Surveillance: Shutdown Won't Impact Economy, Taylor Says

quarter for the capital markets business. It was really tough, especially given that JP Morgan is one of the biggest bond trading houses across the world. He didn't say much. Jamie Diamond didn't say much in the press release yet about what the forward looking guidances for this business, but he definitely was hurt by the fixed income business and Goodies was pretty much in line with an all us expected. It definitely wasn't enough to help trading revenues overall. Q

four's ancient history. Now we expected it to be bad. The only thing that's happened is is it's coming worse than many people expected it to be. Similar story with City Group yesterday City Group traded lower on the numbers. Then as the earning school started and we started to look forward through to Q one, enthusiasm built up. What does look like and could we see a similar story today with JP Morgan. We could see a similar story with JP Morgan. But at the first glance, at least

the lending figures are kind of weak. We're gonna want to see what Jimmy Diamond says about the strength of the economy moving forward. At City Group, they were saying trade wars and all this geopolitical turmoil might not hurt until the fourth quarter of this year or later in the year, So a couple of quarters of stability might

be really good for these banks. So walk me through the long growth story at the moment, because one thing that jumps out to a lot of analysts in the early part of the release was just the credit provisions, more money set aside to cover potentially souring loans. What's the story. You're sanctionally within the numbers, right, the provisions

for credit losses higher is really a problem. Our colleagues on top Live point out that it's mostly from the credit card business, which is good news that it's not all from the mortgages, especially because mortgages have been having a tough market, both at JP Morgan and at City Group.

So you know, we're gonna want to see color about the strength of the American consumer, both in the mortgage markets, and then how much JP Morgan is extending loans in the small business just working our way through the rest of the bank. For the investment bank. A thing that's emerging at the moment is M and A Advisory is doing okay. Debt underwriting is terrible what you'd expect given what happened with leverage loans and fixed income in terms

of supply going into the year end. Just in terms of M and A, is a good pipeline here, a good story to sell for the pipeline. He's going to have to comment on it right now because the SEC is not even taking deals and so the first quarter of this year there is a bit of a backlog. There's a lot of turmoil, and you know, people don't like to do deals when the stock market is moving

all over the place. You don't know what you're paying, And we're gonna want to see what he has to say about that, and we're gonna want to see equity and debt underwriting figures turn around. They're both down at the end of the last year. Right to have us with us this morning. Brian Levitt, jointing US Openhama Fun Senior Investment Strategistic, joined us on the phone here in New York. Brian, it's another big consensus over White. We saw this story plan in as well. How does it

plan for you? So? I think the big story in is that we're actually having a slowing economy but probably a more a better environment for rates and inflation. So I actually think the markets will have a good year in but it goes back to the point where investors are going to be favoring true growth companies over you know, more of the cyclical names in the United States or names that are more value oriented. So it's a shift. I mean, last year was all about better growth but

not great policy. This year is going to be about slower growth. We suspect better policy, but that takes us back to an environment where investors, in our mind bid up the true growth companies. So, Brom, what does that mean for the nation's banks here in America? As we get the earnings yesterday from Steady Group and today from JP Morgan and both of them, just in terms of the numbers for Q four, which we had expectations come

in for already disappointing. Yeah, I mean I would. I would think that in a slowing growth environment and environment where the the yield curve remains relatively flat, that's not typically an environment where the financial sector of the nation's banks um are among the leaders in the market. I don't I don't expect that we're going into an environment where, you know, financials are a significant drag on the market, But I just suspect market leadership will from elsewhere. Brian.

Fascinating to me that the market is already getting ahead of whether the data is coming through. And what I mean by that if you just look at the recent survey from Bank America, like this fund manager survey showing GDP and earnings growth expectations totally plummeting. You see the numbers coming out of China absolutely terrible. But what I'm seeing is a market adjusting for maybe a rebound later this year. I'm looking at the high yield story in Asia and China, the junk bond story. A lot more

people constructive on that. That's a market that's bid Brian, Is that a little bit of a head fake? Is that the market going too far ahead of the data or is that a story you get behind. Now that's a story I would get behind, like I think that. What's what's transpired is, you know, the US, we had a lot of stimulus, the US decoupled from the rest

of the world. That led to a strengthening dollar, money being sucked out of other parts of the world into the United States, oil process collapsing, and that all kind of fed on itself, and the FED compounded it by suggesting they were going to raise interest it's multiple times. We're now seeing the flip side of that, in which the US is slowing back to trend. Yeah, China, Um, China is weakening, but um, you're starting to see some

stimulus come through. New credit growth looks favorable, So basically a stimulant. The catalyst for the rest of the world is the US moving back towards a trend level of growth, the rest of the world generally hanging in the dollar moderating. That's actually a better environment than what we had in eighteen when there was really good growth in the United States, but policy that was pretty disruptive to the rest of

the world. There seems to be a hope, Brian, that the stimulus coming through from China will be enough to stabilize the economy. It was very incremental to me, and there seems to be a shift as well over what they want to stimulate the economy with, moving away from infrastructure spending, moving away from leaning on monetary policy too heavily, and leaning into things like tax cuts. Now, have the incremental moves been enough, Will they be enough to turn

the story around? It's a great point because what you had in twenty fifteen and twenty sixteen was significant investment that led to significant Chinese growth that lifted up growth all around the world, and that was the catalyst. We're not getting that this time. So in essence, what you're getting is um efforts to stabilize Chinese growth near a trend level. And so the catalyst for the rest of the world and these higher yielding markets that you're talking

about is not going to be massive Chinese stimulus. It's gonna be what we call stimulus light. So that happens,

that stabilization happens as the US slows towards trend. It doesn't look exactly like fifteen and sixteen, but markets could play out similarly because similar to the twenty sixteen UM, emerging markets have been beaten up UM and you know, investor sentiment has gotten really weak, the dollars pretty strong, and you know this this stimulus light at it China could be the catalyst to unlock some of that volumee,

said Brian. Final final question for a lot of investors out there who are waiting for the data to confirm the turnaround, are you saying that by the time they've got that, they're going to miss the big chunk of the upside. Yeah, I mean that's how it goes. I UM like, I don't think that this cycle ends anytime soon. There's really not inflation anywhere in the world. I don't see significant excess anywhere in the world. So I suspect this is a cycle that goes on longer than people expect.

I think concerns of recession or hyperbole UM investors should be investing. This is one of those big bull markets, long term secular bowl markets that we get in our lives. I've been told you get three of them when you're too young, when you're too old to take advantage of the one in the middle, and and that's that's what

I think investors need to be doing. Hey, Brian, always great to catch out with you, Ma up and hand a fund senior investment strategist to run us through the markets and respond to the latest earnings with us now, kenn Ley on c f R A, he's been wonderful about giving his bank perspective. Kennon looking at the big k X of Keith brianton Wood's bank index down. Maybe it's worse now down a nice bounce. Frankly, folks, it's an elegant chart showing south Ken Can you be long

banks right now? You have to be cautious. So um, these stocks are beaten up the bowl case if you are long, would be there trading below book value. The return of capital is significant for buybacks and dividends. Um. Some of the businesses are stable, but it was a risk class environment. It hurt them in the fourth quarter, with them significantly in December. Okay, I'm looking at the size and folks. One of the things I always get upset about media coverage of the banks is we forget

how large these companies are. For example, JP Morgan's only a hundred gazillion dollars it comes in, they take thirty six cents UH down to the operating income line. Their net income would make GM blush. Net income is extraordinary, Ken. Within trading, how much of it is a variable cost and how much is it a fixed cost? Is they rationalize out two and three years trading to total net revenues for JP Morgan is important. It's just under of

total net revenues UM. You have to feed the beasts the infrastructure for both equity and separately fixed income currency UM. So essentially, if you don't have that volume, and we didn't have that volume in the sixth income side, even with some of the ratcheting down over the last six seven years with Dodd Frank Uh, still there wasn't enough activity. That hurt. And also you've got to get the trade right in terms of the higher riskier areas of fixed

ink on the derivatives. The big story in Q four was that it was bad. The debate, I guess, Ken, is to what degree was it bad? We're finding out it was worse than a lot of people thought. Fine. Q four ancient history. Let's get into a lot of people are looking for a window into the broader economy, show me the loan growth. How's that story progressing? Do you see some positive signs so far? From city group?

From JP Morgan Kent, the first quarter is very important, typically one of the strongest quarters of the year for JP Morgan. Um, what comes in reliably has been the consumer loans up three and fourth quarter driven mostly by consumer and credit card. Commercial lending was down two. Um, that's mostly on a down tick on construction real estate loans. But UM, yeah, I mean long growth, which is of large base in terms of revenues, has to do better. Uh.

You know. The other factor, and Tom gets at this, is that you've got two buckets loans banking, and then you also got net interest income. Um. And we don't have these steep ascension of rates, which means net interest income will grow. But the non parts, as you're addressing here, loans has to do a little bit better. In two thousand nineteen, credit provisions is a story for this morning as well. Can the numbers in JP Morgan suggested a bit of a provision build. What are your thoughts on that?

What do you see in the numbers? Um? Too hard to go through every one of the segments. I think it's kind of mixed. Um, I didn't see there was nothing episodic in Q four two eighteen to say that they're behind the curve in terms of provisions allowance for doubtful accounts or higher reserves. It's another way, of course. Also they get better net income. It's just, you know, be too aggressive in the old days, Ken, I'd ask you this question. So in honor of the old days,

le'sk it right now agony brings mergers and acquisitions. Are we going to see a new consolidation in various sundry banks? So M and A in two thousand eighteen was a significant year, but it's concentrated to large deals. Large deals if they get done from announced to complete, it take twelve to eighteen months. Um. That would be I think the story in two thousand nineteen as well. It's mostly

the America's in Europe. Not to worry about Asia for M and A. But to be firing on all cylinders on JP Morgan today, in City yesterday, they got to get fire up higher growth out of equity underwriting. The dead underwriting is kind of fading because that was used with tax benefits no longer there to fund stock repurchases. He can great to catch up with you. Busy morning for you. I'm so so thank you very much for giving us your time. Kenley on Global Director of Research.

It see our a so if that Jp Morgan, we have had City. We wait on Goldman over the next couple of days and Tom, I think Goldmen will be fascinating. I keep calling it a non bank. I know that that upsets Mr Solomon and Mr blank find but there it is, John the Green today Westminster bells ringing drums. I couldn't even hear the guests next to us. It was. It was on the edge of John bonhom of of

led Zeppelin. It was drumming John Bontom at Westminster. John, you know this is a band from you know, Jimmy Page and Plantifs from the Midlands and John no Zeppelin. I thought you were gonna give me the history to Zeppelin. Oh great album of all time. Don't tell Robert plants out of London and John. Now we have Victoria Houston with us on the Institute of Economic Affair, Senior Council, the International Trade and Competition Unit. Victoria, you are away

from the politics. You are away from the actual voting tonight and on into tomorrow and the next day. At what risk is the UK trade right now? What is the single thing that the United Kingdom will give up in trade with any kind of defeat for Prime Minister may Well, let's be here. A defeat for the Prime Minister and for the whistaal agreement at this point only means that at this point they have to come back with another plan um in um three sitting days time.

So while I'm sure if the vote were to to reject the deal today there would be some repercussions in

market sentiment, it wouldn't in and of itself mean anything. However, if it meant that ultimately the deal was rejected and the Prime Minister wasn't able to bring it back to the House in any renegotiated form, and so the deal ultimately couldn't be agreed at all, and come the twenty ninth of March and leave the European Union without overstore agreement, then you know that's when that's when the possible disruptions

to trade would kick in. I mean the disruption to trade in the messaging and all the newspapers this morning, is this measurement of how long the pain will be the leave people say, yes, there's going to be pain, will get over it and we'll move on. In the remaining people in four differentiates from what I can tell say no, there's going to be a permanent disruption to trade for an eye the nation. Where do you stand on that? Well, I think there's two different sort of sides.

So that there's the question of the immediate disruption at the ports because we've introduced we would have to introduce a new range of administrative requirements to import and export goods, and there are fears being raised of huge queues and tailbacks on the roads leading into Dover and Kelley, the main cross channel trade ports. And then there's the aspect of the more long term structural impact on our trade.

And I think the first side, the immediate practical steps, I think most people probably acknowledge that that would only last a couple of months at worst, while businesses adapt and the government believedly starts making the necessary steps that it should really have been making, um since immediately after

the referendum to to make the trade flow. Okay, well, the government, the government will take quote unquote necessary steps, but on a microeconomic basis, almost a microcosm basis, every single business will adapt and adjust in the United Kingdom, in Ireland, in Scotland, in Europe and around the world to the reality of London just separating away from Europe or do you doubt that that will happen. Well, we're not leaving the continent of Europe or leaving a set

of political institutions called the European Union. And in fact, the number of businesses in the United Kingdom that trades with the European Union is extremely small, um in in you know, in aggregate terms, there's only a small percentage, maybe six per cent of all businesses in in the United Kingdom actually do any trade with CEU. And interesting doesn't account for that much of our our GDP. Actually, um alth, it's a it's a serious and material part

of our GP. I think it's about ten ten percent of our GP is a constitute of trade with the EU. So the idea that we can't survive and the economy will will fall off a cliff and um everyone will you end up scavenging on the streets for food is really quite mistaste. Now some of that is out there to say the least victory, Thank you so much, greatly greatly appreciated this morning a fair senior council to the International Trading Competition Unit. We greatly appreciate that. Paul Sweeney

in New York. I'm Tom Keenan London and with us John Taylor, Stanford University, Professor Taylor. I've had the honors speaking to you any number of times about this, but let's revisit Taylor nine eight. John, this is a few years ago. You were sixteen a protege. You remember this well, and you and Gary mcelvo talking about sticky price's nominal rigidities in wage, in price stickiness, and to bring that forward to where we are now, Professor Taylor, the conundrum

for America has been wages that wouldn't go up. How sticky are wages right now? That's thanks for bringing that research up, but people still talking about it all after all these years. And I think the reason is that stickiness really had to reflect underlying fundamentals over time. So if you don't have productivity, growth, if you don't have the things that earnings, you don't get the wages. That's

that's what's all about. And this is important from London, Professor Taylor, because if I go back to Clement Atlee, World War Two, the mystery that Kane's faced of ugly unemployment, this election, to this vote tonight. Rather hearkens back to the twenties in England, which weren't like the twenties in America. We had an industrial revolution. Then maybe they didn't in England, Ramsey Donald and the sum of this is, we've been here before, haven't we. Yes, Uh, there's an up and

down similarities in the cycle. I think the big decision in uh London right now is key. I think they've laid it out. I don't know what's going to happen. You're you're closer than I am. But you did have some good times in the twenties. They didn't last. Theories were terrible on all over the world, Professor. We're experiencing this country something you know, I guess a little bit unique. That is a partial government shutdown. Do you expect this

shutdown to have any impact on the economy. The markets seem to be, you know, pretty much shrugging it off. Yeah, I don't think so. At this point, people talking about the FETs not getting the data coming in, but they have less of ways to understand what the data is. I think there's certain people that are are hurting, that's for sure, But the overall economy, UH, thus far, it's

doing fine. I think there's other other factors, of course in the economy that people are talking about, which tend to be bigger than the shutdown in terms of the overall economy. And what are some of those out on the top of your list. Well, I've actually been positive that some of the changes we had in the last year and a half, the tax reform, regulatory reform. We talked about the FED already that the concerns are are

are just doesn't want to us forever. And we've got a lot of alto in the markets, and people are talking about the history. John Taylor from and this is Stan Fisher, I believe in seventies seven and goes on to Manqueu and others. Is if we look at wages in the overlays. You mentioned earlier productivity and technology one of the new themes, and folks, this is a strange

word that's not spoken too often. There are monopxanistic tendencies within our companies and within the dominance of companies where they control the wage now like they used to not to do you buy the idea that it's a different wage calculus now because of the dominance of business. I think there's some evidence, uh that people have pointed to about Monopsony orle Ashtonfelder is one of them at Princeton. I don't think it's affecting the overall trend and wages.

I think that really is more productive and that's more the basic economy. But yeah, you can find elements of this, elements of probably just the differences from competition all the time. That's why I have more competitive markets, just because the time Paul Sweenia and I Professor Taylor have to switch to the acclaim of rules versus discretion. Where are the rules right now? Is there a rule book for Chairman Paul Well, you know they've written a lot and in

the last year and a half about rules. In their Monterey report, he's talked about it. The new vice chair Ric Claren has done fun and metal work about out. They're referring to it in there in their speeches, so I think they're they're trying to get back to this. It's it's never rocket science, but there's some good degree of predictability. They emphasize a lot, whether it's the balance sheet actions or interest rate actions. So we've been off for this for a while, so it's not easy to

get back. But I think you're seeing some signs. So Professor just following up on that, particularly on the FED and it's unwinding of its balance sheet. How aggressive do you believe the Fed should be going forward with this balance sheet? You know, I think they've done a good job since the old tapeer tantrum, which was quite chaotic, remember back to five years ago, but they learned from that and have been quite clear about what they're trying

to do. It's Uh, it's predictable, and that's that's what's good. I think there's lots of debate about its impact. I don't see much impact on the markets at this point because it's predictable and understandable. I hope they continue it that way. Of course, they'll be adjusting it and there's a big decision they're making this year about where they're going eventually with the balance sheet. So Professor is a former Treasury official. We would love to get your thoughts

on trade. Uh, it looks like this administration is much more comfortable with UM unilateral UH and bilateral type negotiations. And after the renegotiation, how do you feel or how do you view this administration's view towards trade and how do you think that's going to contribute or hinder the global economy. So it's it's quite different. And they've ever redone aft, of course, and there's more discussions with Europe in different ways. And the big question now is China.

I think what they've pointed to is there's some some trade practices in China they're trying to adjust. I think of the Chinese response to that it will be like what happened with the new after what happened with Europe. But we're not there yet. I think it's it's different. The strategy is different. I don't think the goal is different quite frankly, the goal is to reduce trade barriers around the world, but the strategy to get there what's

happening is different than in the past. Well, you mentioned China. How concerned are you buy maybe just the rhetoric that we're seeing going back and forth between the US and China. Is this something that the Chinese, from their perspective, need to get something done with the U? S How do you how do you think that's going to play out. Yeah, I think the Chinese do need to get something done. There's there's various things, Uh, there's tariffs, there's a restrictions

owner ownership. There's various things they could do. And I think the more that there's a focus on those details. Unfortunately, details are hard to focus on. But the more there is, the better that will be and you'll take away some of this clamoring. Let's not be strangers this year, Professor Taylor, thank you so much. John Taylor is at Stanford University. His public service at Treasury during two thousand one and two thousand two is noted, and of course his work

in monetary theory UH needs no introduction or review. John Taylor of Stand for That University, Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio