Surveillance: Everyone Is Scrambling For Yield, Michele Says

Us of Algebrast, truly expert on EU banking. Davida to our global Wall Street audience, what is the single statistical or ratio observation of EU banking that maybe is not in the zeitgeist right now? What's the Sarah ratio that matters? Well? I think the nless the probably Matt as the most is the number of banking institution. Um, you know, the

EU has the highest number of banks. We're talking about an AMBO which is very twenty eight thousand institution vacompass basically three times or size the US basically for the same economy. And if you take the top five banks in Europe in the US in terms of concentration of the posits now have almost fifty in Europe and not even fifteen percent. Very we've got too many banks and

not large enough. Well, very very interesting. Not only do you do the financial but you also look at the human condition here, and so much of it is set up with boards that I would suggest really don't represent shareholders. Is that true, the boards really don't Deutsche Bank, Commerce Bank, whatever, that they really aren't representing shareholders. Well, yes or no? Because the right now more than seventy eight percent of

large European banks actually held by titition and shoreholders. So the reality is thetituitions shoreholders can have a weight that the reality is because about thirty percent are passive. No one is voting, they don't really care. They're mimicking an index, and that has become a problem. And that's why you see a few activists stepping up and actually making a point, simply because the majority has basically abdicated the role of stewartship. We still see in the US. Do you own any

Deutsche Bank or Commerce Bank? We do not own any Dodge bank or merge equity. We do on some of the credit if a merge will be very positive of their credit status because you'll basically need a recap or some sort of the other. So you probably need equity at the bottom of the capital structure, so that will be positive for credit equity will have to see. I know we were talking a little bit about it last week,

but does it make sense. This is, I guess the only way in which you can really cut costs because of the unions and because some of the labor laws. But then Deutsche Bank is also doing with its U S investment arm and I don't know how that fits into the conversation. Well, I think there are a free issue here. The first one is under German label laws, you can't really get a massive redendancy package and five

lots of people unless you have eneminy activity. Secondly, if you look at common Spank and dodge Bank, dodge Bank has about ninety people. If you have contractors, you're almost under and ten thousand for a revenue base of twenty eight billion euro, which is below Goldman, which has a third of employees less than thirty. So the issue is

Dodge Bank is just too many employees for its revenue base. Secondly, inside Germany, Common Spank is about fifty thousand employees but an asset base which is a quarter of the one of Dodgemank. So a merger between the two will strengthen and will enable cost cutting. The Germany that will do anything to the will do nothing to the international operation

on the dodgemank. And as a result you probably need you know, you're looking at thirty forty employees or the combined the cost pays I have to go, it's a huge number. What's your favorite European bank right now? On a standalone basis, our favorite are in Tessa, UniCredit, Santandre, NBNP. That's sort of a retail skew there as well. You mentioned fifteent, which I think for all Americans dobbyde is

basically unimaginable. Who controls the politics of Germany, the politics of Austria, the politics of Italy is that the small banking lobby? Is it the mid bank lobby or is there a conduit from say unit credit right to the Italian political leaders who olds who holds that power right now? Well, first of all, in Europe, if you say banking, it's bad simply because the populish rhetoric, it's centered around banks of money. They're only given to us and as a

result of bad guys. This is across Europe. It's as simple as that. Secondly, in Germany, though, because seventy cent of the banking market is actually state owned, whether it is SPA, Cassen or Lander's Banking, they hold the true power and hence the strongest lobby group of the spark Assen and the caster Path and in France the combination of the two are the one which can basically make laws. The larger banks forget it, they're basically in the dark house.

So one word echoed around trading flaws following the latest jobs report goldilocks, goldilocks. Goldilocks investors taking some comfort that the jobs market was running neither too hot or too cold, and fueling the view that the rallying risk assets has a little further to go. Here in the studio to discuss this, Ibrahim Rock Barry City, Global head of FX Analysis. Ibrahim, let's just begin with that word, goldilocks. I heard it

so much Friday through the weekended into Monday morning. Your view on whether that accurately describes the U S economy right now? I think it probably does. I think we're in a world that's ultimately very supportive for for sid markets and for risk appetite, and and the main the main pillars of that are that growth indeed is is good enough. It's neither too hot nor too cold, and inflation will will be subdued, and all of that is being being underwritten by a very dovish central bank. So

I don't think it's misleading. So I caught up with the administration, and the administration wants a rate cut, and I'm trying to understand the justification for a rate cut at this point. Are you part of that group of individuals that thinks we could get a right cut sometimes soon from the Fed? Yes? Absolutely, I think that we are dealing with a very very dovish central bank and and ultimately with the combination of two forces that are

pushing pushing them in that direction. One is real politic, if you like, we haven't. We have a big election coming up next year, and of course part of the rhetoric is to both make it more likely that the economy stay stay strong and to position this administryation as a pro growth administration. But the other and maybe intellectually more interesting question, and ultimately economically one is how do you how do you formulate policy to avoid a major slowdown?

Is there a way to beat the cycle if you like, because that's I think precisely what the FED is trying to do. Well. These kind of conversations worry may they worry others as well. They preham the idea that you can beat the cycle. Does that make sense to you that kind of language. Well, I think it makes sense for me to try. I think in the end you

will you will fail. But I think there's something to the idea that perhaps historically central banks or policy makers more generally have at times been slow to react to a changing picture. I think this FED in particular has been obsessed for some time with not repeating the mistakes of the past. So I'm sympathetic to the view that if you if you see a slow downcoming, try and come,

try and come into the act early. The front page of Barons over the weaekend is the bull market unstoppable, and then the lead quote was as follows the bull market recently it's tent birthday. Can it rally for another ten? We've heard it many times before, but it's worth repealing. Bull markets do not die of old age. You have to say that a lot of criticism about the front out page being a contrayer and indicator, it was a very balanced piece. Once you read through it. But Abraham,

that's kind of the position we're in right now. I think there's a little bit of complacency creeping through. And it's the idea that central banks can beat the cycle, they can carry on pushing this out, and the view of Federal Reserve Chairman Jpal himself that his old own objective now is to extend the cycle. We're putting a little bit too much faith in central bankers and their ability to do that. Yes, absolutely, you know, and it

shouldn't be clear that one. I think if we look at the most recent market developments, they clearly suggests that some some some markets are being overboard. Whenever melt up enters the financial vocabulary, you have to be you have to be cautious. And the other is that clearly can't just be sent show banks that safeguard this sort of

goldilocks environment. And I put much more weight on the combination of stabilization and Chinese growth, including the policy similars that they have had a peak in trade tensions, and then the FED as a supportive act the march and does currency dynamics right now, and particularly dollar dynamics, does it help us multinationals? I think broadly speaking, yes, I

think we're because we are effectively an arrangement scenario. Of course, the dollar is is still strong and relatively highly valued, but the fact that it's not getting aggressively stronger is I think a world that these multination. Part of the enthusiasm John's mentioning on the cover of barons U is the idea that multinationals can keep delivering down the income statement. Right. Yeah, her world doesn't get in the way right now. So

I think that the dollar is not helping. But but all I'm arguing is it's not it's not hurting too much. And I think that their concerns probably more recently have been centered around trade as opposed to as opposed to perhaps the dollar. So again I don't think the dollar is helping, but it's probably not top of their stuff concerns. The cheap guide just looking back, I'll put my hat on as the c i O of the of Hindsight

Capital just for a moment, if that's okay. But the cheap guide for the EFEX market over the last couple of years, Abraham, is when global risk appetite is good, the dollar is weaker, and when global risk appetite is bad, the dollar is stronger. I mean, that's pretty consistent. That's maybe the one consistent framework that you can apply to the effects market over the last couple of years. If you're forecasting better risk appetite, a more stable Chinese economy, equally,

I imagine your forecasting a weaker dollar around you eventually. Yes, But I think there's the devil is a bid in the detail because two factors come into play here. One is carry matters. So we are in a in a search for yield environment, and the dollar is uncharacteristically now a high yielder in in G ten exactly, it's it's it's expensive to funding dollars. We're looking for alternative funding

currencies across the range. And the other is that we we don't think that that improvement in risk appetite and the improvement in the economic trajectory will be will be a monitor monotonic dynamic. We think in particular that Europe for now lacks some of the global improvement for European reasons, if you like, so, particularly within G ten. I think we're moving in that direction over the course of this year, but I don't think right now this is a dollar

cell environment. Is you're at the trouble spot for you at the moment. Sorry, I didn't it's Europe the trouble spot for you at the moment. Certainly a laggard. I think it's they're clearly a number of of of economies in the world that are struggling even more. But I think the level of disappointment in Europe is right up there. Abraham right to catch out with the Abraham wrap. Bowery City's global head of Effects Analysis, John Pharaoh is Brexit

worn out. And I got a little more interest in John, but everybody, as we know it is Brexit worn out. She was on with us ten days ago or so and we got huge response from Catherine Barnard, who is like actually an adult on the legal minutia, the paragraphs, the sentences of all this Brexit EU trade stuff. She is of course at Cambridge and is definitive on this. I love this the UK and a changing Europe. Senior fellow, I have no idea what that means, professor, Thank you

so much for joining us again. Where are the red lines right now? Where are the red lines? Well, we don't know if you're on the answer. They're looking a bit pink. I a bit fuzzy around the edge. The one red line that seems to still be there is Theresa May wants to stop free movement of persons. That's where individuals can go from France to Germany and live there pretty much with that restriction. He wants to stop that for UK citizens going abroad and for Polish and

Hungarian citizens coming to the UK. Okay, fine, but I did some careful analysis ready for publication at a Cambridge University standing in line at Heathrow, what's the what's the soul? What if people have to go movement through a different line at Heathrow or wherever it's It's not so much the sort of temporary movement for tourism purposes. It's for people who want to come to work. And at the

moment they can work in the UK pretty much without restrictions. Crucially, they don't need a visa um if they come to the UK. So an American or a or a Pakistani national comes to the UK to work on a long term basis, they need a visa, probably into visa and those are really bureaucratic to get and they're also very very Okay, the UK has got a visa rating probably the most expensive world. Well well explained. Tell me what

Boris Jansen and other Brexiteers will do today. It's been very centric and Tory labor that you know, no compromise thought. And then of course Prime Minister May shooting a high quality video Spielberg like and then and then of course she's going to trot off and see macraw and get her frequent flyer miles up. What are the other guys doing? What does brexiteer doing? Well, what Brexiteurs are doing at the moment is maneuvering to be to be the next

prime minister. The trouble is they don't want to be the next prime minister now I this week or next week, but they want to be able to do it in three or four months time when I think the deal is done and so. But what they're really worried about is the reason May today is talking to the Labor Party, the opposition Labor Party, and they think this is an appalling decision. So the Brexiteers, people like Pretty Patel, who you might remember from the referendum campaigns. He was part

of the group with Boris Johnson and others. She was saying, you know, it is absolutely unforgivable that Theresa May should be talking with the the Labor Party. The EU or the EU think she should be talking to the Labor Party they used to dealing with grand coalition. Charles Moore, writing on the Telegraph, had a bar chart of like who's for who's against? Regionally, basically only London's for. It is the summary. I actually thought Prime Minister May's address yesterday

was something she should have said years ago, Catherine. I mean, at the end of the day, this wasn't across party lines. They should have got together a long long time ago. Why did it take so long to get together and talk about a compromise. I think there's a couple of reasons. Partly to do with Theresa May's personality that she is not a particularly collaborative individual. And secondly, in the UK politics are very polarized. It's very party politics based, and

it's also very tribal. People stick with their own tribe come what may, and so the idea that you actually have some sort of grand coalition, as you might have in Germany is totally anathma to our system. On the other hand, it would have been strategically clever to have actually got chatting to the other side from the summer of six because then they would have been forced to buy into whatever was produced. It would be very hard for them to vote against, so we wouldn't have been

where we are now. So, Professor, I think one question that I've been asked again and again and again over here in New York is when is the real deadline? When do we have that grease type crisis moments summit over in Europe where it hits midnight and I can't kick the can down a road any longer? Professor? Is it this week? Possibly possibly Wednesday night? Because this is the EU emergency EU summit And if they say no to us, if remember the mayor or an extension to

the June. If they say no to us, you can't have any more extensions, then there really will be a crime. Can you give us? Can you give us like eight or ten pm ones night? Yeah? Absolutely, I'll come and tell you, but that that really is a country that the odd thing is although actually with due to leave the EU without a deal on Friday at eleven pm on Friday, there's not a sense of crisis at the moment, So I think most people think that you will give

us an extension. The million dollar question is what's the data that extension. Will it be only to the twenty second of May, Why is that important? That's the day of the European poem to elections, which at the moment we're not participating in. Or will it be unlikely that's what Truason they want unlikely? Or will it be a year hence, and that's what Donalds could be present of

the European Council talking about. Well, I must admit Fox, my observation of ten pm at night watching this in London is totally different than from the distance of the United States of America. There's something about late night parliamentary meetings. It's like did you enjoy that? It was like I did not enjoy it, but no, it was not like theater. It was like exhaustion. I always forget one of one issue country the UK has become, and then I go

back and realize and I'm reminded of it. Catherine, I just wonder the Labor Party has actually done quite a decent job of trying to make it more than just about one issue. In fact, maybe that explains some of the success that Jeremy Corbyn had in the previous election. If we went to another election, would it be in one issue election? Well, that's a million dollar question because Jeremy Corbyn has really tried to talk about other things

apart from Brexit. Brexit has completely convulsed the Conservative Party. UM. But if there is a general election, there's not one due to two but most people think it's likely to occur Before that, the parties will have to write manifestos to say what they want. And the manifestos won't just have one issue on at Brexit, but it also have

issues about the health service, education, public spending and so forth. UM. But in reality there's a good chance that it will be on Brexit because they'll have to write a paragraph or two to say what do we want out of the future relationship. One final question, Professor, and this goes to your expertise. Explain to our audience what European parliamentary votes mean. What what are the British people vote? Who's voting in Britain for EU parliament votes? Is that the

nation votes? Yeah, So there's European parlant elections every five years when all of the states or of the EU twenty seven or EU twenty eight will send m ep s members of the European Parliament to sit in Strasbourg and the elections take place pretty much on the same

day sent me around the same weekend across Europe. And at the moment, the UK's seventy odd seats in the European Parliament have been partially redistributed to the EU seven to the remaining member state, but that needs to be unpicked. If we have an extension beyond June, we will have to participate in European Poems elections and we will steats will have to be retained for the UK. And the European Poems is actually rather important body now. At the beginning when it was set up, it was nearly a

sort of assembly and a talking shop. Now it's what's called a co legislature in most areas, so it's got really significant powers in making EU legislation which is binding on the most valuable Catherine Bernard, thank you so Cambridge University just immensely enjoy speaking to her other real expertise

versus the country. Try. Okay, here's the ballet fogs. If you work for a firm and you're doing a deal, it makes complete sense that if you're directly involved with that deal, you can't comment on it in the media. And then, far more importantly, if you're tangential to a transaction under way, it's usually very clear that you cannot

talk about it in the media. And then there's the idea of this is Bloomberg's surveillance, and we spread we respect the pressure that our guests under So even if he was tangential, and even if he was as brilliant as he is, we wouldn't be rude to Bob Michael and asked him about the Saudi transaction. We would we would not do that as he is with JP Morgan, and of course JP Morgan out trying to do the

book on this uh huge and historic transaction. Bob. What I can do is ask you in fixed income about globally the insatiable demand for paper Boy does it ring of two thousand and six? Is it the same? Good Morning Tom? It does? And this is both a good time and a challenging time to be a bond investor. The good part of it are the central banks tostill have taken a lot of pressure off of the market, so you don't have to worry about yields continuing to

go higher and the balance sheet running down. The bad is that this is all you're gonna get. You're gonna get two and a half percent ten year treasury and you're going to get credit spreads. If you look at some of these new TRANSACTIONSY referenced in the market at a hundred basis points over, but you've got to buy it. There's not a lot of inflation out there. There's not a lot of inflation, and there's not a lot of substitutes. Now I don't mean and again, Mr Michael, seriously, folks

can't talk about this transaction. But there seems to be an idea in fixed income that I need to buy bills, notes and paper because I don't trust dividend yield. I mean, what's the what's the dialectic if you would almost between fixed income people looking at a dividend, is a is a yield proxy? Well of course we do, but but you've got to look at a company's ability to continue to increase its dividend on an annual basis. Because the one thing we know about fixed income you have the

reinvestment and compounding of interest. I think that for us, the interesting dynamic and fixed income is so much money has gone into cash and short duration over the last three years. That's waiting on the sidelines, waiting to come into the fixed income markets. And what is so important there is a verse short duration, folks. If you buy two year maturity, there's this massive desire to go out to a five year maturity, five year out the tenure, ETCeteras.

That's what's going on. I know people want to extend maturities even though they can't, they do. Everyone's scrambling for ye right now, we'll continue Bob on that idea. I mean, scrambling absolutely captures, it doesn't And and so they're they're they're going out further on the yield curve. The flatness of the yield curve is a bit frustrating. So they're going into credit to pick up incremental yield. They're they're going down in credit to pick up even more yield,

and then they're going into the emerging markets. I mean, I remember, Bob and in folks. The good news is, I forget what the deal was. Was a bond deal in like oh, six oh five whatever, where people were scrambling for seven basis points seven one hundreds of a percent yield and I gotta have that piece of paper. Is it that silly right now? It's not that silly right now because there has been a lot of corporate issuance over the last few years that's still slashing around

in the market. There's more issuance materializing in the bond market right now, so supply is rising to meet demand. In here, Bob and in folks with us Robert Michael, Bob Michael JP Morgan Asset Management, Chief investment officer and a head of global fixed income as well. Buried in your lengthy research is a great spreadsheet of expansion and contraction as compared to the drivers, the monetary environment and the market and positioning. This is a famous Michael billboard.

Give us the value of that right now. Are we in expansion? Are we in a contraction? We're most certainly in expansion. If you look at the employment data, it continues to reflect that we're pretty much at full employment. Wages are going up moderately. But the pleasing thing about this expansion is it's it's growing at trend or just above trend, so it's not overheating resources and increasing inflation, which would get the FED to react negatively by raising

rates and continuing to run down its balance sheet. And then, okay, if that's the case, where do you want a place right now? You mentioned going to credit. Do I want full face and credit or do I want to buy garbage credit to pick up yield until there's a recession that's imminent, say within the next six months, you want to own credit and you want to go down in credit rating because you're getting paid for of that yield.

Without a recession, company should be able to service their dot Bob Michael, thank you so much, with JP Morgan greatly greatly appreciated. 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.