability and full employment.

I think you're if they're not going to say that exactly. Basically, that's where we are right now. It's a FED that's going to be very attuned until weakness in the labor market, the job is rate above four point one percent, the economy probably slowing below trend in the back half of this year on our estimate, so it's a time where they can think about recalibrating policy.

Lower greg with all the things of lining up to be able to recalibrate, Jan Hasias probably agrees with you, and he even goes so far as to put a note out yesterday saying, why wait, if everything is lining up, why wait seven weeks? Would you agree with that? That July actually makes sense?

I think June might have made sense.

I mean, you're really talking about recalibrating monetary policy gradually. You want to avoid a situation where you're reacting to a more significant slowdown in economic activity.

That's really the risk right now, as John was saying, you have an equally.

Balanced balanced environment when it comes to the downside risk on the labor market front and the easing of inflation. So now is really the time to gradually recalibrate monetary policy. Do so with a lot of regard towards how the data is evolving, but gradually moved towards the state where interest rates are more in line with potential growth through the economy and an environment where inflation is continuing to move towards two percent.

So yes, I would agree.

With yanhatsyus there in terms of easing monetary policy now and not necessarily waiting until September.

Andrew Honjost of City, Yes, that I put out a pace in the title read like this, rates cuts go from if to when to how many? On the if not a matter of if. I think we're all waiting for that move on the when, debate about what it is July September or shortly afterwards, a thinmic compos Let's talk about the how many greg when you start to adjust, are they talking about a fine tuning amid cycle adjustment? What kind of adjustments are you actually looking for? And

Tend to focus a little bit too much on the years.

Right, There's nothing that says that there have to be a certain number of rate cuts in any given year. We're anticipating a couple of rate cuts this year in September and December. Given what we've heard from policy makers, and we're anticipating about one hundred and twenty five based points of further easing in twenty twenty five. But as you said, there's a lot of uncertainty, whether it's political uncertainty, policy uncertainty, geopolitical uncertainty that comes on top of the

We're in the early stages now. I think the FED would be well placed now.

To correct, Actually, we calibrate and allow itself some time to observe how the economy is evolving while recalibrating the pace of monetary pols and tightening.

I think certain right now is the uncertainty. But if we could pick up Andrew on the politics, how are you thinking about twenty twenty five, because the Fed could be looking at a set of policies that are very different.

Yeah, it's certainly a key key catalyst. Obviously here we're talking about tariff's taxes, other issues. It's potentially labor supply as well. The key catalyst for us. We think On the inflation front, the FED might be thinking about, or might have to think about in short order is tariffs. We did put out a pretty extensive note last month, and certainly there's a lot of detail that's left unsaid

Something potentially in twenty twenty five.

So that'll be so with cuts priced in right now. One way you could look at it is basically just a hold for longer, but certainly, depending on the mix of policies, you could be thinking about hikes potentially after some cuts, so that you've seen in the past.

Andrew Husby have been preparabout together with Greg daco Ey, both trying to figure out the future here, which is tremendously difficult to do in twenty twenty five. This is the Bloomberg Surveillance Podcast bringing you the best in markets, economics, an gio politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern.