Surveillance: Basak on Gorman Resigning

This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com,

The timeline is certainly a surprise. We knew that it would be coming one day. He's been at the home for a very long time now and we know that more and Stanley has been prepping the bench for a while. Think about how many people have grown up under James Gorman have left the firm and the two men under him right now, Andy Saperstin at the Wealth business and Ted Pick. They're home grown. They have been there for a long time. They have been at the most pivotal

Well, let me just read the exact statement this from Gorman at the firm's annual meeting. He said, it is the boards and my expectation that it will occur at some point in the next twelve months. He's talking about his departure as chief executive officer and becoming the chair of the board. That is the current expectation in the absence of a major change in the external environment. Also, a key question was this a decision that he made

You know, I think that's an interesting question. It's hard to have any evidence of something like that. James Gorman has just made this firm into a behemoth. Remember when I started covering Morgan Stanley, they were worth much less than Goldman's acts. Now they are worth much more. That

So it's interesting to me the point about unless there is some sort of shift in the market conditions at a time when people have been talking about a financial crisis that never transpired, and now people are talking almost about stasis or this calm that has really percolated out. Is this viewed as sort of a calm period, a pond with the duck sailing cross, even if there's paddling underneath, where they can actually make shifts like this without any major disruption and do it easily.

Well, how fascinating to talk about this right before people are worried about a potential recession. Morgan Stanley has seen some of the worst days to two thousand and eight. They remember what it felt like. So this is some calm, isn't it. That is saying it is calm enough to start to transition. And by the way, look how many CEOs are changing on Wall Street. This is the time for the next generation to step Well.

Okay, maybe Paul Davis wrote this six months ago, five months ago for Bloomberg. Thank you to the Washington Post for publishing Paul Davies, and he just I'll never forget the headline, Golden Sachs is quote far far behind Morgan Stanley. It's all about asset management, right, It's an eat advanced thing. I don't know how he trades worked out as well. But where does Sa Pristine fit into that? Because my basic take here is Ted Picks sort of the older guy.

Glad that right, It's a pretty good characterization of what's going on. Listen, in the trading business. These are a bunch of loyalists. This goes back to what true killer was there. You worry about the traders leading without a solid person in charge that they trust that leads the troops. But to your point here on Andy, he also has tens of thousands of financial advisors across the United States. Those are less swashbuckling, let's say, than maybe the traders

Box besides at any firm who takes.

Over the board.

But remember, as we've been talking about, James Gorman is on that board.

Okay, you can find he's on the board. But how independent is on Morgan Stanley board versus a guy who many people would suggest as a CEO of the decade on Global Wall Street.

I think it's a great question.

It's more really good one of the day, so go with it.

Morgan Stanley's board is pretty diverse and very committed, and remember they it's changed quite a bit in recent years. It has talent from the former Securities and Exchange Commission from Japan given their deal with the MUFG during the financial crisis. So it is quite independent relative to a lot of what you're seeing on Wall Street. And that's what kind of makes this succession plan successful in the

If you're just joining right now, the news of the day, Morgan Stanley CEO J Scoreman is playing to step down within twelve months. This he made in an announcement at the annual meeting. The shares of the immediately popped lower about one point seven percent. They've retraced a lot of that down here, just six tenths of a percent. As people digest the news, it does seem like shnali. This

It's already changed so much to your point, with the big acquisitions. They've always had wealth as a huge driver asset management, but the asset manager again, five six years ago, you couldn't see Morgan Stanley becoming more than a trillion dollars in asset management. That has changed, and it changed

Leader off the BQ screen glob and six zero three price to book Morgan Stanley and James Diamond like one point five to three and I'm sorry the guy is so modest that he's underplayed what he did with managing money. I mean that to me is just the massive theme hearon. You've said that he will stay as an executive chairman.

Yeah, he's going to be chair What do they do? What do they do?

What do executive chairman do?

They sit around and they make sure that nothing goes wrong, and they come back if things do go wrong. I mean, listen, the initial market reaction tells you a lot. He's a iconic at the helm of Morgan Stanley. He's changed the firm more than any other bank has changed.

In the last name, I thank you.

She is our chief Wall Street correspondent. There's no other way to put it appropriate to speak Tom his misery. Now, I had a global rates TD securities and we do this with the two tens spread sixty basis points her great call of curven version a good year and a half ago. Priya, good morning. You are focused not on ten year, not on two years, but in the belly of the curve at five years. Why are you suggesting dynamics in the five year would be a more attractive place?

To be sure?

So I think it's all about how far you are from the first rate cut and where is the FED going to cut those rates to.

You know, I still think we're about six months away from the first rate cut.

In fact, the risks are that they don't even cut this year, they start to cut next year. They're so hyper focused on inflation they are looking for a slowdown, So I think they might be a little late. But once they start to cut we think they're going to cut a lot more than what's priced in. I mean, the market's pricing in the you know what we're calling the trough rate, which is the end point of those cuts. At three percent, I mean three percent is actually higher

But if you're too.

Far out, then you know, there's essentially a lot of things that can move long end rates. I think that five years sort of the sweet spot. Three or five year rates, I think those are actually very attractive because they're positioning for the FED whenever they start to cut. Just this idea that they're going to cut a lot post pause.

Whenever that is, where is the ten year yield?

So I would say that the tenure is benefiting a little bit from the fact that there's significant inflows into bond mutual funds. You know, once the pause happens, I think we all look at what's next. I don't really buy this skip idea because the economy doesn't move, you know, it's not that volatile. I think right now we're seeing the slowdown as it starts to build up steam. I think it's going to lose momentum really fast. So I don't buy this skip and then rehike. I think we'll

We've been talking about the resilience and retailers. We've been talking about the resilience in deer sales. We've been talking about the fact that a lot of these companies have been able to pass along price increases, which is one reason why perhaps people are rethinking the view that you just put out there that it's unlikely for the FED to cut rates significantly in the next twelve to twenty

So I can see this, So we're actually looking for one more hike, So we're looking for five and a half, you know, just listening to FED speak, I think they would rather pause and stay on hold for longer than actually try and push the last you know, what's fifty basis months among friends.

I mean, they can go from five and a half to six.

Remember they're also doing QT, so I think it's a high bar for them to keep going. But I think it's also very high bar for them to start to cut because remember they're looking for four and a half on the unemployment rate by year end. I think if we're at four and a half by year end, we're in a recession. The economy is slowing, down pretty drastically, but the FED might say, yes, this was in our forecast, so I think they stay on whole longer.

But I would agree.

I think if inflation increases somewhere, I mean the Fed's telling us that they want to slow things down, they don't see the slow down. I think they're going to keep hiking and as a result, they are going to overdo it. I think we're already in restrictive territory. It just takes a while for different parts of the economy to slow down. I mean, we're not getting that big shock that can slow down everything at the same time, which is why I think it's so tricky to trade

Think we should think about that as well.

It's one hundred billion that the FDIC is selling fixed income paper. That's a new supply that's coming in. I think that's part of the reason why we've risen in rates, but you're supposed to start to think about hedging some of those risk assets if the economy slows down. I think that's a pretty big pain trade as well.

If the FED does raise rates one more time, is that enough to break the backs of some of these regional banks that are drawing on some of the emergency landing facilities still to this day, even though the crisis, if it was one, has simmered off.

So you know, the deposit outflows have stabilized, but they're still continuing to leave banks, and I think that's going to continue to happen. It's very hard for banks to compete with deposits when money market funds are giving you, you know, five percent five and a quarter, and if the FED continues to raise rates, I think that gap continues to be wide. So I think the regional banks are still in trouble, not so much because of massive

When you talk not only about inversion, but large inversion, you're also very lonely. Can you frame out given the cards and I, you know, let's assume optimistically we're going to get beyond the debt idiocy. Great. Can you frame out a six percent three month T bill, six percent libor so for other short term rates? No one's looking for that. All my radars up.

Now that's true.

I think the big paint trade, really another pin paint trade is if inflation remains high. I mean the tips market, it's the best indicator of market expectations of inflation. I think it's extremely mispriced. It's sup two percent in the near term, so I think the market saying some aw, magically, inflation's going to come down, which is why the Fed will not raise rates.

What if inflation becomes extremely sticky?

That was the biggest aspect of our inversion call was inflation is very slow moving, extremely lagging, and so if inflation actually stays high, there's your case for at six percent FED funds.

But does that move the five year or the tenure.

In fact, the more the Fed raisers rates, the more they'll have to cut because I have to think they take rates to you know, restrictive territory. Then they keep it there for a while till things slow down. And that's going to mean that they're going to have to be a lot more accommodative when they start to cut trades.

What's fifty basis points between friends? That's my takeaway from that conversation. With fifty basis points between friends. Prayer measure of today, Prayer one for the catchup, you solve the dut credit.

We're in Washington, director at Vada Partners, Henrietta Treys with serious Capitol Hill cred. Let's translate the reality of this Friday, Henrietta Treys, and that's the idea of recess ready set. There's a great crisis. Wait, Senator Schumer is going to say, no, we're going to recess. So we're running out of money. You and I've been in the cash room at the Treasury. We're literally going to run out of gold cash notes. And the Senator from New York is saying recess.

It's incredible.

You can really watch the Treasury Secretary, you can watch the both bracket banks and their predictions, but you can actually set your watch to the Congressional calendar to figure out when they're going to pass a debt ceiling bill.

That's what I do, and it works every time.

Just pay attention to the Congressional recess schedule for sure.

What does it say right now?

Right now, it says that we're probably going to see bill text on Sunday Monday morning. Maybe Speaker McCarthy will file the bipartisan bill that he and President Biden's.

Team reach over this weekend.

They will hopefully not vote on a bill in the House until Wednesday or Thursday of next week. Anything before that, and I'm very anxious about a tarp like moment where the bill will fail because the House is moving first here, which means the Democrats on the House side, who historically provide the bulk of the votes and the critical votes for a debt ceiling hike, are not going to have local cover from the Democrats in the Senate having voted first.

At that point, Senator Schumer could call the caucuss back.

He is indicated that he will call them back within twenty four hours notice, but eleventh hour in DC really does mean the eleventh hour, and they could well not come back until Tuesday, May thirtieth, two days before the X date, and pass the bill on the Senate next Tuesday or Wednesday.

Well, that's what I'm bracing our investors for. That's what I'm expecting Henrietta.

To that point, what is the risk that there is a technical default because there is a mistake that someone miss times, is that there is a bill that gets rejected or in transigent members of a party.

I do not think that there is any risk of that.

To be honest, I am afraid of a tarp like vote in the early part of next week. If Speaker McCarthy puts a bill on the floor Monday, Tuesday, Wednesday, the odds of a failed vote are about forty percent. But that's a good week before we actually need the bill to pass. I think that's your biggest risk point. After that, I understand there's a lot of hay being made about, Hey, the buildings is sit for seventy two hours,

So then while the hype made by Congress members, made by the president himself, why all the discussion about how this is not anywhere close given the fact what has changed over the past two weeks.

I mean, quite honestly, if you want me to get on my soapbox for just a little minute, the last time we had a balance budget was under the Clinton administration. And instead of using that surplus to pay down the deficit, what do we do? In O one we pass tax cuts? What do we do in O three we passed more tax cuts? Who blow out the deficit? Continue doing that into the Obama years? Did it again in the Trunk years?

I would suggest the charade began. I believe it was in New Hampshire with George Bush Senior where he got run over on the tax verbiage that we've been living for years and years. Let's assume that TX verbiage doesn't change. So what happens next. Obviously everybody's gonna want a tax cut. Everybody wants a free lunch.

Right, better believe it.

So in twenty twenty five, right after this next presidential election cycle, the entirety of the twenty seventeen tax cuts on the individual side expire, the salt deduction comes back in, but all of the individual tax rates go back to their twenty seventeen levels. So at that point we're probably going to blow out the deficit again by temporarily extending those packages for another year or two, just like we

In twenty twenty six, Rinse and repeat.

Tom White, Henrita tries that invite upon it.

Joining us Jordan Rochester of number Jordan. We could do a one hour conversation here. We don't have time for that. I'm going to go at rapid speed. John and Lisa're going to jump in as well. What is the significance of ren membi our past seven? Once again, we visit through seven has been ages since at seven U one per dollar? What is a symbolism a seven point zero one you want, CNY Well.

For market psychology it's a big deal. But for us we think that actually maybe it's the sort of seven twenty five to seven thirty.

Level is where the PBOC be more uncomfortable.

We have had a statement, of course today saying that they want to reduce speculation in the currency market. We've seen that sort of statement before, but that's kind of why we've seen cnh rally a little bit today. But for us, the momentum in the Chinese economy has changed quite significantly from what we hoped it would be, what the market hoped it would be just a few weeks ago, and that has been really driving the remimber underperformance. But

Jord And a lot of people now starting to think about maybe going the other way in the FX market, leaning into some dollar strength after that big consentsus you built up over the last few months off the back of what's happened with the data, just subtle shifts that you've identified, Johdan, can you identify the best way to play that through G ten at the moment?

Yeah?

Absolute, John.

And the one thing this market keeps reminding say is you can't lean back. You can't say I've got this long term medium view of euro upside, which we do and relax. You can't just crack out the popcorn, get the natchos and watch the film. You have to be active and respond to of vents. And what's happened here is the data in Europe has really underwhelmed. I thought At first we could ignore it, John, I thought the factory orders falling lower, that's something that maybe could be

So why is that?

It's because, first of all, next week we've got UK CPI and we think there's gonna be a big drop in that number.

We could actually go below eight percent.

We've been above ten percent for roughly around seven months or so in the UK. It's been quite painful for the consumer. Ten percent double digit inflation. Hopefully next week we get that sign that the Bank of England has done enough and we get that below eight percent seven point nine percent are teams looking for. If we get that, John, the pricing for the Bank of England, which is around about forty five bases points for the next two meetings

To thirty base points.

Jordan.

I love how you describe people getting bored as they put on one trade for too long and then just switched it over to something else. It sounds like basically a junior high school virgin version of a version of macro trading. I'm just wondering, from your perspective, whether this is basically going to be the most painful top swipe down, John, the most painful top that you can possibly imagine, just because it is so tough to stick with any one trade for a considerable period of time.

I think it's quite like twenty twenty one, which was a really difficult year for US.

I remember it quite well.

Twenty twenty we had the vaccines invented, the euro rallied, we got to one twenty three dollar weakness. Then we got to the beginning of January and Joe Biden's Democrats they won those Senate seats in Georgia, and we had a three percent swing higher and the dollar.

It caught us off guard. It caught a lot of people off guard.

The market was pretty much overly positioned for dollar weakness at the time. I think that's kind of where we got to. Most client meetings of not recently, but about two weeks ago it was we agree, we think yurogo high, we think the pound goes higher, we think the end goes higher. That's now changed quite substantially with these data surprises and market moves, and I think it's a lot

So the dollar went up.

For the first three months, and then it went down for the next three months, then it went up again in three months after that.

It was only in Q four twenty twenty one when we got.

A pure sense that the gas supplies that Vladimir Putin was essentially restricting before he invaded Ukraine really added to that dollar strength. And also we had the inflation spike in the US at the time as well. So we're kind of in that sort of mean reversion place in the GS and FX. And that's the tricky part for this year so.

Far, Jordan.

Is that why you're only willing to make a short term tactical call right now with regard to this strong dollar.

John, To be tactical is important. You have to make money here and now. So yes, we always have our eye on the next one month horizon, and then after that we think about the long term. The long term, I think Europe does head hirer again, John, the terms of trade are fantastically moving in Euro's favor. It suggests

Now, let's say I think.

That should be more towards twenty five, and then perhaps the market might start to fade that.

You know, my question, John is if you're with Aston Villa and you're sitting in the cop at Liverpool, the medium term really doesn't matter.

I'd suggest that if you were an Aston Villa fan that you don't sit in the cop end Jordan. You're not doing that, are you?

Maybe not?

Years you think Villa villatile, I'll be wearing I think they'll be kicking them back out.

This is fun. I mean, Urson Villa wasn't supposed to be fun this year and it is like now the plans really well, it's fun.

Jordan, you must be happy.

It's fantastic.

I mean we're fighting relegation not long ago, so this is just to be in the top end of the table and actually look at you know, five, six, seven, eight and think maybe we've got a chance of being there is fantastic.

I've got to talk to Tom about championship playoff finals in the next week of side Jordan's I wish me lot, Jordan Rochester, I Fnamora.

Forget about the theory. Mostly for some people it's about missing a bull market off the October lows. For others it's recalibrating, and I'm going to suggest for many others it's just the fear and maybe being in cash. David Balin advises this morning, chief investment officer for City Global Wealth, you had the courage to be in the markets throughout all of this process. Reassess the courage right now, how do you have the courage to be in the market after this run to forty two two.

Well, it's not a cheap market, Tom, and that's not really the point. If you take a look at what's happened right over the last year, this is a perfect example of why market timing is absolutely terrible. And it's a question then of what you own and not when you own it, right, So it's what's in the equity portfolio. For a long time, last twelve months, we've been defensively positioned right into companies that are high quality with dividends

Well, let's talk about allocated to some of those themes. The answer to this question I hear it a lot on financial news programs. How much should allocate to one thing? How much should allocate to another? Isn't that just highly dependent on who you are, how old you are, where you are in life.

Yeah, I mean obviously, when you do you know, wealth planning and financial planning, you have to determine, you know what your spending patterns are, and you have to actually have a plan.

Right.

But regardless of that, if you think about how portfolio should be constructed in equity, portfolio should be one's best ideas right in exposure to different markets at different times, and there are some, you know, great and obvious ideas. A great example today which we never talk about, right because we're so focused on the US and on AI, is just the fact that right now you've got foreign stocks at their cheapest level, right as cheap as they've

Have you been basically building your equity slice or are you basically even weight when it comes to places like private credit that still offer a tremendous amount of fields.

Let's talk about that. So we've been slowly moving up our equities right in terms of our allocation to them. But the point you just made is extraordinary. And again, you know, think about it from an investment storted point of view. If you can get in the fixed income market an equity like rate of return and sustain that for the next three to four years, should you do it? Absolutely?

Given that that's your belief, you think that rates are going to come down. Is this period of time a golden period? Ironically, even though the chop feels not particularly golden in any way, shape or form. But are you seeing this period where you have an opportunity for outsized re turns that won't come again after this period ends, after rates return and normalize. Right?

That's right, Lisa, I mean you just talked about it in private credit. You're going to see the same thing in the bond market because we are investing into a slowing economy. There's no doubt that the FED action what's gone on with banks, you know, in fact, even the resolution of the debt agreement that we're talking about this coming week. Maybe that's going to be take away stimulus. It's going to take liquidity out of the marketplace after it happens. So all of that's going to slow the economy.

Deevid, you mentioned opportunities abroad, and you throw out some interesting numbers and I just want to work through them with you. Yeah, DAX is at a record high today. Eurostocks fifty year today is up close to twenty percent. Someone's buying it.

Oh No, I'm talking about emerging market equity specifically, yeah, right, EM specifically, no obvious markets.

Right, let's go there. What's happening there? Because Chinese data start to disappoint and some people are reluctant to chase that story. What is it about EM for you that works?

Well?

What works is that you have a lot of companies right that are operating, whether it's in Brazil or in China right where their earning stories are. Actually you know picking up markedly. You know, we saw a bunch of good even earnings from internet stocks in China and they're being completely ignored. Right, so we're overweight in that market because you're buying there at an incredibly good valuation. In Brazil, same thing you're buying when they you know, they've done

How do you identify them?

Right now?

Well, you think about just think about this. You think about let's say a consulting company. I can't name the you know, whatever I say, right, how is there how is it that they're going to modify the business that they're going to provide to clients. They're going to teach AI.

Let's go back to Walter Riston, who would say that US multinationals have international exposure. There's a small startup in Coopertino or something like sixty percent of revenues Apple is foreign revenues. Can we go back to the old days, or if people can buy US multinationals is a foreign proxy.

I'm not exactly sure because of the valuation difference. Let's flip it around and talk about you know, energy stocks in Europe. You know they're saying in a forty percent discount to energy stocks in the US, which would you rather own. They're both multi Apple, it's a big diffdend. That's exactly correct. So my view is you have to be conscious of valuation right right now. You know, everyone

Interesting, David, this was great and waterful. I've said this a few times this week already, but great to see you in person.

Yeah, I love the fact that we're all together. Yes, exactly, It's fantastic. And Jonathan, you need to invest in the company that makes a dessert spoon.

I agree.

I think they're going to make that happen. Is that at the top or just at the top.

You're doing good?

Yeah, that's right.

You keep doing that.

Appreciate it.

I like the small ones.

They've invanted a city glovel wat Appreciate it.

Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot com, the iHeartRadio app. Tune in and the Bloomberg Business App. You can watch us live on Bloomberg Television and always. I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg