Surveillance: Bank Earnings With Tom Michaud

simple question. I think a lot of people are asking, is it a sign of durability that the rally is broadening out, or a sign of excess right or a sign of the Perhaps this is not the leading indicator that used to be. And I think that's been my big question this morning. As you see junk bond yields within sixteen basis points of their all time low, we're talking about sub five percent high yield. It's not high yield anymore, and we're back to that level and it's

rallying much more than investment grade debt. Just wonder going forward, I mean, is this appropriate given where we are in the credit cycles to bring up Channel News. Credit Sweet head of FX Macro trading Strategy, Good Mornity s up. What's the message for clients this morning. Well, we think although these concerns that you just mentioned a real concerns

for now, we think markets continue pushing forward. The bottom line is that from a macro perspective, we have a situation where the Fed and other central banks indicating that

they're not looking to raise rates anytime soon. In fact, there could be monetary policy framework shifts that bring forward ideas like looking at inflation on average over a cycle and waiting on its Inflation is above target for a while, so there's no macro risk at this point that the market can see on the monetary policy side, and I

think that's one of the issues that's driving markets. There was a headline out show up this morning on Spanish bonds, and all our listeners need to know, particularly coast to coast across America, is the number was g enormous. The demand for paper is exceptional. Jeffrey, you with ubs one with this earlier. This is one of his great themes. Do you see that from where you are in foreign exchange that there's just simply a wall of money out

there absolutely. For example, one of the themes at the moment is the large amounts of reverse Yankee bond issuance. So US companies issuing a reverse Yankee, that's where they're in last place, right. No, you can say, well, you know, there's essentially smiled I am familiar with. So you can have a situation where a US company would would want to issue debt in in Europe uh and then take that money and invested in other parts of the world,

for example in the US itself. And this kind of issuance is frequent when there's a belief that rates are going to be lower in Europe for a long time and that funding costs are going to be lower if you raise money in Europe uh. And in essence, the idea that negative yields are going to sustain in Europe is one of the factors of striving this. So there is in that sense of wall of money clearly because companies feel that they can go to Europe and easily

fund themselves and get money. I do have to wonder, John, you raised the issue of durability, and I think that that's a really important one, and I think that I don't want to be Debbie Downer. But I guess that's where I've been pigeonholed. Oh, tomm you don't have to give me that look he's raising his eyebrows at me. But I will say, there's a question do you get in now at a time when we are later and there is a question about liquidity, uh, the ability to

get out when you actually see a problem. Do you continue to take that risk given the fact that you're rewarded for it, or do you back off? It's difficult to back off simply because every day that you've backed off, you you're losing money in effect um and because at the end of the day there's a relative component to this as well. So uh, like I said, you've got negative rates in Europe. There's no sign that that's going to change. And the US, the market still pricing in

another FED cut over the course of this year. And it's not just the US and the rest of G ten. The UK could cut again, Australia could cut very difficult macro backdrop to try to fade. When I I'm glad you're bringing this up shot up John the hockey stick on British rate code expectations absolutely extraordinary driven by the policymakers more than the data. A little about turn from Governor Carney and others as well. I find it absolutely fascinating.

Where did it come from on what three months ago? It's obviously and it speaks for all of credit sweet research. Are you guys glass half full or glass half empty right now? Is a general investment statement. We're definitely glass half full still as as overall we're less how full? Maybe? Well, can you be less half full? We're more optimistic three months ago, just because valuations were better three months ago, right when risky assets were still pricing in uncertainty around

things like the US China trade deals. Some of that has gone away. So obviously as you as you mentioned, it's not as attractive as it was. Have you said that there's no obvious signal yet to back up and in fact price action still tells us that too. For example, the Iran risks that came through at the beginning of the year. If markets really were as overwhelmingly long risk as everybody suspects it talks about, there should have been a more dramatic reaction to that, and there really wasn't.

Thank you so much, up John, us with us with Credit Suite. Looking at JP Morgan, I think we've got a better idea. With a number of thirty six point four billion dollars for annual earnings, that's quite something for a US bank on a yearly, sir, that many people thought perhaps we'd go into recession on a year when we had three interest rate cuts. We've had record profit numbers out of Jack P. Mulkin. How does this correlate with the idea that banks are in a downward slump?

Just throwing that out there, Well, the stop price of performance last year doesn't correct with that absolutely, because people are saying that the sort of years of incredible profitability are over. This doesn't. He's next to us. Now tell me show k B w C E. Oh, Tom, you've retroly the numbers you thoughts place. Yes, I think it's impressive. You mentioned the revenue growth, and you would combine that with only three point nine percent operating expense growth and

share repurchase of about four percent year over year. You put it together, it's it's dynamite. Now that I think it's all about the operating leverage now that revenue growth. Remember last fourth quarter was a terrible fixed income trading quarter. So I know it's an ad plus percent improvement year over year, but that's not really normalized. That's more a

story of how bad last year's fourth quarter was. But still it's really pretty good and it's more dollars than we thought it was going to be, so so it was good performance. But but this type of operating leverage is really impressive. Well, what I find amazing about this is we're gonna hit us again and again through the

next twenty four hours. That we knew this was going to be a big bait because we knew Q four ANDEN was bad, but so did the whole analyst community, and there were still a billion dollars shy fixed income trading revenue LEASA. Yeah, that's been the issue here, is that they managed to beat and then some Do we have a sense time of exactly where they benefited. Yes, it's a matter of fact, so relative to expectations, and our firm was a little bit more aggressive than than

the average firm in terms of our estimate. But they had sixteen cents of share of revenue beat, and they had eight cents of share of mortgage banking miss. Because that's one of the themes we haven't talked about. Is that rate? Is that mortgage banking. We've been expecting there to be a little bit of a of a week or mortgage banking quarter. So that happened, and when you look at that um you'll see that it was really a very big quarter in terms of trading fixed income.

Was were other big twenty plus cent per share beats relatively Bloomberg gap on on your cell phone, or I have a Bloomberg gap on my cell phone, but I happen to be reading the direct delivery of research well on my phone. But this is really compelling. In other words, it wasn't all bright spots right the mortgage decline they had to offset somewhere. I'm wondering they did what was better?

What was so amazing that actually delivered this beat that exceeded even the most aggressive of my senses at the market for fick trading and for equities was probably a little bit more generous than people thought. And I'm going to guess they picked up market share. So I think it's it's it's something well, the bigger, the biggest banks have been picking up market share from European banks. Is the data is what our research has shown and Also

the smaller players, UH, continue to see pressure. So what's the sweat emerge right now? I'm sorry, what's the sweat to merge right now? January? Everybody's back from the holidays, what is the sweat and small bank and regional banks to merge? Merge, merger. I think you're going to see more consolidation because there's an understanding of how you got to take more costs. So we've got some long term

trends on efficiency ratios. Even the talk. You look at some of these banks, they're in the fifties, mid to high fifties efficiency ratio. Wells far Ago is above that, and hence their profitability is lower. So there's a little bit of a competitive competition war on efficiency. And then while they're doing that, they're spend at least the big banks are spending billions of dollars on innovation. So the other banks in the industry are seeing that. And it's

not game over for the regional banks. They just need to play to their strengths, play to their strength year last year. Some of these numbers valitate some of the year this bank had. Show me the year ahead, reasons to be constructive? What not? I tell them. Okay, the industry is very profitable. The balance sheets the strongest it's been an eighty year. Is the some of the Dodd Frank reforms of capital and liquidity reforms have made these

banks safer. The American banks, the gap between their performance in Europe is widening. Of the big global banks, they will pick up more share globally, the and then the operating But remember all this is being said, but the regular banks and the typical banks are gonna have very little growth this year, if any, and it's because the cuts and interest rates have hit the margin. What we didn't talk about is that their net interest margin was

down a lot. The rest of the at JP Morgan, the rest of the industry's margin is going to be down a lot year over year. You have to let that season and get behind you. And once that happens in the back half of the year, we think you'll start to see a pick up in operating leverage again for the banks we got I've got ten more questions, Thomas Short, Thank you so much company, k W as well, Lisa, A good time to speak to Jeffrey you of UBS with one of the great insights last year of a

walla cash out there. It's inside baseball, Jeff. You but the Spain had a ten year offering today and everybody lined up. It was way way oversubscribe. What's its signal? The desperation that people need to buy full faith and credit paper. I'm saying it right now that yield environment is still very very much in place. Are we're saying

in a disregarding credit risks or things like that? You know, perhaps, and but you know people are willing to pay a premium of that, and that's purely reflecting you know that the view central banks, they're going to stay where they are, if not low us, for a very long time to come. Is it like oh, five oh six, oh seven, the memory of people trying to squeeze out ten more basis

points somewhere? Are we back there? So on the market side, and you can see some comparisons, I guess I'll remember back then when the carry trade was putting euro en to one seventy and KeyWe dollar is giving you you know, seven percent or the eight percent things like that. So so those trades are still there. But on the other hand, you know, if you look at balance sheet, if you

look at the assets side, and they're clearly households. They're not taking up leverage, debt to income ratios very stable. If anything, they're a bit more healthy. So I think that's why a lot of investors want to take on risk, because they know that on the financial side, you're not going to see similarities to ten years ago. In trade tensions with China in the US, we're really sort of hanging over the market and depressing gains that people said

otherwise would have been there. Now we have the EU delegation coming to Washington, d C. This week heating up over there with respect to the trade tensions. How much is that going to weigh things down, if at all. So I think that's going to be one of the key risks from that Europe in particular is going to look at and I think you're holding back a lot of investors from going for the risk on in Europe. At Robert Lheiser, you know, talked about rebalancing the trade

relationship between the US and the European Union. So the rhetoric, you know, it hasn't been great. There are areas of corporations say against China and the like um, but clearly your wants to multilateral approach. They're not used to this kind of bilateral um, you know, bargaining. So now that is going to be a source of war, especially for the auto industry in Europe for quite some time. Yeah.

So are we you expecting sort of an unto performance in the auto sector and industrials or do you think that this is just going to be sort of a general overhang? Um? So, actually on the industrial side, if you strip out autos, I think the outlook is not as in a negative data stabilized and that's what the German Treasury curve is theda Gentman bund curvisum telling you as well. But I think these are tactical shifts at the time being. Are we calling for reflation in Europe?

You know, are we going to see um the UCB starter change this language? You know? Probably not, But again you let's see how these talks go. Jeff, you, how do you measure effervescence? I mean, if we're up here, we're up are in a good and positive way across asset classes. What's the Jeff you measurement for exuberance? For exuberance volve again, I go back to being an ex guy. Um, and if you look at how euro dollar implied VOWL month.

I think we're trading on the four handle right, so you know, those were just levels where we where you would think unthinkable form. Yes, it is the most liquid f FX pair you know, but for that to essentially you know, become a a low carry or a negative

carry near cash asset. You know that those are levels where ten fifteen years ago you would tell someone from SX that you're a dog trade on four let's say no chance, But that is happening again, going back to West Central branksa if we are in no chance And it was one of my headlines last year was the London annuity at four point one percent. I believe it was in the f T that was published. Are we going to see the actual rate of return for some

of these annuity products actually go under four percent? To me, that's a little lead back to the nineteen thirties um that that would not be a surprise. And I think this underscores and and and a bigger theme of again the cash you know, for these old I managers, for example, do they really need to be more like the Norwegians and go go towards risk, you know, be or be like the Canadians, you know, go back into I will go into a p framework and otherwise those rates are

going to come down. How do you boost returns? And they're going to need to be a change or in mindset on the regulatory side. But again, if that cash goes out of six income, where they're going to go most likely equities? Lisa Bramo, it's Ian Lincoln just publishing moments ago at the More Capital Markets CPI universally disciplined universally. He was watched on the street there. Yeah, Well to me, I mean I think that this raise a question how can you keep piling into risk at a time when

you have a global economy that's deadily slowing. I mean, the fundamentals just don't matter anymore? Is that it? Now? It's certainly not. It's not that it doesn't matter anymore. And I think people are going to focus on quality. You know, that's a message that we are sending to klients. So um, you go to a company a level fundamentals and be clear about stock picking, but also be clear

what you want to own. So we don't want to own so in a corporate investment expose sectors Right now, one's own consumer exposed and sectors and besides something that's been well flagged again credit in the US and the

senior loans, things like that. But the moment that credit begins to crack, the moment you know where we'd really start to do default rates and you go up where better fundamentals on the household side is no longer enough, you know, to sustain the credit evaluations we see right now, that's when we need to reassess. Jeffrey, you thank you

so much. With us and their wealth management division, just wonderful and set analysis right now my face for its strategists here she's head of strategy for B and Y Melon and Alicia Levine is my favorite strategist because Paul, she has so much Wall Street experience that she puts it on one page. Noticed that there's no seven page memos, there's no twenty page you know. It's remember Sanford Bernstein

in the Black Books. You'd walk around with the Sanford bursting Black Book just to be cool, you know, just to show you a cool not dead. For Alicia Levine, she writes a terse one page mom, Alicia, I want to go right to the risks that are out there because we're risk free right now, we're massively risk on. And I want to go to just a simple one. Are we grabbing like eight months of performance in two weeks?

I mean, is that that's not valid? Right? Well, let's let's say that maybe we're grabbing eight months of performance in the previous quarter. Right, So October represented the first time that we surpassed the previous high. So for like you know, twelve fifteen months, we slashed around to the same levels more or less, even though the if you looked at it an annual basis and looked pretty good.

So the fourth quarter was extraordinary. The earnings estimates, to my surprise, have not come down for they're still hanging out there at and that's actually kind of unusual because normally body December thirty one, you have some softness and the estimates for the following year. Okay, JP Morgan one single headline, your revenues up nine It's stunning. Both City and JP Morrigan did it on on the fixed side,

on the fixing and wheel used to spin the wheel. No, I mean, look, the banks have shown us they've gotten through the compression in yields, they got through the inverted yeel curve pretty good. If they can get through that, I think they're set up for a really nice year

this year. They're still trading inexpensively relative to their business lines. So, Alicia, I don't know if you know, but Tom's dollar cost averaging to the equity markets this year exactly after being in a triple leverage cash fund for should he be chasing the Fang stocks, the tech names, the leaders of this market, or getting a little bit more conservative utilities some of the more defensive sectors. Look, you're talking to somebody who was around in so like, I get queasy

when I get asked that question. On the other hand, you know, if this is a liquidity driven market, and if we're going back to the kind of the high growth stocks pushing it, we see a positive year, you have to own some of it. You have to own some of it. So look, Google based for eighteen months, Facebook based for almost two years. Those are kind of interesting. Also, Amazon has never surpassed it's old high also kind of interesting. So you have to own some of those large cap

tech stocks. But I just wouldn't overdo it. Nine looms large in my mind. And by the way, everybody's talking about how great, they're far oh one K did last year. That makes me nervous. It makes me really nervous. I don't want to hear that right because it means everyone's

piling in. So how about you know the other I would say kind of a I'm not sure if it's a consensus trade, but the trade I hear a lot about as people think about where there could be some opportunities in the Great twenty nineteen is maybe like emerging markets, uh, small caps, things like that I need to think a little bit outside the box. So we like actually overseas markets compared to the US. This year, we still think the US is positive. We're still the best house in

like a mediocre neighborhood. But the issue is that signing the trade deal and separately from that and an uptick and growth is going to be felt most noticeably in the European markets and an emerging markets simply because they've underperformed for so long. I mean emerging markets underperformed for ten years. Europe under has really underperformed since two thousand and twelve. So this is an interesting place to put some capital. Most US investors are not allocated overseas, and

they should be by Melon. What are you seeing your clients do? What is the action plan you're in review? Maybe tax punning, But what's the mood up there? There is there is fear. There's fear not about the red sox about markets. So there's rebalancing. There's rebalancing. So fixed income had a great year last year, but also equity markets had a great year. So we are advising our

clients that diversification is the name of the game. It's the only closest thing that's a free lunch out there, and you should definitely rebalance so you get some sort of protection out there. We still think duration is playable for risk off markets. There is still that negative correlation out there between fixed income and equities. So when I think about the markets performance the equity markets in nineteen,

it was pretty much all multiple expansion. We have to have some earnings growth this year to drive this market. And as you mentioned, are you concerned that earnings maybe too high out there on the street right now, because it's just seems like we're set up for just the quarter by quarter taking down of earnings estimates on the street.

So as long as so right now we're between nine and ten percent for earnings growth in If earnings growth comes in around six percent, which is more or less historical averages, you can sustain the market at this level. The real risk is if you go sub five. We see the first quarter sort of being an air pocket in terms of growth, and we see the the U S economy doing better actually over the summer. That's really where you're going to get the full benefit of those

three rate cuts and the global liquidity coming. And so you have to play. You have to play because you have to get performance, but you should also just realize your your earnings estimates are coming down. I'm afraid to ask this question, but I'm gonna go. If you don't know the answer, that's okay. Is Apple over owned? Is Apple under owned? So my contract says I can't answer that question because about the individual stock right. Tell me about sure by back see always secuite out of that

right to something pretty good. I mean tell you, I mean maybe if the market goes up and multiples get stupid. NBA one of ones is don't affect share buy backs or at least at the margin increased share buy backs. Are you hearing that out there? I'm not hearing that I'll tell you what happened in two thousand and nineteen.

Though your share buy backs gave you a two percent difference in your net income growth versus your EPs growth, So your EPs growth was marginally positive versus your net income which was negative because you had a smaller share account across the SMP huge buybacks last year as a result of the repatriation, hard to buy stocks at this level. I would think if you are you observing that we're CEO s go, No, we're not going to do that. That's a way to make friends and family. No, not yet,

not yet. I think if you still see this year, you can still buy the market. Alicia, I think they're signing a trade deal tomorrow. Do we care? We definitely care. I don't think it's nothing, Okay, I don't think it's nothing because look, if I'm reading the head lines correctly, China has agreed to purchase up to two million in US egg products. That's very important for the farm states

and very important for the Midwest. Separately, there is an agreement and we'll see if this is enforceable that there will be no forced technology transfer. And as you know, those were one of the structural issues that the US really wanted to get for this. So this is something. And don't forget some of the tariffs are coming off. We should see an uptick in CEO confidence and if we get an uptick in CAPEX, we're off to the races. See and then I guess then the question becomes not

to get greedy phase surveillance. Phase two? Is that something the market even cares about or is it just taking off That uncertainty of President Trump and the trade issues is enough for the market. So right now, the phase one really is about getting rid of the uncertainty and not escalation of tariffs. If there's any phase two, it will start in the next administration, of which whoever is sitting in the White House. This is not easy. This

is about changing the Chinese economy. I don't think that's going to happen. Alicia Lavie, thank you so much to being White Mellow. 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 Keane. Before the podcast, you can always catch us worldwide. I'm Bloomberg Radio