Surveillance: Retail Trading With Taft

was a sleeper. I did not expect the excellence of stewardship by John S. Taft. He is bared vice chairman. Of course, a legacy of this American politics in this Wall Street as well, and it was a primal call by John Taft about the state of Wall Street. We're thrilled that we could revisit with John Taft on stewardship in the time of free John. A year ago or so, I opened the Wall Street Journal and one page was free trading, and the next page was free trading, and

the page after that was free trading. Everything's free now. And look at the mess we're in with order flow. How do we extract ourselves from all the disaster we've seen from order flow back to something or forward to something more normal. Well, you're talking about payment for order flow, which is the engine that powers a lot of these quote unquote free retail trading platforms, and tom I've always had uh I felt the payment for order flow was

a smelly practice. It's legal. Um, it has to be married with all sorts of controls and assurances that you're getting best execution. But if you're selling off customer order flow and getting paid for that, how does that not create a conflict with your obligation to get the best

execution for your clients. UM. I think you're seeing, on the part of our new very capable, very aggressive SEC Chairman, Gary Gensler, a commitment to look at that along with many of the other troubling UH issues surrounding retail trading. Would you suggest that the leadership of law Strata, which certainly you're a voice of and part of, support Mr Gensler, and let's get to this to get some confidence back in trading away from the meme stucks. Absolutely. I I

think very highly of the SEC chairman. He's certainly one of the most knowledgeable, game ready SEC chairman we have had, and he's already laid out pretty clearly what his agenda is all makes sense to me. Greater transparency around UH short selling, greater trans parency around the use of total return swaps UH and UH payment for order flow gamification. They're all on his radar, And yes, I think we should get it all of this because Tom, what we found in the past, that we've seen it over and

over and over against. Partly what stewardship is about is that our industry has a habit of of taking legitimate practices that that do make a positive difference in the world and and running them to excess. And every time we do that, we get in trouble, and our clients and customers get in trouble, and society gets in trouble. And you can see some some indications here of commercial excesses or reappearing in the financial markets, and I find those troubling and I look for regulators to try to

tamp those down before they cause a big problem. John, the focus right now is shifting away from some of the trading activity to why there hasn't been more lending in the banking sector. And as someone who is perfect to speak to the nexus between banking and politics, given your great grandfather being the president of the United States. There is a question here of how banks will shape

themselves going forward. As the lenders as helping to generate some of the recovery through UH through some of the extensions to main street, how do you expect that to be transformed in terms of the lack of lending demand, the lack of demand from borrowers to where we are now, well, a couple of things are going on. Obviously, the post COVID softness in the economy led to a decline in

demand for traditional lending. But Lisa, one of the things that we've seen going on is there there's plenty money available to be lent. It's just being lent out of the non bank or shadow financial sector. Private equity funds,

hedge funds are are lending. And part of the reason for that is that during the financial crisis, the focus was legitimately inappropriately on making sure that banks didn't behave in ways that that almost brought a systemic meltdown, and as a result, all sorts of capital requirements and restrictions were put on regulated financial institution. Just like squeezing a balloon, you squeeze it at one end. Uh, it grows at

the other end. And so we've seen capital available for lending moving out of the regulator to the unregulated banking sector. What I would like to see is uh, and you're and and there is some of this going on or was let me put it during the Trump administration remains to be seen. What happens during the Biden administration is for regulators to take a take a deep breath, say, Okay, we actually here, UH oversaw a success story. We oversaw uh,

the rebooting of the financial sector. We put it on sounder footing, safer, sounder, more stable than it's been in a long time. Can we takes the steps to make it easier for regulated financial institutions for you to do the job that society wants them to do. Are we being too restrictive? And that's sort of a counter intuitive to the regulators in place now under the Biden administration, But I think that's what's needed at this point. It's sort of a relook at DoD Frank, not a not

a reinstitution of DoD Frank. So on the flip side, do you think that systemic risk has built up in

the shadow banking system? Yeah, certainly, a lot of people are worried about that, and yes, I think that, um uh, there are indications that, as there always are, risk taking is UH being pushed to dangerous levels in some areas of the unregulated financial sector that you just saw one UH in the explosion of our articles, and UH what was the risk being aken there while it was embedded in total return swaps around which there isn't the same

transparency and there aren't the same disclosure obligations as there are with with normal UH stock positions, major stock positions and publicly traded companies, and those kinds of holes in the system UH sometimes can can destabilize the financial system. And I wasn't big enough banks took heavy losses, but you know they weren't. They weren't system threatening, weren't even institution threatening. But yes, I worry about excess as building up.

They always do. We have a number of organizations like f stock and various research capabilities that we didn't have going into the financial institution supposed to be scanning for risk. Are they, Let's hope. So you know, I was reading Jonah story yesterday about Representative Tom Swaltzney from New York, a case pushing for two and a half percent levy on wealth of more than fifty million in dollars. He says it's a one off, but we know how those

things go. Interestingly, your great grandfather was a champion of the sixteenth Amendment, brought in the federal income tax for for really the first time, UM in nineteen thirteen. What do you think about now transitioning to or adding on a wealth tax. Boy, it never fails. You get me to talk about politics on on surveillance. You know, my my peer people say, don't talk about politics, don't don't, don't talk about your Republican legacy. I guess here, here's

the way I feel. I'm uh, and I think a lot of a lot of Americans and people in financial services industry feel this way is we're we think taxes UH can make sense if they are used to invest in productive assets in the real economy that makes the economy grow faster, Let's face it, unless you want to look at something like long term inflation. UH. The only uh viable way out of the hole we've dug ourselves in the course of the last three or four years

is to grow our way out of it. And if raising taxes and putting that money to work in a solid, uh legitimate infrastructure package is something that Congress can find their way to do, then that's great. If, on the other hand, wealth taxes being used to fund more social spending, then we're just digging the hole we're in deeper. And so it really depends what is going to be the use of a tax increase, uh, whether it's one time

or capital gains or ongoing income tax increase. I would just point out that William Howard Taff, though his his focus was on corporate income tax it's not personal income taxes. John Taff, thank you so much. With Betarter, their vice chairman, they're on order flow and on some of the moments we've seen such as articles this morning. He is again with Beard right now. This is a really important conversation, Sarah Hunt, with us with el Pinewood's Capital investors, and

what's so great about it. This is in the trenches of portfolio construction versus sort of the econo babble that's out there right now. Sarah Hunt, I am absolutely fascinated with how you perceived big tech. We saw the Apple surge yesterday. Is this big tech unloved or are we just climbing on board the mega move that we saw

of eighteen months ago. Well, I think you had a long pause in some of those big tech stocks, and you look at Apple, you go back to September of last year, and you were basically at levels that were

just around where we are now. So that's had some time to digest that fact that it was higher for they had a huge swing up, and then everything sort of slowed down and paused on the big tech side while people went and looked at what else is happening in the economy, So they started looking at cyclicals, I

started looking in other areas. I think what you're seeing now is the realization that rates now starting to back off after reaching a high I think one seventy five on the tenure or the other day, or a couple of weeks ago, that you're starting to see people go back to those tech docs because the growth is still there. And in the end, I think that's what really matters, because as much as we can look at the different parts of the economy, there's still everything we have is

more and more involved with tech. There's semiconductors in almost every single thing we buy these days, so I don't see that the tech space is not a good beneficiary of whatever is happening in the economy, as long as that's good news for the economy. Sarah, where is the greatest degree of undoe complacency and markets right now? Wow, that's a tough one. I think that. I think, you know, go back to your FED discussion. What do we what is the FED going to do? And how does that

play into everything else? It has benefed driven market. All this liquidity has definitely been pushing people out of fixed income and lamentations of fixed income managers and has been pushing towards equities and other higher risky assets. How does that play out? How does the FED back away from that? I think that's going to be, to your point Lisa earlier, a very big question. And we don't know how that's

going to play out just yet. I think the odds that it actually just ends up continuing in a more quiet way are pretty high to me. But in the end, at some point they're going to have to do something that's a little bit different than that, and how our markets going to take that? How our markets going to

take that? And I wonder though, Sarah, whether that's so far afield in the future right now, any sort of normalization that we can continue down this road with regards to the pricing that we're seeing inequities, the pricing that we're seeing in fixed income, and the pricing that we're

seeing frankly in some of these alternative assets. Well, I think if you'd asked anybody four or five years ago, even before the pandemic, you would have said, no, the Fed's going to have to exit their strategy and this is this can't continue forever. And here we are, you know how, many years after financial crisis, still with some very unusual monetary measures globally. And I think that just the rates coming down again in Europe also makes the

US look more attractive. I mean, the German tenure got up to I think negative ten basis points and now is back lower than that. So I think the US does look better relatively speaking, but it's still really tough and I think it's going to be difficult to see how we get out of this. But at the same time, to your point, I think we could keep going with

this a lot longer than people think we can. Sarah, do you have any earnings visibility fifteen days to June thirty, we regroup, ALCOHOLA comes out JP more Gon will start the bank earnings. Sara, do you have any visibility on what earnings look like coming up? I think this has been such an unusual time frame for so many reasons that it's very difficult to see earnings visibility. I was looking back at some of the banking earnings and what the estimates were and what they came out with were

so wildly different. You know, some things are more easier, more simple to predict than banking earnings, which I think are very tough to predict. But in the scheme of things, no, I think it's very tough to say we know what earnings are going to be accepted right now. People are out there spending money, so they're going to be higher. The question is how much and for how long? Sarah, Thank you so much. Sarah hunt with us today with Alpine Woods Capital on a portfolio construction in the view

four or he has seen this before. Michael Holland joins usself from Holland and Company, looking at the idea of careful securities analysis, listening to managements, and moving forward with a more calm and stable approach than the trading. Michael Holland, let's start with the mean trading. Now, when does this go away? Or are we gonna live with mean trading forever? Likely not for every time that we're good to see

the three of you. Uh. The reality is that that all of these things do go away, but you just don't know how long they take to go away. So I wouldn't I wouldn't be real fast to get out of your cash position and start shorting things. Starts right now. So Michael, you just are saying music to Tom's ears.

Why do you think that people ought to be holding some cash right now given the fact that there's extreme accommodation from central banks and ongoing fiscal spending at listen the uh the history of the time talks about the decades I've been What happens is when you get to this point where the complacency is is actually pretty well earned because the Federal Reserve right now is doing what

it's doing. And listen to Carl Weinberg in his testimony in the last couple of days, I think you have very smart people saying things can be pretty good for an extended period of time because of the Fed. Having said that, Tom said earlier in the show, thirty nine percent increase over the last twelve months, name trading stocks, SPACs, ETCeteras, and all the stuff that the bears talk about. Both both camps have very smart people in them. Either or

both could be right for some period of time. Having said that, I really like an all weather portfolio so that when things go in the direction no one expects. You're saying, I'm still okay. I'd like to be a survivor in these markets. All right, Well, let's talk about that survival here. I am curious, Michael, why would anyone buy into the case here that the FED can sort of orchestrate. That's verbial soft landing. I don't think you

buy in remain a hundred percent. That's exactly the right question. In fact, the soft landing may not happen, and it may happen. I think it's it's probably in the school. It probably could be a little messy, but but I have no reason to thank my prediction would be any good or as good as the three of yours or Carl Weinberg's or anyone else's. So nobody knows the answer

to that. Will it be a soft landing? Having said that, it might be, which means that to have a percent triple leverage is probably not the preferred position in the stock market. On the other hand, having some cash in case it's wrong, you're you'll feel better at the end of the day because you will survive. Michael Holland when you look at the accounting statements of these companies, it speaks of fundamental analysis. Does fund fundamental analysis have a

value here? Securities analysis have a value here when you see the ratios we're living with abs salutely Tom, Because when you get to a time like this, if if you are going to inch back into the equity market sometime in the next decade, what you want to have as managements who have financial statements that tell you, as in the case of JP Morgan for example, you referred

to them earlier in the show. UH, they show you why they have fortress like balance sheets, what the prospects are for their trading revenues, uh having been so great in the past. There's a there's a gold mine of information in those financial statements, and that's part of why I've been able to survive myself. By paying attention to things just like that, you can those are kind of immutable things that facts are stubborn things. Ass as it's

consented Michael. There's a spectrum of risk and return, and the idea here of there are times to go hard into risk for that return of their times to accept very little return for not being very risky. I don't need to tell you this, but where are you right now on that spectrum? Perfect question, LESA, because so trees ago, a very successful investor named Rochild said, bye, when there's blood in the streets, we're certainly not seeing blood in

the streets right now. We're seeing the opposite. We're seeing a federal reserve which is given a pass to anyone who wants to see uh, assets of any kind go up. So it's a time to have some cash. As you said before. So in the risk spect I'm saying, you know, you're tilding over the middle to the to the to the area where you have to show some caution lights

for sure. Yeah, yeah, but I mean showing caution. Let's say you don't want to necessarily go into cash, remove a large allocation into cash here, you want to stay invested in the market, and hopefully I'll take part on whatever upside might actually be left here. Is there safety to be found in that thinking? Yeah right. I think Tom's question earlier about fundamental analysis is related to to the answer to your question, um Oracle is going to

report after the close tonight. I saw that the stock there a few months ago, trading it quite low multiple the prospects for the company management that has shown itself over the years to get it right. And my guess is what they're doing. They have a report, and maybe there'll be a lousy report and it'll go straight down. But I think there are companies JP more going to

be in that category. General Mortis with Mary Barrett, I think that there are there are places in the market where you can find opportunities, but you have to work at it. Like Holland, thank you so much, greatly, greatly appreciated this morning. With Holland and Company, the chairman and the founder there. Joseph's song joins working with Bank of America's their US economists with Ethan Harrison the team. Joseph, thank you so much for joining us. I like the

Bank of America tweaks your g d P numbers. You go from a first quarter of prosperity to the boom. You know, a little bit of an adjustment here of the second quarter. What does the clarity that you and Michelle Meyer have on third quarter? G d P Thank me. Um. Look, we're still very bullish on the US economy right now. You know, we're still looking for seven percent growth this year. Obviously, today's retail sales report was definitely on the weaker side,

but we were expecting that. We were expecting negative prints for all the major aggregates, um, but we still see strength in the consumer. If you look at our car data, everything outside of retail sales, you know, group were roughly around six percent on a month or a month basis. So all that service, it's all that spending. Is that

happening on the service side. We saw a lot of strength uh the end of the month in May around Memorial Day with lodging, travel, restaurant spending really really picking up momentum. And early in June we're seeing that carry you do, so you get through June thirty, you go to Q three, I've got question marks on it for radio and TV. How do you guys frame up Q three? Is it a is it a better tone than where

you were ninety days ago? Well, you know, we don't think that the strength that we've seen in the second core will necessarily continue, will be sustaining that at the very extraordinary levels that we're expecting, and Q two we're looking for double digit GDP growth, it will it will soften a bit, but I will still be well well

above trend suggesting the consumer is spending. And remember there's actually more fiscal aid coming online in Q three with the child tax credits, so a lot of middleton lower income households will have more dollars to spend. Joseph, let's talk about the pendulum of stagflation, as Tom so elegantly put this question of whether people are less inclined to

spend as prices go up. Are we seeing signs of that or is this to add a completely irrelevant to that based on this changing of the of the composition of spending. Yeah, I think Mike is correct and that it's it's tough to suss out what is the demand and supply effects going on right now. Um, you know, obviously there is probably some effect with higher prices in the good sector, but you know, when we look at our car data, real spending is still up double digits

relative to twenty nineteen levels. So even if there's some softening in the good sector, clearly those dollars are being shifted over to areas where they're still really strong demand. All right, Yeah, I mean as we look at these uh main numbers here, Joseph, I mean we should point out these April numbers ticket revised higher here on a month over month number. Of course, we were pretty much flat on the previous reading that's being revised to up

point nine percent. I am curious that when you look at the numbers that we've had here on the retail side, retail sales side, and the come down that we're having, now, how much are you factoring in the government support and the potential pullback of some of that support, meaning the expanded unemployment benefits And I guess you can sort of fold in some of the fiscal stimulus that may or may not be coming down the pipe. Yeah, I mean that that is um partially in our kind of slowdown

in Q three. But remember that as these unemployment insuranceets get uh get gets pulled back, you'll see more workers we entered the labor market, and they're actually entering a labor record that is very hot right now. And wages are starting to climb higher, so there actually may not be such a major fiscal cliff where they're losing their benefits and not seeing the same sort of comparable wage levels. There actually might be just you know, substituting benefits for

you know, wage wages. So um, you know, income may soften a bit from here on out, but we still are very constructive on the consumer and the behind the household balance. Okay, Well, unfortunately then that sort of circles me back to sort of the half glass half empty scenario here where if fails, uh, if those wage pressures continue higher and that does pull people back into the labor market, then then do we have to then start talking about those inflationary pressures and what kind of dragged

that might mean for economic activity. Yeah, so, you know, and in the fall, you know, we think that those kind of labor supply contraints will start to ease, So the higher wages that we're seeing today, we won't continue to keep climbing higher. Right, Well, we'll reach kind of city equilibrium where there's more workers that enter a labor

market as unemployment insurance expires. Also, care has been a major issue during the pandemic and we've heard from a lot of major school districts that they'll be going back to traditional in person learning, so childcare will be baked in for a lot of parents, which will allow them to re enter the labor markets as well. So that's gonna we think that you know that that will lead to great US apply in the labor market, and that will have at least a temporarily a cooling effect our wages,

which will keep inflation well well kept. Joseph Song, thank you so much, greatly appreciated with Bank of America. 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 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 In. This is Bloomberg