The U.S. Is and Should Trade at a Premium, Herro Says

America results, what do we say, yamen? Um? Well, you know, we we're all looking at tax numbers. That's what everybody is curious about. So they're the one time charged them that they took on three billion roughly UM is in line with what they said for so that there was no surprise there. We you know, there was some concern that they could add more stuff because there's you know, repatriation tax as well as d T A s UM,

so there's no surprise there. UM. I couldn't find the number for their effective tax rate going forward UM this for this year two thousand eighteen. Most of the banks have given that number. UH reporting so far, UM maybe they will during the call with analysts and and and durals later, But I didn't see quickly when I did a search for a tax. So so we're looking for that number because that's roughly you know, usually around you know, effective tax rates for these banks, the biggest banks have

been around thirty percent. Uh. They pay much higher than most other industries, um, because they don't have as many deductions. So we're gonna look for that number that I don't see it yet. It's going to be ninety one and around there. Um, you know, their fixed income number is really good. Um, what I'm looking at the numbers now, Yeah, at one point seven one billion dollars the estimate with one point six five better and estimates right, so you

know that's one of the area is trading. Trading is important for these big big guys and and um they're you know, trading has been has been down um this year every quarter almost um so. So Bank of America seems to have done better than its rivals in that front, um not losing as much. You know, trading revenue on fixed income is very important. And and equities same thing. It's it's uh um unchanged from a year ago. That's really that's really good. So they're so they're doing better

on that. UM. I was looking at their loans. Loans are growing still, UM and that's you know, that's very important. They growing loans constantly. It's slowed down, it's not as fast as it used to be, but but it's growing. So they're they're doing and their net income numbers really good. Tom. The numbers coming through from Bank America looking pretty solid, inline with estimates. Some single name issues stein Off popping

up once again. But the tanks impact is something that we're all kind of sort of trying to filter through and understand. Going through into I'd say, to me, it's almost old news now. It's like a kitchen sind quarter and the unions come out, folks, and trust me, there's pages and pages and even a grizzled pro like Yoman Honor in his trouble looking at these things. What's the plan Yaman for the first, the second, the third in the fourth quarter of two thousand eighteen, what's the strategy

they're strategizing when they strategize at these big banks. I mean, I think after the tax informed that they have to think about some of the things that that that they've been doing, um constantly. What one of them was, they had very strict goals for cutting costs. Um, maybe they can relax those some You know, there are a lot of banks have come out with saying, you know, we're gonna give one time increases to our bonuses to our employees,

the Bank of America being one of them. And you know, so maybe they don't have to cut costs as harshly because oh, look they have this wonderful tax bonus which is going to really help the bottom line. Um. You know, as I said, if you go down from twenty nine percent effective rate to nineteen percent effect the rate, that's great. You know you chopped off one third of your or if your tax so you can keep that, which means you can you don't have to cut costs as harshly.

You know, you can actually relax a little bit and say, oh, okay, we we you know, we can actually make more profit. Yeah, and thank you for telling me to buy shares at thirteen dollars. Bank of America moonshot out of this fourth of July cash leverage DTS. I am in the double leverage all cash from trust me y'a. I'm an honoring with us and he will return for Golden Sachs Drama at seven thirty this morning, right now in the global

drama of our global economy, Jennet Henry with us. So they just bc joining us in our London studio for too short visit house Investment. We were talking about consumption earlier in that with the tax legislation in the United States, with the effervescence we're seeing out there every day, do you actually see capital investment nation to nation? Jenna, We do you see some improvement in investment? I mean, there has been some pick up already in two thousand and seventeen,

but it's been a familiar story. It's been energy and tech investment. There is a bit more incentive now to invest more, both with the repatriation and with the tax cuts, but most likely a lot of the games from that will as is often the case, I mean, the money's shareholders or to M and A UM and any improvement and fixed investment is likely to be relatively modest. Janne

Henry Larry Fink. Running to some of the world's biggest CEO is of course to boss over a black rock and pushing them to invest more in the future, Can the like Selary think, really push these CEOs to do something they haven't done in a material way over the last couple of years. Uh No. I mean the biggest determinant of investment spending is expected future demand. And I think also the outlook for investment will depend on what

happens to labor. Now, you know, we can talk about Philip's curve, but the fact is this has been a very job rich recovery, arguably because labor has been so cheap.

If we see some signs that wage growth is picking up a little a bit more, if companies are getting more confident about the outlook for future demand, that's likely to be the bigger driver of future investment spending and hopefully stronger productivity growth because we've seen such low investment growth rather than being told to invest more or necessarily given tax incentives, which may as I say, just go into M and A or or ento higher dividends. So, Jannet,

you raise a really important point. If the investment prospects for the CEOs are based on future demand, then what does it say about their belief in future demand that they've been choosing a buyback stock and increased dividends and not invest for the future. World shareholders haven't necessarily punished them for that, but for not investing for the longer term.

And there have been a series of uncertainties over the last few years politically, um and you know, in terms of monetary tightening and and various other factors around the world. But I would argue that the still relatively low level of investment growth relative to GDP growth would suggest that

they are still or just not more confident enough. But growth expectations are being revised, which is why we might just see a little bit more dove till your HSBC economics was Steve Major's hall where he was brilliant for two years or so on low interest rates. And we've now come up and Steve has always said we could come up and yield, but dovetail that HSBC reticence away from higher yields. Do you shift that? Are you? In

Steven speaking terms? How does that work? Steve's view is very has very strong foundations in our economic view and has for a very long time. Jenny Tom, he's just trying to call problems HSBC. Don't worry, no, it's we've very much been in the low inflation Camp and we

think a lot of these influences are structural. I think the difficulty with markets is that their mind set is still framed in the views of the nineteen seventies, eighties, nineties, and two thousands, where it's all about nominal growth and inflation. And actually we had extended periods before that when actually long term interest rates for little or no relationship to nominal GDP growth. We'd only see high yields if we saw much much higher in put and potential very quickly, Janet,

that goes to potential GDP and productivity. As you just said, where's potential GDP in the US sub two percent? Right? Yeah, absolutely, I think it is sub just amazing, Jennet, never enough time. Thank you so much, Henry, thank you. With HSBC today they're they're head of Global Economics. Wonderful to ever in with us. John Farrell, New York. I'm Tom keenan London. Of course, everybody looking at the fourteen different stories coming out of Washington. Any number of ways to tackle the

Wednesday events in Washington. John H. Deck is at Brookings Institution where he tackles the bigger picture, the longer picture, a really interesting book three or four years ago, Presidential Park, just about the actual way that money moves around Washington. He's been looking recently at how the two parties are responding into two thousand eighteen and two thousand and nineteen. John,

Let's look back quickly here. How did the Democrats lose the demock the traditional Democrat voter in states like Michigan in Wisconsin. Well, I think what a lot of voters in those rust belt states saw was an economy over eight years that was recovering but was largely leaving them behind. Either they were not getting new jobs, or they were not getting jobs that were paying as well, or was the stable as the ones that they lost during the

Great Recession. And that built up some frustration, um from some frustration with the Obama administration and with Democrats. And Donald Trump very effectively spoke to those voters and told them essentially the old Bill Clinton line, I feel your pain and I'm going to help you. Well, where are those Democrats now? Are they've been pushed about? I mean, I mean to go to the stereotypes. Are the progressive

eastern left coast? Are progressive ultraliberals? Are they going to be in charge or can there be not a new Democratic party, but maybe one that looks a little bit like it look years ago. Well, it's it's an interesting mix, right. So you have obviously a Democratic party that's turning, uh strongly toward progressivism, and with that comes some social issues

that can turn off moderate Democrats. But at the same time, these progressive Democrats are also talking about issues like healthcare, like uh, increasing the minimum wage, like helping retrain workers who have had industries sort of taken out from under them. And those are the types of messages that those voters want to hear ultimately, and if they can convince uh, those voters that they're actually going to do something about it, they can win them back. I want to go back

to your wheelhouse book, Presidential Park. Does this president believe in pork? Oh? Absolutely, every president believes in pork, but that president does as well. Um, this president does as well.

So we're seeing this not necessarily in the allocation of funds, although there is some evidence of that, but in terms of how tax policy is playing out, with issues such as where to drill offshore in the United States, the president is very sensitive to what swing states want and to what Republican States want, Well, what's you're reading on infrastructure? Brook insist on great work over the years on transportation and infrastructure. Is the infrastructure story of the next ninety

days maybe days? Is it gonna be the same old, same old bridges to nowhere? Or can we actually get JFK Terminal one fixed? Well? I think the President is well positioned to understand that there are a lot of needs in this country and he does want by all accounts, a pretty comprehensive infrastructure bill. And John, why can't we get that done? I get this everywhere I travel, even in London. I get this from people in America. Why

can't we fix this? I mean, it's totally unacceptable. This is a situation in which there are conservatives and Congress who do not want to spend government funds UM. They don't think that there is going to be an economic stimulative effect. They didn't think the stimulus had a stimulative effect UM, and they just don't buy that that type

of economics UM works. And the reality as we know it does and we know, regardless of how much money it pumps into the economy, we also have a crumbling infrastructure. So beyond all of the economic arguments. There's just a functional argument that we have here, and I think most Americans are going to be up in arms, uh if something like that doesn't get past, and frankly the president should be too. Is something about our history? Is it? Is it a legacy of two hundred years or do

you do you dated at a certain point. I mean Eisenhower built the interstate road system. Yeah, I mean we obviously have some historical trends in this country that that uh, pressure towards less government intrusion, less government spending. But some of our biggest spenders, some of our biggest supporters of infrastructure in American history have been Republicans, like you said, Eisenhower, Nixon,

others like that. Um. And so we're just at a crossroads in our politics right now where helping rebuild airports and roads in bridges is somehow economically bad and politically nuclear. It's it's a bizarre situation. We got to do more on this. Love having you on. Thank you so much for the Brookie's institution. Really with an interesting remit in the think tanks in at Washington, his performance is not flattened. If you go to the Bloomberg and you look at

fancy pants mutual fund managers. Nobody can touch David Harrow for performance. Over the last eighteen months, his international stock performance has been truly upper decile. He joins US now with Harris Associates. David Harrow, can you keep it going? How far into the football game the Green Bay Packers playoff green Bay Packers super Bowl bound football game? How far into it are we with international stocks? Um, we're gonna have to wait till next year for the Super Bowl,

but not for international stocks. Now, I think the good news about international stocks there are still decent pockets of value. And in particular, if you look at where the European equity markets are trading versus the world, you know, there's somewhere around thirteen and a half fourteen times next year earnings towards and we're towards it. You know, we're just coming out of the bottom of the earning cycle, so we have rising earnings at relatively low valuations. Um, everywhere

else it's getting tougher. You just really have to be fussy stock by stock by stock. The US of course is selling at a premium to the world, but you know, I always argue it should trade at some premium to the world because it earns the US corporate USA earns good returns to our listeners. By Europe, blind I brought up Siemens s I e g Y is the euro based stock Semens Big Engineering Manufacturing. Maybe it's what Generous Electric wants to be. Here's the headline, David Harrowd, I

got a three percent dividend with minimum dividend growth? Which do I want in Europe? Do I want these guys to give me more dividend growth or do I just take the fat dividend? Well, what we always say about capital allocation is we want the management teams to make the decision in terms of a capital allocation that leads to value creation, and if they can't put the money back in their business or make a reasonable acquisition or paid on debt, then they should give it back to

the owners. But they could give it back to the owners whether it be in the form of a dividend or a stock buy back, depending on the stock valuation. UH is really the variable that determines which of those to use. So just pain dividends itself isn't good. For instance, if the company has a payout ratio, that is, if they're paying out more than they earn. Perhaps they shouldn't be pain such high dividends. That dividend is unsustainable. So

there's so many factors, there's so many fascists. John Ferrell, BMP Perry Bob Paris has a four point one percent yield and the equity is performed well as well. I think what strikes me as an incredible um looking at David Harrow's portfolio is not just the performance last year, but the minimal exposure you have. David tooned States, and I want to get fussy with you and talk about some some single name issues. You've been in Glencore for a long time. You start with Glencore when the stock

was rolled it over in a really aggressive way. Now it's delivered, some people would say that it's still trading at a discount versus a b HP and a Rio. Why do you think that is? And it's there still space for this to rewrite. There is still space for glen corter re rate. And really if you look at the situation of Glencore today, you know, very very low

dealt levels. Again, don't forget unlike those other mining companies you mentioned, over a third of glen Course profitability comes from a very profitable and probably the best commodities trading business in the world. And then if you look at the extraction the minerals and metals that Glencore extracts and minds verse b HP. For instance, UM you see copper and nickel and you don't see iron ore UM iron or is something with an extremely flat cost curve. So

if prices go up, supply could expand greatly. This is not something you really want to be exposed to. On the other hand, b HPS had a very very sour record of capital allocation. Now they have a new chairman who's quite good, but I mean they really made some big mistakes, whether it's being potash or u S energy. We've got to leave it there, David Harrow, too short of visit today. We look forward to a longer conversation with you in London, in New York or at the

Super Bowl when the Packers play next. David Harrow, So the Harris Associates in Chicago. He is a citizen of the nation known as Wisconsin. Is the market really inured or desensitized to anything negative? Let's find out from our next guest, Christina Hooper, is invest goos chief, a global market strategist, and she joins us here in our eleven three oh studios. Christina, thank you for being here. So

are the markets completely desensitized to negative news? Well? I think they certainly have become desensitized to a certain extent, although every now and then a whiff of reality hits markets and they react. And we saw that yesterday with concerns about a government shutdown. And what about animal spirits? Do you think that there's still a lot of excitement left over tax reform or tax overhaul and could we see some infrastructure spending If we talk about that, maybe

it will happen and people get excited there too. They're definitely animal spirits about tax reform still. Um, I'm surprised to see just how excited many companies are, just how generous they've been in terms of giveaways to employees either increases in in pay, one time bonuses. And I do believe that the prospect for infrastructure will keep some level of excitement and markets going forward. Christina, we just see

with the production industrial production number is pretty good. The two year yield really break out to new levels almost to two point zero four percent up up, We go with that yield grinding up, but other yields really not participating as much as that center tendency to year yield. To an equity person like yourself, what does it signal when we see a two year yield have a life

of its own, Well, what it suggests. I mean, usually the two year hughes pretty closely to where we see the FED funds rate moving and where a monetary policy is going. So, um, what we're likely to see is is um, you know, rate hikes in the future, which we knew would happen. We're gonna make some news here. We're gonna see something January thirty one. I mean, you want to surprise as best as you can. That's the time to do it. Right. Well, I don't think we'll

see something January thirty one. We just haven't seen enough data that suggests that, um, we're going to see higher inflation UM by the time the f O m C meets. But having said that, we could certainly see the Fed rays rates more than expected in we have an entirely new Fed. UM. We also have to be prepared as equity investors for the potential for a flattening yield curve and all the implications that that has for the stock market.

Do you assume And this is really interesting, folks, because Christina is with invest Goo, an investment house where she's not really trying to game the forecasting game day to day. But part of your discussion there is a presume good g d P? How good is good? I mean, do we need to get used to two point four or two point six percent is good g d P? Or can we actually do a lot better than that is indicated by the two year yield? We could certainly see

three percent GDP. We're an environment of global growth and it doesn't look like there will be a slowing of that growth based on where we're standing today. Having said that, though, our greatest risk, I would argue is central bank tightening and the potential for central banks to tighten more than expected. We've got the ECB starting to taper, so it's not just a FED story, but I think the FED is front and center in terms of risks UM for markets.

In what would cause them to tighten more than expected? I think largely it would be based on data that suggests higher inflation than expected. The FED is certainly concerned about overheating UM, but they're always concerned about overheating, They're always concerned about underheating. They're always concerned about something. What event would take place or what number or economic metric would cause the Federal Reserve to raise interest rates more

than people have estimated. Well, I think, quite frankly, it's a lot to do with what tax reform might mean for the economy. So we saw some contemplation about the tax reform legislation in the December f O MC minutes, and so certainly there's higher sensitivity to um what tax

reform could do to an economy that's already accelerating. But tax reform in terms of what bringing the money back overseas or reducing the corporate income tax while the economy is three quarters the consumer, Well, I think what we may see going forward is that companies shouldering more of the growth. We've certainly seen corporate spending that has been fairly anemic since the global financial crisis. Now capex spending has picked up, but we could see a big boost

of capex spending because the tax law incentivizes it. You don't believe that they will be spending that on dividends and share buy backs. I think to a certain extent, they'll be spending it on dividends, but they're incentivized to be spending it on capex. And quite frankly, what we do see, what we've seen historically, at least by companies, is they've been pretty good at timing share buy backs.

They don't do it when markets are arguably more expensive, or at least when their stock is arguably more expensive. So I don't think we'll see a lot of share buybacks in two thousand eighteen, especially with valuations where they are today. All right, Christina Hooper invest Goes a chief a global market strategist. 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