Surveillance: Examining Economic Resilience

The commitment of b MP Parry bout in New York City has been steadfast. Give us your thoughts on this nineteenth anniversary of this tragedy. Thank you, Thank you hard for having me by the way today. I would like to stop this morning and really acknowledging the significance of today's date, remembering those were lost on September eleven, two thousand and one. UM, this is going to be forever in our memory and UH and obviously particularly in UH

in New York City. Look, Johnny, if at the uniqueness of this in the pandemic, and that speaks to what every business is doing which is ear to the ground, trying to feel what business is doing. JP Morgan bringing sales and trading back headlining today, what would be the action of BMP Perry but in North America in the coming weeks. Well, you know, in my position, obviously safety

of employees is my absolute priority. However, we've started, you know, returned to the office plan, but it's gradually it's faced in. We're using rotation and uh to give you a sense, at the peak of the pandemic, we were probably of the staff working from home. Today we're eight to five

percent of the staff still working from home. I'm expecting this to stay probably the way it is Untilia end and with a reasss where the pandemic is early in Johnny, if let's talk about something that I guess it's hard to do, but let's pretend, just for the sake of this argument, this conversation, that the pandemic goes away. Perhaps we have a vaccine in the next twelve months and it's widely distributed. What do you think will change permanently

for you operating in New York City. Well, I would say the remote working I believe, uh, it's going to be part of the new normal even under the scenario you just described, John, As you know, we've we've discovered we can be so effective serving clients communicating uh during the pandemic. By the way, make no mistakes, I miss the face to face interaction. I wish, by the way, like we always do, I would be with you in

the studio in person, but it's here to stay. I see another trend in terms of smaller real estate footprints in the dance urban areas consequence of more digitalization and working from home. Are you see business traveling will be dramatically different as there already reassess you know, the need to really uh you know, travel around the world, even though I would love to host you are in Paris

one of these days. And from my clients, UM, I see an interesting trend and it's been back on force, but particularly for the US clients that are more international, A really a real willingness to for realdomistication of supply chains. For economics, I would say, um, independence as well as you know, job creation reasons A lot to unpack their John Age. Let's just talk about things operationally very briefly.

We've seen with debt issuance, for instance, that supplies just kept coming through even in the summer, and I guess that's an example that we can work from home and we can get that death supply way in an efficient way, even in August, and perhaps even in places like Europe as well. I just wonder from an operational standpoint, what you did find difficult working from home? What a bank found hard to do well? I would say what at

BNP pied by. We were probably fortunate to be already very you know, very digital, but still you know too nobody was ready to have this amount of staff working from home, and it was a one investing in bandwidth, small lap tops and um and and making sure rationally uh, you know, activities like you know, trading and payments and and clearing would continue to be uh to to to

to be fine. Another dimension of working from home is, uh, it's actually it's harder, you know, somewhere somewhat because it's chop chop shop. You don't have much time between meetings, and you know, some some of our staff you know, at times, you know, might have felt isolated, and we're here to provide the support and hopefully the psychological support. However, I think a significant part of my staff like the

getting closer to the communities. Know, the main fear of staff, by the way, is public transportation coming to the office and making sure the office is safe here. And John to your point, another real investment we had to make, we all had to make, is to make the workplace safer, much more adapted to this new fare of working. Johnny, that's that's a really good description of the day to day challenges is people try to get back to work

in this current environment. On a broader sense, you talk about the red domestication of supply chains, there's also this d globalization wave that's been enhanced and the tensions that have been exacerbated by the pandemic. Do you feel it being a French bank operating in the US. Obviously we do feel it most importantly for me or clients feel it. And um, you know b antipipis headquartered in France, but

it's rereally European bank today. Then we we we obviously have to make sure we can support clients, help clients managing this uncertainty you just you just described, you know, an area of increased activity because of this uncertainty and unstability. At times, lactility has been a real high demand in terms of hedging, you know, protection strategies across rates, currencies, commodities, and equities. Going forward. There's also a question of the

consumer strength versus the investment bank. John I was talking about the robust issuance of corporate debt record August for that. Do you expect the consumer to take on more of that as we do see this ongoing strength and consumer spending or do you think that those who are putting faith in that perhaps the JP Morgan's and the Golden Saccess of the world have gotten ahead of themselves. Well, I think that's that's a very important point and important

question here. Well on on on the capital markets, by the way, you're right, it's it's been, uh, it's been. It's it's been amazing in terms of how active they've been across your mention earlier, you know, high yield, high

grade across all asset classies CEO Seattle's infrastructure project finance. Um. The what I see still I see a contrast between the very active capital markets and what I would call the real economy and how consumer confidence and consumers spending is going to be evolving of the next few months. Is really going to be depending on what John was mentioning before, how the pandemic is being managed and how

fast do we managed to get a vaccine? And I would say, and only making it work, but distributing it widely. And I think that the whole constumer dynamic dynamic will be there as BNP Pariba. And again my life keeps me very modest but or integrated diversified business model, you know, retail wholesale help us manage you know, the various factors and trends, you know, consumer investment, banking, corporate institutional uh that you know obviously have been fluctuating depending on day

to day conditions. Johnny, if I think the Mackenzie have called this the great acceleration, and I just wanted from your standpoint where E. S G fits into that great acceleration? How much emphasis has been put on that in the last couple of months Moving forward, it's been you know, s G has been in the map already for many many years. We actually this year have exceeded the one trillion of you know, green bond systemability financing issuance around

the world. Uh. The pandemic has been an accelerator, as you know, we've all probably better understand figured out the impact on our communities, health economies. And by the way, I've seen this trend both on the investor and issue side. B ANDP BNP piable one of the only ones, but we've been a pioneer in insistainable finance. Today we lead in the table rankings in terms of floans uh in terms of bonds, and we raised recently actually were one

of the first banks to structure systemability link derivative. Then it's really been part of the product offering. And I think it's a trend that is going to be reinforcing itself over the of the weeks, in the month major I want to expressial here and as E s G on the s of E s G is actually taking more and more visibility. You know, on the social side, you've seen you know, COVID nineteen Waiste cubones becoming much

more of a factor. Here. We at BNP actually underworld large transactions in Europe and in Latin America for you know, very committed supernationals, institutionals and even banks are getting into this this tream. We're lucky to have you on the program with us this morning. Johnny, Thank you Johnny's filly on US CEO. Thank you, sir, oh we care about on this September eleventh, and we are thrilled to have with this Michael Show market Field Asset Management. He's one

of our most astute conversations on the view forward. Michael, give us your sense of enthusiasm to own equities right now? You know, it is kind of slip send some of the measures um that I think track older, older, more established investors that show plenty of skepticism, the AII being

the clearest. You know, outflows some mutual funds and e T f UM you know, have been significant for the last few weeks, and yet at the same time very obviously, you know, the end of the summer saw of this mad rush into a limited pocket of the US equity market. I mean, just a crazy rush. I mean it's just interesting, to say the least, what will be the what will be the next catalyst? Do we go to the FED

meeting here mid September. No, I think the FED has sort of taken itself out of the equation, you know, I think Al was very clear that Jackson Hole that that the FED is going to be following the current policy for the you know, for the foreseeable for the

foreseeable future. Now, I think it's going to be more about the resilience, the internal resilience of the equity market itself, whether support at the fifty day, particularly for an ASDA one holds, you know, and if it does, and I think this is just a consolidation that goes on, you know, goes on and breaks to the upside at some point in Q four or you know, if that's fifty day gives way, then then you potentially have more internal selling

fressure in the most popular parts of the US equity market, or we can get a broader rebound in this equity market and the leadership rotates to our swear. Michael, do you think we can establish that in the coming weeks and months? You know, I do because I I you look, it's only a five days sell off now, um, you know, so it's not really a very long one. But you know what is notable is is some things have not

gone down. Most of the cyclical sectors in the US of sidestep this transportation, um, most of the industrials, a market like Japan, you know, which again is very sort of cyclical, has shown absolutely no interest in, you know, in this sort of mini in this mini correction. And I always think that not going down UM is the first sign that something is moving towards is moving towards leadership. So I think we do have some hints of that.

I think, as they say, you know, for that stuff to break out, I think you need the nastack to be ranged found. I think if the nastac actually broke down, it does enough damage to people that that there's probably a you know, a temptation to generally liquidate UM. And then you be talking about relative performance by not going down as much as the overall market, which isn't quite as good as breaking out. Michael, what do you think the big distinction is between you and a long tech crowd? Um?

You know, I think I think partly I've been wrong for a lot of years about estimated texts text opportunity, But I do think that that people have missed the degree to which be what I call the jewable goods economy globally has really been a beneficiary of this COVID crisis that the the the personal sector of the corporate sector has been forced or encouraged to spend significant amounts on on on on retooling itself. Um, that that is

a I believe a sustainable, a sustainable change in behavior. Michael, how much do you change positioning ahead of the US election? Um? Not a great deal for for myself. I think whichever party gets control, Um, you know, isn't you know? I think there degrees of fiscal support, but I think both are going to be generally fiscal supportive. It's not that we have austerity versus spending between you know, between the two parties. And I don't think monetary policy changes a

great deal. You know, we haven't yet seen the market show a clear preference if you went back to two thousand and sixteen. By now we knew of the market wanted Hillary Clinton to win and Trump to lose. Ironically, it changed its mind three hours after the election result. But but sen with a with a with an example

of a very sort of politically driven equity market. You know, I think right now the non political factors are bigger than the political factors, which is kind of interesting considering the fact that a lot of people are indicating an increase in volatility bets around that November three election. When you talk about fiscal preference. Meanwhile, we're getting no fiscal deal whatsoever in Washington without really a sign that there's

going to be one. How much of a sell off do you expect if we really get a breakdown and talks and does look very unlikely that we get anything out of the election. Well, you know, we still have a lot of monetary support. Um. And I think that part of the economy that is that is most affected by the failure to get a deal done is not that widely represented within you know, within the equity market.

So so far the market has been patient. Um. I think there is a belief that something, you know, something will get done, and even without a stimulus still being done. You know. I think the extension to the debt ceiling means that, you know, we're not dealing with the kind of fiscal cliff risk that we had, you know, that we had several years ago. So I don't yet seaber market showing a great deal of you a great deal

of concern about that. Yeah, I wonder. I wonder Michael, whether that's actually because of the data so far, that the data hasn't broken down and the recovery has continued.

What would your read beyond that? Look, I think that's true. Um, I think that that, um, you know, I mean my view of the US economy is you have a labor market which is you know, back to the early teens and somewhere between two thousand and twelve and two thousand and fourteen, depending on which metric you look at, you know, with much much more fiscal support even without a new

stimulus bill, and much much looser monetary policy than we have. So, you know, I really think that that the U. S economy has enough support without a new um, without a new without a new stimulus spill um. You know, as far as the equity market is concerned. Now, you may have social concerns that don't get addressed and need to you know, you know, need that money. But maybe you know, issues of genuine poverty and hardship, but that's not what drives the S and P five hundred. The S and

P five hundred is not controlled by sociologists. It's controlled by investors, and they really have a different outlook on on what needs to get done. Michael Craig to catch up, stay well one your Michael Shower there of market Field

Asset Management. Thank you, sir, thank you very much. Right now to give us an update on the economy, and maybe it is the resilience you give the American economic experience is Michael Faroli of JP Morgan his service to economics over the recent years has been absolutely extraordinary, particularly in the measurement of what our potential is. Michael Faroli, what is the potential GDP calculation of America given a pandemic?

Is it possible to calculate that? So, like a lot of things, including inflation, right now, there's a lot of noise that it is going to take some time to let filter through before we get a better sense of how things are involving. Now. Has the pandemic affected trend growth in the US? UH? Perhaps? I think there's still quite a bit of debate about that. I think one of the easy things to say is that we've had a period of slower capital spending in the middle part

of this year, which will hold back productivity growth. That said, capital spending, like many other aspects of alluate demand, is recovering pretty nicely in the third quarters. So that's why I think it's probably wise the whole judgment here, or at least a few more months to see where things settle before radically rechanging one's view of potential GDP growth. Mike, are you surprised by how balanced the inflation debate is

right now? I would have expected overwhelmingly a consensus around disinflation, and that's not what we experience in any given day on this program. What are you experiencing in the conversations you're having? So, I do think most people that I speak with are on the distant are in the disinflationary

or low inflation camp. But I think it's reasonable that there are going to be two sides this debate, because conceptually the pandemic is both a supply shock and a demand shock at the same time, and so at least from first principles, there's no necessary reason to think that one side or the other is going to hold this

way here. I believe in part the reason I'm more in the disinflationary or low inflationary camp is that while the supply constraints were temporary, particularly concentrated in the second quarter, the slowness and the weakness and aggregate demand looks like

it's going to be enduring for longer than that. In other words, the unemployment rate, while it's come down quote nicely in recent months probably will be elevated, we think for several quarters, and so that's why I think on net the evidence is going to lead us towards a low inflation outcomes for the next few years. The Federal Reserve Michael have said repeatedly that they've shifted the framework,

the reaction function has changed. Have made the argument over the last twelve months tolerating car inflation is not the same as engineering car inflation. Are there any policy moves left, Mike, Uh, that's a great question. So you know, there are a few things they could do to bolster their recent move and their recent change in their framework. None of them

are going to be home runs here. So they can obviously tell the market that they're not going to high rates until inflation gets above two, which is fine, will probably eventually do that. The market is not even pricing in hikes until to begin with, so it's not like this isn't like two thousand nine can where the market was really chopping at the bit to price rad hikes nine months in the future. Right now, I think the market has learned that lesson, so that well, that's that's

good that the markets learning that lesson. It also reduces how much. Uh, these types of moves, by the fact, can really provide further fur the stingless Michael Faroli of JP Morgan And of course they're huge investment on Park Avenue and new facilities, their belief in New York City. Right now, many images here from a very different nineteen remembrance of September eleventh. Right now, Vice President Pence and Karen Pence walking into the ceremonies again very much pandemic affected.

We just saw images of Vice President Biden and Dr Biden along with a former mayor of New York, Michael Bloomberg. I believe I saw a Governor Cuomo there as well. I must say, Lisa Brow, it's a little there's Vice President Biden. For those of you on radio, Uh, the images here are uh quite poignant, Lisa Bromo, it's for those on radio and t t V. It's just a whole lot harder to do this this year because of all those masks, especially when you look at the concept

of mourning. When you look at the concept of resilience, usually it has to do with coming together, being face to face, being close, and that has been shattered by the pandemic. These images also raise a question about the recovery, and Michael Faroli, I do wonder what we're seeing with respect the recovery of the labor market. I don't think we made enough of yesterday's employment figures, the jobless filings that came in higher than expected, with the number of

individuals receiving unemployment benefits actually increasing week over week. Michael, is this a significant data point that marks a turning, a sort of souring of the labor market that has been recovering at a pretty fast speed. So I think that's fair to UH. I think it's a fair response. One problem, though, is that these jobless benefit numbers, the weekly claims numbers, have been a bit skewed in recent

months by issue use with processing of filings. UH, and a lot of those continuing claims that you mentioned is for this pandemic unemployment assistance program, which the reporting by the jobless claims numbers are reported by the fifty states and aggregated together, and how those states are reporting that has been not a very clean process. And so while on the face of it, I agree with you that it's not a it's not healthful indicator that we stalled

in the progress we're seeing in those claims numbers. That hasn't been a perfect indicator in recent months. If we don't get another round of fiscal support, where will we end the year with respect to the unemployment rate? So we have something in the high sevens, I think without further fiscal support, that could be in the remain in the low aids. UH. That said, you know, look, I think the response that we're seeing in in Capitol Hill. You know, I wouldn't want to say fiscal policy is

perfectly endogenous with respect to economic developments. But I think the fact that the economy has been performing well or better than expected, let's say over the summer months, may have reduced some of that urgency UH in Washington to deliver more stimulus. So I think we have to take the lack of stiulus or lack of progress in stingulas alongside with the better numbers together when we look at how the economy is evolving here as we go into

the fall. Michael Ferrati writes a cash up Jpmugan Securities Chief US Economists. It is September eleven, and Thomas showed visits with us each year. Of course, his tour of duty at Keith Bury in Woods after their horrific moment of nineteen years ago. We're thrilled to Thomas showed could join us today and particularly please that he will stay with us and speak of the changes in banking here into this half hour as well. Thomas showed what a

different September eleven this year. And to me, the pandemic also makes us almost remember the wonderful ceremony only we've seen for the previous eighteen years. Yes, it's uh, it's uh. There are a lot of similarities with h with I think really other crises that are going on with this pandemic. I mean, I think nine eleven, if it was anything, it was a story of resiliency, I think, both for

my firm as well as for New York and the industry. Um, and here we are again right now with more challenges both you know, global recession as well as the pandemic. And and I'll tell you I over the years, over the nineteen years, there have been many times where there's been more challenges as we all know. And I'll never forget a story, uh that that happened. Uh during the global financial crisis. We had just had a senior meeting

at the firm. I think it was after Fannie and Freddie had been put into conservatorship, and one of my colleagues came up to me and he said, Tom, I know this is a challenging time, and we just discussed how we're going to address it. But remember, we've seen what the end of the world looks like, and we

know this isn't it. And frankly, when you feel about what happened on nine on eleven, how devastating that was, I think it's really built in some of the resiliency that's going to help New York and other other cities as we get through the current situation. With the current situation and with the strength of New York City, what is the Machowed plan? How do we get through this?

Verry icon Green at Berkeley made very clear he thinks this moment we're going into of economic contraction and frankly, challenges for banking is gonna be tougher than February March in April. What's the Machowed plan to drive KBW forward? Well, first of all, I don't necessarily share that belief that that we're going to go back and retest where we

were in March. Um so I don't. And I think remember too, I think you and I had talked to because there are a lot of concerns that were were going to do the global financial crisis all over again with the banking industry. And I think, if anything, uh, the American banks have demonstrated that a lot of the reforms from Dodd Frank, while some of them more maybe a little bit too onerous, they still worked, and that

the industry is plenty of capital and lots of liquidity. Uh. So I think the banking industry is in good shape, but by no means uh. And and clearly what I'm hearing from the banking industry is that things are getting better. Loan deferral requests have declined. Uh, They're feeling better about credit quality generally, even though there's still a lot of concern about hotels and other areas. But a lot of the stimulus programs have been working. So it's not gonna

be easy. It's gonna be bumpy, But we're not in the camp that we think that this is going to roll over and get get really hard again. And and and our plan is is UH to continue just to stay focused to good research, make sure we've got communications with our clients and that uh, you know, and that we continue to be their form um as we Tom one are the symbolisms of the lights to the sky. I think it's Uh. First of all, I think it's remarkable how much support there was for those lights. And

I think it's just another reminder. And what's beautiful about it is that you can see it from so far away. And I think it's a moment to think about thing about those who lost their lives in that attack, and an attack is exactly what it was, um, And I think it's somewhat of a beacon to the heavens about what New York is capable of doing and what our country is capable of doing when really put to the test, Tom, You know, from far from London, it feels like this

is a very different America. The way that the US came together for eleven is not the same way that the US is coming together for coronavirus. Why is the USO splinter down? Well? Uh, First of all, I know what I can speak to, which is the remarkable unity following nine eleven, Uh and uh, and that was really remarkable. I also can speak to some of the energy that nine eleven created in the volunteer community for the follow up, and I can speak to is what we're doing specifically.

For example, I'm a board member of something called nine eleven Day, which is an organization that worked with Congress to make nine eleven a national days service. We think it's now today the biggest day of volunteer engagement during the year in the country. Uh. And so this year our focus is we're gonna be delivering forty thou meals today in thirty cities to medical first responders and frontline care workers UM and and it's an idea where where we're going to not let not let the bad guys

frankly define what nine eleven is. And so the answer to that question is we're working hard to make sure that we haven't forgotten that spirit after nine eleven. And while there will be ebbs and flows, and I wouldn't I wouldn't underestimate America and our ability to pull together when we really need to. So I wouldn't undermate it. But but I think we'll work to You think that

you're coming together is the US? I mean, has it changed or do you think that actually fundamentally this is the same country now that it was nineteen years ago. I I think that we've had a long too. That's a very big and bold question. I think we've had

a two hundred year history of ebbs and flows. But I think the fabric of the company country still remains that there are don't don't underestimate the people who you don't hear speaking up one way or other on the extreme, because my things are as the majority of the country wants to do the right thing and wants to be unified and wants to see a great outcome for all Americans and frankly for the world community to be a

little more peaceful like that. Thomas showed with us this morning with KBW of course Keith pet and was an of course, Tom. You know, this was a move that was largely cheered by many people yesterday. It's the first female in a top Wall Street job. Does it show how much progress we've made or does it actually show that there's a real lack of diversity because everyone cheered it and she's one of the very few women at

the time. Well, first of all, uh, I think that she's highly qualified for the job, and I think that's the most important thing. Uh. She has played a senior role in UH in the consumer businesses at City Group, which is probably the most important business at City Group. She's had international experience, she looks like she's highly qualified and is the right person for the job. And also

I believe it was telegraphed. So I'm delighted that there's a woman leading the leading a top bank in the country. But I think the most important comment about Jane is that she's got the skills, the background, and the talent to have a good go at it as a CEO of a really important banking company. Thomas shown on this nine eleven, we have remembrances back nineteen years for Mr Corbett and others. It is simply remembrances back what twelve thirteen years. I want to review this now because there's

great criticism about the profitability of the bank. Thomas showed, is it's safe to say was City Group that they're lucky they're here right now because of the leadership and

management of Michael Corbett. I think that Michael Corbett paid played an enormously important role at City Group, and I agree with you, Tom, I think you got to turn back the clock and look at where the thing where he took over and and and I've been thinking about why now because my firm and our analyst who follows the company, and I think many were surprised that happened now, But I think when they write the book on Michael Corbett's period at City Group, they're going to see that

he he stabilized the bank, he built capital, he built the built uh built liquidity in the bank. And while City Group does lag many of its peers in terms of valuation and profitability, but now I think I think the question is what's next, And if somebody's at the tail end of their career as CEO, it's hard to set up what's next for the five next five. At ten years, I believe Jane is fifty three boarding the public sources, So you need a new CEO to do that.

And I think in that regard, the time is good. And Tom, this is so important, folks that the heritage of Keith Burutton Woods from Tucker Anthony you are all Day and KBW and the roll ups of the nineteen eighties and all that. Tom, I mean, do you just anticipate that the way that City Group gets retail mass is a reductive roll up of what we saw from the nine eighties. I I don't. I think uh. I

think City Group is an internal improvement story. And I think that if I were having a conversation with Jane now, my my advice would be to really, City Group's got a great footprint. They're a significantly important company, but but they do lag in terms of profitability there Peers, and I think continuing to focus on steps they can take to improve it, to improve their performance. And look, the

digital era and banking is accelerating. The pandemic has been driving that City Group has all the skills they can to do that. In some ways, they don't have to build branches across America. They can use digital engagement, which they're very good at. And as they continue to hone the profitability of the bank, I think there's an opportunity to catch up with Peers. But but so you know, Tom, concretely, what is it that Jane Fraser needs to do? Is it is it just that it's the group is to unruly.

I think it's it's frankly, operating leverage. They need to generate more earnings off the revenues that they have, and I think that's pretty much it. So I think it's gonna be. I really think that while there will be offensive revenue, certainly opportunities for them, I think you're going to see the real focus on the expense side of the equation. And um, you know they One of the things I think too about Michael Corbett is they finished

some time ago. I'm gonna get off the top of my head, I think eighteen months months ago finished running off city holdings, because you know, is a runoff business. Uh. And I think there's gonna be a continued, relentless approach on the expense side. Uh. And I think that's going to be an important part of the equate Tomas showed thank you for these important comments on this day of remember it. Mr Machadas with km W a stifle Company.

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