 So hello and welcome to episode 39 of the market watch and instead of Pierce Curran, I'm joined by Eddie Donmez who I'm sure our regular listeners are more than familiar with but before I get into conversation with Eddie. Huge shout out to the community resounding response to the call to arms. Last week, where we wanted to get people to just give us a little boost up the rankings of the podcast league tables, and you guys responded so thank you very much. The job is not done. I said the target by year end is 100. We went from 61 to 78, which is a phenomenal effort. If we get a repeat like that we don't need Christmas we already be there by the end of October so help us out jump on Apple if you're listening on that platform. And then review, as I said before, really helps just get this out to as many people as possible, share the love and the education, but other than that let's get straight to it. And so I wanted to swap out peers for Eddie because it's earning season sat time of year, and it's the really the first unofficial week that big corporate earnings really kick off in the United States and that means it's the bank stocks that take precedence and we had JP Morgan earnings come out early this week they were the kind of the first ones to kick things off and so by numbers, the largest US bank reported a profit of $11.7 billion or $3.74 bucks per share up from 292 in the same period last year. And they basically beat expectations but when you start breaking down the bank, I thought Eddie would be a great person to speak to to understand that more detail in particular, some of the differential between trading activity and things like investment banking fees which have been phenomenal. And I'm sure that's going to lead us down some other discussions so just from the top then Eddie, the bank earnings that you've seen so far any first thoughts this week. Yeah, so I think it's always useful to look at context, in terms of why we look at these bank earnings. So, everyone looks at JP Morgan, particularly as a real bellwether for the economy not just what they're doing as a business because it's just twined in, you know, the world's largest economy of the US. And, you know, as we know, the Federal Reserve, basically lead all other central banks as well as they tend to follow so it's always really really important to, if you're going to listen to the bank's earnings core listen to one CEO it's going to be Jamie Diamond and JP Morgan, because especially as a kind of reported first, you can learn a lot and you can get kind of get get to grips with what they've reported it's going to be pretty similar to the other banks, depending on, you know, of course, which banks they are, so if it's investment banking, kind of the investment banking of JP Morgan, that's going to of course be very correlated with city Morgan Stanley and Goldman Sachs so for example, if M&A volumes are through the roof and investment banking fees are through the roof for JP Morgan, chances are it's going to be the same for a Goldman Sachs, or a city for example but as we kind of look at JP Morgan as a kind of reported first kind of really continue to, you know, actually be relatively positive on the economy. So the bank itself delivered really, you know, quite strong results. The economy continues to show growth, despite Delta and the supply chain disruptions that we've Anthony and I and Piers and I have discussed at length. So they've released another, I think 1.5 billion in credit reserves as the kind of economic outlook continues to improve. So we've kind of mentioned about commercial real estate loan growth, kind of seeing some early signs in recovery, but it's really all about investment banking, and they actually recorded all time high M&A fee fees being generated. So the investment banking financial advisory divisions of JP Morgan, but as well Morgan Stanley, Goldman Sachs is really firing on all cylinders and what I mean by that is M&A so mergers and acquisitions so investment banks advising both buyers and sellers on, you know, both sides of the transaction to, you know, acquire or merge with different companies. Capital markets so equity capital markets and when you hear about IPOs, follow on equity offerings when a company raises more cash through selling that you know some new kind of issuance and shares but also things like that capital market so raising liquidity or the investment bank JP Morgan advising and helping their businesses or their clients so normal corporations to raise liquidity through the capital markets. So all of that has been really, really strong. So just to give some context here for JP Morgan specifically the investment banking fees because you were saying they were up they rose 52% year on the year to 3.3 billion say smashed estimates there and investment banks are raking in record sums as you said fees surging past 100 billion in the first nine months of the year. And a lot of journalists talk about in the media, which I'm sure a lot of listeners read about is this rush of deal making. So just to strip this back a little bit before we go deep diving, why the rush. That's a really good question in 2020 I think it's always important to look at kind of it's almost pre COVID and now post COVID. So in 2020. As we know, the COVID crisis basically hit in March 2020 equity markets sold off financial conditions tightened and it led to dramatic central bank intervention. But what it also did was through the economy and all the businesses that operate into in in the global economy into duress right everyone was scared. You know, regardless of what business you were operating and even if it was technology, but particularly let's say industrials energy. In 2020, all of the C sweet and all the board members and all employees were like, we don't know what the next week looks like never mind the next month. Never mind the next three months never mind the next six months, never mind the next fiscal year, we don't know, are we going to get through this week really. Immediately, all businesses go into kind of survival mode if you like and planning and what this prevents is deal making potentially so in March 2020 and really the first kind of half of April 2020 deal making fell off a cliff. The volumes were dramatically lower because companies were really conserving their capital right. It's all about shoring up your balance sheet so you can pay your employees, you can pay your suppliers, you know you can operate your business or you can continue to operate. You know that survival mindset, what you're not doing is going, wow, we should go out and make the next best acquisition, you know, think about Instagram or WhatsApp, you're not going to go and spend that excess cash on something quite crazy, particularly in a world that's so so uncertain. But what this actually means from a banker's perspective is when they're advising on these transactions also, it's very very hard to value a business, right and some of you may be thinking, okay, in March 2020, even the big fangs, about 30% you know the small cap Russell 2000 whatever you like, how even more because smaller businesses are more susceptible to, you know, the economy, COVID, you know they're less kind of financially strong. These businesses are cheap, right, why not why why would that mean deal activity falls off a cliff, it should increase it because you, you can see like targets becoming more affordable and you know coming into certain price ranges, it's very difficult to value a business when, okay, first of all, revenues potentially a shut off completely cash cash flows are shut off completely. So from our, you know, evaluation perspective, it's very very uncertain. So when you're advising, let's say a buyer, what do you pay for a target. Okay, what's the target worth in that really uncertain environment, you know you really don't want to pay for something and use up that cash. And for a seller. So if you're being purchased, you, you know you don't want to basically get sold for less than your worth in normal conditions. So, you know from a seller's perspective you'll go okay I'll write this out. I'll wait till we know more about COVID and then I'll kind of come to the table. So, you know the M&A volumes really fell off a cliff, but as we kind of progressed into the second half of 2020. There was a huge amount of, well there's a huge amount of different drivers. Okay, so we saw interest rates get slashed. Okay, so what does that mean, it means cheap financing, cheap money, cheap debt to basically raise to go out and make acquisitions. Particularly for those businesses that actually somewhat I'm doing a quote unquote benefited from from the pandemic, you know they were flush with cash, right and they were like okay this is a great time to, you know snap up some of these targets. Others really maybe were looking at deals, you know to do pre COVID. And then they got delayed because you don't want to purchase something that you're not very sure that it will survive in the next three or six months, but when the economy started to return, and COVID became less scary and of course later on in the year November, we had the vaccine certainty so we had vaccines basically we had the US election and Joe Biden come into power so all these risks kind of started to subside. There's a huge amount of pent up demand. Okay, and it's always. Well, let's put it this way, building a business and is very hard organic growth is very hard so just building your business organically and generating revenues organically is very very hard. Why do you do M&A, why do you do deals. It's really to expand your business right, maybe new product lines maybe geographical expansion. Maybe, and a very topical at the moment, it's supply chain consolidation right, so there's a lot of horizontal but more importantly vertical mergers right so if you're a vaccine producer if you're a medical supplies producer, if you're a manufacturer, and you've shifted all of your operations to Asia, right, where it's low cost and you can benefit from that, and then COVID happens and freight race freight costs kind of quadruple, you know their supply chain bottlenecks and you can't get your input goods, then you can't sell your product. So now you're looking from a kind of growth mindset okay what businesses can we acquire domestically to shore up those, let's say supply chain issues, so particularly in points of stress, like we're seeing right now. You know, you really need to be diversified, otherwise you're just not going to sell so there's a lot of kind of defensive, you know, action going on. There's a lot of offensive. So, think about the major trends that are being, you know, that are apparent right now. And COVID made it even more apparent, digitalization, right, businesses having to come from kind of legacy and it doesn't matter if you operate in technology. If you operate in industrials energy they're all trying you need to be kind of tech savvy and digital right in most. So there's a kind of tech flavor across all different kind of deal areas. So that's a big trend and this is what you know companies are trying to acquire for its ESG, and things like that, but it's all about, you know, one thing that COVID made very very apparent for companies was the biggest and the best, the strongest financially the strongest balance sheets did very well right and those that were more vulnerable to these kind of the economy and things like that did less well. So it's really bolt ons what can we do to become a bigger stronger financially kind of more, you know, sustainable business. So this is really what's driving a lot of the kind of volume from from last year. And then, you know, it's definitely carried in into this year. So we're, I kind of mentioned interest rates. So they got slashed of course last year. So this sheet financing is fueling M&A activity. You know, companies are raising debt, because it's almost free, right, to then go out and purchase companies, but the other side of that kind of function is equity. If you're a business, and you've got the S&P 500 at almost all time highs, the NASDAQ at, you know, very elevated levels, particularly let's say if you're a tech company, you've got one level to pool which is cheap debt, but you've also got a very elevated share price. Right, so if you're doing an all stock offering, for example, or you're selling some equity to raise some capital to then go out and do a deal. That condition is also very, very favorable for you. So all of these different different things are fueling this activity, as well as the kind of the strong economy we've really had, you know, really this shit up until now kind of thing. So one thing I was thinking as you were you were talking through that was that a lot of that activity seems spurred on then by this pent up demand as you said, on the initial onset says kind of to mean a game of two halves so to speak. I'm just wondering what the third quarter of this game looks like because rates are going up. Yeah, let's say vaccination efficacy is potentially decreasing. There's, there's some sensitivity at the moment around other subjects increasing with the geopolitics or whether foreign shores in China and the property situation ever grand. Surely then this activity cannot continue in this direction forever. I'm just asking the question I guess about going further forward then surely this needs to moderate back it's almost like the pen that the environment now that's pretty crazy in the m&a space seems like the only way is down from here, and the, because the economy started to show signs of it's already peaked policies are now tightening. Surely the parties over. It's not completely the party's not finished. I just wonder what that means that because obviously everyone's asking the question about equity. If I'm looking at equity indices valuation at these levels punching all time high still pretty much. We've had some pullback recently, but I just wonder with the earnings when we look at them in a more broad sense with the future outlook for for potentially then, yeah, a bit of a recalibration back to degree of normality it's almost like the GDP numbers we're seeing in the pandemic monster declines super recoveries. And now we're kind of somewhere in the middle and it feels like earnings and kind of like that slightly and now if you see where we go from here. Yeah, so yeah on top of I think what you were what you sound like a UK journalist talking about the housing market, about to crash. I think I know what report you're talking about in terms of Goldman Sachs revising down for example their GDP growth figures for next year, kind of decelerating from this kind of base effect that we've had this year and this pent up demand. I think really. I think the party will continue. Right, I think if you think about interest rates and generally financial conditions. Sure, we're talking about tapering, starting in November ending being brought forward in the middle of the year. The prices are on the kind of upwards trajectory, if you like, which makes funding costs higher, you know, that's that's a fact, it would make a raising debt to then go and do these deals more expensive. Okay, if we see tapering, and more importantly interest rate hikes being moved forward from 23 to maybe next year, and that hits stocks, right so equity markets, then, you know, of course, that would essentially derail the kind of feel good factor, it hits generally wealth. And then again, it could have knock on effects let's say into the housing market and you know all those different assets so there's definitely a risk of course, as always that these kind of series of events could potentially derail or slow down activity. However, we're talking about almost the the loosest financial conditions that we've ever had right and a 25 basis point hike in 2023 is most likely not going to derail this activity, of course, there's, you know, some supply chain issues that were kind of battling there's, you know, the economy potentially talk about stagflation is more of a decent deceleration from a 6% growth rate to a 4% growth rate which is still above trend growth. Okay, so the economy so decelerating but it's not, you know, we're not going into a recession. Okay, so that environment still, you know, relatively strong. If you think about the kind of logistics as well of deal activity with COVID, you know, we've got vaccines now we've got the merc pill potentially as a kind of double punch things like that. You know, I've been on a plane in the last two weeks, you know, one of the things that you know commentators mentioned about, say, March 2020 deal activity when COVID hit was, you know, you can't go and inspect that business you can't do your due diligence you can't go and see that factory you can't go and meet with the founders and shake their hands and look them in the eye to see if they're trustworthy. You can't do the legal due diligence you can't go and spend time with the software developers and check the code to make sure it's airtight. So all these things but that didn't derail it because we found this beautiful technology called zoom. And actually, it didn't matter too much but cross border M&A is going to, you know, come roaring back. There's kind of elements of this kind of coming through in the sense of, you know, travels coming back, you know, the high frequency data is improving terms of, you know, flying around. So cross border M&A took a massive hit last year and it's been kind of the slowest to rebound. But now, you know, flight flights are going on. So that cross cross border M&A could be the next tailwind behind these deals so I believe that this party will continue. I think what the pandemic exposed is that, you know, M&A and a growth mindset will pay you back kind of dividends in times of big stress. So I think companies will continue to trend towards things like digitalization and the themes that were I kind of were aforementioned. Okay, so at the moment we talked about participants such as investment banks specifically but also private equity firms but I wanted to touch on hedge funds, because I know you've mentioned to me before about how, you know, there's a very core element to human which is a very powerful emotion called jealousy. And I'm sure hedge funds are looking at this thinking how do I get a slice of this pie and I remember you talking to me about this before and about how they've kind of entered the phrase so what's the deal with the hedge funds side how are they involved in this in this space. Yeah, so these investment banking fees are, you know, are going through the roof they're advising strategic buyers so imagine, and as they're buying a Morrison they're advising private equity firms so a KK are acquiring a medline for example. So that's, you know, private equity are very much a core element of these volumes and general deal volumes I think they make up about they've made up about 30% of the deal activity this year, you can add specs into that kind of mix but private equity are definitely there. There's about or rumored number of about 4 trillion in some something called dry powder that they've got at their disposal. Okay, so private equity firms are very, very active and have been since the March 2020 kind of pandemic, deploying capital in those distressed assets. Those kind of rebound stories but also investing, particularly in technology and software, you know, planning for the future so private equity have a lot of dry powder, they've deployed, but they've got a whole lot more to deploy. So their returns have been very, very good. And this is leading to a bit of jealousy. Okay, so generally, what kind of firms do private equity funds invest in, it's kind of in the name as a clue, generally private businesses. So they're providing capital and making investments in these private businesses that they will then make operational improvements potentially in, or not do anything and sell at a higher multiple so they're looking to generate a return by investing in a private company and then selling it to either a strategic buyer or another PE firm, essentially, so they've been doing very, very well. Over the last five years, their returns as a kind of industry have been double that of the hedge fund returns. Okay, so hedge funds, of course, they can, they mainly you I think you can say that invest in things like public equity so liquid kind of assets, private equity, generally are investing in more less liquid more illiquid. More illiquid type assets, right, private businesses, whether these companies are not listed on an exchange, just like you, if you were to type in, you know, Apple share price, you could buy and sell Apple stock right that doesn't happen for private businesses as a buyer, like a private equity firm, they'll, you know, put in some capital and the general kind of holding period or investment period will be something like five to seven years five to 10 years, seven to even up to things like 20 years. Okay, so there's somewhat of a long, you know, time horizon there, but generally the returns have been very, very good. So now we've got a bit of competition with hedge funds entering the kind of private capital space. And this private capital space has seen a lot of interest from even the big investment bank setting up private capital units, you know, asset management units and this private capital kind of industry is worth about 7 trillion now so it's, it's still relatively in terms of the kind of overall market but it's growing, and it's growing quickly. And I think Morgan Stanley had a 2023 estimate that it's going to double all, you know, from 7 trillion so there's, it's growing. And there's a lot of returns to be made so hedge funds are now competing with these private equity firms for these really, really attractive targets. Okay, and kind of kind of what we mentioned, just kind of in the intro was investment banks IPO activity and capital markets activity has been also very strong. So, IPO volumes have been very, very healthy. There's been a huge amount of interest because of the IPO pops, referring to the kind of performance on the day, the weeks following an IPO so there's been some great kind of pops on IPO day. But what this means for hedge funds is, it's quite hard to get an allocation to an IPO right there's a whole book building process and the investment banks are you know allocating capital to you know pension funds asset managers hedge funds, and these hedge funds, you know, if they do get an allocation great but maybe they're investing post IPO maybe on the first day, potentially after a 510 15% pop for example. So my thinking is, okay, how can we kind of our this and get in before this IPO, you know this company goes through the series C and then goes to an IPO. Okay, they're like, okay, who does that. Well, private equity, and these private equity firms are of course investing kind of pre IPO. So these hedge funds are now investing. There's been a record kind of investment of hedge funds investing in private equity and private capital, kind of away from the public equities. Of course, this is kind of raising some alarm alarm bells just because hedge funds are relatively liquid and they invest in liquid things are sure there's a lock up period and investors can redeem their money. So it's a lot shorter than that of a private equity kind of redemption period right five to seven years or 10 years is quite a long time. So if you've got these hedge funds investing in illiquid private assets that have a long time horizon there's somewhat of a liquidity mismatch there. So there could be a kind of trend that we all should watch, but there's a huge amount of competition for quality assets and this is what's driving M&A activity. This is what's driving PDL making, and now the hedge funds are kind of entering the party, looking for those really really attractive private assets to get their hands on before that pre you know that that IPO pop. So I think we can kind of capture more alpha and kind of grab some more of those kind of private equity gains. Super interesting times, and you know there's a lot to digest there that you just offloaded. So what I'd say to anyone listening is that just just jump to amplify me.com jump on the hub, and you'll be able to reach out to be in Eddie directly. So we'll look to wrap it up there. The other thing, thank you Eddie for your time today, but the other thing I was, I was going to add in, even if you're a new listener or you listen every week. If the latter thank you, but just give your heads up that we're going to start on the same podcast channel this channel, a career hack series that will accompany then these just general weekly chats that I have with the team that are more kind of market and we're going to drop those episodes on a Wednesday, and it's going to be with our head of China division Joe, who's kind of the expert who oversees a lot of our stuff about interviews assessment centers. Group exercises tips tricks hacks, how to perform better at those so stay tuned for that will drop the first one on Wednesday. Otherwise, it'll be back probably me and peers next week. So just to say thank you once again for those who rated and reviewed the podcast on Apple please again we're on 78 times recording push us up let's get to 100. And yeah, everyone stay safe. Have a great weekend. Thank you Eddie, and catch you next time. Take care.