Surveillance: Banks Are Underpriced, Leon Says

last year? Can you continue to acquire shares of this of these banks this year? We do, but I think we're all boats rows in the fourth quarter. With strong stock performance for the banks, it's going to be more selective. We have an America Fast First plan, which is really the banks like Bank of America and JP that are highly concentrated in the US. That's driven by the core, which is loan growth and deposits. I would not really look to the capital markets or the strong reprint for

fixed income. Last year was a very weak fourth quarter. Sequentially, it's flat to down for six from the third quarter of two thousand nineteen. So bringing it back um, what we're continually seeing as um flat or weakness outside the US. UH. The US consumer is just strong. So I think if you can drive loan growth that offsets kind of a flat environment for rates, and if you're growing accounts by expanding into new metropolitan markets like Bank of American JP,

they are taking markets here from Wells Fargo. Ken, who's having success? Get in the volume side of the story up who's delivering loan growth? Um, you know clearly it's being driven by mortgage auto, but also you know what drives the US economy is small business in terms of employment growth. We're also seeing households that have pretty good balance sheets compared to where we were ten years ago. UH. I think there's a surprise on the upside. Bank analysts

are generally very conservative. They look historically at price to book. But if you have the loan growth here, and you have very good credit quality via as a strong credit quality, and there's no distressed industry on the commercial side, you have a pretty good setting for financials, particularly banks, to do well in the market because they're under price relative to the market. Ken, which bank would you bet on most for this year? Well? The by recommendations we have

as mentioned, our Bank of America and JP Morgan. We mentioned it's going to be a stock picking market. We have cells on Wealth Fargo and to sell in Goldman, Sachs Morgan Stanley as a hold in City as well well. Fargo just missed it, and I think Goldman, with the core being cyclical, volatile businesses and capital markets, they're going to have to have a great show on January twenty nine talking about their five year plan. Hey, ken we'll talk about that government called a little bit later in

the program. Ken Ley on a CFL Ray will be sticking with us. The good news this morning the United States and China a little bit later today in Washington, d C. Set to sit around the table and sign a phase one trade deal. The bad news for investors out there at least is that the tariffs are expected to stay in place until after the November election. The issue for many of you I know, is that it

leaves too many issues with China unresolved. Went again on this joining us on the phone, and please to say is Henry had a trades DA partner's managing partner and head of economic policy. Henry had to tell let's talk about it. The issues, the outstanding issues for you as we await this signing ceremony. Hey, guys, the biggest surprise

for me. I mean, we've we've known a couple of mostly tales for about a month now, but the biggest surprise came yesterday with Minu Chin and U str Lifeheiser announced that there would be no upward or down or well no downward adjustment to taris for more than ten months. That's different than what Lifeheiser said about a year ago when he walked through the enforcement mechanism on the trade deal.

He had explained to US a one, a two and a six month period of essentially check ins with the Chinese to see if they were essentially adhering to the Phase one deal. And last night or yesterday afternoon, they announced, you know, even if they are complying, we won't be

reducing tarish for here. And the reason that that's driving markets a bit lower yesterday is because investors have this very strong sense that the president cares deeply about the stock market in particular, not so much macroeconomic data like we're used to with earlier and previous administrations and congresses,

but specifically the stock market. So the hope had been, should we get to you know, September October of next year, and the president needs a boost to the stock market to help carry him over in certain states to win the election in he would drop tariffs, announce you know something else. All right, all chat doesn't seem likely. Let's

talk about the numbers. So the US agreed to have the duties on twenty billion dollars of imports and delay others in return for Chinese promises, particularly on the infrastructure

subsidies and others. Henrietta, how is that palatable to the Chinese government from their perspective politically to not have these rolled back in the near future and have its allayed for so for so long if it's for such political reasons, as you say, my understanding of the Chinese perspective, as they got spooked in August that the President was really quite serious about escalating tariffs on List one through three to thirty percent rates up from twenty five, and then

also on imposing the List four B tariffs, which would have been a hundred and sixty billion dollars worth of additional goods shifted in from China. So their primary goal shifted away from caring about the political consequences and uh, guessing whether Trump would be re elected or not, and onto, how can we avoid further tariffs? From here? We need to in some aggs. We need some pork, So let's

just move this along, Henrietta. My chart of the year was customs money coming in and it's a hockey stick, as you know, about four or five six standard deviations. Let's back off from the math. Have tariffs worked? Um, Tariffs have worked to essentially do what trade wars do,

which is forced losers upon everyone. UM. I think one of the big reasons why you're not going to see a lot of companies clamoring to take part in the new sort of injunction and injustice processes in the Phase one deal is because at the end of the day, if they say that there's a problem in China's not adhering to Phase one, what happens, well, those manufacturers importing those same goods are going to see their cost rise.

So UM, I think the tariff data is proving what a lot of economists have consistently said, which is that nobody wins a trade war. This is the issue, isn't it, Henrietta. The worry that this breaks down again? How long before the United States sits there realizes that, as they have done time and time again, China has agreed to something

they haven't followed through on. When you look at agreement right now, Henrietta, the scarce desetails that we have at the moment before the big reveal of the aty six page document. If we do and did get it all, what is it about this particular deal that you think the samaria for some conflict further down the road. I think the conflict is helpfully pushed off until after the election. The White House has severely lost its appetite for further

tariffs here. UM. There are once again calls for at least essentially as that we had into our recessionary environment in the President's largest approval numbers come from his handling of the economy. So I would not expect tariffs to rise from here, which is probably the best news that we have to look forward to. UM. But when it comes to what people are looking at the most inbound questions I get firm investors, are you know specifics, what are going to be the soy commitments? What are the

purchase commitments for pork? What are the purchase commitments for ethanol? None? Of those details are going to be forthcoming and they won't ever be released, is my understanding. So the six page document is all fine and well, there will be some positive points. I will be monitoring what associations say in the aftermath praising it or UM, you know, reserving

their praise for certain parts but not others. And what I really want to see is UM farmers and manufacturers on the ground saying we are so excited about x amount of purchases in whichever sector and get those hard and fast data points, because that's where President Trump's challengers will be focused, trying to prove essentially the juice was not worth a squeeze on this whole trade war and the ultimately at the end of the day, we're no better off than we were in and those details are

going to be what's reserved, so that those UM talking points will never really materialize and MASSA always got to catch up with you. That's the view from Henrietta Trey's Vada Pounders, managing Powder and head of economic Policy. I do think it's really telling that we have yet another consecutive disappointment in inflation data comping in the United States, and this is the thing that's really it's a little

light again. This comes after the little light CP. I are we starting to see a trend though where people are overestimating already sluggish inflation. And what does it say? I mean, John's your point about the rate cut debate heating up. I mean this basically edifies the calls for it. I mean it to some degree at least the fedge certainly is on hold. Let's bring someone in on this, and we're very fortunate to have her. Megan Green is

at the Harvard Kennedy School. We really thought you would cancel this morning because she is on the shortlist to replace Mr Cora with the Boston Red Sox. She's been sitting by the phone, I know, all the morning waiting for the call. Mr Cora out at the Red Sox and the same idea as the Houston astros uh and stealing of signs. Megan Green, give us the signs and the FED right now, Lisa Brammo, which mentions a little dearth of inflation. Is that enough of a signal to

the Fed to change ways? No, I don't think so. I don't think that this is enough of a mess to cause the FED to sink in expectations that are becoming on board. This is just more of the same we've seen throughout this recovery, where we've just had a dearth of inflation and investors might overestimated to do it every time, it's still not coming in. So this is not a new trend at all. And I think that the set is probably going to stay on holes through

this year unless we get some kind of serious mess. So, yes, we've got the p p I slight mess, we've got the CPI yesterday slight miss. Meanwhile, Target uh kind of really driving action today with their disappointment in terms of holiday sales in the November through December period, shares down more than seven percent ahead of the market open. And I'm trying to understand how much of a signal this is that the consumer is losing steam. Can we read anything into this? No, I don't think we can read

anything into you know, one release like that. If we started to see a series of releases and retail sales really gets then we might start to think that the consumer was flagging. The consumer confidences remain pretty high um and so I think so far it's too early to say that the consumers chuckered out because of course the consumers carrying its entire recovery. So once they are chuckered out, we need to worry. I just don't think we're there yet. And I just want to say, Target, though, is not

the only one. J C. Penny and Cole's previously had some disappointments as well recently, although a lot of people just shrug that off because it's j C. Penny and Coals and they've been sort of struggling for a while and their business models are under attack. But Target has been very strong, and it's been growing, and it's been investing in their online presence, so you know, an increasing amount of this. At what point, I mean, if this is not enough, at what point do you start to say,

wait a second, what does it say about the consumer? Well, I think we need to see other indicators of consumer demand turn as well. So in addition to the results showing it, we need to see retail sales flag, we need to see consumer confidence start to fall UM And so far there's other data points aren't coming through UM. But you know, this could be the beginning of a turn.

I wouldn't extrapolate too much just yet. After a E A been talking to dr pose of the Peterson Institute Megan Green about what was accomplished their people talking about theory. Are we operating going into two thousand twenty on sound economic theory or did everybody making it up as they go? What do you teach at Harvard Kennedy on that has So I'm actually doing a lot of research into this um and my conclusion is that a lot of our

theory just doesn't work anymore. A lot of the frameworks that we learned in ECO one oh one just don't apply. And so I thought it a a Actually, you know, times were really starting to accept that there was a really depressing consensus that we are just stuck with low growth, low inflation, and low rates for the future. And and that's a new consensus, I think, even though there's been

plenty of evidence for it for years. Well, to rip up the script on this, and folks, this is some background and I'll be discussing this, I hope A Davos a really wonderful panel. Megan Green. It's really simple. The debate was negative rates in their efficacy. What did you learn about the negative rate debate? If we're making it

up as we go amid slow growth. Well, So I think generally there's been a negative consensus about negative rates, and I think that's probably right that you know, if you push rates down that far um, you're actually punishing thanks um and you don't see any kind of credit demand develop off the back of it. So negative rates aren't the answer, I mean, in particularly not in the US. UM. There is kind of a consensus now that central banks can't be holding the bag for this recovery. And that's

fairly new as well. So if it's not negative rates cutting rates um, you know, maybe it's yield curve control. Japan's had some success with it. It could be more QUI. Though in academia, I think there's a consensus and QUI hasn't really helped a whole lot overall. I think, so people are accepting the central banks aren't responsible for the this next downturn for combating it, and so we're gonna

need to see fiscal authorities step in. And there's this overwhelming consensus among lots of economists who disagree on lots of things, particularly the causes of all this speak to man, But the one thing that would help all of the potential causes is productive public investment. The problem there is just the political support for that isn't necessarily there, particularly those who are worried about blowing the budget deficit. But you don't have to blow out the budget deficit to

actually do productive public investment, Megan. The longer that the central banks hold the bag, when do we start talking about ascid bubbles Again, It's a great question. You know, we haven't really seen acid bubbles or merge unless you can give it everything the bubble and and and maybe you could, um, but I think that where the bubble might be starting to crop up is in private markets, not in publist markets that we can all see. Um, that's possible in terms of leverage, floans, um, you know,

see a lot of things like that. But we don't have a whole lot of ter guaranty on that. And I think that could be frosty, but it's hard to have any real sense of how to quantify it. Megan Green with us at the Harvard Countedy School, And of course we can tell talk about the specifics of market economics, but we can also talk about bigger, broader themes. Megan. This morning we saw target deliver saggy comp sales, traditional sales,

and their digital sales were up nineteen. What are you seeing at Harvard Kennedy about this new technology overlaying all of our business? I mean, it's something we're going to write about in ten years or twenty years, or even half a century out. But what is the effect of technology on so much of American business, including consumption? It's well, so I think in this example in retails were well, um, you know, you see the technology increases transparency and price discovery,

and so that pushes prices down significantly. That provides a disinflationary force in the economy. And generally technology is doing that across the board, and so that's one of the reasons that we've seen soft inflation data and will continue to for the fort Gavel feature, Megan, just to wrap things up here, I'm wondering, looking out, where do you think we are in terms of a re acceleration or a slowdown in the global economy? Just we're looking at

a slow down, no doubt. Every major economy has been growing above potentials um and we shouldn't expect that to continue without really significant amounts of monetary or fiscal stimulus. And I just don't think that we'll see that this year. So we should expect every major economy to continue to converge with potential growth, which has been lower than what

growth has been over the past couple of years. Making great to catch up with you making great there, Harvard Kennedy, Senior Fellow, joining us on the phone on the latest thing economic take to and the next most with central banks worldwide. Right now, real question for investors here. You had an extraordinary twenty nineteen in terms of market performance. What do you do for Jim Paulson Luke old wed In, Capital Manager, Chief Investment Strategists, joins us to give us

his thoughts. So, Jim again, it's you know, the question is what have you done for me lately? How are you thinking about positioning for Yeah? Probably I think, you know, I think that the bowl continue this year, but I think it's going to go up, you know, far less than it did last year, of course, maybe more like ten percent or something overall. Um, And I do think

I think you hit the nail on the head. I think positioning is going to be the bigger issue in two thousand and twenty that I was in two thousand nineteen, rather than just buy anything around you. I think it's going to be what to buy is going to be more important. There's going to be I think a bit of a leadership shift UH during the year. If the if the global if the global recovery does revive here a little bit accelerating a little bit, which I think

is happening, that tends to really change what leads. So I think in the past, every time we've recovered or accelerated, you've had international markets beat the United States. I think that's going to be one of the big themes yet this year, both developed and emerging, probably more so in emerging, but I think moving away from the US here stopper

full it makes sense. I also think that cyclical areas in general UH have a much better year relative to more defensive UH investments, low volatility quality, defensive sectors and

the like. And then I also think maybe UH, depending on how much we recover globally, you're you're going to see small caps which have continue to do poorly this year, but I think they're gonna maybe finally have a year about performance UM overall, and I'm I'm sticking with tech UM but but I think that's the one area that might continue to do okay, But I think it's I think I'd go with this mall cap tech rather than

a large cap How do you shift to that? I mean, are you selling shares of Apple, Amazon and the rest of them here to do that? Or is that with new cash? I think i'd Uh. I think I definitely maybe UH entertained some selling tom. Uh there's you know, we've in our gap fund. We've put in uh E t F. You can get an e t F for the S and P six uh technology, UM, you know,

sell your SMP five tech. UM. I think if you look at that tech, small cap tech and large cap tech have done just as well in this recovery since two thousand nine. They've had almost identical results, but they've had very different leadership. Here ads sometimes large as dominant, sometimes small. In the last couple of years, it's been large. They're sitting now on a relative basis at the bottom end of a trading range they've been in relative to

the large cap tech back to two thousand two. They're they're trading right now at a slight discount p multiple, when they've normally traded on average at about an eighteen percent premium. They have a much higher long term growth rate estimate among SMP six technology than the SMP five technology has. They're certainly under owned, unloved, and basically not even known. You probably can't name many of them. I

agree with that. So I mean, and lastly, I think that they're not in the They're not in the crosshairs of regulators. Um you know regularly, They're just not in the cross Here is a regularly and no one's looking at small camp Paul Sweeney, what's going to be the catalyst to jump these brilliant for digit stock four letter stocks and Jim is talking about it, Yeah, it's I think it's, you know, some the search for top line growth,

which is something you always look forward. Tom. I think top line growth technology still has it and lots of pockets as we do a five G upgrade as the cloud continues to grow. Jimmy, I'm interested in your comments about emerging markets. Tom and I are hearing more and more about emerging market as potential opportunity for you as it driven more by maybe a moderating trade tensions globally

or lower rates or kind of stabilizing economy. What's kind of driving your thoughts about emerging markets I think the biggest thing is UM is a revival in growth. I mean, you're starting to see the O E c D leading economic indicator for the global economy just turned up in the last two months for the first time since the end of two thousand seventeen. The Westpac Global Economic Surprise

INDEXES has risen dramatically in the last few months. I think we're starting to see signs all across the globe of a recovery. Every time in this recovery since oh nine that you've had a bouncing global growth. Emerging markets have outperformed, and I think they will again. They tend to be more leveraged to economic acceleration than is the

service based, tech based United States economy, for example. But in addition to that, UM, I do think that you know, we're just juice in the heck out of uh more cyclical manufacturing, other areas with incredibly low rates. With quantitative with physical students, I think it's gonna gonna work. I also expect the dollar to go down, Paul Um. I've been trying. I thought that last year. It didn't work. I'm gonna try it again. And if the dollar does

go down, that's gonna boost some of those returns as well. Jim, thank you so much, greatly appreciated with LUFAD group. Jim Pauls enjoyed. H I've been waiting, waiting, waiting, Paults. We need to speak to Mr Shark this. You know, hear me folks talk about granular research reports. He is the king of granular. He knows which valve out in Kansas on which pipeline only has three bolts and not four bolts. And it's Stephen. I'm gonna start with a sixty question.

Is the United States of America energy independent? Yeah? You know, I keep on hearing that, especially in regard to the recent geo political headlines, and that somehow the United States is inoculated. Uh, you know what, Tom, some weeks we are, some weeks we aren't. So if I can say some weeks we aren't energy independent, you know what, we're not energy independent. We have to keep in mind that we still import a considerable amount three to four million barrels

of crude oil a day. This is very normal. Crude oil is not a homogeneous commodity. It depends on where you're what part of the world you're taking it out of the ground. So It depends on what kind of oil your refinery burns. Some of our refineries can burn the oil that we do produce. Some of our refineries have to buy oil outside the United States to keep

the refineries running. We have a balance market. But no, we are not quote unquote energy independent if we cannot put up a wall and not allow any oil to come into this country. And you've got you know, he's got a million charts folks from the weather maps and all that out to actually hard your carbon stuff in your upper left corner. You slam it with employment in the Marcelas shale area. Where is that geographical in the United States? Is that Manhattan or is that Bronx? Exactly,

it's a little west of the Bronx. So so we're talking north central Pennsylvania Susquehanna County, and then western Pennsylvania, um Washington County, and it extends over across the border into Ohio and then West Virginia. Is so considerable amount. And in my report, tom My concern here, of course is the fact that the United States is now in the industrial side of the economy is in recession. And that is to say, one day through the U. S. Economy,

steel mills, factories, so forth. We're in recession right now. Uh. And so if you've got lower demand for by industrial, you have lower demand for oil. And we do have loyal demand for oil and gas and sorts of energy. So my concern living in the state of Pennsylvania, what is this doing to the employment situation to some of the really hard hit areas in the rust belt that are really benefiting now from shale production. And so far,

so good, the employment picture still looks uh stable. But my concern over the next two years, as a considerable amount of debt come to do that we could uh, those counties could be in for a rough outing, uh throughout two Stephen, I'm looking at Brent crew here, sixty four dollars thirty cents a barrel, and it's just a weaker ten days ago when this thing was touching one and change. Is that delta simply the you know, risk premium coming out of Iran? Yeah, and yes, and it's

just it's it's mind boggling to me. If you if if you told anyone ten years ago that you can attack a major oil facility in Saudi Arabia and three weeks later, oil prices would be lower than when they were the day after the attack, or that we could assassinating May your Iranian official in oil would be cheaper ten dollars cheaper today than it was right after that event. You would have said, you know, no one would have thought that possible. So the geopolitics have completely been exercised

out of this market. There there is just this overwhelming nonchalance and it and it is mind boggling. And for me it is a concern because I do think the market, you know, on this group, think that we are energy independent. I do think that this market has lulled itself into this false sense of security that anything can happen and oil will continue to flow and prices will continue to remain attractive. And I think it's a dangerous game we're playing.

And is that game predicated upon Steven just that maybe the markets belief that, you know, things are different now because of the US shale output. Is that a valid point you think or is that overplayed? You know it is. It is part of the equation we have to keep in mind when we're talking about consumer behavior les ticity of demand. You have two functions. You have you have

the price shock, that will alter consumer behavior. But you also have to have a substitut to product, and up until five years ago, we didn't have a substitute product. So we do now have substitutes onto the market. And of course I'm talking about e vs, either full evs or a plug in hybrids such as the short household has one. So you're you're an energy guy. I know, I know, and and and my energy consumption has has been, my oil consumption has been is a fraction of what

it was three years ago. And you know what that is oil demand that's never coming back to the market. So every time you see a Prius or a Tesla or Audi e tron, now that's the demand that's never coming back onto the market. So yeah, that that does have a big impact in the long term, Steve, nobody cares. What we do care about is the back end to your reports. Stephen Short, You've got the famous T s R Weather demand re gap. Come on, it's dooming gloom.

You've got the coldest part of the nation is directly over Biscuit in New Jersey. We go to John Tucker, John Tucker, when it really gets cold in New Jersey, do you see like ice on the beach. Oh no, will you see you certainly do see ice where it's a an amalgam of saltwater. Yeah, st you got the you got New England in the North Atlantic States in one chart gloomy cold, and then you got the entire half of the nation gloomy cold. How cold is cold?

You know cold and cold? You know anything? You know above, you know sustained tempts below freezing, you know in my estimate. So do you remember we're talking about in New Jersey, Remember that poll of vortex in the fourteen win there you you had icebergs coming ashore on Martha's vineyard. You've had the ocean almost freezing, and salt water for salwader freeze. We're talking about temperatures blowed water, temperatures blow twenty degrees.

That is cold. And what's crazy about this guy's is that we do have this cold finally now in the forecast. And the one commodity that normally responds to cold weather is natural gas because we heat our homes in our busy This is with natural gas. And guess what natural gas is going in the complete opposite direction. Uh. And this is a function of one even though you do

have the weather demand? What don't you have? My concern we have an industrial recession, so you don't have that industrial side that is really keeping a lid on natural gas prices. So it's it's interesting. So how about another consumer facing energy gasoline? Is it lower for longer just at the pump? I do believe. So I think we we we we've settled into um this area where and we kind of look at the options markets and the option markets. You always want to look at the option

markets because this is the insurance market. These are the guys who are signing a risk of how high or how low prices will go out into the future, and then they're going to sell you an insurance policy that that doesn't happen. And what we've seen with the option markets through the first six months of this year, the option writers, the guys selling these options, are telling you that they think the ceiling in this market is between

sixty three and sixty six dollars. This is w T I and the bottom of the market is between fifty five and fifty three. And so when we run our quantitative models, our money Collar Carlo simulations, it all kind of dovetails right into that range. So if we're you're looking at low fifties on the up to the midst sixties, that is stability at the pump. And that's a good thing because most producers can make money with oil in that mid sixty dollar range, and most consumers oil consumers

can certainly afford it at the pump. Steven Short, thank you so much, greatly appreciated with the Short group with the Shorking bord uh this morning. 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.