Surveillance: Big Bank Earnings Kick Off

and of course on the Bloomberg terminal. Kema Leon joins us right now with decades of experience, and he can take us back to the ten to one reverse stock split of City Group fourteen years ago, Ken fifteen years ago. Can City Group and MS Frasier with all of her wonderful abilities, can she strategically and tactically compete with these other banks? Well, Tom, it's it's hard work for James Fraser because we're in the second phase of turner at, which is execution and who do they want to be?

They already a NAPS and are disposing non US consumer backs and the question is is do they have meaningful scale outside the US to compete? This is a challenge, and I think investors are tired of looking at a stock that's trading at to net present value or to book value, and what that means is is that we're gonna have to see concrete signs of improvement. Uh, it's

it's really tough. She has a change of leadership in the wealth management area, and that gets the Hinale's point about competing with ubs and private Swiss can't given the year ahead is internationally positive or negative in twenty three, John, I think it's it's actually moving to a surprise of the positive, the reopening of China, potentially Europe not getting crushed from natural gas prices all of a sudden, and for you large US facts, but the other three large

ones it's about you know, of total revenue. But for investment banking that could be interesting as we go into three a little bit further down the road. For Goldman and Morgan Stanley, this is the heart of their business is really international and having this streamline network for corporate treasuries, but it's not there yet. They have to invest in their technology platform. Stocks down this morning by two point

four percent. We can go through some of the banks in the pre market just briefly, got City Soft Bank of America down by two point five percent, got Wells far Go down by four percent, JP Morgan down by about two point eight percent or so. So negative across the board here looking at the financials, the broader ectority market down one percent. Just want to finish on this, can just on the international outlook, this from no data of Ren mac Tom and I were discussing it just

moments ago. Europe's warming up, likely avoiding a technical recession. China is reopening, the FED is stepping down from the aggressive rate hike pace, and fiscal policy is no longer a drag. The Fed expects real GDP in twenty three to slow down to zero point five per and Q four. On Q four he says this, Ken, good luck with

that one. Can't you agree with that? I think if you have an environment of not too hot and not too call, it's a great environment for financial sector, protectularly banks where the expectations are not as high as perhaps other areas that have benefited with a strong bolt Pase scenario. Bank's actually are in a pretty good position for performance for three as we see it, and we just want to see it one bank at a time, have a more constructive view as we get through the earning schools.

I Ken, thanks Obama to Sismonic for the last couple of hours. We really appreciate it. Ken Ley on the CFR. Right, this is a really really important conversation. We don't do this enough. This is sort of what afternoon TV and radio do. It's not the province of the morning, but we're gonna do it because this weekend across this nation, a huge body in the nation is going to reallocate their retirement planned disaster. Lindsey Rosner is a student of this, a c f A of small college in New Jersey.

She darkened the door on years ago, and lindsay, I'm gonna cut to the chase. P Jim, Greg Peters and everybody else in the industry is picking up the pieces from a complete disaster of sixty forty allocation and what PIJUM does, and I don't mean to pick on Pjum, but core this core that core. The other thing is, well, how do you reallocate after the debaccle of two thousand twenty two? Right? Well, um, I think you're right. It

was a debacle in two Nobody can deny that. But I think what we've got now we know what this painful journey led us to is an unbelievable opportunity in the fixed income market. You actually have an opportunity to do the right thing in the safer thing We've been in the world for so long, where the requirement to get any kind of return, what's to go out the rest spectrum. You don't actually need to do that. Now you can get six seven yields in high quality assets.

So I think the allocation, and I'm biased as a fixing comme manager, is bonds. I mean I think it's lindsay, what's so important here? And of course you on the high ground of this, uh let's call it c F A level three territory, folks where your eyes glaze over. But the bottom line is, do our listeners and viewers want to manage more towards an index fund within our squared at to point nine or even higher? Or do they want to get a little more supple and flexible

this year? Not like something like Cathy Woods Art the train wreck that is, but do you want to be a little more active this year? Or INDEXI you want to be active? I think we say we love bonds, but we don't love all bonds, and either should you. This is a year of security selection, especially as we face a recession. There will be winners and they will be users, and you need an active manager to sort that out for you. Let's talk about that right now, lindsay,

let's have that discussion. What are you looking for? What's on the list? So things that we really like, our high quality structured product, great credit enhancement there that even if you have problems and for example, some of the underlying loans and a CLO, you're protected. Um also select names in in corporate world investment great an high yield. There's a lot of opportunity to be had a lot of yields, but you need the resources to analyze the

balance sheets. Let's go through high yield then, so I'll bring up how you spreads more broadly, and you can go a little deeper in town with what sectors maybe even what names you're looking at how you spread to come down to about four twenty lindsay, this is not for your benefits, for the benefit of our audience that

might not follow this asset class. But the wide's a year ago, the whites back in the summer three, so we've tiened a tremendous amount at a time when people are trying to figure out if we're going into recession or not. So what do you like in that lower quality cohort of US corporations. Yeah, it is. It is really names specific and um. For example, there are some in the higher quality. I know you're asking lower quality, higher quality fallen angels that we think become those rising stars.

But then it is is names um specific home builders we really like, which kind of sounds crazy with mortgage rates where they are, But it's about picking those out. And I think the key thing is is that the default projections are extremely low, the recoveries are higher, probably going to be higher than they were historically. These are all good things for high yield at large, but you've got to get those names right at these tight spreads. To your point, Greg emails in from New Jersey and says,

Greg must to know, lindsay, are we clipping coupons? Are we going for total return this year? Help Greg out? I try to That's part of my count. Um. You know, we we can clip coupons. We've got a ton of spread if we just stay static. Um. But you're you're in a case where we are a total return. You know you got to keep looking for opportunity. Helpful to Greg, Yeah, that's are good, you nailed it. Okay, let's keep this

going folks. You don't see this on radio, but behind Lindsay's all of the Naziine tullub She's she's read over the years. I'm sorry. The world's changed. You know that all of a sudden the sharp ratio matters as well. Our viewers and listeners have to deal with a new cost of money. I get it that bonds are the place to be, but what's the recovery line back to two thousand twenty or two thousand nineteen. Do you and p JAM have a three year vision to get back

or is it a five year vision to get back? Yeah, it's it's longer term, right, We're longer than That's what we do. Um. I think a lot of people are quibbling right now. Is is GDP? For example, in the US next year point three is a point six percent? Is a point five and they're going to change it

potentially even on the print we had yesterday. Let's pull the camera back and think long term and buy the right company's the right collateral that's going to do well and pick the spots that are going to have the right kind of recovery. Can we talk about allocation to

bonds from a cross asset portfolio construction perspective. Lindsay, people may be looking to allocate to bonds back into that traditional sixty this year, and I think we're still trying to figure out what snaps that positive correlation between risk equities and between traditional fixed incomes. Say so foreigns, do you think that breaks this year? And lindsay, why do you think it does break? What leads to that? Yeah?

I think it goes right back to what just the time just said, which is we had two black Swans, we just had COVID, and we have a land war in Europe. So those are things that when you're looking at a theoretical model, black Swans aren't part of it,

and we're had a very much black Swan style of year. Um, while we we certainly want to think about the risks or the unknown unknowns, but I think we're going to enter a more normal time and that's important and that's where those correlations you've historically studied come back into play. The challenge to that view if I can provide it,

and I'd love your comment on it. The same reasons that we're seeing equities and emerging mark, it's ripped copper rallying aggressively European banks up a lot for the same reason. I think you could make the argument that yield should be higher, that we're seeing a more resilient economy than expected, that the central banks will have to go further, the ECB being one of them. We will get that growth impulse off the back of Hina reopening. Lindsay, why doesn't

that result in better risk profiles? Equities are credit spreads tighter, but also treasury is going lower and yields still going higher from here through this year. Yeah, I think you're you're bringing up the risk case that is not priced in. So what I think is pretty incredible if you just look at what's implied in the forwards for February. The forwards are saying the Fed's gonna hid twenty seven basis points.

And this is the way I'm answering your question. I can already answer it another way as well, but twenty seven basis points is saying that everybody knows what the Fed's going to do, and they know what's going to do going forward, and despite what it's telling you, they're gonna pause, they're going to cut. Why are we so

confident now? Everybody was last year, and so I think your point of that risk of inflation actually being more persistent, the economy being more robust, China fueling the economy which is inflationary, that is a concern. We can't deny it if that can't be on autopilot cruise control. And by the way, neither convestors lindsay this was great, just fantastic right now. Important to speak to Mr Rochester of n MURA here about what will be the study over the weekend.

He has to be delicate, he is with nu Japanese Bank, Jordan's it is just flat out there suddenly the death of yield curve control. Explain the ramifications for Global Wall Street ex Japan. If China gives if Japan gives way, if the Bank of Japan has to show normalize rates, what's it mean for the rest of US. It means a tom if you think about what Japan has done. They've had quantitative using for over a long period of time, much more than what we've had in Europe and in

the US. So, first of all, those carry trades that are built up over the better part of a decade or longer could be underwound and it could lead to fixed income markets having a tightening in terms of credit conditions, and therefore it's not clear how risk sentiment would do well if they were to suddenly abandon yield curve control number one. How does the local market handler? How much do j g B sell off is fair value? Around eight five basis points. That's a significant daily sell off.

But you know what markets are like in these sort of shock scenarios. You can get a sort of nonlinear market reaction. Then it feeds through to U s treasuries. One of the largest buyers, one of the largest holders of US treasuries outside of America is Japan. So how well do treasuries handle the Japanese having tighter conditions, higher

yields in Japan making US fixed income less attractive. This sort of answer is it would need to quite big sell offs, I think because the sell offs here speak volatility. Ben Emmon's over at New Bridge talks today about China exporting disinflation when you work through the dynamics, If we work through the dynamics of the end of the Corona experiment, does a much larger, healthier Japan export disinflation or the opposite, While the world's very much globalized. Let's walk through the

sort of path of how that could play out. What we're seeing is the first chance in a long time for Japan to have animal spirits and to escape the trap of deflation. We're seeing huge pay rises from certain retailers. The big headline for me this week was unique pay rise, the first time they've raised pay in twenty years. Four zero. That's a massive number across the board. We're seeing other companies doing big numbers, but much less extreme, like six

percent or so. The shunto it's called the wage negotiations. They all come up to us around March time. Do we get big, big pay rises overall for the whole of Japan, then we could see inflation become a bit more of a topic that Japan has not had for a long time. What does that mean for the rest of the world. It means that we have one of the last few central banks doing quantitative easing coming to

an end. If that was to happen, well, Jordan's not our base paste, but it's something to watch out for. In a big risk for this year. You've said it. They see it as a once in a generation opportunity to reset inflation higher. We see it as potentially a policy mistake on the horizon, and Jordan they've got to figure out what kind of policy setting is sustainable. Now. I thought that was the effort just a month ago, and now there's a conversation about maybe renewing that effort

in a week's time. Jordan's what is it? While the base case from US is that we shouldn't get much of a change next week because of these risks we've talked about. But there's a trade off for the Center Bank, which is, are the benefits of yield curve control which are leading to Japan having to do massive amounts of quantitative easing to defend that target? Are they working against the potential positives from it? So are they? Are those

positives becoming negatives? So let's just bear in mind Japan is experiencing inflation. It's nothing like Europe or the US, so it's still quite low compared to our standards, but it is high for japan standards, and we're having wage gains. So is the yield curve control, which is forcing them to do quantitative easing working against the idea of inflation going up and therefore maybe they should tighten. That's the

problem of the policy, that's the buying they're in. It's just how quickly do they exit It is the problem for market. There's some speculation that could happen as early as next week. Hence we're getting these big dolly m moves. For us, it's a little bit too soon. We've got a new governor coming up. The new governor will start probably from April onwards, but it is. It is though the risk for next week another surprise from the Bank Japan.

And that's why for us it's just easier to have a short dolly and trade on rather than talking anything specific about on this date this will happen. Let's break it one thirty right now, we've gone from one fifty to break it one on eight. That's dollar end cable has gone from one oh three fifty are the lows at the end of September all the way back through one twenty Euro dollar has gone from through one away you're looking for one ten six Jordan. Can we just

sit on there just for a moment. What did the fex community get so wrong at the end of September. I remember the conversations we would have. We were talking about parity, perhaps on cable. We got close, euro dollar getting used to life below parity. Look at us now, what changed, Jordans. I don't miss last year at all, John. It was doom and gloom and I really didn't enjoy being right. So we've got the euro dollar view right

at the cable right. We had a really good year in terms of P and l on our trade and gloom it was recession. It was European energy prices spiking to unbelievable heights, the trade balance of the euro Area collapsing for the first time in a generation, two levels that are wider than the US in terms of GDP. What's changed, John, is we've had a few factors of work in the euro where's favor. Number One, we've had energy prices collapse. That has been a massive tale win

for industry. It's allowed all those steel chemical manufacturing plans to turn back on production. It's why we're seeing European data start to improve. Number two is thank you Mr. US. US inflations now decelerating. We could have goods deflation this year. That is a very different story to last year when US inflation was accelerating and the story is about how

much hikes will the FED do. Now it's about when will the FED stop and when will they start to cut We think from September this year, so I think a lot's change on the ground in terms of facts. And then the third factor is China reopening. That's the new one. China reopening is a bigger deal for Europe than it is the US. US exports to China is less than one percent of GDP, no point six seven percent, to be exact. For the German economy, it's more than

three times more important. It's around two point six seven percent of German GDP. Just exports to China, your biggest trading partner, reopening its doors, opening up its tourism flows. Makes Europe so much more attractive now with those energy story and the inflation story in the US too. Jordan, thank you joining us. Katrina Dadly, portfolio manager and research an list of Franklin mutual services. Can we get straight to you in Katrina on just what you expect from

the bank earnings a little bit later this morning. Look, I think what we're looking for the bank earnings is really that arbiter of whether or not we're going into a recession. Because I think they're going to be the first line of defense here and the first people to see it. So we're looking closely at JP Morgan when it comes out and to see what Jamie has to

say about where we are in the economic cycle. Yeah, I look at Trina at the economic cycle and I would suggest to nine days is change And for a portfolio manager with all the sell side advice, you've got your internal wonderful advisors at Franklin Mutual have you, you know, not radically adjusted, but is there a change agent within a given portfolio because we've gone from December twentye to

what we hope will be January. Where a value managers, so we do not make those very very significant shifts training you're not shifting on the inflation dynamic now as a value manager. No, in terms of the inflation, we continue to see the FED working and bringing it down.

The question is, and that's the question we've been talking about all over two, is whether or not the FED engine is too much of a recession or whether or not they walk that tight load rope of slowing down the economy to slow down inflation without tipping us into a deep recession. We continue to be of the position that if we do go into a recession, it will be a mild one. And I think we're seeing all the signs of a very mild recession and that has

very good implications for companies because it's manageable. A deep recession is really difficult to manage, as you talk about that fixed versus variable cost curve. UM, we think a mild recession companies can muddle through. So on a value basis, where do you which sectors do you find the best dynamics to surprise and to say Junior July in terms

of surprise, one area we're looking at is the industrial sector. UM. I think that when we're talking about industrials, we're not talking about as much the autos that you're talking about with Tesla, and we are aware of what happened there yesterday, well this morning. We are now looking at industrial companies well placed, and they have this really good secular theme that we're focused on. It's the electrification, it's industry four

point oh, it's the Inflation Reduction Act. Those things will be structural drivers, and we're just making sure that these companies have enough wherewithal three, we think the order books are very very strong, the backlogs are at very high levels, and we think that the variable costs are rising, rages and any other type of inflation is really manageable. These industrial companies are areas that we like, Katrina, Where did

they minus fit into this? We caught up with a guest a little bit earlier this week, Christopher owners Frateigus, Rio, absolutely, Rippley liked Rio, b HP, glen Core. Where are you guys on those names? Um? We we do own a position in Rio UM and we would we disclose that UM, and we like the the the asset quality that we have there. But you're right, those type of names have gone up substantially, which makes the valuation case a lot

harder than it was just a few months ago. But as a value manager, we're looking at where are they positioned in the commodity complex, and we're trying to make sure that we've got that really good combination of companies that while they are dependent on commodity prices, they have a lot of things that they can do internally that will drive earnings in addition to realizing the benefits of the commodity cost moves, both both up and down. Katrina,

can you just go a little bit further there? You said it's cordant where they are exposed in the commodity complex. Where do you want them exposed and why do you want them not exposed? Um? I think that we can look at something like the copper market, which people are very much structurally bullish on. We're seeing some science that actually that's coming into balance. And what does that mean is you're likely to have some level of pressure on prices,

but balance is okay. It's when we have over supply that we need to be cautious about. So they're the type of markets that you want to avoid, and so from our perspective, we just pushed them to the side and we focus on those type of commodities where we have the either iron or exposure, and we have copper exposure and various medals where we're very comfortable with that supply demand. D'manamy riohans that that's for sure. Katina, thank you. Turn it down to their Franklin Mutual series. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days from seven to ten AMI Eastern and Bloomberg Radio and Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course, on the terminal. I'm Tom keene In. This is Bloomberg.