 Hello and welcome to episode 102 of the Market Maker podcast and Piers, I can see you're joining me from a different location. It's either Shoreditch in London or New York City. Where are you? New York City, baby. Yeah, landed. Well, landed yesterday. Yeah, in the Big Apple. Is this business or pleasure? Business. Yeah, a couple of a couple of big things going on actually just so kind of big big event and running for Citadel. Tomorrow, well tonight and tomorrow, a bit of a networking session tonight. There's 130 students that they've sort of selected from universities all over the US. And they're coming up to New York and a bit of an event tonight and then yeah we were taking them through our market making and quant trading simulation tomorrow so yeah. And then I got a bit of time for Sunday I got working Saturday but Sunday free but the next week I've got a big Morgan Stanley simulation going on on Tuesday. Yeah, so hitting some some big clients, but then you know sightseeing on Sunday maybe a little strong my home just around the corner from Central Park. Actually just a couple of blocks away. So, yeah, get the tourist action in somewhere. Okay, well, you know, when I'm in the Midlands next week. You know, not downplaying the quality of the Midlands in the UK but yeah, we should. Yeah, that's true actually I get New York you get Birmingham. Yeah, nothing wrong with that. So on the agenda for this week then want to talk about a couple things going to blend a bit of a single stock story and a bit of education around how some financial institutions structurally a different from others because I know that's important, particularly for students who are applying to these firms to understand that unique difference between investment banks. So not even going as far as what's the difference between sell side by side what is the actual difference between investment banks themselves, like, Goldman's to JP to MS and others. So we'll touch a little bit on that, and then we'll talk macro because this week we've had us q for second reading of GDP, we've had the Fed's preferred inflation figures PCE. And we've also had the latest FMC minutes. So want to get your take on those events and see whether or not that's shifted the view on markets at all going forward. So, starting off, JP Morgan, they could have exclusive access to the VIP club, the $1 trillion club, which is normally reserved only for tech, big tech people, tech firms. And that $1 trillion club at the moment, it's, well, Apple, Google, Microsoft, Tesla briefly didn't they, I think they flirted with it and then obviously got chopped back. What about Facebook they're not are they in it anymore. They've also been hammered over the last sort of 12 months, but so the idea here is then that JP Morgan could become part of that club. And, you know, from a very top level perspective kind of make sense with tech, or perhaps you could explain that why are the tech valuations so wildly different to a bank, for example, from a sector equity perspective. But one word growth, or I should say maybe two words growth potential. Right. These tech firms, you know, are growing their top and bottom line growth rates so their revenue growth rates and their profit growth rates are way higher, way faster than, you know, most other sectors. And, you know, banks certainly. And so that that rap more rapid growth rate is why you get high evaluations because you're seeing some of that future growth being priced into the market cap today. And then being cut back because interest rates are rising. Exactly. So, you know, 2022 was definitely the interest rate sensitive sectors. So, and certainly tech are right up there top probably top of that list. They've been hurt the most in terms of their share prices dropping in 2022 as chef as interest rates have risen and yeah one. That was about that future growth right being embedded in today's share price. Well the value of that future growth has been discounted because of inflation and higher interest rates. And so, if you like, the value of that future money is dropped is now less valuable today. And that's why share prices come down and in those interest rate sensitive stocks. Before I talk about the one trillion I must put the caveat on. They are expecting that to potentially happen. Quite a way off. I think it was 2030 actually where they think that jp could hit that milestone I think their current market caps something like the 400 billion 411. Okay. Yeah, so around that kind of level gives you an idea. Yeah. Go ahead. This is like, so this was a headline earlier in the week. Right. And like all good headlines. They get attention and they get clicked on. And this was in true classic sort of equity research style. You know, as a person, if you're an equity research analyst. Then, you know, you want to become known, right. Your profile, you want it to, you want, you want potential customers to be obviously aware of your work, and what you're doing and one way of kind of increasing your your your awareness out there is by generating big headlines and people clicking on them and then reading your stuff. This actually came from a Morgan Stanley, ironically, came from a Morgan Stanley equity analyst, who came out with this piece that they obviously cover the banking sector us big US large cap. Financial sector is grass at that's the name of this Morgan Stanley equity research analyst Betsy grass at. And so she put this piece out and it had the headline. Yeah, JP Morgan, to whatever I'm the exact headline but to join the $1 trillion Club. Yeah, when you when you kind of delve into it. It's, it's, she's very bullish obviously 411 billion is the market cap today. And so she's saying it's going to more than double but yeah her caveat is not until 2030. It's about seven years to go. She should she does say, well actually no sorry, she said actually her central theme apologies was that it would reach a trillion bucks in 12 years time. But then her range is the earliest it might happen is by 2030 base cases 12 years so 2035 I mean that's a hell of a long time. And so to make predictions that are 12 years into the future are. Yeah, not sure there's too much merit that should be placed on this kind of ultra long term forecasting, but her key central theme, as opposed to those tech stocks which are interest rate sensitive. The banking sector that's the exact opposite. So banks are one of the few sort of companies that actually benefit from interest rates going up. And so her kind of whole thesis is about interest rates will stay high for longer. And so this will feed into, you know, much better net interest income revenues for these big giant banks. So I think that's a bit of a breakdown of the different revenue streams for some of these investment banks. And just to give you some context of numbers. I was looking at the Goldman global banking and markets so Goldman's been streamlined into three divisions in this current restructuring they've been going through so there's global banking markets. So this is kind of your trading and your IBD type packaged into one unit, then you've got asset wealth management, then you've got platform solutions. Now, when you combine. So when you think of Goldman's you think yeah they're the, the leader in IBD, they do all the deals, obviously trading securities across different derivatives. So they generate about six and a half billion or they did in their last quarter, in terms of the earning statement, so six and a half billion US dollars if you bolt in asset and wealth management takes up to 3.6 billion. So you're talking around 10 combined. Right. Yeah, when you look at JP Morgan. So not only is their corporate investment bank already bigger than that just by a whisker just short of 11 billion, their consumer and community banking area. I think if I said to most students, do you fancy working in consumer and community banking, or do you want to work at Goldman's. So that consumer and community banking revenue is far greater the entire pool of revenue across in all of the divisions of goldman's clocks in just shy of 16 billion. Quite incredible. Yeah, and JP Morgan is the biggest bank. I mean, I actually not sure what the valuation of goldman's is. I know, you know, there's, you know, there's kind of, I guess the goldman's and the Morgan Stanley's are a little bit more niche, even though they've been trying to broaden and diversify and try and get into the kind of commercial banking gig but but broadly you would say that they're quite they're more niche where it's more about global markets and IBD. But then when you think about big banks like JP Morgan, Bank of America, city group. You know, they are giants of the commercial and retail banking world. And so JP Morgan's business as you're saying they're like half of it. More than half of it, I believe or but yeah more than half of that well about half is is from consumer and community banking and that's their kind of big, big kind of underlying engine and that engine is firing into life. That engine's been a little bit squeezed for a decade, because interest rates have been at zero. And now the interest rates have elevated pretty sharply this big engine that they've got is really firing and so why does that happen because the whole point around consumer and sort of corporate banking it's had a banks make money it's about borrowing money on the short term by getting individuals to deposit their salaries and whatever the income they've got coming in and deposit your money at the bank. The bank pulls all those deposits and lends that money out to their other individuals through things like mortgages but other corporations and so on. Okay. And we talk about something called the net interest income. So that's just the difference between the amount they're paying to depositors. The interest rate on deposits versus the amount they're earning when they lend the money out and that gap the spread between the two so the interest they pay on deposits is really low. And the interest they charge on loans is much higher. And as interest rates rise, that spread between those two can increase, and this is why therefore the revenues. And in the end the profits that come from that part of the bank have risen sharply so 2022 has been a really good year for these big banks that have the giant, you know underlying consumer corporate banking divisions. It's something Goldman's been desperately trying to break into. And I've spent a fortune trying to do it over the last, well you probably say 10 years but especially over the last five years. And yeah this was one of the revelations a few weeks back when Goldman's had their earnings and their earnings were shocking. It was the owning up, it was the fessing up that our strategy, trying to break this commercial banking market our strategy has been terrible and it's failed, and we've spent a whole load of money and we've not got very far. And so that's why Goldman's who have been trying to build that that kind of same similar kind of engine that JP Morgan have haven't quite yet managed to figure it out. Yeah, I think I remember reading an FT newsletter and they were talking about if you're an investor. It's not about trying to pick the best bank. It's about diversifying which banks you are invested in. And so it's not like you're trying to bet on Goldman's will be able to diversify and mitigate the volatility on the dependency of fee generated business which as we saw was quite susceptible to economic and macro conditions. No, they will outperform like we saw with record breaking fees during the initial onset of the pandemic. Yeah, and through 21 and then the other banks will pick up and not and balance counterbalance that in the current situation we were at the moment in a potential slowdown environment. Yeah, and you could say that JP Morgan's a one stop shop right for an investor who you're you're looking to get exposure across the sort of banking elements and divisions you could say that JP Morgan's one of those ones that has has it all. Right, in that it's got the big consumer banking arm it's got passive investment banking arm, it's got a big asset management division. So it's yeah as a business is much more diversified than banks like goldman's which makes it a safer investment. And that's why the JP Morgan share price is a lot less volatile. And back to this analyst at Morgan Stanley. Grasek, and she's saying that yes. So her thesis is based off the idea that there'll be a soft landing. And so the Fed will carry on hiking and they'll maintain rates at a higher level for longer. That then benefits JP Morgan she's also saying that you'll get a return of the IBD fee generation that has such a shocking year in 2022. And if the economy soft lands and we start to get an uptick, then you see a return to those IBD revenues which would benefit the goldman to this world but definitely would also benefit JP Morgan so they could be strolling into that like the perfect scenario where all divisions are firing. Perhaps later this year and maybe into 2014, which is why I think Grasek is so bullish. Yeah, I think the other element with JP makes a quite interesting medium term so let's say the coming years is also their investment in technology. Because I remember, I think it was last year that they said that they were going to come up with a timeline of the investment but they were going to invest about $12 billion in a broad range of technologies simultaneously. And I know that their team of technologists is like, they're aiming I think for $50,000 which is larger than most other banks' total headcount. I mean I guess that's one of the big risks for these big giant incumbent banks is their legacy tech. And you get these new challenger banks coming along like banks like Starling or Revolute and all these kind of players that are brand new. They don't have a legacy tech stack, they're just coming at it with brand new tech, building it from scratch. And you get these super slick apps that are really intuitive to use and you know a fit for purpose for the modern age, right. But these big banks trying to get their old tech stack and trying to revolutionize it and make it new and shiny and pretty is a mammoth task and is costing huge amounts of money. And of course the longer it takes them to do it will the more market share they lose to these new upcomers. And so, yeah, they got to go big investment side. You know they are the giants like the JP Morgan's they're not going to get washed away by this new wave of kind of challenger banks but I guess strategically they approach this. It's a two pronged attack there's build out your headcount in your development team, and then also get quite aggressive on your acquisition strategy. Right. The end of last year, they acquired a payments startup called renovite, which is basically a rival of stripe and block. And then that was the latest in a string of fintech deals that they've been doing I think they acquired five fintech startups as well, just as soon as the pandemic hit, they were straight on it. So I guess having the ammunition to be out of the fire as well is another benefit that someone like goldman's might not have with that variability, because I was just looking the revenue of goldman's this last quarter reported 10.6 billion. When you actually put in the operating expenses everything else you actually just at the end you're left with what I say just left with your left with 1.3 billion US dollars from 11 billion revenue with JP 34 and a half going in. 11 as net income right billion at the end of it. Yeah, so 10 10 x the net income that goldman's have. Yeah. Yeah, and that's obviously a big war chest to put to work. Yeah, I mean you always get the big boys having the competitive advantage. I'm surprised the regulator. I mean this is another thing right obviously the regulator I don't want to be go down this rabbit hole but the regulator is so obsessed with big tech and trying to break up big tech and trying to stop big tech. And yet you have these other giant industries. And they just don't care and you get the JP Morgan's hoovering up, you know all these acquisitions and you know, solidifying their sort of market dominance and yeah how are these politicians going to be able to trade if they sever those relationships. Come on. All right, well let's pivot and talk a little bit about the macro scene just for five or 10 minutes. I'm starting off with the economic data points that we had, and I guess that kind of combines with the minutes, because US was a second reading of force quarter GDP earlier in the week and it was previously estimated at 2.9% The advanced reading got downgraded if you like 2.7. However, the feds preferred inflation figure PCE was revised up. So you've got slightly more aggressive slowdown with a slightly more concerning inflation situation. And that does kind of feed into the summary of what the feds were saying right which was kind of we're downshifting in rates, but the concern of inflation remains high. Yeah. I think it's been like broadly. Obviously January and the start of February were just rip roaring weeks for markets right and just bounced like way faster than almost everyone was expecting and that was all off the idea that the Fed are going to stop hiking. They might do one more quarter point hike and then that's it. And then we may well see a recession, a mild one towards the second half of the year which means we'll get some rate cuts. But what's happened in the last couple of weeks is now I kind of a bit of a flip of all that argument where we're now feeling a little bit nervous because the data that's been coming in has been over strong. So the US economy is actually firing. Right we had a really strong non farm payrolls report for the month of January few weeks back now but that was like stellar massive huge surprise. Then we've had some really strong, you know, PMI data as we had a crazy strong retail sales number out of the US and it's like what's what is going on here how is this economy staying solid in the face of this massive interest rate hiking onslaught from the Fed and you know I think it surprised everyone right we were expecting the economy to turn and that feed into all that narrative about the Fed stopping their hikes but it hasn't turned. And yeah in the minutes I mean the minutes I would say the Fed minutes so just for those who don't know the Fed have a meeting every six weeks. But then three weeks after each meeting, they release the minutes from that meeting. It just gives you much more detail as to what was discussed and what the members were thinking, like for example here's a quote from the minutes that kind of was picked out. That's led to some of this market downside that the quote is the participants favoring a 50 basis point increase so remember last meeting they hiked by 25 basis points. It was a unanimous decision but some had wanted a bigger 50 point height right and those that wanted that. They noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance. So this was kind of picked out by the media. And so yeah it's now playing but those minutes are a bit you got to realize those those minutes are from the meeting in January which was before all of this strong data. So if you now add in all the strong data and there's already some people on that committee who wanted 50 and when they meet next time in three weeks to come. If we continue to get strong data, then I do think that you will see a slightly different Fed than we saw back in January. The Fed were very dovish in January and I think they probably going to have to reverse that to an extent, their next meeting and that's what markets are reacting to now that's why you've seen some pretty decent downside in a lot of these markets So for example, you know if you want to just pick the S&P, you know we've dropped from 4200 back to below 4000. So that's more than a 5% drop just over the last couple of weeks as we've been getting all this super strong data coming in. Yeah, and I can see that the market pricing at the moment is 76% in short term interest rate futures indicative of that meeting in three weeks of a mover 25. So 75, 25, 25% still looking for 50. And I assume that's gone up and the likelihood of a 50 hike has increased over the last couple of weeks. It was like north of 90% not that long ago before 25. Yeah, 25. Yeah. The one person then that's feeling a little bit better, I guess. Is our is our buddy Mike Wilson. The Uber bear. Yeah. But just to, you know, kind of stoked the flame a little bit further he came out with his, his report called the death zone. He was talking about basically a measurement so equity risk premium. And he was looking at that and basically on that measurement, he's saying that the S&P 500 has fallen into the death zone, which means then in that scenario, the S&P could slide a further 26% from its current levels. Well, we'd be talking 3000. Wow. We're just, we've just gone through 4000 at the moment. Obviously that would be his worst case scenario. He was basically talking about, again, same thing as really as you were there, which was recent data suggests the economy might be able to dodge your recession. They've also taken the possibility of a Fed reserve pivot off the table. Yeah. So therefore that doesn't bode well for stocks as the shark rally this year has left them the most expensive they've been since 2007 by the measure of their equity risk premium. Yeah. I love it. You know, so if you were kind of stumbled across this podcast and you knew nothing about markets. And then you hear that you go hang on the economy is going to avoid recession and therefore stock markets are going to collapse. It's like, well, hang on. No, you've obviously said that wrong. But it's not wrong. That's exactly the case. Good news is bad news. The better the economic data, the worst news is for share prices because there won't be the Fed pivot. And yeah, it's just quite, it's just a funny old world, isn't it? And quite an important point to understand the behavioral side of how markets go about their business. But yeah, and a good point to conclude then is that markets, again, if you are new to the game, the markets are forward looking. And so, yeah, trying to just deal with this changing of situation over the last it's been a really interesting couple of weeks actually. We've really shifted through through the first two months of this. This year, what a significant sea changes is underway at the moment. So we'll see. It'd be interesting to see where the S&P closes today because we're right down at what was the low point of yesterday's insight at the moment. So whether we close above or below there will be quite telling. Yeah, and it's quite there's actually a really important trend line on the S&P that goes back to the October low. What it takes in the October low, then the sort of December, January low and now where we are now is kind of the third test this trend line. So technically, really important around this 4000 handle and yeah, where we might close, where we might close out the week can be pretty significant. You know, and as ever, we're data dependent. You know, the Fed say that but also markets are as well and I tell you what if this US data continues to come through strong, then yeah, this market's going down. Okay, well, look, while you're in New York, then if you see Mike, just buy him a beer and cheer him up a little bit. I'm not sure that's possible. All right, cool. We'll end it there. Thanks very much, Piers. Enjoy your time in the Big Apple and I'll see you next week. Yeah. Cheers. See you. Take care.