Economy is Doing Relatively Well, Zingales Says

the headlines. And it's Morgan Stanley this morning smashing estimates with investment banking revenue up seven percent, trading revenue for debt trading and equity trading also smashing estimates, and the stock up this morning by one point eight percent in the pre market. And please to say that joining us to react as Kate Moore, black Rock chief equity strategist and on the financials so far, Kake, just to get your thoughts, I'll go through the single names and can

talk about the sector. Um JP Morgan, they beat, they deliver a record profit, and the stock is down. We sort the same thing with government sacks. We haven't seen that with Morgan Stanley, but overall we've seen really really decent numbers get a market that doesn't seem to be

overly impressed. Why do you think that is. You know, I've heard a host of reasons why the market is reacting so softly to what seemed like very very strong numbers and very solid expectations for future earnings growth this year. You know. Some of them are that deposit betas are rising a little bit, i e. That there's more competition across the bank's for deposits, and so they're having to pass on the benefits of higher rates um to their customers.

That might be one explanation. Some of it's been the guidance from banks around future growth and loan growth has been a little bit lower. That might be one excuse. To be honest with you, I think the sector is an outstanding shape, and I've been kind of disappointed with how the market has reacted to these exceptionally strong numbers. I think that we need to stay long the financials and particularly a cat banks, and it remains one of

my favorite picks throughout this year. Okay, to what extent is there at a market that's just looking at the vis pulling back dance with fifteen handle and saying, yeah, well done, great first quarter. You're not going to repeat it on the trading side. It's too cute. Yeah, well, that's right. I mean, look, it takes some skill though to be able to really benefit from significantly higher volatility.

We had these high vall days um and lots of plus and mind is one percent inter day moves much more so than we saw, of course in two thousands seventeen, where there was no movement, but volumes weren't huge. And so in order to really take advantage of it, I think you need some skill traders, and you need some great relationships. So I wouldn't say it has to just be about the vix in order to continue to benefit from the trading side. Is there an efficient frontier now?

I mean, Kate, if we're to wax all theoretical right now, is there a thing out there that's all curvy and stocks and bonds and I know where I want to be and maybe I even know what to do with my cash? Is does that theory work? Still? I think we've had some sort of evolution in thinking about fully considered Well, look, we we've been in a period where it made sense to hold a significant amount of debt and a hold the signific amount of equity at the

same time. If we are right about a sustained global economic expansion persisting for the next couple of quarters, for the next couple of years, that we're not kind of at the end of the cycle, and that rates will continue to rise. We need to be pretty thoughtful about how we approach fixed income. You've heard it from US many times, but we prefer short duration. We certainly perform prefer you know, parsing the margin market debt world over

some of the long duration uh U S treasuries. But I know this sounds I sound like a broken record because I'm an equity strategist, But I still strongly believe that equities are the place to be, even this late in the cycle, even if your returns are not going to be north year. Maybe, Kate, what's so important here is we forget about you know, cf A one oh one like level one. I'm in a panic, and I don't know what this means. You look at way to

average cost to capital. I'm looking at a major, famous consumer durable which will you know a staple almost will leave it the name of it out, It doesn't matter. They've only got nine point one percent debt. Their cost is modeled at two point one percent, which is a zero point two percent contribution to a waited average cost

to capital. This isn't in the theory books. Now, that's right, And this is one of the real challenges I think when you're looking forward and trying to put together forecasts, but then you use historical relationships and historic balance sheets and historic um, you know, sort of corporate behavior as your guide. That's always this risk, whether you're thinking about asset allocation or whether you're thinking about kind of near term returns of driving your car by looking through the

rear view mirror. And so your point about debt being relatively low. We've talked about this before, about how what a great job companies have done of turning out their debt and locking in low rates, and you know, how less sensitive they are and how healthy I think their balance sheets are relative to say, where they were, you know, fifteen or twenty years ago. Um, we need to be careful about using history too much as a guide. So, okay,

what are you concerned about? Most of all, there's no big maturity wall coming up for many of these companies, as you said, have turned out that debt quite effectively of the last couple of years and really locked in low right, So what's the concern you know, I really worry about risk appetite. We were talking about this in terms of trade and geopolitics. I think that's very present.

You know, there were three things that came up last year consistently when talking to companies and talking to investors, both on the institutional on the individual side, and they were you know, major concerns about where valuations were, anxiety around that, uh, significant anxiety around politics and the impact that politics could have on market movements. And then I think there was a lot of concern that you know, significantly higher interest rates were going to you know, be

around the corner and end impact companies earnings. You know, here we are where the anxiety around valuations shouldn't really be there. We've compressed multiples, uh, you know around the world where now at levels that look much more like their five year averages. UM. You know, politics certainly has been in play, but most companies have been able to continue to operate as usual and are seeing strong growth

despite the headline noise. And you know, as we were saying before, I'm not really concerned that significantly higher rates are going to have an impact on on earnings. You know, places I'm watching those small and MidCap and I'm watching you know, uh, in particular those companies that haven't been as smart or engaging in a new round of investment that is going to be financed by debt. Okay, well, it's great to have you with us to get your thoughts.

Thank you very much forgiving your trying to Bloomberg Savannas on sav and Readier through the morning, Blank Rocks, Chief Equity Strategists, Chum Pharaoh at our studios, Blumberg eleventh three in New York. I'm Tom Keen and FM Studios in Washington, d C. John. Just in the distance, I can see the Gucci store, which is always a good and appropriate thing here for the World Bank. I m F meetings as well, and also today a panel with Luigis and

Gallis of the Boost School in Chicago. Luigi. One of the great jewels which really folds into the modern debate right now is a paper by Michael Bordo and Anna Schwartz of years ago on the Chicago history of traditional Keynesie and economics. And the title of the paper was called I S l M and Monitorism, And what it amounts to is we set up a geometric structure about all this economy stuff works in six and ninety nine with Hicks, and we dragged it forward to Milton Friedman.

Neither of those parties, Hicks, Kines, Alvin Hansen, or Milton Friedman at Chicago had to deal with trill in dour deficits. How does the fiscal debt fold in through our traditional economic models. I think they certainly did not have to deal with the deficit of this size, But also they did not have to deal with the deficits of the side in a moment where the level of debt is so high and where the economy is doing relatively well.

So I think that what is surprising is not so much that we have a deficit where the huge deficit in two thousand and nine was a bigger deficit, but that was in a difficult moment, uh sort of economically, and now we are nine years into an expansion and the economy is doing relatively well. So I think that increasing the deficit at this moment of the cycle, with this level of debt coming in my reduce the ability

to do contact policy when never session will come. Can you say that the rising debt and deficit lowers the degrees of freedom that monetary authorities have, whether it's the Italian government or its chairman Powell, does it? Does it give you just less choice? Given an outside chuck Um? First of all, I will differentiade between the Italian situation that you have, situation that you ask control its own currency, So they have a flexibility that Italy does not have.

They said, I think that what I'm most worried about is the limited ability of the fiscal policy. So when the next recession will come, and one forecast that can make for sure there will be ever session at some point. I don't know when, but there will be another session, and we have limited ability to uh intervene from a monitory point of view because in the typical Rey session and interest rate drop by five cents a point, and where is the space for the monetary policy to act? Luigi,

let me bring in my colleague. He and I have been discussing the World Cup coming up in Russia. Would be there last night in the early evening. I'm talking brighton Tottenham Premier League football, not the World Cup. John Farrell, John, I just don't get it. So let's bring him Mr Ferrell with more important items. A professor greatest speak to you again, we're talking about exhausting fiscal policy. Let's talk

about exhausting monetary policy. That the FED has made a move here in the United States in a way that

the ECB really hasn't. And Professor, I look at Europe right now with some concern about the next downturn in Europe, and not so much on the fiscal side, a lot of people concerned about that, but on the on the monetary policy side, with the deposit rate still as negative as it is and the ban of sheet as big as as it is, in growing Yeah, I think that if the United States UH shouldn't share, the Europe is in a war situation because there is no European fiscal

policy to to know of, and as you said, the monetary policy is basically zero interest rate, so that it's not very much room. Um. I think that there is still way to go in the European expansion, so we hope that we don't have in a session soon, but if we had to add one, it wouldn't look look

pretty well. Professor. The reason I bring this up is because arguably in Europe we've seen peak growth in terms of the absolute levels of growth that we had at the back end of last year, in the beginning of this year, and yet CPI is barely one and a half percent. It's at one point three and got revised lower this morning on the continents. So the e cp has got a choice to make now, haven't they, Professor.

They can either sort of have their credibility question and start moving before they get back to target, or sit here and wait and ultimately it might never happen. Yeah, I think that the first thing they need to do is convinced that adding at one point three percent inflation

is too low. You know, in the e c B website is still written that the price stability means to have an inflation below two percent and and some of the c B board members say below but close to two percent, and but others just saying that below two percent is fine. So I think that the first job of drug is to convince them again that one point three is too law and something needs to be done.

I look, Luigia, where we are today. I want to save time for our panel today, and I guess I have to do that right now, because you've got to get on with your I m F today as well, Professors and goals. It was a panel that you know. I was thrilled that Madame m Guard's people called me up the honor to do the panel with you and Laura Tyson of Berkeley and Mr Harrington of Edelman. They're profoundly important folks. Edelement in the measurement of people's moods

worldwide where they aimed eedlement trust parameter. But Luhig, I had no idea when I accepted this panel on trust and resilience we would have the political discourse of the day. The trust seems to be evaporating towards a new populous state. Is it the same populism nation the nation or is it really each culturally discreet? Of course, there are many

ways to be dysfunctional, many way to be populistic. And I think that there is a web common theme, and the common theme is that the elite that tends to be a globalized elite does not appear to be trust wealthy. I think that the lack of trust is not fault of the people who don't trust us. Is our fault that we don't appear and hopefully just a p M MAB there's also some substance, but we don't appear as trust wealthy, as we should be given the responsibilities that

we are in charge with. John, I think that part of this is almost media exhaustion, where you and I are buffeted every single day by the next populous crisis or populous reality, and we almost become numb to it. Yeah, I'd have to say, if we've seen a populous crisis yet, And I asked that because we had the Brexit vote and I don't see a crisis in the economy, and we've had the President of the United States do on a Trump walk into the White House, and I don't

see a crisis in the economy. Quite the opposite. I'm just wondering whether we've actually seen that populous crisis that many people forecast but ultimately hasn't materialized. I think he's building. If you have paid attention to the last Italian elections, I think there was arts were quite disruptive, and we don't know when we'll have a government. So I think

that there is building momentum in different places. And I agree with you, we have not seen the wars yet, And Professor, I think some people might say that maybe Italy without a government is it's a better place at the moment. Professor l which she's in Gallas University of Chicago, both School of Business professor in Washington, d C. With Tom Keane and to get to the markets and the commodity market. It's been a rally that not too many

people saw coming. It's certainly not at this magnitude. By eight percent on Brent here today, by almost twelve on w t I. It's away. And I'm really pleased to say that Francisco Blanche has entered the studio the head of Global Commodities and Derivatives Research for Mary Lynch. Francisco

what happened this year that maybe some people weren't positioned for. Well, look, I think I think we've had a meaningful reduction in supply on driven by the Cordel or big in Russia UM and importantly we've had strong old girls and that's led to maybe a fast at an expected invagory withdrawal still relates to oil, and that's pushed the price of

crude higher. That that's that's one one thing. Obviously, metals, as you know, having performed as well, and there's smaller set of issues there and and on the on the precious side, gold has had a nice run up because I think people starting to get a little bit nervous about policy tightening, volativities picked up and that supported the pressures.

So there's different reasons driving the moority prices higher, but but in general, I mean the strong global growth and and the uncertainty about about when it's gonna peak have been driving the commodity complex. So we've got three things to work through. UM. One is on oil, and we'll do that first, and then the second part is these sort of idiostocratic stories around metals like aluminum. And then the third part is only what global policy means for

security a product like gold. Um, let's start with oil Francisco. The geopolitical risk premium that was injected into this market over the last couple of weeks. Seemingly it's going to drain back out. Can we keep prices elevated once that geopolitical risk premium drains back out if you do believe it will train back out. Well, first of all, I think I think there's a little bit of geo political risk,

but not a lot. Um If you if you look at the well again, it depends if you call Venezuelan production falling geo political risk, then yes, you have geo political risk, but I think that's been the main driver

of of prices moving higher. On the supply side, right, you've had a cartel cut, collective cut, and then you've had a collapse in Venezuelan production that really kicked off starting right around jun July of last year and it's accelerated into the start of this year, and that's been a big driver of of the upper price moving oil prices UM so I think I think the geo political risk premium is readically modest still UH, and prices could definitely push higher if if that geo political risk UH

becomes more prominent. But I do think we're going to hire anyway. We have an eighty o our target by by the end of the quarter. We think we're going pretty much in a straight line to eighty from here. We have seasonal fectors, we have cyclical factors. There's a lot of reasons to believe that in the short run, in the next couple of months, oil prices are gonna

move higher. But within that is move higher, And if we don't have a Memory Francisco planche of a hundred dollars a barrel, it's a terrific bowl market in oil, and the vector's garment would say is from the lower left of the upper right, why can't oil just drive higher based on to make the global economy a great again.

The economy uh it can tom and and and I think one of the other issues that's popped out more recently is that even though we're seeing very strong growth in the US and and even in Canada, we're starting to hit a lot of transportation bottlenecks here. So UM much of the much of the supply that was expected to come from from North America is getting clogged up in pipes. We've seen differentials to uh W t I

in in shale basins like the Permian. So the Midland UM prices have have really the coupled from prices uh in other parts of the US and around the world. Sam's happened for Western Canada prices UM and that that's I think on a slowdown investment a little bit UM so. So my sense is that that we are very reliant on on a US infrastructure system is quite clogged up.

And and at the same time, the cartel is getting closer to a deal on June twenty two where they may either extend or at least keep a very very close, very tight grip on the oil market because Saudi Arabia needs it. And also now Russia, UM, with with the economic pressures they're facing, they're probably also gonna keep gonna gonna be leaning towards staying in the deal. So that

that's what's going on in oil. I look at the going on an oil and I guess the money question and John Farroll is better to san I am is does it fold over into other commodities? Is oil discreet or can Francisco blancheo along Brazil this morning? Um? Well, I mean definitely oil. Oil has a lot of spill

over effects. Um. And Um you know, to your to your point, there's gonna be Um if if we do break above eighty bucks and start to see a more sustained rally, that's gonna have spillover effects, gonna is going to move into other markets. Um. And And what's interesting about it is really that that we're seeing some of it already. Um. We've seen finally recovering some of the energy equities. We are seeing moves in in in the MLP sector. So even outside just the cruel oil, right

outside just the the outright crueler price. We're starting to see other sectors reacting and and and that's because the back end of the price of oil might might even move on on a four basis UH in the next few weeks. Francancisco, Francisco, this is this really interesting story

in aluminium over the last couple of weeks. And it's an inviously cratic event that roussel has been sanctioned by the United States, and ultimately it's very huge concern about whether supply is going to come from What are the base case? What is the base case for you guys now looking at the situation in aluminium. Well, so, so first thing, uh you have to you have to put in perspective is russ is about six percent of the global aluminium market and that's uh and and obviously that's

creating a pressure on the price. But but we we already saw the first round of tariffs adding pressure to aluminum risk premium UM and and that was a direct effect of the out of the tariff UM in the US. Now, obviously we are saying a large chunk of the market being carved out. So we do think aluminium could be going to three tho dollars at on um. The pressure on the aluminium price is directly proportional to the Tariuts

as well as to the to the sanctions. Right so, um, so in in our view, we're talking about one of the biggest players in the market. We're talking about a large portion of the supply side being pulled out. Can you imagine if we pulled out six percent of global oil supply, I mean in that that would be I mean six percent of global oil supply is bigger than Iraq. Iraqi is four and a half percent of global supply. To bring into context, so so this is a lot

of a lot of aluminium. And uh now, aluminium is a much more common ingredient. There is some spare capacity. We're gonna probably restart smelters in parts of the world that that um had been shut down for a while. But that that's the story, right and and um and and you know, the politics have gotten in the way of aluminium here. Francisco Blanch, great to have you with

us and to get that context and perspective. Head of Global Commodities and Derivatives Research for Merrow Lynch right now, um he is the pitbull terrier for the Bush family. John Snow knew of New Hampshire. He is the mechanical engineer from the Massachusetts Institute of Technology. And uh, Mr Sannuna, Governor Sannuna, I can only say that you will always be fifty five years old and protective of the Bush

family instead of your more august and retired view. Right now, I want to go back to and where some will say Mrs Bush salvage the Bush campaign at a speech in Lebanon, New Hampshire, and Mr Bush was struggling with Mr Buchanan, and uh, some would say Barbara Bush saved the day. What did she bring to the politics is George Herbert Walker Bush tried to drag the Republican Party towards his Republican Party. Well, Barbara Bush had a very

good political sense. Uh. She liked, I think campaigning in New Hampshire, and every time she came here, she seemed to connect directly with the voters. You know, we're a seemy, touched me, feel me kind of campaign state, and she was able to do that quite well. Um, she was sort of very comfortable, and I think that comfortable conveyed a a sense of warmth, and that sense of warmth obviously went to the benefit of the president. There have been criticisms over the years of any number of families.

We can take it back. You were not active in the John Adams administration, were you. I think that was even before that. I was around for the second one. You were around for Quincy Adams. But there's always talk about royal families of American politics. The Kennedy's, of course, have been front and center in that debate. Were the Bushes and was she the queen of a royal family? Well, you know, they were strong believers in public service and

it was something that they felt an obligation to. UM. They had an active life in the private sector, unlike a lot of the their so called dynasty families in American politics, all of them from the President who founded and who was one of the early founders and certainly developed a great company offshore drilling companies, the Potto Oil jeb certainly had a big private sector life in Florida

and George w including ownership of the Texas Rangers. So they as the family, were able to combine private sector public sector involvement UM quite effectively. I really do think that they all understood that they wanted to give a little bit back to the system. She certainly instill that in the kids. UM. They they recognized her as the as the definer of what the family was like and

UH and responded to it. So I I think, UH, although there was never any stated agenda, there was an implicit you owe UH the communities you live in, the country you live in a little bit of payback, and public service was the mechanism of payback. Governor Sunu, do you a call the first time that you met Barbara Bush. I think the first time was probably in the night campaign that was not successful for the president of the eventual president, George Bush, but I don't remember it specifically.

But I really got to know them extremely well after I was elected governor in eighty two and then he was vice president UM. And they were smart enough to know that if there's any continued ambitions to be president, it is good to develop a good relationship with the governor of New Hampshire. But we became very close friends while I was governor. My wife and I actually spent a couple of nights with them in the vice presidential residence in Washington and at Goobern at events for national

governors and things like that. So we we developed a very close friendship even before the eighty eight campaign. What was what was Barbara Bush like in in your relationship with her as the White House chief of staff for George H. W. Bush serving in You remember, historically there's been some tough relationships between chiefs of staffs and first Lady. But I was very lucky. We had a very good relationship. I think I think she obviously sensed that that I

was there to have the President's back. She certainly felt that was one of her responsibilities as well, and so we shared this mutual responsibility and and and as a result, I think that helped bring us even closer together. There's a comment that has been published from the late Tim Russert, having made a speech quite a while ago talking about when you finally left the White House of President George H. W. Bush, h that she kind of was someone that you confided in.

I'm wondering if you could expand on that. Well, she was someone I felt very close to. Uh and UH. When I was leaving, we spent two or three occasions talking about, frankly, the good times we had had. I left really on a positive note. I had expected to last about six to nine months, which is what most Jesus staff last. I left it in the White House a little over three years, and and it was very positive. We stayed close um uh during that transition, and we

stayed close afterwards. In fact, I came back to the White Does a few times and played Ross Perrot and the mock debates, and every time I went back, spent a little time chatting with her. She she was really the rock of the family, and even in the White House, she was the rock the President counted on. And those were tough times in the ninety two campaigns, and she was there um as as uh stalwart as she had

been in the eighty eight campaign. You mentioned the role of the chief of staff, and I'm wondering if you could expand on your thoughts about the current White House Chief of Staff and some of the issues that Mr Kelly is probably facing. Well, I haven't had any time to spend with General Kelly, so I my my analysis would only be through the press that I've seen, and frankly, that means I probably don't have a real feeling for what's going on down there, So I'm going to pass

on that. Okay, you have been credited with being part of a group of people that had recommended David Suitor New Hampshire as appointment to the Supreme Court of the United States. Uh. Do you have any thoughts about that recommendation and subsequent roles of White House chiefs of staff for those kinds of appointments. Yeah. If if you read my book, you'll actually get the real story. I actually

ended up supporting Edith Jones in the final selection. David Sudor was a great uh Supreme Court judge in New Hampshire and a terrible Supreme Court judge when he got to Washington. UM. It is a great example, in my opinion, of somebody who lives their life with a singular ambition uh, and lives their life in order to achieve it. And sometimes when you when they get there, the person that's at the destination is different than the person that was

perceived on the trip. And it's one of the great disappointments in my public life that that David Suitor ended up being as as really a different a Supreme Court judge than he sold both the President and all the lawyers that that vetted him for the President in that process. Boyd and Gray is certainly one of the great conservatives in Washington, and uh, he and his staff were all

quite conservative. They were absolutely convinced reading David Suitor's New Hampshire decisions, that this was going to be a good conservative judge, and it turned out otherwise. I want to thank you very much for joining us former Governor of New Hampshire, Johnson new New former White House Chief of Staff under President George H. W. Bush, sharing his thoughts and memories of Barbara Bush, former First Lady and matriarch of the Bush family. She died and was ninety two

years old. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.