Surveillance: Mixed Bank Earnings

four million a day. That often yeah, okay, I did some fancy yeah you know, you taught me the f A function, and uh, you know it's They're ginormous. And what I saw Allison Williams in their view for two thousand twenty two is page fourteen, which is a layout of their technology to come. How does any buddy and banking compete with Lorie Beer in twelve billion dollars a year in technology? Well, and I think that the big number of seventies seven billion for next year from JP

Morgan is even more significant. And and the way they're competing is they're spending. And I thought that, um, you know, the JP Morgan call is going on now. But Jamie Diamonds sort of finished up last quarter by saying, we're going to spend whatever it takes to compete with all these folks in our space. And I think the numbers today are showing that they are committed to doing that. I think that's might be a reason why people are

reacting negatively in the short term. But I think, you know, the not just the articulated commitment, but seeing it in the numbers like that shows you that they are going to, um, you know, focus on building their positions, defending their positions. Allison talked to us about loan growth out there. UM, I know that's one of the key issues you and your bank colleagues were focusing on this quarter. What we've seen from some of the big banks so far looks

about in line. I think Bank America will be the interesting one next week because they're they've been sort of the more bullish one, and the commercial side of things is really where we're getting the lift, and I think where we're sort of the most bullish on the card side of things. You know, payments still continue to be elevated and people are spending, so consumers are healthy. It's just that they have money in their pockets to pay off those balances. So I think that's that's great for

the economy. It's great for the credit outlook for banks, UM. But less borrowing means less interesting come related to that bar what's the sweat factor on traditional credit cards? I mean, there's like a firm and they're doing something with Amazon and you know all this stuff better than me, Allison, But like the are the big banks worried about the

end of charge cards or they're like, so what? I think the big banks are aware of by things like by now pay later, and you know they have competing products, but I would argue that, you know, the distribution at point of sale UM is obviously what's given the big lift to that product. So I think it is something that they're watching. I would keep in mind that it's it's still very small in the scheme of things, UM

so growing very rapidly. But you know, so if you go from one percent share of a market to two percent share of a market, UM, you know, that's small for the person that owns the lion share of that market, but for that fast grow where they're doubling their revenue, right, So, UM, I think it is something that um As I said, the banks are aware of their not completely dismissing it. And I think that goes to um as I said, sort of the higher spending and and the focus. That's

that's what's different. I think that this time around, if we looked back to sort of the evolution of the internet, you know, way long ago. Uh, I think, you know, initially banks were very dismissive of that, and then they sort of saw the progress and they saw um, they saw sort of things chip away at things that they could have done themselves. And they're they're much more aware

and committed this time to making sure that they stay competitive. Alison, how are my friends on the trading desk doing this quarter of the equity desk, the fixed income desk, the commodities, How are they doing? Because they had such a rip roaring they did, and I think they're doing fine. Um. You know, trading came in a little bit weaker than expected, but but I would I would say it's fine, especially you know last you know four Q twenty, as you said,

was was exceptionally strong. But the big winners are your friends in the investment banking department, especially the M and A bankers. Fees super strong, um coming in even better than expected. Uh, there's momentum I think carrying through at the moment of you know, we watched the environment um. A big spike in volatility would be the biggest risk to disrupting that. Obviously, any correction to ask A prices

might might hamper that. But but for now things are strong and you know that's leading to the higher compensation cost that you know, the war for talent and that's awesome. Left too expensive. Saw that phrase on top livel of Ellison Williams on here soon work about that. That's awesome coming Memorial Day, but it's serious, Elison Williams, thank you so much and goodbye. We get perspective from Scott Clemen's

chief investment strategist at Brown Brothers Hareman. Scott, you know, it sort of felt like a year so far and maybe it's at least a quarter here in the first fourteen fifteen days of the year. Have you changed your outlook since twee No, I don't think so, Tom. I think what we've seen in the first handful of weeks of this year, if anything, is a microcosm of how the year is likely to unfold. If anything. The surprise

in one was the relative lack of market volatility. We only have seven trading sessions last year in which the SMP five index moved by two percent or more up or down in either direction, and usually in a given a year we have about twenty days like that. So we're cautioning our clients they, given all the transitions taking place, and we could talk about that for the rest of the day, that there is likely to be more market volatility in two. That may be a risk, that may

be disruptive and anxiety inducing. It's also an opportunity as well for investors. How do you use it that as an opportunity, Scott Well, Really, when you get that dislocation between price and value is what a discipline, long term patient investor can exploit. And what that really is is not so much knowing something more than the market or knowing something more than another trader. It's having a different

time frame for making that investment. So if you see a company stumble in the near term of your confident in the long term fundamental value direction of the business, that near term stumble, maybe a near term EPs miss, a product thiss, whatever it may be, is more of an opportunity than it is a threat. So I want to go to the story of the moment. As the banks this morning, they're just killing it. Yet today the stoke performance more than ten percent based self through in

the morning. Some people am willing to chase this. What advice do you give them, uh, Jonathan, to take the same kind of long term approach. This is an environment which ought to be better and better for banks. Banks are certainly undervalued relative to where they've been over a long run. Higher interest rates ought to be beneficial for banks.

But as you and chnologist reported on City Bank the City Group, there are a lot of moving parts within the banks, be the regulatory or be they a market environment where the revenues are coming from higher costs of employment when they can get back to offices, etcetera, etcetera, etcetera. So it is an environment which is going to be a great deal of holatility. I'd stay focused on the

longer term. Well focusing on the longer term though, and this really goes to the heart of the moment, which is what is being priced in from an interest rate perspective, from a way to increased perspective, how do you determine that to decide whether or not to say City Group down three having a really rough time of it over the last twelve months relative to other banks, let's go.

I think the the the interest rate environment is probably the most important economic backdrop over the course of this year, and it's really important. This is a subtle nuance, but it's an important one. The important thing for markets, the important thing for banks in particular, is not that interest

rates are rising, but why they're rising. And that's admittedly subjective, and the push and pull and markets, even on a day to day, hour to hour basis, might be precisely that, on one hand, of interest rates are rising because people are more confident in the economic outlook, the durability of the labor market, the sustainability of corporate earnings, etcetera, etcetera. That's a benign backdrop in which banks can do well,

in which the market can do well. If, on the other hand, the market concludes that interest rates are rising because the FED has lost a grip on inflation and they're behind the curve and you're rushing to catch up,

that's a rather negative or rather disruptive outlook. And I think there's gonna be a lot of push and pull back and forth on that as the year unfolds, we even see that to my earlier comment to Tom as a microposit within individual training sessions, I'm confident that when all is said and done, this transition of economic leadership away from policy support, government support, monetary policy back to the more traditional fundamental drivers of economic activity household spending

to name the most important one, that will take place. But it is not a straight line between here and there. Let's thank you, sir as always skilled clements that the chief investment strategist at Brand Brothers Harriman, we get perspective now and from Dana Peterson, chief economists at the Conference Board, this is an important conversation and with a conference boards heritage of looking at the American consumer, go beneath the

headline data. Dana, what is the American consumer telling you? Well, I think the American consumer is telling us that December was a really rough month. But let's think about this. When we look at October sales, they were really strong, so lots of people probably accelerated their holiday shopping. In fact, I went and bought all my toys in October UM, but we also had empty shelves and let's not forget omicron.

It was a huge issue during December and many people probably were uh just not out there shopping because they were afraid of getting sick or they were getting sick in fact um. And indeed, we wouldn't be surprised if consumer confidence in January comes off from what we saw in December. But again that's a big function of omicron. Dana. The first point that you made empty shelves, how much is this a supply chain disruption story? And I just

frankly supply story. If there wasn't the inventory to sell, well, I think it all factors in if you can't if there's no inventory, you can't clearly buy anything. And so we really need to watch metrics that tell us what's going on with inventories. And certainly when we look at other private measures, we didn't see some improvement in terms

of of the movement of goods. But again arm across is a big issue, certainly in foreign goods that we're importing are challenged by zero COVID policies abroad, and then also even just getting things two shelves, um, we still have this huge backlog of ships uh takerships with with things that can't be unloaded, and even once they're unloaded, um, we can't get it to the stores because truckers are

in short supply. One Bloomberg Blue viewer rights in and says have four kids, Santa had a rough time finding at things, so talking about how Santa is pursuing it from exactly the UK when I got over that same thing, I said chains are tougher and shuff online and it was intill. Sorry. Well, I'm sure that that will that will read really well across the family and baby Charlie. But there is an issue with if December was bad because of amacron, we haven't even peaked in the United

States yet. When it comes to the virus, how bad is January could have pay well, certainly we could see some poor numbers in January, and at the conference board, we've already factored in a pretty weak first quarter, looking at two point two percent growth, which is pretty similar to what we saw in the third quarter, um with the delta variant. But you know, we're coming off a very strong quarter in general. Fourth quarter probably looked pretty good.

We're gonna see a sad second first quarter this year, but then the second quarter should pick up as we get beyond AMCRON and certainly as in person services reopen and people can go out there and enjoy their lives. Dana a World Health organization as amicrons starting in South Africa and to go north to Botswana A November two

thousand twenty one. You guys on the high ground on this does a conference board see like charge card dynamics, in entry dynamics into stores that really changed in December? Is there actual granular evidence of what we all felt, Well, we don't actually try that data, but um, I think that, you know, certainly the retail sales are reflecting what happened on the ground again for the reasons that that we've

all been discussing. And you know. The good news though, is that in December, consumers were still kind of optimistic in terms of the future. They were still thinking that they're going to go on vacation within the next six months. They're looking to buy cars, appliances, clothing, you know, all that great stuff. And certainly, um, as Lisa mentioned earlier,

consumers have the capacity to spend. Many people are working, people still have savings from the stimulus checks, Household balance sheets are in good shape, and so once we get past the omicron issue, which may be short lived. Certainly, as we saw in South Africa came in strong and then faded pretty quickly. We should probably get back to an environment where consumers feel comfortable spending. Dina, thank you as always to respond to that big down side surprise

on retail. Sus Diana Pattison at the conference, Bolt, Oh, you know, I was out with the plague, and you know, Mrs Kame was really upset, and she goes, you know that were that rash on your face? I mean, what is that? And I said, you know, I said, well, you know, it's a case of lepto critosis. Um. She said lepto critosis. And I said, yeah, it's a bad, bad case of lepto critosis. And so I said, get Ash ellen care. So we're gonna talk to Ash ellen

car right now about lepto critosis. Leptocretosis, folks, it's not what between your toenails. Lepto Critosis is when the markets are out of whack and the distribution is different of whatever is going on, and the tails get flatter fatter, I should say. And you that's where you hear about this phrase fat tails, which is quite talk. We talked to ash Allen Carro can translate this right now as the dispersion of what's out there, the cacophony of noise.

We're seeing a crown and everything else. Has that created fatter tails with greater potential risk? Yes? Uh? Why why? I am familiar with liptocaturus. I'm not exactly sure I know how to spell it, but you're exactly right, Like, you have a lot of tail risk in the system now, and that tail risk can take one of two forms. It can be left tail risk, which is that bad tale, um or it could be a right tail risk, which

is that good tale. And it really rests on the notion that everyone is focused on today of whether or not the US FED can strike that right balance between fighting inflation yet keeping growth intact. And if you're a betting man, um, and I am a betting man, the history is pretty bad. The track record is a FED striking that right balance is really really really bad. They just never has able been They've never been able to

historically do to really balance that cause and effect correctly. Um. So, naturally, that's the worry on everyone's mind that the days of free money are coming to an end Um, the FED is going to increase borrowing costs in an economy which is fragile. UM. And today you saw retail sales numbers UM. You hear JP Morrigan's earnings report, UM that things aren't looking that good. Um. Is it a one time blip maybe,

but it's something we have to pay attention to. And if they can strike that balance, then a right tail can unfold. Um. The FED is able to contain inflation which is killing people purchasing power um, and you could see consumption increase. UM. You could see UH credit continue to flow, you could see people take on leverage, an equity market shoot up. Another just we're just doing this for ash because we want to dazzle Im paul I went to the Bloomberg and looked at JP Morgan done

ten dollars, having a difficult morning. JP Morgan down to two standard deviations of where it's been is down five point seven percent rounded out six percent from here from where we are right now, from where it was in the top band of standard deviation. It's a correction move. We would have to go down eleven percent from where we were to really show the bottom of a two

standard deviation truth, nobody cares. I'm just doing it the dazzle Ash well, you know, Ash with the m I T He's got a PhD from U C. L A. I think he knows standard deviations. You know, he's okay with that stuff. Ash. A lot of your portfolio managers and your analysts and Janice probably haven't really had a lot of experience in a rising interest rate environment. What are you suggesting to them as they think about the

next question? Great question, UM that this is a completely new regime, but it's a regime which is already priced in. So what you have to realize markets are efficient. The markets today are pricing in about two hundred or two increases in the overnight rate over the next two years. That's already being priced in. UM. That's exactly the same pace of the interest rate hikes that Powell and team

UM underwent in two thousand seventeen. So the key question is are they going to hike faster and increase rates faster than what's already priced? Who knows that the baseline is a pretty aggressive baseline. I personally believe it's not going to happen because we're entering a completely new post. UM pandemic economy. UM. That economy is a new economy UM characterized by remote working, characterized the characterized by the rise of the suburbs. Character is buy a new endemic

to add to the seasonal flu. So you have to realize the baseline is pretty aggressive. Nevertheless, if they do hike faster than that brace line, because inflation pressures really need to get into check, what should you do, UM, Well, naturally, as rates rise, fixed income holders are going to sell out of fixed income and look for other ways to capture yield. So think about high divided yielding stocks. That's

a good rotational play. UM. Think about that left tail risks or those tail risks TOM that you articulated to. How do you hedge those tail rifts? The big tail downside tail risk to the system is an increase in real rates, so they sell off. We see an interest rates over the past couple of weeks, it's all due to the real rate increasing. So heads your real rates.

Think about buying options on put options on tips UM to to hedge that left tail risk, which is not not just a left tail risk to tips, it's a left tail risk to all risky asset. You know one thing that concerns me. Hear in Paul Sweete is an old equity guy where he talks about yields up. Nobody cares. It's about price. Are we in a bond bear market? Or can you predict a bond bear market? Of our listeners have never been in It's hard. I don't think we're in a bond bear market. Um. I do believe

that the feds hiking schedule is going to be gradual. Um, it's very unlikely they're going to hike more than what is it eight times over the next two years. So if they stay on course, that should be a non event um in terms of fixed income rates. But it can be actually a meaningful and significant event when it comes to equities because you likely will see a shift of your nominal interest rate being more real rate and

less inflation. And more real rate is bad because at the end of the day, your pe ratio, which is a real ratio, right, prices are nominal, earnings are nominal, your real rate rises. This fantastic p expansion which tons of people have made tons of money off of, you start to compress. I mean, this is good. We gotta leave it their ash, We gotta you gotta Could you make a note kill? Can we get ashback on? I think we need to. I think the snow is pretty

good out there in Denver. Ye, listen to you. You're trying to get the ski trip. Yes, we get a weekend brief from Andrew Pecks. He's professor of Rologists and Therapists for the Keen Dining Room table joins us today from Johns Hopkins and the Bloomberg School. There. Andy, this came up last night at the table. What's after a macron?

What is after this variant? Well, you know, it's hard to predict exact what's going to happen with the with these variants were we can say with pretty good certainty that there will be more variants coming down the pipeline. But we really think that, you know, all Macron was a tremendous challenge to the current vaccines and the treatment regimens.

And if we can handle all Macron, which in many ways when it comes to hospitalizations and the rates of hospitalizations, we are we probably are going to be in a good place to be able to deal with other surges and be able to limit them in the future. Where did Delta go? Delta is still around a little bit. We have a few people here in the hospital that are infected with Delta. Delta is at very low levels

across the country, maybe ten percent of sequences. But all Macron has really come in and outpaced Delta and really become the dominant virus and an incredibly fast period of time. Andy, we're talking about economic momentum in the face of the A macron up swaying, and we've been talking about when

we can expect it to be over. I'm curious about what you've observed about a five day isolation period, as the CDC guidance lays out as well as now the United Kingdom, is that proven to be the effective amount of time that people are contagious after which they can go back into circulation. The problem is is a very nuanced, good question. There is some data suggesting that if you've been vaccinated that after five days um you are very

unlikely to be infectious. But all of that data was was generated with variants other than a macron, and we already know from some of the testing procedures some of the transmission of all macron that it's doing things a

little bit differently than previous variants. So many scientists, including myself, really wanted to hear that five day incubation period ended with a negative antigen tests, because that would have really been strong evidence that you would be very unlikely to spread the virus if you went back to the work place. And although with other variants I would have said fine, but with a Macron things are a little different. Andy Tom started the conversation off saying, what comes after a Macron?

And we're talking about bank earnings, We're talking about the return to work plans that were put on hold as we deal with this latest variant. What will return to work, return to party, return to restaurant look like once we are back to an endemic phase of this virus rather

than pandemic. Well, if there's any bit of a silver lining right now, it's, Uh, it's it's becoming clear that if you've been vaccinated and you get an O Macron infection, your immune response afterwards is not only tremendously high, but it's also very broad, meaning that it recognizes all these previous variants that have come through. So there's suggestive data right now, uh, indicating that people who have gotten through this Amicron surge may end up with a really strong

immune response. Afterwards, it's going to provide even more protection against whatever the next variant is. And if that's true, that could be a returning point in turn of in terms of dealing with this as as a pandemic versus something seasonal like influenza. Dr Pecrows, thank you so much for joining us today with JOHNS Hopkins at University. This

is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best and 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 and this is Bloomberg