Surveillance: Morgan Stanley Shakeup

barely describes the king of gossip of Wall Street. Who's next? Is Golden Sacks gonna have a shake up? Goldman Sachs is one of the recent films that we've had a CEO shakeup. So you saw that in twenty eighteen when Lloyd Blank find I need to come on, I need some more fun from these fruits. It's Golden. Seriously, it's Golden Sacks next. If Jamie Diamond is gonna take fifteen years and James Gorman one the same time, I bet David Solomon doesn't want to live anytime soon Tree the

co president's role. Can we talk about that a little bit more? How on Earth does that work well at least at this firm. It is important that the Morgan Stanley of today is extremely different of the Morgan Stanley from ten fifteen years ago. You have a firm that is not a pure play Wall Street investment bank anymore. It's wealth management arm contributes to nearly fifty pc of

its overall revenue. So it kind of makes sense to pick someone like Ted Pick who has charge of the entire investment bank, and Andy Sapperstein, who has really built Morgan Stanley into a wealth management powerhouse, starting from with the Smith Barney purchase through to last year with the Each Trade by which was one of the biggest deal, possibly the biggest bank deals since the financial crisis. That it has become a major center of gravity for the firm.

So at Morgan Stanley you had to have a situation even without any inside knowledge. The best guess anyone else out there would have had was the most logical outcome here in trying to figure out who will be the top deputy to James Gorman, would have been these two men in tet picked from the investment bank and Andy Sapustin from the wealth management zone. So three he wants three years, He's told the board another three years as

the CEO. Many people reflecting on what happened with City Group in the last couple of years, where Mr Corback said something similar, then all of a sudden, Jane phrases just started to move really quickly. Was the city situation unique or do you expect some people expected to see something similar? Here? City Group and Morgan Stanley two very different places right now. In fact, Margin Stanley's market cap

is even higher than City Group right now. Imagine saying that a few years ago that that would not have been considerable. Even now, City Group has twice the assets of Morgan Stanley and City Group has been going through a number of challenges on the regulatory front and elsewhere. Morgan Stanley is a different story. They are in a good position. They are in what James Gorman calls a position of strength, and then whend going is this good?

It's hard to imagine you'll want to leave. And that's why it makes sense when James Government is starting the senior man aagement and the boarding saying he wants to hang around for at least three more years. So if you buy the argument that banks are reshuffling senior management ahead of the bank hearings in Washington, d C next week. What is the message being sent by the personnel choices, by the moves being made. I have to take the

contrarian side here, Lisa. I'm not sure the Morgan Stanley move necessarily signals much to d C. However, the pandemic could very well have played at all. It is our understanding that James Gorman has been working on this succession plan at least for a good part of the last year. He does this New Year's resolution every year where the start of the year he puts out a list of things he wants to accomplish, and this year it very much was on the list to make sure that it's

a smooth transition of power, and that's important for him. Three. It's sort of old school to me when I walls through the biographers of guys. Edward pick is a guy who's seen it all. He went over to the equity capital market side, and then he entered the death star the fixed income shop, which at Morgan Stanley was an absolute train wreck for years. Is he vantaged here because he has equity capital markets, in bond capital markets experience.

He certainly does bring big credentials with him. When you say he was started off on the equity capital market side, he helped with the I P of none other than Google, So he's had some big ticket names that he helped take public. Then he took over the equities business and in the aftermath of the financial crisis, that was a big challenge to make sure that they could lift Morgan Stanley's equities business and now it is the number one player in Wall Street. And then he helped to fix

income business that was flagging. So he's clearly built up the credentials, he's notched up the winds. So his story is certainly very much on the race. Straight tremendous reporting. As always, I'm gonna catch up with his blimberg Stree Natacha and breaking down the news coming out of More Can Standing. Let's bring in Russ Strict show, black Rock Global Allocation Fund portfolio manager. Russ. Are we talking about talking about it? And should we be talking about it

this morning? How significant is it? We're gonna be talking about it one way or the other? Uh, Look, I think this is important. The FED is likely to start to shift their their policy stands in the coming months. It's not unrealistic to think you begin tapering in in Q four. Having said all that, you know, despite all the ink being spilled, you know, a couple of points, long term yields have actually remained remarkably contained. We've never taken out the high from back in February and March.

Bond market volatility is down significantly from where it was again back in February and March, despite the biggest inflation printing forty years. So this is a big deal. But you know, the wheels are not coming off the vehicle yet, and I think that's important to realize. We still have a one sixty ten year bond market volatility right now is still modest. So as of today, that helps explain why stocks are only down three I mean, the correction has been a non correction. Russ. Can you buy the

big text here? Have they've been on love for a long enough time where they're actually a relative value of relatively unloved. I think there are some opportunities in the big tech, you know, just to be clear, we're talking about I think it is the mega cap high quality tech. It's not necessarily the more speculative names, uh, the ones where earnings are you know five or ten years out,

we've actually been trimming those from the portfolio. But yes, if you're talking about high quality tech in man to perform over the next one to two quarters. If we get these gaudy g d P numbers and the cyclical trade continues to three years out, I think you want to own them. You want them in your portfolio. You know.

While as we talk about portfolio construction rusts, there is a question of whether treasuries can provide truly a hedge for equities at this point, especially given the negative correlation that's gotten it by one measure to the most since the two thousand's what's your sense right now early two thousands, I should say, what's your sense of how hedge worthy treasuries really are right now? Not much? Uh? You know. The reality is things have changed, and if I look

at stock bond correlations, everyone knows they're taking up. What's been let discussed is the fact that equity market volatility has remained elevated compared to bond market volatility. There wasn't a few a couple of months ago. But the reason that's important and the reason it's affecting the efficacy of the hedge is that tells you how convex the hedge

it is. You know, what you're seeing is even in these days when the market is down a couple of percent the way it was last week, either bonds are flat or they're up a little bit, they're not giving you that big movement that made them such an efficient hedge the way that we're a couple of years ago. And that's a big change. You know. We don't talk about that a lot. We talked about bitcoin, We talked

about the FED. If you're building a portfolio, the degradation and efficacy of bonds as your primary hedge is a big deal. Just to be clear, Hey, Russ, you were the first person to mention bitcoin on this program, So Finn's be rre about that. Rus, just find me in quickly. You still nurse in that cash position. She still sits on that gun. Take Prince of Summer. We do have the cash position again. It's it's the flip side of that being very underweight duration. Everyone's got a volatility. They

look to manage their portfolio. Two. In the absence of duration, you need other hedges. Part of it is cash. There are other things as well. There's ball as an asset class. Uh, there's f X pairs. But in a world where you're not getting that convexity from durations at hedge, you're gonna run with more cash. Russ thank you best that I'd saying. Ruskulligh strict that of black Rock. Right now in London, Roger Boodle joined us. He's with Capital Economics or chairman.

Very important work of the Telegraph is well, Roger, I really have to ask about the churn that we're seeing right now in this great economy. The Philip Lane comment that John Farrell just had is so important. Uh, you're Ambrose Evans preachers the Telegraph writing up inflation worries. Do you have inflation worries? Yes? I do, actually um for the first time for quite a long time now saying that I've got inflation worries. And I don't think it's

going back to the inflation of the nine seventies. But it concerns me that a lot of people in the markets and central banks and governments are becoming I think a bit complacent about this now. At the moment of course, we're seeing you know, particular prices going up, and as some of your people have been saying, this morning, those effects are going to fade out. Frankly that I think the bigger issue is the stance of policy. All this

money slashing around, these incredibly low interest rates. I think we risk an inflation surge. Roger, Is there a place around the world where you think that complacency it's more concentrated a region, a country at central bank? Well, I think the danger has put this with the danger's greatest in the States because the economy was not that hard hit. I was hard hit by the pandemic, but not as hard hit as countries in the Eurozone or the UK.

And you've had this massive, absolutely massive fiscal stimulus, and the money supply has grown substantially, and you're already at four point two and the latest a give for the CPI. I think you'll see inflation readily at five percent, and I don't think it's going to subside that easily. At the other end of the spectrum, I think the Eurozone

is not facing that much of an inflationary danger. Of course, there will be the spikes the result of our commodity prices and energy prices and so on, but I don't think you're going to see anything like five percent in the Eurozone and the UK is I think just about in between those two cases. Do you think there's some fun interal stability risk here along with that? Yes, I do.

The big question is what central banks do, and if they don't do anything very much for some considerable time, then I think the risk is that they're going to be bounced into jumping interest rates, and then that has a very substantial stability risk. I think the appropriate thing once we're clear that the economy really is pretty strong and inflation biggers are picking up, I think central banks

should start to edge up interest rates pretty soon. Roger, what's going to be the impetus behind higher wages in the United States? To a lot of people who come on this show say, it's sort of a predetermining factor too longer lasting inflation. As you're predicted, what depends how strong the economy is. Uh, and all the signs of the economy is going to be very strong, and that

increases the bargaining power of labor. Now, it's not going to appear necessarily immediately, but it does happen, and the economy is very strong. As a shortage of of people, wages are a bit up, but you're right to say that you can't have continuing inflation going mad for a long time unless wages pick up. But I think they will.

And after all, wage ournalists will have to pay higher prices in the shops and that will affect their living wage, and they'll want to get some sort of compensation for that.

This is how inflation starts. And by the way, in the past, you know, when inflation has got a bit out of control, it's always begun with people saying, oh, these are special factors, don't worry, it will fade out, and with a central bank saying, I know, we're taking a relaxed approach, and then, of course a bit later down the line they find out that it doesn't play. Now I'm sitting here trying to make these two views coherent.

This idea that we could get inflation that rises to five and stays there for a while, and the idea of a financial stability risk that torpedoes markets and causes perhaps a return to pressures on the economy. I mean, can you square the trajectory of the inflationary push and perhaps the market crash that subsequently results. So I don't think it's the inflation itself that actually poses the risk to markets. Obviously, it's a risk of bond markets um

these incredibly low yields. But as far as equities is a concerned, I don't think inflation itself obviously, which is then sensitive to whatever happens in bond markets. Now the

risk is from policy. Now. Of course, if the policy makers decided they're prepared to tolerate five percent inflation for a bit, then fair enough that doesn't materialize, but I would presume that at some point or other five would be seen to be too I now the Fed has altered its target, it's prepared to tolerate inflation, hasn't it explicitly? But phats fill present for a while for a few years. But if this gets bedded in, then I think it

has to act. And then if it acts by raising interest rates by anything other than a tiny amount, you've got to wonder. In the financial conditions in which we've been living with very high asset valuations, huge amounts of debt, you've got to wonder what the fallout from that will be, and I think that will be quite ugly. Roger Bruttle

very quickly. Here have we've forgotten the joy of nominal g D P. I mean you and I are fossil enough to remember the bright lights of nominal g d P really helping corporations, the corporate spirit, the business spirit, if you will have we've forgotten a little bit of inflation could be a good thing. Well, I hadn't forgotten about that. The trouble with a little bit of inflation is a bit like being a little bit pregnant. Things stay that way, would I play tend not to stay

that way? Now in some conditions. In the fift and sixes we had inflation to three. It didn't get out of control, at least not for a long while, but then it did get out of control. I think you're right in the sense that we obviously don't want an economy and that's flat on its back with zero inflation, let alone deflation. And if we've got two percent, that's perfect probably good, better than having one percent or zero, maybe even three. For a few years, it's perfectly okay.

But once you get to these higher levels then I think you do begin to get difficulties emerging. And so far, of course, central banks have not wanted to accept something like five. Maybe they will not. The conversation I expected between the two of you to round this up, but we'll leave it there. Roger, thank you, Roger the Caman, I bet you are. But it's not the good kind either. We talked to Senator as we talked to congressman and women sometimes in manufactured. Steve Danes of Montana is the

real deal. He is original Montana, growing up in Bozeman, chemical engineer from Montana State University. Ween there within Republican politics and the Senator joins us this morning. Senator Janes is Montana's government site says Montana works. What are you gonna do with the three point eight zero percent unemployment rate? Well, I'll tell you a big shout out to our new governor of Montana, Gratten forty, who has been a friend of mine for twenty years. We were in business together

in the Cloud, competing business for twelve years. Greg understands how you make economies work, how you create jobs. In Montana was the very first state that eliminated that three week supplemental federal unemployment insurance benefit. Because when you take a look at the state benefit plus the federal benefit, he was about seventeen bucks an hour to stay home. And this isn't about folks. Being lazy. This is about logic.

You just look at the what you could make going to work versus staying home, and you can make more by staying home. Greg stepped out a little over two weeks ago and said no more of that. Twenty states now have followed Montana's lead. We we have right now in this country is primarily a labor crisis, not a job crisis, as evidence by the eight point one million jobs available right now. You know, you get down to the Western Cafe and Boseman, Senator, and that's where you're

gonna actually learn what's going on. What does the anecdotal evidence you were the governor's see right now in Montana after this decision was made. I mean it clicks in in late June, I believe June seven. But what have you observed with this policy action? Well, you're talking about the Western Cafe. I'm getting homesick. That's inside baseball there. But you can go to the Western Cafe or go up and down the main streets across Montana. You're gonna

hear a couple of things. First, help widened science everywhere, now hiring everywhere. My wife and I were in my pickup driving by a small business recently in Montana, and there were balloons all around this business. I thought, what's going on. It looked like a car lot or something. There was a tent set up with people inside. They were doing live radio hits. It was a hiring promotion. They were trying to find people to work. But here's

one of the adults we've already heard in Montana. We've had a business there in Helena that was seeing one to two applicants every few weeks prior to the governor's action to suspend these federal additional benefits. After that happened, they saw sixty applications come in within the first seventy two hours. So it's early, it's anecdotal, but we're gonna keep an eye on that. Clearly, I think we're going in the right direction here of creating incentives to get

back to work incentive. You clearly believe this is the right policy for the state of Montana. Do you think that applies to the rest of the country. Well, governors will make that decision, But I think generally, anytime you are paying people more to stay home than to go to work, that's a problem. And I think it does depend certainly when it's an urban versus ural kind of situation as well, so with within the states, there may be differing kinds of incentive issues going on. But again,

I think come back to common sense. When you have these very generous benefits that were needed for a time when we hit that crisis last year, it was the right thing to do. But you can't keep people paying people more to stay at home than to go to work. Clearly, people find this an intuitive argument. What do you make of the argument that perhaps because children haven't been able to go back to school in many places still, that

that's how the bank participation in this labor force. Yeah, I think that that's a fair point, and I think it's important that there's just not one thing we need to do here to continue to get folks back on the job. I think the child Cares You is a very real issue that's quite so important we get the schools opened up and kids back in the classroom. Parents are upset, they want their kids back in the classroom.

They learn better in the classroom, and you know, it allows mom and dad to get back on the job if they need to do that. Senator. When I think of Montana, I think of the c c C back in the nineteen thirties, which helps shaped Yellowstone National Park one of the key national places, uh that are that

really represent America's natural history. I'm wondering from your perspective, whether you're becoming more open to the idea of something akin to that, some sort of work program or some sort of info structure spending that goes beyond just fixing certain bridges and tunnels at this point, given where we are in the economic cycle. Yeah. Well, I I've chaired the National Park Subcommittee for the last couple of Congresses,

so I'm a big fan of our national parks. So We've spent a lot of time as a family in the wilderness areas in our national parks, as people who love the outdoors, as so many Montana's do. But I think fundamentally, first, remember we passed the Great America Outdoors Act under President of Trump and the very strong bypars of vote, which really was targeted infrastructure for our national parks as well as funding the Land and Water Conservation Fund.

So we we've already I think made a down payment on infrastructure for national parks badly needed to repair some of the really the fraying edges of our national parks. But I think stepping back on the infrastructure question, I think we need to come back just to find what infrastructure is. It's roads, it's highways, bridges, waterways, broadband, UH, airports,

wastewater systems. And I think there's room for a by parts and comprom eyes if we really defined infrastructure as kind of the man of woman on the street would say, it is not some of these social programs, free community college, free daycare that the Biden administration is saying, that's part of infrastructure. What size bill would you like to see with that bipartisan plan. We've heard a headline number about

eight hundred billion dollars. Yeah, I think there's a range somewhere, probably in the five to eight hundred billion dollar U range. That's still a huge amount of money. I think we've been desensitized as we've been talking these trillion dollar numbers now over the last year and a half. Remember these are it's massive amounts of spending, and I think we all have some concerns about what inflation or impacts that might have on our economy to our long term detriment.

So I think we want to be measured, but we also want to address the issue that the infrastructure is an investment in America. I think I view that more investing than spending. We'll get a return on that investment. Senator Days, you've been a supporter of President Trump and much of his policy as well. You need to look forward to two thousand twenty two and two thousand twenty four. I want you to find common ground with a retiring

Senator from Ohio, Rob Portman. Is there a place for a diverse future Republican Party or is it going to be the party of Trump? No, there's absolutely a diverse party. Rob Portman is a very good friend of mine. You know, I was a proctor and gamble guy for thirteen years of course headquarter Cincinnati, and Rob used to work in ranches during the summer in Montana as a kid growing up, and so Rob and I go back a long ways. Had the utmost respect for Rob Portman. But no, there

there there, there's room here for a big ten. I mean, at the end of the day, politics is about addition, not subtraction, and we are stronger when we have those diverse views within the Republican It should be there. So I don't mean to interrupt Senator, But I think this is absolutely critical. What would you like to see from the former president to bring a more diverse Republican Party together? Versus his nine hundred nine page statement to two attorneys

in New York yesterday. What does President Trump need to do now? Yeah, we'll tell you if you think about what happened over the course the last several years. The President brought so many blue collar workers into the Republican Party. They weren't necessarily political or parts, and they really don't

care there's an R and D behind their name. They wanted to see this America first, protecting manufacturing, bringing jobs back to our to the United States, and in somebody ways he expanded the party as well as with with Cuban Americans, with Hispanics. You actually saw very strong numbers in this last like and that's part of the untold stories. They actually inroads with minorities that was made by Republicans

and and led by President Trump. Now, I understand that some folks don't like some of the mean tweets and other things, but take a look what's going on right now in our economy with these policies. What it's going on. He canceled Biden canceled the Keystone pipeline. Well, uh, well, at the same time he's green light in the Nurse From two pipeline and helped Russia. And you can't make

this up. And so these inconsistencies and they're going to cause a real problem for many voters or they're gonna have some remorse or what they decided to vote for President Biden A two thousand twenty. Well, we'll say in the midtims in twenty two you send it to let's send this commiss Asian by saying up our next conversation and hopefully we can do that in a couple of weeks time. Bringing Europe along for the ride. For the

foreign policy goals of this administration. This country has proved difficult over the years on both China and Russia with North Streams two. As you mentioned, said it to your priorities, how they set up with that with that in respect with regards to that, yeah, well, of course, the Europeans are incredibly important allies and wealth in terms of economic allies as well as from the national defense and with NATO and so forth. But think about what's going on

right now. We're we're importing the United States is importing more oil from Russia as we speak here today than Saudi Arabia. The Keystone pipeline oil would more than replace the Russian oil that we're importing. And why present Biden would kill that project, that pipeline, while at the same time we've heard now green lighting the North Strain to pipe lifting those sanctions to create greater dependencies for Germany and Europe on Russian natural gas. I'll tell you who

cheering right now, it's the Kremlin. And that's a real albums at least, and not just short term but long term geopolitical implications. The sentence, I think we'd all love to get your banks soon. So let's sign find some time in the timary over the next couple of weeks and we'll pick up on this conversation. So the senator

from Montana, Senator Steve down to that right now. What we're gonna do is look at the equity markets when we do this to the prism of institutional equity selection, and Malotty is kind of get wells Fargo out in Milwaukee where was strong years ago she owned the high ground of Vailue and Milotty. We could have a three hour conversation here on the efficacy of vailue. The basic idea is value sits for X number of years and then it's go, go go conveil you go moving forward.

We look, Tom, it's had a great run, and certainly it's closed the gap with growth outperforming growth and such a wide um by such such a wide margin in Q one and pass that. As you know, the challenge really here is a million dollar question that the three of you have been talking about so much this morning. Do we really have inflation ahead of us or is it something more like you know, we're in this economy that was shut up with a light switch and is

now being turned on with a dimmer switch. And at the end of the year we actually start to see this booming economy really look more normalized and much slower, and therefore some of the inflation fears that investors have today really start to kind of moderate, and you then focus on the companies that can outgrow. And so while value is still attractive to our investment teams, there are some stocks in the growth space that that investors would kind of call the growth space that are also starting

to look attractive to us too. Given some of the sell off and given the fact that those stocks have started to beat, you know, can he need to beat earning's estimates? And the multiples have compressed. So there's a lot out there, UM, a lot of moving pieces. But this, you know, the recent volatility that we've seen and the recent run in the cyclical stocks in particular, UM has has made it more interesting and certainly more of a

stock pickers market. And just quickly I mentioned the surprise industries that come from both City and here at Bloomberg as well for the US, the fact that they've rolled over that we're consistently missing expectations. What signal does an

equity investor take from a picture like that? You know, it's it's interesting because you see, on one hand a lot of expectations being beat and then there's some economic data that has lagged a little bit more so, you know, you've talked about what the FED is probably paying attention to wage growth, employment, UM, you know, the right prices,

et cetera. And those things haven't haven't necessarily surprised on the upside, and so UM those are the main focus points I think for the FAT when they look out long term inflation and UM, that's that's kind of what they're focused on. Investors, however, see and hear from companies all of the pressures they're seen with commodity costs, with all with transportation costs, all of these things that longer term will compress margins if they don't get solved. And

I think they worried that that spillover effect. If the economy stays as strong as it is, fueled by all of the stimulus that was put behind it, you get inflation in those hits scenarios. Well, an and and this is one reason why a number of investors have come on the show and they've said they're looking for companies that have pricing power that can raise their prices on consumers effectively without denting their sales. That's something that you

reiterated in recent research. How much has that already been priced in though, that these companies do have that power and thus are attracting that much more investor attention. Yeah, it's a good point, Lisa. You know, certainly, our our investment teams have been very, very focused on pricing power over the last quarter. You know, to Tom's point earlier, the cyclicals and the value space as you go into

a recovery phase of the market. That's the place you're going to get a lot of bang for your buck early on. But the longer the cycle continues, the more careful you have to be about where the staying power is for that pricing power. And so our teams are now, you know, rather than it be an industry or a big you know, part of the market that's going to get that pricing power, it's really more company by company who can sustain it. And that's what they're really paying

great attention to. And thank you glad to get you on the schilf and get your input on the market and les see that of last Faco. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten AMI Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

Bloomberg dot com and of course on the terminal. I'm Tom Keene and this is Bloomberg