This is the Bloomberg Surveillance Podcast. I'm Tom Keane, 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 Bloomberg Terminal, and the Bloomberg Business app. In nineteen ninety nine, Mike Mayo got hiss butt fired at a major bank. It was a testament to all of us
in the racket about independent securities analysis. The culmination of that was the Forestall Award, John's the number one award at the CFA and I can't tell you. In twenty thirteen, the symbolism of Mike Mayo fired one evening for being independent, winning top ward CFA on ethics. This is a guy to speak to, mister Solomon.
The star analyst at whilst Fango. Now my Mayo joins us Mike Wander for to catch up with you, sir. Let's talk about this story and the criticism around the Goldman Sachs leader. Do you get the sense this is strategic or deeply personal.
Thanks for having me on and thanks for bringing up the CFA, which is the pre eminent accreditation for a financial analyst. And I actually go back to those roots to think how should I approach the situation about the CEO Goldman Sachs and the differentiation between the external metrics which are good, and potential internal metrics which might not be so good. The issue here is I'm not seeing
these metrics. I don't have these internal metrics. The company said they've not had any unusual turnover in the partner ranks relative by the numbers, So I'd say, look, what it comes down to is winning cures.
All.
Goldman's had recent performance issues. They've missed expectations two of the last three quarters, and when that happens, other issues moved more to the four And if I were to summarize the three issues, it'd be the three fs. One is the consumer expansion that was a debacle. Second is the cultural change David Salman running Goldman more like a public company almost twenty five years after they went public. And the third would be his character and some attacks
and the press on that character. So I'll go wherever you'd like to go.
Well, Mike, I want to go to what has to happen in order for the character issues to not be center stage anymore. In other words, has he lost the room to such degree that they need to have blowout performance and growth in an area that has yet to be identified.
Well, going back to the CFA the basis on how I should perform my job. It is the job of a CEO to up hold the reputation of the firm. But that is important. But when we talk about upholding the reputation in the firm, we're talking about being number one in advisory for the last twenty years. For talking about Goldman growing capital markets twice the pace of Peers over the last you know, three or so years. We're talking about reputation of the firm to their multinational companies,
to governments, to their most important investors. So where it matters the most, they are upholding the reputation the firm based on the business that they're doing. But could there be a point where there's enough upheaval that, you know, the media the tail wags the dog. I suppose it's possible. It's just not going to happen, you know, right now.
Mike, you said the turnover that we've seen the partner ranks hasn't been that unusual. And yet we're hearing about Lloyd Blankfeind being brought back to the firm and really going after David sala Men having some pretty strong words for him.
What do you make of that?
I mean, do you think that just basically there are a lot of bitter people talking to members of the media.
You know what I really think is happening here. I think it's and I don't have the numbers back this up, so I'm just going to get ballpark numbers. But I think it's like, you know, traders who are earning six million dollars a year who got paid down last year to four million dollars a year or something like that, just zip code wise. I mean, they had a blowout year in twenty twenty one. Last year was a bad year for Goldman. People were paid down when they had
great years. They were partly subsidizing this failed foray in consumer banking, and they're they're upset and they're taking their and they probably go to the CEO, and the CEO it's like, look, when it's the Goldman tax CEO have been a warm and fuzzy person David Solomon. I mean, you have to have strong opinions to change your culture like he's doing while trying to generate profitability. I think a lot of people or are upset about what they're getting paid. They're going to the press with it.
Mike, you're expert on board analysis. We have a new board member, mister Montag obviously Goldman Sex Timber over at Bank of America. He returns. You've got someone like David vinnie Or who ran the ship in two thousand and seven under crisis, color the board makeup and decision right now? How do you look at the Golden Sex board.
Tom, You know, I've been a critic of bank boards, and it probably represents corporate boards, you know, more generally, I feel like they're soft. They don't really hold managements accountable, they don't listen to shareholder concerns. So when I look at Goldman Sachs board more than anything else, like any bank board, I think their push for change is probably not that much. That's the reality of corporate America. And you know, I've wrote my book about it and I
still see it. And you know, there's some other banks today. I'm happy to talk about where I think there's much more need for change than than at Goldman Sachs. So uh, you know, and wait in mind, and I do want to address your Lloyd blank Bind comment. You know, he Lloyd's lif find started to push a consumer seven years ago and he amplified and it took up, you know, all the discussion in the room almost in the meetings. And now David thom A doubled down on consumer, but
it was Lloyd originally. And Lloyd probably doesn't like to be you know, tainted with some of these you know, three billion dollars of losses they're getting out of you know, the Marcus business, aside from the deposits. So you know, his hands aren't completely clean in this whole situation either.
Mike, we've got about sixty seconds left. If we could finish by asking you appointed question that would be good. How would this stock respond if that headline dropped across the Bloomberg that he was out.
I don't think the stock would go up. The fact that stock might even go down. So that's remember I called for the to have the City Group CEO fired back around after the global fancier crisis, and I think the stock went up that day, and that was a good moment, and we've seen that other places where the CEO goes. But if David Solomon were to be fired today, I think the stock would actually go down because it don't be like, Wow, you're running the company based on
media reports as opposed to financial results. And by the way, when I talk to investors, investors aren't saying, oh, get rid of David Tobam. They were really asking the questions You're asking, Hey, does the media impact their performance? I'd say no so far. Having said that David Salmon has to earn his job every day, and so I can come back in three months or six months and he doesn't get the job done, I'll be on the other side.
We appreciate your opinion. Mike, as always of welsh Sonco, Sebastian Phase joined us now head a global modi asset and CIO at t ro Price. Sebastian, you can be one of the five this morning. What's behind that bond market move higher?
Inflation expectations? Look, we're all seeing inflation coming down. But when I look at my one year break events this morning on my Bloomberg, I see one point five six percent to me, that is too low. If I think of the risk to inflation, it's not to the downside, it's to the upside. And Jonathan, you nail the reason. It's the commodities oil prices being up quietly twenty percent.
You need energy to produce goods and services, and I think sometimes we underestimate the impact on even core inflation of higher energy prices. So I'm not saying inflation's coming back to the levels we see, you know, a year ago, a year and a half ago. But to me, I look at this in the risk is to the upside, and that's what the bond market, even in the long end, is starting to smell.
Sebastian and for radio, this is my most important chart right now. It's a Bloomberg total return chart. This is the all in soup the nuts chart as well. And in the bottom line here is we're about ready to break down to new price weakness off the carnage of two or three years ago. And I just, you know, I just don't know what to say here about price down. If we get the bond market to break down to lower prices, what does that do to equities.
It's always a risk to equities because you're revaluing and year today, equities have rallied on the price earnings ratio and the evaluation and that is sensitive to rates, and earnings are kind of soft down seven percent year over year, So it is a risk to equities tom But one thing I want to say is this isn't the time to panic about duration. If anything, now you have a better entry point on our fixed income portfolios. We have
added duration this year. It is a quote unquote and I use quotation marks hedge against a real growth shock. We know that the most anticipated recession in history is becoming the most delayed recession in history. But there's pressure building in the system. So here's what we're doing in our fixed income portfolios. We're not panicking about duration right now. I think we have duration and we're pairing it with credit. I call this the magic Barbelle. But I'm getting nine
percent total yield out of high yield. So I like my fixed income factors to be diversified. And now you get paid. You get paid for the protection of treasuries. If you get a growth shock, it won't protect you for an inflation shock, which is kind of we're not talking about an inflation shock but inflation pressures, which is kind of what you're seeing now. But I think you have to step back and look at what's the greater risk right now? Is yes, sell off in stocks.
Okay a second, let me try to make sure that I understand this.
You're saying that the risk with inflation is an upside surprise that it could reaccelerate, and yet you're leaning into duration because it's not inflation shock, it's just an inflation grind higher.
What is the difference?
So we're using duration as a hedge to a growth shock. We're not going fully overweight duration. To me, the risks to inflation is three six months. It starts speaking back up, but at the end of the day, if you take a six to eighteen month horizon, So Lisa, it's a difference in horizon here. You do want some hedges in your portfolio, and where do you get those hedges right now? You get them a little cheaper than you have in
the past. So it's nuanced, right. It's just diversifying the different risk factors.
And one thing that you talked about is the commodity is pressure to really fuel some of the reinflation, and this comes as we take a look at China and the potential threats there, the risks to growth if let's say there is a reversal in oil prices and that comes with a lot of weakness. How do you rearrange the time where you're preferring high yeald ponds over equities, where you're preferring sort of some Barbell approach, to really being a more conservative kind of acid allocator right now?
Yeah, look at the spread for high yield it's not particularly attractive, although if you adjust it for forecasted default risks, it's not bad. But I'm an asset allocator. I really care about the total yield, and Lisa, the comparison with the earnings yield is really advantageous. Eightieth ninetieth personile in favor of high yield bonds. I'm getting nine percent out of high yield bonds globally, and the earnings yield is down to say, five percent on stocks. That's spread right
now is really advantageous. We're not forecasting a really hard landing wave of defaults, even if things slow down in China, which they are so on a relative basis. Look, we always invested in stocks, but we're close to neutral right now. Slightly underway. If we're going to add the portfolio on the risk side, might as well do it high yield.
Sebastian very quickly your acclaimed book, which is folks. I can't say enough about this effort by Sebastian bay Page, A really sophisticated effort. Do I want to be diversified or do I want to be more acutely focused right now?
Look, I think diversification remains critically important when you're going through a regime shift, Tom, which is what we're going through. You've talked about this on the show. Gravity is back in financial markets. We have a ton of cash in the sidelines. So you don't want to go all the way to cash right and just miss the upside of stocks in the long run. I don't think you want to go all the way to stocks right now, and
there are other opportunities. Look, Tom, let's just think about valuations. Okay. The tech sector's trading at a price earnings ratio of thirty. So let's say you missed the rally. Do you want to chase that momentum or maybe wait to buy the dip. You actually have a third option which speaks to diversification, which is to get in parts of the markets that have really not participated. Quality small caps price earnings ratio of thirteen, that's hard recession level. Emerging market stocks price
earnings ratio at eleven. We mentioned hyal bonds yields at nine percent, you know, so the energy sector trading at twelve pe ratio. So there are ways to get in the market where you're not just chasing the momentum. And I saw I call this the third option. Either you chase the momentum, wait for the dip, or take a diversified approach to your question, Tom and get in parts of the market that haven't participated. Energy em in a very high yield, higher yield in the high yield bond space.
So there are opportunities to get into and diverse five.
Sebastian, Always enjoy your insights, sir, good friend of this program. Sebast I page there a t row price.
We are going to migrate now to an importan conversation. This is our conversation of the day on foreign exchange, the limits paper of the system. Else a Lingos brings serious ECV and EU credit to RBC Capital. Marcus Global head of Foreign Exchange Strategy, also open question right now, what is your biggest mystery in sleepy August. You're the only one in Europe working what's your biggest mystery right now? Forward? In foreign exchange?
I think you touched on it earlier Tom at the top of the hour. The uncertainty around what's going on in China, and part of the struggle for us as outside is trying to understand the reality on the ground when there's actually been a move away from sharing information. The underlying GDP data, the kind of the breakdown of components just isn't there. And on top of that, we just don't have the visibility onto these trouble developers and asset managers balance sheets.
Does China bring in instability? I was talking about euro yen to one sixty and through a strong euro week, en dollar yen back up towards one fifty. Can you see that instability out there? Given the events in China?
And I think people are reluctant to take positions. As you kind of mentioned, it's the middle of August. A lot of investors we speak to have just shut up shop, particularly if they've had a good summer so far. They're just not seeing the opportunities out there. You know, you've got effex very much in a tight range. I mean, you're a dollar to the PIP is almost exactly where it was a month ago. And even when we do attempt to get breakouts, as we did earlier in July,
it just doesn't seem to follow through. And I think people are really struggling with that dynamic at the moment. Just leaves us all looking at carry trades and selling well ELSA.
If everybody's just basically on the beach right now, does that mean when everybody comes back you start to see more concern about the potential for contagion from China and all of the potential in financial instability in certain sectors.
I think we need to see bit more information. I mean, clearly, the fact that you're seeing developers missing interest payments on their bonds has people concerned. But more than anything, you know, we've been in this situation. I mean, I could go back ten years when people were panicking about the big China cliff and suddenly growth was going to collapse, And there've been people that have cried wolf one too many times, and so markets are just naturally reluctant to believe that
this time it could be happening for real. What I think we're missing in order to get bigger trends is a bit of global divergence. You know, at the moment, it feels like a lot of the themes are affecting a lot of countries in a very similar fashion. If I look at developed markets in particular, whether it's the UCB or the FED, or the Bank of Canada, the OBBA, they all seem to be in very similar positions. We need that to break down and diverge in order to get those trends.
But aren't we seeing that in the actual data, Elsa, and I'm talking about, for example, the US and Europe Germany in particular.
We are seeing that divergence.
We're just not seeing it when it comes to a currency that seems to have flatlined because everyone's on vacation.
I mean, it's a great question, Lisa, because even more so than the currency, what I find really perplexing is if you look ahead, you look at twenty twenty four expectations, there's still this widespread consensus that the UR area is going to outperform the US, and cyclically that doesn't seem to ad up At the moment. I mean, yes, the FED has delivered more tightening, but the US also delivered
a whole lot more fiscal stimulus. And actually the titening delivered by the US is not that much more than the UCB for the local realities on the ground. Though. I do think eventually we will get that unexpected break lower in euro dollar. That's not the consensus. Everybody's looking for it to trade up at one thirteen by year ed. I just think we may need to wait for the autumn for that to really start taking hold.
I need to rip up the script. Also, Lingos so and I can do this with you. There's a number of ways to look at the fiction known as the Russian ruble, dollar, ruble, euro ruble, and also a basket of ruble. I'm just going to go to the headline drama. Also, Lingos of dollar is compared to Russian ruble through one hundred. I just did a lord regression of it back twenty years. Ecuse me back to seven. Also, what do I make
of the newly weakened ruble? What does its signal? Given the lack of flows, the lack of information that we.
Have, and it's very clear that if this is a war of attrition that puts Russian a weaker state visa vi the rest of the world. You know the fact that it relies on foreign currency, hard currency in order to buy whether it's military goods and so on, and then it relies on help from partners.
You know, it.
Relies on high oil prices, and we've seen a wild trying to break higher, but it's not really following through. And so I do think that in terms of that war of attrition, it does all else equal just put Russian in a slightly weaker spot. Can you read anything in terms of capital flow? Is almost sadly not. You know, it's a kind of controlled currency at the moment.
But it's unraveling. I'm not going to say it's a Zimbabeli equivalent because it's not. Or you know, even the complexities of the Turkish lira, how do they respond to it or does no one care?
I don't think there is a response as such. I mean it's it's a very different economy to even say the Turkish lera, where it's an economy turkysh an economy that's dependent on commodity imports. I mean being in a position where you're a commodity exporter does put you in a position of relative strength, and so there will always be some hard currency coming in, and so in that sense, the currency the ruble is less of a signal for the underlying strength or state of the Russian economy.
A Selenos, thank you of ABC Capital Markets and the latest in the FX market.
Speaking of an immoderate Capitol Hill. Henrietta Trace joins now economic policy research director Data Partners, who was on fire last week, get a dragger back here this morning to talk about exactly where we are, Henrietta, is a broad statement. Is the debt debate now the same old, same old you've heard for years? Or is there something new about our worry of our debt and our debt.
I had a really interesting conversation with some senior counsel on the Hell late last week that I would share with y'all. The conversation around the debt and a government shut down in federal spending has obviously been with us for a couple of months now, since the Republicans came
into control of the House. And that's great, you want to see that conversation, But the tension that we see between a small faction of House Republicans and the moderate or sort of middle ground of the House Caucus and certainly the Senate is so far apart that the dialogue on the hell now is not about reducing federal spending as a way to get over this impast that we're
going to face at the end of September. It's about who can we impeach, can we get money for the border, what do we need to do to draw attention to immigration? And it is a dialogue that is really markedly important for your exact question, because it's not about the debt, it's not about deficit spending. It's about whatever they can get from a political perspective to score away.
If there are tea leaves out there, like something in a state fair, Okay, fine, iower name another state, or if it's something like the vote in Ohio last week that we talked about last week, is there a point where the middle ground of the two parties put the extremes in their place and we move forward to some kind of true political discourse.
You know, I don't think we're going to see that until we get into the general election, and probably not if Donald Trump is at the top of the ticket on the Republican side. The opportunity for Democrats to stress the extremism of the right when it comes to abortion and the inability to move beyond it from the right during primary season means at least for the next six to eight months, we're going to be in these hyperpartisan camps. And the issue of abortion, as you suggest from Ohio
last week, is so telling. It moves not just Democratic voters to get out, but the pendulum swing that we see from Republican voters, just for example in Arizona, is a four percentage point swing of the voter base from twenty sixteen when they elected Trump to twenty twenty when they elected Biden, and then the twenty twenty two mid terms.
That is abortion. It has moved the needle so substantially that in tight margin states like Ohio, like excuse me, not Ohio, but Arizona, Pennsylvania, Georgia, Nevada, in those states the margin is so razor thin. But the pendulum swing that you're suggesting as they turn from partisan politics towards the moderate center is really the tell. And that's where you see the shift from Republican voters independent voters. Sixty three percent of FOAM or seventy even in some cases
believe that abortion should be legalized. This is a voter issue that has tremendous impact in red states and blue Ohio would be a perfect example in Kansas last year.
First debate nine days away. Let's set the stage. Who's on it?
That's a great question. I don't know that Trump's going to be on it. I think that based off how he's treating these indictments, he clearly wants to be at center stage, So it looks to me a little bit like he should be there. I would recommend, if I was on his campaign, not to go because his next closest competitor, rond De Santis, is the one to beat. He's at about fifteen percent in the polls, which makes him far and away the front runner of the sort
of second tier candidates. Everybody else is locked in sort of those low single digits. So I would say to Trump, you know, stay home if you can avoid the spotlight. Let Rhonda Santis take the last couple of hits. The potential for the Gavin Newsom Randa Stantis debate in November eighth to be canceled. If this can't be pulled off, is something that I think is really important to watch
and Lisa to the conversation we had last week. It really opens the door for a third, another candidate that maybe is not in the race right now, to jump in.
And that's something a lot of people are looking for.
When you talk about Trump being a pro conventional candidate, he is not, as we all know, and he probably isn't listening to conventional advice. At a time where he stopped by the Iowa State Fair, broke with convention pretty directly. He wasn't supposed to be there, and he did this to try to basically lambast his opponent, Rond de Santis, and people applauded him, and they booed Rond de Santis.
How long can this playbook work?
Where people don't need Donald Trump to flip burgers and to hold babies and to go around and shake people's hands. He can just swoop in for about an hour and basically give a stump speech, fly off, and everybody says, we like that he's unconventional.
It's a TV.
Show and he's an expert at it. I mean, it makes for excellent television. The booing gets more stories than the actual candidates. Whether that's Mike Pence, Chris Christi or Rondi Santis. I mean it's the playbook works. I would say keep doing it.
Does wrapping eminem work Henrietta? Does that help?
No, it's just not that I would like tother maybe not directed from the internet. I would love to see that for him. I don't give a lot of credit credence to that.
Heacy, and thank you.
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, on 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