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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordernt. 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. Investors bracing for a potential government shutdown to begin at midnight, Mark hay Fley, the chief investment officer in UBS Global Wealth Management, right in the following. With the direct impact of a government shutdown on financial markets likely to be muted, we maintain a positive outlook for US secrates. Mark joins us now for more make welcome back is Vincin long, my friend,
Let's talk about what's anchoring that view. What's making you bullish right now?
Well, I think we've had continued strong earnings. We've seen this continued investment on the AI side, and then we have the FED cutting rates, so those are positive backdrops would also add in there, you know, the strong fiscal spend that continues, and that's been supporting the economic picture as well.
Mark, I know that these are real numbers, real revenue, real profits. There's been some concerns recently about circle of finance, financial engineering. Do you see any pockets of speculative behavior that concern you and the team?
Absolutely that there is, you know, and there has been for several years, speculation in various parts of the market. I think focus on quality is something that we have maintained and will continue to maintain a focus on cash flows. There are plenty of stocks. It does seem like, you know, you could put dot Com in your name and your stock would go up. Now you put AI in your
name and your stock would go up. That kind of thing is a worrisome sign to a degree, and that's why you really do have to start digging in on particularly I think on the cash flow side, Mark.
Until now, a lot of the money that's gone into tech investment has been cash flow free cash flow. Now we're starting to see more leverage get introduced to more of these deals. I'm thinking of the core Weave Core Weave deal right now, that we announced this morning.
With Meta Core.
Weave is a below investment grade rated company that relies heavily on the debt market, and this comes along with a slew of LBOs and other deal activity. Does that raise concerns about the debt side of the financing structure heading into a really uncertain economic time.
Well, I think it's a I think it's a good point, as you've noted. I think rightly we're starting to see really just kind of the beginnings maybe of some of the more excitement on the institutional side about IPOs and other things. So, you know, I think some of this financing is absolutely something to watch, but we still believe, you know, some of it in the around the core, around some of the core of the hyperscalers. That's still very early, but there's no question that there are pockets
of leverage as well building up in the system. I think, you know, the way the way we look at it overall with the AI project, it's something that we think is one of the longer term themes that we want to stay invested in because we do see the productivity growth, we hear it from our clients who are our customers. That's something they're investing in. We still like the power and resources story associated with that, We still like the
healthcare story. These are areas you know, there are big problems for governments UH and and where there's big problems, there's big money going in. We've seen the President of the United States say we're going to win it. We must win on AI. These are existential, ultimately defense issues, both for companies and for nations, and so I think that gives it something of a little bit of a different quality. And those are the kind of longer term
trends we want to be behind. Even if there is certainly the potential for some choppy trading into the end of the year mark, if you.
Do have all of this investment, the IPO is the deals activity. Can you get a real acceleration in growth heading into the fourth quarter without a reacceleration and inflation.
Look, we think there might be some acceleration of inflation. It's I think it's something about how much the Fed and other central banks would be willing to look through that. But also keep in mind for some of if you take the tech sector, that inflation is not necessarily an
issue for them, because if you take the hyperscalers. They're not that reliant on debt financing, right, So there again, I think it could be a time to get a little more selective about who can continue to benefit given the very large changes we've had in the way the economy has been moving forward this year.
Mark, I've got to squeeze this in. Got about forty five seconds. You're at UBS. I've got to ask you about gold, the move we've seen this year this month. Can you walk us through how investors have taken exposure to the precious metal, whether it's physical paper, and if it is physical, whether they're choosing to store it closer to home.
All of the above. Jonathan, you should come visit the vault someday. Long long equities and long gold has worked very well for us, and we think that will continue to work.
Stay with us.
Multilomberg Surveillance coming up after this. Monica Querra of Mark and Stanley Ontica, welcome to the program. A lot of people looking through this Wall Street saying it doesn't matter to show me the economic tanctor and everything's okay. Do you think about it slightly differently?
I think you have to look at it, you know, from where the risk actually could bubble up. Now, historically markets do look through. You get Marcus outperforming at average about four point four percent during periods of shutdown. Granted they can last from you know, three days to thirty four days, so that's a huge window in time. But typically even with the long shutdowns, you still have markets
out performing. So the risk comes and which industries and sectors are most reliant on those government contracts and that's defense, healthcare, et cetera. Is this a nice by opportunity potentially if you're trying to you know, take a tactical approach, But again it's a short to a short window where markets like to look through.
Well, that last shutdown that was thirty four to thirty five days in the end, what kind of impact did that have on Wall Street and the economy?
Very little, because the macroeconomic factors were really important. The other thing that's critical here is that it was a
partial shutdown. It wasn't a full shutdown. So in twenty thirteen we had a full shutdown, and I think the estimate from the CBO is that they lost about twenty four billion or so in productivity in twenty eighteen, even though it was a double the length twice as long or more of a shutdown, They only lost eleven billion three billion net at the end of the day after everyone was made whole.
So even with.
That length of time, there could be you know, a variety rate of factors that could impact growth.
The conversation I'm hearing out of Washington yesterday today this morning talking to people is obviously the government is shutting down, it's the length. What are you thinking about in terms of how long the government will be shut down?
So when we're thinking about the political factors here, right with the Democrats, they are taking a stand. Earlier this year when Schumer came to the table and they passed the cr there was a large outcry within the Democratic electorate.
Right upset that they moved so quickly.
So I think it does behoove them from a voter standpoint, right of speaking to their base to actually hold a firm line. Then they have to balance that with pressures that can potentially come from the White House.
They were calling for mass layoffs.
That's likely not to happen, but other areas that could be a catalyst is potentially, you know, apportionment control, meaning that the president could deny a transfer of funds posts or daring this shutdown as essentially a catalyst opportunity to look under the hood and see where they can cut.
Why has that been the shift and focus away from possibly some sort of mass layoff program and more just shifting where money goes in the government.
So we look at what happened with DOGE.
They were largely unsuccessful, right, They were able to get some cuts through. There was such significant power within the federal unions protecting the status of workers, and the legal response right was essentially a significant pushback. They don't want
to run into that sort of hurdle again. So I think it's more of an issue of which agencies, which programs, which departments are ideologically aligned with the president, and could those areas actually be in trouble if they choose to withhold funds.
Okay, so let's talk specifics.
What are the areas that could possibly see reductions in funding? What are the areas that could potentially see increases in funding as soon as the next few weeks if there is some sort of shutdown, I mean you.
Could see some risk.
I mean, this is pretty high level and widespread. It's already happening right on the DEI front that's likely to continue. They could also look at anything that's clean energy related. You could maybe see some impacts to EPA. And then the other areas that I think are critical is on the Medicaid healthcare front. They're continuing to want to clamp down, especially on those ACA subsi that the Democrats are looking forward to extending.
Do they get that that's the big question. What's the off ramp. The off ramp here, I.
Think is if you start getting really notable aggressive activity from the White House, and then that could move the Democrats forward because there's a significant amount of programs that they don't want to lose and they want to make sure that their support outside of ACA subsidies. Right now, this is their bargaining chip. This is the thing that
they want to get a win on. If they can't get that and everything else starts to see this, you know, you start to see the train go off the tracks in other ways, that could be the catalyst that gets the Democrats.
The Vice President yesterday was talking about rural healthcare policy and how potentially that is one place where they can come to an agreement.
Is this where the off ramp.
Will be, though it will be in the healthcare policy sector.
If Democrats get a concession, that's their off ramp.
The other piece that I'm talking about is.
The stick off room, right that if the White House says, no, we're not negotiating with you, we're not giving you those subsidies, then you have to come to the table because we're going to cut other things. Right, And it's more of a fear tactic now on the ACA and rural healthcare component. When you're looking at red states, Rural red states their most reliant on ACA. They didn't do Medicaid expansion, so
the Medicaid rulebcks don't really impact them. So it is really all about ACA subsidy extension, and that is an area where you do get bipartisan consensus.
Taking a step back and looking at some of the macro implications, not clear what the longer term macro implications are for bond yield. It's based on just sort of this broader sense that it isn't essentially an economic issue. You do see though, longer term an impact on the dollar. There has been a weaker dollar associated with shutdowns. Do you expect that to be correlation that continues this time around?
Yes, this is a historical relationship. One of the things that we want to note though, is that the length of time right is going to impact that how week it goes. So if we get a week, that's going to be very different than if we get another thirty five day window.
Sight with us more Bloomberg Surveillance coming up after this. FI Lorlando, a Federated Global Investment sees momentum building. He writes the following. Given the potential for a strengthening labor market and moderating inflation, economic growth could accelerate in the second half of this year. Phil joins a snapper more, Phil, good morning, good morning, Thanks for having me back, thanks for being here. Just to build on that quote, is that the story we're priced for.
Stock market's up thirty eight percent since the Liberation Day lows back in the middle of April. So clearly they're not jumping out of the upper floors of the towers because they're concerned that the labor market's collapsing. Has the data been soft the last four months, no question, But in our view the data was sort of troughing here and has the potential to accelerate going in the next couple of.
Months relative to what this is what I want to understand, were priced for a lot of this going into twenty six. Expectations have already picked up. We've had the equity market rally. How much of that has been about earnings? How much of that is just a better economic story or reading.
So the earning situation we think is excellent. You know, you look at the first quarter. In the second quarter, second quarter, revenues up six percent, earnings up twelve percent, much better than expected, the consensus expectations for the third quarter starting to come in. Those numbers look pretty strong. We're in the process of upgrading our earnings estimates for full year this year, full year next year. So the earnings pictures in pretty good shape. Clearly, the labor market
has been the weekly. Now you look at the August jobs report, it was terrible, admittedly, but there are a couple of things associated with that number. One, August tends to be the quirkiest month of the year. You've got you know, schools starting and starting up again, factories taking downtime to retool, temporarily furloughing workers. So the August non farm payroll report historically is the quirkiest report of the year.
So you look at for example, Kevin Hassett, the National chairman director, came out and said that they're expecting seventy thousand jobs to be revised up over the course in the next couple of months. That's consistent with what we've seen historically. All of the noise and the nonsense in August tends to gets revised up. All right, that's point number one. Point number two. When we saw the initial weekly jobas claims the first week of September, the numbers
were terrible. I think it was about two hundred and sixty four thousand. The market was freaking out a little bit, but you know, we suggested take a deep breath. Number one, it's a holiday shortened week. And number two, you had the allegations of claims fraud in Texas. So as we went to the next week, which was the survey week for September, the number came down on about two hundred and thirty thousand, and then last week came down further
about two hundred and seventeen thousand. So we think the claims are pointing to the fact that the numbers are to be pretty good. And then you know, we were talking about nonfarm versus ADP. Going into this, the expectations
for ADP about fifty thousand plus. That's kind of the number we're looking for for nonfarm That would be a number roughly double what we saw in the month of August for nonfarm So we think the labor market there may be a little too much pessimism built in, so our expectation that the number is probably troughed here and we'll start to see some improvement.
Given that backdrop, there's a mystery, and we were unpacking that ahead of the Nike earnings after the bell This idea, even CEOs don't know how much consumers will absorb price increases. What is the connection right now between corporate profits and potential inflationary pressure?
No question. If you look at the piece that I wrote last week focused on how good the back to school season was, back to school was up four point two percent three months through August. Back to school a year ago is only up two point three percent. So the consumers in pretty good shape, particularly at the high end. But I think there is absolutely some consternation about what pricing is, particularly at the low end of the price spectrum.
So companies are going to have to you know sort of weigh that that situation high end consumers can afford a little bit more in pricing. But the question of are there going to be any forced pricing issues because of the tariff situation that companies need to pass on in order to maintain profit margins. Profit margins have been pretty strong up until now. Is that situation going to
deteriorate in the third quarter in the fourth quarter. We don't know the data yet, but that's something that we're going to have to say.
The big question mark over this has been holding back the broadening out in the S and P five hundred, in the RUSS of two thousand and the S and P six hundred Pickure index. How much are you betting that we are going to see that broadening out versus just this consolidation in big tech, this idea that the profits will continue to be driven by the biggest ten names.
We're absolutely in the broadening out camp, and that's been our call for the last year. In case in point, look how well the small camps have done both growth and value over the course of the last couple of months. In our view, the small caps were completely mispriced, and once we began to see the fed kipped over their cards, they're going to cut interest rates. An interest rate reduction
cycle is usually beneficial to the small cap companies. It improves their ability to self finance, kicks off an M and A and an IPO cycle, And you've got a situation where domestically, we think economic growth is accelerating. Small cap companies do eighty percent of their business here. If the US economy is doing well, that's going to benefit small cap companies.
But aren't more tariffs going to hurt small cap companies even if they do business here? A lot of the import could be coming from other countries.
Well, again, that's a case by case situation. I was on Bloomberg Radio recently and we were talking about this, and I got some random person that sent me an email when I got back to the office asking that question, isn't that going to impact pricing and imports and won't Christmas sales be a disaster? And the answer in our situation is, we think it's going to be a case by case situation. How is a company sourcing what they're selling?
What's the pricing of that? Can they source more domestically? What's their labor situation? Immigrant versus native born that there are a lot of factors here that are going to dictate the answer to that question.
Is there an area within the small caps that's immune to a lot of this.
We love healthcare and within healthcare biotechnology. These are biotechnology gurus are telling us that the pipelines have never looked better yet, the valuations have never been more extreme out of favor. And what we've been waiting for is some catalysts, and we think the interest rate cutting cycle is that catalyst. The big cap companies Pfizer and MERKETC will start to
think about you know, M and A activity. Lower interest rates again will make it easier to self finance, and people are now going to focus on the really good phase one, phase two, phase three clinical work that these companies have done with their drug development. That's the sector we think is poised to move higher.
Stay with us more Bloomberg Surveillance coming up after this. Investors looking for signals the US economy is heading back towards stable growth of vlacility and higher inflation. Bruce Van Sun is the CEO of Citizens Financial Group, which serves approximately six million consumer and business customers. Bruce joins us Now for more Bruce, good morning.
Good to see you.
Oh, it's great to be here.
Do we say happy anniversary? Twelfth anniversary, Yeah, that's twelve years. That's well, it is flown by. You've got to read on both the consumer and businesses as well. We talked a lot of our corporate confidence, the m and A, the boom things picking up. Consumer confidence still hold back. Would you see across the business a difference between the two.
I'd say we're in generally good shape. So I think everybody's still a little holding back because of the uncertainty around tariffs and some of the fiscal policies, but that's become the new normal, and so I think businesses now are leaning in a little more. And I'd say consumer is split. So the higher end consumer is still enjoying life, sees the stock market very strong, spending money, a little
more pressure at the lower end. Inflation still is persistent and real wage gains haven't fully covered that, so they're pulling in a little bit.
What opportunities are available to you and the team right now to lean into that higher end consumer just a little bit more higher income the private side of the business.
Yeah, So one of the moves that we made a couple of years back was we tried to buy all the first Republic JPM. Ultimately was successful, but we hired a lot of the talent, a lot of the private bankers came over to citizens. Hired one hundred and fifty folks on day one, and then we've ramped that up
now to close to five hundred people. We're a cross ten billion of deposits and we're kind of target at year end hitting twelve billion in deposits eleven billion of AUM, So the business is basically exploding in terms of new customers coming onto the platform. I think we're delivering really good quality service at this point, and we're integrating that with our commercial bank. So a lot of our middle
market companies are successful people. They have families in need of both business services on the commercial side and then individual banking and wealth services for the family and for the individuals, and so we bring that together to provide really robust solutions, and I think we're doing that better than anybody in the market these days.
Can you give a sense of just the rapid rate of growth and what you see over the next say couple of years in terms of that wealth management sector that's been driving growth.
I've been driving growth at a lot of the major banks. Yeah.
So one of the things we said is that by this year that that business would be five percent accreative to our bottom line. So it's basically a startup inside a two hundred year old bank, And so we had all the expenses day one, and now revenues are kind of exceeding those expenses, and we'll be well over five percent of the bottom line this year. You played that out three to five years, this business could be fifteen
percent of our bottom line. So anyway, we're kind of continuing to be finding the sweet spot between growing it at a nice clip but growing it profitably. So one of the issues at First Republic had is their return on equity never got above eleven percent. We're running this business today between twenty and twenty five percent. So we have good operating discipline on this thing. As we continue to grow, then we reinvest back in the businesses. We're
opening up new regions. We open southern California, We're going to expand in Florida, put more teams here in New York tonight, in fact, we're opening our flagship private bank office on fifty second and six, so really exciting times and great initiatives. Our team is executing very well on.
It's amazing how many points of contact you have to gauge consumer and business sentiment.
As John was talking about, I just.
Wonder what is the sort of feeling not just about investors people who are trying to manage their wealth. Is it risk on, is it risk off? But also the companies in terms of are they moving past that waiting pattern, the holding pattern that we were talking about earlier this year.
Yeah, I'd say they're not fully leaning in yet, so we're not seeing our credit lines that we have out with companies really being taken down to invest in growth, in capex and things. But having said that, all of our businesses are having very strong years, so cash flow is good, businesses are solid, We see no real credit issues. I think with a little more certainty, they'd be leaning in more and they'd be doing more investing. So I
think that's still to come. The good news is on the private equity side, on the kind of financial sponsor side, there's now a kind of tick up in deal flow, which we've been waiting for over three years to see that, and so our commercial bank has been positioned for this to happen. We've really invested in it. We've got great people, and so I think we're having a great quarter in terms of our capital markets revenues. The deal machine is going,
the flywheels going, so I think that'll continue. So that feels really good. So the corporate side has a little bit to catch up, but the financial sponsor side that's ticking up very nicely.
You mentioned Florida. How much wealth have you seen move down from Florida, But you're still doubling down on New York and I want to be concerned about the mayor race.
Yeah, it's interesting. So we're focused big on three regions right now for growth. One is the New York metro, so we bought HSBC's East Coast branches to get a foothold in New York. We bought Investors Banks and we now have two hundred branches in New York City. We've invested in middlem market banking teams here, so we're really gaining market share in New York. The other two regions, one is Florida, as you mentioned, and one is California. So we now have over three hundred people in both
locations and Florida has a lot of tailwind. During COVID, a lot of people moved down to Florida. That's continuing and so we started with a private banking team in Florida and now we've added middle market, so we have both corporate and private bank working together. That's a market where we don't have a lot of retail yet. So in New York we have the full ground team with the retail. Florida, I say that we're coming in over the top of that market to really bank successful people.
Same thing in California, over three hundred people there coming in over the top. We have private banking teams, we have corporate banking teams, and seeing a lot of growth there as well.
This is the Bloomberg Survendics podcast, bringing you the best in markets, economics, anngient 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.
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