Surveillance: "Wait And See" Mode After Draghi, Coronado Says

guys up to a bt i G. Yeah. No, Well, look, first of all, we're historians, and the FED cuts rates after hiking cycles. Generally they start within five to six months after the last hike UM and so so the one time they didn't was two thousand and seven. But it's more than that. The FED is very cognizant of the message of the yield curve. We're not believers in in in the yield curve in version. We we strictly adhere to twos tends, but the rest of the market

does look at it. Uh So, the psychology of recession has started to form. We saw that in the plunging yield. But more importantly, the FED wants inflation. The Fed is is very focused on stoking I want inflation to come on. There's technological change starting with Uber John's I said on TV today, John, did you really try to get thirty thousand shares of Uber popped on Uber? Can I just

editorialize your folks, it's like worldwide. After doing this show for forty years, John, you've been a saint about this. The I p O giddiness, it's just ridiculous. While the reporting from Bloomberg suggesting that we could get a filing for that ip as soon as tomorrow like a RAM, and maybe a listing as soon as May for Ruber. So the IPOs are snacking up. You know what some people will be saying, Julian, this is it the C suite, as some of these private companies see, this is the

final opportunity. The window is closing, Let's go public. What do you say back to that, Well, there's no question that you know, when you think about the activity the last several weeks, there's been some major, major deals, major ones coming and you could say that our point of view is that what you've really seen is a lot of that risk has occurred through the private investment markets over the last call a dozen years or so UM and in actuality when you think about evaluations, we're not

to that froth point yet. So let's dig into the rate cut call and why you still think stocks can go higher. That's hard to reckon sile for so many people.

If you have the environment that's fertile for a rate cut that is tipping, not the environment that risk assets perform well in Why do you, at the same time as predicting forecasting two rate cuts this year simultaneously forecast a higher equity market because it doesn't necessarily have to be that sort of seeing recession in the whites of the market's eyes if you look at it UH in a time where we think there are similarities. The Fed cut five months after the last hike in in early

just because inflation UH and growth dipped briefly. We are in the midst of the soft patch. We're not necessarily in the midst of a recession of any sort. But the Fed wants to also give the rest of central banks UH flexibility and that means rate cutting. Julian, The charm of your research notes is the first two pages are in English, and then the rest of it is all this derivative mumbo jumbo which basically centers around what's the bet of the market, what's the bet of the

market right now? Like what actually are hedge funds doing, what's the long only buy side doing? What are we doing actually doing and not talking about? Well, the bet in the market is that equities are going higher, But interestingly enough, that has been a very grudging bet over the last several months, and and in fact, without without Gamma, there's no pop to it, exactly exactly, And and our our concern in the very near term is that this vaal selling has gotten a bit too carried away, well,

like February of year ago carried away well. So there are actually two examples. There was late two thousand and seventeen when val sellers were so extreme that they actually ran to the outside. But also like the same as last year where you had on the downside move is comment John Gamma, g A M m am in the Greeks. We're doing the Greeks today. It's Greek onesday. Looking for a short term pop involva. Over the long term risk assets performed well. Just walk me through the thinking care

of but what time. That's exactly right, so so and again this short term pop involved, particularly if you get good news, um, you know, market satisfaction with the breggsit extension, the potential for some sort of Chinese deal to materialize, um, you know, that is where volatility could actually pop on the other Okay, we need to talk about that. That's a catalyst good news as a catalyst for higher volatility.

Walk me through it. So if you go back, the way to think about this is sort of the end of ten, beginning of eighteen, and Tom alluded to it with February. Essentially you got into a performance chase and there are a lot of people that are behind their benchmarks, came into the year under invested, remains somewhat underinvested, and that kind of psychology that chase, particularly if the Fed continues to indicate that it's got the markets back, uh,

causes volatility to expand down the opposite. Do you know, Julian, it's it's amazing on your channels. That's what John and I do every day. We do a performance. Cheez Can we talk about a performance just briefly that's going to take place on Capitol Hill a little bit later, speaking of volatility the House versus Wall Street. That's what it feels like, That's what it's teed up for. With Jamie Diamond, David Solomon, Brian moynihan, Michael Corbett, James Coleman all going

up against the House Financial Services Committee? What does that bring a little bit later other than theater, what are you looking for from that? Julian well being overweight financials? It always concerns us when you've got executives testifying on Capitol Hill, and it's one of the reasons that were neutral rated on technology because we continue to see technic

technology executives in front of Capitol Hill. Essentially, what they're gonna do is try and convince legislators that the system is far better off and that they are really, you know, socially conscious. In this new age, there's important phrases that you see, say the late nineties into two thousand one, two thousand six over to two thousand seven. Julian yesterday, I'm Blueberg surveillance. We heard one of those phrases of the era, the debt hamster wheel? Are we on the

debt hamster wheel now? Where we're gonna be like two thousand six worrying about every ten basis points. UH with a yield below two fifty in the ten year, we are going to worry about it every ten basis points, which goes back to our fall for rate cuts because we actually think that if you cut rates, you can potentially stimulate inflation expectations increasing the yield at the long This is just you know, the guy goes to work for Rich Greenfield and he becomes radical, radical, got to

keep up with Rich. I feel like once she leaves the Swiss Bank she becomes unleashed a little bit true. There's a lot going on, Thank you getting a manueout BT. I g chief E put into rivatives rategy shop glens with us with credit Sweete, and I guess shop where I want to go is Mr drag. He's going to do everything not to move the Euro. And yet you've got to decide if there's alpha or pop or gain either way in the Euro. Is the Euro movable over

the next six months? Well, the market has sold implied volatility in the Euro in massive size for the market certainly thinks that there aren't many reasons for a large euro move. I think in terms of today, the biggest surprise would be if, as part of the Q and a um ECB Chief Drug decides to address head on this issue or the stories in the markets around the

possibility of tiered rates in the future. I think if there's a substantial discuss and around that topic, then I think the Euro could move, and it would probably be to the downside. Let's talk about the move to the dance on and how difficult that would be. Euro dollar has really struggled to break one two a half and we've thrown a lot at it. What is it going to take to get the euro to break that level?

I think it's going to have to be something like like what I just described, some something along the lines of a conversation that raises the possibility of new innovations in monetary policy designed to address more specifically what we can see, which is very low inflation, very falling inflation expectations, and a high likelihood of the e CV missing its

targets for inflation in the future. Until now, Drug has maintained that ultimately the economy will cover and the inflation expectations and inflation itself will move up against So anything that suggests that there's a greater risk that that won't happen. We would need to see that before the europe can conclusively break down through those levels. In John Field, this is critical because Shabs and the trenches and this this massive, as you call it, binary call. John does coming up

on what central banks do? What is the e c BAS next move. I mean, President drag tease the prospect that we could have a tier deposit rate of the e c B or they would do something to offset the pain of negative interest rates for financial and the financial sector. Shahab, It doesn't seem to me that that's

on the horizon in terms of happening anytime soon. No, that's right, and I think that's the reason why, as we discussed volatility in the urine imply, volatility is so low and one markets are basically betting on the current ranges holding um. It would be a surprise if Frankly, if today he decides to make a big issue of

these of these themes. But the thing is, it's still difficult to completely give a zero probility to this because ultimately it's still the case that the economy is shaky and certainly inflation data a very week so that you can't really hide from that, and that's why we stair alive to this risk dumb question of the day which we just take for granted, but I think for a lot of our audience, it's not a dumb question. Can

the ECB cut rates? It's still technically possible. Um, there are central banks, for example the Swiss National Bank that have even lower rates than the u CBS current rates. There's a debate about how useful that would be, particularly for bank profitability and therefore credit creation which comes from banks ultimately in your area. So but it's but it's

technically possible. And again that the issue is what does the CD do if we go into another major slow down with another big fall in inflation expectations when it's tool set is as limited as it is, As long as the market doesn't perceive there to be a wide range of other options, it will still keep open, keeping up in mind around the possibility of more negative rates, which again, you know, I think hells us that maybe the problem lies elsewhere in all of you that if

they don't go into be a solution, it probably will need a fiscal component. UM probably need the countries that have room for fiscal expansion, like Germany, to the player role in that. But that doesn't seem to be on the menu. And Joan, wasn't it ten days ago that Cherry Yellen in Asia said exactly what you heard Mr Jones say. I think so many people have made this point and for whatever reason, Europe just doesn't want to explore the policy options Jha. But I just don't know

when that changes. When does the penny finally drop that you need a counter cyclical fiscal policy in Europe. I think the difficulty there is it's not so much in the fact that it's not been discussed efficiently clearly it has. It's just that philosophically, obviously the German has been disinclined to go that way, but also maybe they want to see more signs of reforms that they approve of in

the other countries, big countries like France for example. Um so there's a quick pro crow thoughts playing out here. The question is whether the European economy can sustain itself long enough for this to really work itself out. Again. This this plays into the view of some who believe you need crises to force the issue, and in the absence of those nothing much happens, which is why so

many investors tend to have a structural bearers your review. Well, let's talk about that structural bearers your review and talk about the cycle as well. At the moment, your view is a different degree of bad. It's weak. Will agree that it's weak in Europe, but to what degrees you have, because manufacturing is very much weak in a recession pretty much, services is okay, the hard data is still coming out. Okay,

the soft data looks terrible. How do you think DR actually analyzes the Eurozone economy today with all of those different things going on. It's not that clear. It's really not clear because there are other problems too. For example, we don't know whether the US and President Trump will push on and force the issue around auto tariffs, which obviously, if the US were to impose auto tarmas in Europe

would be a new economic shock. Uh and something that isn't currently has been talked about, but I wouldn't say it's necessarily in the price at this point in time for the euro or maybe even drug his assessments of the future. So I think it's very difficult because of the changing nature of global trade relationships um and especially for the Your area being a net exporting region largely

used to Germany. This is a key factor I think in terms the current data, as you suggest, you do have the split between the services sector and reasonable employment outlooked by European standards on the one hand, and yet obviously this terrible manufacturing story and the other. But I think ultimately you know what I'm looking at there to

to solve that dylemma is inflation expectations. And if you look at some of the e CVS own favored measures, example the five year five year inflation swell for it, uh, they'd been falling. These are in session. Expectations are going lower and I haven't bounced too much yet either, even with positive news like China's upside p M I surprises so much. So I think that as long as that's the case, we should lean on the side of VCV having to be remaining under pressure to come up with

new ideas. Sham Johns with us with credit sweet, thank you so much. Right now. Julia Cornado on a weaker Euro, I mean the Euro Julia is just to be direct, really floats off of every word that Mr Droggy says. What is the significance right now of this weaker euro. I mean, nobody really expected the market wasn't really looking for dragging to deliver a lot today, and he didn't.

And he's sort of dancing between the raindrops in his comments, sort of indicating that they're studying what they can do and that they're willing to do more, but also trying to stick to that optimistic baseline. But uh so there's a little bit maybe of disappointment that he didn't deliver anything, or maybe that he sounds still a little too um sanguine and about the outlook and less willing to do what needs to be done. But you know, it's it's

really not a big reaction. I think we're still going to be in wait and the mode after this meeting. Uh the one what the data do and what the ECB comes up with. One question went to what we spoke about earlier on Bloomberg's surveillance, this idea of looking out five years and then five years forward from there. So when when the pros talk about a five year five year forward, Am I right, Julia, that that's a

ten year guestimate of inflation. Yes, that's basically what the market is thinking is trend inflation and they're we've seen a real deterioration in market expectations for European inflation, and I guess that's where probably some of the disappointment comes, because Draggy is downplaying that deterioration, saying it's it's just risk premium, which is what central bankers say when they want to sort of dismiss it and put it okay. Does the market have a good track record of getting

tenure out anything right, let alone inflation. We can't even in forecast inflation in the next six months, let alone the next five or ten years. So I don't think anybody's got a good Julie. We'd go an hour long with you, but we've got festivities in Washington. We're gonna run to Paul Sweene and I are going to begin to frame out a bank conference. We thank Dr Coronado for a really good perspective at this morning, across all

of Bloomberg surveillance on television and radio. We are beyond honored, Paul Sweeney and myself to have a gentleman who is the only gentleman I would like to talk to on this bridge from two thousand eight o nine to where we are now, with bankers defending City Group at ugliest negative eight billion operating income than positive fourteen billion bailout operating income up now, Mike Mayo to twenty three billion

of operating income. Do these bankers come before Maxine Waters minting money look at night and day versus before the financial crisis or during the financial crisis, and what you've seen so far. So far, we've had four CEOs testify, and there's a contrast between three of those and one other. And so Bank America they said they recognized the damage

caused by the company. Morgan Stanley, the CEO, said, if not for the support attack payers for a Right Night survived and City Group CEO said it was a searing x And moynihan went right after ken Lewis secondarily here talking about country Wise that it's not my faults, my predecessor that fought this from that was one of the worst acquisitions. There's a strivancy to tone that the three of us, we've all the combined three of us folks in the studio have been in forty two thousand three

D twelve conference calls. This isn't a normal conference call, is it. This is pretty unique? But in terms of being night and day. There's one statistic that really sums up the strength of the banking industry the fixed income market. There's a trillion dollars of bank bonds out there and the spread of those bank bonds in the last decade of decline from seven hundred basis points down to a

hundred basis points. So if somebody says the banking industry is at big risk today, what we would say back to them is we have one trillion dollars of bank bonds that disagree. That's right. So, Mike, what would be a success for these bankers coming in front of the Democratic House. They haven't had to do it since the financial crisis. This could get ugly. It's starting out pretty calm here. What would you define a successful day for

these banks CEOs? A successful day for the seven banks eato us that are testifying is that there's no headlines, there's not many articles. By the time we get to the weekend, there certainly will be a lot of press on this today and tomorrow. But make no mistakes. So it's one misspoken word or one dad answer that could be really damaging the reputation. Where do you think they might be most exposed. Is it diversity and hiring, is it lending? Is it compensation? Where do you think they're

most exposed? Well, I think compensation is an issue not when banks perform well, but when they don't perform well, because that gives a perception of a system that's not fair. And so we published a report about the Estate Street CEO over the last nine years made a hundred fifteen million dollars even when their primary target got worse, not better. Its predecessor. It's predecessor, So you know this, But this is the realm. This should be the realm of shareholders.

So you know nature abhors a vacuum wash and DC loves one. So if shareholders don't step in and control compensation, then it's an invitation for Congress to say something about it. Okay, we got in a couple of gun number of minutes before this. We're gonna go back to David Solomon of goldn Sex here when he steps in. But Michael Mayo, this is critical and this goes back to you for you know you you were Jackson, it was a bank

of the United States. When you begin securities analysis, right, I mean, it's always a tension of Washington in the mean capitalist New York City banks that this goes back to Jape Moore, goes back to Jefferson. I would suggest as well, that's never going to change. So what is Mr Corbett through Mr Solomon alphabetically, what's their best outcome today knowing it's never gonna change. Well, you know, I think Jamie Diamonds, uh, you know, ceol in the Any

report just came out last week, sums it up. He goes, Sometimes the job of a banker is to not be liked because you need to say no sometimes. And you know what when Congress people say, you know, make more loans, well, lending is an output, an outcome, not a decision. You can make as many loans as you want, and that got us into the subprime crisis for sure. So I think it's just a matter of it's a natural sometimes a healthy tension. You don't want banks learning too much

because then you do, indeed have a financial crisis. I was surprised Paula didn't mention the number of construction workers that are going to tear down and rebuild the Palace. I mean I looked it up. The Ocean Bay apartments or whatever in Rockaway Beach and there it is on Google is is is. One of the bankers mentioned that as well, Paul, So, Michael, do you think that, I mean again, post financial crisis, a big layer of regulatory oversight came up to the global banking industry, the US

banking industry. Do you feel like we're at a point now where they can start pushing back and saying, listen, we the system is much safer now, we can pull back some of those regulations off of the cities and the JP Morgan's or do you think the CEOs don't even want to go there? Well, I don't. I think you're the way you phrased it, pushing back. I don't like that phrase. I think preserve the safety and soundness of the banking into stree. It's stronger than it's been

in decades. Having said that, you know, improve the efficiency of regulation, improve the transparency of regulations, improve the effectiveness of regulations. Regulators did a great job. Regulators should take a victory laugh. But now it's time for a look back and say, hey, can we have this effectiveness of regulation better? How did the new mergers fold into this

BB and T and whatever? I mean? They were beginning to see what you've predicted for years, and you know those of your ILK insecurities analysis, they're all gonna fold up. They're gonna roll up. Not Canada like, but the big banks are gonna get bigger in America just because they

get the technology technological edge. Don't think well here in the tenure anniversary of the financial crisis, and the immediate catalyst for banks getting better, it was banks, you know, pretty much almost failing, and then banks got much bigger before they were really equipped for that size. In the last couple of years, you're seeing now that Goliath is winning. The largest banks have become more efficient and generating more deposits because of the scale of technology. So if you

if you can't beat them, join them. And you had the B B and T and and SunTrust merger. The first reason the game was gave was to get better economies from technology. Soldier with us today, Michael Mayo, where us with Wells Fargo. They are not in attendance today. Of course, we wouldn't want Mr Mayo to comment on Wells Fargo executive policies and such. We're listening to bankers of eight banks, including State Street and Bank of New

York Melon as well. We await Mr Solomon of Golden Sex, Paul, when you try to squeeze in one more question, extinguished Mayo exactly, and Michael's seen this come and go many cycles to the banking sector. Is there risk now that we have a more progressive part of the Democratic Party in the House, Now, does that increase the risk for

more regulation on the banks? Not less? Well, the importance of the hearing today by the seven CEO s is, you know, sound bites can turn into policy, ideas can turn into presidential agendas, can turn into legislation, which turns into regulation. So this might be a preview of what's to come during next year residential election. And beyond dumb question, is President Trump pro big bank? You know that was

a very tribal question you just asked. You know, I'm serious, Like it's almost tribal now either four big banks, you're against big banks? And can we just be pragmatic whatever best for the economic system is what we should support. Okay, Mike bo with us with Wells Fargo. We're honor to have them with us. 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